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  1. 1. Unit 1Developing newbusiness ideas 1
  2. 2. Section 1: Characteristics of successful entrepreneurs Characteristics of entrepreneurs What motivates entrepreneurs? Leadership stylesSection 2: Identifying a business opportunity What makes a market? What should firms supply? Identifying what consumers want or needSection 3: Evaluating a business opportunity Researching demand for the business idea Is there a market for the business idea? Positioning the business idea Product trial Opportunity costs (developing one business idea as opposed to another)Section 4: Economic considerations Current economic climateSection 5: Financing the new business idea Sources of financeSection 6: Measuring the potential success of a business idea Estimation of sales levels, costs and profits Break-even revenue level Measurement of profitSection 7: Putting a business idea into practice Creation of a business plan2|Page
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  5. 5. Resourceshttp://www.s-cool.co.uk/http://www.businessstudiesonline.co.uk/http://www.tutor2u.net/http://www.thetimes100.co.uk/http:// www.bized.co.uk5|Page
  6. 6. Section 1 see if their business is in a strong enough position to fill this gap. Characteristics of In order to make a success of the new entrepreneurs business venture, the entrepreneurIdentifying an Opportunity must be hardworking, ambitious, firm, decisive, organised, a good negotiatorIt is vital for the success of a business and must be able to recognise anthat it manages to identify an opportunity when it arises.unsatisfied consumer need in a marketand then produce a product, or provide Keywords: Initiative, creative,a service, which meets the consumers resilient, risk-taker, hard-worker, self-needs. The new product / service can confident.be protected against competition bythe use of copyrights and patents.These protect the owner / inventor Find out what thesefrom having their products, ideas, etc. words mean.copied and reproduced by other Watch the dragon´speople without their permission. den videos.Some of the most common reasons forstarting up a new business include theneed for independence; to achieveyour personal ambitions; being boredwith your current job; links with yourhobbies and interests; redundancyfrom your previous job.Many businesses which have startedin the UK over the past 25 years havefailed within the first 3 years of trading.To reduce the probability of failure, it isvital that businesses carry out marketresearch in order to establish if aprofitable gap exists in a market and to 6
  7. 7. Motives for being an Beientrepreneur ng able to make aKeywords: Profit motives: survive, differencesales maximization, profit by offeringmaximisation a service to theNon-profit motives: being your own community such as a charity shopboss, working from home, helping or hospice.others (ethical) A new business needs its own name and a product. The challenge is to make goods and services that satisfy customers, are competitive and sell at a price that more than covers costs. (Risk) Problems of Start-upsWhat are the benefits of being ethical?– good publicity, additional sales, Most new businesses will face ahelping others. number of problems when they are starting up and if these problems areWhy start a business? (Motives) not tackled immediately, then they may lead to the insolvency and failure ofThe skill involved in wanting to start the new venture. Below are listedand run a business is called some of the major problems faced by aenterprise. The individual who sets up new company:their own business is called anentrepreneur.There are several reasons whyentrepreneurs are willing to take acalculated risk and set up a business.Possible motives include: Making a profit. A business does this by selling items at a price that more than covers the costs of Raising finance and meeting the production. Owners keep the profit repayments as a reward for risk-taking and Raising finance and meeting the enterprise. repayments is often cited as the major The satisfaction that comes from reason for the failure of many new setting up a successful business business ventures. It can often be and being independent.7|Page
  8. 8. difficult for a budding entrepreneur to cash flow problemspersuade banks and other financial that the business isinstitutions to lend money to a new facing.business, and often they will only lendthe money at a high rate of interest. Paperwork and legal requirementsThese repayments can cripple thebusiness and eventually lead to its All businesses face a variety ofinsolvency. paperwork and legal requirements, and if any of these are overlooked orAs well as the repayments, the bank completed inaccurately, then this couldwill insist that some security (or lead to the failure of a new business.collateral) is provided by the business, Taxation and insurance payments areso that if the business defaults on the vital for the smooth running andloan repayments, then the bank will survival of new businesses. Anytake ownership of an asset of the oversight on these payments couldbusiness which will cover the amount land the entrepreneur with a large taxof the outstanding loan. bill or, perhaps worse, property and stock which will not be insured againstHaving a positive cash flow fire, theft, etc.Leading on from this previous point, Enticing consumers to try the newhaving a positive cash flow is vital for productthe survival of the business. Liquidity isthe financial term given to express the Enticing consumers to try the newability of a business to raise cash at product / service can also be a majorshort notice. Any new business must problem for any new business,have sufficient cash available to meet especially if there are already aits short-term needs (such as paying handful of established businessesemployees, paying suppliers, rent, which dominate the market. Ensuringutility bills, etc.). that consumers try your product and then buy it again at a later dateMany businesses have a lot of cash (consumer loyalty) can often only betied up in stocks, which are often done through extensive (and costly)difficult to sell and therefore the advertising and promotionalbusiness may find it difficult to raise campaigns.cash quickly. Further to this, if thebusiness gives its customers credit(i.e. buy now, but pay us at a laterdate) then this will simply add to any8|Page
  9. 9. it is not very common in todays business world. Leadership DemocraticLeadership is the process of This involves managersinfluencing people so that they will and leaders taking intoperform a variety of tasks in an account the views of the workforceeffective manner. It is, therefore, before implementing any new system.crucial to have a strong leader who This can lead to increased levels ofcan inspire and motivate the morale and motivation amongst theemployees. workforce, but it can also result in farA leader is different to a manager, more time being taken to achieve thesince a manager is often appointed to results since many people are involveda position of power, whereas a leader in discussing the decision.may often emerge as the best to copein a given situation (i.e. an employee Laissez-fairewho is very competent at computing This is wheremay well be viewed as a leader, even employees are setthough he may be towards the bottom objectives, and thenof the organisational hierarchy). they have to decide howThere are a number of styles of best to achieve them using theleadership: available resources. This method of leadership can result in high levels ofAutocratic enthusiasm for the task in-hand, but it can at times rely too much on the skills This is often referred to of the workforce. as an authoritarian leadership style, and it basically means that the people at the top of an organisation make all thedecisions and delegate very littleresponsibility down to their Paternalisticsubordinates. This is fairly autocratic in its approachCommunication is top-down, with no to dealing with employees, althoughopportunity for feedback to the leader. their social and welfare needs areIt can cause much resentment and taken into account when a decision isfrustration amongst the workforce and made that will affect them. The leader is likely to consult the workforce before9|Page
  10. 10. implementing any decision, but he is feedback.unlikely to listen to much of the Be well informed and knowledgeable about matters What makes a good leader or relating to the business manager? Possess an air of authority For many it is someone who Managers deal with their employees in can inspire and get the most different ways. Some are strict with from their staff. their staff and like to be in complete Be able to think creatively to control, whilst others are more relaxed provide a vision for the and allow workers the freedom to run company and solve problems their own working lives (just like the Be calm under pressure and different approaches you may see in make clear decisions teachers!). Whatever approach is Possess excellent two-way predominately used it will be vital to communication skills the success of the business. “An Have the desire to achieve organisation is only as good as the great things person running it”. Summary of management styles Description Advantages DisadvantagesAutocratic Senior managers Quick decision making No two-way take all the important communication so can be decisions with no Effective when de-motivating involvement from employing many low workers skilled workers Creates “them and us” attitude between managers and workersPaternalisticManagers make More two-way Slows down decision decisions in best communication so making interests of workers motivating after consultation Still quite a dictatorial or Workers feel their social autocratic style of needs are being met managementDemocratic Workers allowed to Authority is delegated to Mistakes or errors can be make own decisions. workers which is made if workers are not motivating skilled or experienced Some businesses enough run on the basis of Useful when complex majority decisions decisions are required that need specialist skills10 | P a g e
  11. 11. McGregorExamined how managers´ attitudes affect how workers behave. Heidentified 2 extreme types of managers.TASK: Find out about McGregor´s theory1.1.1 Characteristics of Entrepreneurs: Text pp questions 1-5 may 2009 q1 Self-confident, creative, resilient, risk-taker, may 2010 q1 initiative hard-worker.1.1.2 What motivates Entrepreneurs? 1-5 Jan 2009 q2 Sample paper q9 Profit & non-profit motives May 2010 q91.1.3 Leadership Styles: 244-247 Jan 2009 q8 Effective leader, May 2010 q2 styles, factors affecting, theory x and y11 | P a g e
  12. 12. Past paper questions12 | P a g e
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  14. 14. Section 2: Identifying a demanded than business opportunity at higher prices, ceteris paribus.What is a market? Basically, whenA shop is an example of a market the price is high demand is low and vice versa. Ceteris paribus means allBusinesses sell to customers in other things being equal. It is verymarkets. A market is any place where important that you state this conditionbuyers and sellers meet to trade when using demand curves. I willproducts - it could be a high street explain why under "determinants ofshop or a web site. Any business in a demand". First, lets have a look at themarketplace is likely to be in normal downward-sloping demandcompetition with other firms offering curve:similar products. Successful productsare the ones which meet customer In the diagram above, the demand forneeds better than rival offerings. CDs is fairly low at the relatively high price of fifteen pounds, but at theMarkets are dynamic. This means that bargain price of five pounds demand isthey are always changing. A business much higher.must be aware of market trends andevolving customer requirementscaused by new fashions or changingeconomic conditions.The theory of demandAt higher prices, a lower quantitywill be demanded than at lowerprices, ceteris paribus. At lowerprices, a higher quantity will be 14
  15. 15. The determinants (factors) of CD prices are likely to rise in the neardemand future, perhaps due to the lack of competition in the retail market, so you It is fairly obvious so far may increase your demand in the that the price of a good current time period. is a pretty strong determinant of its Advertising. Although many of you demand, but there are probably doubt the effectiveness ofmany other things that will affect some of the appalling adverts on thedemand too. TV, one assumes that these companies would not spend fortunesReal income. If ones real income rose on these adverts if they did not expect(real means allowing for inflation), one to see a significant rise in demand forshould be able to afford more CDs. the product in question (Virgin and Our Price are always trying to sell you CDsThe price of other goods. If the price via the TV.)of CD players rose then one wouldexpect demand for CD players to fall, Population. Quite obviously, aand so would the demand for CDs. significant rise in the number of peopleThese goods are complements. If the in a given area or country will affectprices of rock concerts rose then one the demand for a whole host of goodswould expect the demand for these and services. Note that a change inconcerts to fall. Perhaps those who the structure of the population (wedecided against the concert might buy have an ageing population) willa CD instead. These goods increase the demand for some goodsare substitutes. but reduce the demand for others.Tastes and preferences. A slightly Interest rates and creditobscure but very important conditions. If interest rates aredeterminant. As you get older, you relatively low then it is cheaper tomay lose interest in the repetitive borrow money that can then be spent.music currently in the charts and try This is not so applicable to CDs, butsome original sounds from the 60s, will certainly affect the demand for big70s or 80s. Changing preferences will ticket items such as cars and majoraffect your demand for a product electrical goods. In boom time (like theregardless of its price. late 80s) it is often easier to obtain credit regardless of the rate of interest.Expectations of future prices. If youthink that the price for CDs is likely to The normal downward-sloping demandfall in the near future, perhaps curve shows the relationship betweenbecause of reduced production costs the price of the good and itsor competition from the US, you may demand, all other things beingdelay some purchases which will equal. Those all other things are thereduce demand in the current time list above: incomes, prices of otherperiod. Alternatively, you may feel that goods, etc. If you do not make this15 | P a g e
  16. 16. assumption, then you could have a versa. Again, in is important to assumesituation when the price of CDs falls, that all other things remain constant.but at the same time ones income falls Any change in one of the otherby such a large amount that one determinants of supply will cause theactually demands fewer CDs. In other curve to shiftwords, one does not want toconfuse shifts in the demand While it is fairly obvious why thecurve and movements along a demand curve is downward sloping, itdemand curve. is not so clear why the supply curve should be upward sloping. Basically, The theory of supply the producer will make higher profits as the price per unit sold increases. Imagine that a brewer produced a lager and a bitter. Assume, not unreasonably, that the costs of production are the same per pint produced, whether it is a pint of lager or a pint of bitter. If the price of lager then rose relative to the price of bitter, it would seem sensible for the brewer to transfer resources from making bitter towards the production of lager, thereby increasing the supply of lager as its price rises.Just like with demand, where it onlybecame effective if it was backed upwith the ability to pay, supply isdefined as the willingness and ability ofproducers to supply goods andservices on to a market at a givenprice in a given period of time. Withdemand, the downward-sloping curvereflected an inverse relationshipbetween price and quantity demanded.The opposite is true of supply. Intheory, at higher prices a largerquantity will generally be suppliedthan at lower prices, ceterisparibus, and at lower prices asmaller quantity will generally besupplied than at higher prices,ceteris paribus. So this time we havehigher supply at higher prices and vice16 | P a g e
  17. 17. The determinants (factors) of actually pays the tax. Granted, we endsupply up paying the tax indirectly when the price of petrol goes up, but the actualAs with the demand curve, there are tax bill goes to the firm. This again,many things that affect supply as well therefore, represents an increase inas the price of the good in question. the cost to the firm and the supplyNotice how similar many of these curve will shift to the left. The oppositefactors are in comparison to the factors is true for subsidies as they arethat affect demand. Notice also that handouts by the government to firms.nearly all of these factors affect the Now the firm can make more units offirms costs. Given that the firms output at any given price, so thesupply curve is its marginal cost curve supply curve shifts to the right.(see the costs and revenues topic)then it is of no surprise that a cost Labour productivity.changing measure will shift the supplycurve. This is defined as the output per worker (or per man-hour). If labourPrices of other factors of productivity rises, then output perproduction. An increase in the price worker rises. If you assume that theof, say, hops, will increase the costs of workers have not been given a paya brewing firm and so for any given rise then the firms unit costs mustprice the firm will not be able to brew have fallen. Again, this will lead to aas much beer. Hence, the firms supply shift to the right of the supply curve.curve will shift to the left. The samewould be true for changes in wage Price expectations.costs or fuel costs. Just as consumers delay purchases ifTechnology. they think the price will fall in the future, firms will delay supply in theyThe supply curve think prices will rise in the future. Itsdrawn above the same point but the other wayassumes a round.constant state of technology. But aswe know, there can be improvements Entry and exit of firms to and fromin technology that tend to reduce firms an industry.unit costs. These reduced costs mean If new entrants are attracted into anthat more can be produced at a given industry, perhaps because of highprice, so the supply curve would shift profit levels (much more on this in theto the right. topic Market structure), then theIndirect taxes and subsidies. supply in that industry will rise at all price levels and the supply curve will When the chancellor shift to the right. If firms leave the announces an industry then the supply curve will shift increase in petrol to the left. tax, it is the firm who17 | P a g e
  18. 18. Case Study director of the AmericaUS alcohol retailers find law changes n Beverahard to swallow ge LicenseJon Genderson is gearing up for a big es, which represents 20,000 smallincrease in internet sales retailers across 34 states.The US consumes more bottles ofwine than any other nation in the Prices of alcohol are below saleworld. But almost 80 years after the cost all over England, sometimesend of Prohibition, buying a drink less than a bottle of water. Andcan still be tricky. theres terrible binge drinking. We look at that and say: WhatsIts illegal, for instance, to buy vodka in different about our system?”Delaware to take to a party in Craig WolfWine and SpiritsPennsylvania. And retailers in Wholesalers of AmericaMaryland are not allowed to shipalcohol to anybody living in another Hes particularly concerned about newstate. laws in the state of Washington which take effect in June. State controlled off-licences are closing, and grocery stores and supermarkets will be allowed to sell alcohol instead. But the biggest threat to small businesses comes from a measure which says an alcohol retailer must operate from stores no smaller thanThats because of the 4,000 or so 10,000 sq feet.different laws that govern the alcoholindustry and give individual statesunprecedented rights to regulate sales "Whats happened in Washingtonand consumption within their borders. state is scary," says Chuck Ferrar, owner of Bay Ridge Wine andThe protections have often favoured Spirits in Annapolis, Maryland.small businesses, but many now feartheyre under threat from cross-border "[The alcohol industry] is the lastwine sales on the internet, and the end bastion of small businesses, 50% ofof state monopolies that could lead to our businesses are owned by Asianderegulation. minorities because its one of the few remaining industries whereScary somebody can start a small business"The worst-case scenario is that you and see it grow and thrive.have a reduction of competition,removal of small businesses from the "But Washington will drive the smallmarketplace or potentially not having business under. And I think it willsmall businesses in the marketplace at eventually happen here, that alcoholall," says John Bodnovich, executive18 | P a g e
  19. 19. will be sold in groceries and But Jon Genderson, managing directorsupermarkets." of Schneiders of Capitol Hill, a wine and liquor store in Washington DC,Public demand believes wholesalers are opposedAnother big change affecting the because theyre worried aboutindustry is the internet. In 2005 the increased competition in their tier ofSupreme Court ruled that wineries the market.could ship direct to their customersanywhere in the country, regardless of "The wholesalers are worried aboutindividual state legislation. That left these things, but its change thatmany states scrambling to change benefits the consumer and thats why Itheir laws. think its going to happen," he says.Chuck Ferrar says small retailers will "Its the natural evolution of thebe driven out of alcohol sales in business. It just makes sense andWashington when things make sense and the current laws dont make sense I think"Its coming because the consumer that eventually theyll be changed. Iwants it," says Joe Conti, chief think were smart enough to makeexecutive of the Pennsylvania those changes," he says.Liquor Control Board. "Consumerswill be able to buy from a winery in He says the internet still represents aCalifornia and have it sent to their small percentage of sales, but hishome in Pennsylvania - that will be business is gearing up for thehappening within months. Thats a anticipated change.good thing for the consumer and we "Were in the process of revamping ourembrace that type of competition." website for a third time, modernising and making it more interactive. ImBut the Supreme Court ruling did hoping it will be easier and easier, andnot include small retailers, and the that there will be more and more statesWine and Spirits Wholesalers of well be allowed to ship to," he says.America (WSWA) remains opposedto direct shipping. Checks and balances Moves to deregulate alcohol in the US"Its a black market because you go to the heart of debates about itsdont have the regulatory power to role in society and the concerns thatfind out who is ordering from led to prohibition. Mr Wolf says manywhere," says WSWA presidentCraig Wolf."Once you open the door to directshipping and you dont go through alicensed wholesaler, you dont knowwhether taxes are being paid, whetherminors are getting alcohol, and youdont know if its an illegal source," hesays. Americans have grandparents who19 | P a g e
  20. 20. remember what the country was like big retailers controlling thebefore controls were established. suppliers.Californian wineries will soon be able "Prices of alcohol are below saleto ship direct to homes in cost all over England, sometimesPennsylvania less than a bottle of water. And"There is a fear that if you tinker theres terrible binge drinking. Weand mess with it, you dont know look at that and say whats differentwhat youre going to end up with - about our system?and it could be very bad," he says. "Ours is a much more regulated"We dont want to cast aspersions system. There are many moreon England - but if you look very checks and balances, not onlycarefully at what happened, there between market players but alsowas deregulation. There are now from government on the market24/7 sales there, theres vertical players."integration there with big box storescontrolling the retail operation - or1.2.1 What makes a market? 13 may 2009 q1 Buyers & sellers1.2.2 What should firms supply? 14-15 Jan 2009 q1 Supply, factors of supply1.2.3 Identifying what consumers want or need: 13-17 May 2009 q3/q4 Demand, factors of demand, Jan 2009 9d market-orientation. Sample paper q820 | P a g e
  21. 21. Past paper questions21 | P a g e
  22. 22. Section 3: Evaluating a business opportunityMarket Research • Technologies that may threaten existing productsMarket research involves gathering • New product developmentand analysing data from themarketplace in order to provide goods Information about Pricing in the Marketand services that meet their needs. • Estimates and testing of price elasticity A wide • Trends in pricing over recent years variety of • Analysis of revenues, margins and informatio profits n used to • Customer perceptions of “just or fair” support pricing marketing • Competitor pricing strategies decisions can be Information about Promotion in the obtained Market from market • Effectiveness of advertising research. • Effectiveness of sales force (personal A selection selling) of such • Extent and effectiveness of salesuses are summarised below: promotional activities • Competitor promotional strategiesInformation about the size andcompetitive structure of the market Information about Distribution• Analysis of the market potential forexisting products (e.g. market size,growth, changing sales trends)• Forecasting future demand forexisting products• Assessing the potential for newproducts• Study of market trends• Analysis of competitor behaviour andperformance• Analysis of market sharesInformation about Products• Likely customer acceptance (or in the Marketrejection) of new products• Comparison of existing products in • Use and effectiveness of distributionthe market (e.g. price, features, costs, channelsdistribution) • Opportunities to sell direct• Forecasting new uses for existingproducts • Cost of transporting and 22
  23. 23. warehousing products measuring the effect of each of these• Level and quality of after-sales on consumers. For example, testservice marketing, where a new product is launched in a small, geographical areaPrimary research and then the response of consumers towards it will dictate whether or notThis is research designed to gather the product is launched nationally.primary data, that is, information whichis obtained specifically for the study in Secondary researchquestion. It can be gathered in threemain ways - observation, This is the collection ofquestionnaires and experimentation. secondary data, which has previously beenObservation involves watching people collected by others andand monitoring and recording their is not designedbehaviour (e.g. television viewing specifically for the studypatterns, cameras which monitor traffic in question, but isflows, retail audits which measure nevertheless relevant. Secondary datawhich brands of product consumers is far cheaper and quicker to gatherare purchasing). than primary data, but it can be out-of-Questionnaires are a means of direct date by the time that it is researched.contact with consumers and can take a The main sources of secondary datavariety of forms. Personal are reference books, governmentquestionnaires (such as door-to-door publications and company reports.interviewing), postal questionnaires, The primary and the secondarytelephone questionnaires and group research will provide the business withquestionnaires (such as asking for the much data relating to its markets andattitudes of a group of consumers its consumers. This data can then betowards a new product). used to describe the current situationQuestionnaires can be a very in the marketplace, to try to predictexpensive and time-consuming what will happen in the future in theprocess and it can be very difficult to marketplace, and to explain the trendseliminate the element of bias in the that have occurred.way that they are carried out. It is The business may also use the marketimportant that every respondent must research data to segment the market.be asked the same questions in thesame order, with no help or emphasis This involves breaking the marketbeing placed on certain questions / down into distinct groups of consumersresponses. who have similar characteristics, so as to offer each group a product whichExperimentation involves the best meets their needs.introduction of a variety of marketingactivities into the marketplace and then23 | P a g e
  24. 24. The main ways of segmenting a Quantitative research can also bemarket are: used to measure customer awareness and attitudes to different manufacturers and to understand overall customer behaviour in a market by taking a statistical sample of customers to understand the market as a whole. Such techniques are extremely powerful when combined By consumer characteristics: with techniques such segmentation this involves investigating their analysis and mean that key audiences attitudes, hobbies, interests, can be targeted and monitored over and lifestyles. time to ensure the optimal use of the By demographics: their age, marketing budget. sex, income, type of house, and socio-economic group. At the heart of all quantitative research By location: the region of the is the statistical sample. Great care country, urban -v- rural, etc. has to be taken in selecting the sample and also in the design of the sampleEffective segmentation of the market questionnaire and the quality of thecan lead to new opportunities being analysis of data collected.identified (i.e. gaps in the market for aproduct), sales potential for products Market research involves the collectionbeing realised and increased market of data to obtain insight andshare, revenue and profitability. knowledge into the needs and wants of customers and the structure andQuantitative vs Qualitative research dynamics of a market. In nearly all cases, it would be very costly andQuantitative research time-consuming to collect data from the entire population of a market.Quantitative research is Accordingly, in market research,about measuring features of a market extensive use is made of samplingand quantifying that measurement with from which, through careful design anddata. Most often the data required analysis, marketers can drawrelates to market size, market share, information about the market.penetration, installed base and marketgrowth rates. However, quantitative There are several types of sampleresearch can also be used to measure that can be used to gathercustomer attitudes, satisfaction, quantitative data:commitment and a range of otheruseful market data that can tracked Market research involves the collectionover time. of data to obtain insight and knowledge into the needs and wants of customers and the structure and24 | P a g e
  25. 25. dynamics of a market. In nearly all also helps guard against sample biascases, it would be very costly and in a way that selecting by judgement ortime-consuming to collect data from convenience cannot.the entire population of a market.Accordingly, in market research, Defining the Populationextensive use is made of samplingfrom which, through careful design andanalysis, marketers can drawinformation about the market.Designing the sampleSample design covers the method ofselection, the sample structure andplans for analysing and interpreting theresults. Sample designs can vary fromsimple to complex and depend on the The first step in good sample design istype of information required and the to ensure that the specification ofway the sample is selected. the target population is as clear and complete as possible to ensure that allSample design affects the size of the elements within the population aresample and the way in which analysis represented. The target population isis carried out. In simple terms the more sampled using a sampling frame.precision the market researcher Often the units in the population canrequires, the more complex will be the be identified by existing information;design and the larger the sample size. for example, payrolls, company lists, government registers etc. A samplingThe sample design may make use of frame could also be geographical; forthe characteristics of the overall example postcodes have become amarket population, but it does not have well-used means of selecting ato be proportionally representative. It sample.may be necessary to draw a largersample than would be expected from What size should the sample be?some parts of the population; forexample, to select more from a For any sample design deciding uponminority grouping to ensure that the appropriate sample size willsufficient data is obtained for analysis depend on several key factorson such groups. (1) No estimate taken from a sample isMany sample designs are built around expected to be exact: Anythe concept of random selection. This assumptions about the overallpermits justifiable inference from the population based on the results of asample to the population, at quantified sample will have an attached margin oflevels of precision. Random selection error.25 | P a g e
  26. 26. (2) To lower the margin of error usually usually representative of therequires a larger sample size. The population as a whole.amount of variability in the population(i.e. the range of values or opinions) Cluster sampling - this normallywill also affect accuracy and therefore involves the consumers being groupedthe size of sample. into geographical groups (or clusters) and then a random sample being(3) The confidence level is the carried out within each location.likelihood that the results obtained Stratified sampling - the consumersfrom the sample lie within a required are grouped into segments again (orprecision. The higher the confidence strata) based upon some previouslevel, that is the more certain you wish knowledge of how the population isto be that the results are not atypical. divided up. The number of peopleStatisticians often use a 95 per cent chosen to be interviewed from eachconfidence level to provide strong strata is proportional to the populationconclusions. as a whole.(4) Population size does not normally Qualitative researchaffect sample size. In fact the largerthe population size the lower the Qualitative market research is aboutproportion of that population that investigating the features of a marketneeds to be sampled to be through in-depth research thatrepresentative. It is only when the explores the background and contextproposed sample size is more than 5 for decision making. There are twoper cent of the population that the main qualitative methods - depthpopulation size becomes part of the interviews and focus groups. Howeverformulae to calculate the sample size. qualitative research can also include techniques such as usability testing,Random sampling - this gives each brainstorming sessions and “vox pop”member of the public an equal chance surveys.of being used in the sample. Therespondents are often chosen by Depth Interviewingcomputer from a telephone directory offrom the Electoral Register. Depth interviews are the main form of qualitative research in most businessQuota sampling - this method markets. Here an interviewer spendsinvolves the consumers being grouped time in a one-on-one interview findinginto segments which share certain out about the customer’s particularcharacteristics (e.g. age or gender). circumstances and their individualThe interviewers are then told to opinions.choose a certain number ofrespondents from each segment. The majority of business depthHowever, the numbers of people interviews take place in person, whichinterviewed in each segment are not has the added benefit that the26 | P a g e
  27. 27. researcher visits the respondent’s consumer, or part of a team evaluatingplace of work and gains a sense of the technology, group discussions can beculture of the business. However, for an effective way of understanding whatmulti-national studies, telephone depth customers are looking for, particularlyinterviews, or even on-line depth at more creative stages of research.interviews may be more appropriate. Niche MarketingFeedback is through a presentationthat draws together findings across a This involves a business selling itsnumber of depth interviews. In some product(s)circumstances, such as segmentation in small,studies, identifying differences oftenbetween respondents may be as lucrative,important as the views that customers segmentsshare. of a market. ItThe main alternative to depth is theinterviews - focus group discussions - opposite strategy to mass marketing.are typically too difficult or expensive Many small businesses can identifyto arrange with busy executives. unsatisfied consumer needs in aHowever, on-line techniques particular segment within a largeincreasing get over this problem. industry, and they can develop products to meet these needs.Focus Group Discussions This allows the small businesses to Focus groups exist in industries that are dominated are the by large businesses (e.g. Classic FM mainstay of in the radio broadcasting industry, consumer SAGA in the holiday industry). research. Here However, if larger rivals appear within several the niche market, the smaller customers are businesses will often find it difficult to brought compete effectively with these well- together to take resourced businesses.part in a discussion led by a It is also dangerous for a business toresearcher (or “moderator”). These offer just one product within thegroups are a good way of exploring a market, since any larger rivals aretopic in some depth or to encourage likely to be more diversified and have acreative ideas from participants. wider product portfolio. Theses larger businesses could, therefore, reduceGroup discussions are rare in business their prices to such a low level that themarkets, unless the customers are small business cannot competesmall businesses. In technology profitably.markets where the end user may be a27 | P a g e
  28. 28. Nevertheless, during periods of knowledge = market expertiseeconomic growth and higher consumer • Can often charge a higher price –spending, then niche markets can offer customers are prepared to pay fora very lucrative opportunity to many expertisesmall businesses to offer a • Profit margins often higherpersonalised, high value-added • Customers tend to be more loyalservice/product. The main disadvantages of marketing to a niche include:What is the difference between • Lack of “economies of scale” (theseniche and mass marketing? are lower unit costs that arise from operating at high production volumes)In most markets there is one dominant • Risk of over dependence on a single(mass) segment and several smaller product or market(niche) segments… • Likely to attract competition ifFor example, in the confectionery successfulmarket, a dominant segment would be • Vulnerable to market changes – allthe plain chocolate bar. Over 90% of “eggs in one basket”the sales in this segment are made by By contrast, mass marketing can bethree dominant producers – Cadbury’s, defined as:Nestle and Mars. However, there aremany small, specialist niche segments Where a business sells into the (e.g. luxury, organic or largest part of the market, where fair-trade chocolate). there are many similar products on offer Niche marketing can be defined as: The key features of a mass market are as follows: Where a business targets a smaller • Customers form the majority in the segment of a larger marketmarket, where customers have • Customer needs and wants are morespecific needs and wants “general” & less “specific” • Associated with higher productionTargeting a product or service at a output and capacity (economies ofniche segment has several scale)advantages for a business (particularly • Success usually associated with low-a small business): cost operation, heavy promotion,• Less competition – the firm is a “big widespread distribution or marketfish in a small pond” leading brands• Clear focus - target particularcustomers (often easier to find andreach too)• Builds up specialist skill and28 | P a g e
  29. 29. Competitive Advantage Create a poster identifying how the product (Mercedes Class M) or brand (Gilette) has gained this competitive advantage. Eg Apple Ipod and imageDefinition: A competitive advantage isan advantage over competitors gainedby offering consumers greater value,either by means of lower prices or byproviding greater benefits and servicethat justifies higher prices.How: Location, Value for money,Brand name, Facilities, Image ,Taste,Customer service . Competitive AdvantageChoose one of the methods of how acompany could gain a competitiveadvantage over its competitors. Selecta well-known product or brand.29 | P a g e
  30. 30. Adding Value operate profitably. Why? Remember the definition of adding value: where The increase in the the selling price is greater than the benefits of a good or costs of making the product. service which are created at each stage By definition, a business that is adding of production. substantial value must also be operating profitably. Methods – changing raw materials, Quite simply, it can make thepackaging, branding (using difference between survival andpersonalities or famous logos) failure; between profit and loss.For example, businesses can add The key benefits to a business ofvalue by: adding value include:Building a brand – a reputation for - Charging a higher pricequality, value etc that customers are - Creating a point of difference fromprepared to pay for. Nike trainers sell the competition.for much more than Hi-tec, eventhough the production costs per pair - Protecting from competitors trying toare probably pretty similar! steal customers by charging lower pricesDelivering excellent service – high - Focusing a business more closely onquality, attentive personal service can its target market segmentmake the difference betweenachieving a high price or a mediumoneProduct features and benefits forexample, additional functionality indifferent versions of software canenable a software seller to chargehigher prices; different models ofmotor vehicles are designed toachieve the same effect.Offering convenience – customerswill often pay a little more for a productthat they can have straightaway, orwhich saves them time.A business that successfully addsvalue should find that it is able to30 | P a g e
  31. 31. Positioning the Business Idea Identify Gaps in the market – market mapping.This is the process of creating an Try to gain a competitiveimage for the product in the minds of advantage.customers. Add value Identify the competition. Market mapping consists of identifying Identify their strengths and key variables about a product, plotting weaknesses. where existing brands or suppliers are Identify how to differentiate your in terms of combining the variables, product. then identifying any gaps in the market”.Positioning and Market Examples of those dimensions mightmapping be: High price v low priceOnce an entrepreneur has identified Basic quality v High qualityan appropriate segment of the market Low volume v high volumeto target, the challenge is to Necessity v luxuryposition the product so that it meets Light v heavythe needs and wants of the target Simple v complexcustomers. Lo-tech v high-tech Young v OldOne way to do this is to use a “marketmap” (you might also see this called Let’s look at an illustrated example of aby its proper name – the “perceptual market map. The map below showsmap”). one possible way in which the chocolate bar market could be mappedThe market map illustrates the range against two dimensions – quality andof “positions” that a product can take in price:a market based on two dimensionsthat are important to customers. 31
  32. 32. How might a market map be used?One way is to identify where there are “gaps in the market” – where there arecustomer needs that are not being met.For example, in the chocolate bar market, Divine Chocolate (a social enterprise)successfully spotted that some consumers were prepared to pay a premium price forvery high quality chocolate made from Fairtrade cocoa. Green & Black’s exploitedthe opportunity to sell premium chocolate made from organic ingredients. Both thesebrands successfully moved into the high quality / high price quadrant (see above)before too many competitors beat them to it.The trick with a market map is to ensure that market research confirms whether ornot there is actually any demand for a possible “gap in the market”. There may bevery good reasons why consumers do not want to buy a product that might,potentially, fill a gap. 32
  33. 33. Complete a Market Map for a local shop or restaurant in Valencia.33 | P a g e
  34. 34. Product trial customers. It is much better if customers can be encouraged to The first become loyal to the product – even step for a better, to recommend the product to new their friends and family! business or product is to Achieving a high level of repeat attract trial purchase is good news for a business. purchases. So what is required? A new Firstly, the product should be of themagazine may run special offers to get right quality. A sub-standard or lowcustomers to try the first issue, hoping quality product is sure to disappoint first-time customers. They are unlikelythat repeat sales are generated. Themagazine will soon close if customers to buy again or recommend thefail to buy future issues. The aim of a product to others.special offer scheme is to convert trial Secondly, a business should do all itpurchases into repeat sales. can to develop an effect relationshipRepeat business is all about with existing customers. This includesencouraging customers who buy for activities such as:the first time to buy again and again!A business invests a lot of effort and - Regular communication (e.g. email newsletters)cash in trying to get a customer topurchase a product for the first time.This is known as product trial. Much - Incentives for loyalty (e.g.advertising is aimed at encouraging promotional discounts)customers to try a new product, orswitch from an existing competitor. - Research into customer needs andAfter a new product has been tried wants (e.g. through customer surveys)once, its success can be measured inhow quickly, how often, and in whatquantity it is repurchased. Repeatpurchase refers to the number orpercent of customers who purchase asecond time, or to how often they buyagain.The problem with advertising is that itis very expensive. A business isunlikely to be successful and profitableif it has to keep advertising heavily inorder to generate demand from new 34
  35. 35. StakeholdersThere are many groups of peoplewho have an interest, financial orotherwise, in the performance ofa business - these differentgroups are known asstakeholders. The mainstakeholders are considered tobe: functions and tasks of the businessShareholders (producing output, meeting deadlinesThese people have a clear financial and delivery dates, etc.) and overinterest in the performance of the recent years their traditional role hasbusiness. They have invested money started to change. They are often nowinto the company through purchasing encouraged to become involved inshares and they expect the company multi-skilled team-working, problemto grow and prosper so that they solving and decision making - thusreceive a healthy return on their having a significant input to theinvestment. The return that they workings of the business.receive can come in two forms. Firstly, Customersby a rise in the share price, so thatthey can sell their shares at a higher Customers are vital to the survival ofprice than the purchase price (this is any business, since they purchase theknown as making a capital gain). goods and services which provides theSecondly, based on the level of profits business with the majority of itsfor the year, the company issues a revenue. It is therefore vital for aportion of this to each shareholder for business to find out exactly what theevery share that they hold (this is needs of the consumers are, and toknown as a dividend). The produce their output to directly satisfyshareholders are also entitled to vote these needs - this is done througheach year at the A.G.M. to elect the market research. The goods andBoard of Directors, who will run the services must then be promoted incompany on their behalf. such a way as to appeal to the target market and to inform them of theEmployees availability, price, etc. Once the goodsThis group also has an obvious and services have been purchased byfinancial interest in the company, since the customer, it is essential that after-their pay levels and their job security sales service is offered and that thewill depend on the performance and customer is happy with his/herthe profitability of the business. It is purchase. The business must try toemployees who perform the basic keep the customer loyal so that they35 | P a g e
  36. 36. return in the future and become a since the repayments will now berepeat-purchaser. significantly higher). However, businesses can also benefit fromSuppliers government incentives and initiatives, such as new infrastructure, jobWithout flexible and reliable suppliers, creation schemes and businessthe business could not guarantee that relocation packages, offering cheapit will always have sufficient high rent, rates and low-interest loans.quality raw materials which theyrequire to produce their output. It is The Local Communityimportant for a business to maintaingood relationships with their suppliers, Businesses are likely to provideso that raw materials and components significant amounts of employment forcan be ordered and delivered at short the local community and often willnotice, and also so that the business produce and sell much of their outputcan negotiate good credit terms from to the local residents. The sponsorshipthe suppliers (i.e. buy now, pay at a of local events and good causes (suchlater date). as local charity work) can also help the business to establish itself in theThe Government community as a caring, socially responsible organisation. ManyThe government affects the businesses develop links with localworkings of businesses in many schools and colleges, offeringways: sponsorships and resources to these1. Businesses have to pay a variety of under-funded institutions. However,taxes to central and local government, businesses can also cause manyincluding Corporation tax on their problems in local communities, suchprofits, Value-Added Tax (V.A.T) on as congestion, pollution and noise, andtheir sales, and Business Rates to the these negative externalities may oftenlocal council for the provision of local outweigh the benefits that theservices. businesses bring to the community.2. Businesses also have to adhere to a Disagreements between stakewide-ranging amount of legislation, holderswhich is aimed at protecting the Due to the demands placed onconsumers, the employees and the businesses by so many differentlocal environment from business stakeholders, it is no surprise thatactivity. there are often disagreements and3. Businesses will be affected by conflict between the different groups.different economic policies, (for Some of the more common areas ofexample, if interest rates are conflict are:increased, then this will discouragebusinesses from borrowing money Shareholders and management36 | P a g e
  37. 37. Profit maximisation is often the over- complain about the late deliveries ofriding objective of shareholders - raw materials and components fromresulting in large dividend payments suppliers, and the dubious quality offor them. However, it is far more likely the parts once they have beenthat the managers of the business will inspected.aim to profit satisfy rather than profitmaximise (that is, they will aim to earn The community and the businessa satisfactory level of profits, and thenuse the remaining resources to pursue As outlined previously, the localother objectives such as diversification community can often suffer at theand growth). This conflict between hands of a large company through thethese two groups is often referred to negative externalities of pollution,as divorce of ownership (the noise, congestion and the building ofshareholders) and control (the new factories in areas of outstandingmanagement). beauty. However, if the business faces strong protests from residents andCustomers and the business from pressure groups concerned about its actions, then it may decide toCustomers are unlikely to remain relocate to another area, causingloyal and repeat purchase from the much unemployment and a fall inbusiness if the product that the have investment in the community it leavespurchased is of poor quality and/or is behind.poor value for money. More customersare prepared to complain about thequality of products and after-salesservice than ever before, and thebusiness must ensure that it has inplace a number of strategies designedto satisfy the disgruntled customer,reimburse any financial loss that theymay have incurred and persuade themto remain loyal to the business.Suppliers and the businessSuppliers are often quoted ascomplaining about the lack of promptpayments from businesses fordeliveries of raw materials, and if thisbecame a regular problem then thesuppliers may well refuse credit to thebusinesses or may even cease alldealings with them. On the other hand,many businesses have been known to37 | P a g e
  38. 38. Market segmentation -targeting strategiesOnce a firm has successfully identifiedthe segments within a market, the nextstep is to target these segments withproducts that closely match the needsof the customers within that segment.There are a number of targetingstrategies, including:Niche/concentration marketing – The main benefit for the firm is that itthis is concerned with targeting one can produce on a large scale,particular, well-defined group of benefiting from low unit productioncustomers (a niche) within the overall costs via economies of scale. Thesemarket. lower costs can be passed on to the consumer in the form of lower pricesJordan’s, the cereal company, adopted because, although profit margins onthis approach by targeting groups of each item sold may be lower, highcustomers interested in organic sales volume should generate largeproducts at a time when this group of profits overall.consumers represented a relativelysmall proportion of the overall market. The main disadvantage of mass marketing is that, increasingly inNiche markets can be targeted today’s markets, consumers are lessprofitably by small firms who have interested in standardised productsrelatively small overheads and, and often prepared to pay premiumtherefore, do not need to achieve the prices for products that cater for theirvolume of sales required by larger specific needs.competitors.The main disadvantages of niche market segmentation - bases of segmentationmarkets are that the potential for salesgrowth and economies of scale may Geographicbe limited, and the survival of the firmmay be seriously affected if sales • Region of the countrybegin to decline. • Urban or ruralMass marketing – this is concerned Demographicwith selling a single product to thewhole market. This strategy is based • Age, sex, family sizeon the assumption that, in respect to • Income, occupation, educationthe product in question, customers’ • Religion, race, nationalityneeds are very similar if not identical. Psychographic38 | P a g e
  39. 39. • Social class Customer circumstances change, for• Lifestyle type example they grow older, form• Personality type families, change jobs or get promoted, change their buying patterns. ByBehavioural marketing products that appeal to customers at different stages of their• Product usage - e.g. light, medium life ("life-cycle"), a business can retain,heavy users customers who might otherwise switch• Brand loyalty: none, medium, high to competing products and brands• Type of user (e.g. with meals, specialoccasions) Target marketing communicationswhy segment markets? Businesses need to deliver their marketing message to a relevantThere are several important reasons customer audience. If the targetwhy businesses should attempt to market is too broad, there is a strongsegment their markets carefully. These risk that (1) the key customers areare summarised below missed and (2) the cost of communicating to customers becomesBetter matching of customer needs too high / unprofitable. By segmenting markets, the target customer can beCustomer needs differ. Creating reached more often and at lower costseparate offers for each segmentmakes sense and provides customers Gain share of the market segmentwith a better solution Unless a business has a strong orEnhanced profits for business leading share of a market, it is unlikely to be maximising its profitability. MinorCustomers have different disposable brands suffer from lack of scaleincome. They are, therefore, different economies in production andin how sensitive they are to price. By marketing, pressures from distributorssegmenting markets, businesses can and limited space on the shelves.raise average prices and subsequently Through careful segmentation andenhance profits targeting, businesses can oftenBetter opportunities for growth achieve competitive production and marketing costs and become theMarket segmentation can build sales. preferred choice of customers andFor example, customers can be distributors. In other words,encouraged to "trade-up" after being segmentation offers the opportunity forintroduced to a particular product with smaller firms to compete with biggeran introductory, lower-priced product ones.Retain more customers39 | P a g e
  40. 40. Opportunity costOpportunity cost is one of the most important and fundamentalconcepts in the whole of economics. Given that we have saidthat economics could be described as a science of choice, wehave to look at what sacrifices we make when we have to make a choice. That iswhat opportunity cost is all about.The definition of opportunity cost is: The cost expressed in terms of the nextbest alternative foregone or sacrificed Take the following example: I recently bought a new pair of shoes which cost me £40. The cost here is being expressed in terms of the amount of money you had to give up to acquire those shoes. Because we all have a common understanding of money as being notes and coins that we use toexchange for the things we want, we can pretty much understand this sentence.We have to remember that money is merely bits of paper ormetal that we use as a convenient and accepted method offacilitating exchange - getting what we want. Expressing cost interms of the amount of money we have to give up to get whatwe want is always helpful in giving us the true cost ofsomething. For that, we need to use opportunity cost.What statements like this fail to convey, however, is the true picture of what you aresacrificing by choosing to buy the shoes. It is more accurate to say something likethe price I paid for these shoes was £40. To get an idea of the true cost, we wouldreally need to know something of the sacrifice made in giving up that £40.£40 can buy a number of things - let us assume that it can also buy the following:When thinking about how to dispose of your money, you have to make choices andthese represent the choices at this moment in time. These choices representdifferent aspects of value. Each of the items might represent some value to you butthey may be different. It is important to remember that you might, in an ideal worldwhere there were no scarce resources, want all these things. 40
  41. 41. TRADE OFFSIn business there are many occasions whenone factor has to be traded off against another.An entrepreneur might get huge help at thestart from friends, yet realise that these samefriends lack the professionalism to help thebusiness grow. The needs of the business may have to be traded off against the friendships. Othertrade-offs may include – giving up a good job and prospects to be your own boss,giving up the most enjoyable things for profit etc.1.3.1 Researching demand for the business idea: 143-149 may 2009 q5 Market research: jan 2009 q6 Methods-primary/secondary sample paper q7 Quantitative/qualitative problems.1.3.2 Is there a market for the business idea? 152-155 Sample paper q3 Market size & share, May 2010 q 3 growth, May 2010 q 10 mass marketing niche, segmentation.1.3.3 Positioning the business idea. 7-10 May 2009 q8 Competition, May 2009 q11 market mapping, Jan 2009 q3 competitive advantage, Sample paper q9b adding value. May 2010 q6 differentiation1.3.4 Product Trial 166 Jan 2009 q9a Testing, expense, methods, benefits, Sample paper q1 disadvantages. May 2010 q71.3.5 Opportunity Costs 48-50 Jan 2009 9e Trade-Offs Sample paper 9e Choice – factors, stakeholders.41 | P a g e
  42. 42. Past paper questions42 | P a g e
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  44. 44. Soft drink projectDesign a “new” soft drink to bereadily available from December2012.Your Project should include An advert Marketing Mix:Identify price, product, place andpromotional aspects Questionnaire/Interviews/Surveys – to determine through market research, the current fashion/tastes of the soft drinks markets. Segmentation – whose is your market/customers? Which groups would buy your product? Market Mapping – who are the competitors and what are the strengths and weaknesses. Product trial – How are people going to try it? Additional information – market size, recent trends etc Added value – how do you convince people to pay a price for it when they know it only costs x amount to produce.When complete you will havecompleted a business plan! 44
  45. 45. Section 4: There are several methods that a government can use to reduce the Economic considerationsThe Economic EnvironmentEconomics is concerned with theprocess of satisfying the needs andwants of the population, by using thelimited resources of the economy(land, labour, capital and enterprise,otherwise known as the factors ofproduction) in the most efficient way.There are generally considered to befour main objectives of an economy: amount of unemployment in an economy: 1. A low level of unemployment 2. A low level of inflation Policies to increase demand: such as reducing taxation or reducing 3. A high level of economic interest rates. growth 4. A good foreign trading Retraining incentives offered to the position unemployed.Unemployment is defined as the Helping new businesses to set-up,number of people in the workforce in a and offering incentives to existingcountry who are looking for a job, but businesses to relocate to areas of highcannot find one. unemployment.The two major measures of Inflation is defined as a general andunemployment are the claimant sustained rise in the average prices ofcount (where people must declare goods and services within an economythat they are out of work, capable of over a period of time. It is calculatedworking, available to work and actively by reference to the Retail Price Indexseeking work) and the International (R.P.I), which is a weighted index,Labour Force count (where people designed to indicate any changes inmust be out of work, have been the average price level in the UK.looking for work in the past 4 weeksand must be available to start work in Inflation can be very damaging to anthe next 2 weeks). economy because it leads to the reduced purchasing power of theUnemployment can be very damaging pound, uncertainty about the future, ato an economy because it can lead to fall in investment and savings, andfalling output, high government increasing costs for businesses.spending, and falling aggregatedemand.45 | P a g e
  46. 46. and businesses, minus the income earned by foreigners investing in the UK). Economic growth is likely to lead to an increase in the amount of investment in the economy, as well as an increase in the number of new businesses starting up, leading to increases in output, expenditure and income. In order to improve the G.D.P. or the G.N.P. per capita (i.e. in order to achieve a faster rate of economicThere are several methods that a growth), then the government mustgovernment can use to reduce the ensure that the workforce israte of inflation in an economy: adequately educated and trained toIncreasing interest rates to discourage perform their jobs effectively,high levels of customer spending. significant amounts of investment in new machinery and productionReducing the amount of credit techniques are undertaken, and(borrowing) that is available to natural resources must be used tocustomers. their optimum efficiency.Incomes policies, where pay increases Balance of payments. This is aare limited, so to deter high levels of record of a countrys financialcosts and expenditure. transactions with the rest of the world over a given period of time (normallyEconomic growth. This term refers to 12 months).a real growth (i.e. accounting for theeffects of inflation) in the income per The current account of the balance ofcapita (or income per head) of the payments measures both visible tradepopulation over a given period of time. (that is, the imports and exports of tangible goods such as furniture andIt is normally measured by reference to cars) and invisible trade (that is, theGross Domestic Product (G.D.P) imports and exports of intangibleand Gross National Product (G.N.P). services, such as banking, shipping,Gross Domestic Product is the total and insurance). The capital account ofvalue of a countrys output over a the balance of payments measuresperiod of time (usually 12 months). any flows of capital between the UK and other countries (purchase ofGross National Product is calculated shares and other forms of investment).by adding G.D.P. to the net incomefrom abroad (i.e. the income earned on The exchange rate is the externaloverseas investments by UK citizens price of a countrys currency,46 | P a g e
  47. 47. expressed in terms of another foreign goods and services cheaper tocurrency. import.For example, £1 = 1.5 euros A fixed exchange rate system involves the value of the currencyA free-floating exchange rate system being fixed against other currenciesinvolves the value of the currency and not being allowed to fluctuate inbeing allowed to float (fluctuate) response to the demand and supplyaccording to the supply and demand for it. This involves governmentfor the currency. intervention on a regular basis, buyingA demand for sterling is created when the currency when its value isthe UK exports goods and services threatening to fall, and selling the(foreigners must pay for these goods currency when its value is threateningand services using sterling, which they to rise.purchase in exchange for their own Under this system, the governmentcurrencies). can devalue the currency if it feels thatA supply of sterling is generated when its value is too high against foreignthe UK imports goods and services currencies, making their goods and(i.e. the UK must pay for these imports services uncompetitive. Thisusing the foreign currency of the devaluation of the currency boosts thecountry concerned). These foreign international competitiveness of thecurrencies are purchased in exchange countrys exports, by making themfor sterling on the world currency cheaper for other countries tomarket. purchase.An increase in the value of the pound Alternatively, the government canis known as an appreciation, and a revalue the currency if it feels that itsfall in the value of the pound is known value is too low against foreignas depreciation.. A strong pound currencies, making the level ofmakes goods and services produced demand too high for their goods andin the UK more expensive for services and leading to inflation.foreigners to purchase, but makes47 | P a g e
  48. 48. Exchange Rates recently. Anything that comes from abroad is now more expensive: parts, components, finished goods, stocks, oil, food. Almost all firms import something, and are therefore likely to face higher costs. UK customers may move away from imports and foreign holidays as they are relatively more expensive. - That leads to a wider benefit: the UKThe exchange rate is the price of a is now relatively cheaper to foreigners,currency. That’s often a very difficult providing UK firms with better exportconcept to get your head around, opportunities, as well as moreparticularly as ‘common sense’ is domestic demand.misinformed by “exchanging” or“swapping” currencies when you go Evaluation pointsabroad on holiday. But if you getsome Euros before heading off for - The impact of changing exchangeFrance, you aren’t swapping your £s rates will be different on differentfor €s. You’re buying them. businesses. Firms with big import bills will be hit hard. Other businesses thatSo the £ is quite literally on sale in the are seeking to expand exports mayforeign exchange market. The graph find demand increasing for theirabove points out the basic history you products or services. Firms that wereneed to understand. The £ broadly fell planning to ‘offshore’ some of theirin value (it ‘depreciated’) from the production might reconsider (check out1980s until the early 90s. Our the links below).currency then sharply appreciated in - The uncertainty of exchange ratethe mid 90s, where it stayed (with change is a big headache for firms,some fluctuations) before plunging and tends to undermine overseasagain in 2008. investments and makes UK firms think twice before embarking on anyWhat does this mean for UK overseas project.businesses? - Exchange rates might not make such a big difference if firms or their- In general, a lower value £ means customers are not price sensitive, ofthat imports are more expensive. course.That’s part of the reason why there’sbeen upward pressure on inflation48 | P a g e
  49. 49. 1.4.1 Current Economic Climate: text may 2009 q6 may 2009 q12 Economic Growth, 46-50 jan 2009 q7 Exchange Rates, may 2010 q 13 Inflation unemployment49 | P a g e