Unit 4.1 What Are The Key Decisions That Businesses Make?

WHAT WILL BE THE OBJECTIVES OF THE BUSINESS? Is it just to survive? OR Does it want to make the largest possible profit?

The owners - eg, shareholders, sole trader, partners - may wish to achieve maximum profits and offer a quality product/service. The workers may be more interested in good pay and working conditions. The managers may wish to ensure the survival of the business. The customer - may be most interested in value for money, a quality product/service and a high standard of customer care. The government - may be interested in ensuring that all legal/environmental requirements which apply to the business are met.

WHICH GOODS OR SERVICES WILL THE BUSINESS PRODUCE? Businesses have to decide: what goods and services will be produced; and therefore - what resources, like raw materials and workers, are needed to produce these goods and services. A new business will normally decide to offer a good or service for which they believe there is a gap in the market - eg a taxi service in a new suburb; locally grown organic vegetables for the increasingly health conscious market.

HOW WILL THE BUSINESS ORGANISE PRODUCTION? Every business has to decide how it will organise the production of the goods or services it will produce and sell. It has to plan:  what inputs (resources) will be required;  where supplies of these resources will be purchased;  how production will be organised - eg machine/labour intensive;  what skills will be required;  what stocks will need to be kept;  how the finished product/service will be delivered to its customers.

HOW MANY GOODS OR SERVICES WILL BE PRODUCED BY THE BUSINESS? One way in which a business can plan its production levels is to draw up a budget. to calculate the break-even point of production. To do this it will need to know the fixed and variable costs of production as well as the price it plans to charge for its product.

WHERE WILL THE BUSINESS PRODUCE ITS GOODS OR SERVICES? Location decisions are very important. Although a number of factors influence business location (see Unit 3.1 for specific details on location) some of the key influencing factors are: the type of good/service being produced; transport requirements; labour force requirements; target market - ie your customers.

WHAT PRICE WILL THE BUSINESS CHARGE FOR ITS GOODS OR SERVICES? In a ‘market economy’, profit is a motivating factor and the business has to balance the demand for its goods/services and the price to be charged for these products. If the price is set too high, very few products will be sold. If it is set too low, many will be sold but costs will not be covered. Profits and losses can be the sign for businesses to expand or to cut back production.

HOW WILL THE BUSINESS MOTIVATE ITS WORKERS? Businesses want their workers to work hard and produce goods and services of a high standard. Workers are more likely to do this if they are well motivated.  Training

WHAT MARKETING DECISIONS WILL BE MADE? Businesses have to sell what they produce. They therefore have to make a number of marketing decisions. These include:  Which goods/services will be produced and sold (product);  What price will be charged for these products (price);  How the products will be promoted to the customer (promotion);  Where the products will be sold (place).

Product Businesses have to decide what to make and sell. Businesses with this sort of information are far more likely to be successful than ones who have little knowledge of their market. Businesses need information if they are to make effective marketing decisions. One way of gaining this information is by carrying out market research. There are various types of market research and businesses need to decide which methods are most likely to give them the information they need - eg, phone call, questionnaire, clipboard questions, interview, advertising.

Price Price is one element of the marketing mix. A business must decide how to price its product. In making this decision it needs to consider:  the prices charged by competitors for similar products;  the best price to charge to achieve increased sales figures;  the minimum price to cover the costs of production.  The higher the price set, the lower will be the demand for their product and the less they will be able to sell. Some businesses have to accept the market price for their product if they are to sell at all, eg petrol stations charge “the market price”.

Promotion Promotion is the third element of the marketing mix and a business will have to decide how it will promote its product. Promotion options can include:  advertising in newspapers, on TV, on radio, on the internet;  giving away ‘free’ gifts with the product;  offering discounts for bulk buying.

Place Finally a business must decide where to sell its product - in the local, national or international market - and whether to sell in retail shops, to wholesale distributors, in mail order catalogue, via tele-sales etc.

WHAT WILL DETERMINE IF THE BUSINESS MAKES A PROFIT OR A LOSS? Success? If the business is providing a product (good or service) that customers want, it may sell the product and, more importantly, make a profit if the price is right. If customers don’t buy enough or pay enough, the business will make a loss.

Learning from past success or failure Businesses have to respond to the market if they are to survive. I’m sure you can think of some good ideas to keep your customers loyal to your firm. Businesses must therefore consider ways in which it will retain market

HOW WILL PROFITS BE USED? If they make losses over a period of time, they are likely to be forced out of business. pay it out to shareholders, buy new machinery or acquire another business. If there are high profits to be made in a market, then a business might be tempted to enter the market or expand existing production.

WHAT WILL THE BUSINESS INCLUDE IN ITS BUSINESS PLAN? The business plan needs to show: What will be produced; How production will be organised; Where production will be located; How and where it will be marketed; How finance will be obtained to start the business; Who will work in the business; The likely sales, costs, and profit of the business.

WILL THE BUSINESS EXPAND OR STAY THE SAME SIZE? If the business wants to maximise profits, it needs to earn the highest possible revenue and to reduce cost to a minimum. To do this, it must know where its revenue is coming from and what its costs are. The level of revenue and costs will depend almost totally on the size and type of organisation involved.

BUSINESS SIZE The reasons for expanding - such as greater profits, taking more control of the market, personal satisfaction; The equipment needed to produce the goods or services - such as the use of machinery and people’s skills to gain the benefits of large-scale production (making better use of the machinery and people); The costs per unit of production as more is produced - such as the real facts of economies (or dis- economies) of scale (spreading the costs over more units) and spreading the fixed costs; How flexible the business is prepared to be in the face of change - such as increased competition, changes in government policy and the law, new technology - and of course new customer tastes.