Business Studies: Theme 1

Market - where buyers and sellers meet in order to exchange goods or services. 

Mass market - selling to the whole market (generic products)

Benefits:

- huge potential number of customers 

- higher production levels which allow for economies of scale 

Niche Market - small segment of a larger market (specialist products)

Benefits:  

- meeting consumer needs more precisely allows higher prices to be charged 

- higher profit margins 

4 major issues to consider in relation to Dynamic Markets: 

1. Online Retailing

History has shown that retailers who fail to switch to online retailing can fail completely, as online rivals steal sales.

2. How Markets Change 

Political, Economic, Social, Technological, Legal, Environmental

3. Innovation and Market Growth 

Competing firms continually trying to develop new products/services that offer new features. 

4. Adapting to change 

Identifying subtle changes in what consumers are looking for in their products, allows businesses to adapt their products to better suit their needs. 

Product Orientation - making decisions that considers internal factors rather than the market 

Market Orientation - placing consumers views and behaviours at the heart of decision making

Primary Research - new research conducted for a particular purpose e.g. surveys and observations 

Advantages:

- addresses specific issues 

- data is up to date 

- can help you undertsnad customer psychology 

Disadvantages: 

- expensive

- risk of bias from questionnaire and interviewer

Secondary Research - pre-existing data that has been gathered for another purpose e.g internet and government statistics. 

Advantages: 

- often free 

- provides good market overview 

- usually based on a large scale; reliably produced research 

Disadvantages: 

- information may be out of date

- not tailored to suit particular needs 

- can be expensive to buy published research 

Maket Segmentation - dividing market into groups based on different characteristics 

Benefits of segmenting include; 

- products/services can be designed to suit specific customers 

- meeting customers' needs precisely allows a higher price to be charged

Market Positioning - consumers perception of a brand in relation to competing brands/products

With a market map produced, a business can identify gaps in the market. Following this, a check to ensure that the gap can be filled profitably.

Competitive Advantage

- the two major routes to find a competitive advantage inlcude being the lowest cost producer and finding a sustainable point of differntiation. 

Product Differentiation - attempting to make your product seem different in the minds of consumers 

Actual differentiation includes, design, functions, taste and performance.

Perceived differentiation includes, branding, advertising, sponsorship and celebrity endorsement

Adding Value - the difference between the cost of goods and the selling price of a product 

• product differentiation generally helps to add value to products and services; the ability to push prices higher without increasing costs will naturally add value. 

Demand - the level of interest consumers have in particular products; main factors affecting demand inlcude;  

1. Price

• Higher prices lead to lower effective demand, since fewer customers can afford to pay. But higher prices make alternatives seem better value. 

Effective Demand - interest backed by the ability to pay 

2. Changes in prices of substitues and complements 

• A relationship exists between the demand for a product and the price of it substitutes. If the price of one good falls, the demand for the substitute will fall, as consumers turn to the cheaper alternative. 

Substitute - a similar/rival product 

Complement - a product whose use accompanies another (e.g petrol and car). 

3. Changes in consumer incomes

• As income levels rise, demand for normal goods rises in line as consumers more disposable income. For inferior goods, demand rises as incomes falls e.g Poundland. 

4. Fashion, Tastes and Preferences 

• consumer trends change unpredictably but can have a major impact upon demand for products. 

5. Demographics 

• Changes in the make-up of population can affect individual products.

6. External Shocks 

• E.g natural disasters, changes in the law and unexpected traffic problems 

7. Seasonality

Supply - total amount of a specific good that is available for consumers; factors which affect supply include:

1. Changes in cost of production

• If production costs rise, the amount supplied will fall.
• If production costs fall, the amount supplied will rise.  

2. Introduction of new technology 

• new technology should lead to an increase in supply 

3. Indirect Taxes (taxes that the government imposes on goods e.g. VAT)

• An increase in indirect taxe rates will increase cost, thus reduce supply
• A decrease in indirect tax rates will cut total costs and therefore increase supply. 

4. Government Subsidies (opposite of taxes) 

• When the government want to encourage supply of a product, it may offer subsidies - this cuts the cost of production, increasing supply. 

5. External Shocks 

• Unexpected events such as economic crisis, poor harvests or natural disasters can reduce the total quantity of an item available.

Markets and Equilibrium 

In commodity markets (crude oil), price is determined by the interaction of supply and demand; 

• If demand is higher than supply, the price of the product will rise, until demand falls back to the level of supply . 
• If supply is higher than demand, the price of the product will fall, stimulating more demand to ensure that all supply is sold. 

PED - measures the responsiveness of demand for a product to a change in its price 

PED = % change in demand / % change in price

If price elasticity is between 0 and -1: 

• product is price inelastic 
• changes in price have a small effect on demand/sales 

If price elasticity is a negative number greater than 1: 

• product is price elastic 
• changes in price have a large effect on sales/demand 

Factors influencing price elasticity inlclude, degree of product differentiation, availability of substitutes, branding and brand loyalty. 

YED - measures the responsiveness of demand for a product in relation to real incomes

Real Incomes - amount by which average incomes have adjusted for inflation. 

YED = % change in demand / % change in real incomes 

1. Inferior goods - have a negative income elasticity 

2. Normal goods -  have a positive income elasticity between 0 and 1

3. Luxury goods - have a positive income elasticity of greater than 1

Significance of income elasticity:

Sales forecasting - knowledge of the likely reaction of a product to a change in real incomes allows a business to forecast sales (if reliable forecasts are available).

Financial planning - if income elasticity gives sales forecasts, then this information can be factured into budgets and financial plans. 

The Design Mix; 

Aesthetics - look, taste or feel of an item

Function - whether the item does what it is expected to do

Economic Manufacture - the ease and economy with which the item can actaully be made on the scale required 

The benefits of a good design include, added value, point of differentiation, improvement to brand image and therefore brand loyalty. 

Branding and Promotion 

Promotion - methods used by a business to persuade consumers to purchase a product. 

Long term methods include, persuasive advertising and public relations. 

Short term methods include, BOGOF and seasonal price cutting promotions. 

Individual Brand - single products e.g Marmite. The firm that makes these products makes no attempt to push their company name. 

Brand Family - brand name that is used across a range of related products e.g Cadbury. Brand name can be can be used to push sales of each product. 

Corporate Brand - using the company name as a brand e.g Nestle. Can convince consumers that all products across the entire range share similar characteristics. 

Ways to build a brand:

• Advertising (reinforceing the message that the company wants to send about its brand)
• USP
• Sponserships (can help to create attachments in consumers minds)
• Digital Media 

Changing in branding and promotion to reflect social trends: 

• viral marketing ( spreading recommendations about a product via social media)

Price Skimming - launching a new product at a high price before competitors enter the market

Advantages and Disadvantages: 

-- high prices generate rapid profits 

-- high prices help to create a desirable image for the product 

x early buyers may be frustrated when prices start to fall and image may suffer 

Price Penetration - launching a new product at a low price to entice customers 

Advantages and Disadvantages:

-- low price boost sale volumes

-- high volumes may persuade retailers to buy a product, increasing distribution 

x likley to create price sensitivity among customers, a higher price elasticity  

Cost Plus - deciding price by adding a desired percentage onto total cost per unit; (price charged = unit cost + % mark-up)

-- should guarantee a profit is made on each unit sold

x ignoring market may mean an unrealistic price is generated 

Predatory - setting price low enough to drive competitors out of a business. 

-- once rival has been forced to close, prices can be pushed up higher increasing margins 

x it's illegal

Competitive - charging a price at the market average or at a discount to the average 

-- should ensure that price will not put customers off buying the product 

x firms that use this strategy have little control over the price they charge and thus the revenue they generate 

Psychological - prices are set below psychological levels, e.g. £9.99 instead of £10.00

-- encourages costumers to spend, as product seems cheaper

x may have little effect on many planned purchases

Factors that determine the most appropriate strategy: 

• Level of product differentiation
• Price elasticity of demand 
• Level of competition
• Strength of brand
• Stage in the product life cycle 
• Costs and need to make a profit 

Distribution channel - route a product takes from a producer to a consumer 

Intermediaries - businesses between the producer and the consumer in a distribution channel

Distribution Channels:

Traditional Physical Channel 

• Producers sell their products to wholesalers who act as suppliers to smaller retailers. This channel pushes selling prices up as wholesalers and retailers add their own mark-up. 

Direct to Retailer

• Larger producers ignore wholesalers and sell their products in bulk to major retail chains. 

Be Your Own Retailer

• Producers that want to exert complete control over how their products are sold can set up their own retail outlets e.g. Apple. 

Direct Online - producers can set up their own websites (often at significant costs) to allow consumers to buy products directly from them. 

Online Retail -  for smaller producers unable to afford the expense of building e-commerce platforms, sites such as Ebay offer the chance to sell online to a wider audience. 

Product Life Cycle and Portfolio

The PLC is a pattern of sales over time that most products tend to follow, it consists of:

Introduction - sales are low and rise only slowly. 

Growth - sales begin to rise much more quickly.

Maturity - growth in sales slow, and sales stabilise at their highest levels.

Decline - sales begin to fall until product is phased out, or extension strategy is launched. 

Extension Strategies - medium to long term plans for extending the life cycle of a product

The Boston Matrix 

- assesses each product within a firms product portfolio against the variables of market share and market growth

PROBLEM CHILD - high market growth, low market share. They have potential, but need heavy investment to grow; management must decide whether to close or continue them. 

RISING STAR - high market growth, with high market share. Often stars need heavy investment to sustain growth; eventually growth will slow and if they keep their market share, Stars will become Cash Cows. 

CASH COWS - low market growth, with high market share; mature, successful products with relatively no need for investment. They need to be managed for continued profit in order to generate strong cash flows needed for 'Stars'. 

DOGS - low market growth, low market share. May generate enough cash to break-even, but are rarely worth investing in. 

Staff as an assest vs Staff as a cost

Treating staff as an Asset                                                                 

• permanent contracts                                                        
• develop staff skills with training                                           
• pay staff as a salary                                                                
• builds loyalty from staff       

Treating Staff as a Cost 

• flexible contracts
• minimal training offered
• low pay, often at an hourly rate
• high staff turnover

Flexibility - a businesses ability to adapt its operations to changes in patterns of demand. 

How to achieve a flexible workforce: 

Multi-skilling

• using training to ensure that staff can perform a range of different roles within a business, means employees can cover for absent colleagues, and switch to roles that need to be filled when patterns in demand changes. 

Part-time and Temporary

• helps to bring people into the workplace who may offer excellent skills and experience but are unable to commit to full time work.

Flexible hours and Home-working

• working from home gives staff greater flexibility to manage their time around other commitments.

Outsourcing - contracting another business to perform certain business functions, allowing increase in capacity when needed. 

• Benefits: ongoing fixed costs can be kept at a low level within the business; sudden surges in demand can be met quickly 
• Drawbacks: the outsourcing company still needs to make a profit, adding to cost; outsourcing arrangements may take time to work out. 

Dismissal - when your employer ends your employment

Redundancy - a form of dismissal that occurs when an employer needs to reduce their workforce

Collective bargaining - occurs when an employer deals with one or a few representatives for the whole workforce when discussing problems. This is beneficial because;

• employers only need to negotiate with one or two people on behalf of the whole workforce. 
• employees benefits because acting together gives them more power. 

Internal recruitment - filling a job vacancy with somebody who already works for the business.

-- quicker and cheaper

x creates a vacany elsewhere in the business that will still need to be filled 

External recruitment - filling a job vanacy with somebody who doesn't work for the business. 

Training - designed to enhance employees' existing skills and develop new skills

Benefits 

• higher skill level can boost productivity and innovation
• motivates staff who feel they have been invested in by the business

Costs

• normal operations of the business can be disrupted
• better trained staff are more attractive to other businesses which may try to poach them

On-the-job Training 

Advantages 

• tailored to the company's own ways of working
• saves time and cost of sending people out

Disadvantages

• less knowledge acquired on methods used elsewhere 
• staff only focus on production targets 

Centralised Structure - structure where most major decisions are taken at the very top of the organisation. 

Decentralised Structure - where decision making is passed lower down the organisation structure through delegation. 

Span of control - number of subordiantes directly answerable to the manager.

Types of Structure

TALL - structure with many layers and narrow spans of control 

Advantages 

• allows close supervision of staff; many layers = oppurtunities for promotion.

Disadvantages

• poor communication as a result of many layers; staff may feel over-supervised and not trusted by management.

FLAT - structure with fewer levels but wider spans of control

Advantages

• removes excess layers and improves speed of communication between employees
• can increase ability of firm to respond to changes in customers' tastes, boosting competitiveness

Disadvantages

• fewer levels mean fewer prospects of promotion 
• control at the top may be weakened due to a wide span of control

Effects on effeciencty and therefore unit cost:

• poor communication leading to mistakes; tasks being overlooked and not done; departments failing to work together effectively 

However, structure can affect motivation by encouraging responsibility, scope to show initiative and opportunities for promotion. 

F.W Taylor - 'Money Motivates'

Theory suggests that people work in order to maximise their income, thus in order to get people to work harder, money should be used as an incentive. Taylor's beliefs are summarised below: 

• break the task down into small, simple repetitive tasks
• design a payment system that rewards each worker each time they complete their task

X - workers felt treated like pieces of machinery and denied the opportunity to use their minds at work. 

Elton Mayo - 'Humans Relations Theory'

Theory centres on the importance of interpersonal relations as a factor affecting productivity. Factors identified are as follows:

• workers gain satisfaction from a certain level of freedom and control over their working environment.
• managers taking an active personal interest in their employees has a beneficial impact on workers performance.

Maslow - 'Heirarchy of Needs' 

Maslow believed that all humans have 5 sets of needs and that meeting each level is a priority until a person can move up the heirarchy. 

• Physical needs (food) = Pay levels and working conditions
• Safety needs (security) = Job security and clear job roles
• Social needs (belonging) = Team working and social facilities
• Esteem needs (recognition) = Regonition of achievement 
• Self - actualisation = Scope to develop one's full potential

Herzberg - 'Two-Factor Theory' 

Theory suggests that factors affecting people at work can be grouped into 'motivators' and 'hygiene factors'. 

• Motivators: achievement, responsibility, advancement and a sense of growth, meaningful, interesting work
• Hygiene Factors: pay, supervision, working conditions, interpersonal relations, company policy.

Piecework - paying staff a set of money each time they repeat a task 

• Advantage; encourages the speed as the quickest staff earn the most money. 
• Disadvantage: likely to lead in qulaity problems as staff rush to complete tasks.

Performance related pay - rewarding staff whose performace exceeds a certain level where performance is hard to quantify.

• Advantage: allows individual performances to be clearly rewarded financially
• Disadvantage: emplyees may feel that the process used to decide on PRP is biased against them. 

Commission - paying staff whose role involves selling a certain percentage of the revenue they generate, usually ontop of basic pay.

• Advantage: incentivises staff to sell as much as they can
• Disadvantage: may lead to mis-selling, as staff try to sell more expensive products to maximise their commission. 

Manager - a person whose major job is to oversee putting plans into action, getting the details right and ensuring the resources allocated are used correctly. 

Leader - a person whose role is to identify key issues, set objectives, and secide what should be done to address those issues, and who should do it. 

Autocratic Leaders - issue instructions and expect these to be obeyed; communication will be one way, top down, with the manager not responding to feedback. 

Democratic Leaders - expect their staff to be involved in decision making; they will delegate authority to subordinates, believing that this the best way to get the job done. 

Paternalistic Leaders - see themselves as a father-figure; they care about the best interests of staff and listen to their views, but the leader makes the decisions. 

Laissez-faire Leaders - leave staff alone to get on with things, generally without providing a clear sense of direction; this may be because the leader is too busy or too lazy, however for a new business, leaving talented staff alone can provide fertile ground for innovation. 

Role of an Entrepreneur:

• Generating a business idea
• Spotting an opportunity
• Running and exapnding a business

Barriers to Entrepreneurship

• Funding: banks in the UK have been less willing to lend to small firms and business start-ups

Gender Bias

• UK entrepreneurs are three times as likely to be male as female

Lack of public sector support 

• some view entrepreneurs sceptically, suspecting tax avoidance or motives based on greed

Reasons why people set up a business include:

• Profit maximising - continually seeking te get the most profit from every business transaction.
• Proft satisficing - blending a desire for profit with other factors e.g. building a good reputation. 
• Social Entrepreneurship - business whose main aim is to make a positive contribution to their community. 

Objective - specific target set by a business. 

Strategy - plan devised by a business to achieve its objectives. 

Specfic, Measurable, Achievable, Realistic, Time-bound

SOLE TRADER - person who starts and runs a business without turning it into a company. Owner is liable for any debts built up in running the business. 

• Benefits: owner has full control over decisions, owner keeps all profits made, minimal paperwork needed to start up. 
• Drawbacks: owner has unlimited liability for all debts, hard to raise finance. 

PARTNERSHIP - two or more people who start and run a business. 

• Benefits: more owners can allow for more finance to be raised, partners may bring varied skills and experience, shared burden of responsibility.
• Drawbacks: partners have unlimited liability, there's potential for disagreements among partners. 

Unlimited Liability - business owner must take personal responsibility for covering debts run up by their business.

Limited Liability - form of legal protection which ensures that business owners can only lose the money they have invested in the business. 

Private Limited Company - company with no minimum share capital

Public Limited Company - only type of business that can sell shares via the stock market

• Benefits: allows the business to raise vast sums of share capital 
• Drawback: in order to become public limited, a business must have a minimum of £50,000.

Other forms of business:

Franchising - arrangement where one party grants another party the right to use their trade mark and business operations. 

• Benefits: access to a tried and tested fromula for business success, easier access to loans as banks recognise the lower risk involved in starting as a franchisee
• Drawbacks: likely to be an initial franchise fee to buy the licence, franshisor will expect royalties (a % of revenue).

Franchisee - person that buys a licence to use another business's name and business model in return for payment.