A293

Mr E Botha

Normanhurst School

Production, Finance and the External Business Environment

Revision Guide

v1 12 Feb 14

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The examination is called Unit A293: Production, Finance and the External Business Environment.

What will the exam be like? This is a pre-release case study examination. A case study is information about a business situation. Pre-release means that you will be given this information before you sit the examination. The examination will last for 1 hour and 30 minutes. There will be a total of 90 marks. The marks will count for 50% of your overall score in GCSE Business Studies. There will be three main questions. Each of these will be divided into a number of parts. The questions will be based on the case study.

What will the exam test? The examination tests three skills: 1. Knowledge: How well you can define business terms and can explain business ideas. Example. You might be asked to define what is meant by the term ‘globalisation’ or to explain the advantages of competition.

2. Application: How well you can use your knowledge to explain a business situation. Example. You might be asked to explain how a rise in costs may affect the break-even output of a firm. 3. Analysis and evaluation: This is about weighing up advantages and disadvantages, in order to make judgements. You may need to recommend what a business should do and then give your reasons why you think this is the right thing to do. Example. You could be asked to recommend whether or not a business should move its production to another country.

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The marks for the different skills on this paper are: Knowledge – 27 marks Application – 31 marks Analysis and evaluation – 32 marks

How difficult will the questions be? The questions in this examination will vary in difficulty. Some are used to test F and G candidates, and some are there to challenge A and A* candidates. The exam board spend hours to make sure that the examination will be a fair test of what you should be able to do. They are not trying to catch you out.

How much should I write? The number of lines that are provided for your answer is a good guide as to how much you should write. If there are ten lines and you only fill two of them, you may not have developed your answer as fully as you should. 2

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Mr E Botha

Normanhurst School

Production

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Each company needs to decided:

1. What to produce?

They use research to find out what consumers want

2. Where to produce?

They might produce in low-cost countries (e.g. China)

3. How to produce?

E.g. batch production, job production, flow production or process

production

4. How to deal with legal and other constraints?

For example, cars have to meet minimum safety requirements

5. How technology can help?

Use of machines, robots, mechanisation, automation

There are four types of production

Job production

• This is when each product is produced individually

• In business, job production is used when producing one-off

products

• For example, there is only one Millennium Eye.

Flow production

• This is when the same product is made

continuously

• In this situation the product rarely changes

very much

• For example, paper clips

Batch production

• This is when companies produce one

product for a while, and then switch to a

similar but different product

• For example, different types of bread

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Process production

• Involves a series of processes which some raw materials go

through

• The end result is a large quantity of different finished

products, for example:

– Oil refining producing oil, diesel, plastic etc.

Value added

When companies add value they are able to sell their

products/services for more than the cost of production.

For example, it costs Starbucks £0.40 to make a cup of coffee,

yet they charge customers £2.50.

In this example, they have added £2.10 of value to the cost of the raw materials.

There are many ways of adding value, for example:

Coca-Cola can charge more because of their strong brand.

Toyota can charge more due to the high quality of their products.

Boots can charge more due to their excellent customer service.

Most companies operate in a dynamic, competitive business market. Dynamic means

“always changing”.

In other words, in most markets there is lots of competition, and the nature of the

market is always changing. Also, companies are now competing globally… it‟s not good

enough to be the best in the UK.

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The mobile phone market – case study

In the last few years everything has changed. Nokia used to be the market leader.

Then Apple entered the market with its iPhone, Google launched its Android operating

system (initially on HTC handsets), and Samsung launched its Galaxy range.

This is a truly global market. HTC and Samsung are from South Korean, Apple and

Google are from the USA, and Nokia is from Finland.

Division of labour/Specialisation

Division of labour is when job is divided up into a number of different parts. For

example, BMW doesn‟t have only one person making each car; instead hundreds of

people make each car.

There will be employees who:

- Put the wheels on.

- Fit the engine.

- Put the doors on.

- Fit the glass.

- Etc.

- Etc.

Division of labour is most common on a production line, and very common when making

complex products with hundreds/thousands of parts. For example, the car below has

over 10,000 parts.

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Advantages of division of labour

- Each employee becomes an expert at their job. This is known as specialisation.

- It is quicker to assemble/make products. This improves productivity.

- Complex production can be broken down into a series of quite simple tasks, so it

may be possible to employ less skilled (and therefore cheaper) workers.

Disadvantages of division of labour

- The work is often boring, which leads to:

o Unmotivated workers.

o Unskilled workers.

o High rates of absenteeism.

It should be noted that this is why companies use job rotation… to try to stop their

employees becoming bored.

The impact of technology on production

Technology has made it possible to make higher quality products for less money.

Key words

1. Mechanisation

This is when machinery is used but labour is still

required to operate it

o For example, fork-lift trucks

This makes production more efficient

2. Automation

This is when machinery is used and a computer

controls it

o For example, car production lines

Workers are still employed to supervise and

program the computers

It‟s easy to remember: autopilot is when a

computer is flying the plane

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3. CAD (Computer Aided Design) – This is when computers are used to design

products. Almost all products are now designed on computers, as it is easier to

make changes, and save/share information.

4. CAM (Computer Aided Manufacturer) – This is when computers control the

machines in the manufacturing process.

5. CIM (Computer Integrated Manufacturer) – This is when the whole factory is

controlled by a computer.

6. Productivity – Companies always want to try to make more using the same or less

resources. For example, if a motorbike factory employed 50 workers per 1,000

bikes it made, it would look to reduce that number of employees (possibly using

automation or mechanisation). If they managed to do this, they would have been

said to have improved productivity.

How technology helps

1. It enables companies to make higher quality goods. It is possible to engineer

to a hundred of a millimetre using machinery. Humans are at least 100 times

less precise.

2. It is possible for computers to detect minor defects in goods being made.

This leads to less poor quality products.

3. Computers, machines, robots etc. don‟t get paid, don‟t need to take holidays,

and can work 24/7 all year round – they are much cheaper than humans. This

means, by using technology, companies can reduce their costs and produce

more.

4. Machines are faster – one machine can often do the work of 50 workers.

5. The Internet has also enabled companies to sell all over the world. For some

companies, it has reduced their production, transportation and retail space

costs significantly (for example, iTunes, sell downloads).

6. Some workers can use technology to work from home, or they may be able to

check the quality of work being done from remote locations.

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The downside of technology

1. Often technology is very expensive to buy, and it can date quickly. This

means the up-front costs are often high, and companies may have to buy

replacement equipment every few years.

2. Some workers could lose their jobs if they are replaced by machines. A

simple example, years ago people were employed to put lids on jars… all of

these people have now been replaced by machines.

3. There are now far less unskilled jobs as a result of technology – this means

that companies may have to retrain staff if their job has been replaced by a

machine (which could include training on how to operate and repair the new

machine). This costs the company money.

Just In Time (JIT) / Minimum stock levels

Just In Time (JIT)

JIT is when companies do not hold large quantities of raw materials/ components.

Instead, they get their suppliers to deliver raw materials/parts Just In Time. Just In

Time places the responsibility on the supplier to be on time and, as such, the supplier

must be reliable and must always deliver the correct quality required amount of stock.

This saves on costs

There are costs associated with storing large quantities of stock. For example, you

have to have a warehouse (buildings cost money – security, electricity, insurance etc.)

and there is a greater risk of parts being damaged being moved in and out of the

warehouse.

However, the risk is that if there‟s a delay in delivery or there is a problem with the

raw materials/parts, production will have to stop. For example, a one-day delay could

stop the production of 500 cars. (If each car sold at £10,000, that would cost the

manufacturer £5,000,000 worth of sales revenue.)

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Minimum stock levels

Minimum stock levels places the responsibility on the buyer to monitor stock levels and

order when a 'safe' minimum level is reached.

The buyer orders stock as they see fit. By keeping spare stock, the company hopes

they will never run out. However, this system incurs costs as they have to pay for

storage.

Judgment must be made by the buyer as to how long the delivery of replacement stock

will take. For products sourced locally then there is usually no problem. For replacement

stock sourced from around the world there is more of a problem, and higher stock

levels may need to be maintained.

Lean production

Lean production means “using less of everything”. For example, less energy, less raw

materials, less space etc. By constantly looking at reducing the amount

Quality control

Why making high quality products is important

Consumers will not buy from the same company twice if they are supplied with poor

quality products.

• For example, if your car keeps breaking down you are unlikely to buy the same

car again

Also, if goods are not of a good quality:

• They may not be able to be sold, and

may have to be thrown away

• Or, if they are sold:

– they may have to be sold at a

reduced price

– they may be returned

Finally, relations with customers are affected, which will lead to:

• Less repeat purchases

• Poor word-of-mouth publicity

• Time costs in dealing with complaints etc.

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Quality control

In the past, quality control was undertaken by quality-control inspectors. These

people would inspect a small amount of the products being made, and would check for

mistakes. They may have sampled/inspected as few as 1 in 2,000 products made.

BUT, things have changed… the job of quality control is now in the hands of the

workers doing the job. They check their own work, and that of their colleagues. So,

throughout the production process, quality is being continually checked. This is known

as Total Quality Management (TQM).

TQM

The job of quality control is in the

hands of the workers doing the job.

They check their own work, and that of

their colleagues. So, throughout the

production process, quality is being

continually checked.

So, Total Quality Management spreads out the work, and puts it in the hands of the

experts (i.e. the people making the product).

This is important due to the increasingly complex nature of modern products. For

example, it would be impossible for a quality control inspector to check that all 10,000+

parts in a car are all working and have all been fitted properly.

TQM is therefore mainly used when making products with lots of different parts.

Key term – Quality Assurance

This is how companies ensure quality standards are met throughout the production

process.

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Mr E Botha

Normanhurst School

Finance

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Break Even Analysis

Break Even Used to predict the quantity a business needs to produce and sell before it

starts making a profit. Can predict the effect of changes in price or costs on

profit.

Break-even point is the output at which a firms Total Costs are equal to its

Sales Revenue (Price x Quantity). In other words, when the company doesn‟t

make a profit or a loss.

Selling less than the break even quantity results in a loss.

Selling more than the break even quantity results in profit.

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Break-even table

Fixed costs

Total variable

costs

Total costs

Sales revenue

£3,000

£0

£3,000

£0

£3,000

£1,000

£4,000

£2,500

£3,000

£2,000

£5,000

£5,000

£3,000

£3,000

£6,000

£7,500

0 100 200 300

Variable costs = £10 per unit

Selling price = £25

Profit = Sales Revenue – Total Costs

For example if the above business make and sell 100 units:

£2,500 – £4,000 = (£1,500)

The above table shows a break even quantity of 200 units, where total costs and

sales revenue are equal

Break-even Formula

Units

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Limitations of break-even analysis

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Business Costs

A business has many different costs, from paying for raw materials through to paying

the rent or the heating bill.

Fixed Costs of production are costs that stay the same regardless of the

quantity produced e.g. Rent, Advertising, Electricity

Variable Costs increase as the quantity produced increases e.g. materials,

packaging. Variable costs per unit x number of units

Variable costs Fixed costs

Raw materials Rent

Workers wages Salaries of head office workers

Energy/fuel for machines Heating and lighting

Insurance

Interest on loans

Total Costs of a business are found by adding together it‟s fixed and variable

costs. Fixed Costs + Variable Costs.

Average Costs is the amount of money each unit costs to make. Total costs ÷

number of units

It is important for a business to calculate average cost because it helps to decide what

price to charge for the product.

Example: James owns a photography business. He charges, on average, £10 for each

picture. His fixed costs are £2,100 and variable costs are £3 per picture. Fill in the

gaps below.

Pictures

sold

Sales

revenue

Fixed

costs

Variable

costs

Total

costs

Profit Average

costs

0 0 2100 0 2100 -2100

100 1000 2100 300 2400 -1400 24

200

300

400

500

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Economies of scale

Consider the following questions:

Why is the average price of smart phones falling all the time whilst the

functions and performance level are always on the rise?

How can IKEA profitably sell flat-pack furniture at what seem to be impossibly

low prices?

The answer is – economies of scale. Economies of scale are when a company reduces

their unit costs as they get BIGGER.

Economies of scale are a key advantage for a business that is able to grow. There are six economies of scale a business can benefit from.

Purchasing economies They are given discounts for buying in bulk, which reduces their costs

Managerial economies They can employ specialists, such as accountants and lawyers which can

improve efficiency

Financial economies They can borrow money cheaper. i.e. they pay less interest on

borrowed money

Marketing economies They can negotiate reduced media costs

Risk-bearing economies They can produce a range of goods and services. So, if one fails,

another will succeed

Technical economies They can afford superior machinery, computers, robots etc.

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Diseconomies of scale

This is when firms become inefficient as they grow. In other words, their unit costs go

UP as they get BIGGER.

This is usually caused by companies becoming too big; and this makes them very hard to

manage.

Companies such as British Airways, Ford and IBM have all suffered from diseconomies

of scale.

Diseconomies of scale occur for several reasons, but all as a result of the

difficulties of managing a larger workforce. Some reasons include:

Poor communication

As the business expands communicating between different departments and

along the chain of command becomes more difficult.

Lack of motivation

Workers can often feel more isolated and less appreciated in a larger business

and so their loyalty and motivation may diminish.

What can a business do about this? Possible solutions include:

Delegation of decision-making (empowerment)

Making jobs more interesting (job enrichment)

Splitting employees into teams (teamworking)

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Loss of direction and co-ordination

It is harder to ensure that all workers are working for the same overall goal as

the business grows.

Choosing the scale of production

There are a number of factors that will determine the size of business that a firm

chooses to be:

The size of the market- This will affect how large or small a business can grow.

The amount of capital needed- Some businesses need a lot of capital. Starting a car

manufacture firm requires massive investment in materials and equipment.

A large market gives opportunities for firms to produce on a large scale and gain economies of scale.

E.g. Food canning.

A small market is likely to be supplied by small firms.

E.g. hardware shop

Niche Market- small firms often make specialist goods.

E.g. body paint firms

The markets for services that require personal attention.

E.g. hairdressing.

A local market may be supplied by local firm.

E.g. domestic building work

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Economies and diseconomies of scale- When increasing the scale of production leads

to lower costs, large firms exist. Firms will prefer not to grow if increasing the scale of

production results in diseconomies of scale.

The motives of the owners- Many people enjoy running their own business. Many

owners prefer to stay in charge and choose not to increase the size of their business.

Co-operation of firms- Small firms sometimes work together to help them to compete

against larger firms.

Doing sub-contracted work- A large firm may prefer to contract out work to smaller

firms so that it does not have to employ as many people.

Sources of Finance

Why might companies need to obtain finance / money?

Reason Example

Starting up a new

business

A person setting up a new café near Southfields station.

Internal growth Opening a new restaurant.

Take-over Kraft buying Cadbury‟s.

Replacement of

old machinery

The school buying new computers to replace old outdated

models.

Moving to new

premises

The business has expanded and needs to move to a more suitable

location.

Cash flow

problems

A theme park which is only open from April to October. As

such, they may be short of money from November to March.

Research and

development

Apple researching and developing the iPhone 5.

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Factors that influence Sources of Finance

The cost of finance – Businesses will often try and use internal sources of finance

before external sources as they are cheaper. If they have to pick an external source

they will try to choose the cheapest option.

The purpose of the finance – Businesses will use different sources of finance for

different reasons. For example they might choose a mortgage for a new building or to

lease a car.

The length of time that the finance is required – Businesses will chose appropriate

sources for the length of time they need it for. This is categorised as:-

– Short term: up to 12 months

– Medium term: 1-3 years

– Long term: more than 3 years

The degree of risk involved – Banks will not lend money to high-risk businesses as

they may not get it back. Therefore new businesses might have to rely on the owner‟s

investments. If banks do lend to small businesses the rates of interest charged will be

higher, when compared to low-risk big companies.

Appropriate of source of finance for the business – Big businesses like PLCs will have

more money and are more likely to use internal finance. PLCs can also sell shares. Small

businesses are much more likely to rely on owners investment and other sources like

government grants.

Internal Sources of finance

Short term Medium term Long term

Cash in bank Retained profit

Sale of assets Owner‟s Investment

Retained Profit - Profit that is made by the business but kept for its own use.

Companies use this as interest doesn‟t have to be paid and the finance doesn‟t have to

be repaid. The main disadvantage is that shareholders won‟t receive as high a dividend

payment.

Owner‟s Investment - The existing owner(s) may invest more money in the business.

Sale of Assets - When the business sells something that it owns.

The assets that are sold may now longer be needed by the business.

Cash in the Bank - Cash that is held in the company‟s bank account.

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External Sources of finance

Short term Medium tern Long term

Overdraft Bank Loan

Trade credit Lease

Hire purchase

Grants Share issue

Mortgage

New partner

The various sources of finance and what they‟re used for:

Overdraft - An arrangement with the bank that allows the

company to withdraw more money than it actually has in its bank

account. It‟s used to overcome a short-term shortage of funds.

Interest is charged on the daily amount of money which the

business owes to the bank – that is the cost of an overdraft.

Trade Credit - When businesses allow customers to take the

goods now and pay later (“buy now, pay later”). It helps

businesses which have a temporary shortage of funds (you can

buy the goods, sell them for more, and then pay for them later). The period of credit

is usually interest free.

Bank Loan – An amount of money borrowed from a bank,

usually for a fixed purpose and for a fixed period of time.

A bank loan may be used for business development or

maybe a business start-up. The money borrowed has to

be repaid with interest.

Lease – A method of obtaining items for a fixed period of

time, after which they are returned to the owner. This is

like renting something. For example, used to finance

company cars, lorries, computer equipment. Leased goods

are not owned by the user. Monthly or annual payments

have to be paid for the right to use the equipment.

Hire purchase - A system of obtaining items over a given period of time. They become

the property of the user after the final payment. Used to finance company cars,

lorries, computer equipment. A deposit has to be paid followed by monthly payments

which include interest payments.

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Grant – Mooney given to certain types of companies by the government, charities or social enterprises. Grants are available to young people starting new businesses and

companies setting up/expanding in poor/deprived areas. Used to finance new

businesses, factories, costs of training (e.g. providing new skills to employees) etc.

Grants don‟t normally need to be repaid.

Mortgage – The finance is used to help fund the

purchase of property. The money which has

been borrowed has to be repaid together with

interest. If the borrower fails to pay, the

lender can repossess the property (i.e. the

property is the “security”). Note: the amount of

interest payable to usually low.

Share issue - This is only used by Public Limited Companies (PLCs). They sell shares in

the company to raise money. For example, Google recently sold shares in their

company. It is used to expand into new markets, to invest in new technology etc..

Share issue costs the company nothing except paperwork. However, the owners risk

losing control of the company if they sell over 50% of the shares.

Taking on a new partner - This is only used by

partnerships. They can take on a new partner, and

that new partner will have to pay to join the firm.

For example, a doctor may pay £100,000 to join a

doctors‟ surgery. The money can be used for

many reasons, for example: to pay off another

partner who is leaving, to pay a bonus payment to

existing partners, or to finance expansion/new

technology. There is no cost to the existing

partners.

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Cash flow

Cash-flow forecast

The purpose of a cash-flow forecast is to predict how much money a company

will have at any one given time.

o It also helps a firm to set a budget

It is usually calculated on a monthly basis, so a company knows how much money

they will have left at the end of each month.

Every month thousands of pounds are received and thousands of pounds are paid

out.

The trick is to make sure every month you receive more than you pay.

£4,500Closing balance

£55,500Total cash out

£500Phone bill

£15,000Payments to suppliers

£10,000Electricity

£30,000Wages

Expenses

£60,000Total cash in

£5,000Interest received

£50,000Sales revenue

£5,000Bank balance b/f

JanuaryRevenue

A simple one-month cash-flow forecast

Money left over

from last year

Closing balance =

Total cash in –

Total cash out

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July £s August £s September £s

Balance brought forward 2,000 1,400 (1,000)

Income

Sales of goods 10,000 8,000 11,000

Total income 12,000 9,400 10,000

Expenditure

Materials 3,000 3,000 3,000

Energy costs 600 400 700

Wages 6,000 6,000 6,000

Transport 400 400 400

Interest payments 600 600 600

Total expenditure 10,600 10,400 10,700

Balance carried forward 1,400 (1,000) (700)

You need to be able to identify problems in a cash flow statement. Look out for trends in sales going

up or down, trends in costs going up or down, total income rising or falling and total expenditure

rising or falling.

One massive give away that an intervention is necessary will be a figure in brackets. An example in

the above cash flow forecast would be the closing balance for August (1,000). If a figure is in

brackets it means it is a minus figure.

Possible cash flow interventions that could be used by a business to make it more successful.

1. Extend a trade credit agreement – This will delay payments being made.

2. Use an overdraft facility – This will allow the business to go into debt without incurring

massive charges… but they will still pay interest.

3. Change Suppliers – Getting cheaper suppliers will reduce expenditure… but quality of the

supplies could be compromised.

4. Reduce costs – This will reduce expenditure and create a better end of month balance

5. Increasing sales – This will increase income and create a better end of month balance

6. Change the business strategy – Changing what a business is doing may create a better cash

balance. For example, if a restaurant isn‟t doing well they may change their business model to

a takeaway or delivery model.

Benefits of cash flow forecasting

1. Helps businesses plan for the future.

2. It helps businesses set targets for future performance.

3. It helps businesses identify when they might need finance in the future.

Cash-flow forecast

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Limitations of cash flow forecasting

1. Forecast figures could be different to actual figures.

2. Long-term forecasts are likely to be less accurate than short term forecasts.

3. Lack of control over some figures in the forecast.

4. Possible changes in prices.

5. The demand of your products might change.

6. There might be changes in the costs of production which effect the forecasts.

Cash-flow statement

This is completed each month once accurate figures are known.

It is compared against the cash-flow forecast to see how accurate the prediction was.

Cash-flow statements are used to help with preparing future cash-flow forecasts.

Profit and loss

Profit is a return on an investment

– Shareholders have invested money in the business and they want to get some

money back.

Profit is a reward for taking a risk

– Shareholders risk losing the money they have invested if the business goes

bankrupt (limited liability) so they want the possibility to get some money

back.

How do the owners receive this “return” or “reward”?

Receive “dividends” if business is incorporated.

Receive “drawings” if business is unincorporated.

Remember that not all organisations have profit as an aim. Organisations like

charities raise money to spend it on other things. An example of this would be

Oxfam. They raise money to overcome poverty and suffering worldwide.

What affects the amount of profit or loss?

1. The type and size of the business.

2. The objectives of the business.

3. The demand for the product.

4. The price consumers are willing to pay.

5. The way in which the business controls its costs.

6. The amount of competition.

7. The cost of setting up the business.

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What is Sales Revenue?

The amount of money you receive from selling something

Sales Revenue = Price x Quantity Sold

Sales Revenue can be increased by either, increasing price or increasing quantity sold.

However, if either go down profit could be negatively effected.

Cost of Sales

This is the cost of buying/making the goods that are to be sold.

E.g. I sell sandwiches in a shop. The cost of sales is the money I pay for the bread and

other ingredients.

Other Expenses

Any other costs that the business has to pay that aren‟t covered in the cost of sales.

Examples include:

1. Rent

2. Electricity

3. Heating

4. Lighting

5. Gas bill

6. Wages (unless being paid piece rate/commission)

7. Salaries (unless being paid piece rate/commission)

8. Water bill

Gross/net profit

= = Gross Profit Sales Revenue Cost of Sales -

= Net Profit Gross Profit Other Expenses -

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Two important points:-

1. Gross Profit is the highest level of profit.

2. Net profit is usually referred to as the profit once all other costs have been

deducted.

Profit is often seen as a measure of success for a business. The more profit a business

makes that more successful it is seen to be!

Profit and loss Account

£32,000 Gross profit

£8,000 Cost of sales

£40,000 Sales

Expenses

£7,000 Net profit

£25,000 Total expenses

£500 Stationery

£3,500 Advertising

£1,000 Water rates

£4,000 Business rates

£1,500 Insurance

£12,000 Wages

£2,500 Heating

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Profit Margins

• The profit margin ratio tells us the profit a business makes on its costs.

• It tells us how much gross profit per £1 of turnover our business is earning.

Gross profit margin = gross profit x 100

sales

Net profit margin = net profit x 100

sales

Use the above profit and loss account to work out the profit margins.

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External Business Environment

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Types of competition

Market structure

In business each market has its own unique structure. For example, the tablet

market will be different to the chocolate market.

A market structure includes things such as:

o How many companies are involved?

o What sorts of goods/services are being sold?

o Is there a lot of competition, or is the market dominated by a few large

companies?

There are three types of market structures:

1. Monopoly

2. Oligopoly

3. Perfect competition

Monopoly

A single seller (or a seller with over 25% of the market, who is the biggest by

far in the market)

Branded goods

No real competitors – this means prices are usually higher

Competition prevented by:

– Patents/copyrights, economies of scale, high spending on marketing, high

set-up and operating costs

Oligopoly

Industry is controlled by a few large suppliers (usually three to six)

Competition prevented by

– Patents/copyrights, economies of scale, high spending on marketing, high

set-up and operating costs

Competition based on brand, service, design, image etc. NOT price

http://news.bbc.co.uk/1/hi/business/4274335.stmhttp://news.bbc.co.uk/1/hi/business/4274335.stmhttp://news.bbc.co.uk/1/hi/business/4274335.stmhttp://news.bbc.co.uk/1/hi/business/4274335.stmhttp://news.bbc.co.uk/1/hi/business/4274335.stmhttp://news.bbc.co.uk/1/hi/business/4274335.stm

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Perfect competition

Many buyers, many sellers

All firms provide very similar products

o E.g. potatoes

Businesses are often small

Perfect

competition Oligopoly Monopoly

Best for consumers

- Lots of choice - Low cost/prices - Higher quality - competing - More likely to innovate

Worst for consumers

- Little choice - High prices - Possibly lower quality - Less likely to innovate

Very competitive No competition

34

Ethical Business Practices

Ethical Business practice

•Rules or standards governing the conduct of a business

•Moral code – what is „right‟ and what is „wrong‟?

Unethical business practices

- Child labour

- Poor health and safety conditions

- Low wages

- Long hours

- Selling military equipment

- Selling to countries with poor human rights

- Persuasive advertising (kids)

- Product testing animals

- Selling unsafe product

CSR (Corporate Social Responsibility)

A CSR policy functions as a self-regulating way in which a business can monitor and

ensures it operates within the spirit of the law and ethical standards.

Fairtrade

Fairtrade guarantees producers a minimum price for their produce. This

ensures farmers get a fair price for their goods, which guarantees stable

incomes (which provides stability/certainty).

Ethical dilemmas facing business

•Profits versus higher wages

•Expansion versus development

•Production versus pollution

•Supplier benefits versus consumer prices/lower costs

•Survival of the business versus needs of stakeholders

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Business ethics and the consumer

•1980s – Growth of boycotting unethical companies

•1990s – Institutional response (growth of ethical labels etc.)

•2000s – Growth of ethical markets and mainstreaming ethical business

BUSINESSES NEED TO BE ETHICAL BECAUSE INCREASINGLY IT‟S WHAT

CONSUMERS WANT!

Being unethical (and being criticised by the media and pressure groups) can

reduce sales and revenue of firms as well as their ability to recruit staff.

e.g. Primark, McDonald‟s, Nestle and Tesco.

Environmental Influences and Business Ethics

The importance of the Environment

Households and businesses make use of the environment in three ways:

1. It provides us with natural resources.

2. It is something from which we get pleasure - we like fresh air, using it for leisure etc.

3. It is somewhere to dump waste produced by households and businesses.

Business effect on the environment

Urban blight – excessive development, inappropriate development

Waste – land-fill, re-cycling

Energy use – renewable energy, non-renewable resources

Global Warming – rising water levels, ecosystem collapse

etc.

Pollution:

– Noise

– Air

– Land

– Water

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Corporate Social Responsibility

The continuing commitment by business to behave ethically and contribute to economic

development, while improving the quality of life of the workforce and their families, as

well as that of the local community and society at large.

Consumers often look for green products and green ways of delivering services. And it

will not be too long before companies which do not think about these issues are left

behind!

Measures businesses can take to reduce their environmental impact

Examples:

Tesco – re-useable shopping bag

Eco refill packs e.g. Kenco

Tesco – zero carbon emissions store

Bio-diesel made from processed crops like rapeseed oil – more eco friendly than regular

diesel

Recycling Packaging

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37

Social Costs and Benefits of Business/Consumer Activity

Businesses affect society, either in a positive or negative way.

Social benefits = Social benefits occur when a business has a positive effect on a

community and the environment.

– Creation of jobs.

– Regeneration of a „Brownfield‟ site.

Industrial or commercial development that was previously occupied by another

industry (run down, empty shops/offices/factories)

– Sustainability of resources.

Some businesses focus on creating new ways of utilising energy and resources

e.g. creation of solar panels/wind turbines, planting trees

Social costs = Social costs occur when a business has a negative effect on a

community and the environment

– Using up non-renewable resources (oil, gas) which causes:

• Pollution (Noise, air, sea).

• Global Warming (rise in average temperatures caused by burning

fossil fuels like coal and oil).

– Building on a „Greenfield‟ site

Industrial or commercial development in an area that has previously not

been built on – can spoil countryside.

– Causing congestion on the roads (traffic) – costs time/money and adds to

pollution and uses non-renewable energy resources.

– Big businesses forcing out small local businesses.

38

One way of being „green‟ is to use renewable resources.

Examples

• 52% of Starbucks‟ electricity comes from wind turbines

• 100% of Whole Foods market‟s electricity comes from Solar and Wind energy

providers

The government is also trying to reduce carbon

emissions (which cause global warming) by making

it easier for people to insulate their homes to

keep them warm and reduce the need for heating.

Another way of being „green‟ is to use reduce the amount of packaging they use.

Examples:

Persil washing liquid – more concentrated liquid =

smaller bottle

Original Source Shower Gels = 50% less

packaging

39

Government Spending & Taxation

Fiscal Policy

Fiscal policy is the government‟s policy on spending and taxation. The Government uses

fiscal policy to influence the levels of demand for goods and services in the economy –

this helps it control inflation and create economic growth.

How it‟s used to increase demand

Reduce direct taxes (e.g. income tax) = People have more money and spend more.

Reduce indirect taxes (e.g. VAT) = This makes goods and services cheaper.

Increase Government spending = The Government is a massive consumer so this

can have a significant effect on overall demand in the economy.

How it‟s used to decrease demand

Increase direct taxes = People have less money and spend less.

Increase indirect taxes = This makes goods and services more expensive.

Decrease Government spending = The Government is a massive consumer so this

can have a significant effect on overall demand in the economy.

1. Government spending (expenditure)

The government spends money…

1.To provide goods and services

For example, education, NHS, Police and infrastructure (e.g. roads, bridges etc.)

2.To help poorer/unfortunate/unemployed people in the community

For example, various benefits including Job Seeker‟s Allowance.

3.To help businesses

For example, government contracts, grants, education and training, and infrastructure.

Multiplier effect

When the Government spends money to stimulate demand in the economy, this can

cause a multiplier effect as the money spent by the Government can lead to further

spending by people and businesses who benefit from the original spending.

40

For example:

Government builds a new school.

Creates employment and workers have more money to spend.

Demand for other products and services in the local area increases, as the people

building the school will spend their wages.

2. Taxation

There are two kinds of taxes:

Direct taxes - These are taxes on income and capital.

Indirect taxes – These are taxes on spending.

Direct taxes

Income tax – this is tax on people‟s income

above a tax-free level of earnings (£8,105 –

2012/2013)

Corporate tax – the tax that companies pay on

their profits

Business rates/council tax – these taxes are

paid to the local council.

Increasing direct taxes - Can decrease consumer and business income which can decrease level of demand for goods and services.

Decreasing direct taxes - Can increase consumer and business income which can increase level of demand for goods and services.

Indirect taxes

VAT (value added tax) – This is paid by producers on the value of

products that they produce. The current rate of VAT is 20%.

Excise duties – These are special [high] taxes on petrol, alcohol and

cigarettes.

Increasing indirect taxes - Can increase prices of products and services reducing the spending power of consumers and businesses. Decreasing indirect taxes - Can decrease prices of products and services increasing the spending power of consumers and businesses.

41

Interest rates

The interest rate is a cost or a reward:

• It is a cost for borrowing, or a reward for saving.

• It is usually written as a percentage (%).

For example, an annual interest rate of 5% means £5 is

paid in interest every year for every £100 saved or

borrowed.

Q - Why do businesses borrow money?

A - To finance things such as: expanding (e.g. new factories), buying materials

etc.

Test yourself:

For example, a business borrows £20,000 from the bank, which charges an

annual interest rate of 8%.

Interest rates affect businesses in three ways:

1. It affects the cost to the business of borrowing money

2. It affects the cost to the consumer of borrowing money

3. It affects the amount of interest paid on

savings

1. The interest payments are the cost to the

business of borrowing money

• Like any other cost, interest payments affects the profit a company

makes.

• A rise in interest rate will cause business costs to rise.

Q - Why do consumers borrow money?

A - To finance things such as: a new house, a car or a holiday.

42

2. Interest rates are cost to the consumer of borrowing money

• If the interest rate goes up, consumers may decide they cannot afford to

borrow as much and so they reduce their spending.

• Consumers who already have loans pay more in interest.

Q - How does this impact on a business‟ sales?

A - There is less demand for the goods & services especially for companies

whose sales rely on consumer borrowing. For example, most people borrow

money to buy a car or a house.

3. Interest rates are the reward for saving

• When people receive money they either spend it or save it.

• If the interest rate is high, people may prefer to save some of their

money rather than spend it.

Q - How does this impact on a business?

A - Sales and profits of the businesses may fall.

How interest rates affect businesses

• The impact of a change in interest rates varies from business to business.

Firms that make non-essential goods (“wants”) are hit hardest when

interest rates rise.

• This is because most customers cut back on non-essentials when the

amount of interest they pay increases (as they have less disposable

income to spend).

Think about it... what essential items (needs) would you have to buy regardless of the price?

43

Inflation

Definition of Inflation: “a general rise in the price of goods and services over a

period of time (and an erosion in the value of money)”.

• Prices are rising.

• This means the costs of living is increasing.

• The government will always try to keep inflation

low because if prices go up too fast consumers

(voters) will become unhappy as they will be

unable to afford what they want.

Q - What is the current rate of inflation?

A – around 3.3% (but check the BBC website to find

out the current rate of inflation – it changes regularly).

Q - What is the government's target for inflation?

A – 2.0%

Q - Who is responsible for monitoring inflation in the UK?

A – The Bank of England‟s Monetary Policy Committee

• If inflation is too high, the Bank of England will raise the interest rate.

This should reduce demand for goods and services.

• If inflation is too low, the Bank will reduce the interest rate. This should

lead to an increase in demand.

Changes in consumer incomes

How are businesses affected by changes in consumer incomes and employment? How are businesses affected by changes economic growth and recession? The economy is made up of millions of individual decision makers who, as

consumers or companies, buy and sell goods, borrow and lend money, and raise

taxes and change interest rates.

44

Economic cycle – this shows how well the economy is doing

• BOOM: A period of fast economic growth. Output is high due to increased

demand, unemployment is low. Business confidence may be high leading to

increased investment. Consumer confidence may lead to extra spending.

• SLUMP: A period when output slows down due to a reduction in demand.

Confidence may begin to suffer.

• RECESSION: A period where economic growth slows down and the level

of output may actually decrease. Unemployment is likely to increase.

Firms may lose confidence and reduce investment. Individuals may save

rather than spend.

• RECOVERY: A period when the economy moves between recession and a

boom.

WHAT HAPPENS IN A BOOM?

• Businesses produce more goods and services.

• Businesses invest more.

• Consumers spend more money (there is a FEEL GOOD FACTOR).

• Less money is spent by the Government on unemployment benefits.

• More money is collected by the Government from, for example, income

tax and VAT.

• Prices tend to increase due to extra demand.

45

WHAT HAPPENS IN A RECESSION?

• Businesses cut back on production.

• Some businesses may go bankrupt.

• Consumers spend less money (fall in FEEL GOOD FACTOR).

• Individuals may lose their jobs.

• More money is spent by the Government on unemployment benefits.

• Less money is collected by the Government from, for example, income tax

and VAT.

• Prices start to fall.

ECONOMIC CONDITIONS

• Rising employment and rising consumer incomes = economic growth

• Falling employment and consumer incomes = recession

Q - Is there high or low demand for goods & services during economic growth?

A – High Demand.

Q - What types of goods do you think will have increased sales during economic

growth?

A – Houses, cars, restaurants, luxury goods.

Q - Is there high or low demand for goods & services during a recession?

A – Low demand.

Q - What types of goods do you think will have increased sales during a

recession?

A - Better value products. E.g. supermarket own brands.

46

Changes in the population How do changes to the population affect businesses? The population of the UK is around 62 million people. The population is still growing.

TRENDS

• The UK population is „ageing‟.

• Lower birth rates and longer life expectancy have both contributed to this.

• These dramatic demographic changes in the population would pose huge

implications for hospitals, care homes, the housing stock, pensions, benefit

systems etc.

Q - What do you think are the reasons for the growth in immigration? (Why do people

want to move to the UK?)

A – Look at the factors grid below:

Q - Which political factor has caused an increase in migration to

the UK in recent years?

A – Expansion of the European Union to include countries like

Poland, Romania, Latvia.

Impact on of population changes on business activity

• Increased demand for goods and services.

• More choice of skilled labour.

• Increased innovation (products for older people, or those

from overseas, for example).

• Increased competition.

Political Countries with stable governments tend to have a high

population density e.g. the UK

Social Groups of people want to live close to each other for

security e.g. USA

Economic Good job opportunities encourage high population

densities, particularly in large cities around the world.

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Globalisation and UK Business

Globalisation is how businesses in different countries have become increasingly

dependent on each other. It is signified by the increase of international trade and the

increased movement of companies, brands, money and people across the world.

The main developments in globalisation:-

1. Growth of international trade. The UK trades with

more countries and in greater volume than ever

before.

2. Movement of production to low-wage countries

E.g. Closing factories in the UK and opening

factories in China. They can make products at the

same quality for a lower price.

3. More outsourcing. Improvements in technology

have made it possible to outsource some functions to a cheaper country. For

example call centres in India.

4. Growth of Multinational Corporations. Big businesses are getting bigger and

more powerful.

5. More global branding. Brands have gone global - everyone recognises the Coca-

Cola brand. These desirable brands are wanted across the globe.

6. Movement of people around the world increasing. People are moving between

countries more than ever before. People often move to countries where the pay

is high.

7. Inward Investment. This is money that is invested from one country to another.

An example of this would be a British company building a factory in Poland. This

creates jobs and helps grow the Polish economy.

Globalisation is both good and bad for countries. You need to have a balanced view and

be able to explain the advantages and disadvantages of globalisation in the given

context of the exam question.

Positive impact of globalisation

1. Jobs - more jobs for the local community.

2. Low prices and More choice – consumers in

developed countries benefit from lower prices and a

greater choice of things to buy.

3. Money investment in local economies for education,

health and infrastructure.

4. Mix of cultures from all over the world, sharing of ideas, experiences, and

lifestyles.

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Negative impact of globalisation

1. Richest countries get richer - Big business send profit back to own country.

2. Exploitation of workers - Poor working

conditions, low wages, poor health & safety,

child labour.

3. Environmental issues - Factories and

increased transportation increase pollution.

4. Diversity threatened - Traditions and

languages eroded.

The UK‟s biggest trading partners are other businesses in Europe.

Why? We are a member country of the European Union.

The European Union (EU) is a

collection of countries in Europe,

which aim to co-operate together

on trade, social affairs and certain

laws. The EU has 27 member

states, as 10 new members have

joined since May 2004.

The European union membership

can be good for UK businesses

because:-

• An enlarged market – The UK has population of around 60 million the total EU

population 501 million. We can sell more

products.

• Common Standards - This means that all

products sold in the EU have to have the same

labelling (e.g. food), have similar safety

features (e.g. seat belts in cars), etc. This

makes it easy for companies, as they only have

to produce one version of the product for the

whole of the EU. This make production more

efficient

• The Single market - No tariffs (i.e. no import or export taxes) on goods or

services. Workers have freedom to work anywhere within the EU. This makes

trade easier and cheaper. Therefore the amount of trade increases.

• Grants and Subsidies – UK businesses may receive grants and subsidies from

the European Union. E.g. UK Farmers receive EU subsidies.

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Key words

• Grants = money paid to companies and deprived areas to help them create new

jobs.

• Subsidies = money paid mainly to farmers to encourage them to grow more crops

etc.

The European Union membership can also be a problem for the UK because:-

• An enlarged market - An enlarged market = More Competition. British

businesses might make less money as European rivals take their market share.

• The Social Charter – The UK has to abide by some Europe wide laws. For

example, the minimum wage and maximum working week (48 hours)

• Environmental Standards - New standards on water quality, recycling and

pollution could increase a UK businesses costs.

• Common Agricultural Policy (CAP) - CAP sets minimum prices for agricultural

produce = Surplus food. This creates inefficient markets, as it may be able to

import cheaper food from outside the EU.

Whilst we trade mostly with Europe we also trade a lot

with other developed countries such as Japan and

America. However, our trade with developing countries

has gone up massively in the last few decades. We are

trading a lot more with countries such as Brazil, Russia,

India and China.

The reason we are trading a lot more with these developing countries is due to:-

Historical reasons – The UK still has close ties with may of its old colonies (e.g.

India).

Cost Reasons – It is cheaper to buy products from developing countries than

developed countries. Often the cost of production is lower eg. Cheaper labour

and raw materials.

Rising Demand – Demand for products is rising in the UK as people get richer.

So we have to look for other places to buy them.

The size of the market – As these markets develop and become richer it

becomes viable for UK businesses to sell to these markets.

The pool of potential workers – As countries develop and their work forces

become more skilled, UK businesses may move to these areas to take advantage

of this. For example, the increase of a skilled IT workforce in India has meant

that many UK businesses have moved operations to India.

Trade arrangements – The UK government has negotiated a reduction of trade

barriers (tariffs and quotas) with certain countries. This makes trade more

likely with some countries over others as it is cheaper.

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How UK businesses compete against foreign competition

UK businesses must compete to supply the goods and services that are being demanded.

There is a lot of competition from developing countries such as China and India who

have a lot of cheap labour and developed countries such as Germany, Japan and the

USA who have strong manufacturing businesses.

UK firms need to sell in the UK and export to countries across the world. The

strategies UK firms must use to compete include:

1. Producing the right goods and services.

2. Selling at the right price.

3. Marketing to create a strong brand image.

4. Delivering the goods and services at the right time.

5. Outsourcing or moving production abroad when necessary.

6. Adding value to goods and services (e.g. having a USP).

7.

Statement True False

Businesses in newly developing countries have

advantage of cheap labour over businesses in the

UK.

British firms only compete with businesses in

developing countries like China and India.

Britain no longer has manufacturing businesses,

it only produces services.

Service industries do not need to compete with

firms abroad.

Newly developing countries produce both

manufactured goods and service.

Let‟s not forget Inward Investment

This is when foreign firms decide to set up in Britain.

Think about how this could be good for

the UK labour force and bad for UK

businesses.

51

Exchange Rates

Exchange Rates - The value of one currency against another.

For Example. £1.00 = $1.70

Therefore:

£5.00 = $8.50

£10.00 = $17.00

£100.00 = $170.00

If the exchange rate for pounds to dollars was £1.00 : $1.65

A pair of trainers in the UK costs £50.00

In the US these trainers would cost $82.50

Exchange rate falls

(the value of the £ goes DOWN)

Exchange rate rises

(the value of the £ goes UP)

Exporters benefit.

The cost of UK produced goods in the

USA goes down.

Exporters suffer.

The costs of UK produced goods in the

world go up.

Importers suffer due to increase in the

price of imported goods measured in

pounds. As a result their costs go up, and

this could result in them changing higher

prices (and therefore losing customers).

Importers benefit.

The cost of imports will fall as fewer

pounds are needed to pay for them. This

will mean that sales and profits might rise.

The cost of UK produced goods in the

goes up.

Strategies to deal with changing exchange rates

1. Changing supplier

2. Outsourcing production and distribution to countries with cheaper labour

3. Exporting to more than one country to spread the risk