Business IGCSE Notes Complete Summary

Purpose of Business Activity:

The purpose of business activity is to identify and satisfy the needs and wants of the people
with the overall aim of earning profit.

Concept of Adding Value:

To add extra features to a product. The customer is willing to pay more after the value has
been added.

Nature of Economic Activity:

The nature of economic activity is that there are limited resources to satisfy unlimited
wants. Due to the limited resources (Scarcity), everyone has to make choices (individuals,
businesses, governments). This is known as the economic problem.

Factors of Production:

Land
Labour
Capital
Enterprise

Primary Sector
Extraction of raw materials from the Earth. E.g. Mining, Fishing.

Secondary Sector
Processing of raw materials into finished or semi-finished products.

Tertiary Sector
Service Industries. E.g. Transport

Quaternary Sector
Hi-tech industries. E.g. Trading, Health.

Chain of Production = Primary Sector (Extracting Iron) Secondary Sector (Processing

Iron into Car) Tertiary Sector (Sold by car dealership).
GDP = The total market value of all final goods and services produced in a country in a
given year. High GDP = More Jobs, Better Infrastructure, High Productivity, Balance of
Payment.

Decline: Primary and Secondary Sectors

A key factor in the decline of both the primary and secondary sectors in recent years has
been the impact of competition from overseas.

Great demand for raw materials in the UK has been increasingly met by imports
Many manufacturing businesses have relocated overseas where production costs are
cheaper.
Remaining UK-based manufacturing businesses have been forced to continually
lower their prices because of low-cost imports.

This decline is known as de-industrialisation.

Growth: Tertiary Sector

The growth in the tertiary sector has occurred for a number of reasons:
Increase in disposable income more paid on services
Tertiary businesses sell their services abroad and at home.
The tertiary sector has less scope for automation. Workers cannot be easily replaced with
machines.

Disposable Income
Income remaining after deduction of taxes and other mandatory charges

Opportunity Cost
The next best alternative given up by choosing another item.

Specialisation/Division of Labour
When the production process is split up into parts and each worker performs one of these
tasks.

Advantages

Increased efficiency
More work in less time

Disadvantages

Workers can become bored

If one worker is absent, production is
stopped

Specialisation improves the efficiency of resources used (Scarce).

Value Added
Not the same as profit. It is the difference between the selling price of a product or service
and the cost of bought in materials and components

The Size of a Business Can Be Measured By the Following Means

Sales turnover
Share Capital
Profit
Market Share
Number of Outlets

Why Businesses Wish To Grow

Benefit from economies of scale

A larger Market Share
As means of survival if they wish to compete with other growing businesses.

Organically Growing (Internal)

Lower Price
Increasing Advertising
Selling in different locations
Sell on credit

Unnatural Growth (External)

Merger
Takeover
Conglomerate

Horizontal Merger
Merge or takeover a firm in the same industry at the same stage of production.

Vertical Merger
Merge or takeover a firm in the same industry, but at a different stage of production.

Conglomerate Merger
Merge or takeover a firm in a completely different industry. AKA Diversification.

Constraints On Growth (Disadvantages)

Financial Limitations
Size of the Market
Government Controls and Laws
Human Resources
Environmental Constraints
Consumer Action and Pressure Groups

Economies of Scale
The advantages of the company being big. Leads to a reduction in average costs

Purchasing Economies
The unit cost of each item decreases as large numbers of components are bought
(buying in bulk)

Marketing Economies
Purchase its own vehicles for distribution rather than rely on other companies. Sales
staff numbers will decrease and the size of advertisement will increase

Managerial Economies
Specialists and highly qualified individuals will prefer to work with a well known
company that can afford them, unlike small companies that cannot

Financial Economies
Raise capital more cheaply as banks believe it is less risky to lend to a bigger
business. A lower interest rate is therefore charged

Technical Economies
Flow production Specialists need advanced equipment to be bought and
maintained . Smaller businesses may not be able to afford these expenses

Diseconomies of Scale
The disadvantages of the being big. Average costs increase as business grows beyond a
certain size

Poor Communication
This makes sending/receiving messages much more difficult. Managers decisions
will be responded to in longer amounts of time and top managers will be so busy
directing affairs that they have no contact with employees/customers

Low Morale
Employees will feel unimportant and will not establish any relationships with fellow
employees. Managers will not work closely with subordinates, making them feel
unvalued, reducing efficiency

Tax
As the size of the business increases, the higher the amount of corporation tax it will
have to pay

Aims
The long term intentions of a business.

Objectives
Targets that must be achieved in order to realise the stated aims of a business.
Aim

Survive the year

Maximise profits
Increase market share
Maximise share price

Objective

Open more stores

More advertising
Reduce costs
Beat competitors
Reduce waste
Reduce prices

Private Ownership Options

Sole Trader 1 Owner

Partnership 2-20 people (Solicitors, accountants)

Private Limited Companies Often a family run business with the

protection of limited liability.
Public Limited Companies Large organisations whose shares are
traded on the stock exchange.
Franchises Small business based upon an existing successful firm.
Cooperatives Collectively owned by workers/customers.

> Unlimited Liability

> Limited Liability

Unlimited Liability: Owners are responsible for all debts and may have to sell
personal possessions.

Limited Liability: Owners can only lose their investment even if the company has
huge debts.

Stakeholders
Any individual or group with a direct interest in the performance and activities of the
business.

Suppliers Keep a long term relationship

Financer Dividend
Customer Good quality for cheap price
Employees Work hard and receive salary
Owner Run their business and succeed

The business will try to please all stakeholders and achieve their aims, however, sometimes
there are conflicts. I.E. Win some, lose some.
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Aims of the Government

Low Unemployment
Keep Inflation Down
Economic Growth
High Balance of Payment

How the Government Raises Its Money

VAT
Income Tax
Corporation Tax
Road Tax
National Insurance

An increase
in income tax

A decrease In
disposable
income

A decrease in
demand for
products

A decrease in
companies revenue

An increase in
corporation
tax

An increase
in costs

A decrease in
retained
profits

A decrease in
shareholders
dividend

A decrease in
VAT

A decrease in the
price of
companies
products

An increase in
demand for
products

An increase in
companies revenues

Public Sector

Central government controls these organisations

Main aim is to provide essential services for the whole population
They are not profit making
General public pays for these services through taxation
Some services are the responsibility of local government, such as refuse collection
and the maintenance of parks

Government Control Over Business Activity

Production of goods and services

Consumer protection
Control of monopolies
Protection of employees

A monopoly is when a single company owns all or nearly all of the market for a given type of
product or service.
6

Advantages of a Command Economy

There should be work for everybody

The needs of the population are met

Disadvantages of a Command Economy

Fixed wages meaning less incentive to work

Lack of profit meaning low efficiency/productivity

Advantages of a Free Market Economy

Workers work hard as they can keep most or all of their income due to low or nonexistent taxes
Businesses compete with each other, meaning low prices

Disadvantages of a Free Market Economy

There could be many uncontrolled economic booms or recessions

Businesses might be encouraged to create monopolies in order to increase prices

Advantages of a Mixed Economy

Government restrictions on monopolies

Businesses will aim to gain profit (competition)

Disadvantages of a Mixed Economy

Companies in the private sector must pay taxes

Too many government restrictions

How the Government Influences Private Firms

The law
Providing assistance to business
The government as a customer
Controlling monopolies

Interest rate
A cost for borrowing, or a reward for lending or saving.
= Interest Paid

How interest rates affects business

Cost to business of borrowing money

- High interest rates will cause costs to rise and profits to fall.
Cost to consumer of borrowing money
- Consumers buy many goods with loans.
- High interest rates will reduce demand as these goods become expensive.
Reward for Saving
- High interest rates encourage people to save rather than spend money.

Inflation

When prices of goods and services are rising.

The bank of England must control UK inflation.
The target is 2%.
If inflation is high they raise interest rates to reduce demand for goods.
If inflation is low they reduce the interest rate. This leads to an increase in demand.

High inflation leads to

People real income falls

Prices produced in country will be high
No expansion for businesses

High Interest Rates

Make business expansion hard

Make loans expensive
Encourage customers to save

Low Interest Rates

Make business expansion easy

Make loans cheap
Encourage customer to spend

Inflation causes the price of raw materials to rise The business reacts by raising its prices
Customers cant pay the higher prices The business sells less Its staff demand pay
rises to match that inflation rate The business gives its staff pay rises The business
must raise its prices again.
8

Low levels of unemployment

Unemployed people do not produce (low output)

High unemployment compensation

Economic Growth

Rising employment and rising consumer incomes

High demand for goods and services
Businesses sell more, employs more, people spend more, everyone is confident.

Recession

Falling employment and consumer incomes

Fall in demand, consumer spending and confidence.

The business cycle

Economies go through periods of growth and recession, or trade cycles

Gross Domestic Product

The value of output of goods and services produced in the country during one year.
Includes all primary, secondary & tertiary sectors.

Balance of Payments
Comparing the difference of the amount of exports and imports. A negative balance of
payments means that more money is flowing out of the country than coming in, & vice
versa.

Electronic Commerce
E-commerce is the selling and buying of goods or services over the internet.

Advantages For Business:

Increased customer base

Cost effective
Improved productivity
Improved competitiveness
Reduce wastage

Disadvantages For Business:

Increased competition
Slow adoption
Purchasing the equipment
Maintenance
Training staff

Advantages For Customers:

Increased convenience
Greater choice
Cost effective
Product details
Customer reviews

Disadvantages For Customers:

No human interaction
Returning goods
Fraud
Stock issues

10

International Trade

Consumer choice
Increased competition
Business growth
Free trade (workforces and technologies anywhere in the world)

Advantages to International Trade

Specialisation
Consumers benefit from imported goods otherwise not available to them
Competition
Economies of scale
Best workforces

Disadvantages to International Trade

Competition
Movement to less well developed economies
Negative balance of payment
Global demand may be dominated by certain developed/developing economies

Barriers to Free Trade

Tariffs A tax or duty to be paid on a particular class of imports or exports

Subsidies Money granted by the government to local companies
Quotas Limiting the amount of a particular products imports/exports/production
Embargoes Ban on trade or commercial activity with a particular country

Arguments For Trade Barriers

They help protect small businesses and new industries

They prevent dumping
They prevent over-specialisation by protecting a range of different industries

Arguments Against Trade Barriers

They restrict consumer choice and opportunities for new businesses and business
growth
They protect inefficient domestic businesses with higher costs and often lowerquality products
Other countries will retaliate by introducing their own trade barriers

11

Entering Overseas Markets Problems

Language Barriers
There are increased risks of non-payment
Different cultures, customs and tastes will need to be understood
The business must manage exchange rate risks
The business must comply with different laws, regulations and taxes

Overcoming Problems

A business can use local contacts

A business can set up assembly or sales only business units overseas
It can enter into a joint venture with an overseas business
A business can merge with or takeover an existing business

Management
Controlling
Measure and evaluate the work of all individuals and groups to ensure that they are on
target. It is the managers job to find out why targets are not being met and then correct the
problem

Planning
Planning for the future of the organisation by setting aims and objectives in order to give
the business a sense of direction and purpose. It also involves planning which resources will
be needed and setting strategies in order to achieve the set aims

Organising
Delegating tasks, responsibilities and resources to others in the organisation

Co-ordinating
Ensuring all departments in the organisation work together to achieve the plans originally
set by the manager

Commanding
Ensuring all supervisors and workers are keeping to targets and deadlines. Instructions and
guidance must be provided

Motivation
Improving the work ethic of employees through constant praise and rewards e.g. pay rise

12

Training
Giving knowledge to employees to help them achieve targets

Qualities of a Good Manager

Intelligence
Initiative
Self confidence
Assertiveness and determination
Communication skills
Energy and enthusiasm

Autocratic leader
A leader or manager in a business who doesnt delegate authority to the subordinate and
takes all the decisions by himself e.g. Police and defence

Democratic leader
A manager or leader who accepts the opinions of subordinates, discusses with them,
delegates authority and then takes the decisions

Laissez-faire leader
A leader or manager in a business who gives full freedom to the subordinates in their area
of work

Strategic decisions
Important decisions which can affect the overall success of the business

Tactical decisions
More frequently and less important

Operational decisions
Day-to-day decisions taken by a lower level manager

13

Departments in a Business
Accounting

Prepares budgets
Control cash flows

Marketing

Market research
Extends product life cycle
Plans new products

Human Resources

Recruit staff
Interviewing and selecting staff
Keep staff records

Production

Orders stock
Extends product life cycle
Decides production method

Administration

Cleaning, maintenance and security

Clerical office support
Responsibility for the IT system

Communication
If there is effective communication, there is high motivation.

Why Do Businesses Need to Communicate?

Obtain information
Decide on a course of action
Communicate plans for action

Communication Mediums

Oral Communication
Letters
Fax
Meeting

14

Communications in business can be Informal or Formal

Written Communication Pros/Cons

Permanent record of the

communication
Can be studied later if necessary
Can reach a wide number of people
Effective at conveying complex or
important info

Time consuming to produce/deliver

Complicated language
Instant feedback is not guaranteed
Risk that messages may be ignored

Communication Problems

The sender may not explain themselves properly

Information could have changed through the path of communication
The sender may use the wrong language
The receiver may not see or hear the information
Faulty technology
Timing of the information

How to Improve Communication

Technology
Reduce the number of layers the communication has to go through (Delayering)

15

Exchange rates
How Are Exchange Rates Determined?
Most currencies are allowed to vary or float on the foreign exchange market according to
their demand and supply of each currency, just as the prices of goods can vary according to
the demand and supply in a free market. Exchange rates will vary between currencies on a
day by day basis depending on supply and demand for currencies.

Advantages for UK Firms of the UK Joining The Euro:

Lower costs as one price list throughout Europe can be used

Lower costs as the charges for converting one European currency into another will
disappear
Easier to trade with other European countries
Easier to compare costs of supplies from different EU countries
No risks of losing out from exchange rate charges between European currencies

Globalisation
When the world becomes one large market rather than a series of separate national
markets
Free trade agreements and economic unions have reduced protection for industries. No
import controls.
Improved travel links and communications between all parts of the world. Easier to
compare prices and quality.
Advantages

Competition
Consumer choice
Cheaper prices
Higher standard of living

Disadvantages

Lower sales Firms may find it hard

to sell
Lower profits Prices will be cut to
compete
Business closure and loss of jobs
16

Protectionism
When countries protect their industries from overseas competition

Problems

Retaliation
Price rises
Inefficient Industry

European Union
Organisation of 27 countries working to strengthen their economies. This leads to a single
market within Europe. Selling goods anywhere in the member states is easier. No tariffs or
controls.
- Creates a huge market for goods and services. Benefit from economies of scale
- Increased competition. More choice and lower prices, new higher quality
products

Common Currency
All euro. Same interest rates. Could lead to same tax rates. The UK has not joined yet.

Motivation
The desire of workers to work hard and complete tasks well. Not the same as morale. High
morale means workers are happy. This does not necessarily mean they work harder.

Motivation Increase Leads to

Higher Productivity
Higher Quality
Flexible Working Pattern

Financial Rewards

Wages & Salaries

Fringe Benefits (Perks e.g. Holiday)
Performance Related Pay Piece Rates, Time Rates

Non Financial

Job Rotation (Different jobs)

Job Enrichment (Interesting/challenging)
Job Enlargement (More tasks of a similar nature)
Better Working Conditions
Empowerment and Team Working
17

Person with the most authority is at the top. Least authority is at the bottom. This is known
as the chain of command. Orders are delegated down the chain of command. the number
of people each manager is responsible for is known as the span of control.

How the Hierarchical Structure Motivates Workers

Support mechanism
Rewards
Appraisal

By organising a company like this it allows them to specialise

It also increases accountability within each section e.g. performance can be monitored
Enables managers to identify which areas are performing well or not

Problems With a Long Chain of Command

Messages get lost or distorted

Resistance to change from people further down the chain
De-motivating feeling of being alienated
Each layer may own aims rather than that of the whole business

Delayering

Removing management layers of the hierarchy to flatten a long chain of command

Responsibility and decision making gets pushed down the line empowering
workers
Empowerment - can motivate workers and they might get a pay rise
Communication is quicker and more accurate
End result = Cutting Costs

18

Theories of Motivation
F.W.Taylor

Division of labour breaking a job into small repetitive tasks, each of which can be
done at a speed with little training.
Piece work Means payment by result, e.g. per item produced
Tight management Ensure the workers concentrate on their jobs and follow the
correct processes

Herzbergs Two Factor Theory

Motivators

Sense of achievement
Recognition for effort and
achievement
Nature of the work itself
Responsibility
Promotion and improvement
opportunities

Hygiene/Maintenance Factors

Working conditions
Supervision
Pay
Interpersonal relations
Company policy and admin, inc,
paperwork, rules, red tape

Mcgregor Theory X and Theory Y

X= Dislike work, do not want responsibility and are not ambitious. Only work for money.
Y= Thinks work is natural and do not dislike it in principle. Accept responsibility and will seek
it. Committed to hard work and their greatest need is self-actualisation.

19

Accounting
Breaking Even

The break-even point is the level of output where an organization will just cover its
costs. When a business first starts up, its financial objective is likely to be to breakeven particularly if it is a small business. If the business sells more than this, it will
make a profit

Break-Even level of output =

Fixed costs
Costs that do not vary with output or sales e.g. Salaries, rent, Insurance, Interest and loans

Variable Costs
Costs that vary with the quantity produced or sold e.g. costs of raw materials, sales staff
commissions

Profit
Difference between total revenue and total costs
Contribution = Selling price Variable Costs
Total Revenue = Selling Price x Quantity
Total Costs = Variable Costs + Fixed Costs

Example:
No. of Guests
0

20

40

60

80

100

120

Fixed Costs

200,000

200,000

200,000

200,000

200,000

200,000

200,000

Variable Costs

50,000

100,000

150,000

200,000

250,000

300,000

Total Costs

200,000

250,000

300,000

350,000

400,000

450,000

500,000

Sales Revenue

100,000

200,000

300,000

400,000

500,000

600,000

20

Benefits of Break-Even chart

Make decisions about future investments

Helps businesses understand what the level or volume of activity needs to be in
order to be profitable
Cheap to carry out
Loan/budgeting
Helps spot potential problems

Limitations

External changes (cannot deal with sudden changes such as wages, prices and
technological changes)
Not all produced is sold
Fixed costs change with scale of production
It can apply to a single product or single mix of products
Rejects owners objectives of expansion (Fixed Costs)

21

Profit & Loss

Sales = Price x Quantity
Cost of Goods Sold = Opening Stock + Purchases Closing Stock
Gross Profit = Sales Cost of Goods Sold
Net Profit = Gross Profit Expenses

Opening Stock
Goods at the beginning of the year

Closing Stock
Goods that are left at the end of the year

Expenses
Extra costs that help operate a business

Dividends
Return payments to shareholders for investing in the company

Direct Costs
Costs which can be identified directly with the production of a good or service e.g. Raw
Materials

Indirect Costs
Costs which cannot be matched against each product because they need to be paid whether
or not the production of goods or services take place e.g. Rent on the premises

22

Balance Sheets
Shows the assets and liabilities of a business

Fixed Assets
Anything that you own as a business that can be useful for longer than one year e.g.
Buildings, machinery

Current Assets
Last less than 12 months e.g. Cash, stock, debtors

Debtors
People who owe your business money

Current Liabilities
Things that a business will need to pay out for within 12 months e..g. Creditors, Overdrafts

Creditors
Groups that your business owes money to

Overdrafts
Money that must be paid back to the bank within 12 months

Net Current Assets/Working Capital

The money that a business has for the day-to-day running of the business
Net Current Assets = Current Assets Current Liabilities
Net Assets Employed = Net Current Assets +Fixed Assets Long Term Liabilities

Capital Employed
The money you initially begin with

Long Term Liabilities

Mortgage, Long term loans
Capital Employed = Net Assets Employed

23

Ratio Analysis
1. Liquidity
The ability of the firm to pay its way

2. Investment/Shareholders
Information to enable decisions to be made on the extent of the risk and the
earning potential of a business investment

3. Gearing
Information on the relationship between the exposure of the business to loans as
opposed to share capital

4. Profitability
How effective the firm is at generating profits given sales and or its capital assets

5. Financial
The rate at which the company sells its stock and the efficiency with which it uses
its assets
Return on Capital Employed =
Gross Profit Margin (%) =

x 100
x 100

Net Profit Margin (%) =

x 100

Current Ratio =
Acid Test Ratio =
Gearing Ratio =

x 100

Operating Profit
Net Profit before Tax & Interest & Dividends
Advantages of ratio analysis

Evaluation of performance
Setting targets
Comparison with competitors

Disadvantages of ratio analysis

May not indicate how a business

will perform in future
Inflation comparison between
years may be misleading

Budget
An estimate of income and expenditure for a set period of time.
24

Cash Flow
The majority of businesses who do not survive their first year of trading, fail because of cash
flow problems. Without sufficient cash to pay day-to-day bills, even a highly profitable firm
will be unable to survive.

Improve Cash Flow: Increase/Advance Inflows

Offer cash discounts

Reduce credit time
Chase up outstanding money owed
Sell assets
Bank overdraft/loan

Improve Cash Flow: Decrease/Delay Outflows

Negotiate longer credit terms with suppliers

Reduce purchases
Sale and lease back

Overdraft
Banking facility that enables a firm to spend more than the balance of the account

Sale and Lease Back

When a firm sells property freehold but simultaneously leases it

Opening Balance
Cash you have at the start

Inflows
Funds that come into a business or organisation e.g. money, sales, debtors, loans

Outflows
Funds that leave the business or organisation e.g. Creditors, overdrafts, wages, bills

Net Flow
Inflow - Outflow

Closing Balance
Opening Balance + Net Flow

Debt Factoring
Business sells its debts to a debt factor who advances payments against the debts, for a fee

25

Uses of a Cash Flow Forecast

Aids in decision making when starting up a business

Running an existing business future plans
Managing cash flow
Keeping the bank managers informed

How Cash Flow Problems Can Be Solved

Loans when negative cash flow

Reduce or delay planned expenses
Increase forecasted cash income in some way
Ask for credit on purchases

Week 1

Week 2

Week 3

Week 4

30

-5

10

Pocket Money

10

30

Wages

20

70

Total Inflows

20

15

70

30

Canteen

10

10

10

10

Travel

Clothes

40

Music

10

10

Social

20

10

Total Outflows

45

25

55

30

Net Cash Flow

-25

-10

15

-5

10

10

Opening Bank Balance

Inflows

Outflows

Closing Bank Balance

26

Sources of Finance

Internal sources (raised from within the organisation)

External (raised from an outside source)

Owners Funds
When the person who starts the business brings their own savings into it

Doesnt have to be repaid

No restrictions

Limit to how much can be invested

Retained Profit
When a business uses its own profits to help expand in the future

No interest
Doesnt have to be repaid

Not available to a new business

Business may not make enough profit
to plough back

Bank Loan
The business borrows and amount of money which is repaid in instalments with interest

Spread over a period of time

No restrictions or limitations

Expensive due to interest

Bank may require security on the

loan

Trade Credit
Buying goods from suppliers and not paying them for 30-60 days

No interest charged if money is paid

within agreed time
Business can sell the goods first and
pay for them later

Discount given for cash payment

would be lost

Carefully manage cash flow to ensure

money will be available when the
debt is due to be paid

Overdrafts
When a business is allowed to spend more money in its account than it has

Cheaper than a bank loan if used in

the short-term

Interest

Can be expensive if used over a

longer period of time
27

Grants
When the government or EU provides the business with money as it is beneficial to the
economy

Dont have to be repaid

Government restrictions

No interest

Not all businesses are eligible

Hiring & Leasing

Using expensive equipment by paying a monthly charge

Up to date equipment immediately

Fixed Cost

Can be expensive

The asset belongs to the finance

company

Issuing Shares
Investors buy these from limited companies in return for a dividend each year

No interest

Doesnt have to be repaid

Decreased control over the business

Dividends to more shareholders

Selling Assets
Selling buildings or pieces of equipment that it no longer needs

Raise money from something no

longer needed

Unlikely to have surplus assets to sell

Slow method of raising finance

Venture Capital
Finance from a company which specialises in lending to successful small businesses
often in exchange for shares

More money to spend on growth

survival
Doesnt have to be repaid

Lost control

28

Marketing
The management process responsible for identifying, anticipating and satisfying customer
requirements profitably

Principles of Marketing

Understanding customer needs

Keeping ahead of competition
Communicating effectively with consumers
Utilising new technology

Product Orientated Business

Focuses mainly on the activity of the product itself. Product orientated businesses tend to
produce basic necessities and are general products that consumers need to buy may not
have their own name or brand. Manufacturer and retailer are mainly concerned with the
price and quality of the product.

Market Orientated Business

Carry out market research to find out consumer wants, adapt to changes and set prices
before a product is developed and produced. Market orientated businesses tend to survive
more than product orientated businesses as they are usually more prepared for changes in
customer tastes.

Objectives of Marketing

To increase market share

To maintain or improve brand image
To target new sectors
To develop new products
To increase sales and profits

Market Segmentation
Where the market has been divided up into groups of consumers who have similar needs
(segments). E.g. by income, age, region, gender, use of the product, lifestyle.

Market share
How much of the consumers the business owns, as in how much percentage the business
products are bought from the total consumers buying the product.

Mass Market a very large number of sales of a product

Niche Market a small specialised segment of a much larger market
4 Ps = Price, Place, Product, Promotion. Also known as the marketing mix.

29

Marketing Mix Product

Branding and Differentiation

A brand is a named product which customers can identify with and which is seen as
different from other similar products
Generic products are products made by a number of different businesses, which
customers fail to recognise and differences between e.g. Mp3 player
Own brand is one which is sold under the brand name of a supermarket, not the
company that manufactured it

Achieving Branding and Differentiation

Design. Make each product have different features, quality, build to others in the
range. Make your product features different to those of competitors
Name. Make each name unique. Either make the name reflect the product e.g. Gold
blend coffee or make the name obscure to imply that it is highly technical e.g. Intel
Pentium Processor. Some firms market themselves under the company name brand
e.g. Cadbury, whereas others prefer to do it through individualised branding e.g.
Nestle with Kit Kat and Yorkie.
Quality. Value for money
Packaging. Attractive appeal, protect the product, instructions
Range. Appeal to different market segments
After Sales Service. So the customer gets help when they need it

The whole purpose of branding is repeat custom

Unique Selling Point (USP)

What makes it different from everything else on the market

Advantages of Branding/Differentiation

Repeat Custom
Premium prices. A strong brand may allow firms to charge a higher price than rivals
Greater Consumer Awareness. Consumers are more likely to buy a high profile brand
rather than a rivals less well known brand
Increased Sales and Market Share. Retailers will devote shelf space to well known
brands

Disadvantages of Branding/Differentiation

High costs needed for massive promotion to establish and maintain the brand
A single bad event will affect the whole brands products
Launching a new version of the brand may lead to a risk of failure and damage to the
brand
Brand names may be difficult to protect in a world market fake products
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Extension Strategy

Extending the maturity stage to benefit from high sales & profit
Slightly changing the product to give it a fresh appeal to it its target market
Appeal to new segments
Repositioning is directing the product and its benefits to different segments E.g.
Lucozade went from sick people to targeting new segments
Wider Product Range is giving different variants to the same product E.g. Wrigleys
gum and their flavours
Aiming the product towards Specific Target Markets
Changing the appearance and packaging

Saturation
When everyone has the product

Market Research
The process of gaining information about customers, products, competitors through the
collection of primary and secondary data

Why Research the Market?

Identify consumer wants

Reduce the risk of the product failing
Helps decide which products to introduce or kill off
Helps firms understand how to improve products
Look at what competitors are doing

Quantitative data is about facts that can be statistically analysed and/or expressed as
numbers
Qualitative data is about opinions

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Stages of Market Research

Designing the research

- What needs to be achieved and the best method of achieving it
- Qualitative or quantitative
Undertake the research
Analyse the data
- Charts/Graphs
- Reports

Primary Data AKA Field Research

Original data that has been collected first hand

Questionnaire

Everyone asked same questions

Easy to analyse

Expensive and time consuming

Difficult to express own opinions

Interviews

Detailed information
Can explain verbally/visually

Expensive
Interviewer may travel some distance

Focus Groups

Cheap
Response rate is good

Other members could sway opinions

Too small a sample

Difficult to keep same panel over

time

Panels

Detailed
Show how opinions change over time

Sampling

Random A percentage of the population is chosen. Equal chance of selection

Quota Population is split into segments and a set number is chosen from each
segment. Reflects each segments opinions
Targeted Asking only those who fit in a certain category

Product Samples

Easy to do
Response rate is good

Not representative
People reluctant to give criticism
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Secondary Data AKA Desk Research

Data that already exists and has been collected by someone else E.g. Internet, Books,
Newspaper, Market Research Agencies

Advantages of Desk Research

Cheap
Instantly available
Wide collection of opinions
Time saving

Disadvantages of Desk Research

Out of date/Continuously changing

Inaccurate (time consuming)
Does not anticipate consumer wants/needs
Only Market Research Agencies are expensive

Open Questions
Allow respondents to give opinions without being tied to a set answer E.g. What do you
think about our product?

Closed Questions
Questions that require specific answers with a limited range of responses E.g. Do you use
our product?

Bad Questions
Bias/Leading Questions Make people answer it in the way you want them to
Weasel Words Phrased so badly that it is misunderstood

Marketing Mix Price

Cost-plus Pricing
Aimed at ensuring the business covers its costs and makes an acceptable profit. The total
costs of producing one unit of the product are calculated to which is added the required
profit margin. This gives the selling price

Very easy and fast to calculate

Ensures that all costs are covered

Does not look at what competitors

are charging
Does not take into account how
much the customer is willing to pay

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Competitive Pricing
Competition is strong. Customers have a wide choice of suppliers to buy from. Businesses
must set their prices close to the prices of competitors, having regards to the quality of the
product and any unique selling points (USPs)

Avoid price competition which could

damage the company

Only just cover production costs

low profits
Business must attract customers in
other ways, price will not do

Price Skimming
New product is likely to generate a high volume of initial sales and is priced high to
maximise profits. Price is reduced when initial demand has subsided

High prices give the product a good

image
Pay back research and development
costs

Competitors may lower prices, taking

away your market
Put off potential customers because
of high price

Penetration Pricing
Low initial price when entering the market to try and capture a share of the market. The
price is then raised when more customers are aware of this product to maximise profit.

Increases market share quickly

Attracts customers to try it

Does not pay back R&D costs

Revenue is lost when low price

Promotional Pricing
Charging low prices for a short period of time to attract new customers and increase sales

Earn revenue on what would not sell

Renew customer interests

Profits will be lower

Can be risky if sales dont rise

Psychological Pricing
Pricing strategy that pays attention to the effect that a price will have on the way a
customer thinks E.g. 1.99 instead of 2

Encourages customer to buy

Calculation complication

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Destroyer Pricing
When a business lowers its products pricing so much that all competitors are destroyed

Increases market share

Increases sales

Reduces profits
Small profit cannot be used on
growth/extension

Price Discrimination
Dependant on the customer. E.g. Health insurance for an old person in comparison with a
young person
Prices are driven by market forces called demand and supply
If price goes up, demand goes down and vice versa

If price goes up, to take advantage of higher profits, supply also goes up.

The place where the two lines cross is called the equilibrium, where the same number of
goods are demanded and in supply resulting in no leftovers

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Factors Affecting Demand

The popularity of substitute products (products that can be used instead of the
product)
The popularity of complimentary products (products that require each other or are
used together)
Changes in income
Changes in taste and fashion
Changes in advertising

Factors Affecting Supply

Taxes and Subsidies Higher taxes means higher costs. Subsidies lead to lower costs.
Climate (for agricultural products) Supply of crops depends on weather
Improvements in technology Makes it cheaper to produce goods
Costs in supplying goods to the market
- Price of raw materials
- Wage rates (because of inflation)

Price Elasticity

If result = 1 or above then it is elastic. If price is changed then sales decrease/demand

falls. Consumers do react
If result = Less than 1 then it is inelastic. Can be sold at a higher price as demand will not
change. Usually high quality branded products. Consumers do not react much.

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Marketing Mix Place

Where the product is sold and how it gets to the customer

Channel of Distribution
The route and stages the product goes through to reach the final customer

Method #1

Customer convenience
Cost saving as consumers are close

Limited number of consumers nearby

If product is big then it will be
expensive to mail/ship

Method #2

Everyday products need to be widely

available retailers provide this
Helps perishable products sell quickly

Competitors will use the same

retailer to compete directly for
customers
Increased cost - extending credit to
retailers

Method #3

Breaking bulk
Reduce storage
Provide credit to small retailers

More expensive to buy from

wholesaler
May not have the full range of
products to sell
Takes longer for fresh produce to
reach shops

Breaking Bulk
The wholesaler buys in large quantities from the manufacturer and sells to the retailer in
small quantities

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Method #4

Manufacturer has some control over

the way the product is sold in other
markets
Agent is aware of local conditions
and what places best sell

Agent will charge a price or receive a

commission on sales
Prices may be raised by manufacturer
to cover cost of agent. Every stage
following also increases price

Marketing Mix Promotion

1. Advertising

Paid for communication. Create awareness and transmit information in order

to gain a response from the target market.
Above the line advertising: Expensive medium e.g. TV
Below the line advertising: Cheap medium e.g. leaflet

2. Sales Promotions
Extra % fee
Free Gifts
Coupons

Events
Competitions
Free Samples

Buy one get one free

3. Public Relations

The actions of a corporation promoting good will between itself and the
public, the community. Employees, customers etc.
Newsletters, Press releases, blogs, photos, social media.

4. Personal Selling Promotion

Effective way to manage personal customer relationships. The sales person

acts on behalf of the organisation. They are well trained and have good
speaking skills. However, they are very expensive and should only be used
when there is a genuine return on investment.

5. Trade Fairs and Exhibitions

Excellent way to talk directly to customers.

Show larger items (boats, cars etc)
Demonstrate Products

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6. Sponsorship

Positive associations of the product with a celebrity.

Can be very expensive
Difficult to tell what impact this has on brand loyalty or sales

Factors Affecting Location

Production
- Labour
- Natural resources
- Suppliers
Cost of premises
Government influence (Grants Limits on production (CO2 emissions - tax)
Business rates (Monthly payments E.g. Power, Water)
Transport and communications
Information Technology
Customers
History and tradition
Climate
Personal preferences of the owner
Competitors

Factors Affecting Production

Job Production - Catered to meet each customers specific order. One off product.

Exact Requirements
Job satisfaction
High quality goods
Design is flexible

Expensive
Time consuming
Advantages of economies of scale are
lost

Batch Production Produces a number of similar items. Created in parts that are put
together at the end.

Workers may specialise

Labour costs lowered so final price is
lowered
Machinery may be used
Production is faster

Uninteresting work (repetitive)

More space is required for working
and storage
Larger stock of raw materials must be
kept

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Flow Production When the product is standardised and can be made using a
production line method. Continuous process takes place.

Final product is inexpensive

Production is fast
Large quantities can be
manufactured

Work is repetitive (low motivation)

Large stock of raw materials must be
kept
Large capital investment is required

Productivity The quantity of goods produced in a given time. AKA output.

Productivity formula
Workers x Pieces created by workers x Time

Improve efficiency More produced in the same amount of time. Less costs, more
profits

Labour productivity When workers are trained, skills are developed and used more
efficiently to produce more in the same amount of time.

Ways of improving productivity

Training staff
Specialisation
Improve technology/machinery
Reduce downtime
Improve motivation
Better quality raw materials

Downtime When production is slowed or stopped

Quality
Consistently providing what the customer wants by meeting their needs and expectations.
Poor quality is a source of competitive disadvantage.

Results of poor quality

Lost customers
Cost of reworking or making product
Cost of replacement or refunds
Wasted materials

Quality Management

Quality control
Quality assurance
Total quality management (TQM)
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Quality Control
Detection, not prevention. This makes it very expensive. Identify faulty products. This
involves inspecting and sampling products as they are produced.

Maximises production
Sampled at regular intervals to check
for errors.

Higher costs in remaking products

Wasted materials

Quality Assurance
How the product is designed to minimise the chances of a fault prevent. The focus is on
the development stage. If production is well controlled, then quality will be built in. if
production is reliable, there is less need to inspect production output.

Quality is built in
A quality standard is set

If workers do not support the system,

it will not be effective
Cost, demand and delivery schedules
can be hard to anticipate.

Total Quality Management

Attitude based. The whole business understands the need for quality and seeks to achieve
it. Every stage of production is concerned and quality is checked by workers, not inspectors.

Sampling and inspection at end are

eliminated.
Workers are motivated, as they are
given more responsibility

Time consuming
Workers must be trained

Lean Production

Reducing waste
Improving efficiency
Improves quality of products

Kaizen
Continuous improvement. Overall progress comes from small improvements being made all
the time, even when the process/product seems to be working. Groups of employees meet
regularly to discuss ways in which production quality can be improved.

Kanban
System that uses two components. One being used on the production line, while the other
is being made ready. E.g. Component bins, one with materials to build car. Bin 2 is being
filled and will be delivered when bin 1 is empty.
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Cell production
Where work is organised into team and are given responsibilities. This leads to improved
productivity as a result of increased motivation (team spirit and added responsibility) and
specialisation.

Just In time
Focus is on reducing or eliminating the need to hold stocks. Raw materials are ordered when
order is placed, delivered just in time to be used in the production process. Making of parts
are just in time to be used in the next stage, and the product is finished just in time to be
delivered to the customer.

Reduces costs of holding stock

No money held up in stock

Reliable suppliers and customers are

needed.
Difficult to meet sudden increase in
demand.

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Boston Matrix
Describes products according to their market share they enjoy and whether the market has
any potential to grow.

Dogs are at the end of their life cycle.

Cash cows at the maturity stage of their product life cycle.
Stars are profitable products.

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