Business Studies Revision Booster

Theme 2 - Paper 2

Exam Date: Tuesday 2nd June 2020

Total Marks: 90 Marks

Exam Duration: 90 Minutes

©G.Raw 2019

Business growthInternal Growth

• When a business expands by itself

Methods

• Moving into new markets

• Developing new products

• Investing in new technology

Benefits

• No debts incurred

• Can increase market share

• Can result in lower costs

• Can result in higher profits

External Growth • When a business joins with anotherMethods• Merger – where 2 or more businesses

voluntary agree to join up and work as one business

• Quicker expansion• Increases Market Share• Allows them to compete with larger rivals

• Takeover – where one business buys another. • Quicker Expansion• Increases market share• Reduces competition• Increases revenues• Can be very expensive

Backward vertical (Business buys a supplier)

Horizontal (Business buys arival business)

Forward vertical (Business buys a customer)

Public Limited Companies (PLCs)

Benefits

• Can raise a lot of money through selling shares

• Limited Liability

• Greater public awareness

• Considered more trustworthy

Drawbacks

• More complex accounting procedure

• Risk of potential takeovers

• Increased public scrutiny

• Less financial privacy

• Greater influence on decision making by external shareholders

A type of ownership where shares can be bought by any one of the stock exchange, through a market floatation.

FINANCING GROWTH

• Internal Sources of Finance

• Retained Profit

Advantages

No interest – reduced fixed costs

No loss of control – no new owners

Disadvantages

May not be enough

• Sale of Assets

Advantages

No interest – reduced fixed costs

No loss of control – no new owners

Disadvantages

Might not get much money for them

Wont have the asset in the future

• External Sources of Finance

• Share Capital (Ltd. and Plc.)PLCs issuing more shares and/or

LTDs inviting more shareholders to join.

• Means owners will lose some power/influence

• Dividends need to be paid

• Long term loan• Needs paying off with interest

• Repayments are a Fixed Costs

• Loans are easily available for larger firms

• Only very large firms can issue bonds

Comparing sources of finance▪ Risk - lost of control / cash flow issues

▪ Cost - interest on loans

▪ Availability – Some sources may not be accessible to all business

How & why objectives change?

Internal factors• Performance - is the business

succeeding or struggling

• Leadership - are they risk takers or cautious

• Culture - is the business operate

(e.g. ethical, innovative, traditional)

External factors

• Competition – new competitors can force the business to change objectives

• Technology – may allow new products to be developed

• Legislation - could restrict operations or create new opportunities

• Market conditions – demand could change due to changes in the economic climate

Objectives for a growing business.

• Expand the product range

• Increase sales

• Increase profits

• Gain a larger market share

• Take over another business

• Increase the workforce

Objectives for a growing business.

• Decrease the product range

• Exit markets

• Break even

• Improve efficiency

• Maintain market share

• Reduce costs

As businesses grow their objectives change, due to internal and external factors

Globalisation

Globalisation – where businesses operate internationally and gain a lot of influence or power.

3 affects of globalisation

• Imports - the purchase of a good or service from a foreign business by a UK business. Leading to a flow of money out of the UK.

Allows UK firms to buy cheaper materials from abroad, but increases competition

• Exports - the sale of a good or service to a foreign buyer that leads to a flow of money into the UK.

Opens up new markets for UK firms, but lack of market knowledge can be a problem

• Location

Businesses can relocate abroad to benefit from cheaper labour and materials and

become Multi nationals – a large company with facilities around the world

Benefits of Globalisation• New market opportunities

• Access to technology and resources

Drawbacks of Globalisation• Threat from foreign firms

• Challenges of adapting products to meet the needs of foreign markets

INTERNATIONAL TRADE

TRADING BLOCS……Created when governments of different countries agree to act together to promote free trade amongst themselves. (E.g. The EU and NAFTA)

TARIFFS …… Taxes put on goods imported into a country which makes them more expensive for buyers.

Benefits of Tariffs

✓ Protects jobs in domestic markets

✓ Protects emerging (infant) markets

✓ Prevents cheap products being dumped on the domestic market

✓ Raises revenue for the Government

Drawbacks of Tariffs

Other countries can retaliate and can put tariffs on domestic exports

Can increase cost of imported raw materials

Competing internationally• To compete internationally a UK business needs to adapt its products and

services to meet the requirements of foreign customers

E-Commerce - Allows businesses to access international markets 24 hours a dayAlthough trade barriers may still apply.

Glocalisation - A strategy where businesses change their products to adapt to other countries culture, tastes and legal requirements

Element Changes of Marketing Mix to complete internationally

Product Change technological elements – e.g. sockets Change taste to meet cultural preferencesChange components to meet safety regulations

Price Change price to consider tariffs Comply to different tax lawsAccount for exchange rates Account for lower incomes abroad

Place Change location of products to meet local needs (e.g. what type of retail outlets)

Promotion Revise advertising campaigns to take into account local sensitivities

Business Ethics Ideas about what is morally correct or not, applied in a business situation

Advantages of Ethical Behaviour• Increased sales from ethically

minded customers• Improved reputation• Increased staff motivation• A unique selling point• Can charge a Premium Price• Increased revenues and profits

Disadvantages of Ethical Behaviour• Increased costs- Higher Wages- More Expensive Materials- More expensive Waste Disposal• Lower Profits

Ethical Behaviour includes:• Paying staff a living wage• Paying Suppliers a fair price• Disposing of waste environmentally• Charging fair Prices• Reducing Pollution

PRESSURE GROUPSOrganisations that support causes such as workers’ rights, the environment, animal welfare and world poverty.

Businesses can respond to the actions of Pressure Groups by:1. Doing Nothing2. Working with the Pressure Group3. Work against the Pressure Group

Impact of Pressure Groups• May be forced to change the way they work• May affect their reputation• Could affect staff morale/motivation• May Increase their costs• May reduce their Profits

Environmental Issues

SHORT TERM EFFECTS• Traffic Congestion• Air, Noise, Water and Pollution

LONG TERM EFFECTS• Climate Change• Resource Depletion

Ways businesses can reduce their impact on the environment• Recycling materials• Using renewable energy• Replenishment and Conservation of natural resources• Bio-degradable packaging• Reduction in food miles• Social Enterprise

Costs of being ‘Green’ • Having to comply with Environmental Laws • Increased costs

Benefits of being ‘Green’• Can give a Competitive Advantage• Can provide a USP• Can increase sales from environmentally conscious customers• Increased Reputation

The range of variables which contribute to successful

design .

Design Mix

APPEARANCE

FUNCTION COSTHow much it

costs to produce the product – the

cheaper the better.

How well the product does

it’s job

The way the product looks - stylish

products sell better than products with no

style . E.g. Dyson

Design Mix

PRODUCT LIFE CYCLE – the stages through which a product passes from its development to being

withdrawn from the sale.

INTRODUCTION

• Promotion is aimed at raising awareness.

• Demand has to be created• The product has few competitors

Sales are slow at this stage• The product makes no money at this

stage

GROWTH

• Sales increase significantly• The Product starts to make a profit• Public awareness increases• Competition increases as rivals see sales

take off• Advertising expenditure is high and based

on building a brand

MATURITY

• This tends to be the longest stage of the life cycle• Sales increase slows down • High degrees of competition• Price tends to fall due to heavy competition• Brand Differentiation is the key to success

DECLINE

• Sales start to fall • Marketing expenditure is cut• Product becomes obsolete.• Extension Strategies may be used to prolong the

life cycle• Products may be withdrawn from the market

Extension Strategies – method used to increase the life of a product and prevent it falling into decline

Methods of extending Product Life Cycle• New features/flavours etc.• Advertising• New Packaging• Lower Prices

Product Differentiation The process of making a product different from other products in the market

• Helps position the product in the market and target different market segments

• Can provide a competitive advantage

Methods of Differentiation• Unique product name • High Quality • Design or formula• Packaging• Customer Service

Price and Pricing Strategies

• Price refers to the amount charged by a business for its products and services

Different Types of Price

Premium pricing Setting prices based on what other businesses in the market charge

Competitor pricing Usually charged for generic, non-branded or to encourage product trial when a product is 1st

launched (High volume Pricing)

Low price Price charged by branded products with high customer loyalty and luxury goods

(High Margin Pricing)

High volume pricing strategy

• Producing a lot of a product at a low cost

• Low prices are charged to get lots of sales

• E.g. frozen pizzas / disposable pens

High margin pricing strategy

• Aim is to high levels added value

• High prices are charged so fewer sales

• E.g. Designer clothes / Quality jewellery

Influences on Pricing strategies

TechnologyTechnology can Lower costs -> lower prices

CompetitionHigh levels of competition -> lower prices to compete

Market segmentsMass market product -> lower pricesNiche market product -> high prices

The product life cycle The price will change depending on the stage of the life cycle e.g. Decline stage -> low prices

Promotion

Method Example Benefits Drawbacks

Advertising

TV, Radio, magazines , websites, leaflets, point of sale

Grab customers attention

Can reach a lot of their target market

Can be expensive

Difficult to measure success

Sponsorship

Sponsoring sports teams, sporting events, music festivals

Can provide a lot of exposure

Can reach a lot of their target market

Doesn’t give much information about the products

Product Trials

Free samples, product testing

Can encourage customers to use a new product

Can result in repeat purchase

Can be expensive to give free samples away

People may not come back

Special Offers

BOGOF, Free prize draws, Discounts

Can boost short term sales and clear stock levels

Not sustainable in the long term as cutting prices reduces profit

Branding

Brand name, logo, fonts, colours,

Can encourage customers to connect with the brand

Can build customer loyalty

Takes a long time to develop a strong brand image

Brand image can be damaged quickly

Promotion relates to how a business communicates its products to its customers and potential customers, to raise awareness in its products

Branding

Brand – a named product which consumers see as being different from other products and which they can associate and identify with.

PRODUCT DIFFERENTIATIONMaking one product different from another in some way, for instance through the quality of a product, its design, packaging or advertising

Ways to Differentiate the product• Design, formulation and function• Name• Packaging• Promotion/Advertising• Additional Services

ADVANTAGES OF BRANDING• Premium Pricing

• Greater Consumer Awareness

• Increased sales and market share

Channels of Distribution

Retailing – (shops)

E-tailing – (websites)

PlacePlace is about making the products and services available to customers, when and where they need it.

Manufacturer Retailer Customer

Retailer Customer

Manufacturer 3rd party E-tailer Customer

Manufacturer Customer

Benefits of Retailing• Customers can browse and try products• Offers point of sale promotion• Can offer customers advice and help

Benefits of E-tailing• No expensive retail space needed -> lower costs• Customers can buy 24 hours a day, 7 days a week• Businesses can access customers around the world• Small businesses can compete with larger businesses

Factors affecting Location• Cost• Closeness to customers• Level of competition• Accessibility for customers and suppliers• Availability of workers • Reputation of the area

Marketing MixA combination of factors which help a business to take into account customer needs when selling a product.

• Give customer indication of quality.

• Changes in Price can influence the level of demand

• Branded products usually have a higher price

• Must meet the needs of the customer

• Try to differentiate their product – by:

• Creating a USP• Meeting needs of a specific

market segment etc.

• Ensuring the product is available to customers• DIRECT – straight to the customer (via the

internet)• RETAILER – distributing products through larger

stores e.g. Supermarkets etc.

The way the business makes customers aware of their products –• Creating awareness• Communicating product

benefits to customers• Building a strong brand

image• Boosting Sales

Integrated marketing mix

Integrated Marketing Mix

Product

Price Place

Promotion

The importance of each element will vary depending in the product or service.

To be effective the elements of the marketing mix needs to be integrated

How elements of the 4Ps influence each other

Product and Price The business needs to make the price reflects the quality of the product

Price and PromotionThe advertising of the product needs to reflect the quality if they are charging a premium price

Promotion and PlacePromotion needs to inform potential customers where the product is available

Place and ProductIf the business is to use e-tailing they will

need to design the product so it is easy to post.

Business operationsInputs

Labour

Capital

Materials

Business

Operations

Outputs

Products

Services

Job ProductionInvolves making one item at a time, made to customer orders

Benefits• Can meet customer needs • Can charge a premium price • Higher profit margins

Drawbacks• Specialist skilled workforce

increases costs• Longer production process

Batch ProductionProducts are made in batches

Benefits• Larger volumes than job production • Some flexibility • Semi-skilled cheaper workforce

Drawbacks• Productivity reduced when

switching between batches

Business operations

Flow ProductionInvolves mass producing high volumes of same product

Benefits

• Higher productivity

• High volumes at low costs

• Standardised production

• Low skilled workers

• Highly automated process

Drawbacks• Setting up the machinery is

expensive

• Can increase costs

Impact of Technology

Benefits

• Speeds up production

• Lowers production costs

• Fewer mistakes and defects

• Allows businesses to keep in touch with customers

Drawbacks

• Costly initial investment

• Can quickly become obsolete

• Requires employees to be trained to use new technology

MANAGING STOCK

Stocks – materials that a business holds. Some could be materials waiting to be used in the production process and some could be finished stock waiting to be delivered to customers.

STOCK CONTROL

COSTS OF HOLDING TOO MUCH STOCK

COSTS OF RUNNING OUT OF STOCK

• Opportunity Cost – what the money could have been used for elsewhere.

• Storage Costs – having to rent or pay for storage space – this is none productive space

• Cash Flow problems – money tied up in stock could mean the business may not be able to pay bills

• Increased chance of wastage – goods going off, becoming obsolete or being stolen etc.

• High risk of Stock out – running out of stock

• Can stop production – waste time and resources

• Can fail to meet customers needs / deadlines –could lose sales, money and profit

• Could ultimately affect the reputation of the company

JUST IN TIME A stock management system where stocks are only delivered when they are needed by the production system, and so no stocks are kept by a business.

ADVANTAGES OF J.I.T.• No storage costs• Cash not tied up in stock • No chance of wastage/obsolescence

DISADVANTAGES OF J.I.T.• High risk of Stock Out • Increased costs – no bulk buying• Damage to reputation• Failure to meet customer orders

Quality Control

The process of checking the accuracy of work bought in or completed. This is usually carried out by quality inspectors.

Quality Assurance

The attempt to ensure that quality standards are agreed and met throughout the organisation, to ensure customer satisfaction.

Costs of Poor Quality • Lost customers• Cost of reworking or

remaking product• Costs of replacements or

refunds• Wasted materials • Damaged Reputation

Benefits of Good Quality • Repeat customers• Increased sales revenue• Good reputation• Ability to charge Premium

prices

Quality Standards

Standards set by the British Standards Institute (BSI) guaranteeing minimum standards in a range of products

Cost-effective operations and Competitiveness

PRODUCTIVITY = TOTAL OUTPUT____NUMBER OF WORKERS

Ways to improve Productivity.• TRAINING• BETTER EQUIPMENT• MORE EFFECTIVE WORK PRACTICES

Benefits of increased Productivity• Reduced unit costs• Ability to charge lower prices

Productivity a measurement of how much is produced per worker

Other ways to reduce costs• Improved purchasing - cheaper suppliers• Relocation – cheaper rent• Better design – making it cheaper and easier

to make• Cutting overhead* costs (*costs not directly

related to production)

CompetitivenessThe ability of a business to compete against its rivals .

They can compete on elements such as:• Price• Quality of product/service• Branding etc.

Suppliers and procurementSuppliers are important to a business and can have a big impact of the business’s costs, reliability and customer relations.

What makes a good supplier?

• A good price (value for money)

• Flexible deliveries

• Reliable deliveries

• Discounts on large orders

• High quality supplies

• Availability of products

• Short lead times

Impact on the business

Can increase profit margins or increase competitiveness (lower prices)

Help meet changes in demand

Help meet customer orders on time

Lower costs -> Lower prices and/or Higher profit margins

Help meet customer needs / USP

Help meet customer needs

Help meet customer orders on time

Effective Customer Service

Benefits of Good Customer Service

• Increased Sales Volume

• Increased Repeat Purchase

• Could create a Unique Selling Point (USP)

• Impact on the Selling Price

• Improve the reputation

• Can help motivate employees

• Less complaints to deal with – lower cost

Customer Service - the experience that a customer gets when dealing with a business and the extent to which that experience meets and exceeds customer needs and expectations

Providing excellent customer service

• Providing good quality products

• Good availability

• On time service

• Listening to customers

• Dealing with complaints quickly

• Polite, friendly Staff

• Knowledgeable staff

• Meeting the needs of customers

Costs of Poor Customer Service

• Loss of customers

• Decreased Sales and Revenue

• More complaints to deal with – increased costs

• Loss of reputation

Gross and Net ProfitGross Profit is the profit a business makes on its trading activity

Gross Profit = Sales Revenue – Cost of sales

Net Profit is the profit that a business is able to return to shareholders

Net Profit = Gross Profit - Expenses

Co

sts

Rev

enu

e

Profit

How to increase Profit

Lower costs

Increase Revenue

Ways to Lower Costs• Cheaper suppliers• Increase productivity• Less wastage

Ways to increase revenue• Reduce prices• Increase prices• Advertise *

*Could increase costs

Gross and Net Profit margins

• Profit Margins are ratios comparing profit with revenue.

• They show a business’s Profitability

• Expressed as a percentage

• The higher the result the better

GROSS PROFIT MARGIN = Gross Profit x 100Revenue

NET PROFIT MARGIN = Net Profit x 100Revenue

Average Rate of Return (ARR)• A method to assess the profitability of an investment

ARR = Average Annual Profit* x 100Cost of Investment

* Average Annual Profit = Total ProfitNumber of Years

Year Net cash flow (£)

0 (£800,000)

1 £250,000

2 £250,000

3 £300,000

4 £350,000

ExampleStep 1

Average = 250,000 + 250,000 + 300,000 +350,000 = 287,500Profit 4

Step 2

ARR = 287,500 x 100 = 35.94800,000

Organisational StructureTypes of Structure1. By Product Divided into divisions making

different products.2. By RegionDivided into divisions basedon Geographical location

3. By CustomerDivided into divisions based on the needs of individual customers

Organisation Charts

• Used to show the Personnel structure of a business.• Shows individuals where they fit into the organisation• Shows who you are answerable to and answerable for• Shows channels of communication• Shows possible career paths (can motivate)• Shows chains of command and spans of control

Messages passed between a sender and a receiver, through a medium such as a letter or an e-mail.

Communication

Internal

External

Horizontal

Vertical

Formal

Informal

Communication through channels that are not formally recognised – (e.g. the grapevine)

Communication up and down the hierarchy of the business

Communication recognised and approved by the business

Communication within the organisatione.g. – A staff meeting

Communication between workers at the same level in the business

Communication between a business and an outside individual or organisation like a customer or a supplier e.g. – an order form to a supplier

Barriers to effective communication

• Lack of clarity by the sender

• Lack of understanding by the receiver

• Technological problems

• Poor Timing

• Use of the wrong medium

• Use of Jargon

• Language Barriers

Benefits of Good Communication

• Motivates employees

• Easier to control and coordinate business activity

• Makes successful decision making easier

• Better communication with customers will increase sales

• Improve relationships with suppliers

• Improves chances of obtaining finance

Different ways of workingHours of work

Full time

• +35 Hours a week

Part time

• Less than 35 hours a week

• Gives a business flexibility (longer opening hours)

• Must be treated same as Full time workers

Flexible hours

• Only employ workers when needed

• Keeps costs down

• (e.g. zero hours contracts)

Types of contract

Permanent

• Workers are employed on an ongoing basis

• Workers are more loyal and committed

• Can be expensive

• Offers no flexibility

Temporary

• Workers employed for a fixed amount of time

• Offers more flexibility for the business

• Reduces costs

• Less loyal to the business

• May need close supervision / extra training

Freelance

• Only employed to complete a particular project

• Freelance workers are self employed

• Freelancers are specialists

• Cheaper than paying permanent staff

• No loyalty to the business

• Can work for other firms at the same time

Impact of technologyRemote working - working from home• Lower costs (less office space needed)• Increased staff motivation / staff retentionVideo Conferencing – better communication• Lower costs – (less travel required)• Quicker decision making possible• Effective for global companies

Job roles and responsibilitiesJob Role Responsibilities for…

Directors • Overall business performance• Business target-setting • Developing strategies (long term plans)

Senior managers • Managing key business functions ** Marketing, Finance, Production, Human resources etc.• Providing leadership

Supervisors / team leaders • Leading a team of workers• Performance management • Providing training, support and motivation

Operational staff • Carrying out the key operations of the business …• Manufacturing -> making the products• Retailing -> serving customers

Support staff • Providing services to support the main business function

• Admin staff (secretaries), IT Support etc.

The Recruitment Process

JOB DESCRIPTION

PERSON SPECIFICATION

CURRICULUM VITAE

JOB ADVERT

APPLICATION FORM Document that describes the duties and responsibilities of a job

A profile of the type of person needed for a job –their skills and qualities

Document to be filled in by with personal details when applying for a job

A brief list of the main details about a person, including name, address, qualifications and experience. Produced by the applicant

A notice or announcement announcing an available job vacancy.

Recruitment method Advantages Disadvantages

Internal - a role is only

advertised to the business’s existing employees

• Easy and quick recruitment• Cheaper than external• Candidates are known to the firm

• Limited choice of applicants• May cause issues with staff• No new ideas or skills

External – a role is advertised

to potential applicants bothinside and outside the business

• Higher number of candidates• May bring in new skills • May bring in new ideas

• May take along time • Can be very expensive• Candidate may not be good

Training and DevelopmentFormal TrainingEmployees attend specific training to improve their skills.

(e.g. Workshops, Webinars, on line training)

Advantages

• Trained by specialists

• May offer a formal qualification

Disadvantages

• Can be expensive and time consuming

• May require employees to stop working, so productivity falls

Informal TrainingEmployees learn skills ‘on the job’ by being coached by other staff members.

(e.g. Observing and talking to colleagues)

Advantages

• Cheaper and less time consuming than formal training

• Gives employees ‘hands on’ experience

Disadvantages

• May be stressful for the trainee and they could make mistakes

• Other employees are responsible for training

Types of trainingSelf learning• Where staff take responsibility for their own learningOngoing Training• Allows employees to keep up to date with technology • Employees can continue to update their skillsTarget setting and reviews• Annual reviews help measure staff progress• Allow training needs to be identified• Can be linked to pay and benefits

Benefits of training• Increased staff motivation• Increased staff retention• Staff are better at their jobs• Increased Productivity• Better customer service• Can use new technology

Drawbacks of training• Can be expensive• Staff may get poached by rivals

MotivationBenefits of a well motivated staff

• Motivated workers are more productive - higher productivity usually means higher profits.

• They provide better customer service, - keeping the customers happy.

• Motivated workers are more likely to stay with the company - saves money on recruitment.

Financial ways to Motivate Staff

• Remuneration (pay)

• Bonuses and commission

• Chance of Promotion

• Fringe Benefits

- Company Car- Staff Discount- Free meals- Gym membership- Free health insurance

Non-financial ways to Motivate Staff

• Job rotation

• Allowing workers to do different jobs• Workers develop new skills

• Job enrichment

• Gives employees more responsibility• Allows them to manage their own workload

• Autonomy

• Giving workers more independence to make their own decisions

• Workers take more interest in their work• Workers can suggest improvements

Workers are paid according to the time

worked. They are usually paid a fixed

hourly or weekly rate. This is referred

to as their basic rate.

Types of Remuneration

Workers are paid a certain amount for

every unit of output or ‘piece’ made,

i.e. the more you make, the more you

get paid.

These are extra payments over and

above the basic wage or salary. They

are often paid as a reward for reaching

a target.

Sales people may be paid a percentage

of the value of sales they achieve

This is a payment for reaching an

agreed target. It may be a personal

target agreed with an individual.

These are non-monetary rewards given

to staff. Often known as ‘perks’, these

are benefits other than money, paid in

addition to wages or salaries.

Examples include: Company cars,

Discount card and pension funds

Some firms allow their workers to have

shares in the business. This can make

employees feel part of the business

and can give them an incentive to work

harder.

These are usually paid to managers

and office workers. They are usually

stated at so much a year, although

they are normally paid monthly.