Managing a Business - Miss Cromie`s Business Studies Site

Transcription

Bare Bones Revision Guide
AQA
AS
Business Studies
Unit 2
Managing a Business
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AQA AS Business Studies Unit 2
Managing a Business
Phil Waterhouse
presents this information simply and
cash
copyright
patent
setting budgets
trademark
strengths and weaknesses
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
raising finance
risks
rewards
budgets
risk
market research
opportunity cost
setting budgets
plan
analysis and evaluation;
cash
budgets
includes invaluable exam tips to help
maximise your performance;
concludes with two integrated case
Using budgets ��2
Improving cash flow��3
Measuring and increasing profit��4
6 Notes: People in business
Improving organisational structures��6
Measuring the effectiveness of the workforce��8
Recruitment, selection and training��8
Motivating employees ��9
11 Notes: Operations management
to succeed in the AQA Unit 2 exam;
illustrates the higher lever skills of
business ideas
lim an so
ite d ur
d co ad ce
mpviserss
an
ies
se flo ing maople
w
so tting fore rket
ketsts
br urce bud ca s
st
ea
ca ke s of get
trash floven fin
s
co nsfo w an ance
ns
fo
pu ult rming re alys
ca
bli an
c
ts re st is
ing
fore
bud
res
e
ting
bu
leg
ensinessarc
mark
fixed et
en terp planh
trep ri s
cas
al
fin structugets t
bu
adsine renese
pr dingss id ur
coivate va eas
cos m
lim lu
undts, reve pa
ite e
caserstandnues ni d
es
set h flowing and
marprofi
and entat
total ion
an
ce re
s
segm
variable
sta
trad rtu cost
add emaps
so gro
op le trawth
pric portu de
cone, tota nit rs
pat sul l rev y co
rewardent tan
enu st
s
ts
ande and
rk
maing valu
market e
rke siz
t e
adv pro
ise fit
rs
Starting a business
entrepreneur
traders
s mar sole patent
em ke
ideast un
pl t re rewards
ss reca
de oyin se
ca rstand
g pearch
sh
breakeven analysis
copyright
trademark
risks
rise
terp
en prene
s
sine fo
bu flow idea
sh
ca ess
sin
bu
ur
gths
stren
analysis
fits
plan
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en
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sts
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rst t re
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rk
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ets
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business ideas Starting a business Financial planning
1 About the exam
2 Notes: Finance
provides the essential content you need
effectively;
Contents
This Bare Bones Revision Guide:
Making operational decisions ��11
Quality ��11
Customer service��12
Working with suppliers��13
Using technology in operations��13
studies for exam practice.
The superfluous bumpf that comes with
other guides has been stripped away in
order to leave you with the key to effective
revision and exam success – clear,
concise revision notes!
Time constraints make it impossible
for you to revisit all the material studied
during your course. Instead, you need
to consolidate your knowledge and
understanding by focusing on the central
terms and concepts provided here. Use
these as the framework for recalling other
content before going on to read the case
14
Notes: Marketing and the
competitive environment
studies on pages 18–21. You should
are provided so that you can assess the
Effective marketing ��14
Designing an effective marketing mix ��14
Using the marketing mix: product, promotion, price
and place��15
Marketing and competitiveness��17
Case study 1: T & M Sherborn��18
Case study 2: Best Burger Company ��20
© Cross Academe Ltd 2013
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timed conditions. The A-grade responses
quality of your own answers, identifying
any weaknesses. You can then review
these topic areas.
The structure of the revision notes follows
18 Exam practice
tackle the accompanying questions under
the order of the AQA specification.
The A-Grade Analysis/Evaluation
Examples are designed to help you
ISBN 978-1-909592-16-2
develop these higher level skills, and the
Design by:
Oxford Designers & Illustrators
Number Crunching feature is designed
Published by:
Cross Academe Limited
St John’s House
5 South Parade
Oxford OX2 7JL
The Heathland School
to check your calculation skills.
The case studies will test not only these
skills but also the skill of application.
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
al
fin str
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
ni er
an ucture
ce
s
fixed et
variabsegm
le and enta
total tion
sta
co
so gro
op le tr wth
pric portuad
tra rtu cost
dem ps
add ark
e,
tot
s
pa nsult al rev ty co
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
ide st emploet re rewards
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
marploys of finalysng
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
tion
tra
ribu e
coning valu
kets
add marast
st
w
sts
creovearnutuesps
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
About the exam
The Unit 2 exam builds on the content covered in Unit 1. The
It is important that you are familiar with the different trigger
exam is 90 minutes long and the maximum number of marks is
words used by examiners and that you then demonstrate the
80. This is then converted into a UMS total of 120, while Unit 1
skills they are looking for.
is worth only 80 uniform marks. This therefore means that this
exam is worth 60% of your overall AS mark.
Analytical questions will start with trigger words such as
‘Examine’, ‘Consider’, ‘Explain’ or just simply ‘Analyse’. With
The exam is split into two sections – each on a different
these questions you are not required to make a judgement,
type of business. One of these will normally be a nationally
but you are expected to construct a chain of argument.
recognised firm while the other is likely to be a new business
start-up. The Unit 2 exam is different from the Unit 1 exam
EXAM TIP
in that there are no longer many low-tariff questions. Each
Analysis is achieved by building a chain. Useful words or
section of the exam is worth 40 marks and after a brief
connectives to do this are ‘and so…’, ‘which will mean…’,
company case study, you will be expected to answer 4–5
‘which may then lead to…’, ‘resulting in this…’, ‘which may then
questions on that business. Questions (a) and (b) will be
affect this…’. Try to make sure that you are always explaining
analytical while questions (c) and (d) will be evaluative.
‘why’. You do not want the examiner to think ‘and then what’?
Exam skills
Evaluative questions will start with trigger words such as ‘Discuss’,
Success in any exam is about playing to the rules set out by
the examiners. The four key skills that they will be looking for
are as follows:
‘To what extent’, ‘Justify’. With these questions you must
make a judgement. This needs to be based on the arguments
you have put forward and, most importantly, must be justified.
A good approach is to think of using the three-paragraph or
Knowledge and understanding: Have you learnt and
add-on rule: (1) paragraph builds an analytical argument in
understood the key terms?
agreement; (2) paragraph builds an analytical argument against;
Application: Have you thought about the business and used
the data?
(3) final paragraph makes a decision based on the question.
EXAM TIP
Analysis: Have you managed to build up a good chain of
Reread the question at least three times while you are answering
reasoning/argument?
it. Keep checking that you are still answering exactly the
Evaluation: Have you made a judgement and backed it up?
question set and try to link as many of the different functional
areas as possible.
The mark schemes are now based around the following
categorisation in relation to the four skills above:
Exam practice
Is the answer… good? reasonable? limited?
In addition to tackling the integrated case studies provided
You need to make sure that your answers are clearly applied to
the business presented in the exam, that you develop a line of
argument and that you then come to a conclusion.
on pages 18–21, you should gain exam practice by working
through past papers. These are readily available on the AQA
exam website (www.aqa.org.uk) along with the associated
mark schemes. Try and tackle these under the same time
constraints that you will have in the exam itself. You have
EXAM TIP
To help with your application to the business, ask yourself these
1 hour and 30 minutes to complete the exam, so practise!
three questions: Which companies are the main competitors in
Throughout this guide look out for the A-Grade Analysis/
the industry? What is unique about the company? What are the
Evaluation Examples in order to see how to turn your
major strengths and weaknesses of the business?
responses into A-grade answers.
1
cash
copyright
trademark
patent
setting budgets
business ideas
budgets
risk
contribution
partnerships
cost
cash flow
opportunity cost
raising finance
setting budgets
risks
rewards
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
se flo ing m ple
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
leg g buforecrkets
ensinessarc nies
en terp pla h
tre ri ns
p
mark
fixed et
variabsegm
le and enta
total tion
al
as
fin strucdgets t
an ture
ce
s
sta
ad pro
vis fit
ers
bu
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
tra rtu cost
dem ps
ark
add
so gro
op le tr wth
pric portuad
co e, tot ni er
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
forecasting
legal structure
risk
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
eo h
breakeven analysis
copyright
trademark
risks
analysis
plan
te
en pdrene
tre
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
sts
creovearnutuesps
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
ark
dem
ec
for ets
is
s an
th
alys s
ng
stre
n an n
ve pla ts
ke ss marke
ea
br ine ing arch
s nd
le
op
budersta t rese
un
ke ing peanceis
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
st
risks
tion
tra
ribu e
coning valu
kets
add marast
w
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
Notes
Finance
Using budgets
Example: A clothes shop budgeted for sales of £20,000 per
Definition: A budget is a financial plan that sets targets based
for total expenditure of £10,000 per month and its actual
month and actually achieved £25,000 per month. It budgeted
on projected costs and revenues that the business will face.
expenditure was £8000 per month.
An adverse variance arises when results are worse than
Types of budget
budgeted. This can happen in two ways:
Income budget: This shows the agreed, planned-for income
Actual revenues are lower than the budgeted figures
or sales revenue of the business (or a part of the business)
Actual costs are greater than the budgeted figures
over a set period of time.
Example: A local garage budgeted for sales of £6000 per
Expenditure budget: This shows the agreed, planned-for
month but only achieved £5000 per month. It budgeted
costs or expenditure of the business (or a part of the business)
for total expenditure of £3000 per month but its actual
over a set period of time.
expenditure was £3500 per month.
Profit budget: This combines both the income and
NUMBER CRUNCHING
expenditure budgets for the business and forecasts how much
profit the business (or a part of the business) will make over a
set period of time.
All figures
(000s)
Benefits of using budgets
Can measure performance
Can prove motivational
Make departments accountable
Give the business greater control and can be used to
monitor progress
Jan
Jan
Jan
Feb
Feb
Feb
Budget
Actual
Var.
Budget
Actual
Var.
150
10
180
175
(10)
90
95
40
40
Sales revenue
140
Materials
70
Other direct
costs
30
35
Overheads
20
20
Profit
20
15
0
25
0
22
18
Fill in the table above and state whether the overall profit for
Drawbacks of using budgets
the two months of January and February shows a favourable
New business start-ups lack experience in setting realistic
budgets
or adverse variance.
A-GRADE ANALYSIS EXAMPLE
Costs are volatile and can change quickly
Opportunities might be missed if budgets are applied too
Variance analysis is useful as it can help identify whether the
business is under- or over-budget in terms of sales and costs.
strictly
If a budget is inaccurate, it can prove extremely
It will need to review its budgets regularly so that it has a clear
idea about the progress it is making. This will allow the business
demotivating for staff
to adapt and adjust its budgets as required. Setting budgets
at the right level is an important skill and it is highly unlikely
Variance analysis
A favourable variance arises when results are better than
budgeted. This can happen in two ways:
2
that a new business start-up’s budgets will be completely
accurate. Variance analysis will help identify problem areas and
could prompt a search for alternative suppliers if costs are too
Actual revenues are greater than the budgeted figures
high or may lead to a reduction in expenditure in other areas.
Actual costs are lower than the budgeted figures
It will also enable the business to look at its sales projections
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
al
fin str
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
adjustment to the expenditure budget.
ni er
on marketing. However, such an increase would require an
an ucture
ce
s
action to try and increase sales, possibly by spending more
fixed et
variabsegm
le and enta
total tion
further product development; a negative variance may prompt
sta
co
so gro
op le tr wth
pric portuad
against actual figures. A positive variance may encourage
tra rtu cost
dem ps
add ark
e,
tot
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
tion
tra
ribu e
coning valu
kets
add marast
st
w
sts
creovearnutuesps
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
Sale and leaseback
Advantages
May bring in an immediate amount of cash
Reduces the need for maintenance costs
Disadvantages
Improving cash flow
Will be more expensive in the long run
Harder to secure more finance as fewer assets are left to
This topic was covered in Unit 1. Cash flow is a short-run
issue for a firm and measures the cash coming into the
business and the cash going out of the business over a given
use as security
Managing debtors by using factoring
Advantages
time period.
Immediate boost of cash
Causes of cash flow problems
Saves time in chasing up monies owed
The main causes of cash flow problems are:
Disadvantages
Seasonal demand
Over-estimation of sales or under-estimation of costs
Over-investment in fixed assets – firms may invest in assets
such as buildings and machinery, but not leave themselves
sufficient money for day-to-day payments
Credit sales – the marketing department will want to give
A firm will typically receive only 90% of the debts recovered
Customers may resent being chased by the factoring
company
Alternative solutions
credit to customers to attract them to the company, but this
Change or review suppliers
can lead to a shortage of cash
Take out less cash from the business (pay lower wages)
Poor stock management
Control stock more carefully
Unforeseen change
Diversify the range of products in order to reduce
seasonality factors
Possible solutions to cash flow problems
events
Bank overdraft
EXAM TIP
Advantages
Even though this topic does appear frequently in the Unit 1
Easy to organise
Only pay interest when the overdraft is being used
Flexible
exam, it is just as likely to be examined in Unit 2. However, the
challenge in Unit 2 is to interpret the given cash flow forecast
and suggest ways in which the business has managed its cash
Disadvantages
flow badly and ways in which it can be improved. It is crucial
Interest rates are flexible, making it hard to budget
to mention that cash flow is about timing and that it must be
distinguished from profit. Make sure that you do not confuse
accurately
Interest rates will be higher than on a bank loan
Will be more expensive in the long run
Set aside a contingency fund to cater for unpredictable
the two terms.
Sale of assets
If cash flow problems arise, a business is likely to need access
Advantages
to more funds quickly. One way of doing this is to arrange
Can raise large sums (e.g. sell a building)
Might not need the asset
Disadvantages
(or increase) an overdraft facility with the bank. This may be
relatively easy to arrange and set up, allowing the firm greater
flexibility. It will only have to pay interest on the overdraft while it
is being used. This means that the short-term cash flow problem
Hard to sell quickly
can be managed effectively. An alternative method is to use a
Reduces capacity
debt factoring company. This can benefit the business because
3
cash
copyright
trademark
patent
setting budgets
business ideas
budgets
risk
contribution
partnerships
cost
cash flow
opportunity cost
raising finance
setting budgets
risks
rewards
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
se flo ing m ple
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
leg g buforecrkets
ensinessarc nies
en terp pla h
tre ri ns
p
mark
fixed et
variabsegm
le and enta
total tion
al
as
fin strucdgets t
an ture
ce
s
sta
ad pro
vis fit
ers
bu
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
tra rtu cost
dem ps
ark
add
so gro
op le tr wth
pric portuad
co e, tot ni er
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
forecasting
legal structure
risk
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
eo h
breakeven analysis
copyright
trademark
risks
analysis
plan
te
en pdrene
tre
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
sts
creovearnutuesps
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
ark
dem
ec
for ets
is
s an
th
alys s
ng
stre
n an n
ve pla ts
ke ss marke
ea
br ine ing arch
s nd
le
op
budersta t rese
un
ke ing peanceis
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
st
risks
tion
tra
ribu e
coning valu
kets
add marast
w
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
the factoring company will typically pay the firm 90% of the
money owed straightaway. This will substantially improve its
cash position. Obviously the firm will not then receive all of the
funds owed, but the inflow of finance may be more important
and possibly critical.
EXAM TIP
Technically the specification only asks for net profit and ROCE
margins. However, in order to understand what the ratios mean
and to help you make more informed judgements, you should
be aware of gross profit as well. This will not only help you in
the A2 units but also enable you to understand how firms can
A-GRADE EVALUATION EXAMPLE
Many firms have to find solutions to cash flow problems.
One of the key factors is how much cash is required and how
improve their overall profitability – a highly probable question in
the Unit 2 exam.
quickly it needs to be raised. When trying to raise substantial
Net profit margin
sums of finance, selling assets or sale and leaseback are likely
Net profit is simply the sales revenue minus the direct
to prove the most effective solutions. However, this can take
(variable) cost and the indirect (fixed) cost of production. This
time and so it may not be the best option if cash is needed
is known as the bottom line because it shows how much profit
quickly. If smaller sums are required immediately, the firm
is made after all costs have been accounted for. It is normally
might be better off trying to arrange an overdraft or looking to
expressed as a percentage.
debt factoring. Of course, each solution has its drawbacks and
an opportunity cost. It would therefore be better in the long
term for firms to try and avoid running into cash flow problems.
For some firms, seasonal factors will constantly present cash
flow issues. However, by controlling stock more closely, or
by looking to diversify the product range so that they are less
reliant on seasonal peaks, these firms could avoid getting into
difficulty. It would also be advisable in my view for these firms
to set aside funds in the periods when trading is good so that
Net profit margin (%) =
Net profit
Revenue
× 100
Example: Games Workshop has a sales revenue of £15,000
per week. The direct costs involved in production are £1500.
However, there are fixed costs such as rent, rates and salaries
to pay, which amount to £8500 per week. The weekly net profit
is therefore £15,000 − £1500 − £8500 = £5000. The margin is
£5000/£15,000 × 100 = 33.3%.
they can be drawn upon during the periods when sales are
ROCE – return on capital employed
likely to be low.
This is the net profit expressed as a percentage of the capital
employed in the business. It is also known as the primary
Measuring and
increasing profit
efficiency ratio because it looks at how much money is earned
Profit = Total revenue − Total costs
each team member might put in £20 capital at the start. If the
by the capital invested in the business. A Young Enterprise
team of 10 people will start off with relative low levels of
capital invested in the business (typically around £200), as
team makes £800 net profit over the year, the ROCE is 400%.
Total revenue = Price × Quantity of units sold
Costs are made up of fixed (indirect) costs and variable (direct)
EXAM TIP
You will not be expected to have a detailed understanding
costs.
of capital employed at this stage of your course. Just ensure
Profitability ratios
that you know the formula so that you can make the ROCE
calculation and interpret its significance.
Gross profit margin
The gross profit made on a unit sold is simply the selling price
ROCE (%) =
(revenue) minus the direct (variable) cost of production of that
4
Gross profit
Revenue
Capital employed
× 100
If Games Workshop as a group made £45 million net profit
unit. It is normally expressed as a percentage.
Gross profit margin (%) =
Net profit
with £200 million of capital employed in the business, then the
× 100
ROCE = £45 million/£200 million × 100 = 22.5%.
Example: Games Workshop sells figures for £5.00 and the
The ROCE will be compared between different companies
direct cost of each figure is 50p. The gross profit on each
and is also measured against the interest rate at the bank. A
figure is therefore £4.50. The margin is £4.50/£5.00 × 100 =
business is more risky but is likely to provide greater returns
90%.
than the bank.
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
al
fin str
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
ni er
an ucture
ce
s
fixed et
variabsegm
le and enta
total tion
sta
co
so gro
op le tr wth
pric portuad
tra rtu cost
dem ps
add ark
e,
tot
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
tion
tra
ribu e
coning valu
kets
add marast
st
w
sts
creovearnutuesps
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
be to keep the same location and negotiate lower costs with
EXAM TIP
Your understanding of capital employed may be enhanced if you
think of the Dragons’ Den or more simply a Young Enterprise
team. The Dragons often decide not to invest because they
do not think they can get a return on their investment. They
might be asked to invest £100,000 but would expect the firm
to generate sufficient profits to justify the risk of the investment.
The Dragons will typically want a ROCE of at least 20%. The
opportunity cost of investing is the value of the next best
alternative. As Theo Paphitis famously states: ‘You are asking
me to invest my children’s inheritance’.
existing suppliers or new suppliers. If White Stuff were to switch
suppliers, this might reduce the quality of the clothing and this
might be picked up by the customers and could affect brand
loyalty. It could also take a while to build up a good relationship
with the new supplier, which might not be able to deliver the
required quantity or offer the same credit terms as the existing
supplier. However, the opportunity to supply such a major
retailer might mean the supplier is able to offer both a better
service and a lower price, which would improve White Stuff’s
profitability.
Distinction between cash and profit
Methods to increase profitability
Cash is generated by selling items of stock. However, not all
Reduce variable costs by switching suppliers
of this cash will be converted into profit as the firm will need to
Example: A bottle of Coke sells for £1.20 with a direct cost
meet the direct costs of selling the items as well as the indirect
of 40p. If a change in bottle supplier reduces that cost to
costs such as rent, rates and salaries.
30p, the profit margin will increase from 80p a bottle to 90p a
bottle.
Cash flow is about the short-term cash coming into and out of
the business. Profits are more long term. A building firm might
be highly profitable over the course of a year but still have
Reduce fixed costs by reducing expenses
Example: Crew Clothing pays £4000 a month in rent for its
offices. If the company moves premises and manages to
reduce its rent to only £3000 a month, this will increase its
profitability by £1000.
cash flow issues during certain periods because it has to pay
wages and purchase materials before houses are sold.
EXAM TIP
Students frequently fall into the trap of confusing cash flow and
Alter price, depending on the price elasticity of demand,
while costs remain constant
profit. They can also be lazy and make sweeping statements
such as that ‘lower prices will increase sales, which will in turn
Example: Greggs increases its selling price for a pasty from
£1.00 to £1.10 but the cost of a pasty remains at 50p. This will
increase the profit margin from 50p to 60p.
increase profits’. This statement ignores other factors at play
such as elasticity, related costs and overall long-term profits.
Ensure that when you are talking about cash flow you are not
talking about profit, and vice versa. Impress the examiner by
EXAM TIP
making this distinction early on.
The examples above are, of course, simplistic. In practice, it will
be harder to achieve an increase in profitability and you need
to be aware of the implications of raising price or switching
Cash flow issues tend to be short term whereas profit is more
supplier. These options offer great opportunities for both
of a long-run factor. Cash flow problems are commonplace
analysis and evaluation. Choosing one method is likely to have
for many firms and there are various causes and potential
a significant impact on other areas of the business. If you can
solutions. I therefore believe that low levels of profitability in
explain this, then you are likely to pick up high marks.
the long run generally pose a greater threat to a firm’s success.
This low profitability may mean the business is simply not
viable. Alternatively, the business might not be doing enough
By relocating to a cheaper area, the White Stuff store will
to increase profitability. Its prices might be too low or its costs
substantially lower its monthly overheads. However, a move
too high. The business will need to address this. If profits are
from its prime location might reduce the number of customers
low in the long term, they will not provide a fair reward for the
attracted to the store. This will affect sales revenue and so
entrepreneur or allow the business to grow. While cash flow
the drop in revenue may outweigh the reduction in cost. The
issues will often cause considerable stress in the short term,
business therefore needs to consider the likely effects of
they tend to be temporary. If the low profits persist, then the
moving the store to a lower-rent area. An alternative would
business may be forced to cease trading.
5
cash
copyright
trademark
patent
setting budgets
business ideas
budgets
risk
contribution
partnerships
cost
cash flow
opportunity cost
raising finance
setting budgets
risks
rewards
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
se flo ing m ple
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
leg g buforecrkets
ensinessarc nies
en terp pla h
tre ri ns
p
mark
fixed et
variabsegm
le and enta
total tion
al
as
fin strucdgets t
an ture
ce
s
sta
ad pro
vis fit
ers
bu
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
tra rtu cost
dem ps
ark
add
so gro
op le tr wth
pric portuad
co e, tot ni er
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
forecasting
legal structure
risk
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
eo h
breakeven analysis
copyright
trademark
risks
analysis
plan
te
en pdrene
tre
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
sts
creovearnutuesps
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
ark
dem
ec
for ets
is
s an
th
alys s
ng
stre
n an n
ve pla ts
ke ss marke
ea
br ine ing arch
s nd
le
op
budersta t rese
un
ke ing peanceis
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
st
risks
tion
tra
ribu e
coning valu
kets
add marast
w
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
Notes
People in business
Improving organisational
structures
Most jobs are grouped together and organised into the four
main functional areas of Marketing, Production, Finance and
HR. (The specification is also split in this way.)
This is the number of people for whom a manager is directly
responsible. A narrow span of control means that the manager
takes responsibility for only a few people. A wide span of
control means that the manager takes responsibility for
more people. A wide span of control tends to lead to a flatter
organisational structure. A narrow span of control tends to
Levels of hierarchy
lead to a taller structure.
The hierarchy determines the order of how people
EXAM TIP
communicate throughout the organisation. The higher up
The amount of work an individual has to carry out should be
the hierarchy, the more senior is the person. Normally in
considered within any organisation. It is important that workers
the hierarchy, communication flows down throughout the
have enough to do but equally important that they are not
organisation. However, there has been a shift towards
overloaded. Too much work can lead to dissatisfaction and
encouraging communication to flow upwards from the bottom
demotivation. Similar problems may arise if an individual has
to the top.
insufficient work. Examiners frequently seek to assess students’
understanding of the benefits and drawbacks of having tall
Tall structures
versus flat structures.
Advantages
Narrow span of control
Greater specialisation
Less opportunity for delegation
Greater opportunities for promotion
Supervision and control is greater
Clearly defined roles
Many levels of hierarchy (tall)
Narrow span of control
Greater opportunities for promotion
Wide span of control
Disadvantages
Communication problems might occur
Greater delegation opportunities
Slow decision making
Supervision and control is looser
Expensive to run as too many middle managers
Few levels of hierarchy (flat)
Workers may feel ‘over managed’
Fewer opportunities for promotion
Flat structures
Advantages
Centralised
All decisions are made by senior managers at Headquarters
Quicker decision making
Greater control
Better communication
Greater consistency
Cheaper as fewer levels of hierarchy
Allows for specialisation
Disadvantages
6
Span of control
Decentralised
Fewer opportunities for promotion
Decisions are delegated to individual departments
Fewer opportunities for specialisation
Increased motivation
Wider span of control
Managers develop skills of leadership
Managers can become overwhelmed
Quicker decision making
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
al
fin str
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
ni er
an ucture
ce
s
fixed et
variabsegm
le and enta
total tion
sta
co
so gro
op le tr wth
pric portuad
tra rtu cost
dem ps
add ark
e,
tot
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
tion
tra
ribu e
coning valu
kets
add marast
st
w
sts
creovearnutuesps
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
Delegation
EXAM TIP
Understanding the difference between these two types of
This is when the responsibility for a project is passed down
organisation – centralised and decentralised – is crucial. This
to a more junior colleague. It is important that the managers
distinction is frequently examined and the topic will reappear
trust the workers below them and also support them in the
in Unit 3.
way they carry out their roles. Smart delegation is a key role of
managers, helping to motivate the people below them within
the organisation and also allowing those individuals to gain
A centralised structure will bring many benefits to a firm. The
key experience that will benefit them in the long run.
decisions can be made by one group of people and then
communicated throughout the whole organisation. The direction
can be set and then implemented. This will lead to a common
purpose and will mean individuals know their respective
roles. The success of the firm will be very dependent on the
decision makers at the centre of the organisation. However,
such centralisation can stifle creativity and employees may
feel disempowered. Staff may feel demotivated, especially if
the decisions taken show no understanding of the needs of
individual departments.
Communication flows
Communication is a vital part of any successful business. It is
important that communication is effective and two-way. Firms
must make sure that all key information is communicated
effectively within a firm. Workers must know what is required
of them and also the objectives and goals of the business.
Vertical communication
Communication that passes from manager to subordinates
Decentralising the business can lead to faster decision
making and the ability to base decisions on local conditions.
It will also empower managers and help them develop their
leadership skills. This is likely to lead to greater productivity,
since individuals will be more motivated as they have a greater
say in the way the business is run.
and vice versa
Horizontal communication
Communication between workers at the same level within
an organisation
The nature of the business is vital in determining its organisa
Workforce roles
tional structure. Creative firms such as marketing agencies will
You need to be aware of the following different job roles within
tend to have a more laissez-faire approach and a flatter structure
an organisation:
– this will lead to better communication and more ideas coming
Managing directors – responsible for the vision and overall
leadership of the firm
through. Organisations such as schools will tend to have a
taller structure with clearly defined roles. This will help delineate
Managers – responsible for a particular functional area or
department of the business
responsibilities and create order. Organising by hierarchy also
allows individuals the opportunity for promotion, which will link
Team leaders – coordinate the work of a particular part of a
functional area
into motivation as well as assist communication. However, it
is not just the nature of the business (and associated skills)
Supervisors – oversee the work of operatives in large
organisations
that is important: businesses of different sizes need different
organisational structures to make them successful.
Operatives – responsible for specific tasks and producing
the products
EXAM TIP
The People section of the specification is very content heavy.
EXAM TIP
However, it is crucial that you see how it all links together. You
Students frequently show little understanding of how the work
need to link the organisational structures chosen by a business
place is organised in reality. They assume that the managing
to the size of the firm, to motivation theories, to communication
directors of an organisation are closely involved with its day-to-
and to delegation. ‘Good’ analysis is all about building a chain
day running and overlook the fact that this is actually delegated
of argument, such as: ‘The empowerment of local managers will
to people lower down. Those of you with part-time jobs will
lead to increased levels of motivation and improved customer
have practical experience of the levels of hierarchy within an
service, resulting in a better reputation for the business’. It is
organisation. In a school/college, the Principal will have relatively
also dependent on showing a clear grasp of the key terms and
little contact with the operatives on a day-to-day basis.
it is wise to make use of these terms throughout your response.
7
cash
copyright
trademark
patent
setting budgets
business ideas
budgets
risk
contribution
partnerships
cost
cash flow
opportunity cost
raising finance
setting budgets
risks
rewards
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
se flo ing m ple
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
leg g buforecrkets
ensinessarc nies
en terp pla h
tre ri ns
p
mark
fixed et
variabsegm
le and enta
total tion
al
as
fin strucdgets t
an ture
ce
s
sta
ad pro
vis fit
ers
bu
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
tra rtu cost
dem ps
ark
add
so gro
op le tr wth
pric portuad
co e, tot ni er
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
forecasting
legal structure
risk
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
eo h
breakeven analysis
copyright
trademark
risks
analysis
plan
te
en pdrene
tre
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
sts
creovearnutuesps
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
ark
dem
ec
for ets
is
s an
th
alys s
ng
stre
n an n
ve pla ts
ke ss marke
ea
br ine ing arch
s nd
le
op
budersta t rese
un
ke ing peanceis
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
st
risks
tion
tra
ribu e
coning valu
kets
add marast
w
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
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se
ak et risks
mark
d we
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gth
en
str
Measuring the effectiveness
of the workforce
Advantages
Cheaper to advertise
Labour productivity
Applicant knows the organisation and vice versa
This is the amount of output produced by each individual
worker. It is calculated as follows:
Labour productivity =
Internal recruitment
Offers promotion prospects and motivational opportunities
Disadvantages
Total output
Fewer new ideas
Number of workers
Limited pool of applicants
Example: A business produces 5000 units a week. It has 100
May create vacancies elsewhere
workers. The labour productivity is therefore 5000/100 = 500
units per worker per week. However, this is just an average.
External recruitment
Labour turnover
Advantages
Brings in new ideas
This is the ratio of the number of workers leaving an
organisation within a given time period (usually a year) to the
number of employees on the payroll. It is calculated as follows:
Labour turnover (%) =
Number of workers leaving
Total number of workers
× 100
Example: A Waitrose store has 100 members of staff. Last
year, 10 workers left and 10 new appointments were made.
The labour turnover is therefore 10/100 = 10%.
Wider pool of applicants
Disadvantages
More expensive
Will take longer to recruit
Candidate will require induction training
EXAM TIP
The relative advantages/disadvantages of internal and external
recruitment can be explained relatively easily, since the
A change in staff can be good as it brings in fresh ideas and new
initiatives. However, losing too many staff members can cause
problems because you lose their expertise and the invaluable
experience they have gained from working in the business.
High labour turnover also leads to increased recruitment and
training costs because new members of staff have to be hired.
A low labour turnover reduces this expense and means the firm
has a stable workforce that knows what is expected.
advantages of one will be the disadvantages of the other. This
area is frequently examined.
When a job is advertised, the business has to produce two
very important documents: the job description and the person
specification.
Job description
The job description is just that – it describes exactly what the
Recruitment, selection
and training
The recruitment process
1 A vacancy occurs
2 A job analysis is produced
8
job entails and this information is given to the applicant. It will
contain the following information:
Hours to be worked
Overview of the job
What tasks are expected to be carried out
Wages/salary
3 A job description is produced
Person specification
4 A person specification is produced
This document is for internal use and is not seen by the
5 Application forms are issued
applicant. It outlines the particular skills, qualities and
6 Candidates are short-listed
experience required for the position. The firm will have a
7 Candidates are interviewed
particular idea about what it wants and will be looking for the
8 A successful candidate is appointed
person to have those skills listed on the specification.
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
al
fin str
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
ni er
an ucture
ce
s
fixed et
variabsegm
le and enta
total tion
sta
co
so gro
op le tr wth
pric portuad
Methods of selection
tra rtu cost
dem ps
add ark
e,
tot
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
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bli
pu
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ve
ke fore ource
sour
th
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sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
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add marast
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sts
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ing
and
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ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
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s an
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en
str
Induction training
Interview: one to one and/or panel
The purpose of induction training (which may last a few hours
Assessment centres
or a few days) is to help a new employee settle down quickly
Psychometric testing – matching the individual to the
by becoming familiar with the people, the surroundings, the
person specification
job and the business.
Presentations
Work samples
Peer assessment
On-the-job training means that the workers are actually
productive because they are working. They get paid by the firm
A-GRADE EVALUATION
and will learn specific skills from experienced people within the
While the interview is still the main job selection method, the
company. This means that the firm is getting better value for
use of alternatives is increasing and this has clear benefits to
money and the workers will have a greater understanding of the
both the firm and the individual. This is because the interview
business. However, off-the-job training has benefits because
process can be quite a daunting and an unnatural environment.
the workers will go off site and gain formal qualifications from
People might have an excellent interview technique but not
an outside agency. The level of training is normally better and
be suitable for the job itself. In my view the ability to perform
wider ranging than that provided on the job. This will also
effectively in the job role is more important than being able to
benefit the business, since the individuals concerned are likely
present yourself in an interview. This is why assessment centres
to meet other people on the course and may bring back new
and work samples are more effective forms of selection. Certain
ideas. They are also likely to be more motivated, recognising
jobs, such as catering, should be based more on ability in the
that the company is paying for this greater level of training and
kitchen than on how a candidate comes across in the interview.
that this will boost their longer-term employability.
Similarly the recruitment of a teacher should be based more on
ability in the classroom. A wider method of selection is likely to
be more costly and time consuming, but if it secures the best
candidate for the role then I feel that in the long run this is a
Motivating employees
worthwhile expense.
Motivational theorists
On-the-job training
There are many theories of motivation:
Maslow: hierarchy of needs
Advantages
Herzberg: hygiene factors vs motivators
Cheaper
Taylor: scientific management – workers motivated by pay
Practical and relevant skills learnt
Mayo: working in teams, consulting workers and involving
Being paid and productive while training
them
Vroom: expectations – making sure that workers are set
Disadvantages
realistic expectations
Might pick up bad habits
Not always the best learning environment
EXAM TIP
Do not get too hung up on the different theories. You will not be
Off-the-job training
expected to show a detailed understanding of the theories and
when they were written. Much more important is your grasp of
Advantages
how they can be linked to motivation in practice.
Will receive a formal qualification
Learn a wider range of skills
Opportunities to meet staff from other organisations and
learn from them
Disadvantages
Motivation in practice (financial)
Piece rate – paid by number of units produced
Commission – paid by number of units sold
Fringe benefits
Expensive
Profit sharing
Not productive while training
Bonuses
9
cash
copyright
trademark
patent
setting budgets
business ideas
budgets
risk
contribution
partnerships
cost
cash flow
opportunity cost
raising finance
setting budgets
risks
rewards
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
se flo ing m ple
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
leg g buforecrkets
ensinessarc nies
en terp pla h
tre ri ns
p
mark
fixed et
variabsegm
le and enta
total tion
al
as
fin strucdgets t
an ture
ce
s
sta
ad pro
vis fit
ers
bu
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
tra rtu cost
dem ps
ark
add
so gro
op le tr wth
pric portuad
co e, tot ni er
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
forecasting
legal structure
risk
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
eo h
breakeven analysis
copyright
trademark
risks
analysis
plan
te
en pdrene
tre
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
sts
creovearnutuesps
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
ark
dem
ec
for ets
is
s an
th
alys s
ng
stre
n an n
ve pla ts
ke ss marke
ea
br ine ing arch
s nd
le
op
budersta t rese
un
ke ing peanceis
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
st
risks
tion
tra
ribu e
coning valu
kets
add marast
w
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
Motivation in practice (non-financial)
Job enrichment: making the job role more enjoyable and
Improving job design
This can be achieved through either job enrichment or job
enlargement.
more varied
Job enlargement: making the job role larger and giving the
individual more responsibility
Job rotation: making sure that workers do not perform the
same job role each and every day
Job enrichment
Greater responsibility is given to employees, enabling them to
use their skills more extensively and to feel challenged.
Advantages
Why motivation is important
Develops workers’ skills and challenges them
Low motivation can lead to:
Improves their promotion prospects
High levels of absenteeism
Enables them to contribute more to the decision-making
High levels of labour turnover
process
Higher costs for the organisation as a result of the above
factors
Increases their motivation
Disadvantages
Poor image
Some workers may not welcome the additional
Lower productivity
responsibility
Loss of competitive advantage
Enrichment may not be appropriate for some jobs
Could be used as a means of reducing employee numbers
A well-motivated workforce has significant benefits for a firm. If
workers are happy in their work and enjoy their job, they are less
likely to leave, which will reduce labour turnover and the need
to recruit and train new workers. This means a substantial cost
(delayering)
Job enlargement
The scope of a job is expanded through job enrichment or job
saving for the firm. In addition, if workers are motivated and
rotation.
enjoy what they are doing, they are likely to become increasingly
Advantages
efficient and skilled in their particular roles. This should result
in an improvement in the quality of the product/service being
produced and an increased reputation for the firm.
May reduce the boredom of work
Provides a greater sense of participation
Easier to cover for absent colleagues
Increases motivation
While Taylor would argue that workers are simply motivated
Disadvantages
by money, Herzberg would suggest that this can be seen as a
May result in excessive workloads and therefore demotivate
hygiene factor. People will expect to earn a fair wage and if they
Retraining costs will rise
feel that they are being underpaid, this can lead to demotivation.
Less specialisation may reduce output
It is true that the majority of workers are motivated by earning
higher wages. However, I feel that there is more to working than
Teamworking
just money. More varied and challenging work keeps workers
This can increase motivation through shared responsibility and
motivated and enables them to develop a wider range of skills.
a degree of decision making.
This results in a more flexible workforce. Firms should consider
a range of measures to motivate their workforces, since happy
and contented workers enable businesses to thrive.
Empowerment
This can be achieved through formal or informal structures
and involves giving workers more autonomy, which increases
Various methods have been used to improve morale and
their motivation while at the same time improving flexibility and
motivation based on the many theories of motivation. These
quality.
include:
10
Improving job design
Financial incentivisation
Teamworking
There are various ways in which employees can be
Empowerment
incentivised financially, from the use of bonus payments to
Financial incentivisation
share-ownership schemes.
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
al
fin str
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
ni er
an ucture
ce
s
fixed et
variabsegm
le and enta
total tion
sta
co
so gro
op le tr wth
pric portuad
tra rtu cost
dem ps
add ark
e,
tot
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
tion
tra
ribu e
coning valu
kets
add marast
st
w
sts
creovearnutuesps
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
Notes
Operations management
Making operational decisions
Over-investment in fixed assets
Operational targets
A fall in the demand for the product
Lowering unit costs
Mergers – duplication of resources
Impacts of under-utilisation
Improving quality
Higher unit costs
Increasing capacity utilisation and efficiency
Unit costs are the individual costs of producing a single item
of a particular product. Larger firms will normally have lower
unit costs as they can benefit from economies of scale.
Lower profits
Employee boredom
Lower motivation
Being able to meet a sudden increase in demand
Large supermarkets will sell beer at a lower unit price than a
A negative image and a loss of reputation
smaller local shop. This is because they will buy in bulk and
Matching production to meet demand
benefit from cost savings.
Use of overtime
Economies of scale (FIT MATE)
Hiring temporary and part-time staff
FI-nancial: Raising finance is easier
Rationalisation
T-rading: Bulk buying
Subcontracting
MA-nagerial: Expert managers
Managing stock control through JIT
TE-chnological: Use of technology to lower unit costs
It is essential for a firm to be flexible in terms of its operations. If
Capacity utilisation
This can be calculated by working out the actual output
divided by the maximum output.
Capacity utilisation (%) =
it operates at full capacity, this will reduce its ability to meet new
orders and take on extra business. By operating at about 80%
capacity utilisation it will have the flexibility to take on extra
Actual output per annum
Maximum output per annum
× 100
Example: If there are 100 classrooms in a school and at any
point in time 90 of these are in use, the capacity utilisation is
90%.
orders and hire staff when demand increases. Its use of parttime and temporary workers will mean that it can accurately
meet the needs of customers and avoid paying for full-time
staff when they are not actually needed. When a firm is close
to maximum capacity, it faces a decision. It can either look to
expand its operations, which is costly (both in terms of time and
A business will want to work at around 80% capacity on
finance) or look to subcontract part of its production to outside
average. This level of utilisation provides some spare capacity
agencies. This should only be done as a short-term measure,
to take on extra orders and is also less stressful for staff. If a
however, as in my view it will mean that it has less control over
firm operates at full capacity for the majority of the year, it will
the business.
need to consider expanding and looking for larger premises.
This has a cost in terms of time and capital.
Causes of under-utilisation
Quality
Seasonal demand
Definition: The totality of features and characteristics of a
New competitors
product or service that satisfies (or delights) customers.
11
cash
copyright
trademark
patent
setting budgets
business ideas
budgets
risk
contribution
partnerships
cost
cash flow
opportunity cost
raising finance
setting budgets
risks
rewards
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
se flo ing m ple
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
leg g buforecrkets
ensinessarc nies
en terp pla h
tre ri ns
p
mark
fixed et
variabsegm
le and enta
total tion
al
as
fin strucdgets t
an ture
ce
s
sta
ad pro
vis fit
ers
bu
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
tra rtu cost
dem ps
ark
add
so gro
op le tr wth
pric portuad
co e, tot ni er
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
forecasting
legal structure
risk
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
eo h
breakeven analysis
copyright
trademark
risks
analysis
plan
te
en pdrene
tre
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
sts
creovearnutuesps
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
ark
dem
ec
for ets
is
s an
th
alys s
ng
stre
n an n
ve pla ts
ke ss marke
ea
br ine ing arch
s nd
le
op
budersta t rese
un
ke ing peanceis
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
st
risks
tion
tra
ribu e
coning valu
kets
add marast
w
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
The perception of ‘quality’ is subjective. However, certain
products are genuinely ‘quality’ products and the price of
these goods often reflects this.
Ensuring quality throughout the business can lead to benefits in
terms of both production and marketing. Car companies such
as Toyota, Subaru and Skoda have concentrated on producing
Assessment of quality
quality cars. Their reputation for quality gives them a USP that
Appearance
they can then use in their marketing, allowing them to enhance
Reliability
their reputations further. A reliable and high-quality production
Image and brand
process will reduce the number of defective products and save
After-sales service
them money in the long run. It can also enable the businesses
Personal preference
to charge higher prices for their products because customers
are prepared to pay a premium for quality.
Measuring quality
Consequences of introducing quality
systems
Customer satisfaction surveys
Customer complaints
Wastage rate
Costs
Mystery shoppers
ISO 9001 – a national/international quality standard
Quality control and quality assurance
Training
Disruption to production
Quality control involves checking the overall quality of the
In today’s increasingly global market place, I believe it is very
product either at certain stages of the process or, more
important to concentrate on quality. The fact that customers
commonly, at the end of the process.
will normally pay a higher price for what they feel is a higher-
Quality assurance means that individuals involved in
production take care with the quality of the product at each
and every stage. This ensures that the product or service is
produced to the highest quality.
quality product will motivate businesses to stay ahead of their
competitors. Ensuring quality throughout an organisation is a
challenge and needs both good operational procedures and the
staff to carry out this work. Training will be vital, and systems
need to be in place to check the quality of the work carried out.
Quality assurance is more common these days because the
However, by focusing on quality the firm will benefit from a USP.
cost of reworking a product at the end of the process is far
Such a focus will also allow it to meet the specific needs of its
greater than ensuring that the quality is right first time. Quality
customers and maintain its competitiveness in the long run.
control systems are therefore used less frequently nowadays.
Customer service
Total quality management (TQM)
This Japanese concept involves a system of lean production
– minimising waste at every opportunity and focusing on
Good customer service will lead to an enhanced reputation
efficiency savings. Central to this is kaizen – a concept of
and people telling other people about the service they receive.
continuous, small improvements. Every worker is given
This will in turn lead to repeat custom and increased sales.
responsibility for quality and encouraged to have an active
Such service is fairly easy to implement with appropriate
role in the production process through quality circles – a
training techniques. Customer expectations can be met by:
weekly meeting whereby workers discuss ways in which the
Giving customers the product or service that they want
production could be improved.
Ensuring that the product or service is of high quality
Ensuring that staff are friendly and helpful
Benefits of introducing quality systems
Can lead to higher sales
Creates a USP
Can potentially charge a higher price
12
Dealing with customer complaints efficiently
Implementing and monitoring customer
service
Reduces unit costs as it minimises wastage
Customer feedback surveys
Improves the firm’s reputation
Mystery shoppers
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
al
fin str
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
ni er
an ucture
ce
s
CAD
fixed et
variabsegm
le and enta
total tion
Robotics
Looking at key issues that have been identified and
sta
co
so gro
op le tr wth
pric portuad
Focus groups
tra rtu cost
dem ps
add ark
e,
tot
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
tion
tra
ribu e
coning valu
kets
add marast
st
w
sts
creovearnutuesps
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
CAM
resolving any problems
Training staff
Stock control systems
Accounting packages
Benefits of a high level of customer service
Customers return
Benefits of using technology
Creates a USP
Reducing costs
Improves the firm’s reputation and image
Improving quality
Gains a competitive advantage
Reducing waste
Increasing productivity
Easier communication
Good customer service is one way in which a business can
differentiate itself and its products from its rivals. It is also fairly
easy to establish through staff training. This helps build a culture
within the organisation as well as improving its reputation. A good
example of such an organisation is Waitrose, where members
of staff are selected for their personality and willingness to help.
This means that customers are more likely to approach them and
recommend the business to other people, helping it increase its
customer base. While training staff can be expensive initially,
Drawbacks of using technology
Initial costs will be high
Will need updating
Employees will need to be trained
Maintenance costs
Can break down and halt all production
the long-term benefits are likely to outweigh the costs as staff
Investment in new technology will bring many benefits to an
are likely to be more motivated and happy in their work, which
organisation. While the initial investment is likely to be high, in
makes them less likely to leave, which will reduce the labour
the long run it should lead to lower unit costs because the use
turnover figures for the firm, which will in turn lower the need
of technology in production will allow a greater number of units
to recruit and train new staff. When the business does need to
to be produced. Businesses will need to move with the times.
recruit, people will want to work for a company that is friendly
The development of technology in just the last thirty years has
and provides excellent customer service. Customer service is
been substantial with the arrival of broadband Internet and the
also relatively easy to monitor, either through the use of mystery
use of home computers. Keeping up to date with technology is
shoppers or by internal appraisal.
difficult as it moves so quickly. Firms have to make decisions
as to which system they adopt and this can sometimes lead
to poor choices. The constant need to update and replace
Working with suppliers
technology is also an issue in terms of finance and training staff
in its use. However, in my view the advances in technology have
A supplier will be chosen based on a range of factors:
Price
greatly benefited the business world and this situation is set to
continue. Businesses need to embrace the technology.
Payment terms
Improving operational performance
Quality
Capacity
Firms will look to improve the efficiency of their operations
Reliability
through a variety of the methods mentioned in this section.
Flexibility
The idea is to give the business a competitive advantage over
rival firms and it can achieve this through improving any of the
following:
Using technology
in operations
Quality
Capacity utilisation
Customer service
The importance of technology in operations is evident in a
Working with suppliers
variety of areas, including:
Use of new technology
13
cash
copyright
trademark
patent
setting budgets
business ideas
budgets
risk
contribution
partnerships
cost
cash flow
opportunity cost
raising finance
setting budgets
risks
rewards
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
se flo ing m ple
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
leg g buforecrkets
ensinessarc nies
en terp pla h
tre ri ns
p
mark
fixed et
variabsegm
le and enta
total tion
al
as
fin strucdgets t
an ture
ce
s
sta
ad pro
vis fit
ers
bu
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
tra rtu cost
dem ps
ark
add
so gro
op le tr wth
pric portuad
co e, tot ni er
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
forecasting
legal structure
risk
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
eo h
breakeven analysis
copyright
trademark
risks
analysis
plan
te
en pdrene
tre
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
sts
creovearnutuesps
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
ark
dem
ec
for ets
is
s an
th
alys s
ng
stre
n an n
ve pla ts
ke ss marke
ea
br ine ing arch
s nd
le
op
budersta t rese
un
ke ing peanceis
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
st
risks
tion
tra
ribu e
coning valu
kets
add marast
w
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
Notes
arketing and the
M
competitive environment
Effective marketing
Advantages
Large scale production possible
This can best be described using the AIDA model. A firm will
Increases brand awareness
aim in its marketing to:
Large target audience
Attract the customers’ attention
Disadvantages
Interest the customers in its products or services
Develop a desire – make the customers want its products
Action – lead the customers to purchase its products or services
Difficult to appeal to individual customers
High capital costs to start with
Difficult to react to changes in demand
Marketing also involves researching the market and producing
a product that meets the needs of the target audience. It is
about coming up with an effective marketing mix that will
make the product successful.
EXAM TIP
The nature of the market will dictate the overall marketing
strategy of the business.
Designing an effective
marketing mix
The marketing mix is made up of the 4 Ps: product,
promotion, price and place. However, the success of the
business will also depend on other factors and the way in
which they are integrated. The effectiveness of the mix will
Niche marketing
A niche market is a narrowly defined group of customers.
Niche marketing targets this small, specific market segment.
Advantages
The market segment being targeted
The available finance
Competitors
Few competitors
The influence of new technology
Can normally charge higher prices
The reliability of market research
Can tailor the product to individual customers
EXAM TIP
Good for small businesses
The exam will expect you to take a broader view than focusing
Disadvantages
simply on the individual elements of the marketing mix. You
Small target audience
need to be able to demonstrate that you can interrelate the
Can be more risky – limited demand
different aspects of the mix.
Lower overall profits due to size
Difficult to scale the business
The most important component of the marketing mix is, in my
Mass marketing
14
depend on:
view, the product. Once the product is in place, this will dictate
A mass market is a large market that is unsegmented. Mass
the price to be charged, the sales outlets and the promotion
marketing covers this entire market rather than targeting a
strategy. It is essential that the 4 Ps complement each other in
particular segment.
order to ensure the success of the product.
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
probably be set using competition pricing. The place/location
al
fin str
If a new pizza restaurant/takeaway is opened, prices will
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
advertising and specific technology magazines such as Stuff.
ni er
department stores. The marketing is likely to be through TV
an ucture
ce
s
probably be sold in electronics shops or in large, well-respected
fixed et
variabsegm
le and enta
total tion
high price and skimming strategy are likely. The product will
sta
co
so gro
op le tr wth
pric portuad
If a new technological product is in high demand, an initial
tra rtu cost
dem ps
add ark
e,
tot
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
tion
tra
ribu e
coning valu
kets
add marast
st
w
sts
creovearnutuesps
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
Product portfolio analysis
Definition: Product portfolio analysis is the study of
each of a firm’s products in an attempt to improve market
performance. The idea is to create a balance of products with
widespread appeal. The Boston Matrix illustrates this strategy.
Boston Matrix
of the restaurant will need to be central to a town or a city, and
the promotions are likely to be more local and specific to that
Star
High
area. They might involve the delivery of pizza menus to the local
community through the insertion of flyers in local newspapers.
Using the marketing mix
Product
Divest
Invest
Market growth
Prioritise
Kill
Low
The product itself is regarded as the most important aspect of
Cash cow
the marketing mix. The key factors that need to be considered
Dog
are:
Design of the product – it must be reliable, safe, fit for
High
Market share
Low
purpose and durable. It must also, most crucially, meet the
needs of the customers
Product life cycle
Product development
Definition: The product life cycle is the term used to describe
Factors influencing new product
development
the stages through which individual products develop over
time: introduction, growth, maturity and decline.
New technology that produces superior products
New technology that produces goods more cheaply
Developing new products that are individualised to specific
tastes
Stages in the product life cycle (Boston Matrix positions)
Sales revenue,
cash flow (£)
Competition that can force existing businesses to develop
+
Question
mark
Star
Cash cow
new products
Sales
Entrepreneurial skills that spot a gap in the market, enabling
‘first mover’ advantage
Product
development
The importance of a USP
Dog
0
Marketing can add value by creating a unique selling point
(USP). This is important for a firm as it allows it to stand out
Cash flow
Growth
Maturity
Decline
Time
Introduction
–
from the competition and will attract customers to its product.
It will also allow the firm to charge a different price from the
Life cycle: four basic stages
competition.
Introduction
Growth
Maturity
Early
adopters
Mainstream
Late adopters
Laggards
Market
Small
Growing
Large
Contracting
Examiners will not want you to reproduce the diagrams that
Sales
Low
High
Flattening
Moderate
follow. However, you need to be very comfortable with the
Competition
Low
Moderate
High
Moderate
Awareness
Market share
Customer
retention
Transition
Tuning
Scaling
Support
Transition
Audience
EXAM TIP
different theories and link the Boston Matrix to the product life
Business
focus
cycle.
Design focus
Decline
15
cash
copyright
trademark
patent
setting budgets
business ideas
budgets
risk
contribution
partnerships
cost
cash flow
opportunity cost
raising finance
setting budgets
risks
rewards
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
se flo ing m ple
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
leg g buforecrkets
ensinessarc nies
en terp pla h
tre ri ns
p
mark
fixed et
variabsegm
le and enta
total tion
al
as
fin strucdgets t
an ture
ce
s
sta
ad pro
vis fit
ers
bu
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
tra rtu cost
dem ps
ark
add
so gro
op le tr wth
pric portuad
co e, tot ni er
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
forecasting
legal structure
risk
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
eo h
breakeven analysis
copyright
trademark
risks
analysis
plan
te
en pdrene
tre
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
sts
creovearnutuesps
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
ark
dem
ec
for ets
is
s an
th
alys s
ng
stre
n an n
ve pla ts
ke ss marke
ea
br ine ing arch
s nd
le
op
budersta t rese
un
ke ing peanceis
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
st
risks
tion
tra
ribu e
coning valu
kets
add marast
w
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
it should be used with caution. The idea of researching and
A wide product portfolio will allow the firm to target different
markets. It will also allow it to coordinate the launch of its
products. Firms with just one product are more at risk. If this
product enters the decline stage of the product life cycle, they
developing new products while existing ones are in maturity
is certainly a good one. However, it is difficult to know just
how long these products will be in maturity before they need
replacing, which again highlights the importance of timing.
have no other products to rely on. Firms will try and coordinate
the launch of new products when their existing products are in
the maturity stage of the life cycle. At this stage these products
tend to be cash cows, earning high profits with relatively little
market growth. Firms can milk these cash cows in order to
provide the finance required to launch new products and invest
in new potential rising stars.
Promotion
Promotion can be:
Above the line – advertising through media outlets such as
TV, radio, newspapers
Below the line – promotion through sponsorship, public
Extension strategies
relations (PR) and competitions
In order to help products remain in the maturity stage for
as long as possible rather than slip into the decline stage, a
business might look to develop extension strategies to keep
sales high. There are a number of ways to do this:
A business may use a range of promotional methods:
PR
Branding
Merchandising
Modify the product
Sales promotions, e.g. Buy One, Get One Free (BOGOF)
Target new markets
Direct selling
Introduce new promotions
Advertising
Change the image of the product
Increase usage among existing customers
Advertising needs to be either informative or persuasive. The
Maturity
Extension strategy
idea is to raise awareness of the brand and create greater brand
loyalty for the product. It is hard to measure the level of success
of advertising and it can be expensive. Firms will look to have
Sales
Decline
an integrated promotional mix using a range of promotions such
as competitions and BOGOFs that are supported by above-
Growth
the-line advertising campaigns. The promotion of products
is crucial for their success. The firm will need to consider the
Introduction
objectives of the campaign and the costs involved, using
available finance to target the specific market. Most importantly,
it will need to consider the actions of competitors and ensure
Time
that its campaign promotes the unique qualities of its products.
The product life cycle theory can be a useful tool for businesses.
However, it is flawed in that it does not account for the actual
time it will take for a product to pass through the life cycle.
Products such as Heinz baked beans are still in the maturity
stage after many years on the shelves, whereas games
consoles will typically have a life cycle of just six years before
entering into the decline stage. Moreover, not all products will
pass through the life cycle as described in textbooks. Different
products will have different shaped life cycles. While the theory
16
Price
Pricing strategies
Penetration pricing
Price skimming
Price leaders
Cost-plus pricing
Possible pricing tactics
can have some benefits in that it will help a firm decide on its
Loss leaders
promotional strategies at a particular point in time, in my view
Psychological pricing
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
al
fin str
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
ni er
an ucture
ce
s
fixed et
variabsegm
le and enta
total tion
sta
co
so gro
op le tr wth
pric portuad
Price elasticity of demand
tra rtu cost
dem ps
add ark
e,
tot
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
tion
tra
ribu e
coning valu
kets
add marast
st
w
sts
creovearnutuesps
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
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ca ng
s
sse e
tti
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en
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EXAM TIP
Price elasticity of demand (PED) measures the responsiveness
An understanding of how a product is distributed to customers
of demand to a change in the price of the product. It is
is an excellent way of picking up application marks and shows
calculated using the following formula:
an insight into the business and the industry. Your ability to
PED =
% change in quantity demanded
explain how selling direct to customers will reduce the overall
% change in price
cost of production and result in a lower selling price will also
pick up key analysis marks.
If a good is responsive to a change in price, we say it is
elastic. This is important, since the firm with an elastic product
knows that a modest drop in price will prompt a sharp rise in
demand, resulting in an increase in sales revenue.
If a good is not responsive to changes in price, we say it is
Marketing and
competitiveness
inelastic. This is important, since the firm with an inelastic
Perfect competition
product knows that a sharp increase in price will prompt only a
Number of firms
Many and small
Nature of product
Identical
Barriers to entry
None
Effect on business
Low profitability and little need for
marketing
modest drop in demand, resulting in an increase in sales revenue.
Determinants of price elasticity of demand
The degree of need – if the good is essential, then demand
will be unresponsive to changes in price
Monopolistic competition
The percentage of income spent on the good – if a higher
percentage, then customers are likely to shop around
and be more price sensitive; if a lower percentage, then
customers will be less concerned about price
Number of firms
Many and small
Nature of product
Differentiated
Barriers to entry
None
Effect on business
Low levels of profit, but some scope
for marketing
The choice of pricing strategy will be crucial for the business.
Oligopoly
In my view, any firm should first consider cost-plus pricing. It
Number of firms
2–8 large firms
can then guarantee a profit on each item sold. It will need to
Nature of product
Differentiated
consider the target market of the product and try to work out
Barriers to entry
High
the relative price elasticity and how sensitive customers will be
Effect on business
Non-price competition; high levels of
spending on marketing
to price changes. It also needs to consider the nature of the
product and whether it should set a high price initially because
Monopoly
it has such a distinctive USP or whether it should try to break
Number of firms
One
Nature of product
Unique
Barriers to entry
High
Effect on business
Very high profit margins; no real need
for marketing, but will often take place
into the market with a penetration strategy. It is critical to set the
price of the product at the right level in order to be successful.
Place (or distribution)
There are several factors that influence distribution method:
EXAM TIP
The type of product (is it perishable?)
When considering the marketing actions of a firm, make sure
Location of the target audience
you consider the nature of the market in which it is operating.
The complexity of the product
A highly competitive market place will mean that while profit
The four traditional methods of getting the product to the
customer are: (1) manufacturer
retailer
consumer; (2) manufacturer
consumer; (3) manufacturer
retailer
consumer; and (4) manufacturer
jobber
retailer
consumer.
wholesaler
wholesaler
margins are likely to be low, the use of effective marketing
can capture market share. When there are a large number of
dominant firms, the use of pricing strategies is of limited benefit
as a price war might occur. In these markets the use of branding
and promotional strategies will therefore be more prevalent.
17
cash
copyright
trademark
patent
setting budgets
business ideas
budgets
risk
contribution
partnerships
cost
cash flow
opportunity cost
raising finance
setting budgets
risks
rewards
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
se flo ing m ple
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
leg g buforecrkets
ensinessarc nies
en terp pla h
tre ri ns
p
mark
fixed et
variabsegm
le and enta
total tion
al
as
fin strucdgets t
an ture
ce
s
sta
ad pro
vis fit
ers
bu
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
tra rtu cost
dem ps
ark
add
so gro
op le tr wth
pric portuad
co e, tot ni er
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
forecasting
legal structure
risk
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
eo h
breakeven analysis
copyright
trademark
risks
analysis
plan
te
en pdrene
tre
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
sts
creovearnutuesps
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
ark
dem
ec
for ets
is
s an
th
alys s
ng
stre
n an n
ve pla ts
ke ss marke
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br ine ing arch
s nd
le
op
budersta t rese
un
ke ing peanceis
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
st
risks
tion
tra
ribu e
coning valu
kets
add marast
w
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
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se
ak et risks
mark
d we
s an
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en
str
Exam practice
Case study 1:
T & M Sherborn
Question 1 (40 marks)
T & M Sherborn was established in 1895 as a Bedfordshire
(b) Analyse two problems that may arise from the firm’s falling
(a) Calculate the net profit margins for the firm in 2010
and 2011.
building company. It now has a multi-million pound turnover
each year and a staff of over 200 permanent employees. The
business has an excellent reputation in Bedfordshire and the
(5)
capacity utilisation.
(8)
(c) To what extent do you think the company should be more
concerned about short-term cash flow issues than falling
Home Counties.
long-term profitability?
The construction industry has been seriously affected by the
recent economic downturn and the business has had to work
(13)
(d) Discuss the benefits of the way in which the firm trains and
motivates its staff and how it is likely to have led to the
hard to secure contracts and to ensure that no redundancies
success of the business.
have had to be made. However, capacity utilisation has fallen
(14)
and, with staff worried that there might not be more work to
follow, motivation has been badly affected. As a consequence,
the quality of work has suffered. This has become evident from
recent customer satisfaction surveys.
Candidate’s response (A grade)
Question 1
(a) Net profit margin =
T & M Sherborn has always prided itself on the training it
Net profit
Turnover
× 100
provides, regularly taking on apprentices who receive a mix of
both on-the-job and off-the-job training. The firm frequently
sends its staff on training courses and offers loyalty bonuses
2010 =
as well as a very attractive pension scheme. Workers can also
see the promotion opportunities within the organisation, since
2011 =
the majority of directors have been promoted from within the
£4200 £45,250
£2100 £42,215
× 100 = 9.28%
× 100 = 4.97%
The candidate has successfully calculated the net profit
company.
As with any construction business, managing cash flow is a
real issue, since a large outflow of money is required to build
a major project and the final payment is only received on
completion. There are £14 million worth of contracts currently
on the firm’s order books. However, its ability to finance these
margins for both years, as the question requires. The formula
has also been stated, which is good technique as marks would
have been picked up even if an error had been made with the
calculation. Answering to two decimal places is also a sign of
numerical competence.
(5 marks)
projects may be affected by its deteriorating net profits
(b) The first issue is that resources will be under-utilised. In
(Table 1).
terms of machinery and tools, this carries an opportunity cost.
The firm has invested in these items so that it has enough
resources to carry out all the construction required when the
Table 1 Financial and operations data
2010
2011
45,250
42,215
4200
2100
Capacity utilisation of main yard (%)
78
62
Satisfaction with customer service (%)
74
66
Sales revenue (£000s)
Net profit (£000s)
18
firm is busy. During the recession the demand has fallen and
so the investment in these resources is wasteful. Moreover, if
the firm does not regularly use these items, then they may not
be maintained to the highest standards and this can lead to
problems when they are used.
The second and arguably more important issue is to do
with human resources. The firm will probably have insufficient
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
al
fin str
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
ni er
an ucture
ce
s
fixed et
variabsegm
le and enta
total tion
sta
co
so gro
op le tr wth
pric portuad
tra rtu cost
dem ps
add ark
e,
tot
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
tion
tra
ribu e
coning valu
kets
add marast
st
w
sts
creovearnutuesps
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
work for the entire workforce and there is a concern about
course of action as it will improve not only cash flow but also
future orders. This has led to demotivation, with workers
long-term profitability.
worried about their long-term job security. As the case study
makes clear, there has been a fall in quality as a result. This
has caused inefficiencies within the organisation and led to
a decrease in customer satisfaction. The firm needs either to
reduce its capacity or to look at ways to increase the number
of projects that it carries out so that the entire workforce is
utilised more efficiently.
While probably not the best choice of example for the first
issue regarding capacity utilisation, the response does
nevertheless relate to the construction industry and therefore
shows the skill of application. The second issue is analysed
properly and builds a chain of argument. The judgement at the
end of the second paragraph is not necessary, however, as
this is an analysis question.
(6 marks)
(c) For a construction company, short-term cash flow
problems are likely to be commonplace and, to some extent,
can be anticipated. Therefore, in my view, this is less of an
issue. However, given the weekly wage costs resulting from
the high number of people employed within the firm, the firm’s
commitment to retain staff is likely to prove problematic. The
company could look at ways of reducing its cash outflows
in the short term. The fact that the recession is likely to be
affecting many other businesses related to the construction
industry might allow it to negotiate better terms with its
suppliers and possibly reduce its overall wage bill.
If T & M Sherborn were able to do this, this would increase
its overall profit margins. However, as I calculated in question
1(a), the business has actually seen its net profit margin fall by
nearly 50% and this must be a serious concern. The firm has
seen a slight fall in revenue from 2010 to 2011, though this is
not surprising given the tough economic climate. The drop in
margin would suggest that its overall costs have increased
and this should be a major area of concern. It indicates that
the firm does not necessarily have control over these and that
this is causing the lower levels of profitability.
In my view, the firm needs to be concerned about both
issues. However, the short-term cash flow problems are likely
to be less serious than the longer-term fall in profitability. The
firm perhaps needs to reduce its costs and look at alternative
The candidate displays the skill of evaluation early on. The
application is excellent, both to the company itself and to the
industry as a whole. However, the analysis is less strong. The
candidate does not build a detailed argument – instead, a lot
of issues are mentioned without a main line of argument being
fully developed. (8 marks)
(d) The fact that directors have worked their way up through
the company sends out a clear message to other staff that
the firm is willing to invest in its employees and promote
from within. This will benefit the firm by fostering greater staff
loyalty and reducing labour turnover, which means that it will
have relatively lower recruitment costs. The fact that the firm
combines on-the-job and off-the-job training is also beneficial
because new apprentices learn from experienced staff the
specific skills required for the actual work they carry out. This
means that workers are more productive and this is efficient
for the company. The pension scheme and loyalty bonuses
also act as ways of retaining staff.
However, by focusing so much on internal recruitment, the
firm is potentially missing out on new ideas and approaches
that would come from looking outside of the business. While
basic construction techniques may not have changed much
over the years, there have certainly been significant changes
to the way in which many businesses operate in this sector. A
lack of new blood at T & M Sherborn might have actually held
the company back.
In conclusion, I would argue that the high level of orders
and the reputation of the firm are significant indicators of a
very successful business. However, its falling performance
in recent years suggests that the firm may have become less
efficient. In my view the appointment of some new senior staff
is overdue. They could help identify the best way forward for
the firm, perhaps looking to change the loyalty bonuses and
pensions that are adding to the costs of the business and
reducing the overall profitability of the firm. The fact that so
many staff are promoted internally could lead to complacency,
as could loyalty bonuses. I would like to see greater emphasis
placed on performance-related bonuses as this will lead to
continued improvement.
ways to do this. It is likely to have to reduce its prices during
Although briefer than the previous answer, this response is
a recession, but this should be putting downwards pressure
arguably stronger. This is because it builds a clear line of
on the wages that it pays and also on the cost of supplies. As
argument that picks up good analysis marks and is linked to
a successful business, its established reputation will help in
the business. The judgement is also sound, suggesting a new
negotiations. However, by reducing wages it may lose goodwill
way forward for the firm and then backing this up – excellent
among its staff. Nevertheless, I feel that this is a necessary
exam technique!
(13 marks)
19
cash
copyright
trademark
patent
setting budgets
business ideas
budgets
risk
contribution
partnerships
cost
cash flow
opportunity cost
raising finance
setting budgets
risks
rewards
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
se flo ing m ple
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
leg g buforecrkets
ensinessarc nies
en terp pla h
tre ri ns
p
mark
fixed et
variabsegm
le and enta
total tion
al
as
fin strucdgets t
an ture
ce
s
sta
ad pro
vis fit
ers
bu
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
tra rtu cost
dem ps
ark
add
so gro
op le tr wth
pric portuad
co e, tot ni er
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
forecasting
legal structure
risk
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
eo h
breakeven analysis
copyright
trademark
risks
analysis
plan
te
en pdrene
tre
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
sts
creovearnutuesps
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
ark
dem
ec
for ets
is
s an
th
alys s
ng
stre
n an n
ve pla ts
ke ss marke
ea
br ine ing arch
s nd
le
op
budersta t rese
un
ke ing peanceis
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
st
risks
tion
tra
ribu e
coning valu
kets
add marast
w
ing
and
erst
und
flo dg
sh bu ure
ruct
l st
lega
ca ng
s
sse e
tti
ne shar
se
ak et risks
mark
d we
s an
gth
en
str
Case study 2:
Best Burger Company
(c) To what extent is an effective marketing mix crucial to the
long-term success of the company?
(d)Sam believes that an effective recruitment and selection
system is the essential factor in guaranteeing the long-term
Samuel Fraser set up the Best Burger Company in 2004 after
success of the business. Do you agree with him? Justify
attending many festivals and sporting events and lamenting
your view.
the fact that he could never find good quality food. Sam
noticed that there was a growing trend on the high street for
organic and healthy versions of fast food, but there appeared
to be a gap in the events market for burgers made from only
(14)
Candidate’s response (A grade)
Question 2
the best ingredients. He was also aware that the nature of
(a) ROCE =
festivals meant that people had limited choice and therefore
had relatively price inelastic demand. He worked on producing
Net profit
Capital employed
× 100
an effective marketing mix.
Sam made £10,000 net profit on an initial investment of
capital of £25,000.
Sam conducted a range of primary and secondary market
research. By asking friends and drawing on his personal
experience, Sam felt that while selling food at events was
ROCE =
a highly competitive area, there were always opportunities
£10,000
£25,000
× 100 = 40%
because the number of festivals was growing. He decided to
The candidate has chosen the right data and calculated
invest £25,000 of his savings into the venture and, after the
the answer correctly. Again, stating the formula is excellent
first year of operations, he had managed to make a net profit
technique.
of £10,000.
In the initial year of trading, Sam and his partner carried out
all of the operations themselves and attended every festival.
(b) The first way in which the Best Burger Company can
benefit from economies of scale (lower unit costs) is by
it buys larger quantities of ingredients at a lower unit cost.
USP meant that it was very successful. Sam looked to grow
the business and took out an additional loan of £50,000. This
allowed the firm to have more vans at more sites. It also meant
that Sam had to recruit workers from outside the business.
This will increase the company’s profit margin if the original
selling prices are maintained. By buying in larger quantities,
the business will be able to take advantage of bulk buying
discounts. This will be possible because the firm is attending
He decided to offer the minimum wage to workers, but they
more events and therefore has more outlets. This economy of
were incentivised by the opportunity to watch the festival/
sports events during the periods when they were not working.
Nevertheless, the seasonal and temporary nature of the
scale might mean that the company has to change its current
supplier because it may be unable to produce sufficient
quantities. The quality of ingredients, however, would need to
business meant that labour turnover was still high and that
each year Sam had to recruit new staff. However, the relatively
flat organisation helped communication within the company.
remain high.
The Best Burger Company might also benefit from
managerial economies. Rather than Sam and his partner
As the business expanded, Sam was able to take
advantage of economies of scale and this led to increased net
profit margins for the firm. However, by the summer of 2010 he
had become concerned about the entry of larger, mass-market
rivals such as Pizza Express and Subway into this niche
running all the events, they can bring in specialist managers
who can take control of different events or different functional
areas of the business. This will save the business money in
the long run as it will reduce the pressure on Sam. The use of
managers with specific skills will hopefully lead to a reduction
market.
in costs, since these individuals will know how to manage their
particular areas effectively.
Question 2 (40 marks)
The candidate starts with a definition that displays an
(a) Calculate the ROCE for the Best Burger Company in its
first year of operation. (4)
understanding of the concept of economies of scale. This is
backed up with two relevant and well-applied examples that
clearly show how the firm will be able to benefit from them.
(b) Explain two ways in which the firm might have benefited
from economies of scale.
(4 marks)
expanding. It can benefit from trading economies, where
The business managed to build up a good reputation and its
20
(14)
(8)
(8 marks)
cash
copyright
setting budgets
trademark
patent
budgets
risk
contribution
partnerships
cost
cash flow
forecasting
legal structure
opportunity cost
raising finance
setting budgets
risks
rewards
risk
budgets
plan
cash
budgets
co visces
mpa er
s
market research
res
bu e
h
se flo ing meople
w
so tting forearkets
br urce bu ca
st
ea
ca ke s of dge
trash floven fin ts
co nsfo w an ance
ns
fo
pu ultarmin re alys
blic nt g ca
is
lim s anresostin
ite d ur g
d ad
dg ast
ets
leg g buforecrkets
ensinessarc nies
mark
en terp pla h
al
fin str
bu trep ri ns
adsine ren se
pr din ss id eu
coivateg va easr
cos m
lim lu
undts, reve p
ite e
ers nuea
cash
tan s n
ie d
se flo ding and
ttin w ma profitss
ad pro
vis fit
ers
ni er
an ucture
ce
s
fixed et
variabsegm
le and enta
total tion
sta
co
so gro
op le tr wth
pric portuad
tra rtu cost
dem ps
add ark
e,
tot
s
rewarten
an enu st
ds t
ts
an e and
d
maing valu
market e
rke siz
t e
business ideas
Starting a business
entrepreneur
ma sole traders
as
rk patent
de yi se
ess recaofits un
ca rstandng p arc
sh
breakeven analysis
neysis
copyright
trademark
risks
analysis
plan
d
s an
th
te
en
sin fo d pr s
bu flonuwes anidea
sh ve
ca re ess ise
sin rpr nesses
ak
bu
we
ur
sts,
co
ngth
stre
priv
ies
an ies
mp panses
d co comknes
ite ted wea
lim ate limi
s and
c
bli
pu
em ce n ancasti s
ve
ke fore ource
sour
th
w
brea flo ming resow
sh
ca nsfor t gr
ke
tra
mar
ng
pre al s
stre
tre n an lan
en ess p ch
ar
sin
bu t rese
ke
is
ts
ve
ke
ke
mar
ea
br
ing
le
nd
op
rsta
pe ce
de
un
ing an
ark
dem
ec
for ets
risks
tion
tra
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(c) The marketing mix is made up of the 4Ps – price, product,
(d) An effective recruitment and selection policy will clearly
place and promotion. Of these, product is the most important.
provide benefits to Sam and his business. This is because if
If the Best Burger Company gets this right, a clear USP will
appropriate staff are recruited and selected in the first place,
allow the other aspects of the mix to fall into place. By offering
they are more likely to be loyal. This will reduce the need
high-quality and organic produce, the company successfully
to recruit and train new staff each year. If labour turnover
differentiates itself from the majority of other competing
can be reduced, this will benefit the company as a result
festival outlets.
of lower training costs in the future. Hiring the right people
the first time around will pay dividends in the long term. The
The Best Burger Company’s USP will allow the business
to charge a higher price, but the costs of its ingredients are
staff will only need to be trained once and then Sam can
also likely to be higher than its rivals. It would therefore be
delegate more responsibility to them. This would be harder
wise for the firm to adopt a cost-plus pricing strategy. Linked
to do if he constantly had to select and train new staff. The
to this is the fact that the firm is likely to face fairly price
overall recruitment budget can be reduced if the high cost of
inelastic demand. While there are a large number of substitute
interviewing cadidates is avoided.
products available at festivals, the overall market is typically
unresponsive to changes in price because events offer a
quite a high turnover of staff. Pay and non-financial forms of
captive market. This can enable the firm to charge a higher
motivation are therefore likely to be equally important factors
price than is normal and this will influence the pricing strategy
in securing their loyalty. The fact that the work is seasonal
used. However, customers will only be willing to pay a high
suggests that it would suit gap year students, university
price if they perceive the product to be of a higher quality than
students or foreign students travelling in the UK. Recruitment
its rivals.
advertising should target these types of individual. Given the
It is also important for the business to continue to have
fact that the festivals take place around the country, Sam
access to festivals – another crucial element in the marketing
might advertise for workers in the local vicinity using job
mix of the firm. An effective distribution network, i.e. making
centres or employment agencies.
sure that the business has a prominent position at each festival
and that supplies are ordered correctly, will be a major factor.
however, would result in a core group of workers that travel
to each festival. This will mean that there is greater pressure
In terms of promotion, the business will probably not need
The nature of the work, however, would typically lead to
The most beneficial recruitment and selection policy,
to spend a large amount because potential customers will be
placed on the operations management procedures within
able to view for themselves the different food outlets on offer.
the firm. Coordinating staff for a business such as the Best
However, it may prove useful to adopt promotional strategies
Burger Company is likely to be very challenging because even
at individual festivals, such as handing out flyers or having
when staff are recruited, they will not work from the same
festival specials for particular meal combinations.
base each week. This will place a strain on those employees
responsible for organising accommodation for these workers.
Overall, it is going to be very important that the company
combines all aspects of the mix so that it can have an
It is highly likely that the recruitment of staff long term for
advantage over rival firms. The danger is that, if successful,
this business will be difficult – such is the nature of the work
other firms will try and imitate the business and offer a similar
and the demand on its workers to travel. It is likely that the
range of products. In this situation it is going to be crucial for
company will need to recruit a large number of temporary
the firm to adapt, perhaps offering a wider product range and
workers and training will be an issue. In my view, the long-term
looking to adjust its pricing and promotional strategies. While
success of the Best Burger Company is therefore not simply
the current marketing mix is proving successful, the ability of
about its recruitment and selection system but also about how
the Best Burger Company to adjust this mix in the long run is,
it manages its workers effectively in order to gain their loyalty
in my view, absolutely vital.
and benefit from low labour turnover.
This is another very well-rounded response with some
This is an effective answer. It looks first at the reasons why
great application to the marketing mix currently employed
recruitment and selection are essential and then at alternative
by the Best Burger Company. The candidate clearly
factors that would suggest why it is not so important. A final
understands the 4 Ps, but there is insufficient focus on the
supported judgement is provided which directly answers the
importance of the ‘mix’. The candidate tries to address this in
question. This is superb exam technique and ensures that the
the final evaluation, but the attempt is ‘reasonable’ at best.
candidate evaluates. The response is clearly linked throughout
to the Best Burger Company. (10 marks)
(13 marks)
21
Bare Bones
Revision Guides
Bare Bones
AQA
AS
REVISION GUIDE
Business Studies
Unit 1
Planning & Financing
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structured and colourfully presented, making them perfect for
revision. They include important Exam Tips, providing you with
invaluable guidance on what the examiner is looking for and
how to gain those vital extra marks. Regular A-Grade Analysis/
Evaluation Examples throughout these notes emphasise the
importance of the higher-level skills, and there are even Number
Crunching activities to check your calculation ability.
An exam practice section at the end of the guides comprises
integrated case studies followed by exam-style questions. Once
you have assimilated the content notes, you should tackle the
questions under timed conditions. Specimen A-grade responses,
with accompanying examiner commentaries, are provided so
that you can assess the quality of your own answers, identifying
any weaknesses. You can then review those topic areas that
require further attention.
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Written by an experienced examiner, each 24-page guide opens
with a section about the exam, the mark allocation, the skills
required and the importance of exam practice.
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Bare Bones Revision Guides distil the essential content of
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of features:
Highly focused revision
Colour magazine format
Written by an examiner
Exceptional value
crossAcademe

Managing a Business - Miss Cromie`s Business Studies Site

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