Managing a Business - Miss Cromie`s Business Studies Site
Bare Bones Revision Guide AQA AS Business Studies Unit 2 Managing a Business ag n ini tionrofit man tra elescuring ipons e s mea rat c c job u g e op fit o pr t e ow p c em ofi en t l ro in t fi oction r p le cr in sing u rv in se et s er rk s ng s m a ki tic y e sto s m or ac it g cu as m sin w ing t ualrainin t m king bu ea pric q s in ee es oy pl e acn g in g pr ts s e ea asinudg r c e b em or e pl c pl te tio lec se sh a distwork uni ribu forc usinque setilon chae role g b ling ponnels s e ud ints c recr e gets ent n acg budcruitm sh sig ent l p sin re a de rm g in in tra kf or o em t Peivatingtmen ot m rui ogy rec hnol w gn sh si ca b de o j um itm gets an adv ana e rec erse n i n g r u e t v F m m itm ar ent t rec arke ent p iance n e roc wor ruitmentting m ess s m e cus kfo p g i r x o prod tomerrce ro cess ana ser les mar uct m k l et c ife c vice mea s ond ycl n uni suring e que i o t p i i o e mar sellin rforma ns at r keti g poi nce e ng m nts p p ix O r o pric s fi ing stra t nes teg ies e plac v i dis it e t t job ributo e des rs p ign p d l a em istr m c pow ibu e o erm tors e C nt tion g ork theory n ing i t m e anc ix k e ar crossAcademe M t ofi pr y it al m a e te ic g qu ce t an rofi fin p impr ring p y measu on theor i t motiva t life cyaclyle sis wor n productcportfolio agement produ tions mana uppliers s h t operak ing wi petition com of degree g trainin rment e empow ion select g arketin niche m rking tech cisions arketing mass m ervice nology nal de ent operraatitioons managem ope pricin er s custom tics c a t pricing g return o tech titiveness compe g tactics pricin mark intepernraatilo o spreicleingc orga fit mass workfnoisr gets petition of com l degree n capita king with sup plie rs o team wrce roles workfo working team nology wor k uni force que ef sell fective ing n poi ess nts se t ma decisionsing profitow increoaving cash flrofit ope rati ons Bare Bones Revision Guide AQA AS Business Studies Unit 2 Managing a Business Phil Waterhouse presents this information simply and cash copyright patent setting budgets trademark strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure raising finance risks rewards budgets risk market research opportunity cost setting budgets plan analysis and evaluation; cash budgets includes invaluable exam tips to help maximise your performance; concludes with two integrated case Using budgets �����������������������������������������������������������������������2 Improving cash flow���������������������������������������������������������������3 Measuring and increasing profit���������������������������������������������4 6 Notes: People in business Improving organisational structures���������������������������������������6 Measuring the effectiveness of the workforce�����������������������8 Recruitment, selection and training���������������������������������������8 Motivating employees �����������������������������������������������������������9 11 Notes: Operations management to succeed in the AQA Unit 2 exam; illustrates the higher lever skills of business ideas lim an so ite d ur d co ad ce mpviserss an ies se flo ing maople w so tting fore rket ketsts br urce bud ca s st ea ca ke s of get trash floven fin s co nsfo w an ance ns fo pu ult rming re alys ca bli an c ts re st is ing fore bud res e ting bu leg ensinessarc mark fixed et en terp planh trep ri s cas al fin structugets t bu adsine renese pr dingss id ur coivate va eas cos m lim lu undts, reve pa ite e caserstandnues ni d es set h flowing and marprofi and entat total ion an ce re s segm variable sta trad rtu cost add emaps so gro op le trawth pric portu de cone, tota nit rs pat sul l rev y co rewardent tan enu st s ts ande and rk maing valu market e rke siz t e adv pro ise fit rs Starting a business entrepreneur traders s mar sole patent em ke ideast un pl t re rewards ss reca de oyin se ca rstand g pearch sh breakeven analysis copyright trademark risks rise terp en prene s sine fo bu flow idea sh ca ess sin bu ur gths stren analysis fits plan d pro s an ue en , rev sts es co ss ne ak d we is s an gth alys en an pan pani comcom nesses ited ed weak lim te limitand c bli pu em ce n astin ve ces ke forec our th sour w brea flo ing resow sh ca nsform t gr ke tra mar ies es priva str tre n lans eneakeveessg pmarkechts br in din ar an se ople bus rst t re de un ke ing peance marploys of finalysisg an risks rk ema cas fore ets risks trad tion ribu e coning valu ets add mark t sta stss crevoenrtuueps ding rstan unde h flow dg e casng bu ures ctess tti se l struakn et share we mark legaand hs ngt stre business ideas Starting a business Financial planning 1 About the exam 2 Notes: Finance provides the essential content you need effectively; Contents This Bare Bones Revision Guide: Making operational decisions ���������������������������������������������11 Quality ���������������������������������������������������������������������������������11 Customer service�����������������������������������������������������������������12 Working with suppliers���������������������������������������������������������13 Using technology in operations�������������������������������������������13 studies for exam practice. The superfluous bumpf that comes with other guides has been stripped away in order to leave you with the key to effective revision and exam success – clear, concise revision notes! Time constraints make it impossible for you to revisit all the material studied during your course. Instead, you need to consolidate your knowledge and understanding by focusing on the central terms and concepts provided here. Use these as the framework for recalling other content before going on to read the case 14 Notes: Marketing and the competitive environment studies on pages 18–21. You should are provided so that you can assess the Effective marketing �������������������������������������������������������������14 Designing an effective marketing mix ���������������������������������14 Using the marketing mix: product, promotion, price and place�����������������������������������������������������������������������������15 Marketing and competitiveness�������������������������������������������17 Case study 1: T & M Sherborn���������������������������������������������18 Case study 2: Best Burger Company �����������������������������������20 © Cross Academe Ltd 2013 All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without either a licence from Cross Academe or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Limited, Saffron House, 6–10 Kirby Street, London EC1N 8TS. timed conditions. The A-grade responses quality of your own answers, identifying any weaknesses. You can then review these topic areas. The structure of the revision notes follows 18 Exam practice tackle the accompanying questions under the order of the AQA specification. The A-Grade Analysis/Evaluation Examples are designed to help you ISBN 978-1-909592-16-2 develop these higher level skills, and the Design by: Oxford Designers & Illustrators Number Crunching feature is designed Published by: Cross Academe Limited St John’s House 5 South Parade Oxford OX2 7JL The Heathland School to check your calculation skills. The case studies will test not only these skills but also the skill of application. cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h al fin str bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers ni er an ucture ce s fixed et variabsegm le and enta total tion sta co so gro op le tr wth pric portuad tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning About the exam The Unit 2 exam builds on the content covered in Unit 1. The It is important that you are familiar with the different trigger exam is 90 minutes long and the maximum number of marks is words used by examiners and that you then demonstrate the 80. This is then converted into a UMS total of 120, while Unit 1 skills they are looking for. is worth only 80 uniform marks. This therefore means that this exam is worth 60% of your overall AS mark. Analytical questions will start with trigger words such as ‘Examine’, ‘Consider’, ‘Explain’ or just simply ‘Analyse’. With The exam is split into two sections – each on a different these questions you are not required to make a judgement, type of business. One of these will normally be a nationally but you are expected to construct a chain of argument. recognised firm while the other is likely to be a new business start-up. The Unit 2 exam is different from the Unit 1 exam EXAM TIP in that there are no longer many low-tariff questions. Each Analysis is achieved by building a chain. Useful words or section of the exam is worth 40 marks and after a brief connectives to do this are ‘and so…’, ‘which will mean…’, company case study, you will be expected to answer 4–5 ‘which may then lead to…’, ‘resulting in this…’, ‘which may then questions on that business. Questions (a) and (b) will be affect this…’. Try to make sure that you are always explaining analytical while questions (c) and (d) will be evaluative. ‘why’. You do not want the examiner to think ‘and then what’? Exam skills Evaluative questions will start with trigger words such as ‘Discuss’, Success in any exam is about playing to the rules set out by the examiners. The four key skills that they will be looking for are as follows: ‘To what extent’, ‘Justify’. With these questions you must make a judgement. This needs to be based on the arguments you have put forward and, most importantly, must be justified. A good approach is to think of using the three-paragraph or Knowledge and understanding: Have you learnt and add-on rule: (1) paragraph builds an analytical argument in understood the key terms? agreement; (2) paragraph builds an analytical argument against; Application: Have you thought about the business and used the data? (3) final paragraph makes a decision based on the question. EXAM TIP Analysis: Have you managed to build up a good chain of Reread the question at least three times while you are answering reasoning/argument? it. Keep checking that you are still answering exactly the Evaluation: Have you made a judgement and backed it up? question set and try to link as many of the different functional areas as possible. The mark schemes are now based around the following categorisation in relation to the four skills above: Exam practice Is the answer… good? reasonable? limited? In addition to tackling the integrated case studies provided You need to make sure that your answers are clearly applied to the business presented in the exam, that you develop a line of argument and that you then come to a conclusion. on pages 18–21, you should gain exam practice by working through past papers. These are readily available on the AQA exam website (www.aqa.org.uk) along with the associated mark schemes. Try and tackle these under the same time constraints that you will have in the exam itself. You have EXAM TIP To help with your application to the business, ask yourself these 1 hour and 30 minutes to complete the exam, so practise! three questions: Which companies are the main competitors in Throughout this guide look out for the A-Grade Analysis/ the industry? What is unique about the company? What are the Evaluation Examples in order to see how to turn your major strengths and weaknesses of the business? responses into A-grade answers. The Heathland School 1 cash copyright trademark patent setting budgets strengths and weaknesses business ideas budgets risk contribution partnerships cost cash flow opportunity cost raising finance setting budgets risks rewards budgets plan cash budgets co visces mpa er s market research res bu e se flo ing m ple w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad leg g buforecrkets ensinessarc nies en terp pla h tre ri ns p mark fixed et variabsegm le and enta total tion al as fin strucdgets t an ture ce s sta ad pro vis fit ers bu adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss tra rtu cost dem ps ark add so gro op le tr wth pric portuad co e, tot ni er s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e Bare Bones Revision Guide forecasting legal structure risk Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh eo h breakeven analysis copyright trademark risks analysis plan te en pdrene tre en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co sts creovearnutuesps ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu ark dem ec for ets is s an th alys s ng stre n an n ve pla ts ke ss marke ea br ine ing arch s nd le op budersta t rese un ke ing peanceis marploys of finalysng em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar st risks tion tra ribu e coning valu kets add marast w ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Notes Finance Using budgets Example: A clothes shop budgeted for sales of £20,000 per Definition: A budget is a financial plan that sets targets based for total expenditure of £10,000 per month and its actual month and actually achieved £25,000 per month. It budgeted on projected costs and revenues that the business will face. expenditure was £8000 per month. An adverse variance arises when results are worse than Types of budget budgeted. This can happen in two ways: Income budget: This shows the agreed, planned-for income Actual revenues are lower than the budgeted figures or sales revenue of the business (or a part of the business) Actual costs are greater than the budgeted figures over a set period of time. Example: A local garage budgeted for sales of £6000 per Expenditure budget: This shows the agreed, planned-for month but only achieved £5000 per month. It budgeted costs or expenditure of the business (or a part of the business) for total expenditure of £3000 per month but its actual over a set period of time. expenditure was £3500 per month. Profit budget: This combines both the income and NUMBER CRUNCHING expenditure budgets for the business and forecasts how much profit the business (or a part of the business) will make over a set period of time. All figures (000s) Benefits of using budgets Can measure performance Can prove motivational Make departments accountable Give the business greater control and can be used to monitor progress Jan Jan Jan Feb Feb Feb Budget Actual Var. Budget Actual Var. 150 10 180 175 (10) 90 95 40 40 Sales revenue 140 Materials 70 Other direct costs 30 35 Overheads 20 20 Profit 20 15 0 25 0 22 18 Fill in the table above and state whether the overall profit for Drawbacks of using budgets the two months of January and February shows a favourable New business start-ups lack experience in setting realistic budgets or adverse variance. A-GRADE ANALYSIS EXAMPLE Costs are volatile and can change quickly Opportunities might be missed if budgets are applied too Variance analysis is useful as it can help identify whether the business is under- or over-budget in terms of sales and costs. strictly If a budget is inaccurate, it can prove extremely It will need to review its budgets regularly so that it has a clear idea about the progress it is making. This will allow the business demotivating for staff to adapt and adjust its budgets as required. Setting budgets at the right level is an important skill and it is highly unlikely Variance analysis A favourable variance arises when results are better than budgeted. This can happen in two ways: 2 that a new business start-up’s budgets will be completely accurate. Variance analysis will help identify problem areas and could prompt a search for alternative suppliers if costs are too Actual revenues are greater than the budgeted figures high or may lead to a reduction in expenditure in other areas. Actual costs are lower than the budgeted figures It will also enable the business to look at its sales projections The Heathland School cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h al fin str bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers adjustment to the expenditure budget. ni er on marketing. However, such an increase would require an an ucture ce s action to try and increase sales, possibly by spending more fixed et variabsegm le and enta total tion further product development; a negative variance may prompt sta co so gro op le tr wth pric portuad against actual figures. A positive variance may encourage tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Sale and leaseback Advantages May bring in an immediate amount of cash Reduces the need for maintenance costs Disadvantages Improving cash flow Will be more expensive in the long run Harder to secure more finance as fewer assets are left to This topic was covered in Unit 1. Cash flow is a short-run issue for a firm and measures the cash coming into the business and the cash going out of the business over a given use as security Managing debtors by using factoring Advantages time period. Immediate boost of cash Causes of cash flow problems Saves time in chasing up monies owed The main causes of cash flow problems are: Disadvantages Seasonal demand Over-estimation of sales or under-estimation of costs Over-investment in fixed assets – firms may invest in assets such as buildings and machinery, but not leave themselves sufficient money for day-to-day payments Credit sales – the marketing department will want to give A firm will typically receive only 90% of the debts recovered Customers may resent being chased by the factoring company Alternative solutions credit to customers to attract them to the company, but this Change or review suppliers can lead to a shortage of cash Take out less cash from the business (pay lower wages) Poor stock management Control stock more carefully Unforeseen change Diversify the range of products in order to reduce seasonality factors Possible solutions to cash flow problems events Bank overdraft EXAM TIP Advantages Even though this topic does appear frequently in the Unit 1 Easy to organise Only pay interest when the overdraft is being used Flexible exam, it is just as likely to be examined in Unit 2. However, the challenge in Unit 2 is to interpret the given cash flow forecast and suggest ways in which the business has managed its cash Disadvantages flow badly and ways in which it can be improved. It is crucial Interest rates are flexible, making it hard to budget to mention that cash flow is about timing and that it must be distinguished from profit. Make sure that you do not confuse accurately Interest rates will be higher than on a bank loan Will be more expensive in the long run Set aside a contingency fund to cater for unpredictable the two terms. A-GRADE ANALYSIS EXAMPLE Sale of assets If cash flow problems arise, a business is likely to need access Advantages to more funds quickly. One way of doing this is to arrange Can raise large sums (e.g. sell a building) Might not need the asset Disadvantages (or increase) an overdraft facility with the bank. This may be relatively easy to arrange and set up, allowing the firm greater flexibility. It will only have to pay interest on the overdraft while it is being used. This means that the short-term cash flow problem Hard to sell quickly can be managed effectively. An alternative method is to use a Reduces capacity debt factoring company. This can benefit the business because The Heathland School 3 cash copyright trademark patent setting budgets strengths and weaknesses business ideas budgets risk contribution partnerships cost cash flow opportunity cost raising finance setting budgets risks rewards budgets plan cash budgets co visces mpa er s market research res bu e se flo ing m ple w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad leg g buforecrkets ensinessarc nies en terp pla h tre ri ns p mark fixed et variabsegm le and enta total tion al as fin strucdgets t an ture ce s sta ad pro vis fit ers bu adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss tra rtu cost dem ps ark add so gro op le tr wth pric portuad co e, tot ni er s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e Bare Bones Revision Guide forecasting legal structure risk Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh eo h breakeven analysis copyright trademark risks analysis plan te en pdrene tre en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co sts creovearnutuesps ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu ark dem ec for ets is s an th alys s ng stre n an n ve pla ts ke ss marke ea br ine ing arch s nd le op budersta t rese un ke ing peanceis marploys of finalysng em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar st risks tion tra ribu e coning valu kets add marast w ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning the factoring company will typically pay the firm 90% of the money owed straightaway. This will substantially improve its cash position. Obviously the firm will not then receive all of the funds owed, but the inflow of finance may be more important and possibly critical. EXAM TIP Technically the specification only asks for net profit and ROCE margins. However, in order to understand what the ratios mean and to help you make more informed judgements, you should be aware of gross profit as well. This will not only help you in the A2 units but also enable you to understand how firms can A-GRADE EVALUATION EXAMPLE Many firms have to find solutions to cash flow problems. One of the key factors is how much cash is required and how improve their overall profitability – a highly probable question in the Unit 2 exam. quickly it needs to be raised. When trying to raise substantial Net profit margin sums of finance, selling assets or sale and leaseback are likely Net profit is simply the sales revenue minus the direct to prove the most effective solutions. However, this can take (variable) cost and the indirect (fixed) cost of production. This time and so it may not be the best option if cash is needed is known as the bottom line because it shows how much profit quickly. If smaller sums are required immediately, the firm is made after all costs have been accounted for. It is normally might be better off trying to arrange an overdraft or looking to expressed as a percentage. debt factoring. Of course, each solution has its drawbacks and an opportunity cost. It would therefore be better in the long term for firms to try and avoid running into cash flow problems. For some firms, seasonal factors will constantly present cash flow issues. However, by controlling stock more closely, or by looking to diversify the product range so that they are less reliant on seasonal peaks, these firms could avoid getting into difficulty. It would also be advisable in my view for these firms to set aside funds in the periods when trading is good so that Net profit margin (%) = Net profit Revenue × 100 Example: Games Workshop has a sales revenue of £15,000 per week. The direct costs involved in production are £1500. However, there are fixed costs such as rent, rates and salaries to pay, which amount to £8500 per week. The weekly net profit is therefore £15,000 − £1500 − £8500 = £5000. The margin is £5000/£15,000 × 100 = 33.3%. they can be drawn upon during the periods when sales are ROCE – return on capital employed likely to be low. This is the net profit expressed as a percentage of the capital employed in the business. It is also known as the primary Measuring and increasing profit efficiency ratio because it looks at how much money is earned Profit = Total revenue − Total costs each team member might put in £20 capital at the start. If the by the capital invested in the business. A Young Enterprise team of 10 people will start off with relative low levels of capital invested in the business (typically around £200), as team makes £800 net profit over the year, the ROCE is 400%. Total revenue = Price × Quantity of units sold Costs are made up of fixed (indirect) costs and variable (direct) EXAM TIP You will not be expected to have a detailed understanding costs. of capital employed at this stage of your course. Just ensure Profitability ratios that you know the formula so that you can make the ROCE calculation and interpret its significance. Gross profit margin The gross profit made on a unit sold is simply the selling price ROCE (%) = (revenue) minus the direct (variable) cost of production of that 4 Gross profit Revenue Capital employed × 100 If Games Workshop as a group made £45 million net profit unit. It is normally expressed as a percentage. Gross profit margin (%) = Net profit with £200 million of capital employed in the business, then the × 100 ROCE = £45 million/£200 million × 100 = 22.5%. Example: Games Workshop sells figures for £5.00 and the The ROCE will be compared between different companies direct cost of each figure is 50p. The gross profit on each and is also measured against the interest rate at the bank. A figure is therefore £4.50. The margin is £4.50/£5.00 × 100 = business is more risky but is likely to provide greater returns 90%. than the bank. The Heathland School cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h al fin str bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers ni er an ucture ce s fixed et variabsegm le and enta total tion sta co so gro op le tr wth pric portuad tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning be to keep the same location and negotiate lower costs with EXAM TIP Your understanding of capital employed may be enhanced if you think of the Dragons’ Den or more simply a Young Enterprise team. The Dragons often decide not to invest because they do not think they can get a return on their investment. They might be asked to invest £100,000 but would expect the firm to generate sufficient profits to justify the risk of the investment. The Dragons will typically want a ROCE of at least 20%. The opportunity cost of investing is the value of the next best alternative. As Theo Paphitis famously states: ‘You are asking me to invest my children’s inheritance’. existing suppliers or new suppliers. If White Stuff were to switch suppliers, this might reduce the quality of the clothing and this might be picked up by the customers and could affect brand loyalty. It could also take a while to build up a good relationship with the new supplier, which might not be able to deliver the required quantity or offer the same credit terms as the existing supplier. However, the opportunity to supply such a major retailer might mean the supplier is able to offer both a better service and a lower price, which would improve White Stuff’s profitability. Distinction between cash and profit Methods to increase profitability Cash is generated by selling items of stock. However, not all Reduce variable costs by switching suppliers of this cash will be converted into profit as the firm will need to Example: A bottle of Coke sells for £1.20 with a direct cost meet the direct costs of selling the items as well as the indirect of 40p. If a change in bottle supplier reduces that cost to costs such as rent, rates and salaries. 30p, the profit margin will increase from 80p a bottle to 90p a bottle. Cash flow is about the short-term cash coming into and out of the business. Profits are more long term. A building firm might be highly profitable over the course of a year but still have Reduce fixed costs by reducing expenses Example: Crew Clothing pays £4000 a month in rent for its offices. If the company moves premises and manages to reduce its rent to only £3000 a month, this will increase its profitability by £1000. cash flow issues during certain periods because it has to pay wages and purchase materials before houses are sold. EXAM TIP Students frequently fall into the trap of confusing cash flow and Alter price, depending on the price elasticity of demand, while costs remain constant profit. They can also be lazy and make sweeping statements such as that ‘lower prices will increase sales, which will in turn Example: Greggs increases its selling price for a pasty from £1.00 to £1.10 but the cost of a pasty remains at 50p. This will increase the profit margin from 50p to 60p. increase profits’. This statement ignores other factors at play such as elasticity, related costs and overall long-term profits. Ensure that when you are talking about cash flow you are not talking about profit, and vice versa. Impress the examiner by EXAM TIP making this distinction early on. The examples above are, of course, simplistic. In practice, it will be harder to achieve an increase in profitability and you need A-GRADE EVALUATION EXAMPLE to be aware of the implications of raising price or switching Cash flow issues tend to be short term whereas profit is more supplier. These options offer great opportunities for both of a long-run factor. Cash flow problems are commonplace analysis and evaluation. Choosing one method is likely to have for many firms and there are various causes and potential a significant impact on other areas of the business. If you can solutions. I therefore believe that low levels of profitability in explain this, then you are likely to pick up high marks. the long run generally pose a greater threat to a firm’s success. This low profitability may mean the business is simply not A-GRADE ANALYSIS EXAMPLE viable. Alternatively, the business might not be doing enough By relocating to a cheaper area, the White Stuff store will to increase profitability. Its prices might be too low or its costs substantially lower its monthly overheads. However, a move too high. The business will need to address this. If profits are from its prime location might reduce the number of customers low in the long term, they will not provide a fair reward for the attracted to the store. This will affect sales revenue and so entrepreneur or allow the business to grow. While cash flow the drop in revenue may outweigh the reduction in cost. The issues will often cause considerable stress in the short term, business therefore needs to consider the likely effects of they tend to be temporary. If the low profits persist, then the moving the store to a lower-rent area. An alternative would business may be forced to cease trading. The Heathland School 5 cash copyright trademark patent setting budgets strengths and weaknesses business ideas budgets risk contribution partnerships cost cash flow opportunity cost raising finance setting budgets risks rewards budgets plan cash budgets co visces mpa er s market research res bu e se flo ing m ple w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad leg g buforecrkets ensinessarc nies en terp pla h tre ri ns p mark fixed et variabsegm le and enta total tion al as fin strucdgets t an ture ce s sta ad pro vis fit ers bu adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss tra rtu cost dem ps ark add so gro op le tr wth pric portuad co e, tot ni er s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e Bare Bones Revision Guide forecasting legal structure risk Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh eo h breakeven analysis copyright trademark risks analysis plan te en pdrene tre en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co sts creovearnutuesps ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu ark dem ec for ets is s an th alys s ng stre n an n ve pla ts ke ss marke ea br ine ing arch s nd le op budersta t rese un ke ing peanceis marploys of finalysng em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar st risks tion tra ribu e coning valu kets add marast w ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Notes People in business Improving organisational structures Most jobs are grouped together and organised into the four main functional areas of Marketing, Production, Finance and HR. (The specification is also split in this way.) This is the number of people for whom a manager is directly responsible. A narrow span of control means that the manager takes responsibility for only a few people. A wide span of control means that the manager takes responsibility for more people. A wide span of control tends to lead to a flatter organisational structure. A narrow span of control tends to Levels of hierarchy lead to a taller structure. The hierarchy determines the order of how people EXAM TIP communicate throughout the organisation. The higher up The amount of work an individual has to carry out should be the hierarchy, the more senior is the person. Normally in considered within any organisation. It is important that workers the hierarchy, communication flows down throughout the have enough to do but equally important that they are not organisation. However, there has been a shift towards overloaded. Too much work can lead to dissatisfaction and encouraging communication to flow upwards from the bottom demotivation. Similar problems may arise if an individual has to the top. insufficient work. Examiners frequently seek to assess students’ understanding of the benefits and drawbacks of having tall Tall structures versus flat structures. Advantages Narrow span of control Greater specialisation Less opportunity for delegation Greater opportunities for promotion Supervision and control is greater Clearly defined roles Many levels of hierarchy (tall) Narrow span of control Greater opportunities for promotion Wide span of control Disadvantages Communication problems might occur Greater delegation opportunities Slow decision making Supervision and control is looser Expensive to run as too many middle managers Few levels of hierarchy (flat) Workers may feel ‘over managed’ Fewer opportunities for promotion Flat structures Advantages Centralised All decisions are made by senior managers at Headquarters Quicker decision making Greater control Better communication Greater consistency Cheaper as fewer levels of hierarchy Allows for specialisation Disadvantages 6 Span of control Decentralised Fewer opportunities for promotion Decisions are delegated to individual departments Fewer opportunities for specialisation Increased motivation Wider span of control Managers develop skills of leadership Managers can become overwhelmed Quicker decision making The Heathland School cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h al fin str bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers ni er an ucture ce s fixed et variabsegm le and enta total tion sta co so gro op le tr wth pric portuad tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Delegation EXAM TIP Understanding the difference between these two types of This is when the responsibility for a project is passed down organisation – centralised and decentralised – is crucial. This to a more junior colleague. It is important that the managers distinction is frequently examined and the topic will reappear trust the workers below them and also support them in the in Unit 3. way they carry out their roles. Smart delegation is a key role of managers, helping to motivate the people below them within A-GRADE ANALYSIS EXAMPLE the organisation and also allowing those individuals to gain A centralised structure will bring many benefits to a firm. The key experience that will benefit them in the long run. decisions can be made by one group of people and then communicated throughout the whole organisation. The direction can be set and then implemented. This will lead to a common purpose and will mean individuals know their respective roles. The success of the firm will be very dependent on the decision makers at the centre of the organisation. However, such centralisation can stifle creativity and employees may feel disempowered. Staff may feel demotivated, especially if the decisions taken show no understanding of the needs of individual departments. Communication flows Communication is a vital part of any successful business. It is important that communication is effective and two-way. Firms must make sure that all key information is communicated effectively within a firm. Workers must know what is required of them and also the objectives and goals of the business. Vertical communication Communication that passes from manager to subordinates Decentralising the business can lead to faster decision making and the ability to base decisions on local conditions. It will also empower managers and help them develop their leadership skills. This is likely to lead to greater productivity, since individuals will be more motivated as they have a greater say in the way the business is run. and vice versa Horizontal communication Communication between workers at the same level within an organisation A-GRADE EVALUATION EXAMPLE The nature of the business is vital in determining its organisa Workforce roles tional structure. Creative firms such as marketing agencies will You need to be aware of the following different job roles within tend to have a more laissez-faire approach and a flatter structure an organisation: – this will lead to better communication and more ideas coming Managing directors – responsible for the vision and overall leadership of the firm through. Organisations such as schools will tend to have a taller structure with clearly defined roles. This will help delineate Managers – responsible for a particular functional area or department of the business responsibilities and create order. Organising by hierarchy also allows individuals the opportunity for promotion, which will link Team leaders – coordinate the work of a particular part of a functional area into motivation as well as assist communication. However, it is not just the nature of the business (and associated skills) Supervisors – oversee the work of operatives in large organisations that is important: businesses of different sizes need different organisational structures to make them successful. Operatives – responsible for specific tasks and producing the products EXAM TIP The People section of the specification is very content heavy. EXAM TIP However, it is crucial that you see how it all links together. You Students frequently show little understanding of how the work need to link the organisational structures chosen by a business place is organised in reality. They assume that the managing to the size of the firm, to motivation theories, to communication directors of an organisation are closely involved with its day-to- and to delegation. ‘Good’ analysis is all about building a chain day running and overlook the fact that this is actually delegated of argument, such as: ‘The empowerment of local managers will to people lower down. Those of you with part-time jobs will lead to increased levels of motivation and improved customer have practical experience of the levels of hierarchy within an service, resulting in a better reputation for the business’. It is organisation. In a school/college, the Principal will have relatively also dependent on showing a clear grasp of the key terms and little contact with the operatives on a day-to-day basis. it is wise to make use of these terms throughout your response. The Heathland School 7 cash copyright trademark patent setting budgets strengths and weaknesses business ideas budgets risk contribution partnerships cost cash flow opportunity cost raising finance setting budgets risks rewards budgets plan cash budgets co visces mpa er s market research res bu e se flo ing m ple w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad leg g buforecrkets ensinessarc nies en terp pla h tre ri ns p mark fixed et variabsegm le and enta total tion al as fin strucdgets t an ture ce s sta ad pro vis fit ers bu adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss tra rtu cost dem ps ark add so gro op le tr wth pric portuad co e, tot ni er s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e Bare Bones Revision Guide forecasting legal structure risk Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh eo h breakeven analysis copyright trademark risks analysis plan te en pdrene tre en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co sts creovearnutuesps ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu ark dem ec for ets is s an th alys s ng stre n an n ve pla ts ke ss marke ea br ine ing arch s nd le op budersta t rese un ke ing peanceis marploys of finalysng em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar st risks tion tra ribu e coning valu kets add marast w ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Measuring the effectiveness of the workforce Advantages Cheaper to advertise Labour productivity Applicant knows the organisation and vice versa This is the amount of output produced by each individual worker. It is calculated as follows: Labour productivity = Internal recruitment Offers promotion prospects and motivational opportunities Disadvantages Total output Fewer new ideas Number of workers Limited pool of applicants Example: A business produces 5000 units a week. It has 100 May create vacancies elsewhere workers. The labour productivity is therefore 5000/100 = 500 units per worker per week. However, this is just an average. External recruitment Labour turnover Advantages Brings in new ideas This is the ratio of the number of workers leaving an organisation within a given time period (usually a year) to the number of employees on the payroll. It is calculated as follows: Labour turnover (%) = Number of workers leaving Total number of workers × 100 Example: A Waitrose store has 100 members of staff. Last year, 10 workers left and 10 new appointments were made. The labour turnover is therefore 10/100 = 10%. Wider pool of applicants Disadvantages More expensive Will take longer to recruit Candidate will require induction training EXAM TIP The relative advantages/disadvantages of internal and external recruitment can be explained relatively easily, since the A-GRADE ANALYSIS EXAMPLE A change in staff can be good as it brings in fresh ideas and new initiatives. However, losing too many staff members can cause problems because you lose their expertise and the invaluable experience they have gained from working in the business. High labour turnover also leads to increased recruitment and training costs because new members of staff have to be hired. A low labour turnover reduces this expense and means the firm has a stable workforce that knows what is expected. advantages of one will be the disadvantages of the other. This area is frequently examined. When a job is advertised, the business has to produce two very important documents: the job description and the person specification. Job description The job description is just that – it describes exactly what the Recruitment, selection and training The recruitment process 1 A vacancy occurs 2 A job analysis is produced 8 job entails and this information is given to the applicant. It will contain the following information: Hours to be worked Overview of the job What tasks are expected to be carried out Wages/salary 3 A job description is produced Person specification 4 A person specification is produced This document is for internal use and is not seen by the 5 Application forms are issued applicant. It outlines the particular skills, qualities and 6 Candidates are short-listed experience required for the position. The firm will have a 7 Candidates are interviewed particular idea about what it wants and will be looking for the 8 A successful candidate is appointed person to have those skills listed on the specification. The Heathland School cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h al fin str bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers ni er an ucture ce s fixed et variabsegm le and enta total tion sta co so gro op le tr wth pric portuad Methods of selection tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Induction training Interview: one to one and/or panel The purpose of induction training (which may last a few hours Assessment centres or a few days) is to help a new employee settle down quickly Psychometric testing – matching the individual to the by becoming familiar with the people, the surroundings, the person specification job and the business. Presentations A-GRADE ANALYSIS EXAMPLE Work samples Peer assessment On-the-job training means that the workers are actually productive because they are working. They get paid by the firm A-GRADE EVALUATION and will learn specific skills from experienced people within the While the interview is still the main job selection method, the company. This means that the firm is getting better value for use of alternatives is increasing and this has clear benefits to money and the workers will have a greater understanding of the both the firm and the individual. This is because the interview business. However, off-the-job training has benefits because process can be quite a daunting and an unnatural environment. the workers will go off site and gain formal qualifications from People might have an excellent interview technique but not an outside agency. The level of training is normally better and be suitable for the job itself. In my view the ability to perform wider ranging than that provided on the job. This will also effectively in the job role is more important than being able to benefit the business, since the individuals concerned are likely present yourself in an interview. This is why assessment centres to meet other people on the course and may bring back new and work samples are more effective forms of selection. Certain ideas. They are also likely to be more motivated, recognising jobs, such as catering, should be based more on ability in the that the company is paying for this greater level of training and kitchen than on how a candidate comes across in the interview. that this will boost their longer-term employability. Similarly the recruitment of a teacher should be based more on ability in the classroom. A wider method of selection is likely to be more costly and time consuming, but if it secures the best candidate for the role then I feel that in the long run this is a Motivating employees worthwhile expense. Motivational theorists On-the-job training There are many theories of motivation: Maslow: hierarchy of needs Advantages Herzberg: hygiene factors vs motivators Cheaper Taylor: scientific management – workers motivated by pay Practical and relevant skills learnt Mayo: working in teams, consulting workers and involving Being paid and productive while training them Vroom: expectations – making sure that workers are set Disadvantages realistic expectations Might pick up bad habits Not always the best learning environment EXAM TIP Do not get too hung up on the different theories. You will not be Off-the-job training expected to show a detailed understanding of the theories and when they were written. Much more important is your grasp of Advantages how they can be linked to motivation in practice. Will receive a formal qualification Learn a wider range of skills Opportunities to meet staff from other organisations and learn from them Disadvantages Motivation in practice (financial) Piece rate – paid by number of units produced Commission – paid by number of units sold Fringe benefits Expensive Profit sharing Not productive while training Bonuses The Heathland School 9 cash copyright trademark patent setting budgets strengths and weaknesses business ideas budgets risk contribution partnerships cost cash flow opportunity cost raising finance setting budgets risks rewards budgets plan cash budgets co visces mpa er s market research res bu e se flo ing m ple w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad leg g buforecrkets ensinessarc nies en terp pla h tre ri ns p mark fixed et variabsegm le and enta total tion al as fin strucdgets t an ture ce s sta ad pro vis fit ers bu adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss tra rtu cost dem ps ark add so gro op le tr wth pric portuad co e, tot ni er s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e Bare Bones Revision Guide forecasting legal structure risk Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh eo h breakeven analysis copyright trademark risks analysis plan te en pdrene tre en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co sts creovearnutuesps ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu ark dem ec for ets is s an th alys s ng stre n an n ve pla ts ke ss marke ea br ine ing arch s nd le op budersta t rese un ke ing peanceis marploys of finalysng em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar st risks tion tra ribu e coning valu kets add marast w ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Motivation in practice (non-financial) Job enrichment: making the job role more enjoyable and Improving job design This can be achieved through either job enrichment or job enlargement. more varied Job enlargement: making the job role larger and giving the individual more responsibility Job rotation: making sure that workers do not perform the same job role each and every day Job enrichment Greater responsibility is given to employees, enabling them to use their skills more extensively and to feel challenged. Advantages Why motivation is important Develops workers’ skills and challenges them Low motivation can lead to: Improves their promotion prospects High levels of absenteeism Enables them to contribute more to the decision-making High levels of labour turnover process Higher costs for the organisation as a result of the above factors Increases their motivation Disadvantages Poor image Some workers may not welcome the additional Lower productivity responsibility Loss of competitive advantage Enrichment may not be appropriate for some jobs A-GRADE ANALYSIS EXAMPLE Could be used as a means of reducing employee numbers A well-motivated workforce has significant benefits for a firm. If workers are happy in their work and enjoy their job, they are less likely to leave, which will reduce labour turnover and the need to recruit and train new workers. This means a substantial cost (delayering) Job enlargement The scope of a job is expanded through job enrichment or job saving for the firm. In addition, if workers are motivated and rotation. enjoy what they are doing, they are likely to become increasingly Advantages efficient and skilled in their particular roles. This should result in an improvement in the quality of the product/service being produced and an increased reputation for the firm. May reduce the boredom of work Provides a greater sense of participation Easier to cover for absent colleagues Increases motivation A-GRADE EVALUATION EXAMPLE While Taylor would argue that workers are simply motivated Disadvantages by money, Herzberg would suggest that this can be seen as a May result in excessive workloads and therefore demotivate hygiene factor. People will expect to earn a fair wage and if they Retraining costs will rise feel that they are being underpaid, this can lead to demotivation. Less specialisation may reduce output It is true that the majority of workers are motivated by earning higher wages. However, I feel that there is more to working than Teamworking just money. More varied and challenging work keeps workers This can increase motivation through shared responsibility and motivated and enables them to develop a wider range of skills. a degree of decision making. This results in a more flexible workforce. Firms should consider a range of measures to motivate their workforces, since happy and contented workers enable businesses to thrive. Empowerment This can be achieved through formal or informal structures and involves giving workers more autonomy, which increases Various methods have been used to improve morale and their motivation while at the same time improving flexibility and motivation based on the many theories of motivation. These quality. include: 10 Improving job design Financial incentivisation Teamworking There are various ways in which employees can be Empowerment incentivised financially, from the use of bonus payments to Financial incentivisation share-ownership schemes. The Heathland School cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h al fin str bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers ni er an ucture ce s fixed et variabsegm le and enta total tion sta co so gro op le tr wth pric portuad tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Notes Operations management Making operational decisions Over-investment in fixed assets Operational targets A fall in the demand for the product Lowering unit costs Mergers – duplication of resources Impacts of under-utilisation Improving quality Higher unit costs Increasing capacity utilisation and efficiency Unit costs are the individual costs of producing a single item of a particular product. Larger firms will normally have lower unit costs as they can benefit from economies of scale. Lower profits Employee boredom Lower motivation Being able to meet a sudden increase in demand Large supermarkets will sell beer at a lower unit price than a A negative image and a loss of reputation smaller local shop. This is because they will buy in bulk and Matching production to meet demand benefit from cost savings. Use of overtime Economies of scale (FIT MATE) Hiring temporary and part-time staff FI-nancial: Raising finance is easier Rationalisation T-rading: Bulk buying Subcontracting MA-nagerial: Expert managers Managing stock control through JIT TE-chnological: Use of technology to lower unit costs A-GRADE EVALUATION EXAMPLE It is essential for a firm to be flexible in terms of its operations. If Capacity utilisation This can be calculated by working out the actual output divided by the maximum output. Capacity utilisation (%) = it operates at full capacity, this will reduce its ability to meet new orders and take on extra business. By operating at about 80% capacity utilisation it will have the flexibility to take on extra Actual output per annum Maximum output per annum × 100 Example: If there are 100 classrooms in a school and at any point in time 90 of these are in use, the capacity utilisation is 90%. orders and hire staff when demand increases. Its use of parttime and temporary workers will mean that it can accurately meet the needs of customers and avoid paying for full-time staff when they are not actually needed. When a firm is close to maximum capacity, it faces a decision. It can either look to expand its operations, which is costly (both in terms of time and A business will want to work at around 80% capacity on finance) or look to subcontract part of its production to outside average. This level of utilisation provides some spare capacity agencies. This should only be done as a short-term measure, to take on extra orders and is also less stressful for staff. If a however, as in my view it will mean that it has less control over firm operates at full capacity for the majority of the year, it will the business. need to consider expanding and looking for larger premises. This has a cost in terms of time and capital. Causes of under-utilisation Quality Seasonal demand Definition: The totality of features and characteristics of a New competitors product or service that satisfies (or delights) customers. The Heathland School 11 cash copyright trademark patent setting budgets strengths and weaknesses business ideas budgets risk contribution partnerships cost cash flow opportunity cost raising finance setting budgets risks rewards budgets plan cash budgets co visces mpa er s market research res bu e se flo ing m ple w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad leg g buforecrkets ensinessarc nies en terp pla h tre ri ns p mark fixed et variabsegm le and enta total tion al as fin strucdgets t an ture ce s sta ad pro vis fit ers bu adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss tra rtu cost dem ps ark add so gro op le tr wth pric portuad co e, tot ni er s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e Bare Bones Revision Guide forecasting legal structure risk Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh eo h breakeven analysis copyright trademark risks analysis plan te en pdrene tre en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co sts creovearnutuesps ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu ark dem ec for ets is s an th alys s ng stre n an n ve pla ts ke ss marke ea br ine ing arch s nd le op budersta t rese un ke ing peanceis marploys of finalysng em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar st risks tion tra ribu e coning valu kets add marast w ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning The perception of ‘quality’ is subjective. However, certain products are genuinely ‘quality’ products and the price of these goods often reflects this. A-GRADE ANALYSIS EXAMPLE Ensuring quality throughout the business can lead to benefits in terms of both production and marketing. Car companies such as Toyota, Subaru and Skoda have concentrated on producing Assessment of quality quality cars. Their reputation for quality gives them a USP that Appearance they can then use in their marketing, allowing them to enhance Reliability their reputations further. A reliable and high-quality production Image and brand process will reduce the number of defective products and save After-sales service them money in the long run. It can also enable the businesses Personal preference to charge higher prices for their products because customers are prepared to pay a premium for quality. Measuring quality Consequences of introducing quality systems Customer satisfaction surveys Customer complaints Wastage rate Costs Mystery shoppers ISO 9001 – a national/international quality standard Quality control and quality assurance Training Disruption to production A-GRADE EVALUATION EXAMPLE Quality control involves checking the overall quality of the In today’s increasingly global market place, I believe it is very product either at certain stages of the process or, more important to concentrate on quality. The fact that customers commonly, at the end of the process. will normally pay a higher price for what they feel is a higher- Quality assurance means that individuals involved in production take care with the quality of the product at each and every stage. This ensures that the product or service is produced to the highest quality. quality product will motivate businesses to stay ahead of their competitors. Ensuring quality throughout an organisation is a challenge and needs both good operational procedures and the staff to carry out this work. Training will be vital, and systems need to be in place to check the quality of the work carried out. Quality assurance is more common these days because the However, by focusing on quality the firm will benefit from a USP. cost of reworking a product at the end of the process is far Such a focus will also allow it to meet the specific needs of its greater than ensuring that the quality is right first time. Quality customers and maintain its competitiveness in the long run. control systems are therefore used less frequently nowadays. Customer service Total quality management (TQM) This Japanese concept involves a system of lean production – minimising waste at every opportunity and focusing on Good customer service will lead to an enhanced reputation efficiency savings. Central to this is kaizen – a concept of and people telling other people about the service they receive. continuous, small improvements. Every worker is given This will in turn lead to repeat custom and increased sales. responsibility for quality and encouraged to have an active Such service is fairly easy to implement with appropriate role in the production process through quality circles – a training techniques. Customer expectations can be met by: weekly meeting whereby workers discuss ways in which the Giving customers the product or service that they want production could be improved. Ensuring that the product or service is of high quality Ensuring that staff are friendly and helpful Benefits of introducing quality systems Can lead to higher sales Creates a USP Can potentially charge a higher price 12 Dealing with customer complaints efficiently Implementing and monitoring customer service Reduces unit costs as it minimises wastage Customer feedback surveys Improves the firm’s reputation Mystery shoppers The Heathland School cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h al fin str bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers ni er an ucture ce s CAD fixed et variabsegm le and enta total tion Robotics Looking at key issues that have been identified and sta co so gro op le tr wth pric portuad Focus groups tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning CAM resolving any problems Training staff Stock control systems Accounting packages Benefits of a high level of customer service Customers return Benefits of using technology Creates a USP Reducing costs Improves the firm’s reputation and image Improving quality Gains a competitive advantage Reducing waste Increasing productivity A-GRADE ANALYSIS EXAMPLE Easier communication Good customer service is one way in which a business can differentiate itself and its products from its rivals. It is also fairly easy to establish through staff training. This helps build a culture within the organisation as well as improving its reputation. A good example of such an organisation is Waitrose, where members of staff are selected for their personality and willingness to help. This means that customers are more likely to approach them and recommend the business to other people, helping it increase its customer base. While training staff can be expensive initially, Drawbacks of using technology Initial costs will be high Will need updating Employees will need to be trained Maintenance costs Can break down and halt all production A-GRADE EVALUATION EXAMPLE the long-term benefits are likely to outweigh the costs as staff Investment in new technology will bring many benefits to an are likely to be more motivated and happy in their work, which organisation. While the initial investment is likely to be high, in makes them less likely to leave, which will reduce the labour the long run it should lead to lower unit costs because the use turnover figures for the firm, which will in turn lower the need of technology in production will allow a greater number of units to recruit and train new staff. When the business does need to to be produced. Businesses will need to move with the times. recruit, people will want to work for a company that is friendly The development of technology in just the last thirty years has and provides excellent customer service. Customer service is been substantial with the arrival of broadband Internet and the also relatively easy to monitor, either through the use of mystery use of home computers. Keeping up to date with technology is shoppers or by internal appraisal. difficult as it moves so quickly. Firms have to make decisions as to which system they adopt and this can sometimes lead to poor choices. The constant need to update and replace Working with suppliers technology is also an issue in terms of finance and training staff in its use. However, in my view the advances in technology have A supplier will be chosen based on a range of factors: Price greatly benefited the business world and this situation is set to continue. Businesses need to embrace the technology. Payment terms Improving operational performance Quality Capacity Firms will look to improve the efficiency of their operations Reliability through a variety of the methods mentioned in this section. Flexibility The idea is to give the business a competitive advantage over rival firms and it can achieve this through improving any of the following: Using technology in operations Quality Capacity utilisation Customer service The importance of technology in operations is evident in a Working with suppliers variety of areas, including: Use of new technology The Heathland School 13 cash copyright trademark patent setting budgets strengths and weaknesses business ideas budgets risk contribution partnerships cost cash flow opportunity cost raising finance setting budgets risks rewards budgets plan cash budgets co visces mpa er s market research res bu e se flo ing m ple w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad leg g buforecrkets ensinessarc nies en terp pla h tre ri ns p mark fixed et variabsegm le and enta total tion al as fin strucdgets t an ture ce s sta ad pro vis fit ers bu adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss tra rtu cost dem ps ark add so gro op le tr wth pric portuad co e, tot ni er s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e Bare Bones Revision Guide forecasting legal structure risk Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh eo h breakeven analysis copyright trademark risks analysis plan te en pdrene tre en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co sts creovearnutuesps ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu ark dem ec for ets is s an th alys s ng stre n an n ve pla ts ke ss marke ea br ine ing arch s nd le op budersta t rese un ke ing peanceis marploys of finalysng em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar st risks tion tra ribu e coning valu kets add marast w ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Notes arketing and the M competitive environment Effective marketing Advantages Large scale production possible This can best be described using the AIDA model. A firm will Increases brand awareness aim in its marketing to: Large target audience Attract the customers’ attention Disadvantages Interest the customers in its products or services Develop a desire – make the customers want its products Action – lead the customers to purchase its products or services Difficult to appeal to individual customers High capital costs to start with Difficult to react to changes in demand Marketing also involves researching the market and producing a product that meets the needs of the target audience. It is about coming up with an effective marketing mix that will make the product successful. EXAM TIP The nature of the market will dictate the overall marketing strategy of the business. Designing an effective marketing mix The marketing mix is made up of the 4 Ps: product, promotion, price and place. However, the success of the business will also depend on other factors and the way in which they are integrated. The effectiveness of the mix will Niche marketing A niche market is a narrowly defined group of customers. Niche marketing targets this small, specific market segment. Advantages The market segment being targeted The available finance Competitors Few competitors The influence of new technology Can normally charge higher prices The reliability of market research Can tailor the product to individual customers EXAM TIP Good for small businesses The exam will expect you to take a broader view than focusing Disadvantages simply on the individual elements of the marketing mix. You Small target audience need to be able to demonstrate that you can interrelate the Can be more risky – limited demand different aspects of the mix. Lower overall profits due to size A-GRADE EVALUATION EXAMPLE Difficult to scale the business The most important component of the marketing mix is, in my Mass marketing 14 depend on: view, the product. Once the product is in place, this will dictate A mass market is a large market that is unsegmented. Mass the price to be charged, the sales outlets and the promotion marketing covers this entire market rather than targeting a strategy. It is essential that the 4 Ps complement each other in particular segment. order to ensure the success of the product. The Heathland School cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h probably be set using competition pricing. The place/location al fin str If a new pizza restaurant/takeaway is opened, prices will bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers advertising and specific technology magazines such as Stuff. ni er department stores. The marketing is likely to be through TV an ucture ce s probably be sold in electronics shops or in large, well-respected fixed et variabsegm le and enta total tion high price and skimming strategy are likely. The product will sta co so gro op le tr wth pric portuad If a new technological product is in high demand, an initial tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Product portfolio analysis Definition: Product portfolio analysis is the study of each of a firm’s products in an attempt to improve market performance. The idea is to create a balance of products with widespread appeal. The Boston Matrix illustrates this strategy. Boston Matrix of the restaurant will need to be central to a town or a city, and the promotions are likely to be more local and specific to that Star High area. They might involve the delivery of pizza menus to the local community through the insertion of flyers in local newspapers. Using the marketing mix Product Divest Invest Market growth Prioritise Kill Low The product itself is regarded as the most important aspect of Cash cow the marketing mix. The key factors that need to be considered Dog are: Design of the product – it must be reliable, safe, fit for High Market share Low purpose and durable. It must also, most crucially, meet the needs of the customers Product life cycle Product development Definition: The product life cycle is the term used to describe Factors influencing new product development the stages through which individual products develop over time: introduction, growth, maturity and decline. New technology that produces superior products New technology that produces goods more cheaply Developing new products that are individualised to specific tastes Stages in the product life cycle (Boston Matrix positions) Sales revenue, cash flow (£) Competition that can force existing businesses to develop + Question mark Star Cash cow new products Sales Entrepreneurial skills that spot a gap in the market, enabling ‘first mover’ advantage Product development The importance of a USP Dog 0 Marketing can add value by creating a unique selling point (USP). This is important for a firm as it allows it to stand out Cash flow Growth Maturity Decline Time Introduction – from the competition and will attract customers to its product. It will also allow the firm to charge a different price from the Life cycle: four basic stages competition. Introduction Growth Maturity Early adopters Mainstream Late adopters Laggards Market Small Growing Large Contracting Examiners will not want you to reproduce the diagrams that Sales Low High Flattening Moderate follow. However, you need to be very comfortable with the Competition Low Moderate High Moderate Awareness Market share Customer retention Transition Tuning Scaling Support Transition Audience EXAM TIP different theories and link the Boston Matrix to the product life Business focus cycle. Design focus The Heathland School Decline 15 cash copyright trademark patent setting budgets strengths and weaknesses business ideas budgets risk contribution partnerships cost cash flow opportunity cost raising finance setting budgets risks rewards budgets plan cash budgets co visces mpa er s market research res bu e se flo ing m ple w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad leg g buforecrkets ensinessarc nies en terp pla h tre ri ns p mark fixed et variabsegm le and enta total tion al as fin strucdgets t an ture ce s sta ad pro vis fit ers bu adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss tra rtu cost dem ps ark add so gro op le tr wth pric portuad co e, tot ni er s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e Bare Bones Revision Guide forecasting legal structure risk Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh eo h breakeven analysis copyright trademark risks analysis plan te en pdrene tre en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co sts creovearnutuesps ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu ark dem ec for ets is s an th alys s ng stre n an n ve pla ts ke ss marke ea br ine ing arch s nd le op budersta t rese un ke ing peanceis marploys of finalysng em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar st risks tion tra ribu e coning valu kets add marast w ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning it should be used with caution. The idea of researching and A-GRADE ANALYSIS EXAMPLE A wide product portfolio will allow the firm to target different markets. It will also allow it to coordinate the launch of its products. Firms with just one product are more at risk. If this product enters the decline stage of the product life cycle, they developing new products while existing ones are in maturity is certainly a good one. However, it is difficult to know just how long these products will be in maturity before they need replacing, which again highlights the importance of timing. have no other products to rely on. Firms will try and coordinate the launch of new products when their existing products are in the maturity stage of the life cycle. At this stage these products tend to be cash cows, earning high profits with relatively little market growth. Firms can milk these cash cows in order to provide the finance required to launch new products and invest in new potential rising stars. Promotion Promotion can be: Above the line – advertising through media outlets such as TV, radio, newspapers Below the line – promotion through sponsorship, public Extension strategies relations (PR) and competitions In order to help products remain in the maturity stage for as long as possible rather than slip into the decline stage, a business might look to develop extension strategies to keep sales high. There are a number of ways to do this: A business may use a range of promotional methods: PR Branding Merchandising Modify the product Sales promotions, e.g. Buy One, Get One Free (BOGOF) Target new markets Direct selling Introduce new promotions Advertising Change the image of the product A-GRADE EVALUATION EXAMPLE Increase usage among existing customers Advertising needs to be either informative or persuasive. The Maturity Extension strategy idea is to raise awareness of the brand and create greater brand loyalty for the product. It is hard to measure the level of success of advertising and it can be expensive. Firms will look to have Sales Decline an integrated promotional mix using a range of promotions such as competitions and BOGOFs that are supported by above- Growth the-line advertising campaigns. The promotion of products is crucial for their success. The firm will need to consider the Introduction objectives of the campaign and the costs involved, using available finance to target the specific market. Most importantly, it will need to consider the actions of competitors and ensure Time that its campaign promotes the unique qualities of its products. A-GRADE EVALUATION EXAMPLE The product life cycle theory can be a useful tool for businesses. However, it is flawed in that it does not account for the actual time it will take for a product to pass through the life cycle. Products such as Heinz baked beans are still in the maturity stage after many years on the shelves, whereas games consoles will typically have a life cycle of just six years before entering into the decline stage. Moreover, not all products will pass through the life cycle as described in textbooks. Different products will have different shaped life cycles. While the theory 16 Price Pricing strategies Penetration pricing Price skimming Price leaders Cost-plus pricing Possible pricing tactics can have some benefits in that it will help a firm decide on its Loss leaders promotional strategies at a particular point in time, in my view Psychological pricing The Heathland School cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h al fin str bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers ni er an ucture ce s fixed et variabsegm le and enta total tion sta co so gro op le tr wth pric portuad Price elasticity of demand tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning EXAM TIP Price elasticity of demand (PED) measures the responsiveness An understanding of how a product is distributed to customers of demand to a change in the price of the product. It is is an excellent way of picking up application marks and shows calculated using the following formula: an insight into the business and the industry. Your ability to PED = % change in quantity demanded explain how selling direct to customers will reduce the overall % change in price cost of production and result in a lower selling price will also pick up key analysis marks. If a good is responsive to a change in price, we say it is elastic. This is important, since the firm with an elastic product knows that a modest drop in price will prompt a sharp rise in demand, resulting in an increase in sales revenue. If a good is not responsive to changes in price, we say it is Marketing and competitiveness inelastic. This is important, since the firm with an inelastic Perfect competition product knows that a sharp increase in price will prompt only a Number of firms Many and small Nature of product Identical Barriers to entry None Effect on business Low profitability and little need for marketing modest drop in demand, resulting in an increase in sales revenue. Determinants of price elasticity of demand The degree of need – if the good is essential, then demand will be unresponsive to changes in price Monopolistic competition The percentage of income spent on the good – if a higher percentage, then customers are likely to shop around and be more price sensitive; if a lower percentage, then customers will be less concerned about price Number of firms Many and small Nature of product Differentiated Barriers to entry None Effect on business Low levels of profit, but some scope for marketing A-GRADE EVALUATION EXAMPLE The choice of pricing strategy will be crucial for the business. Oligopoly In my view, any firm should first consider cost-plus pricing. It Number of firms 2–8 large firms can then guarantee a profit on each item sold. It will need to Nature of product Differentiated consider the target market of the product and try to work out Barriers to entry High the relative price elasticity and how sensitive customers will be Effect on business Non-price competition; high levels of spending on marketing to price changes. It also needs to consider the nature of the product and whether it should set a high price initially because Monopoly it has such a distinctive USP or whether it should try to break Number of firms One Nature of product Unique Barriers to entry High Effect on business Very high profit margins; no real need for marketing, but will often take place into the market with a penetration strategy. It is critical to set the price of the product at the right level in order to be successful. Place (or distribution) There are several factors that influence distribution method: EXAM TIP The type of product (is it perishable?) When considering the marketing actions of a firm, make sure Location of the target audience you consider the nature of the market in which it is operating. The complexity of the product A highly competitive market place will mean that while profit The four traditional methods of getting the product to the customer are: (1) manufacturer retailer consumer; (2) manufacturer consumer; (3) manufacturer retailer consumer; and (4) manufacturer jobber retailer consumer. wholesaler wholesaler margins are likely to be low, the use of effective marketing can capture market share. When there are a large number of dominant firms, the use of pricing strategies is of limited benefit as a price war might occur. In these markets the use of branding and promotional strategies will therefore be more prevalent. The Heathland School 17 cash copyright trademark patent setting budgets strengths and weaknesses business ideas budgets risk contribution partnerships cost cash flow opportunity cost raising finance setting budgets risks rewards budgets plan cash budgets co visces mpa er s market research res bu e se flo ing m ple w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad leg g buforecrkets ensinessarc nies en terp pla h tre ri ns p mark fixed et variabsegm le and enta total tion al as fin strucdgets t an ture ce s sta ad pro vis fit ers bu adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss tra rtu cost dem ps ark add so gro op le tr wth pric portuad co e, tot ni er s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e Bare Bones Revision Guide forecasting legal structure risk Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh eo h breakeven analysis copyright trademark risks analysis plan te en pdrene tre en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co sts creovearnutuesps ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu ark dem ec for ets is s an th alys s ng stre n an n ve pla ts ke ss marke ea br ine ing arch s nd le op budersta t rese un ke ing peanceis marploys of finalysng em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar st risks tion tra ribu e coning valu kets add marast w ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Exam practice Case study 1: T & M Sherborn Question 1 (40 marks) T & M Sherborn was established in 1895 as a Bedfordshire (b) Analyse two problems that may arise from the firm’s falling (a) Calculate the net profit margins for the firm in 2010 and 2011. building company. It now has a multi-million pound turnover each year and a staff of over 200 permanent employees. The business has an excellent reputation in Bedfordshire and the (5) capacity utilisation. (8) (c) To what extent do you think the company should be more concerned about short-term cash flow issues than falling Home Counties. long-term profitability? The construction industry has been seriously affected by the recent economic downturn and the business has had to work (13) (d) Discuss the benefits of the way in which the firm trains and motivates its staff and how it is likely to have led to the hard to secure contracts and to ensure that no redundancies success of the business. have had to be made. However, capacity utilisation has fallen (14) and, with staff worried that there might not be more work to follow, motivation has been badly affected. As a consequence, the quality of work has suffered. This has become evident from recent customer satisfaction surveys. Candidate’s response (A grade) Question 1 (a) Net profit margin = T & M Sherborn has always prided itself on the training it Net profit Turnover × 100 provides, regularly taking on apprentices who receive a mix of both on-the-job and off-the-job training. The firm frequently sends its staff on training courses and offers loyalty bonuses 2010 = as well as a very attractive pension scheme. Workers can also see the promotion opportunities within the organisation, since 2011 = the majority of directors have been promoted from within the £4200 £45,250 £2100 £42,215 × 100 = 9.28% × 100 = 4.97% The candidate has successfully calculated the net profit company. As with any construction business, managing cash flow is a real issue, since a large outflow of money is required to build a major project and the final payment is only received on completion. There are £14 million worth of contracts currently on the firm’s order books. However, its ability to finance these margins for both years, as the question requires. The formula has also been stated, which is good technique as marks would have been picked up even if an error had been made with the calculation. Answering to two decimal places is also a sign of numerical competence. (5 marks) projects may be affected by its deteriorating net profits (b) The first issue is that resources will be under-utilised. In (Table 1). terms of machinery and tools, this carries an opportunity cost. The firm has invested in these items so that it has enough resources to carry out all the construction required when the Table 1 Financial and operations data 2010 2011 45,250 42,215 4200 2100 Capacity utilisation of main yard (%) 78 62 Satisfaction with customer service (%) 74 66 Sales revenue (£000s) Net profit (£000s) 18 firm is busy. During the recession the demand has fallen and so the investment in these resources is wasteful. Moreover, if the firm does not regularly use these items, then they may not be maintained to the highest standards and this can lead to problems when they are used. The second and arguably more important issue is to do with human resources. The firm will probably have insufficient The Heathland School cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h al fin str bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers ni er an ucture ce s fixed et variabsegm le and enta total tion sta co so gro op le tr wth pric portuad tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning work for the entire workforce and there is a concern about course of action as it will improve not only cash flow but also future orders. This has led to demotivation, with workers long-term profitability. worried about their long-term job security. As the case study makes clear, there has been a fall in quality as a result. This has caused inefficiencies within the organisation and led to a decrease in customer satisfaction. The firm needs either to reduce its capacity or to look at ways to increase the number of projects that it carries out so that the entire workforce is utilised more efficiently. While probably not the best choice of example for the first issue regarding capacity utilisation, the response does nevertheless relate to the construction industry and therefore shows the skill of application. The second issue is analysed properly and builds a chain of argument. The judgement at the end of the second paragraph is not necessary, however, as this is an analysis question. (6 marks) (c) For a construction company, short-term cash flow problems are likely to be commonplace and, to some extent, can be anticipated. Therefore, in my view, this is less of an issue. However, given the weekly wage costs resulting from the high number of people employed within the firm, the firm’s commitment to retain staff is likely to prove problematic. The company could look at ways of reducing its cash outflows in the short term. The fact that the recession is likely to be affecting many other businesses related to the construction industry might allow it to negotiate better terms with its suppliers and possibly reduce its overall wage bill. If T & M Sherborn were able to do this, this would increase its overall profit margins. However, as I calculated in question 1(a), the business has actually seen its net profit margin fall by nearly 50% and this must be a serious concern. The firm has seen a slight fall in revenue from 2010 to 2011, though this is not surprising given the tough economic climate. The drop in margin would suggest that its overall costs have increased and this should be a major area of concern. It indicates that the firm does not necessarily have control over these and that this is causing the lower levels of profitability. In my view, the firm needs to be concerned about both issues. However, the short-term cash flow problems are likely to be less serious than the longer-term fall in profitability. The firm perhaps needs to reduce its costs and look at alternative The candidate displays the skill of evaluation early on. The application is excellent, both to the company itself and to the industry as a whole. However, the analysis is less strong. The candidate does not build a detailed argument – instead, a lot of issues are mentioned without a main line of argument being fully developed. (8 marks) (d) The fact that directors have worked their way up through the company sends out a clear message to other staff that the firm is willing to invest in its employees and promote from within. This will benefit the firm by fostering greater staff loyalty and reducing labour turnover, which means that it will have relatively lower recruitment costs. The fact that the firm combines on-the-job and off-the-job training is also beneficial because new apprentices learn from experienced staff the specific skills required for the actual work they carry out. This means that workers are more productive and this is efficient for the company. The pension scheme and loyalty bonuses also act as ways of retaining staff. However, by focusing so much on internal recruitment, the firm is potentially missing out on new ideas and approaches that would come from looking outside of the business. While basic construction techniques may not have changed much over the years, there have certainly been significant changes to the way in which many businesses operate in this sector. A lack of new blood at T & M Sherborn might have actually held the company back. In conclusion, I would argue that the high level of orders and the reputation of the firm are significant indicators of a very successful business. However, its falling performance in recent years suggests that the firm may have become less efficient. In my view the appointment of some new senior staff is overdue. They could help identify the best way forward for the firm, perhaps looking to change the loyalty bonuses and pensions that are adding to the costs of the business and reducing the overall profitability of the firm. The fact that so many staff are promoted internally could lead to complacency, as could loyalty bonuses. I would like to see greater emphasis placed on performance-related bonuses as this will lead to continued improvement. ways to do this. It is likely to have to reduce its prices during Although briefer than the previous answer, this response is a recession, but this should be putting downwards pressure arguably stronger. This is because it builds a clear line of on the wages that it pays and also on the cost of supplies. As argument that picks up good analysis marks and is linked to a successful business, its established reputation will help in the business. The judgement is also sound, suggesting a new negotiations. However, by reducing wages it may lose goodwill way forward for the firm and then backing this up – excellent among its staff. Nevertheless, I feel that this is a necessary exam technique! The Heathland School (13 marks) 19 cash copyright trademark patent setting budgets strengths and weaknesses business ideas budgets risk contribution partnerships cost cash flow opportunity cost raising finance setting budgets risks rewards budgets plan cash budgets co visces mpa er s market research res bu e se flo ing m ple w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad leg g buforecrkets ensinessarc nies en terp pla h tre ri ns p mark fixed et variabsegm le and enta total tion al as fin strucdgets t an ture ce s sta ad pro vis fit ers bu adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss tra rtu cost dem ps ark add so gro op le tr wth pric portuad co e, tot ni er s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e Bare Bones Revision Guide forecasting legal structure risk Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh eo h breakeven analysis copyright trademark risks analysis plan te en pdrene tre en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co sts creovearnutuesps ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu ark dem ec for ets is s an th alys s ng stre n an n ve pla ts ke ss marke ea br ine ing arch s nd le op budersta t rese un ke ing peanceis marploys of finalysng em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar st risks tion tra ribu e coning valu kets add marast w ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning Case study 2: Best Burger Company (c) To what extent is an effective marketing mix crucial to the long-term success of the company? (d)Sam believes that an effective recruitment and selection system is the essential factor in guaranteeing the long-term Samuel Fraser set up the Best Burger Company in 2004 after success of the business. Do you agree with him? Justify attending many festivals and sporting events and lamenting your view. the fact that he could never find good quality food. Sam noticed that there was a growing trend on the high street for organic and healthy versions of fast food, but there appeared to be a gap in the events market for burgers made from only (14) Candidate’s response (A grade) Question 2 the best ingredients. He was also aware that the nature of (a) ROCE = festivals meant that people had limited choice and therefore had relatively price inelastic demand. He worked on producing Net profit Capital employed × 100 an effective marketing mix. Sam made £10,000 net profit on an initial investment of capital of £25,000. Sam conducted a range of primary and secondary market research. By asking friends and drawing on his personal experience, Sam felt that while selling food at events was ROCE = a highly competitive area, there were always opportunities £10,000 £25,000 × 100 = 40% because the number of festivals was growing. He decided to The candidate has chosen the right data and calculated invest £25,000 of his savings into the venture and, after the the answer correctly. Again, stating the formula is excellent first year of operations, he had managed to make a net profit technique. of £10,000. In the initial year of trading, Sam and his partner carried out all of the operations themselves and attended every festival. (b) The first way in which the Best Burger Company can benefit from economies of scale (lower unit costs) is by it buys larger quantities of ingredients at a lower unit cost. USP meant that it was very successful. Sam looked to grow the business and took out an additional loan of £50,000. This allowed the firm to have more vans at more sites. It also meant that Sam had to recruit workers from outside the business. This will increase the company’s profit margin if the original selling prices are maintained. By buying in larger quantities, the business will be able to take advantage of bulk buying discounts. This will be possible because the firm is attending He decided to offer the minimum wage to workers, but they more events and therefore has more outlets. This economy of were incentivised by the opportunity to watch the festival/ sports events during the periods when they were not working. Nevertheless, the seasonal and temporary nature of the scale might mean that the company has to change its current supplier because it may be unable to produce sufficient quantities. The quality of ingredients, however, would need to business meant that labour turnover was still high and that each year Sam had to recruit new staff. However, the relatively flat organisation helped communication within the company. remain high. The Best Burger Company might also benefit from managerial economies. Rather than Sam and his partner As the business expanded, Sam was able to take advantage of economies of scale and this led to increased net profit margins for the firm. However, by the summer of 2010 he had become concerned about the entry of larger, mass-market rivals such as Pizza Express and Subway into this niche running all the events, they can bring in specialist managers who can take control of different events or different functional areas of the business. This will save the business money in the long run as it will reduce the pressure on Sam. The use of managers with specific skills will hopefully lead to a reduction market. in costs, since these individuals will know how to manage their particular areas effectively. Question 2 (40 marks) The candidate starts with a definition that displays an (a) Calculate the ROCE for the Best Burger Company in its first year of operation. (4) understanding of the concept of economies of scale. This is backed up with two relevant and well-applied examples that clearly show how the firm will be able to benefit from them. (b) Explain two ways in which the firm might have benefited from economies of scale. (4 marks) expanding. It can benefit from trading economies, where The business managed to build up a good reputation and its 20 (14) (8) The Heathland School (8 marks) cash copyright setting budgets trademark patent strengths and weaknesses budgets risk contribution partnerships cost cash flow forecasting legal structure opportunity cost raising finance setting budgets risks rewards risk budgets plan cash budgets co visces mpa er s market research res bu e h se flo ing meople w so tting forearkets br urce bu ca st ea ca ke s of dge trash floven fin ts co nsfo w an ance ns fo pu ultarmin re alys blic nt g ca is lim s anresostin ite d ur g d ad dg ast ets leg g buforecrkets ensinessarc nies mark en terp pla h al fin str bu trep ri ns adsine ren se pr din ss id eu coivateg va easr cos m lim lu undts, reve p ite e ers nuea cash tan s n ie d se flo ding and ttin w ma profitss ad pro vis fit ers ni er an ucture ce s fixed et variabsegm le and enta total tion sta co so gro op le tr wth pric portuad tra rtu cost dem ps add ark e, tot s pa nsult al rev ty co rewarten an enu st ds t ts an e and d maing valu market e rke siz t e AQA AS Business Studies Unit 2 business ideas Starting a business entrepreneur ma sole traders as rk patent ide st emploet re rewards de yi se ess recaofits un ca rstandng p arc sh breakeven analysis neysis copyright trademark risks analysis plan d s an th te en sin fo d pr s bu flonuwes anidea sh ve ca re ess ise sin rpr nesses ak bu we ur sts, co ngth stre priv ies an ies mp panses d co comknes ite ted wea lim ate limi s and c bli pu em ce n ancasti s ve ke fore ource sour th w brea flo ming resow sh ca nsfor t gr ke tra mar ng pre al s stre tre n an lan en ess p ch ar sin bu t rese ke is marploys of finalysng ts ve ke ke mar ea br ing le nd op rsta pe ce de un ing an ark dem ec for ets risks tion tra ribu e coning valu kets add marast st w sts creovearnutuesps ing and erst und flo dg sh bu ure ruct l st lega ca ng s sse e tti ne shar se ak et risks mark d we s an gth en str business ideas Starting a business Financial planning (c) The marketing mix is made up of the 4Ps – price, product, (d) An effective recruitment and selection policy will clearly place and promotion. Of these, product is the most important. provide benefits to Sam and his business. This is because if If the Best Burger Company gets this right, a clear USP will appropriate staff are recruited and selected in the first place, allow the other aspects of the mix to fall into place. By offering they are more likely to be loyal. This will reduce the need high-quality and organic produce, the company successfully to recruit and train new staff each year. If labour turnover differentiates itself from the majority of other competing can be reduced, this will benefit the company as a result festival outlets. of lower training costs in the future. Hiring the right people the first time around will pay dividends in the long term. The The Best Burger Company’s USP will allow the business to charge a higher price, but the costs of its ingredients are staff will only need to be trained once and then Sam can also likely to be higher than its rivals. It would therefore be delegate more responsibility to them. This would be harder wise for the firm to adopt a cost-plus pricing strategy. Linked to do if he constantly had to select and train new staff. The to this is the fact that the firm is likely to face fairly price overall recruitment budget can be reduced if the high cost of inelastic demand. While there are a large number of substitute interviewing cadidates is avoided. products available at festivals, the overall market is typically unresponsive to changes in price because events offer a quite a high turnover of staff. Pay and non-financial forms of captive market. This can enable the firm to charge a higher motivation are therefore likely to be equally important factors price than is normal and this will influence the pricing strategy in securing their loyalty. The fact that the work is seasonal used. However, customers will only be willing to pay a high suggests that it would suit gap year students, university price if they perceive the product to be of a higher quality than students or foreign students travelling in the UK. Recruitment its rivals. advertising should target these types of individual. Given the It is also important for the business to continue to have fact that the festivals take place around the country, Sam access to festivals – another crucial element in the marketing might advertise for workers in the local vicinity using job mix of the firm. An effective distribution network, i.e. making centres or employment agencies. sure that the business has a prominent position at each festival and that supplies are ordered correctly, will be a major factor. however, would result in a core group of workers that travel to each festival. This will mean that there is greater pressure In terms of promotion, the business will probably not need The nature of the work, however, would typically lead to The most beneficial recruitment and selection policy, to spend a large amount because potential customers will be placed on the operations management procedures within able to view for themselves the different food outlets on offer. the firm. Coordinating staff for a business such as the Best However, it may prove useful to adopt promotional strategies Burger Company is likely to be very challenging because even at individual festivals, such as handing out flyers or having when staff are recruited, they will not work from the same festival specials for particular meal combinations. base each week. This will place a strain on those employees responsible for organising accommodation for these workers. Overall, it is going to be very important that the company combines all aspects of the mix so that it can have an It is highly likely that the recruitment of staff long term for advantage over rival firms. The danger is that, if successful, this business will be difficult – such is the nature of the work other firms will try and imitate the business and offer a similar and the demand on its workers to travel. It is likely that the range of products. In this situation it is going to be crucial for company will need to recruit a large number of temporary the firm to adapt, perhaps offering a wider product range and workers and training will be an issue. In my view, the long-term looking to adjust its pricing and promotional strategies. While success of the Best Burger Company is therefore not simply the current marketing mix is proving successful, the ability of about its recruitment and selection system but also about how the Best Burger Company to adjust this mix in the long run is, it manages its workers effectively in order to gain their loyalty in my view, absolutely vital. and benefit from low labour turnover. This is another very well-rounded response with some This is an effective answer. It looks first at the reasons why great application to the marketing mix currently employed recruitment and selection are essential and then at alternative by the Best Burger Company. The candidate clearly factors that would suggest why it is not so important. A final understands the 4 Ps, but there is insufficient focus on the supported judgement is provided which directly answers the importance of the ‘mix’. The candidate tries to address this in question. This is superb exam technique and ensures that the the final evaluation, but the attempt is ‘reasonable’ at best. candidate evaluates. The response is clearly linked throughout to the Best Burger Company. (10 marks) The Heathland School (13 marks) 21 Bare Bones Revision Guides Bare Bones AQA AS REVISION GUIDE Business Studies Unit 1 Planning & Financing a Business dg n te id a pa ss g is ne si tinalys bu ar n an Setakeveright bu se ea k ar ets d w em budg s an tradtting th st ps t ng py ark co dem re br ks ris is tra s aly an n k utionnershi st ow g rib fl tin ris e nt part co cocashecas tur t r c os fo ets ht sh rig ca py co u tr pla s et dg bu bu n pla s es sin archle t rese op markeoy ing pe arkets ces AS k ris ce ch an ar fin ese ur rs inget r ne e t s re rad en ard getssh raisark m ep t at ew ud ca tr ole p r b en s s ea foreca ri nterp eur dgets Bare Bones AQA s se es kn breake empl tanding m cast unders flow fore ts cash ing budge nce sett ces of finaalysis sour ven an sting seasrpclahns re se busines publi ow resourvisers cash flformingan ad trans ultants dcompanies cons c limited nue cash fl value adding t size trad ps startu emark fixed variabl ion segmentat cost market e and total financ ent pat ds rewar ants consult pric h marke t growt s marke trader fit soleportunity coe st and proers vis op e, total revenu and ad s bu setting ucture legal str es trade conr m unde ibut ark rstan ion din g ma rke ts marke t sha risk re reve g marke st tandin unders ow foreca costs, n e re p s entrsiene ss idea bu valued ng lim ite addi e sts privat panie com s and profi ts priva stren te lim ite gth s an d co d we mpan akne ies sse s ReviSion GUide Business Studies Unit 2 Managing a Business g tra s mea c c ng em t ofi we po pr ofit em g n pr si g ets ea asinudg r c e b c job us at er op s t cedget tmen h ign nt plaing burecrui as des rme inin em g le ag inin tion ofit man ro tra elesucring ioprns e ti va ru gy rec hnolo c ce a pllection te se sh a or e kf l or op t Pe itmen oti m w gn sh si ca b de jo dis wor uniq tribu kforc er ue tion usin g bsellingchpaonnoelsles e ud ints c en t plo in inc ing fit us on psrelectio r ope ec get n it adv rationsru s m a rec erse manag en n i ru m itmen varian ement t t F re ark n tp c wocruitmeeting roces es me cus rkfo nt pro mix s ge prod tomerrce ro cess ana ser les mark uct m v lif ic et c e c mea ond ycle e ns uniq suring ition tio markue sellinperforman s ra g proeting mpoixintsce Ope pric s fit es ing stra te plac gies tiven dist e eti job ributo desi rs p gn p di la em m powstribu ce mot erm tors pro team ivat ent Co m w ion th mea oti g surin on orkineory in g pe al g t rform mix ance ke ar crossAcademe M r m s al m e qu a te rvic ing se et er rk ng s m a ki tic y sto s m or ac it g e cu as w g t al ininanc fit in s e ye fit pro ity s es sinm in u bu ea pric q The subsequent content notes are highly focused, carefully structured and colourfully presented, making them perfect for revision. They include important Exam Tips, providing you with invaluable guidance on what the examiner is looking for and how to gain those vital extra marks. Regular A-Grade Analysis/ Evaluation Examples throughout these notes emphasise the importance of the higher-level skills, and there are even Number Crunching activities to check your calculation ability. An exam practice section at the end of the guides comprises integrated case studies followed by exam-style questions. Once you have assimilated the content notes, you should tackle the questions under timed conditions. Specimen A-grade responses, with accompanying examiner commentaries, are provided so that you can assess the quality of your own answers, identifying any weaknesses. You can then review those topic areas that require further attention. tra t mak decisionsing profiflot w sh increa t ing ca improvsuring profi ry mea ivation theo cle mot t life cyalysis ing ro fin p g trainin of com degree work ucportfolio an ment prod t ge produc ons mana ppliers operatiing with su petition ope ent operatio managem rations ting ss marke logy s nes techno petitive return on etition of comp degree capi pricingtal pricing inte rations man ope ction sele pricing organ extern rnal and agement ture ent workf isational straluc recruitm fit with supp liers com tactics g pricing marketin es mass orce rol budg ets pro ma er service custom tactics work ing using t ermen empow tion selecarketing niche mworking team force roles work working team nology tech nal decisions workf uniqu orce e se effectiv llin g po eness ints Written by an experienced examiner, each 24-page guide opens with a section about the exam, the mark allocation, the skills required and the importance of exam practice. c s t y it e l s tun udg bus ga or b ine co cas le opp tting s bustss, rehveflnouew foss idea se sk s ines s andrecas s rireward pro s t g st idea fits in s n enrengths and w n bre tre ea bu akevenpreneknesses pla und sine ana u l r e lysis m rstan ss ia c emparket ding mplans n loyin rese arkets so g pe arch na bre urces Fi cash akeve of fina ople na nc flo tran ss sfor w fore nalys e mark min e is c a g st n pubet grorewsothurceins g busi limite li a d co mpa c g nies n i c o rt reve st ta sta nue s riskrtsups s s S ea settcash flow adding va d lue ing stre lega i fo re b ngth ca l s s an stru udge st ts dw eakncture es esse s sin crossAcademe bu ente rpris e Bare Bones Revision Guides distil the essential content of the AQA units of study as clearly and succinctly as possible. The Bare Bones Revision Guides provide a unique combination of features: Highly focused revision Colour magazine format Written by an examiner Exceptional value crossAcademe
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