BUSINESS STUDIES PLUS

2009-10-10T01:24:00.000-07:00

Sources of Finance - Mind Map

Mind Maps have been produced to introduce topics and give students an overview of key topics being studied. The maps can be viewed as a whole page or, for those who prefer a more linear approach, as a text version.

(click image for the full Map)

Sources of Finance

Business Growth

Internal

Generating Increasing Sales
Use of retained profit
'Organic growth'
Sale of Assets

External

Long Term

Ordinary Shares
Preference Shares
New share issues
Rights Issue
Bonus or Scrip Issue

Loans

Debentures
Bank loans (mortgage)
Merchant or Investment Banks
Government/EU

Grants

Short Term

Bank loans
Overdraft facilities
Trade credit
Factoring
Leasing

'Inorganic Growth'

Acquisitions

Merger
Takeover

Business Angels

Small sums (<100k)
Network of informal investors

Venture Capital

Larger sums (>500K)
Expertise
Longer term involvement
High growth businesses

CASH FLOW

2009-10-10T01:19:00.001-07:00

Cash Flow

Because the firm is constantly receiving cash (from sales, debtors and perhaps even from interest), and constantly using cash (paying bills, paying staff and so on) it needs to ensure that the two balance out. The consequences of a mismatch of the two should be obvious. Think of it in terms of your own bank account and you will see what I mean. More money going out than coming in quickly leads to bouncing cheques and 'persuasive letters' from the bank manager. The same will happen to a firm and it will run into cash flow problems.

A firm needs therefore to plan its cash flow carefully, and this should be in the form of a cash flow forecast. This will set out all incoming cash from any form and when it is coming in, and all outgoing cash and when it is going. A sample is shown below:-

	January	February	March	April	May	June
Balance b/f	100	100	75	(150)	........	........
INCOMING
Sales receipts - cash	500	600	700	........	........	........
Sales receipts - credit	275	325	350	........	........	........
TOTAL CASH	875	1025	1125	........	........	........

OUTGOING
Wages & salaries	300	350	400	........	........	........
Bills	150	275	375	........	........	........
Raw materials	200	225	250	........	........	........
Other expenses	125	100	250	........	........	........
TOTAL OUTGOING	775	950	1275	........	........	........

Balance c/f	100	75	(150)	........	........	........

As you can see - although the firm was selling very well in February and March, it nevertheless ran into cash shortages because of a high level of expenses. If it was able to foresee this by planning ahead with a cash flow forecast, they would be able to arrange for short-term finance to tide them over. They will get a far more sympathetic response from the bank if they go in well in advance than if they go in in a panic when they actually run out of cash.

MACRO-ECONOMIC ENVIRONMENT

2009-10-10T00:38:00.000-07:00

Economic factors are important to be considered by any organization, whether it is a new start-up or a well established firm. When the economy is bad, almost every business suffers; this in turn, can lead to job losses. When the economy is recovering, things get better for almost all firms.

The diagram below shows a typical cycle of an economy.

Today, the world is facing an economic downturn, which means there is a negative economic growth.

Current economic climate

Business thrives on confidence. Confident consumers are willing to dip into their savings for a holiday, or to borrow to buy a new carpet or car. Confident investors are willing to put more money into businesses in return for shares. And the companies themselves will spend to invest in their future: New factory buildings, new machinery and new computer systems, etc. All this spending can create a strong improvement in economics activities. However, when the economy is in a crisis (recession), business will face serious problems. Thus, economic climate is important. The following economic factors (see the diagram) can create an economy either of optimism or pessimism.

INFLATION AND THE ECONOMIC CLIMATE

2009-10-10T00:35:00.000-07:00

Inflation

Definition

It is the percentage of the annual rise in the average price level of goods and services. It reduces the purchasing power of money (decline in the real value of money).

For consumers: It increases the cost of living.

For businesses: Impact on businesses is mixed (there are some advantages and also disadvantages).

Causes of inflation

Demand-pull inflation
Cost push inflation
Monetary inflation

Demand-pull inflation: This occurs when the excessive demand in the market pulls up the prices. Businesses may find themselves unable to cope with the ever increasing demand. For this reason, they might increase their prices, and ultimately leads to inflation in the long run.

Cost Push Inflation: Cost-push inflation occurs when businesses respond to rising production costs, by raising prices in order to maintain their profit margins. There are many reasons why costs might rise: [1] expensive imports, [2] increase in the cost of raw materials, [3] increase in labour costs, [4] higher indirect taxes imposed by government (eg. Increase in excise duty and VAT).

Monetary inflation: This occurs due to the increase in the money supply. It causes inflation when the rate at which the increase in money supply is faster than the output of products. For example, excessive growth of money supply in UK may create inflation in UK economy.

Consequences of inflation

1. Inflation distorts prices between different time periods. Normally, people save some money, and there is a balance between savings and spending. Savings go to banks where they become loans for business investment. If there is inflation, you’re better off spending the money now before it loses its value, so consumption now rises at the expense of consumption later; savings are money you plan to spend later.

2. Instead of saving, consumers may start borrowing. £10 000 borrowed now will buy lots of things, and by the time you repay it in a few year’s time, the £10 000 is worth less, and is probably easier to repay if your salary has risen because of inflation. So consumers tend to borrow more and spend even more.

3. Interest rates rise. If a lender normally wants 5% to let someone else use the money for a while, and inflation is also 5%, then the lender will want 10%. This puts up business costs and makes borrowing less and therefore investment less; less investment means less growth and employment.

4. Inflation causes uncertainty which increases risk. Higher risk means businesses are less likely to invest, with the results mentioned in 3. For example, budgeting becomes difficult because of the uncertainty created by rising inflation of both prices and costs - and this may reduce planned capital investment spending.

5. Inflation re-distributes wealth and income. People with fixed incomes eg some pensioners see the real value of their income fall (they become worse off) and other people get pay rises to compensate for inflation (they become better off). Wealth moves from savers to borrowers eg house price inflation makes the owners of houses much better off, and the mortgages become easier and easier to repay.

6. Input prices (raw materials, wages and supplies) rise so business costs rise. Wages are often the largest business cost, and there could be a danger of a ‘wage-price’ spiral where rising costs leads to higher prices, workers ask for a pay rise in compensation, so costs rise again, so prices rise again, and so on.

7. ‘Shoe-leather’ costs. Because prices are always changing businesses and consumers spend a lot of time looking for the best price (walking up and down the high street) which is a cost and they may not find the best deal, which is another cost.

8. ‘Menu costs’ are the costs of constantly changing prices as in the literal example of reprinting the menu. But it’s not just the price labels on the goods, but the whole business system that has to be changed.

9. Wage negotiation. If there is inflation, workers will want pay rises. The actual time and cost of negotiating this, and making the necessary administrative changes can be quite high. Whilst managers are negotiating, they aren’t doing anything else.

10. Asset-price inflation. Houses, shares and other investments (even art & antiques!) often rise in price during inflation as investors look for a safe haven for their money. These prices then rise due to strong demand, which attracts further buying. So normal spending patterns are changed because of less spending on normal goods and services and more spending on assets. This switch reduces demand for normal businesses and creates an artificial ‘bubble’ in these other markets.

11. Trade. If the UK has higher inflation than competitor countries (which it isn’t now, but it has been for a lot of the last few decades) then UK prices gradually rise above imported prices. More imports are bought, so demand leaks out of the country and leaves UK businesses in a weak position. The same effect occurs with UK export businesses. The eventual effect may be a fall in the £ which puts prices back where they were, but leaves UK consumers worse off because they can buy fewer imports than before.

Competitiveness and Unemployment: Inflation is a possible cause of higher unemployment in the medium term if one country experiences a much higher rate of inflation than another, leading to a loss of international competitiveness and a subsequent worsening of their trade performance. If inflation in the UK is persistently above the major trading partners, British exporters may struggle to maintain their share in overseas markets and import penetration into the UK domestic market will grow.

UNEMPLOYMENT AND THE ECONOMIC CLIMATE

2009-10-10T00:30:00.000-07:00

Unemployment

Unemployment is created when the number of jobs (the demand for labour) falls in comparison to the number of people looking for work (the supply of labour). Therefore, there are just two things to consider: The demand for labour and the supply.

The demand for labour in Britain is mainly affected by two things:

The demand for goods in general and therefore the number of jobs available. If the economy is booming, firms need plenty of fulltime, part-time, and seasonal staff, so there are plenty of job around. In an economic downturn, jobs are far less plentiful.
The demand for jobs in Britain compared with overseas: When British companies moved their operation to other countries such as India and China, the unemployment level will increase. This means the demand for labour will decrease. eg. Outsourcing call centres, etc.

The supply of labour in Britain is affected by two things:

Demographic factors affecting the number of people of working age plus the number of EU migrants available within the workforce.
The willingness of employable people to look for work, which may be weighed down by benefits such as free rent for those out of work, but is boosted by rising minimum wage rates, which help to provide a better financial incentive to work.

In the long term, the above are key factors. In the short term, the main single factor is likely to be the number of jobs on offer. Firms squeeze hard by an economic downturn will stop recruiting and may start to look for redundancies, to cut back on the workforce. This could push unemployment up sharply. In the current global recession, the unemployment rate in Britain has been increased and therefore, the people’s lives are becoming severe.

An exchange rate appreciation tends to cause a slower rate of growth of real GDP (e.g. because of a fall in net exports). A reduction in demand and output may cause job losses as businesses seek to control costs. Some job losses are temporary – reflecting short term changes in export demand and import penetration. Others are permanent if domestic industries move out of some export markets or if imports take up a permanently higher share of the UK market. Some industries are more exposed than others to currency fluctuations – e.g. sectors where a high percentage of total output is exported and where demand is highly price sensitive (price elastic)

Changes in the growth of UK exports – movements in the exchange rate affect the competitiveness of UK export industries in global markets. A higher exchange rate makes it harder to sell overseas because of a rise in relative UK prices. If exports slowdown, then exporters may choose to cut their prices, reduce output and cut-back employment levels. A fall in export demand will reduce real national income relative to potential output – and thus might lead to a negative output gap. This puts downward pressure on inflation

When the exchange rate is high, there is pressure on businesses to control their costs of production in order to remain competitive – this may lead to downward pressure on wage inflation.

INTEREST RATE AND THE ECONOMIC CLIMATE

2009-10-10T00:27:00.000-07:00

Interest Rates

The Interest Rate is the price changed by a bank per year for lending money or for providing credit. Individual banks decide for themselves about the rate they will charge on their credit card or for the overdrafts they provide. But they are usually influenced by the interest rates that the bank of England charges the banks for borrowing money: the bank rate. This is set each month by a committee of the bank of England.

The Bank of England committee is asked to set interest rates at a level which should ensure that UK prices rise by around 2% a year. If the committee members decide that the economy is growing so strongly that prices may rise faster than 2%, it will increase interest rates. Then people will feel worried about borrowing more (because of the higher repayment cost) and may cut their spending. This should help discourage firms from increasing their prices.

For firms, the level of interest rates is very important because:

· It affects consumer demand, especially for goods bought on credit, such as houses and cars; the higher the rate of interest, the lower the sales that can be expected

· the interest charges affect the total operating costs (i.e. the higher the interest rate, the higher the costs of running an overdraft, the therefore the lower the profit)

· the higher the rate of interest, the less attractive it is for a firm to invest money into the future of the business; therefore there is a risk of falling demand for items such as lorries, computers and factory machinery.

If interest rates fall, the opposite effects occur, to the benefit of both companies and the economy as a whole.

Interest Rates

This Describes: 1. The cost of borrowing

2. The reward that depositors get from financial institutions

Do interest rates have a macro-economic impact?

Yes. This can be seen in the two different cases.

· When interest rates go high, investors at all sectors of production will be discouraged to borrow. Eventually, the supply of money in the economy will be less which may result to less economic growth, unemployment and less disposable income and discretionary income.

· When interest rates become lower, investors at all sectors of production will be encouraged to borrow. Eventually, the supply of money in the economy will be high leading to high economic growth, and more disposable income and discretionary income due to high employment.

Do interest rates have micro-economic impact?

Yes. In particular, small and weaker businesses would be vulnerable to any increase in interest rates.

This would effect on:

1. Finance: In general, small businesses find it difficult to raise finance. However, any increase in interest rates will make it more difficult for these businesses to finance their activities. Eg. buy a machinery, etc.

2. Stock: Businesses might find it better to reduce the level of stock, so that the money that was tied up in stock could be sued to finance short term requirements.

3. Cost: The cost of borrowings would be high leading to less profitability. On the other hand, the cost of the other factors of production will be high, eg. Keeping stock where demand is less.

4. Revenue: As a result of high interest rates, customers will be more attracted to savings than spending. They are also less likely to borrow money to spend and consequently, it may reduce sales for the business.

5. Competitiveness: In the domestic market, smaller and weaker firms would lose their competitiveness (in terms of price), as their costs are maximized. However, in the foreign market, both small and big businesses will be harmed, as prices in the international market tend to be lower. [ higher interest rates might cause an appreciation of the exchange rate à expensive exports and cheaper imports]

A useful link that can guide you in writing your business plan

2009-10-05T08:31:00.000-07:00

www.businesslink.gov.uk/bdotg/action/layer?topicId=1073869162&r.s=sl

Break-even

2009-08-30T14:43:00.000-07:00

Break-even is the output level where total costs equal total revenue.

A vital part of any business plan is to see what output level or sales level is necessary before you are going to break-even. Break-even does not specify a time that it will take to reach this level. This will depend on how quickly sales are generated. In some cases it can be many years before a firm would reach its break-even sales level. A bank or other investor will almost certainly want to see break-even information. To work out break-even we need to know various bits of information:

The price you are charging
The variable costs (direct costs) of each unit - these are the costs of raw materials, labour and so on that can be directly attributed to each unit.
The fixed costs (or indirect costs/overheads) - these are the costs that stay the same whatever the level of output and will be things like rent, marketing costs, admin costs and so on.

Once we have this information, we can work out the break-even level of output. Let's look at an example:

Price = £5
Variable costs = £3 per unit
Fixed costs = £1,000

From this information we can see that every time we sell one more unit we have an excess of income over variable costs of £2. We call this figure the contribution. However, this is NOT the same as profit, because we still have to pay the fixed costs of £1,000. We therefore need to work out how many we need to sell for the total contribution to be equal to the fixed costs. In this case, the contribution is £2 per unit and the fixed costs are £1,000, so if we can sell 500 units then we will have had enough contribution to pay the fixed costs. Any units we sell beyond that level will then make a profit of £2 each. So if we sell 501 units, our total profit will be £2. If we sell 502 units our total profit will be £4 and so on.

The break-even level of output can therefore be calculated from the following formula:

Break-even output =	Fixed costs
	Contribution (per unit)

However, we can also work out the break-even level of information by plotting the figures on a graph. To do this, we need to go through the following steps:

Stage 1

Plot the total cost line - remember this will be the sum of the fixed costs and variable costs. This means that it will start from part way up the y-axis because of the fixed costs.

Stage 2

Add the total revenue curve. This can be plotted by working out the total revenue at the maximum capacity of the firm, e.g. if they can produce 50,000 units of a good and they sell them at £28 each, then the TR line will go from the origin to a point given by 50,000 units and £1.4m.

The diagram should now look like this:

Stage 3

The point where the TR and TC lines cross is the break-even level of output. At this point the firm will break-even. Any level of output above this point they will make a profit, but any level of output below this point they will make a loss. We can see this from the diagram below:

Stage 4

We can also identify from the diagram the margin of safety of the firm. The margin of safety shows how far from break-even output the firm is currently producing. It shows, in other words, how much output could fall before the firm started making a loss. We can see the margin of safety on the diagram below:

On the diagram below, estimate the company's position if it produced 10,000 and 20,000 units respectively.

	£ ( 10,000 units)	£ (20,000 units)
Total Revenue	0.2m	0.4m
Total cost	0.42m	0.5m
Profit/ loss	0.22m (loss)	0.1m (loss)

The total revenue from selling 10,000 units would be £0.2m. The total cost of producing 10,000 units would however be £0.42m. The company would therefore be making a loss of £0.22m if it continued producing at this level. However, if it increased output and sales to 20,000 units, then the revenue would rise to £0.4m and the costs of producing 20,000 units would have risen (because of the variable costs) to £0.5m. The fixed costs of producing 10,000 units and 20,000 units are however the same so the revenue is rising at a faster rate than the costs. The loss at this level of sales therefore would be £0.1m. This figure is lower than the loss made at 10,000 units. If you follow through the logic here you can identify the level of profit or loss at different levels of sales and output.

This is all based on an assumption about the structure of the total revenue curve. Total revenue is price times the quantity sold (TR = P x Q). If the business decided to charge a different price, the total revenue curve would be a different shape. If the company decided to charge a lower price, the total revenue curve would be flatter. This would mean that the company needs to sell a greater volume before they will break-even. It does not mean that they will never sell enough, it merely means they have to sell more.

On the other hand, if they decided on setting price at a higher level, the TR curve would now be steeper. This would imply that the number of sales needed to break-even would be less. The decision on the price level will depend on a host of factors - the level of competition, the type of product and what market it is aimed at (for example, is the product aimed at groups A and B in the 'social class groupings' or at a mass market?) and the results of market research conducted by the company that may inform their decisions. Using break-even analysis therefore allows a business to be able to plan and be informed of the impact of its decisions.

Break-even analysis is therefore an example of a quantitative decision making technique. The decision on the actual price to charge will largely be a qualitative one albeit based on other forms of information such as the results of market research.

Banks lend more and charge more at the same time

2009-08-20T14:57:00.000-07:00

Commercial loans and overdrafts and other forms of credit for businesses are hugely important to sustain businesses fighting a recession or those in better shape and looking to expand. It is a truism that the UK economy will not engineer a durable recovery unless the international financial and economic backdrop improves. Increasing the availability of bank lending especially to small and medium-sized enterprises is another essential building block to an upturn in output and jobs.

In this sense the news that Barclays has lent £17 billion to UK households and business in the first half of 2009 - already outstripping the £11 billion target it set for the whole of 2009 - is welcome. But that figure hides the actual cost of servicing loans. Even if a business can maintain an overdraft facility or gain access to fresh credit, it is likely to be paying more for the privilege. The cost of debt can be as important as the supply.

Given that thousands upon thousands of smaller businesses use credit cards as a way of tiding them over from month to month (something the business studies textbooks and exam boards seem strangely reluctant to recognise despite overwhelming evidence), it will come as little comfort to entrepreneurs to be paying upwards of 40 times base rate (policy rate) for their loans.

UEFA: Clubs face financial ruin if they match City

2009-08-04T12:00:00.000-07:00

Premier League clubs risk financial ruin if they attempt to compete with the spending power of Manchester City, according to UEFA general secretary David Taylor.

Khaldoon Al Mubarak: The new City chairman.

City have embarked on a huge summer spending spree with the high-profile signings of Carlos Tevez, Roque Santa Cruz and Emmanuel Adebayor, backed by their mega-rich owners from Abu Dhabi.

But Taylor believes the Eastlands club, and Spanish giants Real Madrid, are setting a dangerous precedent.

"I would say in this financial climate, it is surprising, a little bit destabilising of the market," Taylor told the BBC.

"It is raising the ante in terms of the player costs, in terms of the general market place, which is not a thing that gives us a great deal of comfort in these difficult times.

"There is certainly disquiet in the corridors of power here (at UEFA)."

The demise of Leeds United, who were relegated from the Premier League in 2004 saddled with debts and now play in League One, is often used as an example of how a big club can hit the rocks and Taylor said their plight should be a warning.

"There are stories concerning some English clubs that are of significant concern," he said. "There are a number of English clubs where the value of the club itself has fallen significantly and they are effectively on the market.

"We've seen what has happened in recent years with a number of very high-profile clubs, Leeds United for example. They fell into serious financial difficulties by over-extending themselves.

"In this current economic environment, I would never say never to anything like that. Clearly we do not see that as imminent but the concern is that we have to establish a stronger financial basis on which clubs can compete."

Liverpool's parent company Kop Holdings, owned by Americans Tom Hicks and George Gillett, announced a loss of £42.6m last year mainly due to interest payments to service the debt taken out to buy the club.

They recently renegotiated the club's debt with the Royal Bank of Scotland, believed to be around £290m.

Manchester United's American owner Malcolm Glazer also borrowed heavily to complete a takoever of the English champions in 2005, sparking unrest among supporters.

Sample Question and a Model Answer.

2009-08-03T18:21:00.000-07:00

Imgaine your case study focuses on a new company in a breakfast cereal market.

Analyse why company A has decided to focus on segmentation so carefully.

Compare these two answers:

Answer 1
Company a have decided to segment their market so that they know who they are trying to target. This will make it easier for them to market their products and will lead to more profits. They may decide to segment their market according to income, age, gender or lifestyle so that they can earn more profit and be more successful.

Answer 2
Segmentation is the process of dividing up your market into groups of people sharing common characteristics eg. Age, gender or lifestyle. Company A operates in the highly competitive cereal market which already has a wide range of cereals for different segments. For example, the market is segmented by age or lifestyle. Coco Pops target children and Special K targets the health conscious. Company A may decide to focus on a segment which offers more potential, for example they may bring out an organic range specifically for the segment interested in how foods are produced. By doing this, they will better understand who their customers are and how to reach them with advertising. Thus may lead to higher sales as there are not so many organic cereals available at the moment and ultimately it may lead to more profit.

Company A may also develop a name for itself for organic cereals and may gain higher levels of customer loyalty, making it better able to cope with competition.

Note: Text in Red = Knowledge (Level 1); Blue = Application (level 2); Purple = Analysis (Level 3); Green = shows some extra bit of knowledge that you possess and insert into your answer.

What is the link between product differentiation and a USP?

2009-08-01T13:18:00.001-07:00

An important part of the marketing of the product is through product differentiation. This means making the product different from its competitors. Product differentiation can be achieved through…

• Distinctive design– e.g. Dyson; Apple iPod
• Branding - e.g. Nike, Reebok
• Performance - e.g. Mercedes, BMW

A key term to remember is USP, which is the acronym for Unique Selling Point.

A Unique Selling Point (sometimes called a Unique Sales Proposition) is a feature or benefit that separates (or differentiates) a product from its competitors. The concept of a USP is one of the basics of effective marketing and business that has stood the test of time.

The USP could be a lower price, a smaller version of the product, offering extra functions, or even simply producing a standard product in a range of colours or designs.

A business needs to look at its unique selling points compared to competitors. If it doesn’t have any, the business will probably struggle to make the product seem attractive to customers (the remaining option is usually to compete solely on price).

If a business finds that its customers are switching to competitors or buying purely on price, it should be asked whether the business has identified the USPs for its products and services. If it has, then the question is whether it is communicating USPs clearly to customers?

What is a brand name and what are the advantages of having a strong brand?

2009-08-01T13:16:00.000-07:00

A brand name is a name used to distinguish one product from its competitors.

It can apply to a single product, an entire product range, or even a company (e.g. Virgin, Ferrari, Bang and Olufsen).

A brand name is usually associated with a logo or other graphical representation of the brand in order to strengthen the brand image.

The main purpose of branding is to differentiate the products and services of one product or business from those of competitors.

The key advantages to having a strong brand include:

· Successful brand-building helps profitability by “adding values” that customers are prepared to pay for.

· Strong brands inspire customer loyalty leading to repeat sales and word-of mouth recommendation

· The brand owner can usually charge higher prices, especially if the brand is the market leader

· Better access to distribution - retailers, distributors and other sellers usually want to stock top selling brands. With limited shelf space it is more likely the top brands will be on the shelf than less well-known brands

What is meant by repeat business and why is it important?

2009-08-01T13:05:00.000-07:00

Getting a profitable customer to buy from a business for the first time is often difficult and expensive. The key to a successful business is to persuade that customer to buy again, and again. That is what is meant by repeat business.

However, many businesses focus on amassing new customers and making more sales from them. They will try anything to land a new customer, including making promises they cannot keep or offering more than they can afford. Even when tactics like these do work, the customer will usually leave for a different business when they see the true nature of who they are dealing with!

Repeat business is all about encouraging customers who buy for the first time to buy again and again!

A business invests a lot of effort and cash in trying to get a customer to purchase a product for the first time. This is known as product trial. Much advertising is aimed at encouraging customers to try a new product, or switch from an existing competitor.

After a new product has been tried once, its success can be measured in how quickly, how often, and in what quantity it is repurchased.

The problem with advertising is that it is very expensive. A business is unlikely to be successful and profitable if it has to keep advertising heavily in order to generate demand from new customers. It is much better if customers can be encouraged to become loyal to the product – even better, to recommend the product to their friends and family!

Achieving a high level of repeat purchase is good news for a business. So what is required?

Firstly, the product should be of the right quality. A sub-standard or low quality product is sure to disappoint first-time customers. They are unlikely to buy again or recommend the product to others.

Secondly, it is important to look at the methods that are available to a business to encourage repeat business. Here are some ideas that usually work:

· Regular communication - Regularly remind them of the business – send an email, a postcard or a catalogue periodically

· Treat repeat customers like they are special (they are!). Offer repeat or regular customers special offers, exclusive deals or other promotional incentives - Incentives for loyalty (e.g. promotional discounts)

· Pick up the phone, or jump in the car, and contact them. A visit or phone call can generate new sales and help a business obtain useful information on customer needs

· Make ordering and delivery as easy and efficient as possible

· Research into customer needs and wants (e.g. through customer surveys)

What is meant by having a “customer focus”?

2009-08-01T13:04:00.000-07:00

Quite simply, a business that has a “customer focus” is one which takes the time and trouble to understand and address customer needs.

A customer is anyone who buys a product – either a good or a service – from a business. A customer will be satisfied with his/her purchase if the product meets the customer’s needs. So it is essential that a business has a good understanding of what customers want and need from a product.

If customer needs are met, then the customer is generally satisfied.

The following ideas are usually considered to be fundamental in achieving customer satisfaction:

• The product or service must deliver what is promised – i.e. it must be of good quality
• Sales and promotional activities need to create a positive experience for the customer. For example, the attitudes of employees who make contact with customers should be positive and professional.
• After-sales service should also be positive and appropriate (e.g. user training, help lines, servicing). Customers often need reassurance after they have bought something that they have made the right choice, or help in using a product properly.

Customer expectations of good customer service also play a part in customer satisfaction. These expectations typically include factors such as:

• Safety and security – the product is safe to use!
• Clear and accurate information
• Legal rights to be upheld
• Complaints, enquiries and suggestions are dealt with fairly and promptly
• Special needs catered for (e.g. disability access)

How to answer a question? = For UNIT 1 =

2009-07-31T05:09:00.000-07:00

Demonstrate knowledge and understanding of the specified content. – 30%
Apply knowledge and understanding of the specified content to problems and issues arising from both familiar and unfamiliar situations. – 30%
Analyse problems, issues and situations. – 20%
Evaluate and differentiate between and assess appropriateness of fact and opinion, and judge information from a variety of sources. – 20%

Unit Grade	A	B	C	D	E
Max. uniform mark = 100	80	70	60	50	40

Some Important Terms

2009-07-27T11:45:00.000-07:00

Innovation

This means the commercial exploitation of an invention (i.e. altering an invention, so that it appeals to consumers and meets their needs).

Market orientation

This is a strategy that involves researching consumers' needs, and then developing new products and processes based around these needs. The main alternative is production orientation, where the business develops products based on its production capability and ignores consumers' needs.

Market penetration

This is a pricing strategy for a new product. The product is launched onto the market at a low price in order to build up a strong customer following. This low price aims to steal market share from existing competitors and it deters new competitors from entering the industry.

Market research

This is the process of gathering data on the habits, lifestyle and attitudes of actual and potential customers, with a view to developing products to meet their needs.

Market segmentation

This involves breaking the market down using various criteria, in order to identify distinct groups of customers. The main ways in which a market can be segmented are :

Demographically (such as occupation or age)
Psychographically (by peoples' attitudes and tastes)
Geographically (by region)

Market share

This measures the percentage of all the sales within a particular market that are held by one product or by one company.

Market size

This is the total sales of all the businesses in a particular industry.

Marketing mix

This is often known as "The 4 Ps" (product, price, promotion and place) and it is the term given to the main variables with which a firm carries out its marketing strategy and meets customers' needs.

Marketing model

This is a framework for making marketing decisions in a scientific manner. It is derived from F W Taylor's method of decision-making. The model has five stages.

Stage 1 - Set the marketing objective
Stage 2 - Gather the data that will be needed to help make the decision
Stage 3 - Form hypotheses
Stage 4 - Test the hypotheses
Stage 5 - Control and review the whole process

Marketing plan

This outlines the marketing objectives and strategy of a business. The plan is normally developed in three stages :

carrying out a marketing audit
setting clear objectives for the next year
developing a strategy for achieving the objectives

Marketing strategy

This is a medium- to long-term plan for meeting marketing objectives. A marketing strategy is implemented through the marketing mix (product, price, promotion and place).

Niche marketing

This is a business strategy that involves identifying consumers' needs and providing products to meet these needs in small, lucrative market segments. It is the opposite strategy to mass marketing.

Primary data

This is first-hand information that is specifically related to a firm's needs.

Primary research

This involves gathering first-hand data that is specifically concerned with a firm's products, customers or markets. It is gathered through questionnaires, observation or experimentation (e.g. test markets).

Product life cycle

This theory states that all products follow a number of stages during their commercialisation (introduction, growth, maturity, saturation and decline). Each product will pass through these stages at different speeds.

Product portfolio

This refers to the range of products produced by a business. This portfolio should range over a variety of markets and a variety of stages in the product life cycle. One way of analysing the product portfolio of a business is through the Boston Matrix.

Qualitative research

This is detailed research into the motivations behind consumers' attitudes and behaviour. It is carried out through interviews and discussion groups.

Quantitative research

This means carrying out research into consumers' buying habits, trying to investigate such issues as a product's consumer profile, likely levels of sale at different price levels, and predicted sales of new products.

Quota sample

This involves segmenting the population and interviewing a given number of people in each segment, according to their demographic characteristics

Random sample

This involves giving every person in the population an equal chance of being interviewed to find out their tastes, shopping habits, etc.

Retail prices index (RPI)

This shows changes in the price of the average person's shopping basket. The RPI is the main measurement of inflation in the UK and is calculated through a weighted average of each month's price changes.

Sample

This is a group of people who are chosen to take part in a market research campaign. Their views and opinions are assumed to be representative of the population as a whole.

Secondary data

This is market research information which is collected from second-hand sources (e.g. reference books, company reports, or government statistics).

Stratified sample

This is a method of sampling that interviews people from a specific subgroup of the population, rather than from the population as a whole. This method of sampling would be chosen buy a business if the buyers of its products fell into a certain age-group or geographic area, rather than being spread across the whole population.

Test market

This is the launch of a new product within a small geographic area (rather than nationally), in order to measure its potential sales and profitability. This reduces the risk and the costs associated with a national failure.

Value added

This is the difference between the cost of the raw materials / inputs and the price that customers are prepared to pay for the final product (i.e. value added = selling price - bought-in goods and services).

An important quote

2009-07-02T16:32:00.000-07:00

In addition to self-awareness, imagination and conscience, it is the fourth human endowment-independent will-that really makes effective self-management possible. It is the ability to make decisions and choices and to act in accordance with them. It is the ability to act rather than to be acted upon, to proactively carry out the program we have developed through the other three endowments. Empowerment comes from learning how to use this great endowment in the decisions we make every day.

*** Stephen Covey Author & Consultant ***

LEADERSHIP

2009-06-25T16:39:00.000-07:00

AUTOCRATIC LEADERSHIP

Strengths:

Can increase efficiency -"tighten up" operations.

	Since there are no discussions, it will save valuable time.
	Quick results, especially in emergency situations.
	Chain of command and division of work (who is supposed to do what) are clear, understood by all.

Works well with people who have a low tolerance for ambiguity, feel insecure with freedom and even minor decisions and need full direction.

Weakness:

	The efficiency of one-way communication (orders) is often only apparent as, without feedback, many orders are misunderstood and miss their goal.
	An autocrat (leader) must be an expert on every job under his control since he receives little or no advice or information from his people.
	People usually feel excluded and unimportant due to the leader's autocratic rules. They may have low morale and productivity, and sometimes even go for work slowdowns or stoppage and strikes.
	May result in poor or no development of people's potential talent.

DEMOCRATIC LEADERSHIP

Strengths:

	When people have a genuine voice and part in the making of a decision, they tend to view it as their own, support it and try hard to make it work.
	Wide-open, two-way communication and the free-of people to voice their ideas, information and knowledge of specific aspects of jobsprovide a leader valuable ideas and advice.
	When people have a genuine share in decisions and thereby share in the burden and responsibility for decisions, they tend usually to:

(a) Feel important, respected and recognized as valuable (a deep ego satisfaction)/and

(b) Develop rapidly their full potential of effort, talent, accomplishment and value.

Most people work harder, more efficiently, more enthusiastically and at a high level of motivation when they are given genuine responsibility, freedom to act and contribute to their work and goals. People's deep personal satisfaction in a participative climate results in maximum human contribution to the accomplishment of organizational goals.

Weakness:

	People participation in decisions can consume great amounts of time (in meetings, discussions/waiting for the views of all, telephone calls, etc.) causing inefficiency, delay or inability to decide and act within critical time limits (especially in emergency situations).

	The consultative style invites people to provide their views and therefore, not all the views are considered in decision making. Therefore, at least some of the employees' views may be rejected. This will reduce the motivation of such employees.
	This style, unless carefully handled, can lead to collapse of managerial control by the manager who is ultimately and solely accountable for results.

LAIZZES FAIRE (FREE REIN) LEADERSHIP

Strengths:

This style, when it works, enables a manager to handle the maximum number of projects, delegated almost completely to others and thus using up very little of his own managerial time -but he is always ultimately accountable for each project.

Man/workers, especially highly educated, technical and professional ones (doctors, engineers, etc.) thrive and can contribute their best work only if granted wide freedom and responsibility.

A free rein leader can handle a larger span of control (more people directly reporting to him) than is possible with any other leadership style, the very maximum utilization of people and resources and "multiplication" or "extension" of himself as a manager of many people, projects and results.

Weakness:

By the very nature of free rein leadership, little or no control is exercised over subordinates and thus the risk of errors, even catastrophic ones, is greater than with any other leadership style; unless the leader knows for sure that his people are completely competent and dependable, and indeed it turns out that they are, his delegations of responsibility for projects and great freedom can end with deadlines missed or reached but with a series of disasters regarding specifications of projects, budget overruns, safety or legal violations etc.; in short, a leadership style with enormous potential for vast quantities of work produced by a single manager -but with enormous risk as well.

The free rein leader can easily misjudge people and delegate to them projects and give them freedom which may be beyond their own knowledge and personal confidence. Therefore, this may result in failure in meeting targets and achieving goals.Finally, this can affect the morale of employees negatively.

Source: Adapted from http://www.apparelwarehousing.com/Leadership.htm

Please read these sources. It may be useful for your understanding.

http://www.leadership-expert.co.uk/leadership-styles/

What is the best leadership style?

- Each style of management can work well in different situations. It will change according to the particular situation and the people involved.

Autocratic style might work well during crisis because employees often look for a strong leader to tell them what to do. For example: Sales have unexpectedly fallen by 50%, causing uncertainty within the organization. This requires management to quickly take control and put a plan into action.

Democratic style might be more appropriate during a stable situation where employees are trained and able to do their work successfully.

Factors affecting leadership style

1. Personality

These are the personal characteristics of a leader. The personality of the leader may be affected by the heredity, culture, education, parents, culture, etc.

2. Skills and abilities of the manager and his workforce

Confident manager who knows her job well but is faced with an unusual difficult problem may ask ideas on what to do next from staff if they are trained well and are capable – democratic leadership style. On the other hand, when faced with a routine problem, he may just tell the employees what to do because there would be no need to discuss with the employees.

(Skills – acquired or learned talents; Abilities are natural talents – eg. Intelligence)

3. Time constraint

When there is enough time to talk to employees and obtain their views and suggestions for a problem/task/decision, the leader may adopt (use) democratic leadership style. However, if there is no enough time and the decision is required to be taken quickly, then he may adopt an autocratic style of leadership.

4. Organizational Culture

Different organizations have different organizational cultures. For example, organizations that have employee involvement, participation, and empowerment as their shared values will demand democratic leadership style.

Note: Organisational culture = the shared values, norms, and beliefs that guides the behaviours of employees.

5. Rate of change

The rapid changes in external environment require quicker decisions to be made by the leaders. In those situations where a decision has to be made faster, an autocratic style of leadership may be most appropriate.

6. Risk

The degree of risk involved in a decision will affect the leadership style. If a decision has to be made urgently and involves high degree of risk, the manager is likely to be quiet autocratic.

7. Nature of the tasks

A manager is more likely to be democratic in problems or tasks that are complex. The opinions or views of employees and their involvement in such complex problems are important. However, a manager is likely to be autocratic in easy and simple tasks/decisions because there may be no need for discussions.