Gazdasági Ismeretek | Közgazdaságtan » Purpose of Business Activity

Source: http://www.doksinet O Level Business Studies 7110 Topic: Purpose of Business Activity Any activity, which is carried out to satisfy the needs of people e.g production, services or exchange. Reasons for Business Activity • To satisfy the needs of people • To provide jobs for the people • To make best use of available scarce resources • To bring economic growth in the country Added Value It is the difference between the selling the selling price of a product and the cost of bought in materials and components. Added value is not a profit because there are other expenses to be paid to calculate profits. Objectives Objectives are the aims to work towards. These are the set targets towards which businesses devote all of their resources. Business objectives might be long medium or short term Objectives in private sector Profit maximization Profit is excess of income over expenses. Any private sector business operates with the objective of profit maximization. It is

the prime motive of private sector businesses Assume you are the owner of private business, and you want to maximize the profit in your business. State how will you do it? Profit is important for private businesses: • To attract future investors; • To pay back the loans • To pay for the interest on loans • To bring the business in better cash position • To pay for accruals or creditors of raw materials • To re-invest in the business for the purpose of growth Added Value Second important objective of private sector businesses. They want to add value in their products to maximize profits and to increase the number of customers buying business products (i.e market share) Page 1 Source: http://www.doksinet O Level Business Studies 7110 Added value is not a profit, which is the difference between the excess income and expenses and costs. Added value is the simply the difference between sales and cost of material and components. When a business tries to make

product worth more than its sales price, it is called adding value. Two ways of adding Value Use of modern technology in production • New machines make less use of raw material by less or no wastage of raw material; • Improves quality • Control the cost by saving on raw material and time on production due to speedy production Effective Marketing • Attractive packaging • Persuasive advertising • Sales promotion such as buy one get one free or discount prices Growth Internal growth is when business grows its size by introducing new range of products, or by opening of new branches External growth is when business merges or takes over Reasons for Growth • Creating new jobs • Offering higher status to the owners and employees or managers • Economic growth • Minimizing the risks of losses or failure • Economies of scale (i.e when business operates at large scale and reduces its average cost ) • Increase in market share Survival Survival is

avoiding of going out of market. Survival is required at three occasions • When business is at its initial stage of operations • When business is facing stiff competition • When economic conditions in the country are worse or in recession. Page 2 Source: http://www.doksinet O Level Business Studies 7110 Government or state owned business objectives • Providing services of public or merit goods to all regardless of people’s status in the economy • Charging lower or least possible prices • Providing employment for every one • Welfare of the community • Operating at cost (break even – neither loss nor profit) Stakeholders The groups or individuals who have some interest in the activities of the businesses e.g owners, workers, managers, consumers, government, community as a whole Types of Interest of stakeholders Ways of affecting the business Profits (or dividends); Performance Taking out the investment or Stakeholders Owners (or investors)

Managers Employees increasing the level of investment Performance or growth; Making effective or ineffective Satisfying all the stakeholders; decisions about the allocation of Pay rise and fringe benefits business resources Performance or growth; Pay rise and Working with devotion, and fringe benefits; Job security motivation; Disrupting production or going on strike Customers Reasonable prices; product quality; Buying more of existing products; variety of goods buying new products; switching over demand to the products of other businesses Government Business growth; profitability; Preparing rules and regulations business dealings with employees and customers The whole Business growth; caring of Forming pressure groups against community environment; creation of new jobs business’ socially unacceptable activities Page 3 Source: http://www.doksinet O Level Business Studies 7110 Topic: Types of Business Activity Levels of economic activity At primary stage

of production goods as raw material are extracted from natural resources or from earth surface or sea. The extraction of resources involves oil or coal extraction, agriculture, fishing, or forestry. At this stage of production no value is added but simply extraction takes place. At secondary stage of production goods or raw material extracted from natural resources at primary stage of production is brought into process using machines or labour or combination of both to form finished goods. At this stage of production goods previously called raw material now became finished goods, which means value is added into raw material to form a finished good. E.g raw wood cut from the forests is now being transformed into furniture using saw mill and the labour. At tertiary stage of production goods produced at secondary stage are brought into packaging, distribution, advertising, and sold to the final consumer. At this stage value is being added by advertising and delivering to the final

consumers. Reasons for growth of tertiary sector in developed economies (or reasons for growth in employment through tertiary sector) When countries switch over from primary to secondary sector, it is called industrialization. When countries move from secondary to tertiary sector, it is called Deindustrialization. Deindustrialization is very much involved in developed economies due to the reasons below: (1) Improved Standard of living of people – People in developed economies have increased their income. Both husband and wife work, hence their standard of living improved and they started outsourcing of services such as laundry, catering, and baby sitters. Hence tertiary sector grew (2) Technological Advancement in primary and secondary sector – Capital insensitivity of primary and secondary sectors have increased, which brought increase in productivity of these sectors. In order to deliver this increased production of these sectors to business customers or to the consumers, greater

tertiary sector activities were needed. This also grew tertiary sector Page 4 Source: http://www.doksinet O Level Business Studies 7110 (3) Imports from newly industrialized countries – Newly industrialized countries such as china, Taiwan, Korea are producing various types of consumers’ durable goods at lower costs. Hence developed economies started importing from these countries, which also demanded greater of tertiary activities. Growth of tertiary sector increased the demand for labour in this sector. Public and private sectors of industry Market Economy • Private ownership • Profit maximization • Price mechanism • Freedom of choice for consumers • Perfect competition but chances of monopoly • No government intervention • Variety of goods and services produced • No public or merit goods • Efficiency of businesses • No or less law and order • Incentives for businesses and individuals to work hard • Demerit goods / Externalities

are common Command Economy • Government ownership • Social welfare no profit • Government controls prices • No competition exists, all are controlled by the government • Jobs for every one • Availability of public and merit goods • No variety of goods or services • Consumers have no or less choices of goods • Control over economic conditions • Law and order is maintained • No incentives for individuals or businesses to work hard • Natural monopoly exists Page 5 Source: http://www.doksinet O Level Business Studies 7110 Mixed Economy Features of both command and market economies are found in mixed economic system There is no country in the world which completely follows either market or command economy. In past, USA had the most free market economy, and China had the most command economy. Market economy is also called free economy, capitalistic or laissez faire economy. Command economy is also called communism, socialism, planned, and

centrally planned economy. Privatization (or De-industrialization) It is when the government sector organizations are sold to the private sector individuals or groups. When privatization takes place public sector organizations become public limited companies and their share are traded in stock exchange. Advantages of privatization (or arguments in favour of privatization) • New owners target profits hence work efficiently • Competition in private sector increases hence privatized organizations work efficiently and keeps the prices lower • Investment and growth in the privatized organizations also increase • Important decision of these businesses are taken without any political influences as there is no more government intervention • Government earns revenue when it sold the business on profit and later when the privatized business earns profit, government gets corporation tax on their profits Disadvantages of privatization (or arguments against privatization) •

Profit motive of new owner of the privatized business require him to discontinue services in unprofitable areas • Inefficient workers might lose their jobs as the new owner wants efficiency; it will bring unemployment • New owner might create monopoly also as it is being inherited from natural monopoly of the government • New owner might charge higher prices also as his objective is profit maximization; this way poor community of the country might not afford this service Page 6 Source: http://www.doksinet O Level Business Studies 7110 Comparing the size of the business There are four major sources of measuring the size of the businesses including: • By number of employees • By value of output and sales • By capital employed • By amount of profit By number of employees – this method of measuring the size of the business require all the businesses under comparison to be from the labour intensive method of production. Otherwise if one or others are

capital intensive while others are labour intensive, it will not be a fair comparison. By value of output and sales – in this method we measure the sizes of the businesses using the value of nature of output produced by the businesses. In order to use this method, it is necessary that all the businesses under comparison should be from similar industry otherwise it will not be a fair comparison. By amount of capital employed – it is obvious that capital intensive businesses usually have higher amounts of capital employed due to the amount of money invested in machines or equipment. Therefore, fair comparison using this method requires that all the businesses under comparison should be from capital intensive nature of production. By amount of profit – profit is a good method of measuring the size of the business if it is used in terms of profit as return on capital employed, otherwise it will not be a fair method of comparison, because profit does not only depend on value of output

and sales but also at effective decisions of managers. Business Growth Growth in businesses takes place internally and externally. In internal growth, businesses introduce new range of products or open the new branches of the business, whereas in external growth, merger and takes over takes place. Here we are referring to external growth means merger and take over. Merger – is when two or more businesses join each other with their own consent; both lose their original existence and become a new business. Take Over – is when one business buys another business, but the buying business maintains its original existence and business being bought becomes part of the buying business. Integration – is a term being used for both merger and take – over. Page 7 Source: http://www.doksinet O Level Business Studies 7110 Types of Integration Horizontal Integration – is when two similar types of businesses integrate with each other, e.g two restaurants merge with each other Benefits of

horizontal integration • Reduces the competition among the businesses • Opportunities of economies of scale for both the businesses • Larger market share for the businesses Vertical Integration – there are two types of vertical integration. Vertical backward integration – when a manufacturer integrates with its supplier of raw material or components. Benefits of vertical backward integration • Assured supply of raw material or components • No more supply of raw material or components to competitors from integrated supplier • Cost of raw material or components will remain under control as no more profit will be charged by integrated supplier • Profit margin of the supplier will be enjoyed by the expanded business Vertical forward integration – when a manufacturer integrates with its retailer or retail outlets. Benefits of vertical forward integration • Assured outs for sales of manufacturers products • No more sales of competitors’ brands

through integrated outlets • Profit of the retailers will be enjoyed by the expanded business • Direct information about the customers’ preferences and complaints, hence greater consumers’ satisfaction Conglomerate – also called diversified integration; this type of integration takes place by taking over or merging with absolutely a new type of business. Eg merging of shoe manufacturer with Construction Company Benefits of conglomerate integration • Share of ideas among businesses • Minimizing the risk of losses or failure – support of businesses to each other against failure or losses Page 8 Source: http://www.doksinet O Level Business Studies 7110 Businesses prefer to stay small due to the reasons below: • Type of industry in which businesses are operating requires them to stay small because they need to have direct contact with the customers otherwise satisfaction of customers might not take place and business’ failure may be the result. Eg retail

industry • Second factor is market size; the smaller businesses deal with less number of customers, hence they do not need to have large amounts of resources. • Third factor is owners’ preference to keep business smaller, because he or she wants to have proper control and management of the business. If they go too large, they might experience diseconomies of scale. Page 9 Source: http://www.doksinet O Level Business Studies 7110 Topic: Types of Business Organizations Sole Trader A business in which single owner owns the business; however, it could be controlled or run by more than one person, which are the employees of the sole trader such as shop assistants. Advantages of a sole trader • Few legal requirements to run the business – the only requirement is to register with government tax office, and in some countries the name must be registered with the Registrar of Business. • The owner is his own boss, who controls over his business and he does not need to ask

any one before making a decision • The owner is free to choose his holidays, hours or work, prices of goods, and whom to employ • The owners keeps personal contacts with customers and know their needs, hence customers could be satisfied to greater extent • The owner gets incentive to work hard as he enjoys full amounts of profits • The owner can keep all the business matters secrets except from tax office Disadvantages of sole trader • Risk of making ineffective or wrong decisions as no one is considered for suggestion before taking the decision • Unlimited liability of the owner means the owner is fully liable for the debts or losses of the business even he has to sell his personal property • Expansion becomes difficult due to lack of finance as the owner himself is the only source of investment • Owner can not get the services of specialists such as experienced accountants or sales men due to lack of finance • Discontinuity may happen if the owner

goes sick or become unsound mind or dies Partnership A business which involves voluntary association of two to twenty people as partners in the business Partnership Deed Also called partnership agreement; all the partners are required to sign a written partnership agreement before starting partnership business so that in business disputes could be avoided. Page 10 Source: http://www.doksinet O Level Business Studies 7110 A partnership agreement may include the following: • The amount of capital invested in the business by all the partners • The nature of work the partnership will carry out • The profit and loss sharing ratio • The duration of the partnership • The arrangement for absence, retirement, and how new partner will be admitted Advantages of partnership • More capital than that of sole trader business as there are more than one person as investor in the business (however in banking partnership, there could be more than 20 partners as investors,

because the banking business needs as much capital as possible) • Responsibility of work, decision making, and burden of unlimited liability can be shared among the partners • Motivation for all the partners as greater the hard work and dedication is contributed by the partners, the more profit is enjoyed by all the partners Disadvantages of partnership • Unlimited liability for all the partners, however in limited partnership, all the partners will have limited liability except one partner who will be responsible for the debts and losses of the business and he will be the one who will sell all of his property to compensate the losses • No separate legal identity which means in partnership also there will be a risk of discontinuity but not as much as in sole trader ship. If there are two partners, one dies, business could be at the risk of discontinuity. • (Businesses with no separate legal identity is called unincorporated business) • Risk of disagreement among

partners on various decision making • Dishonesty of one particular partner may put every one into loss • Limited capital as the partners will only be limited to 20 partners except banking partnership Limited Companies Businesses with limited liability, incorporate businesses (or separate legal identity) and registered with registrar of business are called limited companies. Limited Companies are of two types: • Private limited Company • Public limited Company Page 11 Source: http://www.doksinet O Level Business Studies 7110 Before we proceed to these two types of limited companies, it is important to know some terms: Shares – are the certificates, which show the ownership of the shareholders in the company according to the amount of money they have invested in the company. Shareholders – are the people who own or hold shares in a company. Articles of association – a document shows set of rules under which company will run its business’ activity or day to day

operations Memorandum of Association – a document which gives details about the company such as the official name of the company, and its address, the amount of share capital the directors intend to raise, and the number of shares to be bought Certificate of Incorporation – a certificate issued by the registrar of company when either private or public limited company gets completed the registration process Prospectus – a document issued by the company as an invitation to the investors that they can make investment in the company; the prospectus include published accounts of the company and auditors report to help the investors in investment decisions. Annual General Meeting – an annual meeting the directors of public limited companies call upon so that shareholders of the company could be informed about the performance of the company, and shareholders could elect new directors of the company. Dividends – the profit share paid to the shareholders as return of their investment;

it is not necessary that the shareholders are paid dividend every year. Formation of limited companies Step # 1 Both public and private limited companies prepare and submit two documents to the registrar of companies for registration process, which are completely checked Step # 2 Once the document is checked and satisfied, the private limited company is issued certificate of incorporation; however public limited company will be issued certificate of trading, which is a permission to issue prospectus and raise minimum share capital requirement of £50,000 from general public by issuing shares Step # 03 After raising required share capital, the public limited company is issued certificate of incorporation Private Limited Company – limited company which are called family run business and they are allowed to issue shares to friends, relations, and to the known people. Page 12 Source: http://www.doksinet O Level Business Studies 7110 Advantages of private limited company •

Large sum of capital unlike unincorporated businesses as there are no limited number of investors • Shareholders have limited liability • Control and ownership remains in the hands of shareholders and they are directors of the company also Disadvantages of private limited company • Complex legal formalities to form the business (refer to formation of the business) • No transferability of shares to others without the consent of other directors or shareholders • No secrecy as registrar of companies require the business matters opened in the form of prospectus which could be seen by any member of the community • Not allowed to issue shares to the general public hence finance problem might arise Public Limited Companies Companies which can issue shares to the general public to raise finance; they are quoted or listed in stock exchange, which means companies’ shares can be traded in the stock exchange. Advantages of public limited company • Limited liability

for the shareholders • Very large capital as shares are issued to the general public • Freedom of transferability of shares to others by selling shares in stock exchange • Higher status of the company, hence providers of finance such as banks are ready to lend, and trade creditors are available for credit supplies Disadvantages of public limited company • Complex legal formalities (refer to the formation of the company) • Strict regulations and control over public limited companies to protect the interest or rights of the shareholders • Large businesses hence difficult to control and manage • Divorce between control and ownership as control remains in the hands of directors, and ownership in the hands of shareholders • Expensive to sell shares due to cost of issuing shares such as commission for the intermediaries helping selling of shares such as banks or underwriters; and thousands or even more number of copies of prospectus Page 13 Source:

http://www.doksinet O Level Business Studies 7110 Co-operatives These are the groups of people who agree to work together and pool their resources. They can take two forms: • Producers or workers co-operatives – type of co-operatives, which produce and own the business • Retail or consumers’ co-operative – type of co-operatives, which buy and own the business Features of co-operatives • One vote for one member regardless of number of shares • Active role by the members in running of the business • Equal profit or loss sharing ratio Joint Ventures A joint venture is when two or more businesses agree to start a new project together, sharing the capital, the risk and the profits. Advantages of joint venture • Sharing cost of the project • Sharing of risk of loss • Enjoying the same project as enjoyed by the bigger businesses Disadvantages of joint venture • Disagreement among joint ventured businesses on use of the project or its maintenance

Franchise A type of business in which a franchisee (the person who opens the branch of the business) takes the permission from a franchisor (the actual owner of the business) to start an independent business by getting a license to use the name of the product or symbol of the franchisor’s business. Advantages to the Franchisor • Expansion without making investment by the franchisor • Regular income for the franchisor in the form of license fee and percentage of franchisee’s sales revenue to the franchisor • Management of the shop or the branch goes to franchisee • International recognition of the franchisor’s business Page 14 Source: http://www.doksinet O Level Business Studies 7110 Advantages to the Franchisees • No direct cost of advertising • No risk of failure as the brand is already well known • Training of the staff goes to franchisor • Décor of the shop is standard and franchisee does not have to worry about • Important decisions are

taken by the franchisor • Status of the business in the market hence providers of finance are ready to lend • Supply of raw material or ingredients come from the franchisor or arranged by the franchisor Advantages of franchisor can be taken as disadvantages of franchisee and advantages of franchisee can be taken as disadvantages of franchisor Public Corporations or Public Companies are government run organizations; please do not confuse them with public limited companies which are part of private sector organizations; also called parastatals. Advantages of public corporations • Financed by the government hence they do not have to worry about financial problems, but they are aimed operate at cost • Natural monopolies, hence no competition; only providers of services • Every one gets the services of the business at reasonable charges • Contribute in employment in the country Disadvantages of public corporations • Inefficient as no fear of going bankrupt or

competition • Highly influenced by political decisions • Financed through public finance, hence government may charge higher taxes to cover the financial needs • Risk of denationalization or privatization if proves to be sick unit (i.e which can not run their own) Page 15 Source: http://www.doksinet O Level Business Studies 7110 Topic: Government economic influences on business Government’s economic objectives • Sustainable economic growth • Low rate of inflation • Low unemployment rate • Favorable balance of payment Business Cycle It refers to four phases of economic conditions including: Recovery – refers to growth also. This when GDP is rising, unemployment is generally falling and the country is enjoying higher living standards; most businesses will do well at this time. Boom – This is caused by too much spending. Prices start to rise quickly and there will be shortages of skilled workers. Business costs will be rising and firms will become

uncertain about the future. Recession – Often caused by too little spending; this is a period when GDP actually falls. Most businesses will experience falling demand and profits. Workers may lose their jobs Slump – A serious and long drawn out recession. Unemployment will reach very high levels and prices may fall. Many businesses will fail to survive this period Government economic policies Fiscal policy Government policy concerning with government’s income (i.e taxes), and government’s expenditures (i.e providing public and merit goods) Types of Taxes Direct Taxes are paid directly from incomes – for example, income tax and profit tax (i.e corporation tax) Indirect Taxes are added to the prices of goods and taxpayers pay the tax as they purchase the goods – for example, VAT. Other types of taxes are import duties and tariffs Page 16 Source: http://www.doksinet O Level Business Studies 7110 Effects of income tax on businesses • Fall in people’s disposable income

• Less able to spend on buying of goods and services • Fall in demand for business goods – if goods are basic necessities demand will not fall drastically; however if the goods are luxurious items, definitely demand will fall with the large proportion. Effects of profit or corporation tax on businesses • Lower profits after tax • Less profit available for dividends – less attraction for investors to invest • Lower retained profits available for reinvestment – limited business growth Effects of Indirect Taxes on businesses • Rise in prices of goods, fall in demand • However if goods are addictive or demerit goods such as alcoholic products or cigarettes, people will still buy and increased taxes can be transferred to final consumers • In case of substitute goods or goods with high demand elasticity will have fall in their demand and businesses will either have to pay higher portion of tax on their own or transfer smaller portion of tax to the people

to keep control on prices and maintain the demand Import Tariff is a tax on an imported product. Import Quota is a physical limit to the quantity of a product that can be imported. Effects of import tariffs and quotas on businesses • Demand for local businesses products as imported goods will become expensive; therefore sale of local products will increase • Businesses depending on imported raw materials will have increase in their cost of production and will have to set prices at higher level to cover their costs • Exporting businesses will lose their export markets due to retaliation action of other countries; they will also place the similar types of duties. Monetary Policy is a change in interest rates by the government or central bank of the country. Monetary policy is also concerned with money supply and exchange rates Exchange rate is the price of local currency in terms of foreign currency. Page 17 Source: http://www.doksinet O Level Business Studies 7110

Effects of higher interest rates on businesses • Firms with existing loans with have to pay high interest amounts, which will reduce their profits after tax and interests. • Less profit available for dividends – less attraction for investors to invest • Lower retained profits available for reinvestment – limited business growth • Delay in planned investment decisions – new projects will get halted • Consumers with mortgages will have to pay higher interest hence their disposable income will fall too leading their demand for goods and services to be reduced – demand for basic necessities might not fall much, but for luxurious goods demand will fall • Higher interest will also attract foreign investors, who will demand local currency and exchange rate of local currency will get appreciated Effects of appreciation in value of currency – imports will be cheaper but exports expensive; Effects of depreciation in the value of currency – exports will be

cheaper but imports expensive. Supply Side Policies • Privatization – private investors and owners make the business efficient therefore the supply increases; • Improved training and education – trained labour brings higher productivity • Increased competition in all industries – competition puts the businesses in to efficiency and efficiency brings increased supply Government controls over business activity Government interferes in the activities of the business, when they do the following: • Exploit the consumers • Exploit the employees • Deal in illegal or socially harmful goods such as weapons or drugs Consumer Protection In order to protect the rights of the consumers, government has made the laws below: • Weight and measurement Act: Deals in issues of measurement and weight of the products • Trade Description Act: Deals in the issues of misleading ingredients or descriptions of the products Page 18 Source: http://www.doksinet O Level

Business Studies 7110 • Consumer Credit Act: Deals in the problems of goods bought on credit • Sale of Goods Act: Deals in quality issues, or the product does not function as stated • Consumer Protection Act: Deals in pricing issues in which consumers are being mislead about prices cut off Monopoly It is the level of competition in which the most or whole of the supply is controlled by single dominated business. 1. Government discourages the monopoly due to the reasons below: 2. Exploitation of consumers by charging higher prices to make higher profits 3. Prevention of new businesses getting into the market 4. Exploitation of consumers by offering the customers bad quality goods Protection of Employees Employees are exploited in the following areas: • Unfair discrimination when they apply for the jobs • Health and safety at work • Against unfair dismissal • Wage protection Discrimination could be on the following basis: • Race or colour - Race Relation

Act • Gender Discrimination - Sex Discrimination Act • Disability Discrimination - Disability Discrimination Act Other discriminations could be on the basis of religion or the incumbent is too young or too old Health and Safety at Work • Protect workers from dangerous machinery – cage around the machine • Protect workers from any unpleasant incidence – safety equipment and clothing • Maintain reasonable workplace temperature • Provide hygienic conditions and washing facilities • Do not insist on very long work hours without providing breaks in the work schedule Minimum Wage legislation It is government set wage rate, which exists above the equilibrium wage rate (i.e wage rate at which both labour and producer agree to work with each other) Page 19 Source: http://www.doksinet O Level Business Studies 7110 Effects of minimum wage legislation • Cost of labour will rise and businesses will have to increase the prices to cover their cost of labour

• Skilled workers will ask for wage differentials (i.e difference between the wage levels of skilled and unskilled labour), it will increase the labour cost further • Businesses who are not ready to pay for minimum wage they will reduce the size of labour, it will create unemployment • Training for the unskilled workers to get maximum benefit out of their presence • Improved standard of living of unskilled workers – no more exploitation by the producers Page 20 Source: http://www.doksinet O Level Business Studies 7110 Topic: External influences on business Technological Change It refers to adoption of modern technology production system. Advantages • Competitive advantage for the business if competitors are still not involved in usage of modern technology • Increased productivity • Lower average cost • Reduced labour size and lower cost of labour • Changes in production are adapted quickly therefore flexibility in businesses’ production

methods and possible to meet consumers changing needs about production Disadvantages • Expensive to install new production methods • Training of labour is also a cost to the business • Redundancy phases bring demotivation among employees • Redundancy brings industrial disturbance and cost for the business Competition An activity among the businesses to win larger market share Government encourages competition because: • Businesses become efficient • Quality of the product rises • Variety of the products increases • Prices fall too • Monopoly breaks down • Businesses adopt efficient methods of production and train its labour Damages from business activity • Global warming caused by energy consumption • Pollution of air, sea, and rivers • Use of natural resources that are becoming scarcer Above damages could be controlled by • Laws banning certain waste disposal • Permits big polluters pay more taxes • Public opinions and

pressure groups Page 21 Source: http://www.doksinet O Level Business Studies 7110 Pressure Groups These are the social groups which represent the general public against any of the wrong doings by the businesses. Pressure groups do the following to force the businesses stop doing anti social activities: • Communicate the top management of the businesses • Carry out strikes and boycott against business products • Conduct news conferences • Communicate with the government to formulate laws against businesses wrong doings Cost Benefit Analysis: is the valuation by a government agency of all external an private costs and benefits resulting from a business decision. External costs are the costs paid by the rest of society other than the business as a result of a business decision. External benefits are the gains to the rest of society other than the business resulting from a business decision Private costs are the costs of a business decision actually paid for by the

business. Private benefits are the financial gains made by a business as a result of a business decision. Social Cost is the addition of the private and external costs of a business decision. Social Benefit is the addition of the private and external benefits of a business decision. Examples Private costs 1. Cost of land 2. Cost of construction 3. Labour cost 4. Cost of running the plant when it has been built 5. Transport costs of materials and completed products Private benefits 1. The money made from the sale of the chemical products External costs 1. Waste products will cause pollution 2. Smoke and fumes may damage the health of residents 3. Parkland cannot new be used by local residents Page 22 Source: http://www.doksinet O Level Business Studies 7110 External benefits 1. Jobs will be created 2. Other firms may move into the area to provide services to the chemical firm 3. Important chemicals will be produced to benefits society Page 23 Source: http://www.doksinet O Level

Business Studies 7110 Topic: Business Costs and revenue Reasons for accounting for cost • To calculate profit or loss of the business • To make good financial decision such as which supplier to buy or where to locate • To set a price Types of Costs Direct Costs The costs which are directly related to production; or the one which can not be avoided These are usually Variable Costs, which vary with the levels of production; the higher the production level, the greater will be variable cost. Examples of direct / variable costs • Cost of raw material • Wages of factory labour Indirect Costs The costs which are indirectly related to production or without which production may take place; they are also called overhead costs or fixed costs; they do not change with the level of production. Production is zero or 1,000, fixed cost will remain the same However, overhead costs are semi-variable or semi-fixed costs in which some portion of the cost is fixed and the rest is

variable. Examples of overheads / fixed / indirect costs • Supervisor’s or accountant’s salary • Electricity / Telephone bill • Transportation expenses • Depreciation Break Even and Break Even Chart Break Even – is the point where total revenue equals total cost; at this point there is neither profit, nor loss. Revenue – is the amount of money earned by the business through selling of goods or rendering services. Revenue is calculated by: Quantity sold * sales price Sales price = Total revenue / number of units sold Page 24 Source: http://www.doksinet O Level Business Studies 7110 Break Even Chart – can be drawn to find out the point of sales or production where if business operates, it can avoid loss. To draw break even chart following information are required: Units sold / produced Sales price Variable cost per unit Fixed cost Steps to draw break even chart Step # 1 Scale the costs / revenue on Y-axis, and units sold / produced at X-axis Step # 2

Calculate total costs and total revenue Step # 3 Plot the fixed cost Step # 4 Plot the total cost from the origin of fixed cost Step # 5 Plot the total revenue from the origin of zero Where total revenue line intersects total cost line, it is a break even point Break Even can also be calculated using a formula: Break Even = Total Fixed Cost / Contribution per unit Contribution per unit = Sales price per unit – variable cost per unit The results of break even will be the same using chart or the formula Uses of Break Even Chart • Easier to see profit or loss at a particular level • Possible to see the effects of price or cost change on profit or loss • Shows safety margin (i.e difference between maximum level of output and break even level of output) Limitations of Break Even Chart • Assumes no closing stock, which is impractical • Does not guide the managers about other decisions such as controlling the wastage of raw material or quality improvement •

Requires separate break even chart for every product • Assumes fixed cost as fixed but sometimes in the long run fixed cost increases as businesses grow • Assumes sales revenue and variable costs increase with number of units produced and sold, where other factors may also bring this change such revenue increases as quality increases, or variable cost increases with overtime payment for the labour Page 25 Source: http://www.doksinet O Level Business Studies 7110 Average Cost It is the cost of one unit produced. It is calculated by: Total cost / number of units produced Marginal Cost Cost of one extra unit produced. It incurs only variable portion of total cost or marginal portion of total cost. Economies of Scale It is when business operates at large scale and reduces its average or unit cost of production. Purchasing Economies of Scale – when business buys large quantity of goods and gets discounts on bulk buying Marketing Economies of Scale – when sales of the

business increases, its average cost of distribution or advertising falls Financial Economies of Scale – When businesses borrow larger sum of capital and due to higher security against loan and larger amounts of loans, they are charged lower amounts of interest. Technical Economies of Scale – Businesses adapts new technology and use them to full extent, which reduces their average cost of production Diseconomies of Scale – Businesses operate at large scale, but their average costs start rising due to the reasons below: • Managers lose their control over businesses and poor communication takes place, which is not properly acted upon and work becomes ineffective • Labour goes demotivated due to their unsolved problems at work place; this way labour loses its interest in work and productivity starts falling Forecasts – are the estimates about the future changes in the market. Budgets – are the financial plans about the targeted incomes and expenses / costs of the

business. Budgets are useful in the following ways: • Direction for employees and managers to work towards • Motivation to work hard to achieve those targets • Feeling of responsibility among employees • No supervision cost because employees are responsible for target achievement themselves • Decision making based on variance analysis Page 26 Source: http://www.doksinet O Level Business Studies 7110 Variance Analysis is the difference between actual and budgeted amounts In case of costs, if budgeted amounts are less than actual, the result is favourable otherwise adverse or unfavourable In case of revenues, if budgeted amounts are less than actual, the results are unfavourable otherwise favourable Page 27 Source: http://www.doksinet O Level Business Studies 7110 Topic: Business Accounting Trading Account: shows how the gross profit is calculated. Cost of Sales: is the cost of items which are being sold. It is calculated by: Opening stock + Purchases –

Closing Stock Sales Revenue: is the income earned by the business from the sales of the goods. It is calculated by: Sales Revenue = Units sold * Sales price Gross Profit is the total profit earned by the business. It is calculated by: Sales revenue – cost of sales Profit and Loss Account: shows the net profit of the business. It is the detailed account of business income and expenses. Net Profit is calculated by: Gross profit – expenses Profit and Loss Appropriation Account: is the detailed account showing the distribution of profit. It shows the amount of retained profit. Retained profit is the amount of profit after payment of dividends, interest and taxes. Retained profit is also called ploughed back profit. Balance Sheet: is the snapshot of the business. It shows the total worth of the business Current Assets: are the short term assets of the business, which include stocks, debtors, cash in hand, and cash at bank. Fixed Assets: are the long term assets of the business which

remain in business and for use for a longer period of time. They include land, building, motor vehicles, computers etc Current Liabilities: are the short term debts of the business. It includes creditors, bank overdraft, and accruals. Long term liabilities: are the long term debts of the business. They are long term bank loans or mortgages, and debentures. Working Capital: is the amount of capital which business requires to run its day to day activities; without working capital business might not able to run its activities. It is calculated by: Current assets – Current Liabilities Page 28 Source: http://www.doksinet O Level Business Studies 7110 Net Assets: are the addition of fixed assets and working capital. It shows the net worth of the business which is equal to capital employed. Capital Employed: is the money invested in the business using all of its resources. Capital employed is also calculated by: Shareholders’ funds + Long term liabilities + retained profit Analysis

of published accounts Accounting is called language of business. It speaks about the business’ profitability, liquidity, performance / efficiency, shareholders’ interest, and gearing. In order to communicate about the business, a distinct tool of the business is “Ratio Analysis”. Ratio Analysis In ratio analysis, various formulas and interpretation of results are carried out to communicate with the stakeholders of the business. Profitability Ratios These compare the profits of the business with sales, assets and the capital employed in the business. These are used to assess how successful the management of a business has been at earning profits for the business from sales and from the assets employed. They are widely used to measure the performance of a company as it makes profit on sales by controlling the costs and expenses, and on the capital invested in the business. Gross Profit Margin It measures the gross profit at each one unit of sales. It shows business’ performance

of increasing sales and controlling cost of sales. Gross profit margin = Gross profit / Sales turnover * 100 Gross profit margin can be improved by following steps: 1. Increase in sales through improving the product quality, advertising and marketing activities 2. Controlling cost of production through reducing wastage of raw material and labour idle time Net Profit Margin It measures the net profit at each one unit of sales. It shows business performance of increasing sales, controlling cost of sales, and expenses. Net profit margin = Net (or operating) profit / Sales turnover * 100 Page 29 Source: http://www.doksinet O Level Business Studies 7110 Net profit margin can be improved by the following steps: Point 1 and 2 above under gross profit margin, and the point below: 3. Controlling expenses or overheads by identifying excess amounts of expenses Return on Capital Employed It shows the profit earned at each $1 of capital invested. Return on Capital Employed = Net (operating)

profit / Capital Employed * 100 Return on Capital Employed can be improved by: 1. Increasing profit 2. Decreasing capital employed Liquidity Ratios These ratios show the liquidity of the business; means ability to pay for its short term debts. This ratio effects the business working capital position. Current Ratio This is the proportion of current assets to current liabilities. The standard ratio is 2:1 It means business should have double of its current assets than its current liabilities to maintain its liquidity position. Current Ratio = Current Assets / Current Liabilities Always show your answer in ratio form. Current Ratio can be improved by: 1. increasing cash or bank balance 2. increasing sales on credit or by cash 3. by making more of closing stocks available in stock 4. by depending less on credit supplies 5. by depending less on bank overdraft Acid Test Ratio This is the proportion of quick assets or acid test ratio to current liabilities. The standard ratio is 1.5:1 It

means business should have one and half times of its assets more than its current liabilities to maintain its liquidity position. Acid Test Ratio = Current Assets – Stocks / Current Liabilities Always show your answer in ratio form. Acid Test ratio can be improved by all of the above points except point number 3. Ways of comparison Inter firm comparison – comparison between similar businesses Historical Comparison – comparison of current year’s result with the previous years Page 30 Source: http://www.doksinet O Level Business Studies 7110 Advantages of Ratio Analysis • Shows liquidity, profitability, and performance of the business • Helps managers in decision making • Communicates with shareholders, and loan providers about business performance • Shows comparison with previous years or similar businesses Disadvantages of Ratio Analysis • Does not show the effects of inflation, economic conditions, and management’s policies for the business •

Possible to hide the facts such as reducing or increasing expenses (i.e called window dressing) • Does not indicate future performance Page 31 Source: http://www.doksinet O Level Business Studies 7110 Topic: Cash flow Planning Cash flow Planning • Cash flow of a business is the cash inflows and outflows over a period of time • Cash inflows are the sums of money received by a business during a period of time • Cash outflows are the sums of money paid out by a business during a period of time. Sources of cash inflows • Sales of goods for cash • Payments made by debtors • Borrowing from a bank or any other external source • Sale of fixed assets or stocks Sources of cash outflows • Purchase of goods or materials for cash • Payment of wages, salaries or any other expense • Repayment of loans • Payment to creditors Cash flow Cycle It shows the stages between paying out cash for labour, materials, etc. and receiving cash from the sale of goods.

Profit is the surplus after total costs have been subtracted from sales revenue. A profitable business may also face cash flow problem, because profit depends on sales and expenses. Reasons for cash flow problem • Allowing customers too long credit period • Purchasing too many fixed assets at once • Purchasing or producing too high a level of stocks when expanding too quickly. This is called overtrading. Cash flow forecast It is an estimate of future cash inflows and outflows of a business usually on a month by month basis. This will then show the expected cash balance at the end of each month Cash flow forecast is important: • To manage the starting of a new business or the business already in existence and its expansion is required (most of the businesses fail at their initial stage, because they do not manage their expenses properly or their managers do not know the inflows and Page 32 Source: http://www.doksinet O Level Business Studies 7110 outflows properly and

business goes out of cash. It happens due to overtrading or buying too many fixed assets. • To keep bank manager informed about overdraft needs • To simply manage the cash so that business does not face cash flow problem. Solving cash flow problem • Borrowing money from the bank either long term loan or bank overdraft • Reduce or delay planned expenses • Running down stock levels by selling excess stocks or selling of idle fixed assets or giving the idle fixed assets on rent Page 33 Source: http://www.doksinet O Level Business Studies 7110 Topic: Source of finance Internal sources of finance Retained Profit also called ploughed back profit. It is the amount of profit, which is left over after payments of all amounts of expenses, interest, and dividends. It is the amount of profit available with the business for re – investment purpose. Advantages of retained profit • No burden of repayment • No interest charges • Ready source of investment •

Best use of business’ savings Disadvantages of retained profit • New businesses do not have this source of finance available • Sometimes not enough to meet all the financing needs • Shareholders might be unhappy with this source of finance, which could be available to them as dividend Sale of existing fixed assets Sometimes business may have some of the fixed assets idle or no more in its used can be sold for the purpose of financing. Advantages of Sale of fixed assets • Getting tied up capital in best use as investment • No repayment or interest payment burden • Source of improving cash flow position • Avoiding the increase in cost of depreciation Disadvantages of sale of fixed assets • In future if business needs the fixed assets, it might have to pay more than what it got against sale of fixed assets • Might not get large sum of capital to meet larger financing needs • New businesses might not have this source of finance available Sale of

excess stocks or running down stock levels Sometimes businesses may have stocks available more than required Advantages of running down of stock levels • Recovery of tied up capital • Reduction in opportunity cost of stock Page 34 Source: http://www.doksinet O Level Business Studies 7110 • Reducing cost of stock storage or warehouse cost • Best use of idle stock for investment purpose Disadvantages of running down of stock levels • In future if business increases its demand for production, and it does not have the stocks available, it will lose its customers • Available finance from this source might not be very large • New businesses will not have this source of finance available Advantages of internal source of finance • No direct cost to the business such as interest payments • No increase in liability of debts Disadvantages of internal source of finance • Involves other charges such as lease charges if sold and leased back • Not

available for all types of businesses • Solely depending on internal source of finance slows down business growth as pace of development will be limited by the annual profits or the value of assets to be sold; thus rapidly expanding companies are often dependent on external sources for much of their finance External Source of finance Short term sources Bank Overdraft – it is the short loan from a bank Advantages of Bank Overdraft • Mostly meet working capital or cash flow financing needs • Available on demand • Interest rate is according to number of days the loan is being used Disadvantages of Bank Overdraft • Has to be paid back as bank demands • Normally interest rate is higher Trade Credit – is getting raw material on credit from suppliers Advantages of Trade Credit • Brings the business in better cash position because business does not have to pay for the raw material immediately • No interest payment up to a certain period of time • Trade

discount is available on buying Page 35 Source: http://www.doksinet O Level Business Studies 7110 • Cash discount is available if payment is made on a specified or within given time period Disadvantages of Trade Credit • If payment is not made on time or substantial delay in payment may lead to legal action by the creditor • Shorter creditors’ days may bring cash flow problem Debt factoring – is sale of debtors in discount houses of banks or financial institutions Advantages of debt factoring • Immediate cash available to the business after deduction of certain payment • Responsibility of collection is shared between bank and the business • Risk of delay in payment is also shared between bank and the business Disadvantages of debt factoring • Loss of certain percentage out of the whole amount of debt • Business has to repay the whole amount in case of bad debt • Cash flow problem if payment is not made Sources of medium term finance Hire

purchase - it is buying of fixed assets such as motor vehicles or equipment on installments in which business has to pay certain sum as down payment and the rest on installment. Advantages of hire purchase • Business does not have to pay the whole price of fixed asset at once • Possession of asset is immediate • Ownership is possible on full payment for the fixed asset Disadvantages of hire purchase • Business has to pay more than actual price of the asset • Asset is taken back if series of payments are not made regularly Leasing – is taking the assets such as machinery, vehicles, and even premises or building on rent Advantages of leasing • Immediate possession of the fixed asset • Business does not have to pay a large sum to acquire fixed asset, only leasing charges on agreed period are paid • Repair services is provided by the leasing firm Page 36 Source: http://www.doksinet O Level Business Studies 7110 Disadvantages of leasing • Ownership of

the fixed asset is never given unless paid for the fixed asset • Periodic payments of rental charges in full are more than actual price of the fixed asset Sources of long term finance Issue of shares – the source of finance is available only to the public limited companies; they can issue shares to the general public to raise share capital Advantages of issue of shares • Many of the financing needs can be met • No burden of repayment as it is a permanent source of finance • No interest payment Disadvantages of issue of shares • Dividend payments but not regular • Burden of shareholders’ queries about the performance of the business and details about the use of their finance Debentures – are the long term loans obtained by the businesses against issue of certificates stipulating regular interest payment regardless of business profit or loss Advantages of debentures • Business meets many of the financing needs • Solves cash flow problem • Usually

available for more than five years hence ample time to return the loan out of business profits Disadvantages of debentures • Interest payments regardless of business profit or loss • Ultimately repayment takes place • Business’ assets have to be pledged against the loan Bank Loan – available for short, medium, and long terms Advantages of Bank loan • Ready source of finance • Available for various periods • Easier to match with business financing needs • Interest is charged according the period the loan is demanded Page 37 Source: http://www.doksinet O Level Business Studies 7110 Disadvantages of Bank Loan • Burden of repayment • Interest payment regardless of business profit or loss • Demands collateral or security against risk of non payment • Risk of losing business property if due payment is not made Advantages of debt financing • No shares are sold hence any risk of losing control over the business does not take place •

Loan repayment is ultimately made therefore no permanent liability takes place • No voting rights of lender on annual general meeting • Interest payment is before the tax is charged; hence lower amounts of taxes are paid Disadvantages of debt factoring Gearing of the company increases and this makes the business riskier for the shareholders and they get discouraged of investment Equity financing – it never has t be repaid; it is permanent capital; dividends do not have to paid every year in contrast, interest on loans must be paid hen demanded by the lender. Making the financing decision Factors influencing finance choice • Purpose of finance – why does business need finance • Time period – how long the business needs finance • Available sources of finance – internal or external • (all above are matched to choose the best source of finance) • Status of the business – to decide which source of finance is available to the business according to its

incorporate or unincorporated • Control of the business – especially for public limited companies they should remain in control over the business • Gearing ratio – if already business’ dependency on loans is more or equal to 50% then they should not go for further loans otherwise business will become risky and less attractive for the investors. Page 38 Source: http://www.doksinet O Level Business Studies 7110 Topic: Organizational Structure Organizational Structure It refers to the levels of management and division of responsibilities within an organization. An organizational structure could be either flat or tall. In flat Job Description It is an official documents which gives the details of duties and responsibilities of a would be or an existing employee. Job Description includes the following: • Title of the job • Department of work • Responsible for – Who is answerable to him • Responsible to – Whom the employee is answerable • Main Duties

• Occasional Duties Delegation It is giving responsibility of work to subordinates by the managers, but the given responsibility goes to the managers, The responsibility given to the subordinates is temporary and if they do not perform well it is taken back from them. Advantages of delegation to managers • Time saving for managers, and they will have more time for managerial task such as planning, organizing, controlling, leading, and commanding. • Less work load for the managers and they make less mistakes • Time for staff evaluation and efficiency rises Disadvantages of delegation to subordinates • Work become interesting, challenging, and rewarding • Workers or subordinates feel important as they are selected best ones to delegate • Career opportunities for subordinates they become good managers of future, and their motivation level rises too. Reasons for managers’ hesitation to delegate • Fear what if subordinates do mistake, the whole

responsibility will go to managers • What if subordinates perform the job better, they will lose their position Page 39 Source: http://www.doksinet O Level Business Studies 7110 • Simply autocratic and want to do every work on their own Organizational Chart It is a graphical presentation of organizational structure. Organizational Structure shows the following: • Nature of organization / Structure of the organization – tall / flat • Hierarchy of management • Departments of the organization • Chain of command – short / long • Span of control – wider / Narrower Benefits of organizational chart • Shows how people working in various departments are interlinked with each other • Creates sense of belonging among employees and managers when they see their positions in the organizational structure • Employees could see their positions and identify whom they are answerable and who is answerable to them • Employees also know about chain of

command and span of control Span of control – refers to number of subordinates working directly under one manager Span of control could be either wider or narrower Chain of Command – refers to the way the information passes from top to bottom level of management. Chain of command could be either short or long Along structure organization will have narrow span of control and long chain of command. A flat structure organization will have wider span of control and short chain of command. Advantages of short chain of command • Communication will be quicker and accurate – because message crosses less level of management • Top managers will be less remote to lower level of hierarchy – time saving • Span of control will be wider – benefits of delegation Today’s organizations prefer to keep their organization’s structure flat. Hence the technique of delayering is used. Delayering is removing the whole level of management by promoting the lower level of management to

higher level. Line Management – includes managers who are responsible for the departments or can be called department’s managers Page 40 Source: http://www.doksinet O Level Business Studies 7110 Staff Management – includes managers who are supportive and advisory managers. Advantages of employing staff and line managers • Staff mangers advice to the line managers on various issues such as technological advancement or economic conditions • Spare time available for line managers for managerial task such as planning and organizing Disadvantages of employing staff and line managers • Conflict and frustration among both types of managers due to different view point • Line employees go confuse that whom to follow line or staff managers Decentralized Decisions All types of decisions which are delegated to lower level of management such as operational or tactical decisions. All department decisions are decentralized decisions Centralized Decisions The decisions which

are taken by the top management of the organizations; such decisions are usually taken by chief executive of the organization and they are strategic decisions. Advantages of decentralized decisions • Better decisions by the line managers and supervisors because they know better their departments • Trust of higher management increases on lower management • Quicker decisions because lower managers do not have to ask top management before taking such decisions. Should all the decisions be centralized or decentralized If the decisions involve millions of dollars of investment and likely to effect all the stakeholders, then they should be centralized. Such decisions could be: • Opening of new branches abroad • Take over or merger with other businesses If the decisions are of routine nature and may not affect all the stakeholders, then they should be decentralized. • Introduction of new products • Advertising on a particular media • Borrowing from a particular

bank • Setting level of stock or deciding on number of labour required Page 41 Source: http://www.doksinet O Level Business Studies 7110 Practice Questions Page 42 Source: http://www.doksinet O Level Business Studies 7110 Page 43 Source: http://www.doksinet O Level Business Studies 7110 Page 44 Source: http://www.doksinet O Level Business Studies 7110 Topic: Managing a business Managerial Functions The functions of managers which are performed by all types and levels of managers Planning – involves setting aims or targets to bring a sense of direction or purpose towards which employees and managers work. Organizing – refers to arranging and allocating resources to achieve set targets; it also involves distribution of work among the employees. Co-ordination – the jobs done by the employees and departments are widely spreaded and it is required to be coordinated to move them towards set targets. Commanding – is not ordering but instructing, guiding and

leading the employees or subordinates to lead them towards set targets Controlling – is checking whether the set targets are going to be achieved if yes well, otherwise finding the reasons if the reasons are external, then objectives should be changed. If the reasons are internal, then those reasons should be overcome. Qualities of a good manager • Intelligent • Initiative – the one who takes the first step to solve the problem • Self confidence • Assertiveness and determinant – assertiveness means positive in thinking and determined is firm or stick to do something • Energetic and enthusiastic – able to work longer hours and with emotions Process of decision making • Objectives of the business • Identify and analyze the problem • Collect and analyze data • Consider options and take decision • Review – was it successful Types of Decisions Strategic Decisions Important decisions, which are taken less often and important decisions; they

affect the overall success of the business; they are taken by the top management of the organization. E.g merger or takeover or inaugurating new branch of the business abroad Page 45 Source: http://www.doksinet O Level Business Studies 7110 Tactical Decisions Such decisions are taken by the middle management; they are taken once in six months or quarterly; such decisions are department’s decisions. Eg deciding which bank to borrow; which media to advertise or which area to locate the business Operational Decisions These decisions are taken by the operational or supervisory level of managers; these decisions are taken very often such as deciding level of stock or labour working at factory floor. Business Functions It involve all the functions which line managers and staff perform in their own departments Marketing • Market research • Planning new products • Deciding on marketing mix • Evaluating sales data Production (or Operations) • Ordering materials and

resources • Developing new products • Location decisions • Maintaining efficiency of production Human Resource • Recruiting staff • Training programmes • Negotiating with workers • Staff records and control Administration • Clerical services • IT system • Cleaning and maintenance Accounting and Finance • Keeping financial records • Preparing accounts • Preparing budgets • Plan and control finance Page 46 Source: http://www.doksinet O Level Business Studies 7110 Practice Questions Page 47 Source: http://www.doksinet O Level Business Studies 7110 Topic: Communication in Business Communication – is the transferring of message from the sender to the receiver, who understands the message. The message is the information or instructions being passed by the sender to the receiver. Elements of communication • Transmitter (or sender) – also called encoder • Medium of communication – the source of sending message •

Receiver (or decoder) • Feedback – reply for the message Effective Communication – the message is effective which is clear, to the point, and easy to understand as well as free from all the barriers either at sender, medium of communication, receiver or feedback level. One way communication – involves a message which does not call for or require a response. Eg take these goods to the customer One way communication does not allow the receiver to contribute to communication or to provide any feed back. Two Way Communications – is when the receiver gives a response to the message and there is a discussion about it. Two parties involve in communication process, which bring better and clearer information. Advantages of Two Way Communication • Possible to make clear whether the receiver has understood the message and acted upon • Receiver feels more a part of the process of communication and make contribution and get motivated Internal Communication – the type of

communication within the organization; it is when messages are sent between people working in the same organization. e.g manager talking to workers; a report sent from one director to another External Communication – is when messages are sent between one organization and another organization or outside individual. e.g orders for goods from suppliers; sending information to customers about prices and delivery times; advertising of goods or services; asking customers to pay bills on time Verbal Communication Verbal or oral communication includes one-to-one talk, telephone conversations, video conferencing, and meeting. Page 48 Source: http://www.doksinet O Level Business Studies 7110 Advantages of Verbal Communication • Information passes out quickly in an efficient manner to the large number of people • Opportunity for immediate feed back • Body language of the speaker or facial expression can help to put the message across effectively Disadvantages of Verbal

Communication • Not sure whether every body is listening or understanding the message • Takes longer to get feedback from every one • Not possible to keep permanent record of verbal communication except recording of the oral communication Written Communication – includes letters, memos, reports, notices on the board, notices, faxes, e-mail, intranet, and internet Advantages of written communication • Very hard evidence of the message, which can be referred back • Reduces disagreement among the senders and receivers • Message can be copied and sent to many people • Quicker and cheaper way to reach large number of people Disadvantages of written communication • Not possible or so easy to check that the message has been received and acted upon as with verbal messages • Difficult for some receivers to understand • No opportunity to see body language of the sender or his facial expression Visual Communication – includes films, videos and

PowerPoint displays, posters, and charts and diagrams. Advantages of visual communication • Presentation of information is appealing and attractive • Makes written message clearer by adding a chart or diagram Disadvantages of visual communication • No feedback and the sender of the message may need to use other forms of communication to check that the message is understood • Charts and graphs are difficult for some people to interpret Page 49 Source: http://www.doksinet O Level Business Studies 7110 Formal and informal communication Formal communication – is carried out within the organization and caring with hierarchy of management. Informal Communication – is also called grapevine and carried out without caring of hierarchy of management and off the business environment. Barriers to Communication Barriers to communication can be at any one of the elements of communication Element of Barriers’ Type Way to Overcome Communication Sender / Encoder / • Use

of technical words • Use simple language / slangs • Communicate slowly • Speaks too fast • Assure message is clear by • Unclear message • Message too long Transmitter reviewing it • Keep message as short as possible Medium of • Distortion • Retry if distortion in channel communication • Background noise • Clear off the background • Use of wrong channel of communication • Overloaded channel • Technical break down noise • Learn which channel to choose for what purpose • Use alternative channel for the same message Receiver / Decoder Feedback • Less / no attention • No trust on sender attentive and understand • Unconscious what is said; • Listen but do not • Fully conscious understand • Recover the trust No feedback / feedback • Assure feedback is given not clear • Request for resending of • • Assure the receiver is feedback Page 50 Source: http://www.doksinet O Level

Business Studies 7110 Practice Questions Page 51 Source: http://www.doksinet O Level Business Studies 7110 Page 52 Source: http://www.doksinet O Level Business Studies 7110 Topic: Motivation at work Motivation – is the reason why employees want to work hare=d and work effectively for the business. Motivation is the state of employees taking extra ordinary interest in the work and leading their work towards productivity. It is true that a well motivated worker bring higher productivity, increased output and profitability for the business, and vice versa to this an unhappy employee does not work effectively and bring low output and no profitability for the business. Motivation Theories Many leading management thinkers brought their own theories to suggest the ways to motivate the employees at their work. You only need to remember the key points about their theories rather than learning the whole history of these theories. FW Taylor He presented his theory saying workers

should be brought on the following: • Specialization in work according to their skills and areas of interest • Fair day’s work fair day’s pay • Least intervention by the managers – let workers to work, and let managers to manage the business Abraham Maslow He presented his theory as hierarchy of needs that each worker should be satisfied with their needs hierarchically from lower to upper level of needs. Physiological / basic needs – wages high enough to meet weekly bills; food, rest, recreation, and shelter Safety / security needs – Job security; protection against danger, protection against poverty; fair treatment Social needs – Work colleagues that support you at work; friendship, a sense of belonging to a team Esteem needs – being given recognition for a job well done; having status and recognition, achievement, independence Self – Actualization – being promoted and given more responsibility; succeeding to your full potential Page 53 Source:

http://www.doksinet O Level Business Studies 7110 Self Actualization Esteem Needs Social needs Safety / security needs Physiological / basic needs Herzberg He presented his theory of motivation by proceeding with Maslow’s hierarchy of needs and stated his theory on two aspects: Motivators – higher level of Maslow’s hierarchy of needs including achievement, recognition, personal growth / development, advancement / promotion, and work itself Hygiene (or maintenance) factors – lower level of Maslow’s hierarchy of needs including status, security, work conditions, company policies and administration relationship with supervisor, and relationship with subordinates, and salary. He stated that hygiene factors need to be satisfied before motivators to be satisfied. If an employee or worker remains dissatisfied with hygiene factors though motivators are satisfied, the worker can not be motivated. McGregor – presented his theory as management behaviour stating: Theory X (an

autocratic manager) • Employees dislike the work and avoid it • Employees should be threatened of punishment • Employees have no ambitions and seek security only • Employees only work for money Page 54 Source: http://www.doksinet O Level Business Studies 7110 Theory Y (democratic manager) • Employees think work is natural and like to work • Employees only need proper supervision, guideline and direction on the track of right job • Employees accept and seek responsibility • Employees need self actualization, have great creative potential but it is underutilized People work for following: • Money • Social needs / affiliation with other members of the society • Security at work • Job Satisfaction – work purposefully • Esteem needs – recognition due to their job Motivating Factors Financial motivators It is true money motivates the employees / workers Wages – a payment system work weekly Time Rate – a wage system which works

in accordance with time; under this payment system workers are paid for basic 40 hours, and overtime working hours. e.g Mr Ahmed worked for 50 hours in a week He is paid $8 per hour and overtime pay rate one and half times. Basic pay 40 hours @ $8 = $320 Overtime pay 10 hours @ $8 * 1.50 = $120 Total pay $320 + $120 = $440 Advantages of time rate • Easier to calculate workers’ wages using time sheet in which sign in and sign out show employees’ total number of hours worked according total pay is calculated. • No risk of any discrepancies on pay matters • Motivates employees due to overtime pay Disadvantages of time rate • Good and bad workers are paid the same • Good workers get demotivated due to they are paid the same as workers not working or wasting time Page 55 Source: http://www.doksinet O Level Business Studies 7110 • Business has to employ supervisors to keep workers working, which is an additional cost Piece rate A system under which

employees are paid a basic pay rate and then greater they produce they earn. Advantages of piece rate • Encourages workers to work faster and produce more goods, which is a source of increasing business productivity and motivates the employees • Also motivates the workers that if they produce nothing due to technical break down, they still earn a basic pay rate Disadvantages of piece rate • Demotivate the employees who are quality workers and work slowly to produce quality • Increase defection rate if the workers focus on quantity • Bad reputation for the business if bad quality production is produced • Supervisors or quality inspectors have to be appointed so that defection rate could be controlled Salaries A salary is a payment for work usually paid monthly Advantages of salary • Fixed pay helps employees to plan or budget their expenses • Possible to have increments in pay periodically Disadvantages of salary • Bad and good employees are paid the

same • Good employees get demotivated as they are paid the same as bad employees • Supervision cost may incur for the business Commission A payment system offered to the sales staff in addition to fixed salary per month. Commision is paid as percentage of sales Commission motivates the employees as they are paid more with the increase in their sales; external factors such recession in the economy may affect their performance and sales fall. Basic pay is too low to run the individuals’ expenditures. Page 56 Source: http://www.doksinet O Level Business Studies 7110 Profit Sharing Payment system under which employees are offered share in company’s profit in addition to their usual payment of wages or salaries It motivates the employees as they get higher share in profit if the company earns higher profit, but the business loses the profit share. Bonus Usually bonus is offered to the employees annually when a festival approaches or business has performed well and earned

profit more than usual. It motivates the employees because they can finance their additional festival related expenses, but if not paid due to some reasons they might be demotivated. Performance Related Pay The businesses where the services are offered to the customers and employees performance is difficult to measure, the employees are rewarded annually a performance based pay by conducting an interview called appraisal interview. In appraisal interview employees are discussed on work related problems, and judged with their overall performance on customers’ satisfaction. But this creates kind of feeling of injustice among employees that their performance is not judged properly. They might be entitled for higher pay rise Share Ownership Employees are given ownership by issuing company’s shares to them so that they could be with sense of ownership. Such ownership motivates them to work hared so that the company earns higher profit and they get higher dividend. Non-financial

motivators They are also called perks or fringe benefits. Such rewards are mostly permanent and motivate the employees. Non – financial rewards include: • Children’s education fees paid • Discounts on the firm’s products • Health care paid for • Company vehicle (Car) • Free accommodation • Share options (where company shares are given to employees) • Generous expense accounts (for good and clothing) • Pension paid for by the business Page 57 Source: http://www.doksinet O Level Business Studies 7110 • Free trips abroad / holidays Job Satisfaction One of the disadvantages of specialization is boredom, which may partly create job satisfaction Job satisfaction is the enjoyment derived from feeling that you have done a good job. Job Rotation It involves workers swapping round and doing each specific task for only a limited time and then changing round again. Job Enlargement It is where extra tasks of a similar level of work are added to a

worker’s job description. Job Enrichment It involves looking at jobs and adding tasks that require more skill and / or responsibility. Advantages of Job rotation / enlargement / enrichment • Cure for boredom • Improves efficiency due to change in job nature • Financial benefits • Motivate employees due to higher level of job • Employees feel themselves important • Remedy for absenteeism Disadvantages of job rotation / enlargement / enrichment • Low productivity as job given is new • Wastage of resources if employee is not performing well • Training needs might be there • Some might not accept additional work responsibility and get demotivated Refer to above for autocratic and democratic leadership styles (3) Laissez Faire Managers behave very much trustful on his employees; they delegate to the employees or subordinates and do not ask for the job done. Because they believe employees must have work well or as expected. Formal Group – is a

group designated to carry out specific tasks within a business Informal Group – is a group of people who form independently of any official groups set up within the business and who have similar interests or something else in common. Page 58 Source: http://www.doksinet O Level Business Studies 7110 Page 59 Source: http://www.doksinet O Level Business Studies 7110 Page 60 Source: http://www.doksinet O Level Business Studies 7110 Page 61 Source: http://www.doksinet O Level Business Studies 7110 Page 62 Source: http://www.doksinet O Level Business Studies 7110 Page 63 Source: http://www.doksinet O Level Business Studies 7110 Topic: Recruitment, Training and human resources Work of human resources department • Recruitment and selection of new employees • Setting or negotiating wages and salaries • Developing industrial relations among employers and employees • Arranging training programmes • Providing health and safety for the employees through

favourable work conditions • Redundancy and dismissal Recruitment Process • Vacancy arises • Job analysis – is analysis of the existing job to find out existing and new job requirements • Job description and specification in accordance with job analysis • Job advertisement according to the nature of the job • Application forms and short listing • Interview and selection • Vacancy filled Job Description – outlines the responsibilities and duties to be carried out by someone employed to do a specific job. Job Specification – is a document which outlines the requirements, qualification, expertise, physical characteristics etc. for a specific job Contents of job specification • Job title • Department • Details of job • Qualification • Skills • Physical fitness • Personal Characteristics How does job description help in recruitment of a new employee? Interviewer interviews the employee and asks about his skills and

capabilities which he compares with the job description to confirm whether the employees’ skills and capabilities match with the requirement or not, if it does the employee could be the right one for the job. Page 64 Source: http://www.doksinet O Level Business Studies 7110 Internal recruitment – is when a vacancy is filled by someone who is an existing employee of the business. Advantages of internal recruitment • Saves time and money on advertisement and recruitment and selection process • Person is already known to the business and also his reliability, ability, and potential • No need for induction training • Motivates the employee as he is chosen for the post Disadvantages of internal recruitment • No new ideas or experiences come into the business • Create jealously and rivalry among other employees Above advantages are disadvantages of external recruitment and disadvantages are advantages of external recruitment External recruitment – is when a

vacancy is filled by someone who is not an existing employee and will be new to the business. Places to advertise for external recruitment Local newspaper – suitable for production line workers / low level jobs such as clerical jobs, because does not require very high education or skills so it can be met within local market National newspaper – specialist employees and high level managers could be recruited through this form advertisement, because very high level education or skills are needed so that best among best employees could be recruited. Other modes of advertisements could be specialist magazines, recruitment agencies, and government job centers. Training – is a continuous learning process for employees to teach them skills and techniques by which they could handle and work out existing problems at job. Needs for training To introduce a new process or new equipment To improve the efficiency of the workforce To make unskilled workers skilled one To minimize supervision

cost To improve the opportunity for internal promotion To decrease the chances of accidents Page 65 Source: http://www.doksinet O Level Business Studies 7110 Advantages of training • Greater motivation and commitment of the employees – because they learn new techniques to perform their jobs efficiently • Increased productivity • Improved quality of the output • Improved customer service • Greater flexibility of the labour force – multiskilled • Ability to use new technology Disadvantages of training • Loss of output whilst training • May raise employee expectations of promotion • Cost of training • Employees may leave once they are trained and then another business will benefit from training Induction Training The training given to the new employees and it enables the new employees known to the system of work and get introduced with their colleagues and bosses. Advantages of induction training • Control the nerves of new employees

• Increased the chances of employees’ stay with the organization • Employees’ contribution to the work comes immediately Disadvantages of induction training • Time consuming • Delays new employees’ contribution to the work as long as he understands the system of work On the job training The type of training which is given to the technical workers who learn while they are at work Advantages of on the job training • Workers’ skills improve / they learn new skills • Learn how to handle their existing jobs better • Minimizes incidence at work • Use the resources efficiently • Adapt the changes at production line quickly Page 66 Source: http://www.doksinet O Level Business Studies 7110 Disadvantages of on the job training • Reduces productivity due to learning process • Sometimes bad habits of trainers get transferred to the trainees Off job training It is the type of training given to the line managers in which they are temporarily off

from the work and join a college or university for formal education. Advantages of off job training • Manager becomes more qualified and develops new managerial skills • Application of such skills bring better management and control for the business • Business become modernize • Managers are more able to make effective decisions Disadvantages of off job training • No productivity at all • Cost for the business i.e educational expenditures of the manager • Managers if leave the job after training other businesses get benefits out of training Page 67 Source: http://www.doksinet O Level Business Studies 7110 Topic: Trade Union It is a group of workers who have joined together to ensure their interest is protected. A trade union is a social group representing labour to protect their rights against any unfair act of the business or the employer. Functions of Trade Union • Getting Improved working conditions of employment • Getting improved environment

where people work e.g health and safety, noise, heating • Improved benefits for members who are not working due to any problem such as sickness or retired etc • Improved job satisfaction by encouraging training • Financial advice or support • Protection against unfair dismissal or redundancy Closed Shop – is where all the employees become member of a single trade union A Single Union Agreement – is when a firm will deal with only one trade union and no others Advantages of single union agreement • One union to negotiate hence discussions are clearer • Greater negotiation power • No risk of disagreement among labour views • Better working relationship among management and the union • Quicker solution of disputes • Easier to agree or change to the working conditions • Time saving for the management on negotiation and remain focused as only single union Collective Bargaining – is where representative of management and representative of

labour negotiate on a particular issue. Individual Bargaining – is where single labour negotiates on his or her own individual’s problem with one of the managers Collective bargaining is more effective because that is for the betterment of whole labour and the management does not have to deal with individuals’ problems. Productivity Agreement – is where workers and management agree on increase in benefits in return for an increase in productivity. Page 68 Source: http://www.doksinet O Level Business Studies 7110 Industrial Action – is action taken by the trade unions to decrease or halt production Strike – is when employees refuse to work. A token strike is when a short stoppage of half a day, one day or even an hour to indicate the strength of feeling about the claim A slective strike is whn only a few selected workers walk out; these will be chosen by the trade union in order to cause a lot of disruption to the workplace An all out strke is when all members of the

union stop working and leave the workplace unitl the dispute or claim is settled. Picketing – is when employees who are taking industrial action stand outside their place of work to prevent or protest at the delivery of goods, arrival and departure of other employees etc Work To Rule – is when rules are strictly obeyed so that work is slowed down Go Slow – is when employees do their normal tasks but more slowly than usual Non – Cooperation – is when employees refuse to comply with new working practices An over time ban – is when employees refuse to work larger than their normal working hours. Role of ACAS ACAS is Advisory Conciliatory Arbitration Services It is a mode of resolving an issue before the matter is taken to the industrial tribunal or labour court. ACAS is an independent body which is financed by the government has the role of trying to improve industrial relations. It provides its services free and it is impartial If the dispute goes to arbitration then both

sides must agree to abide by the ruling of ACAS. The service provides: Advice and information on all areas of employment to both employees and employers Conciliation - ACAS talks to both sides in a dispute to try to find areas on which both sides can agree. This will allow both sides in a dispute to start negotiation again if discussion have broken down Arbitration - if a dispute ahs reached a position where there is deadlock and neither side will agree on a settlement they may go to arbitration. ACAS arranges for a n independent group to listen to both sides in the dispute and to propose what they think is a fair settlement. Both sides must agree in advance to accept the arbitrator’s findings. Page 69 Source: http://www.doksinet O Level Business Studies 7110 Topic: Market and Marketing Market: Any arrangement, which brings buyers and sellers in contact to make it possible to perform a transaction, is called market. It is not necessary that market should be a physical place to

perform a transaction; it can be any source even to make the transaction possible. E.g internet, telephone, some one’s home’s drawing room, or a traditional bazaar or a market. Types of Businesses Product Orientated It is a type of business which produces the product and then convinces the customers by carrying out attractive advertising or sales promotion to buy the product. Such types of businesses have their major focus on product itself not on customers needs therefore they can not be confident about the sale of their products or after sale the satisfaction of the product. The product may or may not be successful. Such types of businesses could traditional grocery shops or fruit or vegetable sellers or agricultural tool sellers. Market Orientated business These are the one which carries out market research to find out customers needs and then produces the product keeping in mind the needs of the customers about the product. Producing the product according to the needs of the

customers give them confidence that the product will become successful. Once the product is being produced, the market oriented businesses inform the customers about the availability of the product through informative advertising. They persuade the customers to buy the product by persuasive advertising In today’s business world, all or most of the businesses are called market oriented businesses. Marketing Marketing can be defined as the managerial process of identifying the present needs of the customers and anticipating their future needs and satisfying them profitably. Functions of Marketing • Finding customers requirements • Predicting future needs of consumers • Satisfying consumers needs • Making profit for the business • Marketing Objectives Page 70 Source: http://www.doksinet O Level Business Studies 7110 Objectives of marketing • To increase sales revenue and profitability • To increase or maintain market share • To maintain or improve the

image of business products or services • To target new market or market segment • To develop new product or improve existing products SWOT Analysis SWOT Analysis is part of market research to identify the strength, and weaknesses within the internal environment of the business; and to identify the opportunities and threats in the external environment of the business. After the analysis are being carried out following is done by the business: 1. Improve the strengths of the business further 2. Cure the weaknesses of the business 3. Avail the opportunities 4. Ready to respond the threats Market Segmentation It is the process of dividing the whole market into small group, where each group has distinct needs. The groups formed as a result of market segmentation is called a market segment. Market segmentation is done in the following forms: • By income • By age • By region • By gender • By use of the product • By life style Advantages and Disadvantages of

Market segmentation It is a time consuming process which is only possible after extensive market research. Market segmentation has the following benefits • Easier to identify the needs of the customers • Better able to satisfy the needs of the customers • Increase in business market share • Survival in the market Page 71 Source: http://www.doksinet O Level Business Studies 7110 Mass Market is where there is a very large number of sales of a product. Under this marketing strategy business considers every one as a target customer. Niche Market is where a particular market segment is focused as a target customer,. Under this strategy business becomes specialize in one particular product sale. Market Gap is when none of the products or services available in the market could satisfy particular group of customers. Market Gap could be an opportunity for a business, which has capability to satisfy the need of these customers. Marketing Mix refers to the elements of

successful product, which is consist of four Ps – product, price, place, and promotion; 5th P is packaging. Writing about marketing mix of a product refers to the marketing strategy about a product. In order to develop the marketing mix or marketing strategy of a product, following should be included: Product • How the product is made of (i.e ingredients of the product) • How is the quality of the product? • How is the product packaging (sizes of the packaging?) • Who will buy the product (Target customers)? Price • What is the pricing strategy? • Why this pricing strategy is being chosen? Place • Where the product will be sold? • What will be the distribution channel to send the product to the final consumers. Promotion • How the product will be advertising? • What will be the sales promotions to promote the sales of the product? Page 72 Source: http://www.doksinet O Level Business Studies 7110 Topic: Market Research It is the process of

collection, recording, and interpreting the data about customers’ preferences for a product or service or knowing about the level of competition or any other market condition Purposes of market research Likes or dislikes of consumers about the product Customers’ willingness to buy the product Price affordable for the consumers Nature of customers Product promotion or advertisement Competition stiff or lenient Place where customers want to buy the product Types of information collected in the market research Quantitative Information – figure based e.g sales record from previous years Qualitative Information – opinion based e.g consumers’ preference about the product Types of market research Primary Research – is the collection and collation of original data via direct contact with potential or existing customers; it is the type of research carried out for the product itself, and the data collected is first hand data. This type of research is also called field research

Advantages of primary research • Accurate and up to date information about the product or service itself • Variety of methods which could be matched against purpose of research • Both quantitative and qualitative information can be gathered Disadvantages of primary research • Expensive to carry out • Time consuming • Difficult to decide which method of research should be used Types of Primary Research Questionnaire – postal, face to face, or by telephone Advantages of questionnaire • Possible to collect detailed qualitative information about the product or service • Customers’ opinion about the product or service can be obtained Page 73 Source: http://www.doksinet O Level Business Studies 7110 Disadvantages of questionnaire • If questions are not well thought, the replies will not be accurate and the results will be misleading • Time and money consuming method of primary research Interviews – individual face to face or by telephone or

group interviews Advantages of interviews • Possible to explain the interviewee the difficult questions by the interviewer • Detailed information about the interviewees like and dislike about the product can be gathered Disadvantages of interviews • Risk of bias data because the interviewer may lead the interviewee consciously or unconsciously to reply as he wants • Time and money consuming Questionnaires or interviews can not be applied on the whole population. Hence, sampling is carried out. Sample – is the representative of something as a whole. Random Sampling – is when people are selected at random as a source of information for the market research. Quota Sampling – is when people are selected on the basis of certain characteristics such as age, income, or gender as a source of information for market research. Consumer Panels This is where groups of people agree to provide information about a specific product or general spending patterns over a period of

time. Panel may test new products and discuss about its various aspects. Advantages of consumer panels • Provide detailed information about consumers’ opinions Disadvantages of consumer panels • Time consuming, expensive and bias if some people in the panel are influenced by the opinions of others Observation It may take the forms of recording, watching, and auditing Advantages of observation • Quite inexpensive way of gathering data Page 74 Source: http://www.doksinet O Level Business Studies 7110 Disadvantages of observation • Only provides basic figures; does not provide details about consumers’ behaviour Experiments – Business takes its food items to a supermarket to taste it by the consumers Advantages of experiments • Relatively easy to set up and carry out and an easy way of gathering consumers’ first reaction Disadvantages of experiments • People might not give real feelings to avoid offensive • Many potential consumers might be missed

Secondary research It is also called desk research; data already collected is recollected from company’s internal resources such as sales department, finance department, or customer services department; or using external source such as internet, trade unions, magazines / newspapers, media reports, and government statistical department. Advantages of secondary market research • Cheaper and less time consuming • Available within and outside the Organisation • Readily available data Disadvantages of secondary market research • No up to date information • Risk of inaccurate interpretation is greater • Irrelevant information may also be there Who carries out market research? Company’s own research staff Research agencies Private individuals hired by the firm for research Accuracy of research depends on: • Size of sample • Method of research matched with the purpose of research • The way of interpretation and report preparation and presentation Page 75

Source: http://www.doksinet O Level Business Studies 7110 To design a questionnaire one should keep the following points in mind: • Do not exceed questions more than 12 • Keep questions short and clear • Avoid open ended questions • Avoid making questionnaire bias Page 76 Source: http://www.doksinet O Level Business Studies 7110 Topic: Presentation of information Once the research data is being collected, it is required to be processed and presented into a meaningful way. Ways of presenting data • Table or tally chart • Bar chart • Line graph • Pie chart Case Study A survey about the type and number of vehicles and the number of people passing a particular shop is collected in different timings given below: Time Car Lorry Van Bicycle Pedestrian 1.00 – 159 pm 12 18 3 9 24 2.00 – 259 pm 18 24 12 6 18 3.00 – 359 pm 24 18 18 6 18 4.00 – 459 pm 26 18 15 18 15 5.00 – 559 pm 32 12 9 30 39 Using the above

collected data: Draw the following: (1) Tally Chart (2) Bar Chart (3) Pictogram (or picture) (4) Pie Chart (5) Line Graph Page 77 Source: http://www.doksinet O Level Business Studies 7110 Topic: Role of product and packaging in the marketing mix Product is the core of the whole marketing mix. It becomes the reason for customers’ buying the product. Product performs its function in the marketing mix as it attracts the customers due to its quality, ingredients or description, and the promise to satisfy the customers’ need or want. It makes the other marketing mix to be set Packaging if it is part of the product will make the product long lasting and helpful in transportation. Packaging makes the use of the product easier Types of product Consumer goods – are the goods consumed by the consumers. These are the types of products which can be both durable and non-durable. Durable is the one which remain long lasting with the customers e.g furniture, house, car etc Non-durable is

the one which is disposed off after few uses e.g staple food tissue paper or shaving razor. Consumer services – are the services provided or rendered to the consumers such as banking, retail, laundry, or repair Producer Goods – are the goods which are bought by the producers for production of other goods such as machines or capital equipment Producer Services – are the services required by the producers e.g accounting, insurance, and advertising Product Development Existing products never sold forever, hence a process of product development is inevitable in which the following steps are followed: • Idea generation • Selection of ideas for future research • Deciding if the company will be able to sell enough for the product or services • Developing a sample or a prototype • Testing the product in part of the whole market – Test marketing • Full launch Features of a successful product • Satisfies the existing needs or wants of consumers • Design,

performance, reliability, and quality should be consistent with the product’s brand image • Capable of creating new demands from the consumers Page 78 Source: http://www.doksinet O Level Business Studies 7110 • Lower cost of production / cheaper to produce • Distinct feature in the product Branding – refers to deciding a unique name for a product. Hence brand is a symbol or unique name which makes the product distinct from other products. Brand Image – is the good will of the brand due to the product Functions of Branding • Helpful for the business in advertising • Helpful for the consumers to identify the product any where in the market • Development of business good image • Creation of brand loyalty • Image of good quality Packaging – is the physical container or wrapping for a product. It is also used for promotion and selling appeal. Functions of Packaging • Helpful in protection while transported • Helpful in keeping the product

long lasting • Helpful in providing information to the consumers • Helpful in making the use of product easier • Helpful in making the product attractive Product Life Cycle – refers to stages of a product in its life in the market starting from introduction to growth, then maturity and finally decline. Stages of Product Life Cycle Development Stage • Product is developed • Prototype is tested • No Sales at this time Introduction Stage • Product is launched after testing the market • Growth in sales slower, because most consumers are not aware of its existence • Price Skimming or penetration is used • Informative advertising is carried out • No profit only development cost is covered • However in case of price skimming profit is possible as price is high Page 79 Source: http://www.doksinet O Level Business Studies 7110 Growth Stage • Sales rise is rapid • Advertising switches to persuasive • Creation of brand loyal

customers • Competition increases, hence price is made competitive to gives realistic image • Profit starts to be made as development cost is covered Maturity / Saturation Stage • Sales at maturity increases slowly • Intense competition • Pricing strategy is competitive or promotional • Advertising is extensive • Profit goes at their highest • Stable sales at saturation stage or at its highest point • Stable advertising • No more entry of competitors Decline Stage • Sales start falling, because it has lost its appeal • Product is usually withdrawn from the market • Prices become promotional to get rid of present stock • Advertising is reduced and then stopped Extension of product Life Cycle • Introduction of new version of the product • Selling product in the new market such as export market • Changes in the product design, color or packaging • Using new advertising campaign • Selling through additional outlets

Page 80 Source: http://www.doksinet O Level Business Studies 7110 Topic: Price Price shows the worth of a product. Hence, in order to create the right image of the product in the customers’ mind there should be a right price. Price = cost + profit In a free market economy, price is set in accordance with demand and supply. When the price of good increases, demand falls; when the price of a good falls, demand rises. This called general rule of demand. Determinants of demand There are other factors as well which affect the demand for a product.  Income of people  Price of other goods such as complementary or substitute goods  Population of the country  Taxes on people’s incomes  Trends or fashion  Fear of war or starvation Similarly, supply is also affected by price. When price rises, supply increases; when the price falls, supply decreases too. This is general rule of supply Determinants of Supply There are other factors which affect the supply of goods 

Cost of production  Technological advancement  Weather conditions  Indirect Taxes Elasticity of demand The extent to which demand changes in response to change in price. Elastic Demand – When demand change is greater than price change Inelastic Demand – When demand change is less than price change Elastic Goods are those which have lots of substitutes and consumers fall their demand for those goods as the price rises for them. Similarly, inelastic goods are those which do not lose their demand when the prices rise for them. The reason is consumers find no substitutes hence keep on buying. Remember, if the price for inelastic goods is increased, revenue will increase for those goods because of greater rise in price. Whereas if the prices for elastic goods are increased, revenue will fall, because consumers switch over to other products. Page 81 Source: http://www.doksinet O Level Business Studies 7110 For a marketing manager of a company needs to understand the concept

of price elasticity of demand to decide on the price. If he feels that his product is price elastic, he should not increase the price to avoid loss of revenue. Pricing Strategies Cost plus pricing Under this strategy, average cost of the product is calculated by: Total cost / no of units produced Then a targeted profit is added into it. Advantages  Easy to calculate and apply  Flexible pricing  Targeted profit could be earned Disadvantages  Price might be set higher which result in loss of customers Penetration Pricing When price is set lower than the competitors’ price in order to be able to enter a new market Advantages  Easier to enter into the market  Attract price conscious customers Disadvantages  Losing quality conscious customers  Lower sales revenue Price Skimming It is where a high price is set for a new product on the market Advantages  Create a quality image of the product  Attraction for quality conscious customers Disadvantages  Losing

price conscious customers  Earns large sales revenue and profits Page 82 Source: http://www.doksinet O Level Business Studies 7110 Competitive Pricing When price is set just below or equal to competitors’ price Advantages  Creates realistic pricing image  No risk of losing customers as price is set similar to competitors’ prices Disadvantages  Businesses do not have to spend so much of time on research for setting suitable pricing Promotional Pricing It is when a product is sold at a very low price for a short period of time. Advantages  Useful to get rid of unwanted stock that will not sell  Helpful to renew the interest of consumers for the product Disadvantages  Sales revenue will be lower because the price of each item will be low Psychological Pricing It is when particular attention is paid to the effect that the price of a product will have upon consumers’ perceptions of the product. Advantages  Create an image among consumers that price is low

 Sell the products rapidly Disadvantages  Retailers charge the round figure and set off the effects of such prices  Eventually consumers realize that it was just a strategy to attract them not a realistic price Page 83 Source: http://www.doksinet O Level Business Studies 7110 Topic: Place Channels of Distribution It refers to the way the product reaches from producers to consumers involving intermediaries such as wholesalers and retailers. Distribution Channel # 1 It is called direct sales. Producer Consumers • Producers deals with a bigger / mass market, which increases their sales • Consumers get latest product’s version, e.g e-buying or order through company’s catalogue. • Product satisfies to the customers as made for them only according to their given specifications, e.g made to order furniture or dresses • Expensive and highly specialized goods Distribution Channel # 2 Producer • Wholesalers Retailers Consumers Whole sellers buy in bulk

from producers and sell to the retailers in small quantity – it is called breaking bulk • Producers and retailers both save costs of warehousing and stock holding • Producers save administration cost of ordering as they do not have to deal with many number of small orders from retailers Distribution Channel # 3 Producer • Retailers Consumers Many of the large scale retailers such as super or hyper markets buy directly from producers • It helps the retailers to buy goods at lower prices and sell to the consumers at lower prices • Many of the producers pack and sell the goods under the name of super markets also • Producers have to deal with small number of large orders, which save their ordering costs. • They save on warehousing costs also Distribution Channel # 4 Producers • Agent Wholesalers Retailers Consumers Mostly deal with the exporting businesses, which face language and cultural barriers Page 84 Source: http://www.doksinet O Level

Business Studies 7110 • Producers appoint agents who are known to the local culture and languages • Agents find the demand for goods in the local market and sell the goods to the wholesalers in large quantity, who further distribute in small quantities to the retailers and finally product reaches to the consumers. Factors influencing the choice of the type of channel of distribution • Nature of goods to be marketed – perishable goods such as cakes, bread and snacks need to be sold quickly, hence direct sales channel of distribution will be suitable; goods that can last longer such as garments or footwear should be sold through distribution channels involving whole sellers and retailers. • Size of the market – The producers which want to sell their goods in the mass market may sell their goods through wholesalers. Thus “the bigger the market, the larger will be the number of intermediaries needed.” Producers who cater to small exclusive clientele my open their

own retail outlets, e.g boutiques which sell expensive exclusively designed ready made garments • Quantity of goods bought – Most of the producers are not willing to entertain small orders from small retailers because of the large amount of paperwork involved. However orders from large retailers or wholesalers are normally very large. • Size of firm producing the goods – very big firms which have the financial and human resources normally not only produce the goods but also set up their own retail outlets. Smaller sized producers may prefer to concentrate on the technical aspect of producing and leave the marketing of the goods to others. Page 85 Source: http://www.doksinet O Level Business Studies 7110 Topic: Promotion Role of advertising Purposes / Benefits of advertising Advertising performs the following purposes: • It informs the consumers about the products’ ingredients, price, benefits, method of usage, and side effects of the product • It helps us in

improving our standard of living and quality of life • It persuades the greater buying of the product or service • It reminds the customers about the product’s existence in the market and reinforce the continuous use or buying of the product • It increases the sales of existing products • It informs the launch of new products to the consumers • It creates new job opportunities as advertising itself is a profession • It helps in increasing consumption and GDP of the country Social aspects and dangers of advertising • Advertising brings some social costs and dangers for the consumers • It condemns the other products and reduces the sales of other products • It brings the increase in costs of the businesses, which result in higher prices of the products • It misleads the consumers as businesses advertises the products with the features which it actually does not have • It persuades the buying of consumers and overburdened them with additional

expenses • It makes the buying decisions of the consumers complex or difficult Types of Advertising Informative Advertising – is when the businesses inform about the launch of a new product; or a public message is conveyed to the consumers such as smoking is injurious to health. Persuasive Advertising – is when the businesses advertise the products or services with the attractive features of the product to maximize the sales of the product or proving the product better than the competitors’ ones. Collective (or generic) Advertising – is when the businesses advertise a product collectively without mentioning a particular brand of the product, but promotes the use of the product itself, e.g it is health to use tetra pack milk products Page 86 Source: http://www.doksinet O Level Business Studies 7110 Competitive Advertising – is when the businesses advertise the attractive features of a product and prove that the same are not in the other similar type of product, e.g

Surf Excel advertises the brightening wash of clothes in one minute which is not available with similar detergents. Sales promotion Sales promotion vs. Advertising – Promotion is a broader term which does not only include sales promotion but also advertising Sales promotion – includes all the techniques of marketing in which focus is on rapid sales rise such as buy one get one free, price cuts, prize winning schemes, and free gifts etc. Advertising – is a form of communication with the consumers either to inform them about the new launches or to persuade the buying of existing or new products or services. Methods of promotion – include the following: • Price reduction periodically when the business’ sales are falling or competition has gone stiff • Free gifts / competition also responses the sales rise rapidly such as buy one get one free or prize winning schemes through raffle draw • After sale service / Delivery service – Both give the customers a satisfactory

response that after buying the product they will get free service up to certain number of months or for a year; delivery service saves their cost of transportation, which also promotes sales. Page 87 Source: http://www.doksinet O Level Business Studies 7110 Advertising Advantages Disadvantages Examples of suitable Media Products / services to Advertise using this method Magazines • Magazines are read by a specific • types of person e.g bicycle enthusiast reads bicycle magazines – Magazines are often only published • once a month or once a week • very effective way to reach the Advertisng in magazines is relatively Perfume in specialist magazines fro women • more expensive than newspapers Golf equipment in golf magazines target population if there are specialist magazines which cover a particular activity. • Magazine adverts are in colour and therefore can look more attractive Posters / • They are permanent billboards • Relatively cheap

• They are potentially seen by everyone who passes them • • Can easily be missed as people go past • Local events them • Products purchased by No detailed information can be a large section of the included in the advert population as posters are seen by everyone passing the advertisement • Page 88 Source: http://www.doksinet O Level Business Studies 7110 Cinemas • Can give visual image of the • product and show the product in a Seen by only a limited number of • people who go to watch the film Coca Cola when a film for teenagers is shown positive way • Relatively low cost • Can be very effective if your target audience go to see particular films Leaflets • Cheap method of advertising • Given out in the street to a wide • May not be read • Leaflets are often used to advertise local events • range of people • • Could be given out to They could be delivered door to promote retail outlets door or mailed to a

large number of and may contain a people money off voucher on Sometimes contain a money off the leaflet voucher to encourage the reader to keep the advert • The adverts are permanent and can be kept for future reference Internet • A large amount of information can • be placed on a website which can be seen by a vast number of people at home and abroad • Internet searches may not highlight the • Products that customers website and it could be missed are already familiar In some countries internet access is with e.g CDs, electrical limited goods, books Page 89 Source: http://www.doksinet O Level Business Studies 7110 • Orders can be made instantly via the • website • Others • Very cheap forms of advertising e.g • There is a lot of competition from • Services such as train other websites information and Security issues may discourage ticketing and insurance customers from buying on line are also suitable May not be sent by

everyone • Shops use the bags on delivery vehicles and on the sides given out with of bags from shops purchases to advertise their name • Coca Cola uses neon signs to advertise its name Page 90 Source: http://www.doksinet O Level Business Studies 7110 Choice of method of advertising depends on the following factors: • Purpose of advertising • Nature of target audience and how do they get information • Advertising budget business has • Nature of the product • Cultural and religious issues Page 91 Source: http://www.doksinet O Level Business Studies 7110 Topic: Factors affecting production Production The process of converting raw material into finished goods using machinery or labor and delivering them to the final consumers. Productivity It is output more than input. It can be with regard to machines or labour; also called efficiency. It is measured by: Output / number of employees Production Methods Job Production This method involves customized

or customer based production. In other words, customers are provided the production according to their specific requirements. Advantages of job production • Greater customers’ satisfaction as the production is according to customers’ needs • Labour feels challenge in completing each type of production hence motivation for them • Each type of production is taken as a target hence labour has a direction of work • Time constraint is considered or more focused to assure on time delivery Disadvantages of job production • Highly labour intensive hence expensive • Takes time to complete due to labour involvement • No or less standardization in production due to variation in orders hence labour may feel less used to the new orders or risk of getting production spoiled Batch Production In this method of production, products are produced in variety and batches. Means one set of products are produced until the new batch of products get into production process.

Advantages of batch production • Variety and quantity of production is possible • Partly labour and partly capital intensive hence not as expensive as labour intensive • Involves flexibility in changing production settings – changing the product specification • Technical break down does not spoil the product, it can be continued where stopped and then restarted Page 92 Source: http://www.doksinet O Level Business Studies 7110 Disadvantages of batch production • Each group of product has separate specification hence two groups of products can not be mixed • If each group of products are demanded in smaller quantity, cost might be high in average • If type of raw material used in each different type of production method is less in quantity then cost of production might be higher Flow or line production Production method follows automated production lines on which each stage of production is completed for single product with speed. Advantages of flow

production • Highly automated hence economies of scale due to bulk production • Low average cost of production keep the products prices cheaper • Standardized products are produced • Lower cost and quality products sell well hence benefit of high profitability Disadvantages of flow production • Highly automated machines might be expensive and require expert labour to operate the machines • Training to the staff is needed • Businesses need to keep overhauling of machines so that hygiene could be maintained • Any halt at any one of the stages of production may stop whole production process Lean Production Japanese methods of production in which lean or least level of resources are utilized and output is maximized by saving time on production as the method is with the belief that time is also money and should be saved as other resources. Advantages of lean production • Continuous production, no idle time for labour, hence time is saved • No

additional production takes place • Focus on quality • Time delivery hence customers’ satisfaction • Various methods of production such as JIT, Kanban, and Kaizen are taken to assist lean production effective Page 93 Source: http://www.doksinet O Level Business Studies 7110 • Cost of production is saved by taking less production time Disadvantages of lean production • No economies of scale hence benefits of economies are lost • Ideal situation of getting every thing ready such as availability of raw material or labour is difficult • In mass production, lean is difficult to apply Large scale producers argue that lean production incurs high average cost due to its small scale production, but lean producers argue that they save time and incur less average cost of production by having no idle time for labour or machines and involving automation in production. Just In Time method of production starts production when customers place the orders and at the

same time all the production processes including machinery and labour is got ready. The raw materials are also ordered at the time customers apply for the order. Advantages of JIT • Saving on cost of warehouse • No risk of stock loss due to fire or theft • Customers are assured quicker delivery hence greater customers’ satisfaction • Wastage of time on production or raw material is avoided to minimize cost • Highly automated production method is applied Disadvantages of JIT • Has to assure that supply of raw material is timely available • Labour is motivated to work • Risk of losing customers if the stock is not available Cell Production It is when the whole production is divided into small parts where each part of the production is completed by a specialist group of labour and each part of the production is considered as a complete product, which labour keeps on producing without depending on previous part of the production. Cell production is same as

division of labour or specialization but without interdependence on other part of the production. Computer Aided Design (CAD) This is a technology using which all types of businesses may develop their new products samples or prototype and without incurring additional cost, the design or the specification of Page 94 Source: http://www.doksinet O Level Business Studies 7110 the product can be changed. Using CAD, business may maintain the records of its previous designs to assure every new version of the product will be different from the previous version. Computer Aided Manufacturing (CAM) A technological advancement in manufacturing in which business may set standards of its products and when the products get completed as finished goods, they can be checked against the standard to assure quality and avoid any kind of imperfection in the products. CAM may save the cost of business quality inspectors or controllers and earn reputation among customers. Quality Control A technique of

quality maintenance in which quality is checked all the way along the production; quality controller or inspectors check the quality of products at each stage of production. Quality Assurance The quality system in which it is ensured that quality standards will be met to ensure customers’ satisfaction; it involves checking that standards are met within the firm To make the difference between quality control and assurance, remember quality assurance emphasizes preventing defects whereas quality control focuses on detecting faults once they have occurred. Quality assurance seeks to build quality into the system Total Quality Management It refers to assurance of quality not only on production but in all the functions of business. It is the responsibility of every employee not just quality control department to maintain quality of production and work. Every employee is given empowerment to tackle quality in his or her own way. Employees at each stage of production or work should regard

next stage of workers as their customers and assure quality. Here the target of TQM is zero defects Employees should work as a team to share skills and ideas. But the development of TQM environment needs training costs and requires total commitment from the management. Page 95 Source: http://www.doksinet O Level Business Studies 7110 Stock It is unsold or unused goods of raw material, work in progress, and finished goods. Stock control Charts Stock management or control is carried out using a stock control chart. It includes: Maximum stock level – the level of stock beyond which a business should not go, other wise following disadvantages may happen. • Ware house cost • Risk of stock expiry • Risk of theft or fire However keeping higher level of stocks may have the following advantages • Meeting excess demand of consumers • Avoiding idle machine or labour hours • Avoiding loss of customers towards competitors • Meeting orders on time • Discounts on

bulk buying Stock outs or shortage of stock • When stock is out, it may bring the following disadvantages • Customers’ orders will not be met on time and the business will lose its customers and reputation • Labour and machines will remain idle and business average cost will be high • Prices for completed orders have to be higher and sales may fall Minimum stock level or buffer stock level The level of stock below which if business falls, it may face the above mentioned disadvantages of stock outs Reorder Stock Level The level of stock at which order should be place so that by the time stock reaches to minimum or buffer level, the delivery could be received and the stock level could be boosted to maximum stock level. Lead Time The time between ordering of stock and getting the delivery of stock Page 96 Source: http://www.doksinet O Level Business Studies 7110 Topic: Factors affecting location  Closer to customers’ and suppliers’ markets  Availability

of raw materials/Components  Attractive infrastructure  Availability of labour  No Government influence such as planning permission  Availability of power, gas, communication etc  Transportation facilities  Water supply  Climatic Suitability  Security  Warehousing facilities  Low cost of rent or cheaper availability of land Page 97 Source: http://www.doksinet O Level Business Studies 7110 Topic: Business in International Community Implications of e-commerce E-Commerce is trading through web browsing and internet. Advantages of E-Commerce • Access to larger international market • Access to suppliers of goods • Quicker communication with customers and suppliers • Better exposure of the product by giving extensive details of the product • Low cost of advertising • Helpful in market research by giving e-questionnaire • Customers orders processed rapidly Disadvantages of E-Commerce • Knowledge of internet is important for the

customers • Issues of cyber crime • Cost of postage and dispatching • Packaging cost • Risk of customers’ dissatisfaction about the product because no physical checking of the product by the consumers Trading blocs – these are the restrictions placed by various countries’ governments to discourage imports or to protect local industries. They include the following: Embargo – is a complete ban on imports from other countries Quota – is limited number of quantity of imports a country’s government allows in the country Import Duty / Tariff – is an indirect tax placed on imported goods or raw material Exchange rate – government of a country depreciates the local currency to make foreign currency expensive Advantages of trading blocs • Protection for local industries / infant businesses • Maintaining production levels in the country • Protection for foreign currency outflow • Control on unemployment rate of the country • Control over

depreciation of local currency Page 98 Source: http://www.doksinet O Level Business Studies 7110 • Protection against foreign debts Disadvantages of trading blocs • Imported products become expensive • Retaliation action against the country and fall in exports business • No or less efficiency of local businesses • Businesses dependent on imported raw material faces cost push inflation Free Trade Areas (FTAs) Countries around the world get to gather and make FTAs, Such types of FTAs are EU; SADAC; ASEAN. The purposes of such FTAs are to have the following: • Bigger markets to trade • Greater mobility of factors of production • Operating at large scale • Avoiding trade blocs among member countries • Giving better exposure of products or services to the businesses • Making businesses more efficient and effective • Increasing job opportunities • GDP and Economic growth in the country • Improved or better political relationships

Problems of Exporting Extra cost involved • Higher insurance premiums are charged on goods sent overseas. • Higher packaging costs are incurred for goods • Need extra protection for a more vigorous journey and transport costs are higher too So, the cost of goods exported must be low enough for prices to be competitive with similar goods in the overseas market when these extra costs of premiums, transport and packaging are added. Compliance with foreign market requirements The goods exported must meet the governmental and customs requirements overseas as regards quality, chemical composition, technical specifications, etc. before they are admitted into the importing country Even after the seal of official approval is obtained, it must find buyers there. Can the people afford to buy such a good? Is it offensive to their religious sentiments? Must the good be Page 99 Source: http://www.doksinet O Level Business Studies 7110 modified further to suit the climatic conditions

there? Is the good produced and marked in units of measurement as regards weight, size, and capacity in accordance with local requirements and in a language that is easily understood by the people there? Such questions must be looked into to ensure that the good is saleable in the foreign market Complex documentation and preparation for shipment Expertise is needed to handle the complex documentation, the marking and packaging of goods for shipment and the customs procedures involved. Frequently, licenses of both exports and imports are needed. Risk of fall in rate of exchange If the payment is made in the currency of importing country, there is the risk that the rate of exchange between the two countries will have changed between the time that the price was quoted and the time that payment is made. Thus the exporter will receive less than what he expects if the exchange rate of the currency he is paid in falls. Risk of the foreign buyer defaulting The risk of non payment is higher for

exports than it is for goods sold locally. This is because it is difficult to assess the credit worthiness of the foreign buyer. Default on payment can also be due to political changes in the importing country such as a revolution or the imposition of exchange control by the government. Problems faced by importers 1. Trade blocs on imports 2. Language and cultural barriers in exporting countries 3. Letter of credit from the bank 4. Exchange rate for payment in foreign currency may affect the prices 5. Rising cost of raw material due to trade blocs Multinational Companies – are the type of businesses which have their own stores, units, and factories in more than one country. The country where they do operate is called host country. Advantages of being multinationals • Economies of scale • Cheaper factors of production – mainly by operating in developing countries • Avoid transport cost or import duties / quotas by operating in the country where they want to sell the

product • Easier access to loans from any bank / financial institution Page 100 Source: http://www.doksinet O Level Business Studies 7110 • Easier to access research and development as no financial problems Disadvantages of being multinationals • Difficult to control and manage • Face different rules and regulations in different countries • Face language and cultural barriers • Too much finance is required Country where multinationals operate is called host country Advantages of multinationals to the host country • Create jobs for local labour • Bring new technology • Increase competition in the local market • Carry out research and development, hence create new ideas about product or service • Political relationship among countries • GDP of the country improves, hence economic growth • Improved standard of living of the country’s people • Balance of payment increases due to exports • Bring investment in the country and

foreign currency Disadvantages of multinational to the host country • Outflow of foreign currency when take the profit back to country of origin • Barriers for local firms to grow • Unemployment if they switch their production or operations units to other profitable countries • Exploit workers by offering poor working conditions • Tax evasion due to direct relationship with government authorities • Rapid consumption of natural resources Page 101