YR 11 BUSINESS STUDIES MOCKS

YR 11 BUSINESS STUDIES MOCKS
GROWING YR 11 BUSINESS STUDIES MOCKS

GROWING

An objective is a statement of specific outcomes that is to be achieved
how much profit the business wants to earn what level of sales it the target for the next year how fast the business wants to grow how much profit is to be paid out to shareholders in dividends how much market share the business wants to get Aims Corporate Objectives about the business as a whole usually set by the top management provide the focus for setting more detailed objectives focus on the desired performance and results of the business cover a range of key areas where the business wants to achieve Functional Objectives set for each major business function and are designed to ensure that the corporate objective are achieved as a business expands and becomes more complex it will divide its activities into different business functions, these will have their own objectives: finance & administration, marketing & sales, production & operations, human resource management SMART Objectives Specific Measurable Achievable Relevant Time Bound 3

Why Grow? Economies of Scale
Larger firms can produce at lower average cost than smaller firms. They can pass on these economies of scale to consumers as lower prices which increases sales, market share and their profit. purchasing economies: buying its supplies in bulk so cheap unit price marketing economies: cost of advertising campaign is a fixed cost so they will spend less per unit advertising its products managerial economies: can afford to employ specialist managers who have expert knowledge financial economies: banks are prepared to lend more money to larger firms at lower interest rates as larger firms are more likely to pay them back technical economies: can afford to operate more advanced machinery risk bearing economies: can afford to sell a range of products into many different markets Why Grow? Diversification larger firms can afford to produce more products than smaller firms able sell into different markets, reducing the risk that a decline in sales of one product will harm the business and less threat to their profits Financial Support larger firms are less likely to fail than smaller firms able to borrow money easily from banks so will find it easier to survive cash flow problems more likely to get financial support from the government as they employ lots of people Personal Vanity owners enjoy the power and status that comes from owning a large business Domination of the Market larger the market share a firm has the more it can control the price of its products fewer threats from competitors and could eliminate rivals by charging prices that they can’t compete with 4

Problems Problems With Growing
it is harder for the founder/owner to remain in control it is harder to remain close to customers harder and slower to make decisions for the whole business 5

Organic Growth Organic Growth/Internal Expansion is increasing sales by using businesses own internal resources. The firm can produce more of its current products to sell in its existing markets. The firm can sell its current products into new markets. The firm could launch a new product which is a similar product to existing ones (line extension) or a completely new product (diversification). Advantages easier to raise finance economies of scale more profit inexpensive to achieve workers have more job security less riskier than taking over other businesses can be finances through internal funds builds on business strengths allows the business to grow at a more sensible rate Disadvantages takes a long time to achieve growth growth achieved can be dependant on the of the overall market hard to build market share if the business is already the market leader 6

Takeover is when one business buys another business.
Growing Externally Takeover is when one business buys another business. Merger is when two separate business agree to become a single business. Franchising is selling the right to use your business idea and brand name to other business. 7

Horizontal Integration
Horizontal Integration is a merger/takeover of when the business sell the same good or service, they are at the same stage of the chain of production. Advantages rapid growth higher revenue and profit greater market power reduced competition economies of scale new markets Disadvantages clash of cultures financing the deal diseconomies of scale regulatory problems 8

Vertical Integration Forward Vertical integration is a merger/takeover of a business which is at a later stage of the chain of production so it’s the businesses distributer/customer. Backward Vertical is a merger/takeover of a business which is at an earlier stage of the chain of production so it’s the businesses supplier. Advantages reduces transportation costs diversification into other markets ensures a supplier and customer Disadvantages clash of cultures financing the deal diseconomies of scale regulatory problems 9

Conglomerate Integration
Conglomerate Integration is a merger/takeover between two businesses that sell different goods or services. Advantages diversification means a wider range of products so it spreads the risk of trading economies of scale Disadvantages more risky as the business might make mistakes as they are not familiar with the new industry 10

Franchising Franchising is selling the right to use your business idea and brand name to other business in exchange for royalty payments. The franchisor gives the franchisee a franchise. Advantages quickly increases brand awareness the franchisee is taking on most of the risk they pay you royalty payments economies of scale still your own business less finance for business to expand don’t have to find staff to run the operation expand into multiple locations Disadvantages could have different standards and quality might give the business a bad reputation can lose control harder to get operational problems solved quickly you don’t get the entire profits earned by the franchisee 11

Stakeholders A stakeholder is anyone who is interested in and is affected by the activities and decisions made in a business. Affect how many stakeholders a business has and the strength of their interest and influence size and scale of the business: a small sole trader service business will have relatively few stakeholders compared to a much larger, complex business which has thousands of employees operates in numerous locations and is an important customer to hundreds of suppliers nature of the product or service: some products are more likely to attract the attention of stakeholders, a manufacturing business that has high levels of carbon emissions or waste packaging will be scrutinized much closer than a simple service business, the local community will have a greater interest in a business that is a major local employer than in a one man business shareholders/business owners customers banks & financial providers local community competitors managers & employees suppliers government media 12

Stakeholders Stakeholder Main Interests Power & Influence suppliers
long term contracts, prompt payment, growth of purchasing pricing, quality, product availability customers reliable quality, value for money, product availability, customer service Revenue, repeat business, word of mouth recommendation community environment, local jobs, local impact indirect through local planning and opinion leaders government operate legally, tax receipts, jobs regulations, subsides, taxation, planning Stakeholder Main Interests Power & Influence shareholders profit growth, share price growth, dividends election of directors banks & lenders interest and money to be repaid enforce loan covenants, withdraw banking facilities directors & Managers salary, share options, job satisfaction, status make decisions, have detailed information employees salary & wages, job security, job satisfaction & motivation staff turnover, industrial action, service quality 13

LOCATION

Mainly affect customer service and revenues.
Location Factors Why Location Matters? choice of location has direct effect on the costs of running a business location also potentially affects ability to make sales and deliver customer service a poor choice of location is costly to undo Supply Factors Mainly concerned with the operating costs of the location, what is costs to produce or provide goods and services. costs of the operation Demand Factors Mainly affect customer service and revenues. type of customer service the business wants to achieve potential revenues that can be achieves from the location 15

Supply Factors Labour Costs productive work that people do
varies from different regions in the UK biggest difference is between the UK and low labour costs countries over seas Energy Costs some business use large amount of energy normally through gas and electricity able to negotiate a good price for energy needs anywhere in the UK Land Costs land can be purchased often rented with the business buildings and facilities vary depending on the location and facilities provided government grants are available to reduce the land costs of locating in poorer regions Transportation Costs costs of getting inputs into the business (raw materials & stock) needs to be close to its source of supply if the cost of transporting raw materials is high or difficult cost of getting products delivered to customers cost of distributing to customers is not a big issue delivery firms might carry out the transportation for which the customer pays or the customer comes to the business Community Factors influenced by many non financial factors which can be significant when making location choices local amenities & services (schools, train stations, professional services local government attitude to support business (financial assistance) 16

Demand Factors Customer Convenience
located where customers find it easy to access the service being provided fast food restaurants in high streets, shopping centres, motor ways Site Suitability may need to have some particular characteristics to maximise customer satisfaction and revenues hotel in attractive view, tourist attractions Labour Skills where specialists skills are required locate themselves in areas where there is well established expertise in a specific area Image some customers associate a product with a certain are and prefer to buy from there walking equipment business in the Lake District Expansion Potential future production capacity needs to be taken into account if the location means limited expansion if it restricts output then revenues are potentially damaged 17

Benefits Of Right Location
Competitive unit costs: a combination of a productive and efficiency labour supply, acceptable location overheads and cost-effective access to inputs (raw materials & stock) Optimal revenue opportunities: customer service is not inconvenienced through the choice of location Acceptable rate of return on investment: all business projects compete for scare cash resources Sufficient production capacity: meet demand and future flexibility in capacity management decisions Access to a labour force: enables the business to achieve the objectives of its workforce planning 18

Overseas Many large businesses now have operations of some kind in more than one country Amongst the factors increasing internationalization of business are: cross-border mergers and acquisitions (a UK manufacturer buys a competitor in the USA) organic growth overseas moving production overseas, to enable faster lead times to customers increasing use of off shoring, to access lower labour costs in countries like India and China Accessing demand in suitable markets most important reason for most businesses size of demand in emerging markets, in addition to the fast growth, is a major motivator successful large businesses often find that their revenue growth prospects in the domestic market are constrained by: lower growth, perhaps because the market is saturated regulatory concerns about excessive market share turn to international expansion as a way of driving forward revenues and profits for the shareholders. Cost reduction increasingly skilled labour is available at lower cost encouraging businesses looking to reduce their cost base without compromising customer service to put the advantage of low-wage economies into perspective, the hourly cost of labour in India and China is around 5% of the cost of equivalent labour hours in economies like the UK and Germany business that has a labour intensive production process is bound to be attracted by the potential cost savings, particularly if the business has to handle competitors based in those low wage economies 19

Off Shoring Off shoring is where work is done for a business by others based overseas, usually where labour costs are cheaper. Risk Of Off Shoring Customer service: combination of poor training, cultural differences and local management sometimes lead to worse customer satisfaction Higher than expected costs: low wage economies might seem attractive, but there are many hidden costs associated and some firms find that lower productivity from the overseas location actually means higher unit costs Public and employee relations: decision to move jobs from the UK to a low-wage economy is a sensitive one, handled poorly the damage to public and employee good can be significant Protection of intellectual property: the legal protections for business information processes and brands are not as strong in many countries as they are in the UK, a risk of is that intellectual property (know how & trade secrets) is lost and that a potentially stronger future competitor is born Overseas Issues Exchange rates: operating in another country almost certainly exposes a business to the effects of fluctuating exchange rates Trade barriers: protectionism varies around the world but locating a business to avoid trade barriers is certainly important for businesses looking to compete effectively, common types of trade barrier include quotas, tariffs on imported goods and government subsidies for domestic industries Political stability: most developed economies enjoy relative political stability, like no sudden or dramatic changes in the political landscape which impact on businesses but other locations are less predictable 20

LEGAL STRUCTURE

Liability Limited Liability means that the owners of the business is not liable/responsible for the company's assets or debts. important protection for shareholders in a company can only lose the value of their investment However limited liability does not protect against: wrongful or fraudulent trading when personal guarantees have been given by directors In the eyes of the law, a company has a separate identity from its owners. The company exists on its own. Therefore, if someone wants to sue a business or recover amounts owed, it must take legal action against the company itself, not the people who own (shareholders) or manage it 22

Sole Trader The most common type of business structure. A sole trader is just an individual owning the business on his/her own. The sole trader owns all the business assets personally and is personally responsible for the business debts therefore have unlimited liability. Advantages Quick & easy to set up – business can always be transferred to a limited company once launched Simple to run – owner has complete control over decision making Minimal paperwork Easy to close / shut down Disadvantages Fully responsible – unlimited liability Harder to raise finance – they often have limited funds of their own and security against which to raise loans The business is the owner – the business suffers if the owner becomes ill, loses interest etc. Can pay a higher tax rate than a company 23

Partnerships Where a business is started and owned by more than one person. The deed of partnership describes how the partnership is run. The partners between them own all the business assets and owe all business liabilities, therefore also have unlimited liability. Advantages The simplest way for two or more people to run a business together Minimal paperwork once Partnership Agreement set up Business benefits from the expertise, efforts of more than one owner and can provide specialist skills Greater potential to raise finance – partners each provide the investment Disadvantages Fully responsible – unlimited liability A poor decision by one partner damages the interests of the other partners Harder to raise finance than a company Partners are bound to honour decisions of others Complicated to sell or close 24

Private Limited Companies
Limited companies are separate legal entities to the founders. A legal entity can own things itself (assets), can sue and be sued. The company owns the assets and pays the debts. If the company becomes insolvent (it cannot pay its debts), then the company is closed. Companies are owned by their shareholders and run by directors. The shareholders appoint the directors (often the same people) who run the company in the interests of the shareholders. Shareholders own a share of the company, but they do not own the assets of the company and they are not liable for the debts of the company. Shareholders are not liable for any debts owed by the company that cannot be settled. That is the importance of limited liability By far the most common form is a private limited company. Private means that the shares of the company are not traded publicly on a stock exchange. Advantages Limited liability – protects the shareholders Easier to raise finance – both through the sale of shares and also easier to raise debt Stable form of structure – business continues to exist even when shareholders change Can pay less tax Disadvantages Greater admin costs Public disclosure of company information Directors’ legal duties 25

Public Limited Companies
A public limited company is formed when a private limited company is floated on the stock market allowing any member of the public to buy shares in the company. Advantages still has limited liability – protects the share holders they are not liable for company's debts or assets liquidity – share holders are able to buy and sell their shares can raise much more capital as a plc by selling shares through a stock exchange – there are more potential buyers increased capital allows the company to grow and diversify the status of the company is increased by becoming a plc so banks are more willing to lend money to them Disadvantages there is a threat that someone will buy enough shares to take over the company – if they can convince shareholders to sell there financial accounts are publically published Requirements minimum number of shareholders must be two (a private limited company only needs one shareholder) accounts must be filed within 6 months of the year end (the limit is 9 months for a private company) Company Secretary must be a qualified person (in a private company the secretary does not need to be qualified) minimum number of Directors is two (just one needed for a private company) 26

Company Roles Who runs the company? directors & managers
Who owns the company? shareholders Shareholders: owners of a company, they provide the share capital for the firm, share the profits and take decisions about ownership of the company Directors: make the day-to-day decisions about what the business does and act on behalf of the shareholders Managers: individuals who are given functional and budget responsibility for managing the resources of the business, in larger businesses the organizational structure of the company will have several managers leading a functional or geographical are reporting to a director sometimes shareholders are also the directors of a company, this happens regularly in small, medium-sized or family firms. in larger or more complex businesses where there are many shareholders, it is common for the shareholders to play little if any part in the day-to-day decision making shareholders meet at the annual general meeting of a company to hear from the Board of Directors 27

MARKETING MIX

Marketing Mix The marketing mix deals with the way in which a business uses the four P’s to market and sell its product. product: the item or service that the customer gets price: how much the customer pays for the product place: how the product is distributed to the customer promotion: how the customer is found and persuaded to buy Effective Marketing Mix meets customer needs achieves marketing objectives is balances and consistent creates a competitive advantage for the business 29

A product is anything that is capable to satisfying customer needs.
goods which are physical products that you can touch and feel: clothes, food, mobiles services which are non physical: dental treatment, accountancy, insurance, holidays, hair cut Three Elements Of Products core benefit: what it does, the main functions tangible/physical elements: what it is made of, looks like, dimensions or duration augmented benefits: extra elements which add to the perceived value of it in the eyes of the consumer Product Group/Range/Portfolio selling more than one product, a collection of products produce several similar products that appeal to different customers however greater range in products can mean that the marketing resources are spread more thinly Advantages spreads the risk, decline in a product may be offset by sales of other products selling a single product may not generate enough revenue range can be sold to different segments of the market Unique Selling Point it is a feature or benefit that separates a product from its competitors product differentiation means making the product different from its competitors, this can be done through: distinctive design, branding, performance 30

Packaging protect the product on its journey from the manufacturer and warehouse to retailer then to customer promote the product by communicating information about the product contains key details on usage, storage and safety Product Brand product with unique character, for instance in design or image, it’s consistent and well recognised brand extension: used to develop new products with some of the brands characteristics brand stretching: brand is used for a diverse rand of products logo is a symbol or image that represents the business: it is easy to recognise, establishes brand loyalty, create a favourable image Advantages inspires customer loyalty leading to repeat sales and word of mouth recommendation usually can charge higher prices retailers/service sellers want to stock top selling brands Extension Strategies marketing techniques used to extend the life of the product before it goes to decline advertising: gain or remind audience price reduction: attract adding value: new features of product new markets: abroad? new packaging: new theme, design, material, modernising 1) development: developing and researching the product 2) introduction: launching the product 3) growth: sales increasing at fastest rate 4) maturity: sales are at its highest, rate of growth slowing 5) decline: sales begin to fall and eventually product is not wanted 31

Product Portfolio can be analysed using the Boston Group Consulting Matrix. Based on:
market share – does the product being sold have a low or high market share market growth: are the numbers of potential customers in the market growing or not Boston Matrix Stars high market share in a fast growing market need a lot of investment to sustain growth eventually growth will slow and will become cash cows if the keep their market share Cash Cows high market share in a slow growing market mature successful products which need little for investment manage to continue its strong profit Question Marks low market share in a fast growing market have potential but need large investment to grow market share need to carefully decide which ones they should invest in Dogs low market share in slow growing markets usually generate enough cash to break even, rarely worth investing in usually sold or closed 32

Pricing Pricing methods: how to set the price
Pricing strategies: how to compete in the market over several years Pricing tactics: short term, ways to use price to gain an advantage Price is: the money charged for a product or service everything that a customer has to give up in order to receive a product or service usually expressed in terms of £ per unit Factors objectives: what the business is aiming for competitors: influences, price takers or makers costs: should cover all costs to make a profit state of market for the product: demand and supply of a product state of economy: unemployment and workers wages bargaining power of customers in target market: buyers have power over the price set? negotiation legislation in market: prices regulated by government rules marketing mix: distribution channels, product stage in life, product quality 33

Pricing Methods Cost Plus Pricing Customer perceived value
what customers value the product at price is set at an estimate of the product’s value to customers giving customer prices they would like Cost Plus Pricing full cost of making the product plus a % mark up price is set by calculating the full costs of a product and adding a profit margin advantages easy to calculate price increases can be justified when costs rise cost increases can be passed onto the customer price stability may arise if competitors take the same approach pricing decisions can be made at a junior level in a business based on formulas all costs are covered and a profit is made disadvantages ignores demand and price elasticity of demand may not take account of competition profit is missed if price is set below the that customers are prepared to pay lost sales if price is set above the price customers are willing to pay business has less incentive to control costs Psychological price barriers price beyond which customers will not go set based upon the psychological expectation of customers about price Going Rate Pricing / Price Taking price set after taking competitors into account method favoured by new entrants to a market since it avoids price wars makes use of the expertise of established firms but it assumes that competitors set the correct price ignores the fact that firms have different cost bases 34

Pricing Strategies Price Skimming
setting a high price for a new product before other competitors come into the market maximize profit per unit to achieve quick recovery of development costs best used in introduction or early growth stage of product life cycle product is sold to different market segments at different times, top segment is skimmed off first with the highest price disadvantages cannot last for long as competitors soon launch rival products which put pressure on the price Penetration Pricing starting with a low price to achieve market share, then raising the price later gain market share quickly, build customer usage and loyalty advantages new business must attract new customers little product differentiation, attract lower price making less revenue disadvantage may lose customers when price is raised Premium/Prestige Pricing high price to enhance/reinforce a product’s high quality, luxury image high price is maintained throughout the life of the product 35

Price Tactics Loss Leaders
product prominently displayed and advertised and price below the normal price and even below cost to the seller sold at a low (even loss making) price in order to encourage customers to buy other full price products from the business along with the loss leader product widely used by supermarkets to draw in customers from rival firms customers will get used to the tactic so the loss leader should be changed every so often Predatory Pricing when a dominant competitor in the market deliberately set very low prices with the intention of removing a rival or deterring other potential competition it is illegal under competition law Price Wars competitive price reductions by firms in a competitive industry each seeks to increase market share by price reduction but the result is destructive spiral of price reductions process continues until weaker firms go out of business price wars might be seen as good for customers in the short run but it is harmful in the long run if competition is reduced Physiological Pricing charging at a price which ends in 99p is a way of deceiving people into believing that the product is cheaper than it really is attract customers who are looking for value 36

Promotion Promotional Methods
above the line promotion: paid for communication in the independent media, it can be targeted but can be seen by anyone outside the target audience below the line promotion: activities where the business has direct control, it is aimed directly at the target audience Promotion how customers or potential customers find out about a product and are persuaded to buy communication, the way the business makes its products known ensure customers are aware the existence and positioning of products persuade customers that the product is better than competing products and reminding them why they may want to buy Factors stage in the life cycle nature of product competition marketing budget marketing strategy target market Main Aims inform current and potential customers about the existence of products explain the potential benefits of using the product persuade customer to buy the product help differentiate a product from the competition Main Methods advertising public relations & sponsorship personal selling direct marketing sales promotion 37

Advertising Advertising
paid for method or promotion and the main form of above the line promotion presents/promoted the product to the target audience through a variety of media: TV, radio, cinema, online, magazines, leaflets, newspaper, posters, bill boards to encourage them to buy Two Types persuasive advertising: tries to entice the customer to buy the product by information them of the product benefit informative advertising: gives the customer information, mostly done by the government Advantages wide coverage control of message being promoted repetition, message can be communicated effectively can be used to build brand loyalty Factors reach of the media: national/local, number of potential customers it could reach, how long message is seen nature of product: media needs to reflect the image of the product position in product life cycle size of advertising budget: cost of advertising, cost per head if reaching a larger audience Disadvantages often expensive impersonal one way communication lacks flexibility limited ability to close sales 38

PR & Sponsorship Public Relations
covers a broad series of activities where a business manages its relationships with different parts of the public: customers, media, local communities, suppliers, employees, investors Sponsorship business will sponsor an event, team or individual in order to build brand awareness specialised kind of public relations and increasingly popular, particularly with larger business emphasise social or ethical credentials Main Aims achieve favourable publicity about the business build the image and reputation of the business and its products, mainly customers communicate effectively with customers and other stakeholders advantages no direct charge more powerful and persuasive as its often more believable disadvantages no guarantee that it will reach its target audience 39

Personal Selling Personal Selling
business uses people the sales force to sell the product after meeting face to face with the customer sellers promote the product through their attitude, appearance and specialist knowledge aim to inform and encourage the customer to but or at lest trial the product Advantages high customer attention message is customised interactivity persuasive impact potential for development of relationship adaptable opportunity to close sales Point Of Sale Merchandising face to face contact between sales representatives of producers and the retail trade merchandiser will visit a range of suitable retails premises in their area and encourage them to stock products from a range visit provides the opportunity for the merchandiser to check on stock levels and whether the product is being displayed optimally Disadvantage high cost labour intensive expensive can only reach limited number of customers 40

Direct Marketing is the term that describes a range of promotional activities that are aimed directly at the customer, so bringing the promotional message straight tot the target audience. Direct Marketing Direct Mail sending promotional materials to target customers through post relatively low cost with specific customers targeted negative perception by recipients that it’s junk mail advantages focus limited resources on targeted promotion can personalise marketing message relatively easy to measure response/success easy to test market messages cost effective is customer database is well managed disadvantages response rate vary enormously negative image: junk mail/ spam database expensive to maintain and keep accurate Marketing very cheap and quick method which allows the message to encourage and instant response spam filters on many systems makes it harder for legitimate marketing materials to reach the intended recipient Telemarketing includes all telephone based marketing activity like sales, customer service, market research useful for following up business to business leads, setting up meetings and closing a deal relatively low cost and easy to monitor cold calling has a very negative perception 41

Sales Promotion advantages
effective at achieving a quick boost to sales encourage customers to trial or switch brands disadvantages sales effect may only be short term expect or anticipate further promotions can damage brand image Sales Promotion persuading a potential customer to buy the product short term tactic to boost sales aimed at only consumers Factors promotion cost: sales justify investment consistent with the brand image attract customer who will continue to buy the product Methods money of coupons: enables them to buy the product next times at a reduce price competitions: buying will allow them to take part in a chance to win a prize discount vouchers free gifts: free product when you buy another product point of sale materials: posters, display stands present the product in its best way and show it is there Loyalty Cards encourage customers to return by giving them discounts based on spending from previous visits provide information about the shopping habits of customers valuable marketing research and can be used in planning process for new and existing products 42

Place Provide a link between production and consumption, organisations that form any particular distribution channel perform many key functions: information – gathering and distributing market research promotion – developing and spreading communications about offers contact – finding and communicating with buyers matching – adjusting the offer to fit buyers needs negotiation – reaching agreement on price and terms of the offer physical distribution – transporting and storing goods financing – using funds to cover the costs of the distribution channel risk taking – some commercial risks by operating channel Place (distribution) is about how a business gets its products to the customers. It is to make products available in the right place at the right time in the right quantities. Distribution is achieved by using one or more distribution channels. Distribution Channel all the organisations through which a product must pass between its point of production and consumption includes retailers, wholesalers, distributors/sales agents, direct organisations involved in each stage are referred to as intermediaries they are specialists in selling as they have the contacts, experience and scale of operation which means that greater sales can be achieved 43

Distribution Channel Channel 1: two stages between producer and consumer wholesaler buys and stores large quantities of several producers goods breaks into bulk deliveries to supply retailers with smaller qualities, for small retailers with limited order quantities Channel 2: one intermediary producers sell their goods directly to large retailers which then sell onto the final consumers Channel 3: direct marketing, no intermediary manufacturer sells directly to customers Advantages don’t share profit margins produce has complete control over the sales process product not sold alongside competitors Using Intermediary Advantages more efficient distribution overall costs may be lower consumers may expect choice at the point of sale producers may have not sufficient resourced or expertise to sell direct 44

Intermediary Retailers
most popular distribution channel for consumer goods operate outlets that trade directly with household customer classified by: type of good/service, size, ownership, location, brand enables producers to reach a wider audience high loss of profit margin Best Distribution Channel nature of product: technical/complex, customised, type of product, desired image of the product market: geographically spread, overseas, extent of the competition business: size, objectives, established distribution network, control legal issues, limitations, risk of selling to inappropriate customer Distributors & Dealers take products from producers and sell them on often sell onto the end customer rather than a retailer usually much narrower product range involved in providing after sales service Wholesalers stock a range of products from several producers sell onto retailers Franchises independent business that operate a branded product/service in exchange for a licence fee and a share of sales commonly used by business (franchisors) that wish to expand a service based product into a much wider geographical area Agents sell the products and services of producers in return for a commission, percentage of the sales revenue often working in the service sector 45

FINANCE

Finance Cash is the life of any business and once a business is established it will need to raise finance to help it expand. If a business wants to grow it will need to finance that growth. Business will need to obtain finance to fund: new products and market development increase in production capacity additional trading locations paying the wages/salaries of additional employees as they are added to the payroll Factors Things that determine the type and amount of finance that a growing business needs. profitability: stronger means business is able to finance expansion through reinvesting profits rather than looking for external finance management track record: external providers will look at the abilities and experience of the business to determine the risk involved short/long term: reason for the finance is a main consideration legal structure: public company has the option of raising finance through public stock markets 47

Internal Sources Retained Profits
when a business makes a net profit, shareholders have a decision to: extract it from the business through dividends or reinvest it by leaving profits in the business can be in the bank, spent on additional machinery, get more stocks, reduce overdrafts or loans total value of retained profits is in the equity section of the balance sheet however this could anger shareholders and be criticised for hoarding too much cash advantages cheap don’t have to repay, very flexible complete control, doesn’t dilute ownership Reduction In Work Capital reducing the amount invested in working capital some operate with too much stock and trade debtors, this can be reduced increase the amount owed to trade creditors as a source of short term finance this has to be sustainable for it to become a long term source of finance however working capital usually increases as more stock will be needed and allowing more customers to increase the amounts they owe, to grow Disposal Of Assets / Sale & Leaseback selling non current assets (not needed) like spare land/buildings & equipment creates a one off cash inflow sale and leaseback raises cash from the sale of fixed assets then leasing them back from the new owner 48

External Venture Capital / Private Equity
long term share capital to help private companies grow and succeed helps an entrepreneur/business owner looking to start up, expand, buy into a business, buy out part of an existing group, turnaround/revitalise a company lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of the business is invested in exchange for a stake in the company, venture capitalist’s return is dependent on the growth and profitability prefer to back a entrepreneurial business which aim and have the potential for sales and profit growth advantages great amount of money benefits from specialist investor support better discipline to business management & strategy helps original owners realise their investment disadvantages requires a high rate of return often supported by a high level of bank debt not long term, venture capitalist aims to sell 5-7years loss of control External Selling Shares Flotation – new issue of shares stock market flotation raises new capital by selling a percentage of a company on a stock market for the first time allow existing shareholders to achieve a full/partial disposal of their investments base of the company becomes much wider Rights Issue raise fresh capital company issue new shares, offering them first to existing shareholders shares in a rights issue will be offered at a significant discount to the current market price, especially if the shareholders for those shares are really needed 49

back overdrafts, band loans, debentures
External Raising Loan Capital back overdrafts, band loans, debentures Bank Overdrafts bank lets the business use money which do they do not have creating a negative balance, in return for a high interest rate as a business gets bigger its overdraft facility often needs to grow essentially a short term source of finance used for funding the day to day payments required by a business flexibility, quick and interest is only paid on the amount used advantages easy to arrange flexible interest only paid on the amount used disadvantages short notice withdrawal interest charge varies very high interest rate Bank Loan bank gives you money which you have to pay back with interest within a fixed period of time more available for well established growing businesses as they have established track record of profitability advantages greater certainty of funding, terms complied with appropriate method of fixed assets disadvantages requires security harder to arrange Debentures form of bond/long term loan which is issued by company carries a fixed rate of interest over the course of the loan form of investing in a company which is more secure as interest payments must be made debenture holders have no share in the company itself debenture is the document the company gives its creditors of evidence of the existence and terms of the loan a creditor can take charge over some or all of the assets of the company increasing the chances of being repaid 50

Profit & Loss Account Trading Account Sales Revenue Opening Stock
Purchases Closing Stock Cost of Goods Sold Gross Profit 1,000 12,000 2,000 11,000 35,000 24,000 Profit & Loss Account Expenses Electricity & Gas Vehicles (Petrol) Telephone Rent Operating Profit Less Interest Net Profit Before Tax Less Tax Net Profit After Tax 2,950 500 325 5,500 2,500 3,000 14,725 12,225 9,225 Appropriation Account Retained Profit Dividends Drawings - 7,225 Three Different Sections: Trading Account Profit and Loss Account Appropriation Account Profit and loss account looks at all of the things that you have bought and sold across the year and takes away all of the costs you had to pay during that year. If you make more money than you have to pay out you are in profit and if you payout more than you make then you are in a loss. GROSS PROFIT MARGIN = (GROSS PROFIT / REVENUE) X 100 32%: makes a gross profit of £0.32 for each £1 of revenue NET PROFIT MARGIN = (NET PROFIT / REVENUE) X 100 effectively business turns sales into profit, efficiency of the business 51

Calculates the amount of gross profit the business makes.
Profit & Loss Account Trading Account Calculates the amount of gross profit the business makes. cost of goods = opening stock + purchases – closing stock gross profit = revenue – cost of goods sold Gross profit shows us the level of profit earned on the buying and selling of goods. Appropriation Account Net profit is entirely your own money to spend as you want to. Appropriation account shows us what the business decides to do with the net profit. retained profits: money saved, can be used for future investment and means they will need to borrow less money to the bank dividends: a company will need to give money to their shareholders drawings: owner of the business takes out money for their own personal use Profit & Loss Account Expenses are extra costs that you have to pay for, things that help you operate as a business. This includes electric/gas/telephone bills, staff wages, rent for warehouse, van hire. operating profit = gross profit – total expenses You always pay the banks back first if you awe them. Then the government in the form of taxes, sole traders/partnerships pay income tax and companies pay corporation tax. net profit = operating profit – interest - taxes 52

BALANCE SHEET BALANCE SHEET shows financial position of assets and liabilities of a business at specific moment ASSETS: everything that is owned by a business which has value NON CURRENT ASSETS: value of assets that the business has purchased and expects to keep for more than one year DEPRECIATION: allowance for the wearing out of a non current asset over time CURRENT ASSETS: cash, cash equivalents, expected to be turned into cash during the next year LIQUIDITY: how easy it is to turn current asset into cash LIABILITIES: debts sum of money that is owed CURRENT LIABILITIES: amount owed which are due to be paid within the next year NON CURRENT LIABILITIES: long term liabilities that need to be settled in more than a years time EQUITY: value of capital invested into the company by shareholders and the profits that have been retained LIQUIDITY RATIOS: help assess is there is efficient cash or equivalent current assets to be able to pay its debts as they become due, if doesn’t have cash its debts becomes insolvent, focus on short term using current assets and current liabilities CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES how much business has for every £1 that is owed ACID TEST RATIO/QUICK RATIO = (CURRENT ASSETS - STOCK) / CURRENT LIABILITIES stock is harder and slower to be turned into cash 53

PEOPLE IN BUSINESS

Organisational Charts
Hierarchy level of hierarchy is the numbers of layers within an organisation Span Of Control the numbers of subordinates a manager is directly responsible for narrow span of control: allow for closer supervision, more layers in hierarchy may be required, helps more effective communication wide span of control: gives subordinates more independence, more appropriate if labour costs are significant, reduce number of managers factors: experience and personality of manager nature of business skills and attitudes of employees tradition and culture of organisation Chains Of Command describes the lines of authority within a business 55

De/Centralisation Decentralised Structures
decision making is spread out to include more junior managers in the hierarchy, as well as individual business units or trading locations Advantages decisions are made closer to the customer better able to respond to local circumstances improved level of customer service consistent with aiming for a flatter hierarchy good way of training and developing junior management improve staff motivation Disadvantages more difficult to ensure consistent practices and policies diseconomies of scale strong leadership is not present De/Centralisation Decision Making = Power & Authority centralised: authority rest with senior management at the centre of a business decentralised: authority given further down the hierarchy away from the centre most large business usually have decentralisation as it operates from several location, adding new business units and markets how much independence do business units/groups within a business have when it comes to the key decisions Centralised Structures keep decision making firmly at the top of the hierarchy Advantages easier to enforce policies and rules for the whole business prevents parts of the business becoming too independent easier to co ordinate and control economies of scale and overhead savings easier to achieve greater use of specialisation quicker decision making, stronger leadership Disadvantages more bureaucratic, extra layers lack of authority down hierarchy, may reduce manager motivation 56

Recruiting Staff Application Form
The employers designs it and sends it to applicants, the business is able to tailor it to their exact needs and ask specific questions. When analysing application it will normally be split: those to reject: not meets the standards set out in the job specification, wrong qualifications, insufficient experience, not completed application short list: about 3-10 of the best candidates who are asked to interview long list: in case those on the short list drop out or don’t appear suitable during interview, wont put them through selection process unless they have to Recruitment Process recruiting employees with the correct sill can add value to a business recruiting workers at a wage or salary that business can afford will reduce costs employees should be carefully selected, managed and retained Curriculum Vitae (CV) A business will ask applicants to provide this which includes: personal details: name, address, date of birth, nationality educational history: examinational results, schools attended, professional qualifications previous employment: no of employers, position held, main achievements, reasons for leaving suitability/reasons for applying names of referees: recent employer, people who know applicant well independently 57

Internal/External Recruiting Externally job centres job advertisements
recruitment agency personal recommendation Objectives Of Job Advertisement inform audience of potential candidates about opportunity provide information to inform and interest applicants help stop unsuitable applicants obtain suitably qualifies applicants Internal/External Internal Recruitment Looks to fill the vacancy from within its existing work force Advantages cheaper and quicker people already familiar with business provides opportunities for promotion, motivating knows strengths and weaknesses of candidates Disadvantages limits the number of potential applicants no new ideas introduces resentment amongst candidates no appointed creates another vacancy to be filled Benefits of Interview For Employer: extra detail and information conversational ability natural enthusiasm and manners reactions under pressure For Candidate: job/business right for them culture of business is like exact details of job Employment Contract Legal document describing obligations of employee and employer to each other. External Recruitment Looks to fill the vacancy from any suitable applicant outside the business Advantages bring in new ideas, wider range of experience larger pool of workers from which to find the best candidate Disadvantages more expensive longer process, advertising and interviews selection process may not be effective enough to reveal best candidate 58

Training Training Strategy
identify the kills and abilities needed by employees action plan show how investment in training and development will help meet business goals and objectives implement the plan, monitoring progress and effectiveness Training Training Process of increasing the knowledge and skills of the workforce to enable them to perform their jobs effectively. Reasons For Training new employees (induction training) improve productivity support higher standards new technology/products support employee promotion/progression retraining Not Investing In Training fear employees will be taken by competitors who will then benefit minimise short term costs training takes time to have the desired effect don’t think that training works takes up time when more useful things can be done Induction Training Enables a new recruit to become productive as quickly as possible and can avoid costly mistakes by not knowing the procedures or techniques of their new job. Includes: learning about the duties of the job meeting new colleagues seeing the layout of the premises learning the values and aims of the business learning about the internal working and policies of the business Benefits Of Training higher quality better productivity improved motivation more flexibility through better skills less supervision required easier to implement changes 59

Training Effective Training employees feel more loyal to the business
shows business is taking an interest in its workers employees benefit from better promotion opportunities employees achieve more at work Training On The Job Training Employees receive training whilst remaining in the workplace. Include demonstrations, coaching, job rotating and projects. Advantages alongside real colleagues given individual training cheaper no travel/accommodation worker still producing output trained in firms preferred method Disadvantages bad habits can be passed on trainer may need to leave their work to help quality of trainees work could be poor, wasted resources more suited to individual workers not groups Appraisal performance review, making a judgement about how well an employee is doing once or twice a year carried out by their line manager discuss weakness or problems and come up with solutions set objectives manage performance line manager carry out appraisal provide rewards/remedies Off The Job Training Employees taken away from their place of work to be trained. Includes day release, learning classes, block release courses, sandwich courses, sponsored courses in higher education and self study. Advantages provided by experts and specialists specially designed training equipment enjoy the change of environment Disadvantages more expensive lost working time 60

Motivation Motivation is the will to work
it comes from the enjoyment of work itself and from the desire to achieve certain goals Why People Go To Work to earn money/ a living for job satisfaction to belong to a group for a sense of security to have a feeling of self worth nothing else to do Non Financial Methods Of Motivation empowerment: delegating responsibility to employees praise: recognition for good work promotion: promoting staff to a position of higher responsibility job enrichment: giving staff more challenging and interesting tasks job enlargement: giving employees more tasks of a similar level of complexity working environment: provide a safe, clean, comfortable environment to work in team working: provide opportunities to work in teams job rotation: movement of employees through a range of jobs in order to increase interest Advantages Of Well Motivated Workforce better productivity better quality lower levels of absenteeism lower levels of employees leaving business lower training and recruitment costs 61

Three types: basic pay, performance pay, fringe benefits
Remuneration Direct/Base Pay Fixed salary or wage for the standard for the job often reflects the time spent working, £/hour. Why pay is important? large cast for a business people feel strongly about it is the subject of important business legislations helps attract reliable employees with the skills the business needs for success helps retain employees, instead of joining a competitor What goes into it? basic time or piece rate overtime at premium rate shift bonus for unsociable hours allowances (like uniform) length of service bonus Remuneration is the financial reward that is offered to an employee for providing their services. Three types: basic pay, performance pay, fringe benefits It aims to: help recruit and retain quality labour motivate individuals and team performances support organisational structure by aligning it with roles and responsibilities Wages paid weekly weekly/hourly rate based on skill or experience extra pay made for overtime Salaries paid monthly agreed annual amount based on grade structure overtime not usually paid 62

Remuneration Advantages encourages setting of objectives
encourages monitoring of and feedback on performance promotes entrepreneurial behaviour, greater customer service and quality less need for supervision and control attracts people who like rewards for delivering results Disadvantages not all employees motivated by objectives undermine teamwork if rewards are linked to individuals focus on how much is produced rather than the quality of what is produced focus on short term productivity rather than long term goals employees frustrated if targets are not achievable Remuneration Performance Pay Incentivise to employees and management to achieve agreed objectives, either as individuals or teams bonuses: specific rewards to achieving individual/team targets commission: a percentage or revenues earned on achieved sales. commonly a high proportion of remuneration for salesmen suggestion schemes: payments or prizes are awarded for employees who make workable suggestions on improved quality or efficiency employee share ownership: allows employees to acquire shares in the employing company Fringe Benefits financial benefits that are not paid out directly in cash extras employees get for working in the business many fringe benefits are legal entitlements: sick pay, maternity pay, paternity leave company cars, discounted season tickets, health insurance, pensions, holiday pay, childcare provision, staff uniforms, staff discounts 63

Retention Of Staff Recruiting suitable employees and keeping them is a big business task. The proportion of employees who leave each year is known as staff turnover. Employee retention is the ability of a business to convince its employees to remain within the business. Advantages of experiencing staff turnover chance for new people to be brought into the business who may have fresh ideas and up to date market knowledge workers with specialist knowledge or expertise can be employed rather than having to train up existing lower skilled employees To improve employee retention by offering: financial incentives: bonus, salary rise non financial incentives: promotion, higher status improving effectiveness of its recruitment and selection processes so that fewer unsuitable employees are recruited in the first place conducting research to understand why employees are leaving Why a high staff turnover could cause problems for a business? increase recruitment costs reflects poor morale in workforce and so low productivity levels increases training costs of new workers loss of productivity while new workers settles in Flexible Working Practices in order to retain staff and fit in with the changing trend in UK employment and working patterns greater emphasis on flexible hours contracts and part time working mainly to allow the growing number of women to look after their families and have a working life 64

OPERATIONS MANAGEMENT

Production Methods Job: one off or small number of items produced made to customers specifications Batch: similar items are produced together, each batch goes through one stage of production process before moving onto next stage Process: series of processes which raw materials go through, end result is a large quantity of finished product Flow Production a continuous movement of items through the production process, when one task is finished the next task must start immediately so time taken on each task must be the same advantage normally be automated which reduces unit costs large quantities can be produced ideal for consistent quality products disadvantage heavy investment required in process design and production equipment/facilities difficult and disruptive if the production process has to be stopped little opportunity to make different versions of the product 66

Production Efficiency
Where a business has efficient production, it is operating at maximum output at minimum cost per unit of output. Efficiency is a measure of how well the production or transformation process is performing. A more efficient business will produce lower cost goods than competitors and may generate more profit possibly at lower prices. Ways To Measure Efficiency productivity: measure the relationship between inputs into the production process and the resultant out puts unit costs: divide total cost by the number of units produced non productive (idle) resources: resources that aren’t in constant use, employees left with nothing to do, machines used for part of available time, too many resources sign of inefficiency Calculating Productivity output per worker or hour of labour output per hour / day / week output per machine Improve Productivity training improved motivation more and better capital equipment better quality raw materials (reduces amount of time wasted on rejected products) improved organisation of production, eg. less wastage Average Cost Per Unit = Total Production Cost (£) / Total Output (units) 67

Lean production is an approach to management that focuses on cutting waste while ensuring quality. It aims to cut costs by making the business more efficient and responsive to market needs. Lean Production Lean Approach To Managing Operations doing the simple things well doing things better involving employees in the continuous process of improvement avoiding waste Cell Production flow production line split into a number of self contained units, each team responsible for a significant part of the finished product, team members are skilled at a number of roles allowing job rotation JIT (Just In Time) inputs in the production process only arrive when they are needed so storage space not needed Kaizen continuous improvement constantly introducing small incremental changes in a business on order to improve quality/efficiency, assumes that employees are the best people to identify improvements in the way things are done as they see the processes in action all the time Waste = Cost, Less Waste = Lower Costs over production: making more than is needed, excess stocks waiting time: equipment and people standing waiting for a production process to be completed or resource to arrive transport: moving resources around unnecessarily stocks: held as an acceptable buffer, but shouldn’t be excessive motion: worker who appears business but is not actually adding any value defects: output that does not reach the required quality standard, significant cost 68

Economies Of Scale Economies of scale are the cost advantages that a business can exploit by expanding their scale of production. The effect of this is to reduce the average unit cost of production allowing lower prices for consumers. Technical Economies Of Scale Large scale businesses can afford to invest in expensive and specialist capital machinery. Specialisation Of The Workforce Large businesses split complex production processes into separate tasks to boost productivity, by specialising in certain tasks/processes the workforce is able to produce more output in the same time. Marketing Economies Of Scale Large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices. Financial Economies Of Scale Large firms are usually rated by the financial markets to be more credit worthy and have access to credit facilities with favorable rate of borrowing. Business on the stock market can raise fresh money more cheaply through the issue of shares. 69

Diseconomies Of Scale A business may eventually experience a rise in unit costs caused by diseconomies of scale. poor communication between different departments and along chain of command lack of motivation loss of direction, co ordination, co operation, control Benefits Of Staying Small founder/owner can remain in control easier to remain closer to customers more flexible and quicker decision making employees may be more motivated feeling part of a smaller team avoids risky expansion 70

Quality is meeting the needs and expectations of customers.
Customers want quality that is appropriate to the price that they are prepared to pay and level of competition in the market. Costs Of Poor Quality lost customers cost of reworking/remaking products cost of replacements/refunds wasted material damages reputation/business name Benefits Of Improved Quality customer loyalty, repeat purchase, recommend better image/reputation retailers want to stock the product higher demand lower unit costs, less waste/rejected output more satisfied customers higher selling prices, less need to discount attracting/retaining good staff Aspects Of Quality good design, look and style good functionality, does the job well reliable, acceptable level of breakdown consistency durable, lasts as long as it should good after sales service value for money 71

Quality Management Quality Control
process of inspecting products to ensure that they meet the required quality standards focus on outputs achieved by sampling, checking, inspection targeted at production activities emphasises required standards defect products are inspected out Total Quality Management management philosophy committed to a focus on continuous improvements of product and services with the involvement of the entire workforce attitude that whole business understands the need for quality and seeks to achieve it everyone in workforce is concerned with quality at every stage of production process quality is ensured by workers and not inspectors advantages puts customer at heart of production process motivational, workers more involved making decisions less waste, not throwing out defective finished products eliminates cost of inspection disadvantages requires strong leadership and a keen workforce a lot of investment in training & support disruption and costs may outweigh benefits Quality Assurance processes that ensure production quality meets the requirements of customers focus on processes achieved by improving production processes targeted at the whole organisation emphasises the customer quality is built into the product 72

YR 11 BUSINESS STUDIES MOCKS

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