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IGCSE Business

Business Activity Aims and objectives Goal : Something that an individual or organization tries to achieve. Business organizations have goals that are not always to make a profit. Strategies : The course of action required to meet the objectives Aim : What a company wants. Its a statement of purpose. It is found in the mission statement a written statement making clear to all stakeholders a firms overall aims and values. Enables stakeholders to know why a company is doing what its doing) Objective : What the company must achieve in order to meet the aims Aims vs. Objectives: Aims are a general statement of purpose Objectives are measurable targets. They have to be: o S pecific o M easurable o A chievable o R elevant o T ime bound Why set Objectives? Objectives give businesses a clearly defined target. Therefore the company is able to measure progress towards its stated aims Plans & strategies can then be made to achieve these targets Can motivate employees Exemplar Objectives: Growth Market share Wealth creation Survival Consumer satisfaction Customer loyalty Employee satisfaction Environmental Quality Productivity/Efficiency Levels of Objectives 1. Corporate objectives targets what the whole business is trying to achieve (often related to what the owners of the business want to focus on e.g. profit, survival, growth, etc.) 2. Departmental objectives objectives for specific functions within a business e.g. for marketing department; needs to be in line with corporate objectives

Public Sector Organizations: The objectives of public sector organizations will be different as they are there not to make a massive profit but to serve the people Objectives will be to: 1. Deliver a public service, not a profit 2. Deliver quality service 3. Breakeven so as to not go into a loss making situation 4. Be efficient in its processes 5. To provide an essential economic service for the nation Conflicting Objectives: Often times 2 objectives will clash we call these conflicting objectives They often clash between key stakeholders (owners, managers, employees & customers) An example is that of Growth Vs. Profit for example, achieving higher sales in the short term, probably by cutting prices, will lead to a reduction in short term profits Another example is that of short term vs. long term for example a business may decide to accept lower cash flows in the short term whilst it invests in new products, plants or equipment A common example will be that of Environment Vs. Profits e.g. if a company wants to reduce its pollution contribution, it will need to spend a heavy proportion of profits. Why do business objectives change over time? Business is evolving/changing Competitive environment is changing (possibly due to technology) Technology changes (being the main reason for the currently constantly evolving global market) The market/customers are changing e.g. new products, like digital cameras are replacing film cameras Summary There are three types of organisations covered: Not-for-profit o Providing healthcare o Providing education o Providing community activities Private enterprise o Making a profit o Other secondary goals Public enterprise o Running public services well o Providing ferry and postal to rural communities o Providing street lighting, police service Types of Organizations Things to think about: 1. Different types of businesses 2. Advantages disadvantages of each 3. Implications of the choice of business organization such as: Control of the business Profit distribution Bureaucracy How can the size of a business be measured? 1. No. employees, no. outlets, revenues, profits, capital employed amount invested in business, market value 2

Business size is relative to other companies and the market its in

Sole traders A sole trader is a business owned by 1 person but may have multiple employees Sole traders can often succeed: 1. They can offer specialist services 2. Can cater and specialize to suit the needs of the local community Advantages Disadvantages Total control of business Unlimited liability owner is personally liable for any debts which the business cannot pay for Simple + easy to set up, little formal and complicated legal Difficult to raise finance necessities. Also quicker to startup Quicker decision making Difficult to specialize and enjoy economies of scale Owner can keep all profits Problem with continuity if owner retires or dies

Unlimited liability means that creditors may legally go after personal assets to regain their lost money. This means that the owners may have to sell personal assets

Sole trader partnership Spreads risk across more people Partner may bring money + resources to business along with new skills and ideas Increased credibility with customer and supplier Partnership When ownership is shared between 2 20 people (accountancy firms may have more) Deed of Partnership Amount of capital each partner should provide How profits/losses should be shared Rules on how to take on new partners Advantages Responsibilities and decision making is shared Continuity + support provided. Does not come to a stop for small thing like if the owner goes on holiday Partners may bring expertise and resources More finance available Disadvantages Unlimited liability owner is personally liable for any debts which the business cannot pay for Have to share profits Disputes over workloads/roles Problems if partners disagree on direction of business Difficult businesses to run, partners need to trust each other Less control of business One partners wrong doings can affect all the rest

Limited Companies Companies are a separate legal person in the eyes of the law i.e. it is separate from its shareholders Has to register with the companies house Issued with a Certificate of Incorporation & Memorandum of Association (a document that describes what the company has been formed to do) & Articles of Association (internal rules of the company) In a limited company, shareholders own the company Companies employ directors to control the management of the business and do the day to day jobs 3

These directors are often shareholders Directors are responsible to shareholders The reasons for hiring director can be that shareholders may not want to get involved in the day to day running of the business & also, directors may have special skills or experience Disadvantages Expensive + time consuming to set up

Advantages Limited liability shareholders liability is restricted to the amount they have invested. They can only lose what theyve invested. Creditors can only recover money from existing assets of the business. They cannot claim assets (personal) to recover amounts owed by the company (as the company is a separate legal person in the eyes of the law) Easier to raise finance as shares can be issued and sold (although not on the share market)

Shares cannot be traded on the stock exchange therefore affecting ease of raising finance

Continuity is not an issue as the company itself lives for ever Ability to specialize and enjoy economies of scale Shares in a plc can be traded on the stock exchange whereas shares of a ltd cannot. LTD or PLC? Becoming a plc is all about making it easier to raise finance, for example shares in a ltd cannot be offered on the share market to the general public, also, it restricts availability of finance, especially if business wants to expand. Also, its generally easier to raise finance from banks and other sources Advantages Disadvantages Limited liability shareholders liability is restricted to Costly + complicated to set up the amount they have invested. They can only lose what theyve invested. Creditors can only recover money from existing assets of the business. They cannot claim assets (personal) to recover amounts owed by the company (as they company is a separate legal person in the eyes of the law) Very easy to raise capital Certain info must be made public, even to competitors and customers Continuity is not an issue as the company itself lives Increased threat of takeover forever Able to exploit economies of scale due to their size Greater public scrutiny and profile (e.g. analyst reports and press reports) Separation of ownership and control which means that the owners no longer make all the decisions IPOS/Floatation When shares are first offered for sale A very expensive and complicated process Company is given a listing on the stock exchange Opportunity to raise substantial funds Also a chance for existing shareholders to cash in by selling their shares (e.g. a VC who may have invested earlier) 4

Why buy shares? 1. Dividends (a share of profits) 2. Capital gains (by selling the shares) 3. Control of company Shareholders liability is limited What are the risks in investing? Company reduces or cancels its dividend payouts Value of shares fall below cost Company fails causing shareholder to lose all invested money Franchises A franchisor is a business that sells the right to another business (franchisee) to operate a franchise (an external company that runs the business and keeps the profits) Franchisor is the growth company who sells the rights of the business model and receives a % of revenue from each franchisee (royalty) Franchisor also provides support in marketing, training, finance and purchasing Advantages for franchisor Disadvantages for franchisor Less risk less control Lower costs Reputation risk Less operations Not as fast as M&As Ideal for expansion of a business model Local market awareness Advantages for Franchisee Disadvantages for Franchisee Less risk as there is already a customer base and business Licensing costs model Reduced startup costs Royalty payments Support provided in training and marketing Less flexible Small business but some benefits of large MNCS: A business that operates across national boundaries One aspect of globalization is the growth of Multinational Corporations or MNCs.

o o o o o o o o o o o o

Benefits of MNCs There is usually huge capital investment in major economic activities. It is called Foreign Direct Investment (a flow on private capital from one country to another, normally a funding for business ventures) 2. The country enjoys varieties of products, services and facilities, brought to their door steps 3. There is creation of more jobs for the local populace 4. The nations pool of skills are best utilized and put to use effectively and efficiently 5. There is advancement in technology as these companies bring in state-of-the-art-technology for their businesses. Technology spillover 6. The demand for training and retraining and advancement in the peoples education becomes absolutely necessary. This will in turn help strengthen the economy of the nation 7. The living standard of the people is boosted 8. Friendliness between and among nations in trade i.e. it strengthens international relations 9. The balance of payments of nations in trade are improved 10. There is significant injection into the local economy in respect to investment 11. Best utilization of the countrys natural resources 12. They help in strengthening domestic competition 13. They are good source of technological expertise 5

14. Expansion of market in the host country

Challenges faced by MNCs 1. There is usually acute shortage of manpower people with lack of managerial and technical skills 2. The challenge of unfriendly business environment 3. There is usually the problem of conflicting interest among the three parties the government, the MNC and the general public 4. There may be huge cost of labour in the host country, at least to get the expatriate managers from home country or somewhere else Possible Negative impacts of MNCs 1. Size and power sometimes allow MNCs to manipulate situations to their own advantage. E.g. strategies to make only their home country earn and not the host country. Repatriation of profits. 2. Labour exploitation and breaking international laws on child labour 3. Sometimes, unskilled jobs which require no worthwhile training have been offered to local people, which does not improve the quality of the host countrys workforce 4. Small businesses cannot compete in production and so are driven out of business 5. Governments often feel it necessary to use grants, infrastructure development and tax concessions to attract multinationals. The weak negotiating power and position of many governments means that multinationals can sometimes pay less in tax compared to what they take from the government as help (either directly in grants and subsidies or indirectly through developments in the infrastructure they require) 6. Poor health and safety or environmental standards in host countries Summary Positive Points: MNCs and FDI bring capital, jobs and incomes, prompting development Exports or import reduction can help the trade position Training and skill development can raise worker productivity Consumers can have better and cheaper products with more variety Governments can benefit from extra tax revenue Ethical MNCs make a major contribution to development Why become an MNC? 1. More customers 2. Economies of scale 3. Entry to protected markets 4. Reduced production costs 5. Risk reduction Factors of Production Land : All of the natural resources needed to produce a good/service Labour : All of the physical and mental effort needed to produce a good/service Capital : All the manufactured resources used in the production process of something else e.g. machinery (Note: capital has 2 meanings, one is the above and the other is that capital is money/investment finance) Enterprise : The unique ability some people have in organizing factors of production (FoPs) Relationships between factors of production Availability & cost of factors 6 Negative Points: Some MNCs corner all the benefits for themselves Foreign currency earnings can be repatriated as profits Local workers may only get low wage, unskilled jobs Local businesses might be unable to compete and forced to close Concessions and grants might outweigh any tax receipts Selfish MNCs might hit and run leaving long term problems

Developed (e.g. minimum wage laws) and Undeveloped (no wage or labour laws/restrictions) Combination changes over time (e.g. as a country develops it will most likely use more capital than labour) Technology Labour is a FoP. Workers earn wages this is the price of their labour. Wages are determined by demand and supply. The number of workers employed is also determined by the level of demand and supply. Division of Labour in order to make labour more efficient, firms have spilt up the production process into small tasks. Production is increased, job specialization happens (which can be both, an advantage and a disadvantage). Disadvantages of Division of Labour and Workers Workers may find the work monotonous if it is simple and repetitive If there is little training required to undertake simple tasks, unskilled labour can be paid low wages and exploited. Lack of job satisfaction Threat of unemployment if wokers are easily replaced by machines which can complete the tasks more efficiently

Advantages of Division of Labour and Workers Workers may be able to choose the task for which they are best suited. In this way they can even enjoy their work and become more skilled at the particular task Increased skill therefore productivity may be rewarded with an increase in wages If paid on a piece rate basis, more specialization = more productivity & efficiency meaning they will receive higher wages Less stress as the tasks a worker performs will be simple

Fewer injuries as specialist machines and robots can perform dangerous tasks such as cutting and welding Advantages of Division of Labour and Firms Production will be increased, as time is saved when workers become more skilled at one task Economies of scale

Less time + money needs to be spent on training labour as the tasks are simpler

Disadvantages of Division of Labour and Firms Bottlenecks can occur is one process is quicker than another If the workers are dissatisfied at work, then industrial unrest can occur. This has the ability to reduce production The increased use of machines can lead to problems: The firm may have to borrow money to purchase the machines. Machines may break down Machines may become obsolete and in time will need to be replaced. Handling of machinery needs to be done by trained professionals

Machines can replace workers for some tasks. Machines can work 24/7/365, reduce wage bills, produce consistent quality and take over dangerous tasks Advantages of Division of Labour and Consumers As productivity increases firms may pass a decrease in unit costs on to consumers at lower prices The increased use of machinery may result in goods being produced with a consistent quality Disadvantages of Division of Labour and the economy

Disadvantages of Division of Labour and Consumers Standardization of goods, lack of variety

Disadvantages of Division of Labour and the economy 7

Prices may fall and this can: 1. Reduce & control inflation, 2. Make domestic goods more competitive in foreign markets Increases in productivity may increase economic growth and the standards of living

Unemployment may rise as machines replace workers

Division of labour is usually done through the use of assembly lines Advantages of being Labour intensive Disadvantages of being labour intensive Often intricate personal detail cannot be replicated by Expensive, especially in countries where minimum machines wage laws exist Not standardized variety Prone to disruption in production: 1. Sickness & health; 2. Stirkes Production costs can be more easily controlled as labour size Exposed to wage increases can be adjusted according to demand fluctuations of the market More employment in the economy Not standardized variety in quality Advantages of being Capital intensive Disadvantages of being capital intensive More efficient & productive Prone to breakdowns More production = more sales = more revenues = more profits Workers may feel demotivated as they may be layed off. This means lower production as lower morale More competitive Training expenses need to train employees to use the technology Very expensive implementation Capital-intensive Capital refers to the equipment, machinery, vehicles and so on that a business uses to make its product or service. Capital-intensive processes are those that require a relatively high level of capital investment compared to the labour cost. These processes are more likely to be highly automated and to be used to produce on a large scale. Capital-intensive production is more likely to be associated with flow production (see below) but any kind of production might require expensive equipment. Capital is a long-term investment for most businesses, and the costs of financing, maintaining and depreciating this equipment represents a substantial overhead. In order to maximise efficiency, firms want their capital investment to be fully utilised (see notes on capacity utilisation). In a capital-intensive process, it can be costly and time-consuming to increase or decrease the scale of production. Labour-intensive Labour refers to the people required to carry out a process in a business. Labour-intensive processes are those that require a relatively high level of labour compared to capital investment. These processes are more likely to be used to produce individual or personalised products, or to produce on a small scale The costs of labour are: wages and other benefits, recruitment, training and so on. Some flexibility in capacity may be available by use of overtime and temporary staff, or by laying-off workers. Long-term growth depends on being able to recruit sufficient suitable staff. Labour intensive processes are more likely to be seen in Job production and in smaller-scale enterprises.

Sectors of industry The sectors 1. Primary Where all raw materials and natural resources are extracted. 1st stage of production process. Extraction through (examples): mining, fishing, forestry, agriculture, etc. (there is sometimes a conflict between renewable vs. non renewable resources) Also known as extractive industries 2. Secondary Where all output from primary is processed into manufactured goods. These goods can be either consumer goods or producer goods. A consumer good is a good bought and used by a consumer such as a car. A producer good (aka capital good) is a good used in the production of another good e.g. steel Also known as manufacturing and construction industries 3. Tertiary Production of a service rather than a good Also known as service industries Importance of tertiary sector of industry 1. Can assist the first 2 stages in the production process e.g. logistics 2. Can help the public or the state 3. Services to public include stuff like hairdressing and leisure facilities 4. Services to the industry include stuff like banking and insurance 5. Services to the state can include stuff like education and health Interdependence There is a interdependence between the 3 sectors. Rules of interdependence: o Primary sector will not survive if there is no demand from secondary sector o Secondary sector will not survive if there is no help from tertiary sector, as those are the people who will be selling the output from the secondary sector o Tertiary sector will not survive if there is no production from primary and secondary sectors. As a country/economy develops more of the workforce migrates to the tertiary (higher) sector. E.g. in China there has been a steady migration of workers from agriculture industry to manufacturing industry As all the factories moved from Hong Kong to China, there has been a transition in the services economy. Location Factors affecting location Land Labour Infrastructure & transportation network Raw materials Pull of the market Government policy Impact of the Internet Can reach customers without a physical presence No geographical limitations Both sales and customer service Faster/cheaper entry/exit to/from markets 9

International Considerations Taxes/tariffs Political stability Labour: availability, cost & skills Market potential Financial incentives Bureaucracy Corporate objectives Judging Success Success can be measured against objectives (which have to be SMART for this reason) The measurement of different criteria measured against objectives size, turnover, shareholders, number of employees, consumer reaction/satisfaction.

Key stakeholders Shareholders Directors Managers/management Employees Customers Suppliers Why do companies fail? Small companies Lack of business skills Economic reasons (trade cycle) Lack of finance Wrong understanding of the market Large companies Management decisions e.g. wrong investments Economic reasons (trade cycle) Changes in the market Loss of confidence by investors and creditors (e.g. a bank may refuse to pass a loan) Human resource management Internal Organisation Internal organisation: The levels of management and division of responsibilities within an organisation. In an organization of any size or complexity, employees' responsibilities typically are defined by what they do, who they report to, and for managers, who reports to them. Over time these definitions are assigned to positions in the organization rather than to specific individuals. The relationships among these positions are illustrated graphically in an organizational chart. Types of Organisation Structure Line Organisation It is perhaps the oldest and the simplest organisational structure. In this kind of structure every manager exercise a direct authority over his subordinate who in turn directly reports to their superiors. There is a hierarchical arrangement of authority. Each department is self contained and works independently of other departments. Lines of authority are vertical i.e. from top to bottom. There are no staff specialists.


Advantages Simple to establish and operate Promotes prompt decision making. Easy to control as the managers have direct control over their subordinates. Communication is fast and easy as there is only vertical flow of communication. Disadvantages Lack of specialisation Managers might get overloaded with too many things to do. Failure of one manager to take proper decisions might affect the whole organisation. However, line structures are suitable for: small businesses where there are few subordinates organisations where there is largely of routine nature and methods of operations are simple. Functional Organisation The organisation is divided into a number of functional areas. This organisation has grouping of activities in accordance with the functions of an organisation such as production, marketing, finance, human resource and so on. The specialist in charge of a functional department has the authority over all other employees for his function.


Advantages Is logical and reflection of functions Follows principle of occupation specialisation Simplifies training Better control as the manger in charge of each functional department is usually an specialist. Disadvantages Overspecialisation and narrow viewpoints of key personnel can limit the organisation growth. Reduced coordination between functions. Conflicts between different functions could be detrimental for the organisation as a whole. Difficult for general managers to coordinate different departments. However, it is much suitable for large organisations where there is ample scope for specialisation. Once harmony and proper coordination among different functions is achieved, it could lead to sure success for an organisation. Line and Staff Organisation It is a combination of line and functional structures. In this organisation a structure, the authority flows in a vertical line and get the help of staff specialist who are in advisory. When the line executives need advice, information about any specific area, these staff specialists are consulted. For example Chief accountant has command authority over accountants and clerks in the accounts departments but he has only advisory relationship with other departments like production or sales.


Advantages Line managers are provided by expert advice by these specialists. Staff managers provide specialist advice which can improve quality of decisions in various departments. Disadvantages Line managers and staff managers might have conflicts on particular issues. Line and staff managers might not be clear as to what the actual area of operations is and what is expected of them. Co-ordination may be a problem. Staff personnel are not accountable for the results and thus may not take tasks seriously. However, Line and staff organisation is very suitable for large organisation. Project Organisation The project structure consists of a number of horizontal organisational units to complete projects of a long duration. A team of specialists from different areas is created for each project. Usually this team is managed by the project manager. The project staff is separate from and independent of the functional departments. Advantages Special attention can be provided to meet the complex demand of the project. It allows maximum use of specialist knowledge thus chances of failure are very less. Project staff works as a team towards common goal which results in high motivation level for its members. Disadvantages As the project staff consists of personnel from diverse fields, it might be quite challenging for the project manager to coordinate among them. Matrix Organisation Matrix organisation combines two structures functional departmentation and project structure. Functional department is a permanent feature of the matrix structure and retains authority for overall operation of the functional units. 13

Project teams are created whenever specific projects require a high degree of technical skill and other resources for a temporary period. Project team form the horizontal chain and functional departments create a vertical chain of command. Members of a particular team are drawn from the functional departments and are placed under the direction of a project manager who has the overall responsibility of a particular project.

Advantage Is oriented towards end results. Professional identification is maintained Pinpoints product-profit responsibility Disadvantages Conflict in organisation authority exists. Possibility of disunity of command exists Requires manager effective in human relations Matrix organisations are used in industries with highly complex product systems for example, aerospace industry where project teams are created for specific space or weapon systems. Management Planning Planning is the core area of all the functions of management. It is the foundation upon which the other three areas should be build. Planning requires management to evaluate where the company is currently, and where it would like to be in the future. From there an appropriate course of action to attain the company's goals and objectives is determined and implemented. The planning process is ongoing. There are uncontrollable, external factors that constantly affect a company both positively and negatively. Depending on the circumstances, these external factors may cause a company to adjust its course of action in accomplishing certain goals. This is referred to as strategic planning. During strategic planning, management analyzes internal and external factors that do and may affect the company, as well as the objectives and goals. From there they determine the company's strengths, weaknesses, opportunities and threats. In order for management to do this effectively, it has to be realistic and comprehensive. Organizing


Getting organized is the second function of management. Management must organize all its resources in order to implement the course of action it determined in the planning process. Through the process of getting organized, management will determine the internal organizational structure; establish and maintain relationships, as well as allocate necessary resources. In determining the internal structure, management must look at the different divisions or departments, the coordination of staff, and what is the best way to handle the necessary tasks and disbursement of information within the company. Management will then divide up the work that needs to be done, determine appropriate departments, and delegate authority and responsibilities. Directing The third function of management is directing. Through directing, management is able to influence and oversee the behavior of the staff in achieving the company's goals, as well as assisting them in accomplishing their own personal or career goals. This influence can be gained through motivation, communication, department dynamics, and department leadership. Employees that are highly motivated generally go above and beyond in their job performance, thereby playing a vital role in the company achieving its goals. For this reason, managers tend to put a lot of focus on motivating their employees. They come up with reward and incentive programs based on job performance and geared toward the employees' needs. Effective communication is vital in maintaining a productive working environment, building positive interpersonal relationships, and problem solving. Understanding the communication process and working on areas that need improvement help managers to become more effective communicators. The best way to find areas that need improvement is to periodically ask themselves and others how well they are doing. Controlling Controlling is the last of the four functions of management. It involves establishing performance standards based on the company's objectives, and evaluating and reporting actual job performance. Once management has done both of these things, it should compare the two to determine any necessary corrective or preventive action. Management should not lower standards in an effort to solve performance problems. Rather they should directly address the employee or department having the problem. Conversely, if limited resources or other external factors prohibit standards from being attained, management should lower standards as needed. The control process, as with the other three, is ongoing. Through controlling, management is able to identify any potential problems and take the necessary preventative measures. Management is also able to identify any developing problems that need to be addressed through corrective action. In order for management to be considered successful, it must attain the goals and objectives of the organization. This requires creative problem solving in each of the four functions of management. More so, success requires that management be both effective and efficient. Therefore, it needs to not only accomplish those goals and objectives, but do it in a way that the cost of accomplishment is viable for the company. Short-term The recruitment and selection process Recruitment Involves attracting the right standard of applicants to apply for vacancies Recruiting may be internal or external Internal recruiting means employing someone already working for the organization: this may mean promotion External recruitment involves appointing someone from outside the organization 15

The table below shows the advantages of both Advantages of internal recruitment Advantages of external recruitment There is less risk because the employer already knows the New ideas are brought into the organization from outside person and their capabilities The cost of advertising is saved, so the recruitment process Advertising externally may reach more widely into the is cheaper. (In some countries and organisations, however, business community (e.g. a teacher might be attracted to equal opportunities legislation means that all positions an educational publishing company and bring useful have to be advertised. experience and knowledge to the job) The opportunity for promotion within the organization Internal jealousies are avoided from promotion encourages people to work hard Induction costs are saved. Recruitment process The typical stages in the recruitment process are as follows 1. Identify a job vacancy exists 2. Draw up a job specification Once a vacancy arises the human resource manager will first identify and record the responsibilities and tasks which are related to the job. After analysing the responsibilities and tasks they are noted down which becomes the Job description for the job. It includes: A job title Department of the business in which the new employee would work Details of the tasks to be performed Responsibilities involved Place in the hierarchical structure Methods of assessing the performance 3. Draw up a person specification On the basis of Job description, a job specification is made. It is a document which outlines the requirements, qualifications and qualities, skills and knowledge required for the job. 4. Advertise the post Can be advertised internally (on the company notice board or newsletter) Can be advertised externally in a newspaper or magazine. Advertisement will usually contain the elements of a person specification with additional information like the name and profile of the company, date and time of interview, address of the company and the contact person etc. 5. Create a shortlist Applications most near to the job specification will be called for an interview Those who do not qualify will be rejected 6. Interview The shortlisted candidates will be called for an interview to verify their qualifications, personal qualities and aptitude for the job. May involve a face to face discussion between the interviewer and interviewee. The firm may also conduct skill test, aptitude tests or personality test if it deems fit so. 7. Appoint the most suitable candidate The candidate who scores the maximum in the interview will be selected for the job and given an appointment letter and contract The job description Whenever a business recruits, it is essential to set out a clear description of what the job entails Title of the job Indication of what the job involves and the level of responsibility (e.g. sales manager, South East Asia) Department and location of the job Organisational department and its location (e.g. marketing and sales 16

department, Beijing, China) General terms of what is involved in Indication of what is involved in the post (Many job vacancies describe the job carrying out the job in fairly general terms, particularly if these might change over time) Responsible to whom Who the employee will report to, their line manager Responsible for whom Other employees for whom the employee will be responsible and manage Other responsibilities Resources for which the employee will be responsible and manage Scope of the post Sets out the level of the post (e.g. managerial) Education and qualifications The level of education required to carry out the post Name of compiler and approver and The person who designed the job description and the date on which the date of issue description was written. Different media for advertising jobs Websites can target local, national and international job seekers Newspapers and magazines are useful for targeting applicants. National newspapers often advertise certain types of jobs on particular days. Magazines are often targeted at special interest groups e.g. accountants or marketers who may be looking for jobs Local radio can attract local recruits, particularly in urban areas Vacancy boards/noticeboards in prominent locations such as supermarkets are useful for recruitment Other suitable media include adverts on the sides of trains, buses and in bus and train stations Training Training involves improving the skills, knowledge and attitudes of employees so as to become more efficient and productive. There are two main types of training: on-the-job or off-the-job. On-the-job is when a worker gets training by watching a more experienced worker doing the job. It is on-the-job training common for unskilled and semi-skilled jobs. Thus the worker gets trained while he is performing his regular duties. Off-the-job is when a worker goes away from the place of work to attend a special course. The training can be in the form of a seminar, workshop or a college course. Off the job training is usually conducted for managerial level employees. The main purposes of training Induction o Introduces an employee to a new job and to the company and/or the workplace o It will usually include an overview of the company o There will be information specific to certain industries o Getting to know other people and being introduced to company procedures Understanding the job requirements o Initial training should focus on making sure that an employee is able to fulfill the basic requirements of the job Development of job skills o Specialist skills will need to be developed to enable an employee to do job well o These might be interacting with customers or using important IT applications Broadening knowledge of the business o The more trainees know about the wider activities of the business and the nature of its work, the more they will be able to help the organization meet it objectives Changing attitudes and skills o Organisations frequently have to make changes o Training needs to be designed to help individuals adapt to new attitudes which move the organization forward Motivation and Rewards People work for a number of reasons. Most people work because they need to earn money to survive, while others work voluntarily for other reasons. Motivation is the reason why people work, and it drives them to work better. Therefore, 17

managers try to find out what motivate workers and use them to encourage workers to work more efficiency. This results in higher productivity, increased output, and ultimately higher profits. Nowadays, machinery is more common in businesses which results in increased productivity as well. However, the amount that a well-motivated workforce can produce must still be recognized, since employees are a firms greatest assets. Importance of motivation in a business A positive motivation philosophy and practice should improve productivity, quality, and service. Motivation helps the business: To achieve its set goals and targets Improves efficiency and productivity Reduces wastage lower level of staff turnover which leads to lower recruitment and training costs Lower rate of absenteeism Better quality of products which improves the business image in the long run Types of motivators There are three ways to motivate a workforce: financial motivators non-financial motivators ways to increase job satisfaction Financial rewards Pay may be the basic reason why people work, but different kinds of pay can motivate people differently. Here are the most common methods of payment: Wages Wages are paid every week, in cash or straight into the bank account, so that the employee does not have to wait long for his/her money. People tend to pay wages to manual workers. Since wages are paid weekly, they must be calculated every week which takes time and money. Wages clerks are paid to do this task. Workers getextra pay for the overtime that they do. There are some ways that wages could be calculated: Time rate Time rate is payment according to how many hours an employee has worked. It is used in businesses where it is difficult to measure the output of a worker. Pros: o Easy to calculate the wage of the employee. A time-sheet must be filled out by the Accounts department to calculate the wage. Cons: o Both good and bad workers get paid the same wages. Therefore, more supervisors are needed to maintain good productivity. A clocking-in system is needed to know how many hours an employee has done. Here is an example of a wage slip and time-sheet:


They show: Basic pay + Overtime = Gross Pay Gross pay - Deductions = Net Pay Deductions include: Taxes Pension Union fees National insurance: entitles the payee to short-term unemployment benefits, sickness benefits and state pension. Piece rate Piece rates are paid depending on how many units they have produced. There is usually a base pay (minimum wage) and the piece rate is calculated as a bonus on how many units were created. Piece rates are found in businesses where it is possible to measure workers productivity. Pros o Encourages workers to work faster and produce more goods. Cons o Workers will often neglect quality, and businesses will need a quality control system which is expensive. o Workers who focus on quality will earn less. Tension is caused when some workers earn more than others. o If machinery breaks down, employees earn less. That is why there is a guaranteed minimum pay. Salaries Salaries are paid monthly, and normally straight into the bank account. They are usually for white collar workers. A salary is counted as an amount per year that is divided into 12 monthly accounts. You do not usually receive overtime. Managers only need to pay their workers once a month, and since the amount is transferred by the bank, the manager loses much less time and money calculate salary. Salaries are usually a standard rate, but other rewards could be given to employees: Commission 19

A percentage is paid, usually to sales staff, depending on the value of goods they have sold. Workers are encouraged to sell more. However, they could persuade customers to buy products they don'r really want, making the company look bad. Just like the piece rate, in a bad month where there are little sales, worker's pay will fall. Profit sharing o Employees receive a percentage of the profits made. However, they will get nothing if the business doesn't make a profit. This is often used in the service sector, where it is hard to find an employees contribution to the company. Bonus o A lump sum paid to employees who have done well. It is usually paid at the end of the year or before holidays. However, this could cause jealousy between workers. Giving bonuses to a team works better. Performance related pay o Employee pay is linked to the effectiveness of their work. It is often used in organisations where it is hard to measure productivity. It uses the system of appraisal: employees are observed and their colleagues are interviewed to determine their effectiveness. Afterwards, the immediate superior of the employee has a meeting with them to discuss their effectiveness. Share ownership o Employees receive some shares from the company. They will either benefit from dividends or sell the shares when their price has risen. They will be more motivated because they feel like apart of the company.

Motivating factors - non-financial motivators There are other factors that motivate people in a business, and they are often called perks or fringe benefits. They may be having free accommodation, free car, etc... However, when you look at it, it is just money in different forms. Here is a list of these motivators: Children's education. Discounts on company products. Free Healthcare. Company vehicle. Free accommodation. Share options. Expense accounts. Pension. Free holidays. Job satisfaction Employees will become more motivated by enjoying the job they do. Job satisfaction can come in different ways. However, there are some factors that demotivate employees if they are not satisfied, and must be satisfied before the motivators can take effect. Here are some things that make workers' jobs satisfying: Pay. Promotion. working conditions. Fringe benefits. Management Working hours. The nature of the work itself. Colleagues, etc... Herzberg and Maslow stresses that things such as responsibility recognition is also crucial to provide job satisfaction. Letting workers contribute to the job would also help, making jobs less boring and more creative. Here are some policies to increase job satisfaction: Job rotation 20

Workers in a production line can now change jobs with each other and making their jobs not so boring. It helps train the employee in different aspects of their jobs so that they can cover for other employees if they do not show up. Job enlargement o Adding tasks of a similar level to a worker's job. Job enlargement simply gives more variety to employees' work which makes it more enjoyable. Job enrichment o Adding tasks of a higher level to a worker's job. Workers may need training, but they will be taking a step closer to their potential. Workers become more committed to their job which gives them more satisfaction

Autonomous work groups or teamworking: This is when group of workers are given total responsibility to organise themselves and perform a task. This makes the employees feel more important, as well as giving them a sense of belonging when they are part of a team. If they organise themselves differently every time, the team could get job enlargement and job enrichment too. Leadership Studies have shown that leadership has a great impact on worker's motivation. Good managers have leadership skills that inspire their workers to work better, as well as directing them with a common goal. Managers use many styles of leadership, and they can be summarised into 3 main styles: Autocratic leadership: The manager controls all aspects of their subordinates' work. They keep themselves separate from employees. Employees are expected to obey every command and cannot contribute to decisions. Communication is only top-down. Laissez-faire leadership: Objectives are shown to employees, but the task is completely delegated to them. Communication can be difficult since clear instructions are not given. The manager has a limited role in this type of leadership. Democratic leadership: The manager discusses tasks with his employees before making decisions. Communication will be two-way, both top-down and bottom-up. Here is a diagram to summarise the leadership styles:

The style of leadership used can vary depending on situations where they are the most effective. Formal and informal groups A formal group is an official group that is formed to do a specific task in an organisation. An informal group is a group of people which are formed independently by themselves. They are not official, but the people in the group have a common interest or cause. Both of these groups are needed in business, and let's see why in this example. e.g. a 21

school might create a football team (formal group) but the players need to bond together to play effectively (informal group). Formal groups in business Departments withing a business are good examples of formal groups. From time to time different groups might be set up to cope with different problems or do different tasks. Sometimes people from different departments could come together in a group to do a team project. Informal groups in business There are can be many informal groups in a business that can increase the motivation of workers because they have a true sense of belonging. e.g. There is a group of factory workers who are interested in basketball, and they form an informal group, as a result, when they get back into their formal group they are likely to co-ordinate better with each other. There are other scenarios where two departments merge to become one, making them one formal group. However, the people from these former departments still see themselves as separate from each other. These two groups of people will refuse to co-operate until they are also merged into an informal group. Therefore, informal groups should be handled carefully in business to yield the best results. Regular meetings, free holidays, sporting events and such things could be organised to create informal groups and use them in a more positive way to avoid them getting into the way of business activity. Motivation theories People work very hard when they are working for themselves. When they work for other people, less so. Managers have been looking into what makes employees contribute their fullest to the company and these studies have resulted four main theories of motivation. F.W.Taylor Theory: Money is the main motivator. If employees are paid more, they work more. Work is broken down into simple processes, and more money is paid which will increase the level of productivity an employee will achieve. The extra pay is less than the increased productivity. Cons: Workers are seen rather like machines, and this theory does not take into account non-financial motivators. Even if you pay more, there is no guarantee of a productivity rise. It is difficult to measure an employees output. Maslow Maslow created what is know as the hierarchy of needs. In this diagram, there are 5 different types of motivation: Physiological needs: basic requirements for survival. Security needs: the need to by physically safe. Social needs: the need to belong and have good relationships with co-workers. Esteem needs: the need for self-respect and to be respected by others. Self-actualisation needs: the need to reach your full potential and be promoted. Diagram


Businesses realise that the more levels of motivation are available to workers, the harder they will work. Maslow also suggest that each level of motivation must be achieved before going to the next level. Once one level of motivation is met, more of that will no longer motivate the employee. Cons: Some levels are not present in some jobs. Some rewards belong to more than one level on others. Managers need to identify the levels of motivation in any job before using it to motivate employees. Herzberg To Herzberg, humans have hygiene factors, or basic animal needs of humans. We also have motivational factors/motivators, that are required for the human to grow psychologically. Hygiene factors: Status. Security. Working conditions. Company policies and administration. Relationship with supervisor. Relationship with subordinates. Salary. Motivational factors: Achievement. Recognition. Personal growth/development. Advancement/promotion. Job satisfaction. To Herzberg, if the hygiene factors are not satisfied, they will act as demotivators. They are not motivators, since the motivating effect quickly wears off after they have been satisfied. True motivators are Herzberg's motivational factors. McGregor McGregor splits his theory into what managers believe. One type believes in theory X, while the other type believes in theory Y. Here is the table: 23

Here are some differences in how a X manager will work and how an Y manager will work: X managers believe that people are naturally lazy, and has to be pushed with external factors to work harder. (e.g. higher pay). Y managers believe that people want to do a good days work but need a good environment to do the work. A better environment is an internal factor. X managers will try to provide incentives and supervision for employees to work hard. Y managers will try to provide a favourable environment so that employees can enjoy their work. Theory's like Taylor's theory are X theories, while others like McGregor's theory are Y theories. People may say that money is the main motivator, but studies have shown that many people leave jobs because other motivational factors are not available to them. Ending employment Key ideas A contract of employment can be ended by either party There are reasons for employees ending employment: o Might be retiring o Might be bored or undervalued o Theyve found a better job o May be moving out of the area o Conflict in the workplace o Medical conditions o Personal issues Labour Turnover This is used to measure how many people leave a business over the period of a year Businesses will want this to be low as possible because it costs money and time to: o Advertise o Recruit workers o Train new workers Why reduce workforce? New technology can now do their job o ATMs replacing bank tellers o Factory machinery replacing factory workers Costs need to be reduced o De-layering Demand for their product is low o Bookstores o Video stores How can the workforce be reduced? Businesses can reduce the number of workers by: Offering early retirement o Expensive since payments will have to be made Not replacing people who leave o Known as natural wastage Making new jobs art-time rather than full-time o Reduces the number of hours that must be paid for Asking for volunteers to be made redundant 24

All are examples of redundancy.

Still have to pay redundancy money

Dismissal Occurs when an employer terminates a workers employment contract Often known as giving them the sack Many reasons for dismissal o May be unfair or unfair o Fair dismissal may include: Poor timekeeping Stealing company property Bullying and harassing other workers Criminal damage to workplace Not declaring a criminal conviction e.g. the worker lied on their application form o Unfair dismissal may include: Selecting people for redundancy because they are in a trade union Sacking a female because she is pregnant Sacking a worker for incompetence when no training has been given Dismissing someone because of their gender or race If a firm is found to have dismissed someone unfairly, they can be heavily fined. o If you have been unfairly dismissed, you can seek a lawyer and go to court to have a hearing. If found that you have been unfairly dismissed, you will be compensated. Can be categorized as: o Misconduct Behavior at work may result in a verbal warning or written warning o Gross misconduct Like a criminal conviction e.g. coming into work drunk or high. Exact legal requirements vary from country to country A worker may prove that the true cause for dismissal was, for example, some form of prejudice, which would be unfair1 Redundancy Occurs when a job is no longer needed Accounting and Finance Sources of Finance Internal sources of finance: The money raised from inside the business External sources of finance: The money raised from outside the business


A business might have access to various sources of financing its needs. These sources of finance can be classified as internal and external: Internal Sales of assets o Business might sell off old, obsolete assets which are no longer used by the business to raise additional cash for the business. Advantage Better use of capital Disadvantage A new business might not have any old or obsolete assets

Retained profits o Businesses (especially limited companies) usually keep some part of the profit every year for future use. This is also known as ploughed back profit. Over a period of time it can total up to a huge amount which can be used for financing the business. Advantage Disadvantage

Does not increase liabilities Not available to new businesses No need to pay interest Reduction in working capital o Cutting the stock levels can also help the business to raise additional cash. Advantage Disadvantage

Costs related to storage of stock is May lead to shortage of stock and loss of reduced sales

External Short Term 26

Bank overdraft o Bank overdraft is a facility given by banks to its business customers, people having current accounts. Through this facility the customers can overdraw their accounts to a greater value than the balance in the account. To overdrawn amount is agreed in advance with the bank manager. The bank assigns a limit to overdraw from the account and the business can meet its short term liabilities by writing cheques to the extent of limit allowed. Advantage No need for collaterals or security. Disadvantage

Interest rates are usually variable and higher than bank loans. More flexible and the overdraft amount can Cash flow problems can arise if the bank be adjusted every month according to asks for the overdraft to be repaid at a short needs. notice.

Trade Credit o Usually in business dealing supplier give a grace period to their customers to pay for the purchases. This can range from 1 week to 90 days depending upon the type of business and industry o By delaying the payment of bills for goods or services received, a business is, in effect, obtaining finance which can be used for more important expenditures. Advantage No interest has to be paid. Disadvantage The business may not get cash discounts.

Factoring of debts o It involves the business selling its bills receivable to a debt factoring company at a discounted price. In this way the business get access to instant cash.

Medium Term Hire purchase o It involves purchasing an asset paying for it over a period of time. Usually a percentage of the price is paid as down payment and the rest is paid in installments for the period of time agreed upon. The business has to pay an interest on these installments. Leasing o Leasing involves using an asset, but the ownership does not pass to the user. Business can lease a building or machinery and a periodic payment is made as rent, till the time the business uses the assets. The business does not need to purchase the asset. Advantage Disadvantage


The business can benefit from the asset without The total cost of leasing may end up higher than the purchasing it. purchasing of asset Usually the maintenance of the asset is done by the leasing firm.

Medium term bank loan o A bank loan for 1 year to 5 years.

Long term Long term bank loan o borrowing from bank for a limited period of time. The business has to pay an interest on the borrowing. This interest may be fixed or variable. Businesses taking loan will often have to provide security or collateral for the loan. Issue of share o It is a permanent source of finance but only available to limited companies. Public limited companies can sell further shares up to the limit of their authorized share capital. Private limited companies can sell further shares to existing shareholders. Advantage Disadvantage

Permanent source of capital. Dividends have to be paid to the In case of ordinary shares business will shareholders. only pay dividends if there is a profit. Debentures o A debenture is defined as a certificate of acceptance of loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures. It is issued for a long periods of time. Debentures are generally freely transferrable by the debenture holder. Debenture holders have no voting rights and the interest given to them is a charge against profit. Sales and lease back o this involves a firm selling its assets or property to an investment company and then leasing it back over a long period of time. The business thus can use the asset without purchasing it and can use the revenue earned from its sale for other purposes.

Choosing the right source of finance Factors affecting the choice of finance With so many sources of finance to choose from, a business has to carefully select the appropriate one. The following points may be considered while selecting the most appropriate source of finance. Type of expenditure: Whether the finance is needed for capital expenditure or revenue expenditure. Issue of shares will be more appropriate for limited businesses who want to expand rapidly. If it is a cash flow problem then bank overdraft may be more appropriate. How long the business needs the finance? How much amount is needed? What is the status and size of the business? 28

o A small business might not be able to raise additional capital through issue of shares. What is the capital composition of the business? o Highly geared businesses (i.e. with more debt capital and less equity) would rather go in for equity financing. What will bank see before lending money? o When applying for loan the bank manager or your creditor might be interested in knowing the status of your business. They will review your Balance sheet: to see how much you own and how much you owe to others. Profit and loss account: to see the profitability of your business. Cash flow forecast: Predictions about how much and from where cash will come in and go out.

Budgets and Cashflow Budgets A budget is a document that translates plans into money - money that will need to be spent to get your planned activities done (expenditure) and money that will need to be generated to cover the costs of getting the work done (income). It is an estimate, or informed guess, about what you will need in monetary terms to do your work. Different budgeting techniques The two main techniques for budgeting are incremental budgeting and zero based budgeting. Incremental budgets Incremental budgets are budgets in which the figures are based on those of the actual expenditure for the previous year, with a percentage added for an inflationary increase for the next year. This is an easy method that saves time but it is the lazy way and is often inaccurate. This budgeting technique is only suitable for organisations where each year is very similar to the previous one in terms of activities. Very few dynamic organisations or projects are so stable that this budgeting technique really works for them. Zero based budgets In zero based budgets, past figures are not used as the starting point. The budgeting process starts from scratch with the proposed activities for the year. The result is a more detailed and accurate budget, but it takes more time and energy to prepare a budget in this way. This technique is essential for new organisations and projects, but it is also probably the best route to go in a dynamic organisation that is proactive in taking on new challenges. Limitations of Budgeting Budgeting is a time consuming and costly job. The development of budget includes many repetitive steps before the budget is finally approved. Compared with its costs, budgeting provides little valuable, reliable and relevant information. Budgets are based on assumptions that often turn out to be inaccurate. Budgets also cause great deal of waste and behavioral problems. Peoples main goal is to meet the budgets, so they always try to negotiate to get lower targets with lower sales and higher costs, which are well known as padding the budgets.


A sample budget statement

Advantages It provides targets Involving staff motivates them You can use variances to highlight weaknesses The coordination between departments is improved

Spending is controlled Ability to identify problems early. This means that you can do enough preparation in advance and prevent danger e.g. apply for an overdraft facility a month in advance

Disadvantages If the target is unrealistic, it can be demotivating If staff are not involved, demotivation If not flexible, the business could lose business opportunities Conflicts may arise if, especially between managers, if targets are not met, hence leading to a reduction in the level of morale Large amounts of money may be dangerous in the wrong hands


Cash flow forecast Cash inflow Cash inflow means all the sources from which cash comes into the business over a period of time. Cash inflow can result from Cash sales Payment received from debtors Investment by owner Loans and overdrafts Cash outflow Cash outflow means all the sources from which cash goes out of the business over a period of time. Cash outflow can result from Cash purchases Payment of wages and salaries to staff Purchase of fixed assets Payments to Creditors Repaying loans Miscellaneous expenses. Cash flow forecasts Cash flow forecast is a budget or estimate which identifies the anticipated income and expenditure and the time when it is likely to take place, usually on a month by month basis. Purpose of Cash flow forecast The primary purpose of the cash flow budget is to predict the sources and uses of cash and to identify your cash position for a specific time period (daily, weekly, monthly etc.). Cash flow problems Sometimes a profitable business might face cash flow problems. It may be due to There might be a sudden fall in sales whereas the expenses may not come down in the same proportion. Any unforeseen expenses may lead to high cash outflow as compared to cash inflow in that particular period. Debtors payback period is too long. Main causes of a liquidity crisis 1. Slow or no payment from customers 2. Sales not as high as predicted 3. Costs higher than predicted 4. Unexpected costs arise e.g. something breaks and maintenance is needed 5. Interest rates are higher than predicted (variable rates)


A sample CFF

Advantages of a cash flow statement 1. It shows the actual cash position available with the company between the two balance sheet dates which funds flow and profit and loss account are unable to show and therefore it is important to make a cash flow report if you want to know about the liquidity position of the company. 2. It helps the company in making accurate projections regarding the future liquidity position of the company and hence arrange for any shortfall in money by making arrangements in advance and if there is excess than it can help the company in earning extra return out if idle funds. 3. It acts like a filter and is used by many analyst and investors to judge whether company has prepared the financial statements properly or not because if there is any discrepancy in the cash position as shown by balance sheet with cash flow statement than it means that statements are incorrect. Disadvantages of a cash flow forecast 1. Since it shows only cash position, it is not possible to arrive at actual profit and loss of the company by just looking at this statement alone. 2. In isolation this is of no use and it requires other financial statements like balance sheet, profit and loss etc, and therefore limiting its use Improving cash flow Speed up cash coming in the company by: Increasing sales Taking an overdraft or short term loan Payment terms for customers Increasing owners capital 32

Slow down cash going out of the business by: Lease vs. buying equipment Renting vs. owning buildings and the premises within which the company works Reduce investment Trade credit with suppliers Reducing owners withdrawals Exam question How can budgeting aid decision making (3 marks)?

Helps the owners of a business take appropriate measures beforehand to prevent a worsening of a situation (1 mark) Targets can be made after to motivate staff and so decisions about the future can be made (1 mark) It can allow a business to publish accurate decisions on expenditure (1 mark)

Costs and Breakeven Fixed cost: All costs which do not change with the change in output. Example rent, interest charges. Variable cost: All costs which change with the change in output. Example materials, fuel and labour cost. Total cost= fixed cost + variable cost Revenue: Income from sales of goods and services (Quantity sold Breakeven point: Level of output where the sales revenue is equal to the total cost. That level of output where there is no profit or loss. If a business is unable to reach this level of output it will suffer a loss from this product. Any output in excess of break even generates profit for the company. Margin of Safety: The horizontal distance between the breakeven level of output and the current level of output is known as margin of safety.


The Break-even chart These are graphs which show how costs and revenues of a business change with a change in sales. They show the level of sales the business must make in order to break even.


Method of plotting Break even chart Calculate fixed cost, total cost and Sales at different levels of output in a table Plot the Sales on X axis, Output on Y axis Plot fixed cost from the table Plot total cost from the table Plot sales from the table The point at which the sales (total revenue TR) line crosses the total cost (TC) line is the breakeven point. Breakeven point can be expressed in Output as well as in Value. Uses of break-even analysis Measure profit and losses at different levels of production and sales. To predict the effect of changes in price of sales. To analysis the relationship between fixed cost and variable cost. To predict the effect on profitability if changes in cost and efficiency. Criticism of break-even analysis Fixed cost is represented as a straight line but in actual fixed costs is likely to change at different levels of output. A stepped line may represent fixed cost more accurately. Assumes that sales prices are constant at all levels of output. Assumes production and sales are the same. Breakeven charts may be time consuming to prepare. It can only apply to a single product or single mix of products Breakeven point: Calculating method This method involves calculating break even output without the use of graphs. Calculate the Contribution per unit. Contribution is the excess of price over variable costs. Any money received over the variable costs makes a contribution towards the fixed costs. Contribution per unit = Selling price per unit Variable cost per unit Divide Fixed Cost by Contribution per unit (Fixed cost/contribution per unit) This will give you the break even output. Break-even in revenue (Break even (in units) X price per unit Financial statements Trading Account: The trading account reveals the gross profit of the business. Gross profit: The difference between sales revenue and the direct cost of the goods sold. Cost of goods sold: The cost of purchasing the goods from suppliers (in case of retailing business) or the cost of producing the goods that are sold.


Profit and loss account This account shows the net profit of the business. Net profit = (Gross Profit Expenses and Overheads) + Income from non trading activities Appropriation account is that part of the profit and loss account which shows how the profit after tax is distributed. This profit can be distributed as dividends or can be kept in the company as retained profits.

Balance Sheet Balance sheet shows the value of a businesss assets and liabilities on a particular date. It records what the firm owns (assets), what it owes (liabilities), what it is owed and how it is financed (owners equity).


Balance Sheet Terms Assets: all those items of value which are owned by the business. Assets are further categorized as fixed assets and current assets. Fixed Assets: All those assets which are owned by the business for a period of more than one year. For example, Vehicle, machinery, land, building. Current Assets: all those assets which are owned by the business for a short period of time. Example Cash, stock, debtors. Liabilities: All items owed by the business. Liabilities can be classified in two types: Long term liabilities: These are long term borrowings which are owed by the business for more than one year. Examples include long term bank loans. Current liabilities: These are defined as obligations or debts of the business which have to be settled within one year. Example includes Creditors and bank overdrafts, stock. Working Capital: Also known as net current assets= Current assets - Current liabilities Working capital is needed for the day to day functioning of the business. A shortage of working capital can lead to cash flow problems. Net assets: Fixed assets + Working Capital Shareholders fund: The total sum of money invested into the business by the shareholders. Capital employed: It is the total long term liabilities and shareholders funds which have been used to pay for the net assets of the business. Capital employed = Net assets Accounting Equation Assets= Liabilities + Shareholders funds Ratios and Performance Profitability ratios These ratios measure the profit in relation to sales or capital employed. Gross profit margin Gross Profit Margin shows the relationship of gross profit and sales turnover. GrossProfit Gross Profit X 100 Margin= Sales 36

turnover A lower ratio may be the result of the following factors Decrease in selling price of goods sold Increase in cost of goods sold Over valuation of opening stock or under valuation of closing stock Net profit margin It is an index of efficiency and profitability of a business. Net Profit NetProfit Margin= X 100 Sales turnover Mark up cost refers to profit expressed as a percentage of cost price. Gross Profit Mark Up= X 100 Cost of goods sold Rate of return on Capital (ROCE) It shows the return on the investment made by the owner. Net Profit Return on Capital employed= Capital

X 100

Efficiency ratios These ratios state how efficiently certain areas of the business are performing. Stock turnover ratio It indicates the number of times in a year the average stock can be sold off. The more times the stock is sold the more efficient the business. Cost of goods sold Stock turnover ratio= Average stock at cost price Average Stock is calculated as (Opening stock + Closing stock)/2 Asset turnover ratio Asset turnover is a measure of how effectively the assets are being used to generate sales. It is one of the ratios that would be considered when interpreting the results of profitability ratio analyses like ROCE. Sales turnover Asset turnover ratio= Total assets-current liabilities If the asset turnover is high than its competitors, it shows as an over investment in assets. However, a new firm may have a higher asset turnover ratio than its competitors as the assets are newer and have a higher value. Moreover, some firms may use a lower rate of depreciation than its competitors. In some cases, firms may purchase assets whereas its competitors firms are leasing assets. Trade debtor collection period (Debtors days) This ratio indicates how efficient the company is at controlling its debtors. Total Debtors Debtors days= X 360 Total Sales turnover Trade creditor payment period (Creditors Days) This ratio indicates how the company uses short term financing to fund its activities. Total Creditors Creditors days= X 360 Cost of sales 37

Both these ratios are useful for intra-firm comparison. Liquidity ratios It measures the availability of cash and other liquid assets to meet the current liabilities of the firm. Current Ratio The current ratio compares total current assets to total current liabilities and is intended to indicate whether there are sufficient short-term assets to meet the short-term liabilities. Current assets: Current liabilities The ratio when calculated may be expressed as either a ratio or 1, with current liabilities being set to 1, or as number of times, representing the relative size of the amount of total current assets compared with total current liabilities. A ratio of 2:1 or current assets as 2 times is considered to be healthy for a business. Acid test ratio It is quite similar to Current ratio. The only difference in the items involved between the two ratios is that the acid test ratio or quick ratio does not include stock. Current assets Stock Acid Test ratio = Current liabilities An acid test ratio 1:1 is considered as healthy. If it is below 1 it suggest the business has insufficient liquid assets to meet their short term liabilities. Limitations of Ratio Analysis Differences in definitions Comparisons are made difficult due to differences in definition of various financial terms. Ratio Analysis can be used for: Inter-firm Comparisons o Comparing the performance of one firm with another firm in the same industry. Intra-firm Comparisons o Comparing the performance of a firm with previous years performance. Marketing The Market Usually it is not economical for a company to focus its marketing effort to the whole market. The reason behind is that some people might be interested in buying your product and some might not be, so you are wasting your time and effort on those people who dont want to buy your products. Bases of Segmentation Age o Products for kids, teens, old people. Income o different income levels of different people Lifestyle o types of activities people do to spend their time. Region o cold, hot, wet and dry places. Gender o male or female. Use of the product: 38

Car may be used by a individual for private purpose or may be used by somebody else as a taxi.

The Marketing Mix The 'marketing mix' is a set of controllable, tactical marketing tools that work together to achieve company's objectives. Elements of the marketing mix are often referred to as 'the four Ps': Product - A tangible object or an intangible service that is mass produced or manufactured on a large scale with a specific volume of units. Intangible products are often service based like the tourism industry & the hotel industry. Typical examples of a mass produced tangible object are the motor car and the disposable razor. A less obvious but ubiquitous mass produced service is a computer operating system. Price The price is the amount a customer pays for the product. It is determined by a number of factors including market share, competition, material costs, product identity and the customer's perceived value of the product. The business may increase or decrease the price of product if other stores have the same product. Place Place represents the location where a product can be purchased. It is often referred to as the distribution channel. It can include any physical store as well as virtual stores on the Internet. Promotion Promotion represents all of the communications that a marketer may use in the marketplace. Promotion has four distinct elements - advertising, public relations, word of mouth and point of sale. Product Product can be goods or service. Goods are of two types: Consumer goods o Goods which are consumed by people such as chocolate, washing machine, television etc. Producer goods o Goods which are used by producers or manufactures to produce further goods and services e.g. bottling plant, machinery, trucks etc. Services are also of two types: Consumer services: e.g. taxi, car repairing, schools etc Producer Services: e.g. factory insurance, advertising agencies. Features of a successful product Every successful product has the following features: It satisfying the needs and wants of the customers. Its provides value for money to the consumers. Usually distinctive from other me too products. Stimulates interest of the consumers. Process of New Product Development Step 1-Idea Generation Ideas for new products can be obtained from basic research using a SWOT analysis (OPPORTUNITY ANALYSIS), Market and consumer trends, company's R&D department, competitors, focus groups, employees, salespeople, corporate spies, trade shows Brainstorming Step 2-Idea Screening The object is to eliminate unsound concepts prior to devoting resources to them. 39

The screeners must ask at least three questions: Will the customer in the target market benefit from the product? What is the size and growth forecasts of the market segment/target market? What is the current or expected competitive pressure for the product idea? What are the industry sales and market trends the product idea is based on? Is it technically feasible to manufacture the product? Will the product be profitable when manufactured and delivered to the customer at the target price? Step 3-Concept Development and Testing Develop the marketing and engineering details Who is the target market and who is the decision maker in the purchasing process? What product features must the product incorporate? What benefits will the product provide? How will consumers react to the product? How will the product be produced most cost effectively? Prove feasibility through virtual computer aided rendering, and rapid prototyping What will it cost to produce it? Testing the Concept by asking a sample of prospective customers what they think of the idea. Step 4-Business Analysis The strategic management team has to think about the following issues: Estimate likely selling price based upon competition and customer feedback Estimate sales volume based upon size of market Estimate profitability and breakeven point Step 5-Beta Testing and Market Testing Produce a physical prototype or mock-up Test the product (and its packaging) in typical usage situations Conduct focus group customer interviews or introduce at trade show Make adjustments where necessary Produce an initial run of the product and sell it in a test market area to determine customer acceptance Step 6-Commercialization If the test marketing stage has been successful the company will: Launch the product (national or region by region) Produce and place advertisements and other promotions Fill the distribution pipeline with product Critical path analysis is most useful at this stage Process of Product Development (Simplified description) A Product goes through a series of steps before it reaches the market: It all starts with an idea. The idea needs to be further researched to see the feasibility of production. After this a market research might be conducted to find out potential demand. If the marketing department sees a potential market, a prototype is developed which is then tested in a limited market. Feedback is taken and if necessary changes are made to the product to suit it to the market. Once the product is finalised the product is launched onto the main market. Product Life Cycle A Product life cycle shows the different stages through which a product goes from development to decline.


Introduction Stage Product launched into the market. Sales grow slowly. Informative advertising is done. Firm might not earn a profit at this stage. Price skimming may be used if the product is new invention and has no competitors. Competitive pricing may be used if it already has lot of competitors. Growth Stage Sales grow rapidly. Persuasive advertising may be used. Prices may be reduced if faced by stiff competition. Firm starts earning profits. Maturity Stage Sales increase slowly and reach the highest sales figures. Competition is at the maximum level as many new me too products may be in the market. Promotional pricing might be a good option. Profits are at the highest level as the firm is also getting economies of scale. Repetitive advertising is done to remind the consumers. Saturation Stage Sales are stagnant. Maximum competition but no new competitors and the market is already crowded with the same types of products. Promotional pricing or competitive pricing may be a good choice. Advertising efforts at its highest point. Decline Stage Sales start to decline. Profits start to come down. Marketing research it done to find out whether this decline is permanent or temporary. If the decline is permanent in nature then stop the production of the product, otherwise implement extension strategies. Advertising is reduced. Extension stage Introduce new variations of the original product 41

Try to sell the product in different markets. Make small changes in the colour, design or packaging Start a new advertising campaign. Add more retail outlets to boost sales.

Packaging Why packaging is done? To protect the product while transportation or storage. Usually for fragile products packaging is very important. Think about transporting a 52 inch LCD television from Japan to US. To promote the product, distinguish it among other products through vibrant colours, fonts or material of packaging. On a departmental store self an attractive packing will play a vital role in attracting the attention of the customers. To inform the customers about the contents, ingredients, weight, size of the product. Many government make is mandatory to print this information on the packing of the products Branding Why have a brand? The objectives that a good brand will achieve include: Delivers the message clearly Confirms your credibility Connects your target prospects emotionally Motivates the buyer Concretes User Loyalty To succeed in branding you must understand the needs and wants of your customers and prospects. You do this by integrating your brand strategies through your company at every point of public contact. Your brand resides within the hearts and minds of customers, clients, and prospects. It is the sum total of their experiences and perceptions, some of which you can influence, and some that you cannot. A strong brand is invaluable as the battle for customers intensifies day by day. It's important to spend time investing in researching, defining, and building your brand. After all your brand is the source of a promise to your consumer. It's a foundational piece in your marketing communication and one you do not want to be without. Price Cost Plus Pricing It involves estimating how many of the product will be produced, then calculating the total cost of producing this output and finally adding a percentage mark-up for profit. (Total Cost/Output)* % mark-up=Selling price Penetration Pricing Involves setting the price lower than the competitors prices. This strategy is usually followed where there is a lot of competition and the product launched may not be unique. Price Skimming This is where the product is launched at a premium price. It is common with products which are a new invention and people are willing to pay a premium price because of the novelty factors. It is quite common with Mobile phones and other technological products. Competitive Pricing It involves setting the prices in line with the competitors price or just below their prices. Promotional Pricing 42

It involves reducing the price of product for a limited period of time. Summer sales are an example of promotional pricing. Promotion In todays business environment where communicating with the customer is everything, Promotion holds a very important place in the Marketing mix. With so much of competition and me too products a successful business is one which can communicate effectively with it customers and convince them to buy its products. Promotion is usually thought as advertsing but Promotion is much more than advertising. It involves above the line and below the line activities to communicate with their potential and existing customers and improve sales. Above the line Activities include advertising. o Advertising means communicating with the customers through a paid media. Advertising is of two types: o Informative advertising is when the message communicated includes information about size, quantity, ingredients, composition, configuration or content of the product. The idea is to influence people to buy products buy showing the superiority of the product in terms of quantity or quality. This type of advertising is usually common with technological products such as mobile phones or computers. o Persuasive advertising is when the message communicated focuses on persuading the customers to buy the product through celebrity endorsements, or use of glamour. Usually advertisements have an element of both informative and persuasive advertising. Mediums of advertising Television Radio Newspaper and magazines Posters/billboards Leaflets/direct mail Below the line Activities include all other promotional activities except advertising i.e. Sales promotion It includes activities like: o price reduction o giving out free gifts with every purchase o organising competitions o point of sale display o demonstrations o after-sales service o giving out free samples o Sponsorships It includes sponsoring sports events or cultural shows or fashion shows o Public relations Organizing press conferences in giving out information about new products or carrying out some social service activity. o Personal selling Where a representative from the company influences the customers to buy the product. It is common for products which are expensive or custom designed. Sales person at a car showroom is a typical example of personal selling.

Advertising Advertising is the name given to the process of commercial promotion of goods and services in order to increase its sales. Advertising can be done by means of a number of mediums like television, newspapers, wall paintings, billboards, 43

magazines, Internet, by the word-of-mouth and in many other ways. Advertising informs the buyers about the availability of a certain product or service in the market and encourages them to buy it. Objectives of advertising The main objectives of advertising are: Increasing the usage of a certain product and hence acquiring more orders. Creating new customers and increasing brand recognition. To obtain feedback from customers regarding a certain product. To indicate introduction of new products or replacement of old ones. Issues related with advertising Apart from promoting commercial goods, advertising can also be used to educate and motivate the public about noncommercial issues such as AIDS, deforestation, family planning, etc. It is a powerful media which is capable of reaching to the far out masses. Now a days we find many ads on the internet also. These ads in most cases, have been successfully in connecting the user with the information he requires. To prevent complete commercialization of electronic media, some countries have made it mandatory for broadcasters to air some advertisements related to consumer interest. These public advertisements educate people of that country on a number of social and moral issues. However, some people are very keen on exposing the negative side of advertising. The impact that advertisements cause depends on the state of mind of an individual and his past experiences. For instances, young kids will be easily attracted by the false claims made in advertisements. People are also arguing about the increase in consumption of substances like alcohol and cigarettes after viewing the ads. Excessive advertising has become a nuisance in most cities of the world. Manufacturers easily make false claims about any product and influence the minds of the people. To confront this problem, companies are being asked to withdraw any false and negative claims made in their ads and also being made to pay a fine for these false claims. Mediums of Advertising Newspapers Newspapers are one of the traditional mediums used by businesses, both big and small alike, to advertise their businesses. Advantages Allows you to reach a huge number of people in a given geographic area You have the flexibility in deciding the ad size and placement within the newspaper Your ad can be as large as necessary to communicate as much of a story as you care to tell Exposure to your ad is not limited; readers can go back to your message again and again if so desired. Free help in creating and producing ad copy is usually available Quick turn-around helps your ad reflect the changing market conditions. The ad you decide to run today can be in your customers' hands in one to two days. Disadvantages Ad space can be expensive Your ad has to compete against the clutter of other advertisers, including the giants ads run by supermarkets and department stores as well as the ads of your competitors Poor photo reproduction limits creativity Newspapers are a price-oriented medium; most ads are for sales Expect your ad to have a short shelf life, as newspapers are usually read once and then discarded. You may be paying to send your message to a lot of people who will probably never be in the market to buy from you. Newspapers are a highly visible medium, so your competitors can quickly react to your prices


With the increasing popularity of the Internet, newspapers face declining readership and market penetration. A growing number of readers now skip the print version of the newspaper (and hence the print ads) and instead read the online version of the publication.

Magazines Magazines are a more focused, albeit more expensive, alternative to newspaper advertising. This medium allows you to reach highly targeted audiences. Advantages Allows for better targeting of audience, as you can choose magazine publications that cater to your specific audience or whose editorial content specializes in topics of interest to your audience. High reader involvement means that more attention will be paid to your advertisement Better quality paper permits better color reproduction and full-color ads The smaller page (generally 8 by 11 inches) permits even small ads to stand out Disadvantages Long lead times mean that you have to make plans weeks or months in advance The slower lead time heightens the risk of your ad getting overtaken by events There is limited flexibility in terms of ad placement and format. Space and ad layout costs are higher Yellow Pages There are several forms of Yellow Pages that you can use to promote and advertise your business. Aside from the traditional Yellow Pages supplied by phone companies, you can also check out specialized directories targeted to specific markets (e.g. Hispanic Yellow Pages, Blacks, etc.); interactive or consumer search databases; Audiotex or talking yellow pages; Internet directories containing national, local and regional listings; and other services classified as Yellow Pages. Advantages Wide availability, as mostly everyone uses the Yellow Pages Non-intrusive Action-oriented, as the audience is actually looking for the ads Ads are reasonably inexpensive Responses are easily tracked and measured Frequency Disadvantages Pages can look cluttered, and your ad can easily get lost in the clutter Your ad is placed together with all your competitors Limited creativity in the ads, given the need to follow a pre-determined format Ads slow to reflect market changes Radio Advantages Radio is a universal medium enjoyed by people at one time or another during the day, at home, at work, and even in the car. The vast array of radio program formats offers to efficiently target your advertising dollars to narrowly defined segments of consumers most likely to respond to your offer. Gives your business personality through the creation of campaigns using sounds and voices Free creative help is often available Rates can generally be negotiated During the past ten years, radio rates have seen less inflation than those for other media Disadvantages Because radio listeners are spread over many stations, you may have to advertise simultaneously on several stations to reach your target audience Listeners cannot go back to your ads to go over important points 45

Ads are an interruption in the entertainment. Because of this, a radio ad may require multiple exposure to break through the listener's "tune-out" factor and ensure message retention Radio is a background medium. Most listeners are doing something else while listening, which means that your ad has to work hard to get their attention

Television Advantages Television permits you to reach large numbers of people on a national or regional level in a short period of time Independent stations and cable offer new opportunities to pinpoint local audiences Television being an image-building and visual medium, it offers the ability to convey your message with sight, sound and motion Disadvantages Message is temporary, and may require multiple exposure for the ad to rise above the clutter Ads on network affiliates are concentrated in local news broadcasts and station breaks Preferred ad times are often sold out far in advance Limited length of exposure, as most ads are only thirty seconds long or less, which limits the amount of information you can communicate Relatively expensive in terms of creative, production and airtime costs. Direct Mail Direct mail, often called direct marketing or direct response marketing, is a marketing technique in which the seller sends marketing messages directly to the buyer. Direct mail include catalogs or other product literature with ordering opportunities; sales letters; and sales letters with brochures. Advantages Your advertising message is targeted to those most likely to buy your product or service. Marketing message can be personalized, thus helping increase positive response. Your message can be as long as is necessary to fully tell your story. Effectiveness of response to the campaign can be easily measured. You have total control over the presentation of your advertising message. Your ad campaign is hidden from your competitors until it's too late for them to react Active involvement - the act of opening the mail and reading it -- can be elicited from the target market. Disadvantages Some people do not like receiving offers in their mail, and throw them immediately without even opening the mail. Resources need to be allocated in the maintenance of lists, as the success of this kind of promotional campaign depends on the quality of your mailing list. Long lead times are required for creative printing and mailing Producing direct mail materials entail the expense of using various professionals - copywriter, artists, photographers, printers, etc. Can be expensive, depending on your target market, quality of your list and size of the campaign. Telemarketing Telephone sales, or telemarketing, is an effective system for introducing a company to a prospect and setting up appointments. Advantages Provides a venue where you can easily interact with the prospect, answering any questions or concerns they may have about your product or service. It's easy to prospect and find the right person to talk to. It's cost-effective compared to direct sales. Results are highly measurable. You can get a lot of information across if your script is properly structured. 46

If outsourcing, set-up cost is minimal Increased efficiency since you can reach many more prospects by phone than you can with in-person sales calls. Great tool to improve relationship and maintain contact with existing customers, as well as to introduce new products to them Makes it easy to expand sales territory as the phone allows you to call local, national and even global prospects. Disadvantages An increasing number of people have become averse to telemarketing. More people are using technology to screen out unwanted callers, particularly telemarketers Government is implementing tougher measures to curb unscrupulous telemarketers Lots of businesses use telemarketing. If hiring an outside firm to do telemarketing, there is lesser control in the process given that the people doing the calls are not your employees May need to hire a professional to prepare a well-crafted and effective script It can be extremely expensive, particularly if the telemarketing is outsourced to an outside firm It is most appropriate for high-ticket retail items or professional services. Place The fourth P of marketing is Place. If a product is very good, well promoted and the best prices offered still customers would not be able to buy if it is not easily available to them. Thus, distribution is of vital importance. Channels of distribution There a four ways through which a product reaches the customers. These are also known as Channel of distribution. Channel 1 Direct marketing from producer to consumers Usually common for industrial products, it has become very popular in the consumer market with the improvement in communication technology. It is usually employed by specialist mail-order manufacturers and factory outlets. Channel 2 Manufacturer retailer consumer The rise of large supermarkets chain has reduced the importance of the independent wholesaler. These retail chains buy in bulk and thus deal directly with the manufactures and undertake their own wholesale functions. E.g. Carrefour, WalMart and Tesco. Channel 3 Manufacturer wholesaler retailer consumer This is the traditional channel in consumer goods market. Small retailers depend on wholesalers for supplies and manufacturers are also keen to avail themselves the services of wholesalers. The wholesaler buys in bulk from the producer and distributes to small retailers in according to their needs. Channel 4 Manufacturer Agent Wholesaler Retailer consumer This channel is common when manufacturers want to sell their products in a foreign market. Because of the unfamiliarity to the foreign market the manufacturer takes the help of an agent who assists in the movement of goods through the network of wholesalers and retailers.


Wholesaler A person or a firm, who buys in bulk from the manufacture, breaks it into smaller quantities and supplies it to small retailers. Role of Wholesaler Buys in bulk from the producer and breaks into small quantities to retailers. Provide storage facilities, thus reducing the need for both manufacturer and retailer to hold such large stocks. Wholesalers carry out marketing efforts at their level. Provide credit facilities to small retailers. Sometimes deliver the goods to the small business outlets. Wholesalers usually do some amount of promotion at their level thus helping manufacturers in their marketing efforts.

Scale of Production Definition Economies of scale: The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. Diseconomies of scale: An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased. Types of economies of scale Purchasing economies When business buys in large quantities, they are able to get discounts and special prices because of buying in bulk. This reduces the unit cost of raw materials and a firm gets an advantage over other smaller firms. Marketing economies 48

The cost of advertising and distribution rises at a lower rate than rises in output and sales. In proportion to sales, large firms can advertise more cheaply and more effectively than their smaller rivals. Financial economies A larger company tends to present a more secure investment; they find it easier to raise finance. Banks and other lending institutions treat large firms more favorably and these firms are in a position to negotiate loans with preferential interest rates. Further, large companies can issue shares and raise additional capital. Managerial economies A large company benefits from the services of specialist functional managers. These firms can employ a number of highly specialized members on its management team, such as accountants, marketing managers which results in better decision being taken and reduction in overall unit costs. Technical economies In large scale plants there are advantages in terms of the availability and use of specialist, indivisible equipment which are not available to small firms. Large manufacturing firms often use flow production methods and apply the principle of the division of labour. This use of flow production and the latest equipment will reduce the average costs of the large manufacturing businesses. Diseconomies of scale Although economies of scale have the potential to increase both consumer and producer welfare, there are limits to the advantages that they can bring. It is important to be aware of some of these. Limited market demand o The size of the market may be insufficient for any one business to fully exploit the available scale economies. Large, indivisible units of capital equipment have the potential to produce high levels of output - but if demand is at a low level, capital will be under-utilised leading to excess capacity and rising average total costs. Occupational immobility of capital o Some large units of capital may not be transferable to other uses if there is a switch in consumer demand. A firm may grow beyond the scale of production that minimizes long-run average cost. The rise in LRAC is caused by diseconomies of scale.

It is often difficult to pinpoint exactly the causes of diseconomies of scale. However management theorists often point to the following factors. Control 49

monitoring how productive each worker is within a large business is both imperfect and costly. This can lead to a loss of productive efficiency if worker shirking is common Co-ordination o it is difficult to co-ordinate complicated production processes and they may break down. Achieving efficient flows of information is expensive Co-operation o workers in big firms may feel a sense of alienation, perhaps perceiving that they don't really belong and this may affect their productivity adversely

Lean production Definition: Lean production is set of techniques used by business to cut down any waste in operations. It is an integrated approach to design, technology, components and materials. The seven wastes Waste elimination is one of the most effective ways to increase the profitability of any business. Processes either add value or waste to the production of a good or service. The seven wastes originated in Japan, where waste is known as muda." "The seven wastes" is a tool to further categorize muda and was originally developed by Toyotas Chief Engineer Taiichi Ohno as the core of the Toyota Production System, also known as Lean Manufacturing. To eliminate waste, it is important to understand exactly what waste is and where it exists. While products significantly differ between factories, the typical wastes found in manufacturing environments are quite similar. For each waste, there is a strategy to reduce or eliminate its effect on a company, thereby improving overall performance and quality. Overproduction Simply put, overproduction is to manufacture an item before it is actually required. Overproduction is highly costly to a manufacturing plant because it prohibits the smooth flow of materials and actually degrades quality and productivity. The Toyota Production System is also referred to as Just in Time (JIT) because every item is made just as it is needed. Overproduction manufacturing is referred to as Just in Case. This creates excessive lead times, results in high storage costs, and makes it difficult to detect defects. The simple solution to overproduction is turning off the tap; this requires a lot of courage because the problems that overproduction is hiding will be revealed. The concept is to schedule and produce only what can be immediately sold/shipped and improve machine changeover/set-up capability. Waiting Whenever goods are not moving or being processed, the waste of waiting occurs. Typically more than 99% of a product's life in traditional batch-and-queue manufacture will be spent waiting to be processed. Much of a products lead time is 50

tied up in waiting for the next operation; this is usually because material flow is poor, production runs are too long, and distances between work centers are too great. Goldratt (Theory of Constraints) has stated many times that one hour lost in a bottleneck process is one hour lost to the entire factorys output, which can never be recovered. Linking processes together so that one feeds directly into the next can dramatically reduce waiting. Transporting Transporting product between processes is a cost incursion which adds no value to the product. Excessive movement and handling cause damage and are an opportunity for quality to deteriorate. Material handlers must be used to transport the materials, resulting in another organizational cost that adds no customer value. Transportation can be difficult to reduce due to the perceived costs of moving equipment and processes closer together. Furthermore, it is often hard to determine which processes should be next to each other. Mapping product flows can make this easier to visualize. Over-processing Many organizations use expensive high precision equipment where simpler tools would be sufficient. This often results in poor plant layout because preceding or subsequent operations are located far apart. In addition they encourage high asset utilization (over-production with minimal changeovers) in order to recover the high cost of this equipment. Toyota is famous for their use of low-cost automation, combined with immaculately maintained, often older machines. Investing in smaller, more flexible equipment where possible; creating manufacturing cells; and combining steps will greatly reduce the waste of inappropriate processing. Unnecessary inventory Work in Progress (WIP) is a direct result of overproduction and waiting. Excess inventory tends to hide problems on the plant floor, which must be identified and resolved in order to improve operating performance. Excess inventory increases lead times, consumes productive floor space, delays the identification of problems, and inhibits communication. By achieving a seamless flow between work centers, many manufacturers have been able to improve customer service and slash inventories and their associated costs. Motion This waste is related to ergonomics and is seen in all instances of bending, stretching, walking, lifting, and reaching. These are also health and safety issues, which in todays litigious society are becoming more of a problem for organizations. Jobs with excessive motion should be analyzed and redesigned for improvement with the involvement of plant personnel. Defects Having a direct impact to the bottom line, quality defects resulting in rework or scrap are a tremendous cost to organizations. Associated costs include quarantining inventory, re-inspecting, rescheduling, and capacity loss. In many organizations the total cost of defects is often a significant percentage of total manufacturing cost. Through employee involvement and Continuous Process Improvement (CPI), there is a huge opportunity to reduce defects at many facilities. Underutilization of employees In the latest edition of the lean manufacturing classic Lean Thinking, Underutilization of Employees has been added as an eighth waste to Ohnos original seven wastes. Organizations employ their staff for their nimble fingers and strong muscles but forget they come to work every day with a free brain. It is only by capitalizing on employees' creativity that organizations can eliminate the other seven wastes and continuously improve their performance. Lean Production Techniques Many changes over recent years have driven organizations to become world class organizations or Lean Enterprises. The first step in achieving that goal is to identify and attack the seven wastes. As Toyota and other world-class organizations have come to realize, customers will pay for value added work, but never for waste. 51

Just in time (JIT) production and stock holding Finished goods are produced just in time for them to be sold, rather than weeks or months ahead. The parts that go into finished product arrive just in time to be put together to make a final product, rather than being stored in a warehouse. Requirements of successful JIT production A flexible, multi-skilled workforce needed Strict quality control with zero defects JIT is usually implemented with cell production. Excellent relationship with suppliers and subcontractors. Advantages of JIT production Virtually eliminates the need of stock of raw material and finished goods, thus reducing cost to the business. Reduced work in progress Increased workforce participation Increased equipment utilization Higher quality Cell Production This production involves both machines and human workers. In conventional production, products were manufactured in separate areas (each with a responsibility for a different part of the manufacturing process) and many workers would work on their own, as on a production line. In cell production, or cellular manufacturing workers are organized into multi-skilled teams. Each team is responsible for a particular part of the production process including quality control and health and safety. Each cell is made up of several teams who deliver finished items on to the next cell in the production process. Cell production can lead to efficiency improvements due to increased motivation (team spirit and added responsibility given to cells) and workers sharing their skills and expertise Kaizen (Continuous Improvement) Kaizen is Japanese for improvement. It is a Japanese philosophy that focuses on continuous improvement throughout all aspects of life. When applied to the workplace, Kaizen activities continually improve all functions of a business from manufacturing to management and from the CEO to the assembly line workers. By improving the standardized activities and processes, Kaizen aims to eliminate waste. Kaizen was first implemented in several Japanese businesses during the country's recovery after World War II, including Toyota, and has since spread to businesses throughout the world. Kaizen is a daily activity whose purpose goes beyond simple productivity improvement. To be most effective kaizen must operate with three principles in place: Consider the process and the results (not results-only) so that actions to achieve effects are surfaced; Systemic thinking of the whole process and not just that immediately in view (i.e. big picture, not solely the narrow view) in order to avoid creating problems elsewhere in the process; and A learning, non-judgmental, non-blaming (because blaming is wasteful) approach and intent will allow the reexamination of the assumptions that resulted in the current process. The format for Kaizen can be individual, suggestion system, small group, or large group. At Toyota, it is usually a local improvement within a workstation or local area and involves a small group in improving their own work environment and productivity. This group is often guided through the kaizen process by a line supervisor; sometimes this is the line supervisor's key role. Kaizen methodology includes making changes and monitoring results, then adjusting. Large-scale pre-planning and extensive project scheduling are replaced by smaller experiments, which can be rapidly adapted as new improvements are suggested.


Quality Quality Control It is the traditional method of maintain quality and involves detecting and cutting out components or final products which fall below set standards. This process takes place after these products have been produced. Quality control is carried out by Quality control department which inspects and tests the finished products. It may involve considerable waste as defect products are scrapped. Quality Assurance It occurs both during and after the event, and is concerned with trying to stop faults from happening in the first place. The business will make sure quality standards are set and then it will apply these quality standards in the production process. Quality assurance is the responsibility of the workforce, working in cells or teams, rather than an inspector. Why quality assurance More expensive and time consuming to implement than Quality Control More effective, therefore more profitable An integral part of a Total Quality Culture (TQC) Some examples Fair trade logo on products Heart foundation on products Free-range eggs Total Quality management (TQM) Total Quality Management, TQM, is a method by which management and employees can become involved in the continuous improvement of the production of goods and services. It is a combination of quality and management tools aimed at increasing business and reducing losses due to wasteful practices. Why Total Quality Management? Philosophy of the entire organization Every function and every employee is responsible for quality Zero defects is the goal Quality is viewed from the customer perspective Importance of quality Driving forces of quality Customer awareness Competition Legislation Customer incomes Advantages of good quality and cost of poor quality Benefits of quality Customer loyalty Reduced costs Longer life cycles Stronger brand Premium Pricing Cost of poor quality Re-work Break-down Late delivery Unsafe Complaints Reputation


Total Quality Control/Total Quality Management Advantages Empowered workers Reduced waste Reputation/Image Customer satisfaction

Limitation Cost of implementation Cost of equipment Time consuming Requires total commitment Delayed benefits Bureaucratic

The cost of ensuring quality The cost of designing and setting up quality control systems The cost of monitoring the system The cost of improving the actual quality Communications Non-verbal Formal Body language Company websites Sign language Stakeholder meetings Hugs/Smiles Annual company report Gestures Appraisal interviews Braille Memos Conferences Letters Seminars Leaflets Press conference

Oral Meetings Appraisal interviews Stakeholder meeting Team briefings One-on-one conversations Phone calls Texting

Written Memos Reports Emails

Visual Presentations Bulletin board Diagrams/ Symbols Charts Posters Photos Online conference Graphs Logo

Informal Skype/Video conferencing Social networks Networking

ICT Social networks Skype/Video conferencing Company website Email

Faxes Notices Letters Minutes Agenda Newsletters Website

Phone calls

Grapevine Phone call communication Walkie Talkie Text Powerpoint Online conference

What is communication A process which enable information to be passed from one person/group to another The process of communication can be shown below: Message sent Method of communication

Message sent




Methods of communication There are 3 main methods of communicating, each of which has advantages and disadvantages o Written o Visual o Verbal Communication channels Refers to the medium used to send the message. They can be classified as: o Internal communication Communication within the business to its employees o External communication Communication to outside stakeholders Internal communication External communication Team briefing Letters Face-to-face Advertising Reports Direct mail below-the-line method of promotion Memos Internet Notices Conference Network Video E-mail E-mail Electronic Data Interchange Telephone Fax Causes of poor communication Noise refers to communication problems that may weaken/stop a message being received Examples include: o Language problems/Cultural differences Foreign languages, use of technical jargon, etc. o Jumping to conclusions The receiver may receive what they want to receive rather than what is actually there o Lack of interest The receiver may not be prepared to spend time on the message o Competing environment Real noise such as background sounds o Channel of communication This must be effective Confirmation Because of the problems that noise creates it is often useful for the sneder to ask the receiver for a response and/or feedback o Response Reaction of the receiver after being exposed to the message o Feedback The part of the receivers response after being communicated to the sender. Externalities Externalities are the result of business activity that is not taken into account in normal business decision making. Social costs and benefits are therefore the costs and benefits incurred by the entirety of society (producer, consumer and third party) as a result of the production and/or consumption of a good or service. 55

Private costs and benefits are the costs and benefits incurred by individuals directly involved in the production and/or consumption of a good or service. Where no market failure exists social costs would be equal to private costs. If external benefits exist more of the said good should be produced and consumed (it is being under-consumed or under-produced) thus the market system is not supplying the optimum resource allocation. If external costs exist than less of the said good should be produced and consumed (it is being consumed or produced in excessive quantities) thus the market system is not supplying the optimum resource allocation. Firms and individuals will not consume/produce any good or service unless the private benefit of their activity exceeds the private cost incurred in their activity.

Positive and negative externalities A positive externality is a favorable effect in result of business activity. o A new local shop may be very convenient to a lot of people A negative externality has negative effect in result of business activity. o Pollution, accidents, congestion from too many vehicles on roads o Obesity and lack of fitness from eating too much of the wrong type of food o Drug dependence on certain medicines o Greenhouse gas production and noise pollution from air transport o Exploitation that is, businesses paying low wages (or using child labour) in order to increase their profits. The government will make sure that: Merit goods (goods with external benefits) are encouraged (to prevent under-consumption or underproduction from occurring.) Demerit goods (goods with external costs) are discouraged (to prevent over-consumption or over-production from occurring.) Demerit goods do not have prices which account for their external costs. Smoking and alcohol are examples of demerit goods. The government will: Subsidize merit good producers to reduce the costs of production and thereby encourage production of such goods whilst causing prices to be lowered as a result of the increase in supply and the decrease in prices of production caused by subsidization. Tax demerit good producers to increase the costs of production and thereby discourage production of such goods whilst causing prices to increase as a result of the decrease in supply caused by taxations as well as by the increase in the price of production. Sometimes the government may choose to nationalize certain industries that are producing externalities to regulate and control them and so force them to produce at the socially optimum level. Laws and regulations Limits on the level of emissions of certain chemicals through use of the law and a fining system to punish firms for infringement. Ban on the use of certain chemicals which may result in significant external costs through use of the law and a fining system to punish any infringement. Forcing firms to internalize all costs: Pollution permits (these can be traded to firms who can then pollute more at a reasonable price). Pollution permits are given out to firms by the government before any trading is done. (Equivalent and derived from the Carbon Credits used internationally to restrict national pollution). But this scheme is costly (administration costs are high) to implement, it is difficult to measure pollution levels accurately, rich firms may simply buy their permits off poorer firms and so pollution may not have been decreased at all, it is hard to calculate how many pollution permits to give out. If external benefits exist then the public would be willing to pay more for a certain good to assure that it is produced at the socially optimum level. (Increase in demand, extension along the supply curve). If external costs exist that the public would be willing to pay more to assure that it is produced at the socially optimum level. (Decrease in supply, contraction along the demand curve.) 56

Legal environment factors affecting business Why do governments control business activities? Businesses are usually profit motivated. Many times in order to gain more profit the business might neglect issues like environmental protection and production of harmful and dangerous products. Large business might take the advantage of their size and exploit consumers, employees and even use unfair tactics to overcome competition from small businesses. Business might use media to portray a wrong image of their product or may even mislead customers to buy products. How do governments control business activity? Governments control the business activities is many ways both direct and indirect. We have already covered governments economic policies. However, government can control business activities in a more direct way. These are as follows: Controlling what to produce o In order to safeguard the interest of the community government may ban or limit the production of certain goods and services. For example, selling of guns, explosive and dangerous drugs are illegal in many countries. Moreover, Goods which harm the environment are also totally banned or strictly controlled in many countries, e.g. aerosol cans that use CFCs which has been banned because of their damaging effect on the ozone layer. Employees Protection legislations o Government may pass laws to protect the interest of employees such as laws against unfair discrimination at work and when applying for jobs. There is no unfair discrimination on the basis of Race, religion, sex, age, or colour. Legislations for health and Safety at work: o To protect workers from dangerous machinery. o Workers should be provided with proper safety equipments and clothing. o A reasonable workforce temperature is maintained for workers. o Proper hygienic conditions and washing facilities are provided. o Workers get adequate breaks between shifts. Ensure fair wages for the employees o In many countries, government makes it mandatory to have a written contract of employment. It contains the details of the wage rate; working hours, deductions (if any) and other necessary details regarding working conditions. Minimum wages paid to different types of workers are also determined by the government. Protect employees against unfair dismissal o Business cannot dismiss the workers because they have joined a trade union or for being pregnant. There should be proper warning before dismissing a worker otherwise it will be treated as unfair dismissal. Consumer Protection legislations o Most of the countries have consumer protection laws aimed at making sure that businesses act fairly towards their consumers: A few examples are Weight and Measures Act: goods sold should not be underweight. Standard weighting equipments should be used to measure goods. Trade Description Act: deliberately giving misleading impression about the product is illegal. Consumer Credit Act: According to this act consumers should be given a copy of the credit agreement and should be aware of the interest rates, length of loan while taking a loan. Sale of Goods Act: It is illegal to sell products with serious flaws or problems and goods sold should conform to the description provided. Environment protection o In the recent years government across the globe have passes legislations to control business activities from harming the environment. This includes setting limits to the pollution, making it mandatory for businesses to treat their wastes etc. 57

Location decisions o Government often influences location of business through o Planning controls involve restricting the business activities that can be undertaken in certain areas. o Provide regional assistance to businesses which involves encouraging them to locate in underdeveloped regions of the country. Impact of business decisions on people and the environment

Government objectives Employment Growth Government expenditure Inflation Trade must be balanced Standard of living Social and economic objectives Economic objectives To make sure that more people have jobs To make sure that the economy grows from year to year, so that citizens become better off To protect consumers and business from unfair practices by other businesses Social objectives To make sure that all children are educated in schools To look after the health and well-being of citizens To protect the environment local, national and international

Types of government intervention Public provision of goods and services o Nationalisation Creating rules and laws o Regulation o Too much regulation limits the freedom of business to make decisions: businesses become anxious in case they unknowingly break the law. o Too little regulation can lead to abuse for example, of employees, other businesses and customers and the environment. Taxing and subsidizing goods o Raising taxes to create government revenue to use for social and economic objectives E.g. business and income taxes are used to finance health care, education and building roads Governments can raise taxes to discourage antisocial behavior such as smoking, and then use that money for hospital care. o Subsidies are used to encourage positive externalities Involves providing funds to certain activities E.g. growing important crops or introducing environmentally friendly technology. IRL Article Noise pollution India Impact on business activity in Businesses selling firecrackers may have lower sales since noise from these are being curbed Businesses in general produce noise pollution Support of recycling Businesses need reduce water and energy industry in China consumption to meet quotas, production goes down. Government action Increased regulation to decrease noise pollution. Increase regulation to decrease use of water and energy 58

Support of textile It is now cheaper to produce textiles and this industry in Egypt decreases prices and increases employment increases competition. Pesticide ban Food prices go up because production goes down . Low supply and high demand. Cost-push inflation due to increasing costs of production. Might be demand-pull inflation due to high demand of crops Nigerian oil Prices of oil go up as businesses have to spend more money and production of oil goes down. Pollution in France Decrease demand for plastic cutlery.

Subsidise these industries to investment to these businesses. Increasing regulation


Increasing regulation Increases taxes

Exchange rates Definitions Exchange rate: The value of a currency against another based on demand and supply of that currency in the market. Appreciation: The rise in value of a currency against another Depreciation: The decrease in value of a currency against another. Demand for and Supply of a currency This is what determines exchange rate in a free-floating exchange rate system: When a currency has strong demand it will appreciate in value. In contrast, when there is a large scale selling of a currency it will depreciate. Demand for a currency: Exports and imports of goods/services o If a country has a decline in export industries and earnings, yet its people continue buying imports, the exchange rate is likely to fall. This is possibly not true for countries such as Hong Kong which are dependent on imports of oil and food. o Fewer exports will mean less demand for the currency to pay for them, so the demand for the currency will decrease. o This will lead to depreciation o When a currency has depreciated, this makes the countries exports cheaper abroad. o Thus, exports should become more competitive overseas. Price elasticity of demand for imports o When a currency depreciates, imports become more expensive. o If the demand for imports is price elastic, this should lead to a fall in expenditure on imports o This situation is found where imports compete with home-produced alternatives. o When countries import necessities, such as food and oil, demand tends to be price inelastic so expenditure rises when the currency falls. Pure speculative demand. o Speculators often purchase currencies that they think will appreciate in value against their own currency. Official buying of the currency by the central bank. o This might be done for investment or speculation or security or other reasons. Comparatively higher domestic interest rate. o Thus savers will be likely to convert their own money into your currency to save in your nation and enjoy the comparatively higher domestic interest rates you offer. Supply of a currency Imports of goods and services. 59

Outflows of direct investment. Outflows of portfolio investment. Speculative selling of the currency. Official selling of the currency by the central bank. Rate of interest abroad.

Appreciation and Depreciation Foreigners will tend to save money in ones nation. Thus the demand for ones currency rises which can cause ones currency to appreciate in general. Depreciation means that the value of the currency in terms of other currencies goes down: If the USD depreciates against the RMB then it will take fewer RMB to buy each USD. If 1 Euro was worth HKD 10.2 at the start of the year. It may depreciate if the Greek government declared that it would withdraw from the Eurozone and go back to using the Drachma in order to depreciate their currency. This will cause others to lose confidence in the Euro and speculation will cause people to sell the Euro. This may end up causing the Euro to depreciate to HKD 7 per Euro. In this case the Euro has depreciated against the HKD because it now takes more Euros to purchase each HKD. But the HKD has appreciated against the Euro because it now takes fewer HKD to buy 1 euro Advantages of a Strong Currency Lower import prices This boosts living standards of consumers. An increase in the real purchasing power of HK residents traveling overseas for business and leisure purposes. Cheaper to import raw materials, components and capital inputs causes an outward shift in short-run aggregate supply. Improvement in the terms of trade (lower import prices). Helps to control RPI inflation Domestic producers face stiff international competition and must keep their prices down. Lower inflation allows the MPC/HKMA to keep nominal interest rates at a lower level than if the exchange rate was weak. An increase in a countrys relative position in international league tables showing real GDP per capita when expressed in a common currency: Even if ones GDP, as measured in ones own currency, is no more than previously, because ones currency has appreciated in value, the GDP of ones nation will also increase when it is translated into another currency. Disadvantages of a Strong Currency Cheaper imports lead to rising import penetration and large trade deficit: Import penetration means that a larger portion of the goods and services provided by a nations firms is now provided by foreign firms. Exporters also lose price competitiveness and market share thus causing a trade deficit. Damaged profit and employment in some sectors to which exporting is the key means of generating revenue. Negative impact on economic growth (exports injections of aggregate demand, imports - leakages of wealth form the circular flow of income). Some regions which have a higher than average dependency on exporting industries are more affected than others. Business cycle


Peak The highest point between the end of an economic expansion and the start of a contraction in a business cycle. It is at this point that real GDP spending in an economy is its highest level. Confidence: Optimistic Spending: High o High borrowing, low saving Income: High Unemployment: Low o Skills shortage Inflation: High Investment: High o Firms expanding Recession: Negative economic growth or negative GDP for over two quarters Confidence: Falling Spending: Falling o Less borrowing, more saving Income: Falling Slump/Trough: Recovery/Expansion: Asdf Multinationals Key ideas Businesses which have their operations, factories, and assembly plants in more than one country. Also known as transitional businesses Why do firms become multinationals? Firms become multinational for the following reasons: By producing in various countries they can keep transport costs to a minimum. They can avoid trade barriers by producing inside a country. Can gain access to raw materials or cheap labour. Reduce risks from foreign exchange fluctuations. Impact of multinationals Advantages of being a Multinational 61

Multinational can set up their business operations in countries where the labour and raw material is cheaper, which can give them cost advantage in the international market. Multinational have access to many markets which spreads the risk of failure. If any product may not be successful in a particular market, it might be successful in another. MNCs produce in large quantities thus achieving greater economies of scales. A multinational business is less vulnerable to trade barriers. MNCs set up their local operations in countries where there is potential market for them and get away with import duties and restrictions. o Protectionist methods o Sanctions and embargoes MNCs can locate their operations near the potential market which results in lower transportation cost.

Advantages of Multinational to the host country Multinationals create employment. They bring new technology and techniques of production. MNCs usually provide training to their worker which results in better skills for the countrys workforce. Multinational businesses usually produce in large quantities and export to other countries which can result in valuable foreign exchange for the host country. They pay huge taxes to the government which can be used for the development of the host country Creates sense of community crossing international borders. Allows entire world to improve standard of living Gives access to quality products regardless of location Raises standard of living for regions involved in production Gives local economies new economic opportunities. Jobs are created, which reduces the level of unemployment. Taxes are paid by the multinationals, which increases the funds to the government. Disadvantages of Multinationals to the host country: Ruins local economies Depletes local work forces by drawing to metro centres Stifles cultural growth and expansion on local level Provides little help with problems which are local in nature Creates cultural homogenization/cultural erosion Too big, little interest in the individual. Gives political power to outside interests Creates economic instability by being subject to the whims of the global economy Replaces traditional values with materialistic values Makes local economies subject to mass layoffs. Local firms may be forced out of business. The jobs created are often unskilled. Multinationals often use up scarce and non-renewable primary resources in the host country. Advantages to home country: MNC's create opportunities for marketing the products produced in the home country throughout the world. They create employment opportunities to the people of home country both at home and abroad. It gives a boost to the industrial activities of home country. MNC's help to maintain favourable balance of payment of the home country in the long run. Home country can also get the benefit of foreign culture brought by MNC's. Disadvantages to home country: 62

MNC's transfer the capital from the home country to various host countries causing unfavourable balance of payment. MNC's may not create employment opportunities to the people of home country if it adopts geocentric approach. As investments in foreign countries are more profitable, MNC's may neglect the home countries industrial and economic development.