Camb

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IGCSE
Busin
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studie
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0450

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1.1 Business activity

1.1.1 The purpose and nature of business activity
Concepts of needs, wants, scarcity and opportunity cost
Need: A good or service which is essential to living
Want: A good or service which people would like, but is not essential for
living
Scarcity: There are not enough goods and services to meet the wants of
the population
Opportunity cost: The benefit that could have been gained from an
alternative use of the same resource
Importance of specialisation
Specialisation is important because this means that the business is efficient
and it reduces costs of production.
Purpose of business activity
To create products and services
Concept of adding value and how added value can be increased
Adding value is when a business tries to add value at every stage of the
production process so that they can sell the product or service to customers
at a greater price. They can do this by branding, adding special features,
providing excellent service, making it convenient etc.

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1.2 Classification of businesses

1.2.1 Business activity in terms of primary, secondary and tertiary sectors
Basis of business classification
Primary sector: Firms whose business activity involves the extraction of
natural resources such as farming, fishing, mining and forestry
Secondary sector: Firms that process and manufacture goods from natural
resources such as manufacturing, construction and refining
Tertiary sector: Firms that supply a service to consumers and other
businesses such as shops restaurants, banks, cinemas and airlines
Reasons for changing importance of business classification, e.g. in
developed and developing economies
Because the size of a country's different sectors of business activity often
indicates if it has a developing or developed economy
1.2.2 Classify business enterprises between private sector and public sector
in a mixed economy
Mixed economy: An economy where the resources are owned and
controlled by both the private and public sectors
Private sectors: The part of the economy that is owned and controlled by
individuals and companies for profit. Including: Sole traders, Partnerships,
limited companies, franchises, joint ventures and social enterprises
Public sectors: The part of the economy that is owned and controlled by
the state or government. Including government departments, public
corporations and nationalised industries

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1.3 Enterprise, business growth and size

1.3.1 Enterprise and entrepreneurship
Characteristics of successful entrepreneurs
- Innovative: Good at thinking of new ideas for goods and services or new
ways of presenting existing goods and services
- Self motivated and determined: They have the drive to keep going,
even when things get difficult
- Self confident: They have a strong belief in their own ability and ideas
- Multi-skilled: They have the ability to see an idea through from
development to profitable sales. This requires a good understanding of the
functions of finance, operations, human resources and marketing
- Leadership qualities: They have good communication skills, the ability
to motivate others and are good decision makers
- Initiative: They not only have good ideas but are also able to develop a
good plan for achieving the business's objectives
- Results driven: They are focused on achieving results and make sure
products are sold for profit
- Risk taker: They are prepared to take risks, knowing that failure is a
possibility. They see failure as a positive experience to be learned from
Contents of a business plan and how business plans assist
entrepreneurs
The information it contains can be used to persuade lenders such as banks
and investors to provide finance to the business. The plan gives the
business a sense of purpose and direction. It sets out the resources required
by the business such as finance, the number and skills of workers needed,
and how the goods and services will be market to consumers. The
objectives and financial forecasts provide the business with targets to aim
at and enable the business to monitor is progress

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 Why and how governments support business start-ups, e.g. grants,

training
- To create jobs so unemployment rates are lower
- Increase variety of products available so consumers have more choice
- Create more competition, which usually results in lower prices and better
quality of goods and services
- To create large businesses which the country could benefit from for the
economy
Government supports include:
- Grants and interest free or low interest loans
- Lower taxation rates on profits in the early years
- Rent free premises for a certain period of time
- Free or subsidised training for workers
- Information, advice and support from specialist agencies
1.3.2 The methods and problems of measuring business size
Methods of measuring business size, e.g. number of people employed,
value of out put, capital employed (profit is not a method of measuring
business size)
- Capital employed: The value of long-term finance invested in a business,
to buy things such as factories, office building, machinery etc. (also known
as assets)
- Market share: How large a business owns a share in the market
- Number of employees: How many employees there are working for a
particular company
- Value of output: How much a business is earning from selling their
products or service
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 Limitations of methods of measuring business size

Because many methods are not as straightforward as it seems, this is
because the methods can produce different results so more than one
method should be used in measuring the size of the business
1.3.4 Why some (new or established) businesses fail
Causes of business failure
- Poor planning
- Poor cash-flow management
- Poor management skills
- Lack of objectives
- Economic influences
- Competition
- Poor marketing
- Poor choice of location
- Lack of finance
Why new businesses are at greater risk of failing
Because they are new to the market and may not have a lot of recognition
so there may not be a lot of sales and they usually don't have enough
money to support themselves after a certain period of time

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1.4 Types of business organisation

1.4.1 The main feature of different forms of business organisation
Sole traders, partnership, private and public limited companies,
franchise and joint venture
Sole trader: A business that is owned and controlled by just one person
who takes all of the risks and receives all of the profits
Advantages:
- Quick and easy to set up
- Makes all the decisions
- Has complete control
- Keeps the profit
Disadvantages:
- Unlimited liability (responsible for business debts)
- May not be able to raise funds to expand the business
- Maybe have to work long hours
- Difficult to compete with larger rival firms
- May not have the business skills to run a business
Partnership: A business formed by two or more people who will usually
share responsibility for the day-to-day running of the business.
Advantages:
- Easy to set up a deed of partnership
- Partners invest in the business so greater access to funds
- Shared decision making
- Shared management and workload
Disadvantages:
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- Unlimited liability
- Share the profits
- Business ceases to exist if one partner leaves
- Decisions binding on all partners
- Difficult to raise finance
Private limited companies: Often a small to medium-sized company,
owned by shareholders who have limited liability. The company cannot sell
its shares to the general public
- Usually a very small number of shareholders
- Usually fairly small
- Can only be sold privately
- Often difficult to sell shares because it must be sold privately
- Only a few shareholders, ownership is not separated from control
- May be difficult to raise finance
- Profit belongs to shareholders
- Legal documents must be completed when setting up the business
- Limited liability
- Shareholders vote on major decisions taken by the company
- The business continues even if one or more shareholders die
Public limited companies: Often a large company; owned by shareholders
who have limited liability. They can sell its shares to the general public
- Usually a very large number of shareholders
- Most common form of organisation for very large companies
- Shares can be offered to the public and other organisations
- Quick and easy to sell their shares
- There are often thousands of shareholders
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- Ownership and control are separated

- Each year, they have a annual general meeting to make major decisions
- Often very successful in raising capital
- Setting up is very costly
- Director's decision making is sometimes influenced by major investors who
seek to satisfy their own objectives
- The company is at risk of takeovers
- The legal requirements for the publication of information about the
company is much stricter than it is for private limited companies
Franchises: A business system where entrepreneurs buy the right to use to
the name, logo and product of an existing business
Advantages (to entrepreneurs):
- Less chance of failure
- Franchises often provides advice and training to the franchisee
- Franchisors finance the promotion of the brand through national
advertising
- The franchisor would have already checked the quality of suppliers
Disadvantages:
- Initial cost of buying into a franchise can be very expensive
- The franchisor will take a percentage of the revenue or profits made by the
franchisee each year
- There are very strict controls over what the franchisee is allowed to do
with the product, pricing, store layout
- The franchisee doesn't gain any personal recognition, they only gain
recognition because of the existing brand
Joint ventures: Two or more businesses agree to work together on a
project and set up a separate business for this purpose
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Advantages:
- Reduces risks for each business and cuts costs
- Each business brings different expertise to the joint venture
- Market and product knowledge can be shared
Disadvantages:
- Any mistakes made may damage the reputation of all firms in the joint
venture
- The businesses ay have different business cultures or styles of leadership,
making decision making difficult

Difference between unincorporated businesses and limited companies

An unincorporated business does not have a separate legal identity from its
owners. Whereas, an incorporated business does.

Concepts of risk, ownership and limited liability

Unincorporated business ownership have a greater legal and financial risk
than incorporated business because
- Owners and the business have the same legal identity, e.g. if a customer is
injured from the business's products, then the owners may be sued for
damages
- Owners have unlimited liability for business debts
Limited liability is when the owner is not personally responsible for the
business's debts, unlimited liability is when the owner is personally
responsible for the business's debts.

Business organizations in the public sector

Public corporations:
- Are owned and controlled by the state
- Are financed mainly through taxation
- Most of the times, their objectives are social rather than profit
- The services provided are often free or at a very low price

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1.5 Business objectives and stakeholder objectives

1.5.1 Businesses can have several objectives - and the importance of these
can change
Need for business objectives and the importance of them
Objectives need to be SMART
Specific - specific to the business
Measurable - how much they want this objective to affect their business e.g.
85% of seats in an airline are economy class
Achievable - owners must discuss how they want to act on these objectives
Realistic - should be able to be financed by the business
Time-specific - set a date for the objective to be achieved by
Business objectives are important because it sets out what the business
wants to achieve and it gives an idea to employees, potential investors,
stake holders etc. So the business may be more successful in gaining
people's trust that the business it legit and capable of running the business
Different business objectives
- Survival: To last at least more than a year
- Profit: To gain more money for the owners
- Growth: to gain recognition, reduce costs, reduce competitiveness,
increase profits
- Market share: Increased market share often develops a strong brand image
which makes it easier to sell products to customer
- Corporate social responsibility: The environmental, social, ethical impacts
of business's decisions
Objectives of social enterprises
- Help people who are in need
- Help the underprivileged
- Help the economy
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- Help the government

- Help decrease unemployment rates
- Increase GDP
1.5.2 The role of stakeholder groups involved in a business activity
Main internal and external stakeholder groups
Objectives of different stakeholder groups
Internal stakeholders
- Owners: Interested in the performance of the business and profits
- Shareholders: Interested in the amount of dividends they will receive
- Managers: Responsible for the performance of the business, if they do
well they may gain bonuses or promotions
- Employees: Interested in the performance of the business, so they can
earn good pay and get better job security
External stakeholders
- Lenders: They are interested in the capability of the business to repay
loans and if they can get any interest from the loans they give
- Suppliers: They are interested in the amount of cash the business has to
be able to pay the suppliers at required dates and if they can get success
from supplying the business
- Customers: They have an interest in the activities of the business
because they want to be sure that the business if going to continue to exist
in the future and that they are charged fair prices for the products
- Government: Interested in the capability of the business earning high
profits so they can receive more tax for spending on things such as
education, health etc.
- Local community: Interested in what the business offers to the local
people, in terms of employment, whether or not the business will have a
negative impact on the business etc.
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1.5.3 Demonstrate an awareness of the differences in the aims and

objectives of private sector and public sector enterprises
Private sector:
- Earn profit
- Survive
- Increase market share
- Growth
- Economies of scale
Public sector:
- Increase GDP
- Decrease unemployment rates
- Provide a better standard of living
- Help the economy
2.1 Motivating workers
2.1.1 The importance of a well-motivated workforce
Why people work and what motivation means
People work for many different reasons, including:
- Provide for themselves
- Have a better standard of living
- They are passionate about the job
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- Gain status e.g. being a lawyer is normally seen as a important job and its
normally a job of high status
- Friendship
Motivation are the factors that influence the behaviour of workers towards
achieving set business goals
The concept of human needs - Maslow's Hierarchy
1. Physical needs: basic needs we must have to be able to survive. They
include water, food etc.
2. Safety needs: We need to be safe from physical danger and individuals
need to know that they have job security
3. Social needs: Most people want to be accepted by others and to feel
that they are loved and trusted. It is important to have friends and belong to
a group where social activities can be shared and enjoyed together
4. Esteem needs: Individuals want to be respected and to have their
achievements recognised by others. For some people, having a certain
status is also an important need
5. Self-actualisation: Not everyone will reach their full potential, but for
some individuals it is a very important need. A lot of people rarely achieve
this because they may set more challenges for themselves
Key motivational theories: Taylor and Herzberg
Taylor's theory:
Taylor believes that workers are only motivated by money, so scientific
management is used to reduce inefficiency. This is achieved by finding the
fastest way of performing each task and training all the workers to use the
same method. The piece-rate method is developed from Taylor's research,
workers are paid a fixed amount for every unit they produce.
Herzberg's theory:
Herzberg's theory is separated into two factors, hygiene factors and
motivators
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The hygiene factors include:

- Working conditions: Things like how clean and safe the workplace is and
what facilities are provided for workers, such as washroom, drink machines
etc
- Relationship with others: This considers the importance of having
friendship, relationships with managers and a sense of belonging to the
workplace
- Salary and wage: People need to be paid well to be encouraged to do the
job, but it is not the only factor
- Supervision: This considers the importance of leadership styles and how
the workers are supervised and how decisions are made
- Company policy and administration: These include rules and
procedures that affect the way workers work and their relationship with
others
The motivators include:
- The work itself: The tasks and what the workers need to do. Some
people may find that work needs to be varied and challenging, this is known
as job enrichment
- Responsibility: Giving workers more responsibility for the tasks they
perform, like making decisions which shows that the managers trust them
and value them
- Advancement: Workers have the opportunity for promotion
- Achievement: Workers need to feel that they have reached challenging
goals
- Recognition achievement: Workers need to have their achievements
recognised by managements and the other people they work with, this can
related to 'self esteem' in Maslow's hierarchy of needs
2.1.2 Methods of motivation
Financial and non-financial rewards and methods
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Financial rewards: Cash and non-cash rewards paid to workers which are
often used to motivate workers to increase their efforts. These include:
Financial rewards:
- Hourly wage rate: Payment to workers based on a fixed amount for each
hour worker. A advantage of this is that the business only pays workers for
the number of hours they are at work. However, this type of payment is not
linked to how much they produce e.g. one worker may produce 28 units in
an hour but another worker produces 20 units.
- Salary: Fixed annual payment to certain grades and types of staff not
based on hours worked or output. A advantage of this is that workers do not
receive more pay if they have to work long hours to complete a task.
However, the salary is not linked to their efforts
- Piece-rate: Payment to workers based on the number of units produced. A
advantage of this is that workers are only paid for the number of items they
produce. However the quality of goods produced may be poor because
workers try to work too quickly to increase their output and pay
- Commission: Pay based on the value of sales made by the staff. A
advantage of this is that the pay is linked to the value of goods. However,
workers are never certain how much they will earn
- Bonus scheme: An additional reward paid to workers for achieving
targets set by managers, this is a method of performance-related pay which
is a bonus scheme used to reward staff for performing to the required
standard. An advantage of this is that it is linked to performance targets.
However, if targets set are unrealistic then workers would become
demotivated. Also, if the target is group-bases and the target is reached all
worker in the group will receive the bonus even if some have worked harder
than other, which can cause conflict.
- Fringe benefits: Non-cash rewards such as discounts of company's
products, healthy insurance etc often used to recruit or retain workers and
to recognise the status of certain employees. An advantages of this is that
they can help in recruitment and retention of workers. However, fringe
benefits are often linked to status and not performance
- Profit-sharing: An additional payment to workers based on the profits of
the business. An advantage of this is that it is directly linked to the
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performance of the business. However, profit given to employees may

reduce dividends
Non financial rewards:
- Job rotation: Doing a variety of jobs to prevent boredom and improves
worker's skills and flexibility
- Job enlargement: Workers are given greater variety of similar-level tasks
to do, this helps makes things more interesting and reduces boredom
- Job enrichment: This method was developed from Herzberg's research,
work is organised so that workers are able to use more of their skills and
abilities. This makes the workers feel more valued and creates a sense of
belonging
2.2 Organisation and management
2.2.1 Draw, interpret and understand simple organisational charts
Simple hierarchical structures: span of control, hierarchy, chain of
command and delegation
Span of control: the number of subordinates reporting to each
supervisor/manager

Chain of command: The route in which authority is passed down an

organization

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Hierarchy: The levels in an organisational structure

Delegation: When authority is passed onto subordinates

Roles, responsibilities and inter-relationships between people in
organisations
Workers that are higher in the hierarchy have power over subordinates,
generally people higher up in the hierarchy have more responsibility than
those at the bottom. This is because they have to supervised a number of
workers to make sure the work is done properly.
Directors and chief executive officer
They are the most senior level of management in any limited company, they
are responsible for setting out strategies, making sure that the resources
are available to achieve objectives, reviewing the performance of managers,
protecting the interests of shareholders and other stakeholders. Lastly,
providing leadership to ensure the success of the business
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Managers
They day-to-day running of a department is usually the responsibility of a
manager, they are responsible for making sure that the decisions of the
directors are carried out, delegating tasks to members of their department,
motivating workers, and solving problems that may arise within the
department
Supervisor and other workers
In large departments, supervisors may be responsible for giving out tasks to
workers and other workers must complete their tasks efficiently at the
required quality standard set by the managers and work towards achieving
individual, group or department targets
2.2.3 The role of management
Functions of management - Planning organising, co-ordinating,
commanding and controlling
Planning: Looking at where the business is not and where it wants to be in
the future. Once this has been decided, management must then set clear
objectives and decide on the actions needed for these to be achieved
Organising: This function of management is about preparing and
organising the resources needed to achieve the planned goals and
objectives. Management will have to decide the best way of completing
important tasks at the lowest possible cost to the business
Commanding: This function involves the control and supervision of
subordinates. Commanding should also aim to motivate workers towards
achieving the planned objectives.

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Coordinating: Making sure that all of the different parts of the business are
working together towards achieving the business's goals and corporate
objectives
Controlling: Involves checking to make sure that the plan is working
Importance of delegation; trust versus control
Delegation is important because it is not possible for the managers to
complete all the tasks that are set out to be done. So delegation gives
authority to subordinates to control so the workload is decreased for the
managers and spread more evenly across other workers. This enables
managers to have more time to focus on more complex tasks of greater
importance. Delegation can also help motivate the workers because they
are given responsibility, which makes them feel like they are valued. It can
help with increasing the flexibility and developing their skills.
2.2.3 Leadership styles
Features of the main leadership styles - autocratic, democratic and
laissez-faire
Autocratic: A leadership style where the leader makes all the decisions
Democratic: A leadership style where workers take part in decision-making
Laissez-faire: A leadership style where most of the decisions are left to the
workers
Objectives

Decisionmaking

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Autocratic
Set by the
leader without
any input from
workers
Taken by the
leader without
any input from
workers

Democratic
Set by the leader,
but the workers
are consulted

Laissez-faire
Usually set by the
leader with or without
the input from workers

Workers are
encouraged to
take part, but
leader still makes

Delegated to workers
who take the
decisions

Supervision of Closely
workers
supervised by
the leader

Availability of
information

Communicati
on

Motivation
levels

Workers are
given very
limited
information
about the
business
One-way, from
leader to
worker. No
feedback
Likely to be low

the final decision

Leader is available
to solve problems
but close
supervision is not
needed
Workers given
information which
allows them to
fully participate in
the business
Two-way,
feedback is
encouraged

Likely to be high

No supervision by
leader

Workers provided with

all the information
they need to take
decisions

Little feedback from

manager, mostly
communication is with
the leader from
subordinates
Could be high or low,
depending on the task
and skill of workers

2.2.4 Trade unions

What a trade union is and the benefits of workers being union
members
A trade union is an organisation of workers aimed at improving pay and
working conditions and providing other services, such as legal advice, for
members. Benefits include:
- Workers who join together have a greater power in influencing employer's
decisions
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- Trade unions help to provide legal advice to members and it is inexpensive

2.3 Recruitment Selection and training of workers
2.3.1 The methods of recruiting and selecting workers
Recruitment and selection
Recruitment is essential because there will be times when employees leaves
the company and has to be replaced by another person, and selection is the
process where employers decide whether or not they want to hire certain
people
Difference between internal and external recruitment
Internal recruitment: Filling a vacant post with someone already
employed in the business
Advantages:
- Vacancy can be filled more quickly and cheaply
- Applicants already knows how the business works
- Business already knows the strengths and weaknesses of applicants
- Workers can become motivated when they see that there is a change for
promotion
Disadvantages:
- A better candidate may have been available from outside the business
- It could cause conflict between the workers if they wanted the promotion
- Does not bring in new ideas
- The previous job of the person who has been promoted needs to be
replaced
External recruitment: Filling a vacant post with somebody not already
employed in the business
Advantages:
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- External applicants may bring in new ideas

- Wider choice of applicants with different skills and experience
- Avoids the risk of upsetting workers when someone who is internal is
promoted
Disadvantages:
- Takes longer to fill the vacancy
- More expensive because the job needs to be advertised
- Applicants will need training
Main stages in recruitment and selection of staff
1. The business identifies the need for a new worker and carries out job
analysis
2. A job description is produced
3. A person specification is produced
4. The job is advertised
5. Send out application forms and job details
6. Receive completed applications
7. Select a shortlist from all of the applicants
8. Interview shortlisted candidates
9. Select the right candidate
Job analysis is when the human department identifies the job that needs
to be filled and what are the main skills needed for this job
Job description is a list of the key points about job, job title, key duties,
responsibility and accountability.
A person specification is a list of the qualifications, skills, experience and
personal qualities that the business is looking for.
Benefits and limitations of part-time and full-time workers
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Part-time workers
Benefits:
- Provides greater flexibility, so if workers are sick then part-time workers
can cover their duties
- Business can often attract well-qualified workers
- Sometimes they are more productive than full-time workers
Limitations:
- Increase in induction and training costs
- Could be communication problems
- Quality of service may not be as good as full-time workers
Full-time workers
Benefits:
- They know the business better than part-time workers
- They may be more experienced
- They may be more loyal to the business
- Available for longer hours
- Carry out more tasks
Limitations:
- Workers may not be always so motivated
- More expensive than part-time workers
2.3.2 The importance of training and the methods of training
Importance of training to a business and workers

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Training helps to increase efficiency, quality, productivity, customer service,

safety and overall, the success of the business. Training is a essential factor
to a business' success because without it, running the business may be
difficult and it can lead to poor service, customer dissatisfaction, failure of
the business etc.
Benefits and limitations of induction training, on-the-job training and
off-the-job training
Induction training: A training programme to help new recruits become
familiar with their workplace, the people they work with and the procedures
they need to follow
Benefits:
- The workers quickly feel part of the business making them more motivated
and more willing to perform tasks efficiently
- The training is specific to the business making it more relevant to what the
business requires
Limitations:
- Increases business costs
- Induction training workers receive wage and salary but don't contribute to
the output
On-the-job training: Training at the place of work. Watching or following
an experienced worker
Benefits:
- Relatively cheap
- Workers learn the way that the business wants the job done
- Workers are producing output while training
Limitations:
- Workers may pick up bad habits from some experienced workers
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- Workers may not learn the most up-to-date methods

- Workers make more mistakes when learning and this increases waste
- It slows down the production of the experienced worker
Off-the-job training: Training that takes place away from the workplace
Benefits:
- Workers learn the latest methods and techniques
- It does not disrupt the production of other workers
Limitations:
- Expensive
- Worker does not produce any output during training
- Training may not be specific to the business' requirements
2.3.3 Why reducing the size of the workforce might be necessary
Difference between dismissal and redundancy with examples to
illustrate the difference
Dismissal: Termination by the employer because the worker has broken
company rules or is not performing work to the required standard. Examples
include, incompetence or poor conduct
Redundancy: Termination of employment by the employer because the job
is no longer needed. Examples include, people being replace by machines,
relocation to another country or when the business closes
Understand situations in which downsizing the workforce might be
necessary
- When there is a fall in demand for the product that the worker produces. If
demand does not increase, the business may need to reduce the size of its
workforce because it is costly to employ workers who have nothing to do
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- When new technology is introduced

- Relocation
2.3.4 Legal controls over employment issues and their impact on employers
and employees
Legal controls over employment contracts, unfair dismissal,
discrimination, health and safety, legal minimum wage
Contract of employment include details such as
- Name of employer and employee
- Date of commencement of the employment
- The amount the employee will be paid
- The number hours of working time
- Job title and main responsibilities
- Number of holidays they receive
- The period of time the worker has to give the employer if they wish to
leave their employment
Unfair dismissal
There are laws that protect worker from unfair dismissal, employers must
have a good reason to dismiss the employee and if the employee feels that
he/she has been unfairly dismissed, they can take legal action against the
employer
Discrimination
There are laws that protect workers from discrimination when recruiting new
workers. Laws prevent any discrimination from age, gender, race, colour,
religion and disability. Trade unions can also provide legal advice to support
any of their members
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Health and safety

Health and safety laws are enforced to ensure that the environment of the
workplace is safe to work in and that the workers feel comfortable working
there
Legal minimum wage
This law prevent employers from exploiting workers by paying very low
wages
2.4 Internal and external communication
2.4.1 Why effective communication is important and the methods used to
achieve it
Effective communication and its importance to business
Communication ensures that all parts of a business's operations run
smoothly and that employees understand what they need to do. Everything
needs to be clear to prevent costly mistakes and waste.
Effective communication can help
- Reduce the risk of mistakes
- Enable faster decision-making
- Enable quicker responses to market changes
- Improve coordination between departments
- Improve morale and motivation of the workforce
- Improve customer relationships
Benefits and limitations of different communication methods including
those based on information technology

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Oral communication: Most appropriate when more than two people need
to discuss things
Benefits:
- Easy to communicate
- Direct feedback
- May help build relationships between employees or even customers
- Personal contact
Limitations:
- May be hard to make an appointment as people may be busy
- Takes up quite some time
- No permanent record
- Receiver might not listen
Written communication: Provide a permanent record of a message and
can be looked at more than once to check understanding
Benefits:
- The information is clear and can be looked at more than once
- Message cannot be changed
- Can be sent to many receivers
Limitations:
- Slower way of communicating
- Messages may be lost or destroyed
- Time consuming
- No personal contact
Main types of written communication include:
- Purchase order
- Minutes of meeting (written record of what was discussed at a meeting)
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- Agenda (Order for the conduct of a meeting)

- Memorandum (communication within the business)
- Job descriptions (written statement of what every worker's job involves)
- Invoice (Official form sent to customer requesting payment for goods)
- Company magazine
Electronic communication: Communicating via email, fax or text
messaging
Benefits:
- Messages received instantly
- Video chats making it more real
- Can be sent to many receivers
Limitations:
- Connection problems
- Emails sometimes sent to junk
- Not everyone has electronic communication
- Equipment and software can be expensive
Visual communication: Includes presentations using graphs, charts,
videos etc
Benefits:
- Information more interesting
- Photographs or videos often have a greater impact than just words
- Pictures and charts are easier to understand
Limitations:
- Takes time for preparation
- Costs money to create visual communication
- Details may be lost
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Factors included when choosing the best method of

communication:
- How urgent the message is
- The length and complexity of the message
- How many people need to receive the message
- How far away is the receiver from the sender
2.4.2 Demonstrate an awareness of communication barriers
How communication barriers arise and problems of ineffective
communication; how communication barriers can be reduced or
removed
How communication barriers arise:
- Language is too complex
- Channel of communication is too long
- Demotivated workers don't listen to the message properly
- Poorly disciplined workers
- Too much noise between the sender and receive
- Language barrier
Problems of communication barriers:
- Tasks are not completed which increases waste
- Damaged reputation of the business
- Higher risk of accidents
- Poor sales
- Recruitment problems
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How they can be reduced or removed:

- Make sure the language used is appropriate to the receiver
- Keep the channel of communication as short as possible
- The sender must always insist on receiving a feedback for they know it has
been read and understood
- Physical barriers such as noise should be removed
- Management must build a culture of trust and respect between all
employees
3.1 Marketing, competition and the customer
3.1.1 The role of marketing
Identifying customer needs
Needs are goods and services essential to living
Wants are goods and services that are not essential to living
Satisfying customer needs
The main role of marking is to convert the wants of an individual into a need
and this satisfies customer's needs
Maintaining customer loyalty; building customer relationships
It is essential to businesses to create a group of customers that the business
can sell its products to, they must build customer relationships in order to
get customers to buy their products. Building customer relationships
requires collecting as much information as possible about each individual
customer so it can be used to identify and satisfy customer's needs.
3.1.2 Market changes
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 Why customer/consumer spending patterns may change

- The price of the product
- The price of competitor's products
- Changes in consumer income
- Changes in population size and structure
- Changes in tastes and fashion
- Spending on advertising and other promotional activities
The power and importance of changing customer needs
Changing customer needs is very important to businesses as they need to
make changes in order to satisfy customers and to survive and earn a profit
Why some markets become more competitive
- Legal controls that prevent individual firms from dominating the market
- Deregulation - the removal of government controls from an industry
- Providing financial and other assistance to new and small to medium-sized
businesses
- E-commerce and social networks. This increases the level of competition
because the websites are available worldwide
How business can respond to changing spending patterns and increase
competition
- Develop their products
- Improve efficiency
- Increase promotion
- Look for new markets

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3.1.3 Concepts of niche marketing and mass marketing

Benefits and limitations of each approach to marketing
Niche marketing: Developing products for a small segment of the market
Benefits:
- Small firms are able to survive and earn profit even in markets that are
dominated by larger firms because there target market is only a small part
of the market
- There is less competition so firms do not waste scarce resources because
of competitors
- Consumers will usually pay more for a high status, exclusive product.
Which means that the firm is more likely to have a high profit margin
Limitations:
- The opportunity to earn high profits may attract potential competitors
- The small size of the market means that economies of scale are unlikely to
be achieved
- Small changes in consumer spending patterns could have a very
significant impact on firms
Mass marketing: Selling the same product to the whole market
Benefits:
- Larger firms benefit from economies of scale which reduces unit cost
- Larger market has the potential for high sales and profits
- Changes in consumer patterns might have less effect on firms selling to a
mass market
Limitations:
- Much more competition in the market which lowers prices and profit
margins
- Not all markets are large enough to support a mass marketing approach
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- Consumers today often look for something slightly different and unique

3.1.4 How and why market segmentation is undertaken

How markets can be segmented, e.g. according to age, socio-economic
grouping, location, gender
Market segmentation: Dividing the whole market into segments by
consumer characteristics and then targeting different products to each
segment
Geographic segmentation: Dividing consumers in the market by
geographic area
Demographic segmentation: Diving consumers in the market by factors
such as age, gender, income, ethnic background and social class
Potential benefits of segmentation to business
- Goods and services can me designed to meet the specific needs of
consumers which increases sales
- Small firms which may not be able to compete in the whole market are
able to operate in on or two segments - perhaps a niche market
- Marketing strategies can be better targeted at each segment
- May be possible to charge higher prices
3.2 Market research
3.2.1 The role of market research and methods used

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 Market-orientated businesses (uses of market research information to a

business)
Market-orientated businesses: Products are developed based on
consumer demand as identified by market research
Uses of market research information
- Identify customer needs
- Discover the current and future market size for the product
- Provide information about the business's existing products and markets
- Identify strengths and weaknesses of competitor products
- Decide on how to price the product and promote the product
- Predict how changes and trends in customer tastes and fashion may affect
the future demand
Primary research and secondary research (benefits and limitations of
each)
Primary research: The collection of first-hand data for the specific needs
of the firm
Benefits:
- Data is up to date
- Data is collected for a specific purpose that is directly relevant to the
business
- It is not available to other businesses, which may provide competitive
advantage
Limitations:
- Costly
- Time consuming
- Risk of inaccurate data

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Secondary research: The collection of data from second-hand sources

Benefits:
- Fairly cheap to obtain
- Easier and quicker to obtain
Limitations:
- May not be up to date
- May not be directly relevant to the business
Methods of primary research, e.g. postal questionnaires, online survey,
interviews, focus groups; the need for sampling
Focus groups: A group of people are invited to discuss topics such as new
products, packaging, brand names and advertisements. Advantages include,
getting first hand information of the product and getting it tested by people
so the business can get direct feedback. However it is time-consuming and
there is no numerical data collected, which makes statistical analysis
impossible
Observation: The behaviour of consumers is secretly observed and
recorded by market researchers. Advantages include, often more accurate
then answering questions and it is directly relevant to the business.
However it is time-consuming and costly because businesses need trained
observers to analyse customer behaviour
Test market: A limited quantity of the product is produced and sold in a
carefully selected area of the market. Feedback from consumers is used to
make changes to the product or other elements of the marketing mix.
Advantages include, this research method leads to a better chance of a
successful introduction of the product into the main market. However, it
takes longer to get the product to its main market and the cost of producing
products for the test market makes this method more expensive than
others.
Consumer surveys: Surveys can collect both qualitative and quantitative
data. This includes interviews, postal surveys, and online surveys.
Interviews: A trained interviewer asks questions to an interviewee and
records their answers. An advantage of this is that the interviewer can
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explain any questions that the interviewee doesn't understand and they can
often tell if the interviewee is replying honestly or not. However, this is more
expensive if a trained interviewer was used and if a trained interviewer was
not used then the data may be bias.
Postal surveys: Questionnaires are posted to people's homes and asked to
complete and return them. An advantage of this method is that it is a good
way of getting opinions from a wide spread group of people from different
areas and this is a cheaper option. However, most of these mails are
considered junk mail so they get thrown away.
Online surveys: This uses the internet to carry out surveys. An advantage
of this is that it can cover a wide geographical area and anyone with
internet access can take part. Also, the results can instantly be collected
and analysed. However, they are normally seen as electronic junk mail so
people may not have any interest in replying
The need for sampling: It is too expensive, time consuming and almost
impossible to get every view of every consumer in the market. This is where
sampling comes in, samples are a representative sample of the target
market selected to take part in market research. Samples are taken to
predict what the whole market wants and don't wants, this is a less timeconsuming method and a cheaper method. However, the samples may
produce bias or misleading results.
Factors influencing the accuracy of market research data
- The sample chosen may be too small
- The business may have chosen the wrong type of method to collect the
data
- People may not answer the questions truthfully
- Questions asked may be bias, which forces the interviewee to not give
their true view
- Language may be unclear
- Secondary data may be out of date
- Data may be recorded incorrectly
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3.2.2 Presentation and use of market research results

Analyse market research data shown in the form of graphs, charts and
diagrams: draw simple conclusions from such data
Tables
Advantages:
- Large amount of data can be grouped and presented more clearly
- It is easy to extract numerical data
Disadvantages:
- Lack visual impact
- Too much data in the table can make it hard to understand
Barcharts
Advantages:
- You can easily see the importance of each piece of data
- You can read numerical values from the axis
Disadvantages:
- When the data values are very similar, it is difficult to compare
Pie charts
Advantages:
- Shows how important each part of the data is compared to other parts
- Easier to understand for people who dislike numerical values
Disadvantages:
- If there are too many fractions then it is difficult to see the relative
importance of different parts of the data

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Pictograms
Advantages:
- Data is presented by pictures
Disadvantages:
- Difficult to show exact quantities using pictures
Line graphs
Advantages:
- They clearly show trends
- Values can be read from both axis
- Data can be added for future time periods
Disadvantages:
- They can be difficult to draw and accuracy depends on choosing
appropriate scales for both axes

3.3 Marketing mix

3.3.1 Product
The costs and benefits of developing new products
Costs of new product development
- Market research to identify customer needs
- Development of a new product
- Investment
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Benefits of new product development

- Charge higher prices for new products
- Increase potential sales, revenue and profit
- May achieve growth and economies of scale
- Spreads risks because business have other products and adding new ones
spreads the risk
Brand image - impact on sales and customer loyalty
Brand image is the general impression of a product held by consumers
- Consumers recognize their product more easily when looking at similar
products
- Their product can be charged higher than less well-known brands
- Easier to launch new products into the market
The role of packaging
- Protect the product
- Provide information about the product
- To help consumers recognise the product
- To keep product fresh
The product life cycle: main stages and extension strategies; draw and
interpret a product life cycle diagram

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Extension strategies: marketing activities to extend the maturity stage of a

product
- Finding new markets for the product
- Finding new uses for the product
- Adapting the product or the packaging to improve its appeal to consumers
- Increased advertising and other promotional activities

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 How stages of the product life cycle can influence marketing decisions,
e.g. promotion and pricing decisions
Product

Introduction
Only a basic
model of the
product is
available

Growth
Changes
might be
made to the
product as a
result of
feedback
from
consumers in
the test
market
Brand image
helps to
create
customer
loyalty

Maturity
Extension
strategies
might be
used to keep
the product
in this, the
most
profitable
stage of its
life cycle
Price will
remain
similar to
that of
competitor
products

Promotional
activities are
aimed at
reminding
the
customers
that the
products are
still available
The product
is now
available for
purchase
through a
wide
distribution
network

Price

Prices might
lower than
competitors
prices to
attract
consumer

Promotion

High
promotional
activity

Promotional
activity still
high to
continue
persuading
customers

Place

The product
may be
offered for
sale in
specially
selected
outlets

The product
is more
widely
available,
which helps
to increase
sales

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Decline
The product
and
packaging is
not altered

The price
might be
reduced to
maintain
sales or sell
off the
remaining
stock before
withdrawing
the product
Advertise the
products at a
lower price

The product
is only
available in
profitable
outlets

3.3.2 Price
Pricing methods: cost plus, competitive, penetration, skimming and
promotional; their benefits and limitations
Market skimming: Setting a high price for a new product that is unique or
very different from any other product on the market
Advantages:
- Profit earned is very high
- Helps to recover research and development costs
Disadvantages:
- Laws may have been placed to stop this
- It may backfire if competitors produce similar products at a lower price
Penetration pricing: Setting a low price to attract customers to buy a new
product
Advantages:
- Attracts customers more quickly
- Can increase market share quickly
Disadvantages:
- Possible loss of revenue due to lower prices
- Cannot recover development costs quickly
Competitive pricing: Setting a price similar to that of competitor's
products which are already established in the market
Advantages:
- Business can compete on other things such as service
Disadvantages:
- Still need to find ways of competing in order to attract sales
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Cost plus pricing: Setting price by adding a fixed amount to the cost of
making or buying the product
Advantages:
- Quick and easy to work out the price
- Makes sure that the price covers all of the costs
Disadvantages:
- Price might be set higher than competitors or more than customers are
willing to pay, which reduces sales and profits
Loss leader pricing/Promotional pricing: Setting the price of a small
number of products at below cost to attract customers into the outlet in the
hope that they will buy other products priced to earn a profit
Advantages:
- Good way to sell off unwanted inventory before it becomes out of date
- A good way of increasing short term sales and market share
Disadvantages:
- Revenue on each item is lower so profits may also be lower
Recommend and justify an appropriate pricing method in given
circumstances
When deciding the price you should consider:
- Is it a new or existing product?
- Is the product unique?
- Is there a lot of competition in the market?
- Does the business have a well-known brand image?
- What are the costs of making and supplying the product?
- What are the marketing objectives of the business?

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 Understand the significance of price elasticity: difference between

price elastic demand and price inelastic demand; importance of the
concept in pricing decisions
Price elasticity of demand: Measures by how much demand for a product
changes when there is a change in price
Price inelastic demand: The percentage change demand is less than the
percentage change in price. Products that are not very responsive to
changes in price
Price elastic demand: The percentage change demand is greater than the
Price change

Effect on revenue

Increase

Price elasticity of
demand
Price inelastic demand

Decrease

Price inelastic demand

Decrease

Increase

Price elastic demand

Decrease

Decrease

Price elastic demand

Increase

Increase

percentage change in price. Products that are more responsive to changes

in price
3.3.3 Place - distribution channels
Advantages and disadvantages of different channels

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Channels of distribution

Advantages

Disadvantages

Channels of distribution
1

- All of the profit is

earned by the producer
- The producer controls
all parts of the
marketing mix
-Q uickest method of
getting the product to
the consumer

- Consumers are not

always able to see or
try the product before
they buy it
- Delivery costs may be
high if there are
customers over a wide
area
- All storage costs must
be paid for by the
producer
- All promotional
activities must be
carried out and financed
by the producer

Channels of distribution
2

- Consumers can see

and try the product
before buying it
- The cost of holding
inventories of the
product Is paid by the
retailer
- The retailer will pay for
advertising and other
promotional activities
- Retailers are usually
more conveniently
located for consumers

- The retailer takes

some of the profit away
from the producer
- Producers lose some
control of the marketing
mix
- The producer must
pay for delivery costs to
the retailers
- Retailers usually sell
competitors products
as well

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Channels of distribution
3

Channels of distribution
4

- The wholesaler buys in

bulk from the producer
- Wholesalers will
advertise and promote
the product to retailers
- The transport cost to
the retailer is paid by
the wholesaler
- Wholesalers pay for
transport costs
- Wholesalers pay for
storage costs
- The agent has
specialist knowledge of
the market

- Another middleman so
more profit is taken
away from the producer
- The producer loses
even more control of
the marketing mix

- Another middleman is
added so even more
profit is taken away
from d producer

3.3.4 Promotion
The aims of promotion
Promotion: Marketing activities used to communicate with customers and
potential customers to inform and persuade them to buy a business's
products
- Attract the attention of consumers by making them aware of the product
- Persuading consumers to buy to product
- Explaining how a product is better than competitors' products
- Creating and developing brand image
- Encouraging wholesalers and retailers to stock the product
- Reassuring consumers
Different forms of promotion and how they influence sales, e.g.
advertising, sales promotion

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Advertising: Paid-for communication with consumers which uses printed

and visual media. The aim is to inform and persuade consumers to buy a
product
Informative advertising: Information about the product is communicated
to consumers to create product awareness and attract their interest
Persuasive advertising: Communication with consumers aimed at getting
them to buy a firm's product rather than a competitor's product
Sales promotion: Incentives used to encourage short-term increases in
sales or repeat purchases
Below-the-line promotion: Promotion that is not paid for communication
bus uses incentives to encourage consumers to buy. Incentives include
money-off coupons or vouchers, loyalty reward schemes, competitions and
games with cash or other prizes
Personal selling: Sales staff communicate directly with consumer to
achieve a sale and form a long-term relationship between the firm and
consumer
Direct mail: Also known as mailshots, printed materials which are sent
directly to the addresses of customers
Sponsorship: Payment by a business to have its name or products
associated with a particular event
The importance of marketing budget in making promotion decisions;
need for cost effectiveness in spending the marketing budget
Marketing budget: the amount of money made available by a business for
its marketing activities during a particular period of time
Businesses must make sure they don't overspend when promoting their
products and they must consider which promotion method they should use
to maximise sales of their products. They must be cost-efficient so that
money is not wasted on useless promotion
3.3.5 Technology and the marketing mix

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 Define and explain the concept of e-commerce

E-commerce: The use of the internet and other technologies used by
businesses to the market and sell goods and services to customers.
Examples of e-commerce include
- Online shopping
- Electronic payment
- Internet banking
- Online ticketing
- Online auctions
- Hotel reservations

The opportunities and threats of e-commerce to business and

consumers

Opportunities of
e-commerce to
businesses
Increased
market the
business is able to
sell its goods and
services to more
consumers
Reduced costs
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Threats of ecommerce for

businesses
Increase
competition
competitors can
now be from
any part of the
world, not just
the local market
Unfamiliarity

Opportunities of ecommerce to
consumers
Convenience
Consumers can
order their
products from the
comfort of their
own homes

Threats of ecommerce for

consumers
Fraud A
website might
take a
consumers
money and not
deliver goods

Wider choice

Hacking A

The staffing and

other costs of
shops are saved

consumers are
less likely to
buy products
from new
business they
dont know

Better
information
the website can
provide potential
consumers with
all the information
they need about
the goods and
services

Consumers are
now able to buy
goods which they
would not have
had access to if
they were only
able to uses local
shops
Lower prices
competition is
worldwide and this
reduces prices

consumers
personal details
or bank account
details might be
stolen

Better
information
Consumers are
able to read about
the goods and
services available
from websites of
different
businesses

Returning
items it can
be inconvenient
and expensive
to return goods
which do no
meet the
consumers
needs

No personal
service There
is no face-toface contact
between the
consumer and
seller

Use of the internet and social networks for promotion

Many promotions can be done through the internet by pop ups or video
advertisements when watching youtube videos
3.4 Marketing strategy
3.4.1 Justify marketing strategies appropriate to a given situation:
Importance of different elements of the marketing mix in influencing
consumer decisions in given circumstances
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Place - affects whether or not the consumer wants to go to the shop, this
depends on how convenient it is to reach, how far away it is and how
important it is to go there
Price - affects whether or not the consumer wants to buy the product, if its
too expensive they may not be willing to pay for the product, if it is too
cheap they may think the product is dodgy
Promotion - affects whether or not the consumer is aware of the product
and how many consumers are aware of the product
Product - affects whether or not the consumer wants to buy the product, if
it is not unique enough or not useful then consumers may not want to buy it
3.4.2 The nature and impact of legal controls related to marketing:
Impact of legal controls on marketing strategy, e.g. misleading
promotion, faulty and dangerous goods
Legal controls: laws that control the activity of businesses
- Protect consumers from faulty and dangerous goods
- Prevent the businesses from using advertising to mislead consumers
- Protect consumers from being exploited in industries where there is little or
no competition, also known as monopolising
These laws impact the decisions the business has to make including the
pricing of the product, the quality of the product and the advertisement
used to promote the product

3.4.3 The opportunities and problems of entering new markets abroad:

Growth potential of new markets in other countries
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Growing in other countries can increase sales, revenue and profits. This is
because the business is now available to a wider group of people, which
increases potential customers
Problems of entering foreign markets, e.g. cultural differences and lack
of knowledge
- Difference in language and culture: It may be hard to communicate
with people in other countries because of language barriers and as for the
culture, different images, colours and symbols have different meanings and
importance in different places so for religious reasons, it may not be
appropriate to use some images in advertisements
- Lack of market knowledge: The business doesn't really know the new
market that they are entering into and consumers may not know the
business so it may lead to failure
- Economic differences: The cost and prices may be lower or higher
depending on the economy of the country so businesses may not be able to
sell the product at the price they want to earn a profit
- Social differences: Different people will have different needs and wants
from people in other countries such as the UK and India.
- Difference in legal controls to protect consumers: The business may
have to spend more money on producing the products in a certain way that
the country wants it to be produced so it protects consumers
Benefits and limitations of methods to overcome such problems, e.g.
joint ventures
Joint venture: an agreement between two or more businesses to work
together on a project
Advantages:
- Reduces risks and cuts costs
- Each business brings different expertise to the joint venture
- The market potential for all the businesses in the joint venture is increased
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- Market and product knowledge can be shared to the benefit of the

businesses
Disadvantages:
- Any mistakes made will reflect on all parties in the joint venture, which
may damage their reputations
- The decision-making process may be ineffective due to different business
culture or different styles of leadership

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