revision guide aqa as business studies unit...

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AQA AS Business Studies Unit 2

crossAcademe

Bare Bones ReviSion GUide

Managing a Businessdecision m

aking

increasin

g profi

t

impro

ving cash

flow

measu

ring p

rofi

t

motivation theory

prod

uct life cycle

pro

duct p

ortfo

lio an

alysis

operations managem

ent

workin

g with

suppliers

degree of competition

trainingem

pow

ermen

t

selectionniche m

arketing

team w

orking

workforce roles

team

workin

g

technologyoperational decisions

operatio

ns m

anag

em

ent

mass m

arketing

customer service

pricing tactics

pricin

gdegree of com

petition

return on capital

tech

nolo

gy

competitiveness

pricin

g tactics

mass m

arketing

workforce roles

organisational structure

internal and external recruitment

operatio

ns m

anag

em

ent

selectionpricin

g

Marketin

g Competi

tiven

ess O

peratio

ns m

anag

emen

t Finan

ce

workforce roles

distribution channels

unique selling points

using budgetsrecruitment

operations management

adverse variances

recruitment process

marketing mix

recruitment process

workforce rolescustomer service

product life cycle

market conditions

measuring performance


marketing mixprofit pricing strategies

workforce effectiveness

unique selling pointsplacedistributors

job designplacedistributors

empowerment

working with suppliers

motivation theory

team working

promotional mix

measuring performanceusing budgetsprofit

People in business

team w

orking

increasin

g profit

profi

t

job

desig

n

empow

ermen

tworkforce roles custom

er service

mass m

arketing

motivating em

ployees

training

selection

measuring profit

operations managem

ent

recruitment

pricing tactics

finance

selectionplace

training

incr

easin

g pro

fit

using budgets

profit

selec

tion

technology

quality

training

plac

e

using budgets

recr

uitm

ent

cash

quality

team

cash

job design

cash

profit

1 About the exam 2 Notes: Finance Using budgets � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 2 Improving cash flow � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 3 Measuring and increasing profit � � � � � � � � � � � � � � � � � � � � � � 4

6 Notes: People in business Improving organisational structures � � � � � � � � � � � � � � � � � � � 6 Measuring the effectiveness of the workforce � � � � � � � � � � � 8 Recruitment, selection and training � � � � � � � � � � � � � � � � � � � 8 Motivating employees� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 9

11 Notes: Operations management Making operational decisions � � � � � � � � � � � � � � � � � � � � � � � 11 Quality � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 11 Customer service � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 12 Working with suppliers � � � � � � � � � � � � � � � � � � � � � � � � � � � � 13 Using technology in operations � � � � � � � � � � � � � � � � � � � � � 13

14 Notes: Marketing and the competitive environment

Effective marketing � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 14 Designing an effective marketing mix � � � � � � � � � � � � � � � � � 14 Using the marketing mix: product, promotion, price and place � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 15 Marketing and competitiveness � � � � � � � � � � � � � � � � � � � � � 17

18 Exam practice Case study 1: T & M Sherborn � � � � � � � � � � � � � � � � � � � � � � 18 Case study 2: Best Burger Company� � � � � � � � � � � � � � � � � � 20

This Bare Bones Revision Guide:

provides the essential content you need

to succeed in the AQA Unit 2 exam;

presents this information simply and

effectively;

illustrates the higher lever skills of

analysis and evaluation;

includes invaluable exam tips to help

maximise your performance;

concludes with two integrated case

studies for exam practice.

The superfluous bumpf that comes with

other guides has been stripped away in

order to leave you with the key to effective

revision and exam success – clear,

concise revision notes!

Time constraints make it impossible

for you to revisit all the material studied

during your course. Instead, you need

to consolidate your knowledge and

understanding by focusing on the central

terms and concepts provided here. Use

these as the framework for recalling other

content before going on to read the case

studies on pages 18–21. You should

tackle the accompanying questions under

timed conditions. The A-grade responses

are provided so that you can assess the

quality of your own answers, identifying

any weaknesses. You can then review

these topic areas.

The structure of the revision notes follows

the order of the AQA specification.

The A-Grade Analysis/Evaluation

Examples are designed to help you

develop these higher level skills, and the

Number Crunching feature is designed

to check your calculation skills.

The case studies will test not only these

skills but also the skill of application.

Managing a Business

Contents

© Cross Academe Ltd 2013

All rights reserved; no part

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ISBN 978-1-909592-16-2

Design by: Oxford Designers & Illustrators

Published by: Cross Academe Limited St John’s House 5 South Parade Oxford OX2 7JL



Phil Waterhouse

market research

employing people

understanding markets

cash flow forecast

setting budgets

sources of finance

breakeven analysis

cash flow forecasting

transforming resources

consultants and advisers

public limited com

panies

researchbusiness plans

enterpriseentrepreneur

business ideas

adding value

private limited

companies

costs, revenues and profits


cash flow forecast

setting budgets

legal structurefinancesm

arket segmentation

fixed variable and total cost

startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost

price, total revenue and profit


patentrew

ards

Starting a business Financial planning

business ideas

cash flow forecast


business ideas

enterprise

strengths and weaknesses

entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan

cash flowforecasting

busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

yright

sole trad

ersbud

gets

analysisrisk

srew

ards

opportunity costsetting budgets

risksrewards

trademark

pate

nt

budgets

riskcontribution

partnerships

cost

bud

gets

risk

cashcopyright

pla

ncash

The Heathland School

The Unit 2 exam builds on the content covered in Unit 1� The

exam is 90 minutes long and the maximum number of marks is

80� This is then converted into a UMS total of 120, while Unit 1

is worth only 80 uniform marks� This therefore means that this

exam is worth 60% of your overall AS mark�

The exam is split into two sections – each on a different

type of business� One of these will normally be a nationally

recognised firm while the other is likely to be a new business

start-up� The Unit 2 exam is different from the Unit 1 exam

in that there are no longer many low-tariff questions� Each

section of the exam is worth 40 marks and after a brief

company case study, you will be expected to answer 4–5

questions on that business� Questions (a) and (b) will be

analytical while questions (c) and (d) will be evaluative�

Exam skillsSuccess in any exam is about playing to the rules set out by

the examiners� The four key skills that they will be looking for

are as follows:

Knowledge and understanding: Have you learnt and

understood the key terms?

Application: Have you thought about the business and used

the data?

Analysis: Have you managed to build up a good chain of

reasoning/argument?

Evaluation: Have you made a judgement and backed it up?

The mark schemes are now based around the following

categorisation in relation to the four skills above:

Is the answer… good? reasonable? limited?

You need to make sure that your answers are clearly applied to

the business presented in the exam, that you develop a line of

argument and that you then come to a conclusion�

EXAM TIP

To help with your application to the business, ask yourself these

three questions: Which companies are the main competitors in

the industry? What is unique about the company? What are the

major strengths and weaknesses of the business?

It is important that you are familiar with the different trigger

words used by examiners and that you then demonstrate the

skills they are looking for�

Analytical questions will start with trigger words such as

‘Examine’, ‘Consider’, ‘Explain’ or just simply ‘Analyse’� With

these questions you are not required to make a judgement,

but you are expected to construct a chain of argument�

EXAM TIP

Analysis is achieved by building a chain� Useful words or

connectives to do this are ‘and so…’, ‘which will mean…’,

‘which may then lead to…’, ‘resulting in this…’, ‘which may then

affect this…’� Try to make sure that you are always explaining

‘why’� You do not want the examiner to think ‘and then what’?

Evaluative questions will start with trigger words such as ‘Discuss’,

‘To what extent’, ‘Justify’� With these questions you must

make a judgement� This needs to be based on the arguments

you have put forward and, most importantly, must be justified.

A good approach is to think of using the three-paragraph or

add-on rule: (1) paragraph builds an analytical argument in

agreement; (2) paragraph builds an analytical argument against;

(3) final paragraph makes a decision based on the question�

EXAM TIP

Reread the question at least three times while you are answering

it� Keep checking that you are still answering exactly the

question set and try to link as many of the different functional

areas as possible�

Exam practiceIn addition to tackling the integrated case studies provided

on pages 18–21, you should gain exam practice by working

through past papers� These are readily available on the AQA

exam website (www�aqa�org�uk) along with the associated

mark schemes� Try and tackle these under the same time

constraints that you will have in the exam itself� You have

1 hour and 30 minutes to complete the exam, so practise!

Throughout this guide look out for the A-Grade Analysis/

Evaluation Examples in order to see how to turn your

responses into A-grade answers�

About the exam


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

yright

sole trad

ersbud

gets

analysisrisk

srew

ards


risksrewards

trademark

pate

nt

budgets

riskcontribution

partnerships

cost

bud

gets

risk

cashcopyright

pla

ncash

1111The Heathland School

FinanceUsing budgetsDefinition: A budget is a financial plan that sets targets based

on projected costs and revenues that the business will face�

Types of budget

Income budget: This shows the agreed, planned-for income

or sales revenue of the business (or a part of the business)

over a set period of time�

Expenditure budget: This shows the agreed, planned-for

costs or expenditure of the business (or a part of the business)

over a set period of time�

Profit budget: This combines both the income and

expenditure budgets for the business and forecasts how much

profit the business (or a part of the business) will make over a

set period of time�

Benefits of using budgets

Can measure performance

Can prove motivational

Make departments accountable

Give the business greater control and can be used to

monitor progress

Drawbacks of using budgets

New business start-ups lack experience in setting realistic

budgets

Costs are volatile and can change quickly

Opportunities might be missed if budgets are applied too

strictly

If a budget is inaccurate, it can prove extremely

demotivating for staff

Variance analysis

A favourable variance arises when results are better than

budgeted� This can happen in two ways:

Actual revenues are greater than the budgeted figures

Actual costs are lower than the budgeted figures

Example: A clothes shop budgeted for sales of £20,000 per

month and actually achieved £25,000 per month� It budgeted

for total expenditure of £10,000 per month and its actual

expenditure was £8000 per month�

An adverse variance arises when results are worse than

budgeted� This can happen in two ways:

Actual revenues are lower than the budgeted figures

Actual costs are greater than the budgeted figures

Example: A local garage budgeted for sales of £6000 per

month but only achieved £5000 per month� It budgeted

for total expenditure of £3000 per month but its actual

expenditure was £3500 per month�

nUMBeR CRUnCHinG

Jan Jan Jan Feb Feb Feb

All figures

(000s)

Budget Actual Var� Budget Actual Var�

Sales revenue 140 150 10 180 175

Materials 70 (10) 90 95

Other direct

costs 30 35 40 40 0

Overheads 20 20 0 25 22

Profit 20 15 18

Fill in the table above and state whether the overall profit for

the two months of January and February shows a favourable

or adverse variance�

A-GRAde AnALYSiS eXAMPLe

Variance analysis is useful as it can help identify whether the

business is under- or over-budget in terms of sales and costs�

It will need to review its budgets regularly so that it has a clear

idea about the progress it is making� This will allow the business

to adapt and adjust its budgets as required� Setting budgets

at the right level is an important skill and it is highly unlikely

that a new business start-up’s budgets will be completely

accurate� Variance analysis will help identify problem areas and

could prompt a search for alternative suppliers if costs are too

high or may lead to a reduction in expenditure in other areas�

It will also enable the business to look at its sales projections

noteS


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

yright

sole trad

ersbud

gets

analysisrisk

srew

ards


risksrewards

trademark

pate

nt

budgets

riskcontribution

partnerships

cost

bud

gets

risk

cashcopyright

pla

ncash


against actual figures� A positive variance may encourage

further product development; a negative variance may prompt

action to try and increase sales, possibly by spending more

on marketing� However, such an increase would require an

adjustment to the expenditure budget�

Improving cash flowThis topic was covered in Unit 1� Cash flow is a short-run

issue for a firm and measures the cash coming into the

business and the cash going out of the business over a given

time period�

Causes of cash flow problemsThe main causes of cash flow problems are:

Seasonal demand

Over-estimation of sales or under-estimation of costs

Over-investment in fixed assets – firms may invest in assets

such as buildings and machinery, but not leave themselves

sufficient money for day-to-day payments

Credit sales – the marketing department will want to give

credit to customers to attract them to the company, but this

can lead to a shortage of cash

Poor stock management

Unforeseen change

Possible solutions to cash flow problems

Bank overdraft

Advantages

Easy to organise

Only pay interest when the overdraft is being used

Flexible

Disadvantages

Interest rates are flexible, making it hard to budget

accurately

Interest rates will be higher than on a bank loan

Will be more expensive in the long run

Sale of assets

Advantages

Can raise large sums (e�g� sell a building)

Might not need the asset

Disadvantages

Hard to sell quickly

Reduces capacity

Sale and leaseback

Advantages

May bring in an immediate amount of cash

Reduces the need for maintenance costs

Disadvantages

Will be more expensive in the long run

Harder to secure more finance as fewer assets are left to

use as security

Managing debtors by using factoring

Advantages

Immediate boost of cash

Saves time in chasing up monies owed

Disadvantages

A firm will typically receive only 90% of the debts recovered

Customers may resent being chased by the factoring

company

Alternative solutions Change or review suppliers

Take out less cash from the business (pay lower wages)

Control stock more carefully

Diversify the range of products in order to reduce

seasonality factors

Set aside a contingency fund to cater for unpredictable

events

eXAM tiP

Even though this topic does appear frequently in the Unit 1

exam, it is just as likely to be examined in Unit 2� However, the

challenge in Unit 2 is to interpret the given cash flow forecast

and suggest ways in which the business has managed its cash

flow badly and ways in which it can be improved� It is crucial

to mention that cash flow is about timing and that it must be

distinguished from profit� Make sure that you do not confuse

the two terms�

A-GRADE ANALYSIS EXAMPLE

If cash flow problems arise, a business is likely to need access

to more funds quickly� One way of doing this is to arrange

(or increase) an overdraft facility with the bank� This may be

relatively easy to arrange and set up, allowing the firm greater

flexibility� It will only have to pay interest on the overdraft while it

is being used� This means that the short-term cash flow problem

can be managed effectively� An alternative method is to use a

debt factoring company� This can benefit the business because


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

yright

sole trad

ersbud

gets

analysisrisk

srew

ards


risksrewards

trademark

pate

nt

budgets

riskcontribution

partnerships

cost

bud

gets

risk

cashcopyright

pla

ncash


the factoring company will typically pay the firm 90% of the

money owed straightaway� This will substantially improve its

cash position� Obviously the firm will not then receive all of the

funds owed, but the inflow of finance may be more important

and possibly critical�

A-GRADE EVALUATION EXAMPLE

Many firms have to find solutions to cash flow problems�

One of the key factors is how much cash is required and how

quickly it needs to be raised� When trying to raise substantial

sums of finance, selling assets or sale and leaseback are likely

to prove the most effective solutions� However, this can take

time and so it may not be the best option if cash is needed

quickly� If smaller sums are required immediately, the firm

might be better off trying to arrange an overdraft or looking to

debt factoring� Of course, each solution has its drawbacks and

an opportunity cost� It would therefore be better in the long

term for firms to try and avoid running into cash flow problems�

For some firms, seasonal factors will constantly present cash

flow issues� However, by controlling stock more closely, or

by looking to diversify the product range so that they are less

reliant on seasonal peaks, these firms could avoid getting into

difficulty� It would also be advisable in my view for these firms

to set aside funds in the periods when trading is good so that

they can be drawn upon during the periods when sales are

likely to be low�

Measuring and increasing profitProfit = Total revenue − Total costs

Total revenue = Price × Quantity of units sold

Costs are made up of fixed (indirect) costs and variable (direct)

costs�

Profitability ratios

Gross profit margin

The gross profit made on a unit sold is simply the selling price

(revenue) minus the direct (variable) cost of production of that

unit� It is normally expressed as a percentage�

Gross profit margin (%) =Gross profit

Revenue× 100

Example: Games Workshop sells figures for £5�00 and the

direct cost of each figure is 50p� The gross profit on each

figure is therefore £4�50� The margin is £4�50/£5�00 × 100 =

90%�

eXAM tiP

Technically the specification only asks for net profit and ROCE

margins� However, in order to understand what the ratios mean

and to help you make more informed judgements, you should

be aware of gross profit as well� This will not only help you in

the A2 units but also enable you to understand how firms can

improve their overall profitability – a highly probable question in

the Unit 2 exam�

Net profit margin

Net profit is simply the sales revenue minus the direct

(variable) cost and the indirect (fixed) cost of production� This

is known as the bottom line because it shows how much profit

is made after all costs have been accounted for� It is normally

expressed as a percentage�

Net profit margin (%) =Net profit

Revenue× 100

Example: Games Workshop has a sales revenue of £15,000

per week� The direct costs involved in production are £1500�

However, there are fixed costs such as rent, rates and salaries

to pay, which amount to £8500 per week� The weekly net profit

is therefore £15,000 − £1500 − £8500 = £5000� The margin is

£5000/£15,000 × 100 = 33�3%�

ROCE – return on capital employed

This is the net profit expressed as a percentage of the capital

employed in the business� It is also known as the primary

efficiency ratio because it looks at how much money is earned

by the capital invested in the business� A Young Enterprise

team of 10 people will start off with relative low levels of

capital invested in the business (typically around £200), as

each team member might put in £20 capital at the start� If the

team makes £800 net profit over the year, the ROCE is 400%�

eXAM tiP

You will not be expected to have a detailed understanding

of capital employed at this stage of your course� Just ensure

that you know the formula so that you can make the ROCE

calculation and interpret its significance�

ROCE (%) =Net profit

Capital employed× 100

If Games Workshop as a group made £45 million net profit

with £200 million of capital employed in the business, then the

ROCE = £45 million/£200 million × 100 = 22�5%�

The ROCE will be compared between different companies

and is also measured against the interest rate at the bank� A

business is more risky but is likely to provide greater returns

than the bank�


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

yright

sole trad

ersbud

gets

analysisrisk

srew

ards


risksrewards

trademark

pate

nt

budgets

riskcontribution

partnerships

cost

bud

gets

risk

cashcopyright

pla

ncash


eXAM tiP

Your understanding of capital employed may be enhanced if you

think of the Dragons’ Den or more simply a Young Enterprise

team� The Dragons often decide not to invest because they

do not think they can get a return on their investment� They

might be asked to invest £100,000 but would expect the firm

to generate sufficient profits to justify the risk of the investment�

The Dragons will typically want a ROCE of at least 20%� The

opportunity cost of investing is the value of the next best

alternative� As Theo Paphitis famously states: ‘You are asking

me to invest my children’s inheritance’�

Methods to increase profitability

Reduce variable costs by switching suppliers

Example: A bottle of Coke sells for £1�20 with a direct cost

of 40p� If a change in bottle supplier reduces that cost to

30p, the profit margin will increase from 80p a bottle to 90p a

bottle�

Reduce fixed costs by reducing expenses

Example: Crew Clothing pays £4000 a month in rent for its

offices� If the company moves premises and manages to

reduce its rent to only £3000 a month, this will increase its

profitability by £1000�

Alter price, depending on the price elasticity of demand,

while costs remain constant

Example: Greggs increases its selling price for a pasty from

£1�00 to £1�10 but the cost of a pasty remains at 50p� This will

increase the profit margin from 50p to 60p�

eXAM tiP

The examples above are, of course, simplistic� In practice, it will

be harder to achieve an increase in profitability and you need

to be aware of the implications of raising price or switching

supplier� These options offer great opportunities for both

analysis and evaluation� Choosing one method is likely to have

a significant impact on other areas of the business� If you can

explain this, then you are likely to pick up high marks�


By relocating to a cheaper area, the White Stuff store will

substantially lower its monthly overheads� However, a move

from its prime location might reduce the number of customers

attracted to the store� This will affect sales revenue and so

the drop in revenue may outweigh the reduction in cost� The

business therefore needs to consider the likely effects of

moving the store to a lower-rent area� An alternative would

be to keep the same location and negotiate lower costs with

existing suppliers or new suppliers� If White Stuff were to switch

suppliers, this might reduce the quality of the clothing and this

might be picked up by the customers and could affect brand

loyalty� It could also take a while to build up a good relationship

with the new supplier, which might not be able to deliver the

required quantity or offer the same credit terms as the existing

supplier� However, the opportunity to supply such a major

retailer might mean the supplier is able to offer both a better

service and a lower price, which would improve White Stuff’s

profitability�

Distinction between cash and profitCash is generated by selling items of stock� However, not all

of this cash will be converted into profit as the firm will need to

meet the direct costs of selling the items as well as the indirect

costs such as rent, rates and salaries�

Cash flow is about the short-term cash coming into and out of

the business� Profits are more long term� A building firm might

be highly profitable over the course of a year but still have

cash flow issues during certain periods because it has to pay

wages and purchase materials before houses are sold�

eXAM tiP

Students frequently fall into the trap of confusing cash flow and

profit� They can also be lazy and make sweeping statements

such as that ‘lower prices will increase sales, which will in turn

increase profits’� This statement ignores other factors at play

such as elasticity, related costs and overall long-term profits�

Ensure that when you are talking about cash flow you are not

talking about profit, and vice versa� Impress the examiner by

making this distinction early on�

A-GRAde evALUAtion eXAMPLe

Cash flow issues tend to be short term whereas profit is more

of a long-run factor� Cash flow problems are commonplace

for many firms and there are various causes and potential

solutions� I therefore believe that low levels of profitability in

the long run generally pose a greater threat to a firm’s success�

This low profitability may mean the business is simply not

viable� Alternatively, the business might not be doing enough

to increase profitability� Its prices might be too low or its costs

too high� The business will need to address this� If profits are

low in the long term, they will not provide a fair reward for the

entrepreneur or allow the business to grow� While cash flow

issues will often cause considerable stress in the short term,

they tend to be temporary� If the low profits persist, then the

business may be forced to cease trading�


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

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et re

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People in businessImproving organisational structuresMost jobs are grouped together and organised into the four

main functional areas of Marketing, Production, Finance and

HR� (The specification is also split in this way�)

Levels of hierarchy

The hierarchy determines the order of how people

communicate throughout the organisation� The higher up

the hierarchy, the more senior is the person� Normally in

the hierarchy, communication flows down throughout the

organisation� However, there has been a shift towards

encouraging communication to flow upwards from the bottom

to the top�

Tall structures

Advantages

Greater specialisation

Greater opportunities for promotion

Clearly defined roles

Narrow span of control

Disadvantages

Communication problems might occur

Slow decision making

Expensive to run as too many middle managers

Workers may feel ‘over managed’

Flat structures

Advantages

Quicker decision making

Better communication

Cheaper as fewer levels of hierarchy

Disadvantages

Fewer opportunities for promotion

Fewer opportunities for specialisation

Wider span of control

Managers can become overwhelmed

Span of controlThis is the number of people for whom a manager is directly

responsible� A narrow span of control means that the manager

takes responsibility for only a few people� A wide span of

control means that the manager takes responsibility for

more people� A wide span of control tends to lead to a flatter

organisational structure� A narrow span of control tends to

lead to a taller structure�

eXAM tiP

The amount of work an individual has to carry out should be

considered within any organisation� It is important that workers

have enough to do but equally important that they are not

overloaded� Too much work can lead to dissatisfaction and

demotivation� Similar problems may arise if an individual has

insufficient work� Examiners frequently seek to assess students’

understanding of the benefits and drawbacks of having tall

versus flat structures�

Narrow span of control

Less opportunity for delegation

Supervision and control is greater

Many levels of hierarchy (tall)

Greater opportunities for promotion

Wide span of control

Greater delegation opportunities

Supervision and control is looser

Few levels of hierarchy (flat)

Fewer opportunities for promotion

Centralised

All decisions are made by senior managers at Head-

quarters

Greater control

Greater consistency

Allows for specialisation

Decentralised

Decisions are delegated to individual departments

Increased motivation

Managers develop skills of leadership

Quicker decision making

noteS


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

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breakeven analysis

patenttradem

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tting b

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weaknesses

cop

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eXAM tiP

Understanding the difference between these two types of

organ isation – centralised and decentralised – is crucial� This

dis tinction is frequently examined and the topic will reappear

in Unit 3�


A centralised structure will bring many benefits to a firm� The

decisions can be made by one group of people and then

communicated throughout the whole organisation� The direction

can be set and then implemented� This will lead to a common

purpose and will mean individuals know their respective

roles� The success of the firm will be very dependent on the

decision makers at the centre of the organisation� However,

such centralisation can stifle creativity and employees may

feel disempowered� Staff may feel demotivated, especially if

the decisions taken show no understanding of the needs of

individual departments�

Decentralising the business can lead to faster decision

making and the ability to base decisions on local conditions�

It will also empower managers and help them develop their

leadership skills� This is likely to lead to greater productivity,

since individuals will be more motivated as they have a greater

say in the way the business is run�

Workforce rolesYou need to be aware of the following different job roles within

an organisation:

Managing directors – responsible for the vision and overall

leadership of the firm

Managers – responsible for a particular functional area or

department of the business

Team leaders – coordinate the work of a particular part of a

functional area

Supervisors – oversee the work of operatives in large

organisations

Operatives – responsible for specific tasks and producing

the products

eXAM tiP

Students frequently show little understanding of how the work-

place is organised in reality� They assume that the managing

directors of an organisation are closely involved with its day-to-

day running and overlook the fact that this is actually delegated

to people lower down� Those of you with part-time jobs will

have practical experience of the levels of hierarchy within an

organisation� In a school/college, the Principal will have relatively

little contact with the operatives on a day-to-day basis�

DelegationThis is when the responsibility for a project is passed down

to a more junior colleague� It is important that the managers

trust the workers below them and also support them in the

way they carry out their roles� Smart delegation is a key role of

managers, helping to motivate the people below them within

the organisation and also allowing those individuals to gain

key experience that will benefit them in the long run�

Communication flows

Communication is a vital part of any successful business� It is

important that communication is effective and two-way� Firms

must make sure that all key information is communicated

effectively within a firm� Workers must know what is required

of them and also the objectives and goals of the business�

Vertical communication

Communication that passes from manager to subordinates

and vice versa

Horizontal communication

Communication between workers at the same level within

an organisation


The nature of the business is vital in determining its organisa-

tional structure� Creative firms such as marketing agencies will

tend to have a more laissez-faire approach and a flatter structure

– this will lead to better communication and more ideas coming

through� Organisations such as schools will tend to have a

taller structure with clearly defined roles� This will help delineate

responsibilities and create order� Organising by hierarchy also

allows individuals the opportunity for promotion, which will link

into motivation as well as assist communication� However, it

is not just the nature of the business (and associated skills)

that is important: businesses of different sizes need different

organisational structures to make them successful�

eXAM tiP

The People section of the specification is very content heavy�

However, it is crucial that you see how it all links together� You

need to link the organisational structures chosen by a business

to the size of the firm, to motivation theories, to communication

and to delegation� ‘Good’ analysis is all about building a chain

of argument, such as: ‘The empowerment of local managers will

lead to increased levels of motivation and improved customer

service, resulting in a better reputation for the business’� It is

also dependent on showing a clear grasp of the key terms and

it is wise to make use of these terms throughout your response�


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

yright

sole trad

ersbud

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analysisrisk

srew

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risksrewards

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Measuring the effectiveness of the workforce

Labour productivity This is the amount of output produced by each individual

worker� It is calculated as follows:

Labour productivity =Total output

Number of workers

Example: A business produces 5000 units a week� It has 100

workers� The labour productivity is therefore 5000/100 = 500

units per worker per week� However, this is just an average�

Labour turnoverThis is the ratio of the number of workers leaving an

organisation within a given time period (usually a year) to the

number of employees on the payroll� It is calculated as follows:

Labour turnover (%) =Number of workers leaving

Total number of workers× 100

Example: A Waitrose store has 100 members of staff� Last

year, 10 workers left and 10 new appointments were made�

The labour turnover is therefore 10/100 = 10%�


A change in staff can be good as it brings in fresh ideas and new

initiatives� However, losing too many staff members can cause

problems because you lose their expertise and the invaluable

experience they have gained from working in the business�

High labour turnover also leads to increased recruitment and

training costs because new members of staff have to be hired�

A low labour turnover reduces this expense and means the firm

has a stable workforce that knows what is expected�

Recruitment, selection and training

The recruitment process1 A vacancy occurs

2 A job analysis is produced

3 A job description is produced

4 A person specification is produced

5 Application forms are issued

6 Candidates are short-listed

7 Candidates are interviewed

8 A successful candidate is appointed

Internal recruitment

Advantages

Cheaper to advertise

Applicant knows the organisation and vice versa

Offers promotion prospects and motivational opportunities

Disadvantages

Fewer new ideas

Limited pool of applicants

May create vacancies elsewhere

External recruitment

Advantages

Brings in new ideas

Wider pool of applicants

Disadvantages

More expensive

Will take longer to recruit

Candidate will require induction training

eXAM tiP

The relative advantages/disadvantages of internal and external

recruitment can be explained relatively easily, since the

advantages of one will be the disadvantages of the other� This

area is frequently examined�

When a job is advertised, the business has to produce two

very important documents: the job description and the person

specification�

Job description

The job description is just that – it describes exactly what the

job entails and this information is given to the applicant� It will

contain the following information:

Hours to be worked

Overview of the job

What tasks are expected to be carried out

Wages/salary

Person specification

This document is for internal use and is not seen by the

applicant� It outlines the particular skills, qualities and

experience required for the position� The firm will have a

particular idea about what it wants and will be looking for the

person to have those skills listed on the specification�


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

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weaknesses

cop

yright

sole trad

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Methods of selection Interview: one to one and/or panel

Assessment centres

Psychometric testing – matching the individual to the

person specification

Presentations

Work samples

Peer assessment

A-GRAde evALUAtion

While the interview is still the main job selection method, the

use of alternatives is increasing and this has clear benefits to

both the firm and the individual� This is because the interview

process can be quite a daunting and an unnatural environment�

People might have an excellent interview technique but not

be suitable for the job itself� In my view the ability to perform

effectively in the job role is more important than being able to

present yourself in an interview� This is why assessment centres

and work samples are more effective forms of selection� Certain

jobs, such as catering, should be based more on ability in the

kitchen than on how a candidate comes across in the interview�

Similarly the recruitment of a teacher should be based more on

ability in the classroom� A wider method of selection is likely to

be more costly and time consuming, but if it secures the best

candidate for the role then I feel that in the long run this is a

worthwhile expense�

On-the-job training

Advantages

Cheaper

Practical and relevant skills learnt

Being paid and productive while training

Disadvantages

Might pick up bad habits

Not always the best learning environment

Off-the-job training

Advantages

Will receive a formal qualification

Learn a wider range of skills

Opportunities to meet staff from other organisations and

learn from them

Disadvantages

Expensive

Not productive while training

Induction trainingThe purpose of induction training (which may last a few hours

or a few days) is to help a new employee settle down quickly

by becoming familiar with the people, the surroundings, the

job and the business�


On-the-job training means that the workers are actually

productive because they are working� They get paid by the firm

and will learn specific skills from experienced people within the

company� This means that the firm is getting better value for

money and the workers will have a greater understanding of the

business� However, off-the-job training has benefits because

the workers will go off site and gain formal qualifications from

an outside agency� The level of training is normally better and

wider ranging than that provided on the job� This will also

benefit the business, since the individuals concerned are likely

to meet other people on the course and may bring back new

ideas� They are also likely to be more motivated, recognising

that the company is paying for this greater level of training and

that this will boost their longer-term employability�

Motivating employees

Motivational theorists

There are many theories of motivation:

Maslow: hierarchy of needs

Herzberg: hygiene factors vs motivators

Taylor: scientific management – workers motivated by pay

Mayo: working in teams, consulting workers and involving

them

Vroom: expectations – making sure that workers are set

realistic expectations

eXAM tiP

Do not get too hung up on the different theories� You will not be

expected to show a detailed understanding of the theories and

when they were written� Much more important is your grasp of

how they can be linked to motivation in practice�

Motivation in practice (financial) Piece rate – paid by number of units produced

Commission – paid by number of units sold

Fringe benefits

Profit sharing

Bonuses


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

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business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

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strengths and

weaknesses

cop

yright

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Motivation in practice (non-financial) Job enrichment: making the job role more enjoyable and

more varied

Job enlargement: making the job role larger and giving the

individual more responsibility

Job rotation: making sure that workers do not perform the

same job role each and every day

Why motivation is importantLow motivation can lead to:

High levels of absenteeism

High levels of labour turnover

Higher costs for the organisation as a result of the above

factors

Poor image

Lower productivity

Loss of competitive advantage


A well-motivated workforce has significant benefits for a firm� If

workers are happy in their work and enjoy their job, they are less

likely to leave, which will reduce labour turnover and the need

to recruit and train new workers� This means a substantial cost

saving for the firm� In addition, if workers are motivated and

enjoy what they are doing, they are likely to become increasingly

efficient and skilled in their particular roles� This should result

in an improvement in the quality of the product/service being

produced and an increased reputation for the firm�


While Taylor would argue that workers are simply motivated

by money, Herzberg would suggest that this can be seen as a

hygiene factor� People will expect to earn a fair wage and if they

feel that they are being underpaid, this can lead to demotivation�

It is true that the majority of workers are motivated by earning

higher wages� However, I feel that there is more to working than

just money� More varied and challenging work keeps workers

motivated and enables them to develop a wider range of skills�

This results in a more flexible workforce� Firms should consider

a range of measures to motivate their workforces, since happy

and contented workers enable businesses to thrive�

Various methods have been used to improve morale and

motivation based on the many theories of motivation� These

include:

Improving job design

Teamworking

Empowerment

Financial incentivisation

Improving job designThis can be achieved through either job enrichment or job

enlargement�

Job enrichmentGreater responsibility is given to employees, enabling them to

use their skills more extensively and to feel challenged�

Advantages

Develops workers’ skills and challenges them

Improves their promotion prospects

Enables them to contribute more to the decision-making

process

Increases their motivation

Disadvantages

Some workers may not welcome the additional

responsibility

Enrichment may not be appropriate for some jobs

Could be used as a means of reducing employee numbers

(delayering)

Job enlargementThe scope of a job is expanded through job enrichment or job

rotation�

Advantages

May reduce the boredom of work

Provides a greater sense of participation

Easier to cover for absent colleagues

Increases motivation

Disadvantages

May result in excessive workloads and therefore demotivate

Retraining costs will rise

Less specialisation may reduce output

TeamworkingThis can increase motivation through shared responsibility and

a degree of decision making�

EmpowermentThis can be achieved through formal or informal structures

and involves giving workers more autonomy, which increases

their motivation while at the same time improving flexibility and

quality�

Financial incentivisationThere are various ways in which employees can be

incentivised financially, from the use of bonus payments to

share-ownership schemes�


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

yright

sole trad

ersbud

gets

analysisrisk

srew

ards


risksrewards

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partnerships

cost

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Operations managementMaking operational decisions

Operational targets Lowering unit costs

Improving quality

Increasing capacity utilisation and efficiency

Unit costs are the individual costs of producing a single item

of a particular product� Larger firms will normally have lower

unit costs as they can benefit from economies of scale�

Large supermarkets will sell beer at a lower unit price than a

smaller local shop� This is because they will buy in bulk and

benefit from cost savings�

Economies of scale (FIT MATE)FI-nancial: Raising finance is easier

T-rading: Bulk buying

MA-nagerial: Expert managers

TE-chnological: Use of technology to lower unit costs

Capacity utilisationThis can be calculated by working out the actual output

divided by the maximum output�

Capacity utilisation (%) =Actual output per annum

Maximum output per annum× 100

Example: If there are 100 classrooms in a school and at any

point in time 90 of these are in use, the capacity utilisation is

90%�

A business will want to work at around 80% capacity on

average� This level of utilisation provides some spare capacity

to take on extra orders and is also less stressful for staff� If a

firm operates at full capacity for the majority of the year, it will

need to consider expanding and looking for larger premises�

This has a cost in terms of time and capital�

Causes of under-utilisation Seasonal demand

New competitors

Over-investment in fixed assets

Mergers – duplication of resources

A fall in the demand for the product

Impacts of under-utilisation

Higher unit costs

Lower profits

Employee boredom

Lower motivation

Being able to meet a sudden increase in demand

A negative image and a loss of reputation

Matching production to meet demand

Use of overtime

Hiring temporary and part-time staff

Rationalisation

Subcontracting

Managing stock control through JIT


It is essential for a firm to be flexible in terms of its operations� If

it operates at full capacity, this will reduce its ability to meet new

orders and take on extra business� By operating at about 80%

capacity utilisation it will have the flexibility to take on extra

orders and hire staff when demand increases� Its use of part-

time and temporary workers will mean that it can accurately

meet the needs of customers and avoid paying for full-time

staff when they are not actually needed� When a firm is close

to maximum capacity, it faces a decision� It can either look to

expand its operations, which is costly (both in terms of time and

finance) or look to subcontract part of its production to outside

agencies� This should only be done as a short-term measure,

however, as in my view it will mean that it has less control over

the business�

QualityDefinition: The totality of features and characteristics of a

product or service that satisfies (or delights) customers�

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The perception of ‘quality’ is subjective� However, certain

products are genuinely ‘quality’ products and the price of

these goods often reflects this�

Assessment of quality Appearance

Reliability

Image and brand

After-sales service

Personal preference

Measuring quality Customer satisfaction surveys

Customer complaints

Wastage rate

Mystery shoppers

ISO 9001 – a national/international quality standard

Quality control and quality assuranceQuality control involves checking the overall quality of the

product either at certain stages of the process or, more

commonly, at the end of the process�

Quality assurance means that individuals involved in

production take care with the quality of the product at each

and every stage� This ensures that the product or service is

produced to the highest quality�

Quality assurance is more common these days because the

cost of reworking a product at the end of the process is far

greater than ensuring that the quality is right first time� Quality

control systems are therefore used less frequently nowadays�

Total quality management (TQM)This Japanese concept involves a system of lean production

– minimising waste at every opportunity and focusing on

efficiency savings� Central to this is kaizen – a concept of

continuous, small improvements� Every worker is given

responsibility for quality and encouraged to have an active

role in the production process through quality circles – a

weekly meeting whereby workers discuss ways in which the

production could be improved�

Benefits of introducing quality systems Can lead to higher sales

Creates a USP

Can potentially charge a higher price

Reduces unit costs as it minimises wastage

Improves the firm’s reputation


Ensuring quality throughout the business can lead to benefits in

terms of both production and marketing� Car companies such

as Toyota, Subaru and Skoda have concentrated on producing

quality cars� Their reputation for quality gives them a USP that

they can then use in their marketing, allowing them to enhance

their reputations further� A reliable and high-quality production

process will reduce the number of defective products and save

them money in the long run� It can also enable the businesses

to charge higher prices for their products because customers

are prepared to pay a premium for quality�

Consequences of introducing quality systems Costs

Training

Disruption to production


In today’s increasingly global market place, I believe it is very

important to concentrate on quality� The fact that customers

will normally pay a higher price for what they feel is a higher-

quality product will motivate businesses to stay ahead of their

competitors� Ensuring quality throughout an organisation is a

challenge and needs both good operational procedures and the

staff to carry out this work� Training will be vital, and systems

need to be in place to check the quality of the work carried out�

However, by focusing on quality the firm will benefit from a USP�

Such a focus will also allow it to meet the specific needs of its

customers and maintain its competitiveness in the long run�

Customer serviceGood customer service will lead to an enhanced reputation

and people telling other people about the service they receive�

This will in turn lead to repeat custom and increased sales�

Such service is fairly easy to implement with appropriate

training techniques� Customer expectations can be met by:

Giving customers the product or service that they want

Ensuring that the product or service is of high quality

Ensuring that staff are friendly and helpful

Dealing with customer complaints efficiently

Implementing and monitoring customer service Customer feedback surveys

Mystery shoppers


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Focus groups

Looking at key issues that have been identified and

resolving any problems

Training staff

Benefits of a high level of customer service Customers return

Creates a USP

Improves the firm’s reputation and image

Gains a competitive advantage


Good customer service is one way in which a business can

differentiate itself and its products from its rivals� It is also fairly

easy to establish through staff training� This helps build a culture

within the organisation as well as improving its reputation� A good

example of such an organisation is Waitrose, where members

of staff are selected for their personality and willingness to help�

This means that customers are more likely to approach them and

recommend the business to other people, helping it increase its

customer base� While training staff can be expensive initially,

the long-term benefits are likely to outweigh the costs as staff

are likely to be more motivated and happy in their work, which

makes them less likely to leave, which will reduce the labour

turnover figures for the firm, which will in turn lower the need

to recruit and train new staff� When the business does need to

recruit, people will want to work for a company that is friendly

and provides excellent customer service� Customer service is

also relatively easy to monitor, either through the use of mystery

shoppers or by internal appraisal�

Working with suppliersA supplier will be chosen based on a range of factors:

Price

Payment terms

Quality

Capacity

Reliability

Flexibility

Using technology in operationsThe importance of technology in operations is evident in a

variety of areas, including:

Robotics

CAD

CAM

Stock control systems

Accounting packages

Benefits of using technology Reducing costs

Improving quality

Reducing waste

Increasing productivity

Easier communication

Drawbacks of using technology Initial costs will be high

Will need updating

Employees will need to be trained

Maintenance costs

Can break down and halt all production


Investment in new technology will bring many benefits to an

organisation� While the initial investment is likely to be high, in

the long run it should lead to lower unit costs because the use

of technology in production will allow a greater number of units

to be produced� Businesses will need to move with the times�

The development of technology in just the last thirty years has

been substantial with the arrival of broadband Internet and the

use of home computers� Keeping up to date with technology is

difficult as it moves so quickly� Firms have to make decisions

as to which system they adopt and this can sometimes lead

to poor choices� The constant need to update and replace

technology is also an issue in terms of finance and training staff

in its use� However, in my view the advances in technology have

greatly benefited the business world and this situation is set to

continue� Businesses need to embrace the technology�

Improving operational performanceFirms will look to improve the efficiency of their operations

through a variety of the methods mentioned in this section�

The idea is to give the business a competitive advantage over

rival firms and it can achieve this through improving any of the

following:

Quality

Capacity utilisation

Customer service

Working with suppliers

Use of new technology


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Effective marketingThis can best be described using the AIDA model� A firm will

aim in its marketing to:

Attract the customers’ attention

Interest the customers in its products or services

Develop a desire – make the customers want its products

Action – lead the customers to purchase its products or services

Marketing also involves researching the market and producing

a product that meets the needs of the target audience� It is

about coming up with an effective marketing mix that will

make the product successful�

eXAM tiP

The nature of the market will dictate the overall marketing

strategy of the business�

Niche marketingA niche market is a narrowly defined group of customers�

Niche marketing targets this small, specific market segment�

Advantages

Few competitors

Can normally charge higher prices

Can tailor the product to individual customers

Good for small businesses

Disadvantages

Small target audience

Can be more risky – limited demand

Lower overall profits due to size

Difficult to scale the business

Mass marketingA mass market is a large market that is unsegmented� Mass

marketing covers this entire market rather than targeting a

particular segment�

Advantages

Large scale production possible

Increases brand awareness

Large target audience

Disadvantages

Difficult to appeal to individual customers

High capital costs to start with

Difficult to react to changes in demand

Designing an effective marketing mix

The marketing mix is made up of the 4 Ps: product,

promotion, price and place� However, the success of the

business will also depend on other factors and the way in

which they are integrated� The effectiveness of the mix will

depend on:

The market segment being targeted

The available finance

Competitors

The influence of new technology

The reliability of market research

eXAM tiP

The exam will expect you to take a broader view than focusing

simply on the individual elements of the marketing mix� You

need to be able to demonstrate that you can interrelate the

different aspects of the mix�


The most important component of the marketing mix is, in my

view, the product� Once the product is in place, this will dictate

the price to be charged, the sales outlets and the promotion

strategy� It is essential that the 4 Ps complement each other in

order to ensure the success of the product�

Marketing and the competitive environment

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If a new technological product is in high demand, an initial

high price and skimming strategy are likely� The product will

probably be sold in electronics shops or in large, well-respected

department stores� The marketing is likely to be through TV

advertising and specific technology magazines such as Stuff�

If a new pizza restaurant/takeaway is opened, prices will

probably be set using competition pricing� The place/location

of the restaurant will need to be central to a town or a city, and

the promotions are likely to be more local and specific to that

area� They might involve the delivery of pizza menus to the local

community through the insertion of flyers in local newspapers�

Using the marketing mix

ProductThe product itself is regarded as the most important aspect of

the marketing mix� The key factors that need to be considered

are:

Design of the product – it must be reliable, safe, fit for

purpose and durable� It must also, most crucially, meet the

needs of the customers

Product development

Factors influencing new product development New technology that produces superior products

New technology that produces goods more cheaply

Developing new products that are individualised to specific

tastes

Competition that can force existing businesses to develop

new products

Entrepreneurial skills that spot a gap in the market, enabling

‘first mover’ advantage

The importance of a USPMarketing can add value by creating a unique selling point

(USP)� This is important for a firm as it allows it to stand out

from the competition and will attract customers to its product�

It will also allow the firm to charge a different price from the

competition�

eXAM tiP

Examiners will not want you to reproduce the diagrams that

follow� However, you need to be very comfortable with the

different theories and link the Boston Matrix to the product life

cycle�

Product portfolio analysisDefinition: Product portfolio analysis is the study of

each of a firm’s products in an attempt to improve market

performance� The idea is to create a balance of products with

widespread appeal� The Boston Matrix illustrates this strategy�

Boston Matrix

Product life cycleDefinition: The product life cycle is the term used to describe

the stages through which individual products develop over

time: introduction, growth, maturity and decline�

Life cycle: four basic stages

Introduction Growth Maturity Decline

Audience Early adopters

Mainstream

Late adopters

Laggards

Market Small Growing Large Contracting

Sales Low High Flattening Moderate

Competition Low Moderate High Moderate

Business focus Awareness Market share

Customer retention Transition

Design focus Tuning Scaling Support Transition

Market share

Mar

ket

gro

wth

Low

Prioritise

Inve

st

Divest

Kill

High

Hig

hLo

wCash cow

Star

Dog

Maturity Decline

GrowthProduct development

Introduction Time0

Sales revenue, cash flow (£)

Question mark

Star Cash cow Dog

Stages in the product life cycle (Boston Matrix positions)

+

–

Sales

Cash flow


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A wide product portfolio will allow the firm to target different

markets� It will also allow it to coordinate the launch of its

products� Firms with just one product are more at risk� If this

product enters the decline stage of the product life cycle, they

have no other products to rely on� Firms will try and coordinate

the launch of new products when their existing products are in

the maturity stage of the life cycle� At this stage these products

tend to be cash cows, earning high profits with relatively little

market growth� Firms can milk these cash cows in order to

provide the finance required to launch new products and invest

in new potential rising stars�

Extension strategies

In order to help products remain in the maturity stage for

as long as possible rather than slip into the decline stage, a

business might look to develop extension strategies to keep

sales high� There are a number of ways to do this:

Modify the product

Target new markets

Introduce new promotions

Change the image of the product

Increase usage among existing customers


The product life cycle theory can be a useful tool for businesses�

However, it is flawed in that it does not account for the actual

time it will take for a product to pass through the life cycle�

Products such as Heinz baked beans are still in the maturity

stage after many years on the shelves, whereas games

consoles will typically have a life cycle of just six years before

entering into the decline stage� Moreover, not all products will

pass through the life cycle as described in textbooks� Different

products will have different shaped life cycles� While the theory

can have some benefits in that it will help a firm decide on its

promotional strategies at a particular point in time, in my view

it should be used with caution� The idea of researching and

developing new products while existing ones are in maturity

is certainly a good one� However, it is difficult to know just

how long these products will be in maturity before they need

replacing, which again highlights the importance of timing�

PromotionPromotion can be:

Above the line – advertising through media outlets such as

TV, radio, newspapers

Below the line – promotion through sponsorship, public

relations (PR) and competitions

A business may use a range of promotional methods:

PR

Branding

Merchandising

Sales promotions, e�g� Buy One, Get One Free (BOGOF)

Direct selling

Advertising


Advertising needs to be either informative or persuasive� The

idea is to raise awareness of the brand and create greater brand

loyalty for the product� It is hard to measure the level of success

of advertising and it can be expensive� Firms will look to have

an integrated promotional mix using a range of promotions such

as competitions and BOGOFs that are supported by above-

the-line advertising campaigns� The promotion of products

is crucial for their success� The firm will need to consider the

objectives of the campaign and the costs involved, using

available finance to target the specific market� Most importantly,

it will need to consider the actions of competitors and ensure

that its campaign promotes the unique qualities of its products�

Price

Pricing strategies Penetration pricing

Price skimming

Price leaders

Cost-plus pricing

Possible pricing tactics Loss leaders

Psychological pricing

Sal

es

Introduction

Maturity

Growth

Decline

Extension strategy

Time


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Price elasticity of demandPrice elasticity of demand (PED) measures the responsiveness

of demand to a change in the price of the product� It is

calculated using the following formula:

PED =% change in quantity demanded

% change in price

If a good is responsive to a change in price, we say it is

elastic� This is important, since the firm with an elastic product

knows that a modest drop in price will prompt a sharp rise in

demand, resulting in an increase in sales revenue�

If a good is not responsive to changes in price, we say it is

inelastic� This is important, since the firm with an inelastic

product knows that a sharp increase in price will prompt only a

modest drop in demand, resulting in an increase in sales revenue�

Determinants of price elasticity of demand The degree of need – if the good is essential, then demand

will be unresponsive to changes in price

The percentage of income spent on the good – if a higher

percentage, then customers are likely to shop around

and be more price sensitive; if a lower percentage, then

customers will be less concerned about price


The choice of pricing strategy will be crucial for the business�

In my view, any firm should first consider cost-plus pricing� It

can then guarantee a profit on each item sold� It will need to

consider the target market of the product and try to work out

the relative price elasticity and how sensitive customers will be

to price changes� It also needs to consider the nature of the

product and whether it should set a high price initially because

it has such a distinctive USP or whether it should try to break

into the market with a penetration strategy� It is critical to set the

price of the product at the right level in order to be successful�

Place (or distribution)There are several factors that influence distribution method:

The type of product (is it perishable?)

Location of the target audience

The complexity of the product

The four traditional methods of getting the product to the

customer are: (1) manufacturer consumer; (2) manufacturer

retailer consumer; (3) manufacturer wholesaler

retailer consumer; and (4) manufacturer wholesaler

jobber retailer consumer�

eXAM tiP

An understanding of how a product is distributed to customers

is an excellent way of picking up application marks and shows

an insight into the business and the industry� Your ability to

explain how selling direct to customers will reduce the overall

cost of production and result in a lower selling price will also

pick up key analysis marks�

Marketing and competitivenessPerfect competition

Number of firms Many and small

Nature of product Identical

Barriers to entry None

Effect on business Low profitability and little need for marketing

Monopolistic competition

Number of firms Many and small

Nature of product Differentiated

Barriers to entry None

Effect on business Low levels of profit, but some scope for marketing

Oligopoly

Number of firms 2–8 large firms

Nature of product Differentiated

Barriers to entry High

Effect on business Non-price competition; high levels of spending on marketing

Monopoly

Number of firms One

Nature of product Unique

Barriers to entry High

Effect on business Very high profit margins; no real need for marketing, but will often take place

eXAM tiP

When considering the marketing actions of a firm, make sure

you consider the nature of the market in which it is operating�

A highly competitive market place will mean that while profit

margins are likely to be low, the use of effective marketing

can capture market share� When there are a large number of

dominant firms, the use of pricing strategies is of limited benefit

as a price war might occur� In these markets the use of branding

and promotional strategies will therefore be more prevalent�


market research

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limited com

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Exam practiceCase study 1: T & M SherbornT & M Sherborn was established in 1895 as a Bedfordshire

building company� It now has a multi-million pound turnover

each year and a staff of over 200 permanent employees� The

business has an excellent reputation in Bedfordshire and the

Home Counties�

The construction industry has been seriously affected by the

recent economic downturn and the business has had to work

hard to secure contracts and to ensure that no redundancies

have had to be made� However, capacity utilisation has fallen

and, with staff worried that there might not be more work to

follow, motivation has been badly affected� As a consequence,

the quality of work has suffered� This has become evident from

recent customer satisfaction surveys�

T & M Sherborn has always prided itself on the training it

provides, regularly taking on apprentices who receive a mix of

both on-the-job and off-the-job training� The firm frequently

sends its staff on training courses and offers loyalty bonuses

as well as a very attractive pension scheme� Workers can also

see the promotion opportunities within the organisation, since

the majority of directors have been promoted from within the

company�

As with any construction business, managing cash flow is a

real issue, since a large outflow of money is required to build

a major project and the final payment is only received on

completion� There are £14 million worth of contracts currently

on the firm’s order books� However, its ability to finance these

projects may be affected by its deteriorating net profits

(Table 1)�

Table 1 Financial and operations data

2010 2011

Sales revenue (£000s) 45,250 42,215

Net profit (£000s) 4200 2100

Capacity utilisation of main yard (%) 78 62

Satisfaction with customer service (%) 74 66

Question 1 (40 marks)(a) Calculate the net profit margins for the firm in 2010

and 2011� (5)

(b) Analyse two problems that may arise from the firm’s falling

capacity utilisation� (8)

(c) To what extent do you think the company should be more

concerned about short-term cash flow issues than falling

long-term profitability? (13)

(d) Discuss the benefits of the way in which the firm trains and

motivates its staff and how it is likely to have led to the

success of the business� (14)

Candidate’s response (A grade)

Question 1

(a) Net profit margin =Net profit

Turnover× 100

2010 = £4200

£45,250× 100 = 9�28%

2011 = £2100

£42,215× 100 = 4�97%

The candidate has successfully calculated the net profit

margins for both years, as the question requires� The formula

has also been stated, which is good technique as marks would

have been picked up even if an error had been made with the

calculation� Answering to two decimal places is also a sign of

numerical competence� (5 marks)

(b) The first issue is that resources will be under-utilised� In

terms of machinery and tools, this carries an opportunity cost�

The firm has invested in these items so that it has enough

resources to carry out all the construction required when the

firm is busy� During the recession the demand has fallen and

so the investment in these resources is wasteful� Moreover, if

the firm does not regularly use these items, then they may not

be maintained to the highest standards and this can lead to

problems when they are used�

The second and arguably more important issue is to do

with human resources� The firm will probably have insufficient


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

yright

sole trad

ersbud

gets

analysisrisk

srew

ards


risksrewards

trademark

pate

nt

budgets

riskcontribution

partnerships

cost

bud

gets

risk

cashcopyright

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ncash


work for the entire workforce and there is a concern about

future orders� This has led to demotivation, with workers

worried about their long-term job security� As the case study

makes clear, there has been a fall in quality as a result� This

has caused inefficiencies within the organisation and led to

a decrease in customer satisfaction� The firm needs either to

reduce its capacity or to look at ways to increase the number

of projects that it carries out so that the entire workforce is

utilised more efficiently�

While probably not the best choice of example for the first

issue regarding capacity utilisation, the response does

nevertheless relate to the construction industry and therefore

shows the skill of application� The second issue is analysed

properly and builds a chain of argument� The judgement at the

end of the second paragraph is not necessary, however, as

this is an analysis question� (6 marks)

(c) For a construction company, short-term cash flow

problems are likely to be commonplace and, to some extent,

can be anticipated� Therefore, in my view, this is less of an

issue� However, given the weekly wage costs resulting from

the high number of people employed within the firm, the firm’s

commitment to retain staff is likely to prove problematic� The

company could look at ways of reducing its cash outflows

in the short term� The fact that the recession is likely to be

affecting many other businesses related to the construction

industry might allow it to negotiate better terms with its

suppliers and possibly reduce its overall wage bill�

If T & M Sherborn were able to do this, this would increase

its overall profit margins� However, as I calculated in question

1(a), the business has actually seen its net profit margin fall by

nearly 50% and this must be a serious concern� The firm has

seen a slight fall in revenue from 2010 to 2011, though this is

not surprising given the tough economic climate� The drop in

margin would suggest that its overall costs have increased

and this should be a major area of concern� It indicates that

the firm does not necessarily have control over these and that

this is causing the lower levels of profitability�

In my view, the firm needs to be concerned about both

issues� However, the short-term cash flow problems are likely

to be less serious than the longer-term fall in profitability� The

firm perhaps needs to reduce its costs and look at alternative

ways to do this� It is likely to have to reduce its prices during

a recession, but this should be putting downwards pressure

on the wages that it pays and also on the cost of supplies� As

a successful business, its established reputation will help in

negotiations� However, by reducing wages it may lose goodwill

among its staff� Nevertheless, I feel that this is a necessary

course of action as it will improve not only cash flow but also

long-term profitability�

The candidate displays the skill of evaluation early on� The

application is excellent, both to the company itself and to the

industry as a whole� However, the analysis is less strong� The

candidate does not build a detailed argument – instead, a lot

of issues are mentioned without a main line of argument being

fully developed� (8 marks)

(d) The fact that directors have worked their way up through

the company sends out a clear message to other staff that

the firm is willing to invest in its employees and promote

from within� This will benefit the firm by fostering greater staff

loyalty and reducing labour turnover, which means that it will

have relatively lower recruitment costs� The fact that the firm

combines on-the-job and off-the-job training is also beneficial

because new apprentices learn from experienced staff the

specific skills required for the actual work they carry out� This

means that workers are more productive and this is efficient

for the company� The pension scheme and loyalty bonuses

also act as ways of retaining staff�

However, by focusing so much on internal recruitment, the

firm is potentially missing out on new ideas and approaches

that would come from looking outside of the business� While

basic construction techniques may not have changed much

over the years, there have certainly been significant changes

to the way in which many businesses operate in this sector� A

lack of new blood at T & M Sherborn might have actually held

the company back�

In conclusion, I would argue that the high level of orders

and the reputation of the firm are significant indicators of a

very successful business� However, its falling performance

in recent years suggests that the firm may have become less

efficient� In my view the appointment of some new senior staff

is overdue� They could help identify the best way forward for

the firm, perhaps looking to change the loyalty bonuses and

pensions that are adding to the costs of the business and

reducing the overall profitability of the firm� The fact that so

many staff are promoted internally could lead to complacency,

as could loyalty bonuses� I would like to see greater emphasis

placed on performance-related bonuses as this will lead to

continued improvement�

Although briefer than the previous answer, this response is

arguably stronger� This is because it builds a clear line of

argument that picks up good analysis marks and is linked to

the business� The judgement is also sound, suggesting a new

way forward for the firm and then backing this up – excellent

exam technique! (13 marks)


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

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sole trad

ersbud

gets

analysisrisk

srew

ards


risksrewards

trademark

pate

nt

budgets

riskcontribution

partnerships

cost

bud

gets

risk

cashcopyright

pla

ncash


Case study 2: Best Burger CompanySamuel Fraser set up the Best Burger Company in 2004 after

attending many festivals and sporting events and lamenting

the fact that he could never find good quality food� Sam

noticed that there was a growing trend on the high street for

organic and healthy versions of fast food, but there appeared

to be a gap in the events market for burgers made from only

the best ingredients� He was also aware that the nature of

festivals meant that people had limited choice and therefore

had relatively price inelastic demand� He worked on producing

an effective marketing mix�

Sam conducted a range of primary and secondary market

research� By asking friends and drawing on his personal

experience, Sam felt that while selling food at events was

a highly competitive area, there were always opportunities

because the number of festivals was growing� He decided to

invest £25,000 of his savings into the venture and, after the

first year of operations, he had managed to make a net profit

of £10,000�

In the initial year of trading, Sam and his partner carried out

all of the operations themselves and attended every festival�

The business managed to build up a good reputation and its

USP meant that it was very successful� Sam looked to grow

the business and took out an additional loan of £50,000� This

allowed the firm to have more vans at more sites� It also meant

that Sam had to recruit workers from outside the business�

He decided to offer the minimum wage to workers, but they

were incentivised by the opportunity to watch the festival/

sports events during the periods when they were not working�

Nevertheless, the seasonal and temporary nature of the

business meant that labour turnover was still high and that

each year Sam had to recruit new staff� However, the relatively

flat organisation helped communication within the company�

As the business expanded, Sam was able to take

advantage of economies of scale and this led to increased net

profit margins for the firm� However, by the summer of 2010 he

had become concerned about the entry of larger, mass-market

rivals such as Pizza Express and Subway into this niche

market�

Question 2 (40 marks)(a) Calculate the ROCE for the Best Burger Company in its

first year of operation� (4)

(b) Explain two ways in which the firm might have benefited

from economies of scale� (8)

(c) To what extent is an effective marketing mix crucial to the

long-term success of the company? (14)

(d) Sam believes that an effective recruitment and selection

system is the essential factor in guaranteeing the long-term

success of the business� Do you agree with him? Justify

your view� (14)

Candidate’s response (A grade)

Question 2

(a) ROCE =Net profit

Capital employed× 100

Sam made £10,000 net profit on an initial investment of

capital of £25,000�

ROCE =£10,000

£25,000× 100 = 40%

The candidate has chosen the right data and calculated

the answer correctly� Again, stating the formula is excellent

technique� (4 marks)

(b) The first way in which the Best Burger Company can

benefit from economies of scale (lower unit costs) is by

expanding� It can benefit from trading economies, where

it buys larger quantities of ingredients at a lower unit cost�

This will increase the company’s profit margin if the original

selling prices are maintained� By buying in larger quantities,

the business will be able to take advantage of bulk buying

discounts� This will be possible because the firm is attending

more events and therefore has more outlets� This economy of

scale might mean that the company has to change its current

supplier because it may be unable to produce sufficient

quantities� The quality of ingredients, however, would need to

remain high�

The Best Burger Company might also benefit from

managerial economies� Rather than Sam and his partner

running all the events, they can bring in specialist managers

who can take control of different events or different functional

areas of the business� This will save the business money in

the long run as it will reduce the pressure on Sam� The use of

managers with specific skills will hopefully lead to a reduction

in costs, since these individuals will know how to manage their

particular areas effectively�

The candidate starts with a definition that displays an

understanding of the concept of economies of scale� This is

backed up with two relevant and well-applied examples that

clearly show how the firm will be able to benefit from them�

(8 marks)


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

yright

sole trad

ersbud

gets

analysisrisk

srew

ards


risksrewards

trademark

pate

nt

budgets

riskcontribution

partnerships

cost

bud

gets

risk

cashcopyright

pla

ncash


(c) The marketing mix is made up of the 4Ps – price, product,

place and promotion� Of these, product is the most important�

If the Best Burger Company gets this right, a clear USP will

allow the other aspects of the mix to fall into place� By offering

high-quality and organic produce, the company successfully

differentiates itself from the majority of other competing

festival outlets�

The Best Burger Company’s USP will allow the business

to charge a higher price, but the costs of its ingredients are

also likely to be higher than its rivals� It would therefore be

wise for the firm to adopt a cost-plus pricing strategy� Linked

to this is the fact that the firm is likely to face fairly price

inelastic demand� While there are a large number of substitute

products available at festivals, the overall market is typically

unresponsive to changes in price because events offer a

captive market� This can enable the firm to charge a higher

price than is normal and this will influence the pricing strategy

used� However, customers will only be willing to pay a high

price if they perceive the product to be of a higher quality than

its rivals�

It is also important for the business to continue to have

access to festivals – another crucial element in the marketing

mix of the firm� An effective distribution network, i�e� making

sure that the business has a prominent position at each festival

and that supplies are ordered correctly, will be a major factor�

In terms of promotion, the business will probably not need

to spend a large amount because potential customers will be

able to view for themselves the different food outlets on offer�

However, it may prove useful to adopt promotional strategies

at individual festivals, such as handing out flyers or having

festival specials for particular meal combinations�

Overall, it is going to be very important that the company

combines all aspects of the mix so that it can have an

advantage over rival firms� The danger is that, if successful,

other firms will try and imitate the business and offer a similar

range of products� In this situation it is going to be crucial for

the firm to adapt, perhaps offering a wider product range and

looking to adjust its pricing and promotional strategies� While

the current marketing mix is proving successful, the ability of

the Best Burger Company to adjust this mix in the long run is,

in my view, absolutely vital�

This is another very well-rounded response with some

great application to the marketing mix currently employed

by the Best Burger Company� The candidate clearly

understands the 4 Ps, but there is insufficient focus on the

importance of the ‘mix’� The candidate tries to address this in

the final evaluation, but the attempt is ‘reasonable’ at best�

(10 marks)

(d) An effective recruitment and selection policy will clearly

provide benefits to Sam and his business� This is because if

appropriate staff are recruited and selected in the first place,

they are more likely to be loyal� This will reduce the need

to recruit and train new staff each year� If labour turnover

can be reduced, this will benefit the company as a result

of lower training costs in the future� Hiring the right people

the first time around will pay dividends in the long term� The

staff will only need to be trained once and then Sam can

delegate more responsibility to them� This would be harder

to do if he constantly had to select and train new staff� The

overall recruitment budget can be reduced if the high cost of

interviewing cadidates is avoided�

The nature of the work, however, would typically lead to

quite a high turnover of staff� Pay and non-financial forms of

motivation are therefore likely to be equally important factors

in securing their loyalty� The fact that the work is seasonal

suggests that it would suit gap year students, university

students or foreign students travelling in the UK� Recruitment

advertising should target these types of individual� Given the

fact that the festivals take place around the country, Sam

might advertise for workers in the local vicinity using job

centres or employment agencies�

The most beneficial recruitment and selection policy,

however, would result in a core group of workers that travel

to each festival� This will mean that there is greater pressure

placed on the operations management procedures within

the firm� Coordinating staff for a business such as the Best

Burger Company is likely to be very challenging because even

when staff are recruited, they will not work from the same

base each week� This will place a strain on those employees

responsible for organising accommodation for these workers�

It is highly likely that the recruitment of staff long term for

this business will be difficult – such is the nature of the work

and the demand on its workers to travel� It is likely that the

company will need to recruit a large number of temporary

workers and training will be an issue� In my view, the long-term

success of the Best Burger Company is therefore not simply

about its recruitment and selection system but also about how

it manages its workers effectively in order to gain their loyalty

and benefit from low labour turnover�

This is an effective answer� It looks first at the reasons why

recruitment and selection are essential and then at alternative

factors that would suggest why it is not so important� A final

supported judgement is provided which directly answers the

question� This is superb exam technique and ensures that the

candidate evaluates� The response is clearly linked throughout

to the Best Burger Company� (13 marks)


market research

employing people


cash flow forecast

setting budgets

sources of finance

breakeven analysis




public limited com

panies



business ideas

adding value

private limited

companies



cash flow forecast

setting budgets


arket segmentation


startupstradem

arkadding valuem

arket size

market grow

th

sole traders

opportunity cost



patentrew

ards


business ideas

cash flow forecast


business ideas

enterprise


entrepreneur

breakeven analysis

business plans


market research

employing people

sources of finance

breakeven analysis



market grow

th

public

limited com

panies

private limited com

panies


costsrevenues

startups

riskstradem

ark

conribution

adding value


cash flow forecast

setting budgets

legal structure


market share

risks

business ideas

Starting

a businessentre

pre

neur

legal structure

plan


busin

ess id

eas

raising financem

ark

et re

searc

h

breakeven analysis

patenttradem

arkse

tting b

udgets

strengths and

weaknesses

cop

yright

sole trad

ersbud

gets

analysisrisk

srew

ards


risksrewards

trademark

pate

nt

budgets

riskcontribution

partnerships

cost

bud

gets

risk

cashcopyright

pla

ncash


Bare Bones Revision Guides distil the essential content of the AQA units of study as clearly and succinctly as possible.

Written by an experienced examiner, each 24-page guide opens with a section about the exam, the mark allocation, the skills required and the importance of exam practice.

The subsequent content notes are highly focused, carefully structured and colourfully presented, making them perfect for revision. They include important Exam Tips, providing you with invaluable guidance on what the examiner is looking for and how to gain those vital extra marks. Regular A-Grade Analysis/Evaluation Examples throughout these notes emphasise the importance of the higher-level skills, and there are even Number Crunching activities to check your calculation ability.

An exam practice section at the end of the guides comprises integrated case studies followed by exam-style questions. Once you have assimilated the content notes, you should tackle the questions under timed conditions. Specimen A-grade responses, with accompanying examiner commentaries, are provided so that you can assess the quality of your own answers, identifying any weaknesses. You can then review those topic areas that require further attention.

The Bare Bones Revision Guides provide a unique combination of features:

Highly focused revision Written by an examiner Colour magazine format Exceptional value

crossAcademe

market research

employing people

understan

din

g m

arkets

cash fl ow forecast

setting budgets

sources of � nance

bre

akeve

n an

alysis

cash fl ow forecasting


consu

ltants an

d ad

visers

public limited com

panies

researchb

usiness plans

enterp

riseentrepreneur

business ideas

addin

g valu

e

private

limite

d

com

pan

ies

costs, revenues and profi ts

understan

din

g m

arkets

cash fl ow forecast

setting budgets

legal structure

fi nancesm

arket segmentation

fi xed variable and total cost

startups

tradem

ark

adding value

marke

t size

market grow

th

sole

traders

opportunity cost

price, total revenue and profi t

consu

ltants an

d ad

visers

patentrew

ards

Starti

ng a busin

ess F

inan

cial

pla

nnin

g

business ideas

cash fl ow forecast

costs, revenues and profi ts

business ideasenterprise


entrepreneurbreakeven analysis

business plans


market researchemploying people

sources of fi nance

breakeven analysis

cash � ow forecasting


market growthpublic limited companies

private limited companies

strengths and weaknessescostsrevenuesstartupsriskstrademark

conributionadding value


cash � ow forecast

setting budgets

legal structure

strengths and weaknessesmarket sharerisks busines

s idea

s

Starting a business

entrepreneur

lega

l stru

ctur

e

plan

cash

fl ow

fore

castingbusiness ideas raising fi nance

market research

breakeven analysis

patent

trademark

setting budgets


copyright

sole traders

budgets

analysisrisks

rewards

oppo

rtuni

ty c

ost

settin

g budgets

risks

reward

s

trademark

patent

budgets

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contributio

n

partn

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ips

cost

budgets

risk

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copyright

plan

cash

Planning & Financing a Business


Bare Bones REVISION GUIDE

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Managing a Business

decision making

increasin

g profi

t

impro

ving cash

flow

measu

ring p

rofi

t

motivation theory

prod

uct life cycle

pro

duct p

ortfo

lio an

alysis

operations managem

ent

workin

g with

suppliers

degree of competition

trainingem

pow

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selectionniche m

arketing

team w

orking

workforce roles

team

workin

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technologyoperational decisions

operatio

ns m

anag

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ent

mass m

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customer service

pricing tactics

pricin

gdegree of com

petition

return on capital

tech

nolo

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competitiveness

pricin

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mass m

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workforce roles

organisational structure

internal and external recruitment

operatio

ns m

anag

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selectionpricin

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Marketin

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peratio

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anag

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t Finan

ce

workforce roles

distribution channels


using budgetsrecruitment

operations management

adverse variances

recruitment process

marketing mix

recruitment process

workforce rolescustomer service

product life cycle

market conditions

measuring performance


marketing mixprofit pricing strategies

workforce effectiveness

unique selling pointsplacedistributors

job designplacedistributors

empowerment

working with suppliers

motivation theory

team working

promotional mix

measuring performanceusing budgetsprofit

People in business

team w

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increasin

g profit

profi

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job

desig

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empow

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mass m

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motivating em

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training

selection

measuring profit

operations managem

ent

recruitment

pricing tactics

finance

selectionplace

training

incr

easin

g pro

fit

using budgets

profit

selec

tion

technology

quality

training

plac

e

using budgets

recr

uitm

ent

cash

quality

team

cash

job design

cash

profit

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