Business Studies Unit 2

Key Terms

Adding Value - The process of increasing the value of resources by changing them during the production process.

Bad Debt - Where a customer has bought goods and services on credit proves unable to pay for them.

Delayering - The  removal of layers of hierachy in an organisational structure

Chain of command - Describes the line of authority in a business, who reports to whom

Competitiveness - The ability of a business to offer a better product than competitors

Cost plus pricing - Price is set by calculating the full costs of adding a profit margin

Creditors - Those owed money by a business

Direct Marketing - Where a business sells direct to the customer , without using other intermediaries in the distribution channel.

Efficiency - Measures of how much output is being produced per unit of input

Empowerment - Delegating power to the employees so they can make their own decisions

Historical budgeting - Using last years figures as a basis for the budget

Hygiene factors - Job factors that can cause dissatisfaction if missing but do not neccesarily motivate employees if increased

Job description - A summary of the main duties/responsibilites of a job

Just in time - Where inputs in the production process arrive on the production line just as they are needed

Kaizen - A process of continuous improvement, acheived as workers idnetify many small ways to improve quality. Part of quality assurance.

Liquidity - The ability to easily turn assets into cash.

Loss leader - Where a product is sold for less than it is produced to attract customers in store to buy it.

Margin of safety - Difference between the actual level of output and the break even output

Marketing mix - The set of marketing tools that the firm uses to pursue its marketing objectives. Usually includes place, price, product and promotion

Oligopoly - Where just a few firms dominate the share of the market e.g. supermarkets

Overtrading - When a business expands too fast without sufficient finance to pay its debts

Penetration pricing - Pricing strategy that involves the setting of lower rather than higher prices in order to acheive a large market share.

Price skimming - Pricing strategy where a higher price is charged for a new product to take advantage of customers prepared to pay for innovation

Promotional mix - The combination of promotional methods used by a business

Quality assurance - Organising every process to get the product 'right first time' and prevent mistakes ever happening

Quality control - The inspection of products as part of a sampling process to ensure that the right production standards have been acheived

Redundancy - Where an employee is dismissed because their role is no longer needed. This can happen through reorganisation, cutbacks or closure/failure of the firm

Retained profits - Profits earned by the business are reinvested into the business rather than distributed to the business' owners

Span of control - The number of employees who are directly supervised by a manager

Stakeholders - A person who has an interest in the activities of a business.

Total quality managerment - An attitude to quality where the aims are zero defects and total customer satisfaction

Variance - The difference between the amount budgeted and what actually happens, can be postive or negative

Vertical communication - Where information is passed up and down the chain of command

Workforce planning - The process that identifies what the labour requirements of a business are.

Using Budgets

Key types of budget:
Income Budget
Expenditure Budget
Profit Budget

Benefits of Budgets
Establish priorities - indicates level of importance
Provide direction and coordination
Assign responsibility - make someone responsible for success/failure
Motivate staff - Greater responsibility and recognition when targets met
Improve efficiency
Encourage forward planning

Drawbacks of budgets
Incorrect allocations
External factors
Poor communication

Variance Analysis

A variance represents the difference between the planned standard and actual performance.
Can be favourable - better than thought  or adverse - worse than thought.

Identification of the cause of a variance can allow a company to:
Identify responsibility and take appropriate action.

Variances in costs can be caused by:

• Material costs
• Efficiency changes
• Morale of staff
• Wages
• Quality of material
• Storage and wastage of materials

Improving Cash Flow

Cash Flow Forecast
Causes of cash flow problems:
Over Investment
Overtrading
Credit Sales
Stockpiling
Seasonal factors
Changing tastes
Management errors

Methods of improving cash flow
Bank Overdraft ----------------------- Short term/long term bank loan
Debt Factoring ----------------------- Sales of assets
Sale and leaseback of assets

Bank Overdraft

Benefits
It is easy to organise
Very flexible
Often cheaper than a loan, because interest only paid on amount overdrawn

Drawbacks
Interest rates are flexible, making accuracy difficult
Rate of interest charged on an overdraft usually signifiantly higher than on a short term loan

Bank Loan

Benefits
Usually made at a fixed rate of interests - simple to budget
Rate of interest charged usually lower than that of on a overdraft
May be set up for a significant amount of time to suit needs of the business

Drawbacks
Interest paid on whole sum borrowed
Needs to provide bank with collateral (security) in order to secure loan

Debt Factoring

Benefits
Firm gains improved cash flow in short term
Admin costs are lower because factoring company chases bad debts
Reduced risk of bad debts

Drawbacks
Cost to the business, lose between 5% and 10% of its revenue
Factoring company charges more for factoring than it would for a loan
Customers may prefer to deal directly with business that sold them the product

Sale of Assets

Benefits
Can raise a considerable sum of money, particuarly in case of a large asset i.e. Building
Sometimes asset is no longer needed and is just an unnecessary cost

Drawbacks
Assets such as buildings and machinery may be hard to sell quickly
Fixed assets enable a firm to produce the goods and services that create its profits

Sale and Leaseback of Assets

Benefits
Will usually overcome the cash flow problem by providing an immediate inflow of cash, usually at a quite siginificant level
Ownership of fixed assets can lead to a number of costs, such as maintenance. For leased assets, the company leasing them does not have to pay the costs
Owning an asset can distract a business from its core activity

Drawbacks
Rent paid likely to exceed sum received, eventually
The firm now owns fewer assets that can be used as security against future loans
Business will eventually lose use of the asset when lease ends

Key Formulas

Net Profit Margin = Net Profit/Sales x 100

Return on Capital = Return/Capital invested x 100

Labour Productivity = Output/No. of employees at work

Labour Turnover = No. of employees leaving during period/Ave. number employed x 100

Absenteeism = No. of days absent/total days worked by workforce x 100

Capacity Utilisation = Actual level of output/maximum possible output x 100

Improving Profits/Profitability

Many methods a business can utilise to try and improve profitability:

• Increasing prices to widen profit margin.
• Decreasing costs by:
  • Sourcing cheaper suppliers
  • Employing fewer people
  • Outsourcing production to a country with cheap labour costs
  • Reducing other costs, e.g. cutting back on advertising

Improving Organisational Structures

Org. Structure and how it affects business performance

Functional Managment

This form of management can lead to:

• Clearly defined channels of communication and hierachy
• Clearly defined roles
• Decision making being more centralised

Levels of Hierachy

Many levels in hierachy

• Greater oppurtunities for specialisation
• Greater oppurtunities for promotion
• Can create communication problems between top and bottom
• Org. culture may be bureaucratic
• May be less oppurtunity for delegation
• Admin costs may be higher

Few levels in hierachy

• Fewer oppurtunities for specialisation
• Fewer oppurtunities for promotion
• Communication between top and bottom is easier
• Greater oppurtunities for delegation
• Admin costs may be lower

Wide vs. Narrow Span of Control

Wide Span

• Greater oppurtunities for delegation
• Supervision and control will be looser
• Distance between top and bottom will be smaller
• Reduced contact and communication between manager and reportees
• If accompanied by delayering, can lead to lower costs and lower chances of promotion

Narrow Span

• Less oppurtunity for delegation
• Supervision and control might be lighter
• Distance between top and bottom is greater
• Greater contact between managers and reportees
• Possibility for greater oppurtunities for promotion

Centralised vs Decentralised

Centralised decision making may result in :

• Greater control over decisions made
• More consistency
• More efficient use of specialist skills of employees and managers

Decentralised decision making may result in:

• Increased motivation due to empowerment of lower level managers
• Development of skills in lower level managers
• Quicker decision making - but difficult for lower level managers to have an overview and be aware of the wider impacts of their decisions

Recruitment Process

• What is the job that needs to be filled? (job description)
• Are there any alternatives avaliable? (redeployment, increased overtime, temporary staff, new technology, outsourcing and insourcing)
• Does the organisation deal with the recruitment process or does it use an agency or consultant?
• What does the job entail? (job description)
• What type of person is needed to fill the vacancy? (person specification)
• How can the organisation attract a sufficient number of applicants to apply? (which advertising media should it use)
• How do applicants apply for the job?
• How can the organisation decide if the applicants are suitable? (interview etc.)
• What are the legal implications? (disability, marriage, civil partnership, religion or belief, sex, age etc.) 

Internal or External Recruitment

Internal Recruitment Advantages
Advertising is cheap (intranet, notice board,letters)
The applicant already knows the organisation, reduced training costs
Applicant is known in terms of his or her potential for the post
Can create promotional oppurtunities, potentially increasing motivation

Disadvantages
New ideas not generated
Limited source of potential applicants
May create vacancy elsewhere that needs to be filled

External Recruitment Advantages
New ideas brought in
Wider pool of applicants

Disadvantages
More expensive
Takes longer
Applicant not known to organisation 

Motivation Theories - Maslow

According to Maslow, human needs consist of five types which form the hierachy of needs.

Motivation Theories- Herzberg

1) Hygiene Factors

Salary, security,supervison,working conditions, company policy. Improvements to these might remove dissatisfaction, but they will not increase satisfaction and motivation.

2) Motivators

Recognition, responsibility, work itself, acheivement, advancement.Improvements in these areas will lead to increases in motivation.

Motivation Theories - Mayo

• Employees are motivated by more than money and working conditions
• Work is a group activity and employees should be seen as members of a group
• Recognition, belonging and security are more important in influencing motivation than working conditions
• Informal groups may exert an important influence over employees attitudes
• Supervisors need to pay attention to the individuals social needs and influence of informal groups.

Motivation Theories - Taylor

• Taylor regarded the worker as 'an economic animal responding directly to financial incentives
• Founded the scientific approach to management, aimed at maximising efficiency through specialisation.
• Workers need close supervision

Why Is Motivation Important?

Poor morale in an organisation can lead to :

• High levels of absenteeism
• High levels of labour turnover
• Higher costs of the organisation due to the above factors
• Poor image, which could cause problems in retaining and recruiting employees
• Lower productivity
• Loss of competitive advantage

Examples

• Job Enrichment 
• Job Enlargement - Empowerment, team work, financial incentives

Quality Control

Benefits of Quality Control (inspection)

• An inspection at the end of the production process.It can prevent a defective product reaching the customer - thus eliminating a problem with a whole batch of products
• It is more secure than a system that relies on one individual
• It can detect problems throughout the organisation

Quality Assurance

Benefits of Quality Assurance (self checking)

• Ownership of products rests with production operative rather than with an independent inspector
• It can have a positive effect on motivation, due to the sense of ownership
• There is less need for reworking faulty products
• There is better quality first time. This results in less waste/scrap
• It provides cost savings
• It helps to ensure consistent product quality

Total Quality Management

• Occurs when there is a culture of quality throughout the organisation.
• Based on the philosophy of 'right first time'. If the individual making the product ensures quality, there is no need for inspection

Product Portfolio Analysis

High Growth Market & High Market Share - Star

High Growth Market & Low Market Share - Problem Child

Low Growth Market & High Market Share - Cash Cows

Low Growth Market & Low Market Share - Dogs

Gap Analyis

Can be used to investigate a product range to see if there are any market segments to which the product does not appeal, new products can be tailored to fit any gap that has been discovered.

Niche Marketing

Advantages
Fewer competitors - large companies not attracted to small market
Small firms can compare more effectively
Limited Demand may suit a small firm that would lack the resources to produce on a large scale
Can adapt products to meet specific needs
Easier to target customers - can promote more effectively

Disadvantages
Small scale limits chances of high profits
Can be vulnerable to changes in demand as they have no alternative products
Increase in popularity may attract larger firms into the market 

Mass Marketing

Advantages
Large scale production is possible - lower costs per unit through bulk buying
High revenues
Most expensive (usually most effective marketing)
Helps firms fund r&d for new products
Increases brand awareness - help to sell a range of products

Disadvantages
High fixed costs incurred - large factories
Less flexible in change of products - in change of popularity
Difficult to appeal directly to each individual customer due to it needing to suit all customers
Less scope for adding value 

Marketing Mix - Promotion

Above the Line

Advertising through media - newspapers, television, radio, the cinema and posters

Below the Line

Refers to all other types of promotion - such as public relations, branding, merchandising, sponsorship, direct marketing, personal selling and competitions

Marketing Mix - Price

• Skimming pricing : a high price set to yield a high profit margin
• Penetration pricing: low prices set to break into market
• Price Leaders : Large companies that set market prices, which are then followed by price takers
• Price Takers - Small businesses that tend to follow the prices set by others (price leaders)

Pricing Tactics

• Loss Leaders: Very low prices that are encouraged to encourage consumers to buy other, fully priced, products
• Psychological Pricing - Prices that are set to give an impression of value e.g.) £99 instead of £100

Price Elasticity of Demand

Price elasticity of demand measures how a change in the price of a good or service affects the demand for that good or service

Price Elasticity of Demand - % change in quantity demanded/change in price

Elastic Demand - If the change in price leads to a greater percentage change than the quantity demanded, then the calculation will yield an answer greater than 1.

Inelastic demand - If the change in the price leads to a smaller percentage change than quanity demanded, then the calculation will yield an answer less than 1.

Factors Affecting Competitiveness of a Firm

• Effectiveness of financial planning and control
• Invetsment in new equipment and technology
• Staff skills, education and training
• Innovation through investment in research and development
• Enterprise
• Effectiveness of the marketing mix
• Level of staff motivation
• Efficiency of operations management
• Quality procedures

Methods of Improving Competitiveness

• Financial management
• Operations management
• Human Resource management
• Marketing