Edexcel ial-business-studies-unit-2

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EDEXCEL
INTERNATIONAL ADVANCED LEVELS (IAL)
BUSINESS STUDIES UNIT 2
BUSINESS STRUCTURES AND PROCESSES
AUTHOR: WANJALA RAJAB
B.Ed(UON),CPA

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Topics and Content

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TOPIC 1:MARKETING
Marketing is a process for identifying and satisfying customer needs profitably.
Marketing Objectives
These are the aims that business may wish to achieve through its marketing campaigns. This may
include:-
1. To create brand loyalty:
Marketing activities may be aimed encouraging repeat purchases e.g. offering discounts on
sale, advertising, loyalty schemes e.t.c.
2. To increase market share
Market share is a percentage of the market controlled by a firm or a product. Therefore a
business may engage in marketing to gain customers and increase market share.
3. Survival
Some marketing activities may be carried out with an aim of just keeping the business in
operation. This objective may be pursued by new or struggling businesses e.g. lowering their
prices to attract more sales.
4. To change market position
Some marketing activities are meant to change the perceptions of the consumers with regard
to the product position in the market.
5. To increase sales revenue
Marketing campaigns can be carried out with an aim of increasing the volume of sales e.g. the
business may do sales promotions through offers and discounts to sell more.
Marketing Strategies
These are ways means of achieving the marketing objectives
Marketing Strategies for Different Markets
There are two main marketing strategies:-
1. Mass Marketing
2. Niche Marketing
Mass Marketing
Mass marketing is a process of serving a general market with general needs. In this case the business
does not specialize in any given market segment e.g. A TV station could appeal to general members
of the public.
Benefits of Mass Marketing
1. Economies of scale
By serving a mass market business deals in large scale and may enjoy the economies of scale
such as discounts on bulk buying.
2. Less risky
Mass markets do not depend upon segment of the market; therefore if one sector declines it
may be compensated by growth in other markets i.e. mass markets are more diversified in
terms of risks since they serve various markets.
3. High sales revenue
since the mass marketers serve a large market size its more likely that the demand for their
products will be high and stable, hence high volume of scales.

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4. Easier marketing
By serving a general need it means the product appeals to all segments of the market both
globally and locally. Therefore only one marketing or promotional message such as
advertisement may be required for all the market. This therefore calls for use of mass media
such as television that appeals to all.
Limitations/Disadvantages of Mass Marketing
1. Increased competition
Mass marketers tend to face high competition from successful market niches and efficient
firms producing at lower cost in the industry.
2. High fixed capital costs
A mass marketer may face high costs of capital due to the need for large factories and
expensive machinery required for mass production.
3. Difficult to appeal to individual needs
Mass marketers may find it very difficult to appeal to specific and individual needs of
consumers in various segments. This creates un served or underserved market.
Niche Marketing
This is marketing where a business specializes in serving particular needs of market segments.
Advantages of Niche Marketing
1. Less competition
Since niche marketers offer unique products or services that have no close substitutes this will
mean the level of rivalry for the market is minimal.
2. Product appeal to specific needs
a niche marketer can tailor his products or services to meet the specific needs of customers
e.g. a tailor made wedding cake.
3. High prices
Even though the sales volumes are low in the niche market due to the small market size, the
uniqueness of the product makes it possible to charge a high or premium price. In essence the
market nicher’s product is price inelastic due to its uniqueness
4. Lower promotion costs
While the mass market relies heavily on the mass media such as TV, radio, newspapers e.t.c.
to promote their products, niche marketers use cheap specialized media such as a word of
mouth to appeal to the target groups.
Disadvantages of Niche Market
1. Low sales volume
Niche market size is usually very small and therefore the volume of sales maybe low as there are
fewer potential customers. Besides demand keeps fluctuating from time to time.
2. Risky
Niche marketers that over specialize may risk closing down their business if the demand for their
products or services falls.
3. Attracts new entrants
If the niche market is exploited successfully the super normal profits may attract competition
from well established businesses.

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Marketing Mix
These are a set of elements that make up the marketing strategy or program of a business.
The marketing mix is generally referred to as the 4P’s of marketing. These are:-
1. Product
2. Price
3. Place/distribution
4. Promotion
The ideal marketing mix
The 4P’s of the marketing must be carefully mixed to achieve the desired outcome for a marketing
campaign or program.
To achieve a successful launch of a product it is necessary to ensure that the product element such as
packaging, colour, size, functionalities are proper.
The pricing the distribution and the promotional should also fit into each other for successful launch
of the product.
The Product Element
A product is anything a firm offers for sale.
To achieve its marketing objective a firm or a business must design its products offers to suit the
customers’ needs. For this reason the following products element must be considered:-
(a) Design-This deals with issues such as
 The colour of the product
 The shape of the product
 The size
 Test
 Factuality or features
 Other additional benefits such as reliability
(b) Product packaging-
This deals with how the product should be wrapped to appeal to the customers. This focuses
on:-
 The colour of the packages
 The shape of the packages
 The materials used in the package
The Product Life Cycle
This refers to the various stages through which a new product goes through from the time it’s
developed and introduced in the market up to the time it matures.
Stages of Product Life Cycle
The product goes through the following phases of its life
1. Development
2. Introduction
3. Growth
4. Maturity/Saturation
5. Decline

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Diagram: product life cycle
Product Development
This is the stage where the new product ideas are conceived or generated and tested before being
launched.
At this stage there is high research costs incurred besides the product has not yet been offered for sale
therefore costs are high while revenues is zero.
Introduction
This is the stage at which the product is launched in the market. at this stage sales are increasing at a
lower rate because of the following reasons:-
(a) Consumers are not fully aware of the product existences or benefits. Because of this the firm
needs to spend a lot on promotion to increase awareness and boost sales
(b) The research and development costs might have been high and therefore a high entry price
that may be unattractive to buyers.
(c) Lower market penetration as the business may opt to launch the product gradually in some
sections of the market rather than the entire market. This will reduce the market size and sales
too.
(d) The profits will be negative since there is high cost of promotion at this stage besides the firm
is recovering its R&D costs.

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Growth
At this stage the level of sales increases rapidly and the profits will be high because:-
(a) The product has gained a large market share hence more sales
(b) The customers have gained awareness of the existence of the product in the market
(c) There are lower advertising and promotion costs
Maturity
At this stage the product attains the maximum market share and the sales are at the optimum level.
The profit will also be high up to some point then declines. Once a product reaches maturity the
business has to decide whether to renew it to extend its life or pull out of the market.
Decline
This is the stage at which the sales and profits starts failing. This is because:-
(a) There is an introduction of new substitute products that are better
(b) The firm has stopped promoting the product and its losing popularity
Product Extension Strategies
These are the strategies applied to renew the demand for the mature product.
Once a product attains maturity it sales can be renewed to extend its life shown by the broken lines.
These strategies are:-
1. Finding new uses of the product
This is a strategy of extending the life of a mature product by finding alternative market
segment that needs it for a different purpose
e.g. corn farmers can sell their wheat to pasta manufacturers or to dairy farms as animal feeds.
Therefore if the corn oil market is saturated they have an option to increase sales by selling it
as animal feed.
2. Increase product usage:
This is achieved by encouraging customers to increase the number of times they use the
product e.g. many skin lightener manufacturers may say apply twice per day for better results
to increase sales.
3. Find new markets segment for the product
If the original market has been saturated the business can find new markets to renew the
demand for the mature product e.g. expanding into international markets

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4. Changing the product ingredients
The product life can be extended by adding new ingredients or features on the mature
products e.g. adding new features on an old phone model to make it look different, adding
herbal elements in washing detergents to make them look different.
Value of Product Life Cycle
1. Helps in Product portfolio management
It helps the business in deciding when to introduce a new product in the market so that there is
no vacuum at any given time. In addition it will help the business to decide when to withdraw
the product from the market especially the mature product.
2. It helps in making investment decisions.
In this regard the business will decide which products need more attention and further
investments e.g. product at the introduction stage need little or no investments to grow while
the products are the maturity stage need little or no investment as they are generating
substantial revenues required to support young products.
Limitations of Product Lifecycle
1. It’s not a useful forecasting tool since it is impossible to tell how long a product is going to last
i.e. the manager may not precisely identify the exact stage of every product. In this regard some
products have a shorter product lifecycle than others.
2. It only consider sale and profit-
In this case the product cycle theory may not be helpful to the business as it ignores external
factors such as market share of the product which may still affect its life cycle
3. It’s useless for service sector businesses since they don’t deal in physical product.
Product Portfolio Management Technique
A product portfolio is the range or a mix of products offered by a business.
e.g. Samsung’s product portfolio includes: TVs, Radios, Fridges phones etc
There are 2 techniques for portfolio management.
1. Product life cycle (covered)
2. Boston matrix
Boston Matrix(BM)
This is a product portfolio management tool that helps the firm to analyze the product mix with
regard to:-
(a) Market share
(b) Market growth potential
The Boston matrix classifies products into 4 categories
1. Problem child/Question marks
2. The stars
3. Cash curves
4. Dog
The matrix is also called product portfolio matrix.

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Diagram :The Boston Matrix
The Problem Child/Question Marks
This is a product that has a low market share but a high growth potential. This is the product in the
introduction phase of its life cycle.
The problem child needs more attention to achieve its growth potential. Therefore investments are
required to increase the market share of this product e.g. through advertising.
The Star
This is a product with a high market share and a high market growth. This is the product in the
growth stage of its life cycle. The stars require investments for them to achieve their full potential.
This can be achieved through advertising.
Cash Cow
This is a product with high market share but low growth potential.
These are usually products at maturity stage. The cash cow generates substantial revenues than all the
other categories. Therefore this product requires no investments such as advertising.
The revenues generated by the cash cow are invested in the problem child and stars and to support
the dogs.
Dog
This is a product with a low market share and low market growth potential. These are products in the
decline stage of their life cycle.
The Dog’s should be removed from the portfolio to reduce losses or it could be renewed to extend its
life.
The Value of Boston Matrix
1. Investment decisions
It helps the managers to determine which products to invest in, which products to divest and
which products to milk. The problem child and the stars are invested in. The dog is divested
and the cash cow is milked.

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2. Cash flow management
It helps the management ensure that there are enough products in each category so as to
ensure adequate cash flow at all times. More especially enough cash cows to generate
revenues.
3. Product folio management
It helps the business to know when to introduce or remove products from the mix
Limitations of Boston Matrix
1. It assumes that high profit are always achieved when market share is high in reality product
may have high market share with low profit.
2. The tool assumes that it is always good to be in high growth market. However such markets
that grows quickly maybe unstable.
How current social trends may affect the composition of the marketing mix
There are a number of social factors that firms may want to consider when deciding the composition
of their marketing mix. These factors may affect one of a few of the 4P’s of marketing.
These are:-
 Ethical trading
 Retailer purchasing power
 Sustainability
 Online retaining
 Food miles
 Environmental factors
 Recycling
1) Ethical sourcing of materials
Being ethical is acting with high levels of moral standards by safeguarding the interest of all the
stakeholders
Ethical sourcing is all about sourcing suppliers from suppliers who follow a high standard of
ethics e.g. buying from suppliers who don’t use child labour. Acting ethically can have either
positive or negative impacts on the business.
By following fair trade rules a business would get a fair trade mark on their brands which may
increase sells.
This will affect the product element in the mix as it creates a strong brand loyalty.
Advantages of Using Ethical Trading in Marketing
i. Firms can use their ethical stance in marketing materials such as advertisement. Tesco grocery
store may have all their products branded with fair trade Marks. This will help to promote the
product of the company.
ii. It can also help prevent bad reputation or publicity by acting to be more correct through their
marketing campaigns e.g. a company can use green in the advertisement to avoid being
accused of environmental damages as social with their business.
Disadvantages of Using Ethical Trading in Marketing
i. Ethical trading involves high cost to comply with high standards of morality such providing a
good working environment will reduce profits due to the high cost labour

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ii. It might lead to high prices hence lack of competitiveness arising from high cost
2) Use of Recycled materials
Recycling can be an effective method of waste management. Therefore a business can use it as a
positive marketing tool to gain demand e.g. Ribena promotes the 100% recycled bottle as a
“green product “to promote the image of the brand.
However it does have cost implications such as
i. The collection of waste materials is often expensive
ii. Small business may not find it necessary since they do not have the capacity
3) Retailer Purchasing Power
Retailer purchasing power refers to how much influence they have in the retail mark. In the UK
for example large scale retailers such as Tesco, Asda, e.t.c. have huge influence controlling over
80% of the grocery sales. There are different arguments in view of this. Retailers argue that:-
(a) They can negotiate better terms with the suppliers
(b) Consumers are better informed through comprehensive marketing campaigns and therefore no
cause alarm with regards to exploitation.
(c) Products are sourced from around the globe due to their large scale, hence giving more choice
to customers
(d) They provide better value by offering lower prices
All in all to avoid being conceived in a bad way such large scale retailers may use the lip’s of
marketing to redeem their image with regard to exploitation.
Critics of retailer purchasing power argue that:-
(a) Suppliers are bullied by being offered lower prices as they have no choice or alternative
buyers.
(b) Consumer choice maybe removed as the few large scale retailers dominate the market
(c) Third world producers are being exploited by these large retailers such as Tesco hence
increasing poverty in developing countries
(d) Local jobs are being lost as small local retailers are forced out of business. In conclusion
therefore such aspect of power may require that the firm or retailers must factor into their
marketing mix in order to be seen to be fair.
4) Sustainability
This refers to not consuming more natural resources than can be regenerated. If firms do not use
sustainable resources there is threat that they will be depleted e.g. crude oil.
The element of sustainability may be applied in the area of packaging e.g.
 Plastics are used to package many products. These plastics are made using chemicals
extracted from crude oil.
 Some retailers may charge for carrier bags for misuse of resources.
5) Online Retailing
There has been a massive growth in online trading which means the place mix or distribution will be
affected. More firms are opting for online trading, hence a need to reconsider their marketing mix.

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Benefits of Online Trading
Online retailing may affect the marketing mix positively in the following ways:-
1. Firms will be able to sell a wide range of products 24/7 because of the increase market size
2. The firms will be able to reach a wide audience online rather than a traditional shop
3. Reduced costs since expensive shops are not required
4. The firm can offer lower prices because of the lower costs.
Limitations of Online Trading
1. The firm is exposed to security risks such as the risks of being hacked as losing revenues
2. There is a possible lack of trust from consumers who may fear dealing will anonymous
dealers virtually
3. The consumers have to wait for the products to be delivered which; the distribution channel of
the retailer must be efficient
4. Can only sell to people with internet access
6) Food Miles
This is the distance which food is transported from the producer to the consumer. This can be used as
a marketing tool by business which source products are sourcing products locally mean the business
is promoting local community business.
7) Environmental Factors
People are increasingly worried about the environment.
This consciousness may mean that the business can use it as a marketing tool e.g. the business can
promote itself to be environmentally conscious e.g. through use of renewable energy or energy saving
schemes.
Price elasticity of demand(PED)
This is the responsiveness of demand to change in price.
𝑃𝐸𝐷 =
% 𝐶𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
% 𝑐𝑕𝑎𝑛𝑔𝑒 𝑖𝑛𝑝𝑟𝑖𝑐𝑒
Level of Price Elasticity of Demand
Inelastic demand
This occurs where a big change in price brings about a small or no change in quantity demanded.
This happens when consumers have no alternative option to switch to especially when prices rise.
Elastic demand
This occurs when a small change in price brings about a big change in quantity demanded. This
happens when consumers have an alternative option to switch to especially when prices rise, e.g. if
Samsung increases their prices consumers can switch to alternative such as Apple.
Calculation and Interpretation of PED
PED greater than 1
This means it is price elastic meaning a change in price brings about more than 100% change in
demand.
Luxury products tend to have PED of more than 1

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PED less than 1
This means it is price inelastic i.e. a change in price brings about less than a 100% change in demand.
Necessities such as food tend to have PED of less than 1.
PED equals to 1
This means it is unitary elastic meaning change in price bring about an equal change in demand.
Questions
1. A green grocer decides to cut the price of his bananas from 40 pence per kg to 32pence per
kg. The price elasticity of demand for this product is -2. He currently sells 80kgs of bananas a
day. How many will he sell after the price cut?
𝑃𝐸𝐷 =
Determinacy of Price Elasticity of Demand
1. Availability of close substitutes
A product with many alternatives has a high price elasticity of demand. This is because
customers can easily switch to cheaper substitutes when prices increase.
2. Degrees of necessity
Necessities have inelastic demand. This is because products that are basic tend to attract little
or no change in demand when price changes as consumer will need them whether price
increase or not.
However consumers may cut out luxuries in order to afford basics when prices increase.
Hence more price inelastic.
3. Switching costs
Sometimes companies can make it impossible for customers switch to alternative products by
signing long term products with them. Therefore during the contract period demand will be
inelastic as customers cannot pull out of the contract of fear of penalties or fines.
4. Percentage of consumer income spent on the product
Goods that take up a high proportion of household income tend to have more elastic demand
than those that take a small percentage of the household budget e.g. if a price of a match box
from £1 a consumer who earns £300,000 per month won’t feel it as much and may not
necessarily reduce demand for match box.
5. Habit forming-Products that create addiction are more inelastic in demand as the users will
buy them when the prices increase.

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What Creates Inelastic Demand For Products?
Inelasticity of products a rises because of the following:-
1. Consumer loyalty
When consumers are loyal to a brand and they feel its worth spending on it, it doesn’t matter
the price.
2. Uniqueness or lack of perfect substitutes
When a product lacks perfect alternative/ substitutes, consumers will lack choice and thus pay
whatever price charged.
3. Level of incomes-
Where consumers disposable income is high they tend to tolerate high prices, thus may still
buy the product no matter the price.
Application of Price Elasticity in Pricing and Revenue Management?
The relationship between price elasticity of demand and the firm’s total revenue is very important
because changing the price of goods may affect sales revenue.
1. When a product is demands is inelastic
An increase price leads to an increase in total revenue because the firm will successfully earn
more for every unit sold as the customers will still buy at a higher price. Even though there
might be a slight decrease in demand the sales price will guarantee more revenues per unit.
2. When a product is demand is elastic
A firm can lower prices to raise more sales as a fall in price leads to a sharp increase in
demand which will increase revenues
3. Discriminatory pricing
Sometimes the firms can charge high income customers higher prices but lower prices to the
low incomes groups. This is because high income groups tolerate high prices than lower
income groups.
Question
1. Consider the price elasticity of demand of product whose price changed from £20 per unit to
£18 per unit. The % change in demand is 40% following a 10% change in price. What will be
the effect on consumer spending and sales revenue?
𝑃𝐸𝐷 =
=
40
10
= 4
PED>1 Therefore the product is demand elastic.
Therefore, a fall in price from E20 to E18 per unit would lead to a 4 times increase in sales revenue
or demand
Income Elasticity of Demand(YED)
This is the responsiveness of demand due to changes in consumer’s disposable incomes.
𝑃𝐸𝐷 =
% 𝑐𝑕𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒

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Normal goods
These are goods that have a positive income elasticity of demand such that as consumer incomes
increases more of these goods are demanded. If the consumer incomes fall the demand will fall.
Normal necessities have an income elasticity of demand less than 1. Luxuries have an income
elasticity demand of greater than 1.
Inferior goods
These are goods that have a negative income elasticity of demand. Therefore their demand fall as
income rises and demand rises as income falls e.g. demand for council owned properties or houses.
Implications o YED on Business
The concept of YED can be applied in pricing goods:-
Discriminatory pricing is more practical where different prices for the same goods are charged to
different groups. For example the high income groups are less sensitive to price changes.
The luxuries tend to have a positive income elasticity of demand. This means therefore businesses
that deal in these products will see an increase in demand when income increases and vice versa. The
opposite is true for necessities.

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TOPIC 2:MANAGING OPERATIONS
Operation management is the process of creating goods to meet the consumer demand.
Marketing creates demand while operations management creates supply.
Operations management involves the 4 elements.
It does not only relate to factories but also to service industries
Inputs and outputs in a production process
Productivity and Efficiency
Productivity refers to the quantity of goods that can be produced per unit of factor input such as
labour and capital.
i.e. it is the output per unit of input.
Productivity of Labour =
total output
No of workers
× 100
Factors Influencing Productivity
1. Technology
Using modern technologies increases productivity since it increases the rate of production,
hence more can be produced.
2. Human capital
Education and training of workers improves their skills level and this may increase the output
per worker.
3. Physical capital
Use of machine rather than human labour tends to increase the output since it increases speed
of production.

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4. Access to finance
Access to finance means the business will be able to invest in the best equipment and
production resources hence improve productivity.
5. Innovations
Innovation means coming up with new ways or means of producing goods through research
and development. A firm that invests more on research and development may improve
productivity.
6. Motivation of workers
A highly motivated workforce tends to be more produce as they may feel valued by the
business.
Efficiency
Efficiency refers to using all the available resources with minimum wastage. Efficiency is about
getting the best at the lowest cost possible
Factors Affecting Efficiency
1. Quality of labor
High quality labour tends to be more efficiency since they have knowledge and experience,
hence little chances of wastage.
2. Labour turnover
High labour turnover means more workers are leaving the company. As a consequence this
will mean some resources such as machines will remain unutilized as they seek for
replacements.
3. Location of production
The location of the business may determine whether or not some resources will be unutilized.
For example locating the business far away from its key supplies such as raw materials may
have their production schedules interrupted hence living some of their assets idle.
4. Availability of labour-lack of enough workers may make the business unable to use the
available resources such as their machines that may be left idle e.g. workers strikes may create
idle resources such as the machines, hence reducing efficiency.
Capital and Labour Intensive Production
Capital intensive is a technique of production in which more machines are used in production.
This is common where
 Identical products are produced.
 Goods aren’t tailor made
 Production is on large scale
Labour intensive is a technique of production that uses more human labour but fewer machines. This
is common:-
(a) In the service sector such as banking, insurance, teaching e.t.c
(b) Where the product is produced to meet customer specification e.g. a wedding dress.
(c) The product is produced on small scale.

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Factors that Determines the Choice between Capital and Labour Intensive
Capacity Utilization
Capacity refers to the highest possible level of output that can be achieved with all the available
resources.
Examples
Importance of capacity utilization
1. Capacity utilization ensures that the resources are used efficiently which will increase sales
and profits.
2. Increasing capacity enables the firm to enjoy economics of scales their average cost per unit
will fall due to large scale production. This means that the firm can charge lower prices with
huge profit margins compared to the rivals.
3. Utilizing the full capacity will enable the business to meet its orders since surplus production
may mean they may meet any unanticipated demand.
Limitations of capacity utilization
1. Lack of downtime for maintenance
Operating at full capacity may mean that all the resources such as machines are fully engaged
with no backup or standby machines. In reality there must be some idle resources on standby to
take care of the emergencies such as machine breakdown.

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2. Pressure on the workers
Operating at full capacity puts a lot of pressure on the workers and this may mean they may feel
so overstretched and this may compromise on quality.
3. Not applicable to seasonal related business
In the firms that deal with seasonal products or services, it may be very difficult to manage
capacity. This is because they may never produce where there is no demand or under produces in
seasons with high demand.
Why use capacity: scenarios
As you can note in the busy week, it is cheaper to serve one customer at £0.20 and the cinema can decide to
charge less to attract more patrons.
However, in the quiet week it is expensive to serve on customer. This means that the firm will not be in a
better position to lower their prices to attract customers due to high cost.
Measuring Capacity
𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑜𝑢𝑡𝑝𝑢𝑡
Total capacity
𝑥 100

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Example:
Increasing Capacity
Firms may increase capacity either in the long term or the short term.
Short Term Methods
1. Increasing demand for the products
This can be achieved by looking for new markets for the products in order to utilize the idle
capacity by producing more.
2. Increase working hours
Can be achieved by working extra hours than before, this will increase the usage of labour and
machines, hence utilizing the full capacity. E.g. opening the business early and closing late.
3. Employ temporary staff
This is especially the case for businesses that are affected by seasonal demand such as tourism
industry. They can employ more worker to increase output as and when need arises.
Long Term Methods
1. Expand the business
A business can increase its capacity to produce more by opening new factories or branches to
handle the increased demand.
2. Investing more equipment
By acquiring new equipments such as additional machinery. This gives the company more
ability to produce more.

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Decreasing Capacity
Capacity of a firm can be reduced by
1. Laying off workers to reduce production and costs
2. Closing down some branches that are uneconomical to operate
3. Divest from machinery or equipment by selling them off
4. Stocks piling in anticipation of demand, so that during that high season there is spare capacity as
the stocks needed are available.
Product or Service Design
Product design refers to the process of developing the product with regard to its physical appearance
and functionality.
Types of Designs
1. Standard design
This is a design where a product is meant to meet the general needs for the large number of
customer i.e. it is a mass design for the general users e.g. tooth paste, shampoos e.t.c. are
designed for a general users.
2. Be spoke design
This is a kind of design where a product is tailored to meet a specific customer needs. It’s also
called custom designs e.g. tailored wedding gowns, tailor made software’setc. .
Design Mix
These are the various elements that must be considered while designing a product.
There are three main elements that make up a design mix.
Diagram
Aesthetic
These deals with issues like colors, looks, feel, tastes, shape, size, smell and other physical appeals of
a product. A product should be designed in away it appeals to the customers for it to sale.
Functional
These deals with issues such as the features of the product and how well the product can meet the
customer’s expectations with regard to its functions e.g. a well designed phone should be able to
make calls, make sms e.t.c.
Functional element considers issues such as reliability, ability to do what its designed to do,
convenience(e.g. how heavy or light to carry) etc
Economic manufacture
This looks at the efficiency of manufacturing the product with regard to its cost e.g. a well designed

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product should be manufactured at lower cost to justify its production. If a product is produced at a
high cost it may not sell.
The Ideal design Mix
Improving Efficiency through Design
There are a number of social and economic trends and changes that affects the design mix. These
are:-
1. Changes in the type of materials
The availability of new materials may affect the element of design especially the economic aspect
of design e.g. the availability of cheap plastic materials means most companies producing
cooking oil do not have to use iron cans in packing the oil. This reduces the cost of production.

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2. Availability of new technologies
Availability of better technologies means that designers can produce at a lower cost and offer
lower prices to the consumers. Besides use of better technologies minimizes waste, hence
efficiency in production. This explain why modern day computer have become more
sophisticated yet cheaper than the early generations.
3.
Stock Control
Stock can be used to mean stock of raw materials, working progress, spare parts and finished goods.
Holding the Right Stock Level
It is important for a business to hold the right amount of stock.
Disadvantage of Holding Too Much Stock
1. Holding too much stock costs some money in form of storage, insurance and opportunity cost
(e.g. tying too much cash in stock)
2. Holding too much stock may increase the risk of obsolescence and wastage of stocks.
3. This could create cash flow problems as much of the cash is tied up in stock that is not
moving.
Disadvantage of not Holding Enough Stock
1. It may lead to loss of sales orders which may in turn lead to loss of customers to rivals.
2. It could damage the reputation of the business as it may lead to loss of good will and respect of
the company when it is perceived as unable to meet its customer’s demands.
3. If it may take too long for the company to respond to urgent orders due to lack of stock.

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Management of Stocks or Inventory
There are a number of methods that firms can use to improve the way they manage their stocks.
These are:-
Electronic point of sale(EPOS)
Stock control systems in a business can be assisted by the use of Information Technology (I.T).
An E.P.O.S is a Sophisticated software packages that enables a business to:
i. keep detailed and track on its purchases sales of stocks and;
ii. Providing an automated system of reordering stocks from suppliers, when they fall below
acceptable levels.
E.P.O.S records every transaction made by a business and can, therefore, enable it to monitor its
stock levels and sales of products to a 100% level of accuracy. This system can automatically re-
order stock when numbers fall to a certain level in the warehouse, as well as monitoring the quantity
of each component that is used in the production process.
This enables a tight control to be kept on both costs and waste, as well as recording the amount of
revenue received from customers and any outstanding customer debts.
Stock Control Charts
Stock control is a system used to ensure that the business has sufficient stock available to meet its
requirements.
Terms or terminologies used in stock charts:-
Maximum Stock Levels
This is the highest stock that a firm is able and willing to hold at any given time e.g. a car dealer may
ensure a maximum stock of a 100 cars.
Minimum Stock Level/Buffer Stock
This is the lowest level of stock beyond which if the stocks fall there is a danger of running out of
supplies i.e. it is a stock held for emergency cases such as to meet an expected demand.

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Reorder Level
This is the stock level at which a new order would be made to suppliers.
E.g. for a car dealer an order may be place when the stock falls to 20 cars.
The reorder level varies from business to business e.g. supermarket is likely to have a higher reorder
level than a car dealer. This is because during the time taken to receive supplies, the supermarket is
likely to sell far more stocks than a car dealer.
NOTE:-The reorder level is always above the buffer stock.
Reorder Qualities
This is the amount of stock that a business orders once the reorder level is attained. The reorder
quality is the difference between the maximum stock and the minimum stock /buffer stock.
𝑟𝑒𝑜𝑟𝑑𝑒𝑟 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑠𝑡𝑜𝑐𝑘 − 𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑠𝑡𝑜𝑐𝑘
Factors that affect reorder quantity
There are several factors that may influence the reorder qualities. These are:-
1. The expected level of demand
If it expected that there will be high demand and the reorder quantity will be high and vice
versa.
2. Cost of stock holding
If the cost of holding or storing the stock is too high then the reorder quantities will be
minimized but if the storage costs will be low then more will be ordered.
3. Type of stock
Durable goods can be ordered in large quantities compared to perishable goods
4. Lead times
Lead time is the time taken too receives the order. If the lead time is short then the reorder
quantities can be minimum but if the lead time is long then the reorder quantities can be huge.
The business will wish the lead time to be as short as possible so that it can meet its customer
orders. However, this may not happen due to
a. Delay in the supplier receiving the order
b. The breakdown of the suppliers Lorries delivering the stock to the business.
Diagram: stock chart

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From the diagram
1. The re-order level is 20,000 units
2. 𝑇𝑕𝑒 𝑟𝑒 − 𝑜𝑟𝑑𝑒𝑟 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 𝑚𝑎𝑥𝑖𝑚𝑢𝑚 − 𝑏𝑢𝑓𝑓𝑒𝑟/𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑠𝑡𝑜𝑐𝑘=30,000-
10,000=20,000 units
3. The lead time (the time delay between placing an order and receiving it) is 8 days i.e.(18-10)
Lean Management
This is a system that puts more emphasizes on dong more for less, i.e. getting the best with the least
use of resources.
Therefore lean management aims to minimize waste, cuts costs and improve efficiency.
Lean Management Techniques or Methods
1. Reducing lead times
2. Just in time (JIT)
3. Total quality management (TQM)
1. Reducing Lead Times
Lead time reduction may create benefits in two areas:
(a) Deliver an order
(b) Launch a new product

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2. Just In Time(JIT)
This is a system that requires supplies to be ordered just when required. JIT therefore ensures that are
no stocks to save on storage costs. Therefore JIT system ensures production on order but not on
anticipated demand.
Advantages of JIT
I) Less money is tied up in stocks such as raw materials, work-in-progress and finished goods
II) There is no need for storage space, hence saves on storage and insurance costs
III) There are lower risks of wastage, shrinkage and obsolescence
IV)It helps the business to build strong relationships with its suppliers since they know poor
relationships will affect immediate and reliable delivery of orders.
Disadvantages JIT
I) The business may struggle to meet orders if suppliers fail to deliver on time. Hence may lose
customers due to failure to deliver orders on time.
II) The business will not enjoy economies of bulk buying since they buy small quantities and
miss out on discounts.
III) Buffer stocks could be minimal or non-existent thus the business may reject orders requiring
immediate delivery. Hence loss of revenue.
IV)Increased administration costs due to many small orders placed.
V) It increases dependence on suppliers who may take advantage and may raise the prices of the
supplies.

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3. Total Quality Management and Quality Control
Quality refers to the minimum acceptable standard of performance of a product. There are a number
of methods used to control quality.
These are a number of ways that quality can be controlled:
Quality assurance
This is a culture or system put in place to ensure that products are produced with zero defects. In this
case the quality is built into the product from the start up to the end and the end product is expected to
have no defects.
Note: Quality assurance requires team work, such that every member of the organization is
responsible, committed and trained to check on quality.
Quality assurance runs through the supply chain processes as shown below and they must get it right from
the start to the end:
Methods of Quality Assurance
Quality assurance can be achieved through
1. Total quality management
2. Kaizen
3. Bench marking
4. Quality circles

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Total Quality Management
It is a culture or system where everyone is responsible for quality by ensuring quality is built in the
product from the start to the end.
In TQM the firm has zero tolerance on product defects such that everyone is responsible to ensure the
end product has no defect.
The whole idea of TQM is to eliminate the need for quality controls such as inspection.
Elements of TQM
1. Managers must be willing to delegate responsibilities to the junior workers
2. TQM must be a policy followed by all senior and junior employees
3. Team work is emphasized in ensuring quality
4. There should be a good relationship between the senior managers and the juniors
5. Regular market research must be carried out to ensure customers are happy with the quality.
KAIZEN/ Continuous Improvement
Kaizen is a philosophy or culture where a firm aims to make small incremental changes on its
products or systems. This is meant to improve quality and ensure zero deficits on the final product or
service.
1. Relies on workers suggestions on improvement
2. The system requires that every employee from all departments is involved and committed to
ensuring quality.
3. The business will require regular research to update their products and improve their quality.
4. The system aims to eliminate waste, reduces costs and improves quality.
Bench Marking
This refers to adopting the best practices from the best businesses in the industry e.g. Samsung could
look upon Apple as the best in the industry in terms of products and processes. Therefore Samsung
can try to match the quality of apple by copying them or their practices.
Advantages of Bench Marking
1. It can help a business to identify areas in its operations that needs improvement.
2. It can help to copy the best practices in the industry thus may improve competitiveness
3. It can help the firm to strive to improve efficiency thus reducing costs.
Disadvantages of Bench Marking
1. Bench marking can only work if the rivals considered the best in the industry are willing to
disclose their secrets.
2. The best practices for one business may not work for either businesses due to different
circumstances
3. Bench marking requires market research thus it is costly
Quality Circle
It is a system in which a group of workers voluntarily meet to discuss and recommend to the
management on how to improve quality. Quality circle relies heavily on team work.
Advantages
1. It improves motivation of workers since they are involved in implementing and monitoring
quality
2. Team work provides for social needs of the workers.
Disadvantages

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1. It is time wasting since workers have to meet often to discuss about quality
2. It cannot work if the managers are not willing to delegate authority
Quality Control
This is an alternative to quality assurance that relies on checking products after they have been made,
to check for any defects.
Therefore quality control heavily relies on quality inspections where certain individuals check on the
products to assess if they meet the quality standards.
Limitations
1. This system is very expensive since quality inspectors must be employed to check on quality
2. Quality control makes use of sampling in identifying defective products. Therefore consumers
may end up with poor quality or defective products if sampling was poor.
3. Spoiled products or defective products will have to be redone which is a waste of resources
such as labour and machine hours.
4. Quality control does not empower the production workers to check on quality, hence they will
not feel responsible for it but the inspectors will.

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TOPIC 3:MANAGING FINANCE
Budgeting
These are financial and qualitative statement prepared in advance stating the actions to be undertaken
in a given period.
1. Historical best budgeting
2. Zero best budgeting
Historical Best Budgeting
This budgeting is based upon the existing historical data e.g. a sales budget can be prepared based
upon the previous year sales.
Advantages
1. The information on which to base the future estimates is readily available
2. It is easier and realistic as one can do the budget with accuracy
3. It does not require any field research therefore it is cheap
Disadvantage
1. New business may not have any history
2. Markets are more dynamic and they keep changing from time to time, hence historical
budgets may not reflect these changes.
Zero Based Budgeting
This is a kind of budgeting that is not based on existing historical data.
Advantages
1. Zero based budgeting is based on the current market conditions, thus may reflect the present.
2. This form of budgeting can be used by both new and existing businesses.
Disadvantages
1. The budget may be over exaggerated, given that the firm has no historical figures
2. It requires market research which is expensive
3. It is time wasting since the information is not readily available to prepare the budget
Budget and Variance Analysis
Variance is the difference between the budget and actual figures
Favourable and Unfavourable Variance
Favourable variance
This is when the actual results are better than budgeted e.g.
 More sales than budgeted
 Less costs than budgeted
Favourable variance could arise due to:-
 High demand than anticipated
 Higher selling prices than budgeted
 Reduction in the labour costs, material costs e.t.c
 Competitors ceasing to trade

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Adverse/unfavourable variance
This is when the actual results are worst than the budgeted e.g.
 Less sales than budgeted
 More costs than budgeted
Adverse variance could arise due to:-
 Less demand than anticipated
 Lower selling prices than budgeted
 Increase in the labour costs, material costs e.t.c
 More entry of competition
Example: calculate variance and state whether adverse or favourable. Use (F) for favourable and (A)
for adverse
Budget Actual Variance
£ 000 £ 000 £ 000
Sales revenue 500 605
Raw materials 200 220
Labour costs 100 110
Advertising 50 45
Delivery 20 20
Utility bills 15 16
Sales Forecasting
A sale forecasting is a projection of expected sales in a given period. The sales forecast are used in
preparing a sale budget.
Problems or difficulties of estimate sales
1. The consumer choice and preference do not remain the same hence the forecast may be over
or under estimated.
2. Sales forecasting may require research which may cost the business money and time
3. The economy may decline or improve and this makes it difficult to set a precise sales forecast
4. Sometimes changes in government policy such as taxes and laws cannot be predicted hence
impossible to set a precise budget
5. Competition cannot be predicted precisely, hence hard to set sales forecast
How to Improve or Increase Sales
1. Offer discounts to customers who buy in large quantities
2. Increase spending on advertising and promotions
3. Lower the prices to attract more customers
4. Provide customers with added benefits such as free delivery e.t.c.
5. Provide online shopping to customers

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Cash budgeting/forecasting
Cash forecasting is a statement of expected cash inflow and cash outflow
Format
Period January February March
Cash balance b/f
Receipts e.g.
Sales receipts
Sale of fixed assets
Inssue of shares
Loan receipt e.t.c
Total receipts
Payments
Purchases
Purchases of fixed assets
Loan repayment e.t.c
Total payments
Closing cash balance
xx
xx
xx
xx
xx
xx (A)
xx
xx
xx
xx (B)
xx (A-B)
Xx= (A-B)
Importance of Cash Forecast
1. Support applications for funds
Cash flow forecasts are used to support loan application as banks or financiers can only know
if the business will be able to pay by looking at the cash flow forecast.
2. Identifying timings for deficits its and surpluses
Cash flow forecast provides an insight into the future cash position of the firm. This will help
the business to know whether they will have a deficit in order to organize for alternative
funding such as overdrafts and loans.
3. Monitoring or management of inflows and outflows
Cash forecast can help the business to identify areas of expenditure to be cut down in order to
improve on their cash position.
Limitations of Cash Forecast
1. Cash flow forecasts are based on estimates and therefore may not reflect the true cash flow
position of the business in the future.
2. Managers may manipulate cash forecast to reflect positively on the business cash position
when the situation is actually worse. This is called window dressing.
3. Preparation of cash budgets is time consuming and costly, besides it might require experts to
prepare it.

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Exercise
Example
Alec Powell is a sole trader who buys and sells electrical goods. The following sales and purchase are
expected over the six-month period from November 2011 to April 2012.
- Purchases Sales
Nov £12,000 £17,000
Dec £14,000 £22,000
Jan £13,000 £18,000
Feb £14,000 £14,000
Mar £15,000 £16,000
Apr £18,000 £18,000
Additional information
1. The balance at the bank as at 31 December 2005 was £1000 (overdrawn)
2. Wages are paid each month of £1,000 which is paid in month that they are incurred.
3. Overhead expenses are due each month of £800 and these are paid one month in arrears.
4. On 1 March 2006, a new van is purchased for £8,000. The old van is sold on 15 April for
£1,500.
5. Sales are all on credit and we allow a two-month credit period
6. Half of the purchases are on credit - we are allowed a month credit period - and half are for
immediate settlement,
Required :
Produce a cash budget for the four-month period ending 30 April 2006.
Managing Working Capital
Working capital is the difference between the current assets and current liabilities. Working capital is
the amount required for the day to day running of the business.
Working capital = current assets-current liabilities
Working Capital Items
Working capital comprises of:-
1. Current assets
These are assets only available for use in the business for a short period, usually a year. These
are:-
a. stock of goods /inventory-this is what we offer for sell
b. cash in hand
c. cash in bank
d. debtors (money held by our credit customers)

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2. Current liabilities
These are debts that are payable within a year. These are
a. Creditors-this is the money we owe to our credit suppliers
b. Bank overdraft-this is the amount of money you take which is more than in the bank
A business that does not manage its cash properly may find its self bankrupt/insolvent. Therefore
each item of the working capital must be managed properly.
Management of cash in Hand and in Bank
Many firms may not have major problem managing cash at their disposal. However a budget should
be in place to avoid misuse of cash.
Management of Debtors
Debtors are our credit customers who buy and pay later. To ensure a health working capital
1. reduce the credit period /time allowed to the customers to pay their accounts
2. Offer cash discounts to encourage quick payments
3. Offer credit only to customers whose credit rating is high
4. Offer goods for sale on cash basis
Management of Stocks
Stocks can cause cash shortages if managed poorly. Therefore to maintain a sound or healthy cash
flow
(a) Adopt a Just In Time (JIT) stock system where stocks are ordered only when needed to reduce
tying up cash in the stock and high storage costs.
(b) Where possible deal in fast moving goods to provide the business with the much needed cash
Management of Creditors
A business can ensure it has sufficient funds by negotiating for longer credit periods with its
suppliers. This ensures the business retains as much cash as possible.
Sources of cash flow problem
I) Poor credit policies-
A business that allows too much credit or long credit periods than suppliers offer to it may
suffer cash flow problems as they may not be able to pay suppliers who offer shorter credit
periods.
II) Stock piling
This occurs where the firm holds too much idle stocks which ties up cash especially if they
are slow moving.
III) Overtrading
Overtrading occurs where the business expands too fast by investing in fixed assets which
reduces the available cash putting the business in danger of bankruptcy.
IV)Over borrowing
If a business borrows more than it can pay, this may cause cash flow problems as the high
interest payments may reduce the available cash.

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Contingency Finance Planning
A contingency finance plan is a backup plan just in case the original plan fails.
There firms may have alternative sources of funding when the main one fails this includes
I) Use of bank overdraft to take care of short tern cash needs
II) Introduction of extra cash into the business by the owner/shareholders
III) Debt factoring where the firm converts their debts before they mature
Difference between cash and profits
Cash Profits
1. Amount of money received held by
the business over a given period of
time.
The difference between total revenue and total costs
2. Shows the actual amount of money
received and held in the business.
Does not include credit sales
Considers all amount expected and actual amount to
be received from sales. E.g. includes an account for
credit sales
3. Required in the shorter to meet the
firms day to day operations
Required to meet long-term needs of the firm such as
expansion
4. Cash is a measure of ability to pay
debts as they mature. I.e. liquidity.
Therefore a high profitable firm can
go bankrupt if it has no cash to meet
its short-term needs.
Is measure efficiency in controlling costs to make
profits.
A firm can make huge profits but go bankrupt
especially if most sales are on credit.
Why businesses fail
Statistics show that 2 out five startups go under within 2years this is due to the following reasons
i. Poor cash flow management
ii. Lack of a business plan to provide direction
iii. Poor credit management eg giving too much credit with long repayment periods
iv. Poor stock control overstocking that may lead to obsolete stocks and high storage costs
v. Overtrading by trying to expand production without adequate capital
vi. Investing too much in fixed assets
Lack of experienced human resource

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TOPIC 4:MANAGING PEOPLE
Key Terms
1. Organisation structure
This is the layout of the different levels of responsibilities and authority in an organization
2. Span of control
This refers to the number of employees directly under the control of a manager.
3. Delegation
This is a process of assigning power and authority to the lower level staff by the manager.
4. Chain of command
This refer to the manner in which decision making flows from the senior management to the
lower level staff.
Types of organizational Structure
1. Tall/vertical structure
2. Flat/horizontal structure
3. Centralized structure
4. Decentralized structure
5. The matrix structure
1. Tall/vertical structure
This is a structure in which there are many managers with smaller span of control. i.e. the structure
tends to have many levels of management.
Diagram tall structure

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Advantages a tall structure
a) Promotes closer supervision of the juniors to ensure that the tasks are carried out as expected.
b) Communication between the manager and the junior will be effective since he has a smaller
span of control.
c) It promotes good relations between the juniors and the seniors as the manager can give
personal attention to each employee.
d) It can help unskilled workers who need closer supervision to learn from the manager.
Disadvantages of tall structure
a) Having too many managers may mean high cost of supervision
b) The leader may not consult the juniors in decision making, since the manager mainly uses
autocratic style of leadership which demotivates the workers
c) The communication between the lower level management and the top level management will
be poor since there are so many levels of management in the hierachy
2. Flat/Horizontal Structure
This is a structure in which there are fewer managers with larger spans of control. i.e. the structure
tends to have fewer levels of management.
Diagram flat structure
Advantages flat structure
The advantages for this are the disadvantages of tall/vertical structure
Disadvantage the disadvantages are the advantages of tall/vertical structure
3. Centralized Structure
This is where decision making is done at the top level management or at a central point e.g. the head
office. In this case the junior or lower level management are not consulted in decision making.
Advantages
a) The senior management will have more control over the activities of the firm.
b) Decisions are made with the whole organization in mind e.g. if each department/branch is
allowed to make their own decisions they will only make what is good for them.

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c) With one central command the procedures will be standardized in all branches or the
departments which will mean cost saving
d) Centralized decision making means fewer managers are required hence cost saving
Disadvantages of centralization
I) Workers don’t feel involved in decision making , hence may feel less valued and less
motivated, hence lower productivity
II) The top managers may not understand the day to day operations of each branch and this many
lead to poor decisions
III) The heads of departments or branch managers will have little responsibilities of outcome or
the performance of the section. This may not encourage managers to improve efficiency of
their sections since they believe it’s the responsibility of the top managers.
4. Decentralized structure
This is where most of the decisions making is delegated to the lower levels of management e.g. the
head office may set targets but the individual branches or departments decide on how these targets
are met.
Advantages are the opposite of the disadvantage of centralized structure.
Disadvantages are the opposite of the advantages of centralized structure
5. The Matrix Structure
This is a structure that involves creating teams with specialist from each section of the business. This
is commonly used to carry out specific projects that require input from all departments or sections.
Team 1 Team 2
Finance
Marketing
Human Resource
ICT
Production

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Recruitment and Training
Recruitment
Recruitment is a process of attracting and retaining the best applicants for the job.
Recruitment and selection process
The recruitment process
1. Job analysis and description:
When a new employee is needed, a job analysis needs to be taken to identify the tasks
and responsibilities of the position. This should be easy for a job that needs replacement,
but not so much for a job that has just been created.
Once all the details of the job have been gathered, a job description needs to be drawn
up.
Functions of a job description:
a) Given to candidates so they will know what the job will involve.
b) Allows a job specification to be drawn up which will state the requirements for the job.
c) Shows whether an employee carries out the job effectively or not. It helps solve
disputes between employees and employers about wages, working hours, etc.
Contents of a job description
1) The title of the job.
2) The department one will work in.
3) Who will be in charge of the job-holder.
4) Who the job-holder will be in charge for.
5) The purpose of the job (job summary).
6) The main duties of the job.
Job description sometimes contains information about:
a) The conditions of employment – working hours, wages, pension schemes.
b) Training that will be offered.
c) Opportunities of promotion.
2. Job specification
After the job description has been drawn up, the qualifications for the job can be
identified. They usually include:
a) The level of educational qualifications.
b) The amount and type of experience.
c) Special skills, talents or knowledge.
d) Personal characteristics. (e.g. type of personality)

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3. Advertising the vacancy
The next stage is on how to get people to know that you have a job to be filled. This can
be through internal or external recruitment.
4. Job advertisement
This is what a business needs to decide when drawing up an advertisement:
What should be included:
 Job description
 Job specification
5. Applications forms and CVs/résumés
When a person applies for a job, he will have to fill out an application form, or write an
application letter with a CV enclosed. CVs are descriptions about one's qualifications and
skills in a set format.
Businesses will use application forms and CVs to see whether an applicant match the
job specifications or not.
6. Short listing
From the many applicants interviewed a few of them than suits the job are shortlisted and
invited for the interview.
7. Interviews
At this stage the candidates matching the job specifications are invited to interviews in the
selection stage.
Interviews are the most popular form of selection. However, interviews are not always the
most reliable process of selection. They aim to find out these things:
 The applicant's ability to do the job.
 Personal qualities that are advantageous and disadvantageous.
 General characteristics – whether they can "fit in"?
Interviews can be one-to-one, two-to-one, or a panel of people to interview people which
is used to select people for important jobs. Some businesses include tests in their
selection.
a) Skill tests: To test the skills of the candidates.
b) Aptitude tests: To test how easily candidates can be trained/learn new things.
c) Personality tests: To test for people who have specific personal qualities which will
fit into jobs – e.g. that has a lot of stress; requires you to work with a team.
d) Group situation tests: To test how well applicants work with other people.
8. Selection of the best candidate
The candidate who meets all the job requirements are offered a contract of employment

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Methods of Recruitment
1. Internal recruitment
2. External recruitment
Internal Recruitment
This is where a firm recruits from the existing employees of the business.
Forms of Internal Recruitment
1. Promotion-
This is where junior employees are moved up the ranks to fill up the senior positions.
2. Transfers
This is where employees are moved from one section of the organization or branch to the
other. E.g. moving an employee from one branch or department to fill up a vacancy in the
other.
Advantages of internal recruitment
1. internal recruitment reduces the cost of training new workers to adapt to the new conditions
as existing workers are already familiar with the company
2. It gives employees a chance to advance in their career hence they may feel wanted and valued
in the company, hence high productivity
3. Internal recruitment helps to reduce labour turnover (the number of workers leaving within a
year) since employees have a strong desire to stay longer as there is an opportunity for
advancement in their career
4. Internal recruitment is more cheaper and faster as it may not require any pad advertisement
5. The company will not risk hiring wrong person for the job since they already know them.
Disadvantages of internal recruitment
1. Internal recruitment does not offer an opportunity to bring in new talents with new ideas. It
may lead to recycling of inefficiencies.
2. May create jealousy and rivalry between existing employees.
Sometimes internal recruitment may cause disputes among employees who may feel that the
management was unfair
3. Internal recruitment does not give the business a chance to have a variety of applicants to
compete for the job
External Recruitment
This is where the firm hires employees from outside the business.
Forms of External Recruitment
1. Employment agencies
These are companies that hire staff on behalf of other companies for a fee. These companies
recruit, interview, short list applicants and forward the list to the clients for hiring.
2. Head hunting
This is a form of recruitment in which a company approaches a high performing employee in
rival companies with high pay offer in order to attract them from their companies.

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3. Career fairs
This is where a company recruits fresh graduates through university placements and career
visits.
4. Media advertisement
This is where firms attracts applicants for the jobs by advertising in the media such as radio,
newspapers, TV, online e.t.c.
Advantages are the disadvantage of internal recruitment
Opposite of internal recruitment
Training
Training involves providing employees with new skills or experiences
Types of Training
1. On the job training
This involves training workers as they do the job e.g. where workers learn the skills alongside an
experienced worker.
Advantages of on the job training
a) There is no disruption in production as workers learn while working
b) It is cheaper as employees are trained by fellow experienced workers
c) The employees can apply the skills they are learning there and then which make it more
practical.
Disadvantages on the job training
a) The employees may not gain skills with certificates that can help them to advance in their
careers.
b) They may not be exposed to wide range of skills and knowledge from expert trainers.
2. Off the job training-
This is where employees are trained away from the work place e.g. in a school, college etc.
Advantages will be the disadvantages of this. Disadvantages will be the advantages of on the job.
3. Induction training
This is the training given to new workers when they join the company. This training Helps
worker to learn about the organization values and culture and ethos and his co workers or
faciclities. This is usually done on the job or off the job.
The value of training
1. it improves productivity of workers as their efficiency will improve
2. The business may gain competitive advantage against the rivals because of the well trained
workers.
3. Well trained workers provide an opportunity for the business to introduce new technologies.
4. Training creates motivation among workers as it provides them with an opportunity for
advancement in careers.

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The Limitations of training
1. Workers may leave to the competitors after training
2. Training will increase the cost of labour hence reduce profits
Leadership Styles
This is the ability to guide, direct, or influence people to act in a certain way
Leadership style is the manner in which a leader influences and directs the juniors to carry out their
functions.
Types of leadership styles
1) Autocratic leadership style/authoritative /dictatorship
2) Democratic/consultative style
3) Laissez faire
4) Paternalistic style
Autocratic Style of Leadership
This is a form of leadership in which the leader takes all the decisions without consulting his /her
juniors. In this style the leader sets objective to be attained and insists on obedience.
This form o leadership is commonly applied in the armed forces where orders have to be obeyed
instantly.
Limitation of autocratic style of leadership
1) Poor working relationships
In this form of leadership the employees or the juniors are always dissatisfied with the leader
thus poor working relationships with the managers.
2) Poor motivation
Employees or junior are treated more like machines to take orders without making their own
input thus they may feel not part of the decision and thus more demoralized.
3) High level of supervision
This form of leadership requires high level of supervision to achieve the objectives of the
organisation since the juniors have to be directed on what to do at all times
4) High level of dependence on the manager
Organisations that take up autocratic leadership style of leadership tent to be highly depended
on the leader as the juniors can not make any simple decision. The absence of this leader may
impact badly on the activities of the organisation. eg death of the leader may mean trouble for
the organisation as junior have not been trained to take over.
Advantages of autocratic style of leadership
1) The style give the organisation an opportunity to respond to urgent issues as quickly as
need arises without nee for consultation
2) Helps the firm to directly lowly skilled employees to produce goods and services at the
direction of one skilled supervisor. This may reduce the cost of hiring highly qualified
staff that requires no supervision.
Democratic Style of Leadership
This is a style that encourages participation of all members of the organisation in decision making. In
this leadership style the leader consults his /her juniors in decision making.
Democratic leadership may take two forms
a. Persuasive
This is where a leader comes up with the decision and persuades and persuades
the junior to support it as the best decision/idea.
b) consultative
This is a form of democracy in which the leader consults for the staff input
before making a decision.

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Limitations of democratic style
1) Time consuming
The manager has to consult all the relevant people before making any decision and these
wastes a lot of time.
2) Requires strong communication skills
A leader require good communication skills as the lack of it may render it difficult for the
leader to clearly express his ideas and listen to the opinions of the juniors.
Advantages of democratic style of leadership
1) Good working relations
This style provide a conducive working environment between the seniors and their juniors
2) Motivational
Juniors feel part of the decision process and thus are more motivated in carrying out the
assignments from the seniors.
3) Helps the manager to tap into the knowledge and the experiences of experts in various
areas. The manager can always consult the experts in various areas as s/he can not be a junk
of all trades.
4) Reduces the need for high supervision as the workers /juniors are motivated and aware of
what to do.
Paternalistic Style of Leadership
This is a leadership style in which the leader makes all the decisions but put greater emphasis on the
welfare of the juniors. in this case he behaves like a fatherly figure to them by providing welfare
supervises such as
 Free housing
 Free transport
 Free medical, care etc.
This style is similar to autocratic style of leadership only that an autocratic leader, unlike the
paternalistic leader does not care about the workers welfare.
*Advantages and limitations (read autocratic style of leadership)
Laissez Faire
This is a style of leadership in which the leader allows the employees to carry out activities without
any supervision or direction. The juniors are given power to do anything so long as it is within the
limits. Gives no continuousfeedback or supervision because the employees are highly
experienced and need littlesupervision to obtain the expected outcome. On the other hand, this
type of style is alsoassociated with leaders that don’t lead at all
This kind of style creates a more relaxed atmosphere with very few guidelines and directions.
Limitation of laissez faire
1) Some employees or juniors may be confused if there is no one to provide direction on what
decision to take especially unskilled or nonself motivated staff.
2) Employees/junior will be poorly motivated as there exits little or no strict requirements on
what to be achieved as targets.
Advantages of laissez faire
1) There is no need for supervision of juniors as they are deemed to be responsible to
themselves.
2) The juniors may find the environment more flexible and may have motivation to achieve
more for the business

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Theory X and Y
These are theories that the attitudes or assumptions of managers towards workers
MOTIVATION OF STAFF
Motivation is the process of driving individuals or groups perform at the highest level.
Financial and Non-Financial Incentives
Financial incentives are monetary benefits given to workers to drive them to perform.
These are
1. Time rate
This is paying workers according to the number of hours worked the more hours worked the
more you earn.
2. Piece rate
This is where employees are paid according to the number of pieces produced. This system
can work effectively where it is possible to quantify the units produced e.g. number of biscuits
produced etc.
3. Overtime
This is extra pay for work done over and above the normal working hours. It is usually paid
at a higher hourly rate, e.g. double the hourly rate.
4. Bonus
This is a single payment given to employees for achieving a target however this system may
lead to employees to produce a poor quality to earn a bonus. usually this are paid o
groups/teams.
5. Profit sharing
This is where a percentage of the company’s profit is given to all employees for work well
done.
6. Employee share ownership schemes (ESOP)
This is there the employees are given a chance to buy the company’s shares in order to be a
part of the company ownership.
7. Performance related pay (PRP)

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This is where the employees are paid based on how well they perform on the job. Those who
perform well earn more, e.g. salary increments are based on one’s performance.
8. Loyalty bonus
This is where employees are paid for every extra year they spent working for the company.
9. Perks
This is a payment in kind instead of giving the actual money the employer can give.
a) a company car
b) health insurance
c) first class travel
d) discounted products
This is a saving o the employee and will encourage them to work harder.
Disadvantages of Financial Incentives
1. it is expensive-it is expensive since the company will have to spend which will increase the
cost of labour and reduce their competitiveness in terms of pricing because of high cost of
production.
2. Some forms of financial incentive such as peace rates may interfere with product quality as
employees strive to produce more to earn more.
3. Some workers may not be motivated by money regardless of how much they are paid.
Advantages Of Financial Incentives
1) It is easier to determine how much it costs to motivate workers.
2) Some workers at the lower level may still need monetary incentives to meet their basic needs
such as food and shelter.
Non-Financial Incentives
Non-financial incentives are incentives given to staff to encourage them to perform these are:
1. Promotion
Employees can be motivated by giving them a chance to progress in their career.
2. Delegation/Empowerment
This is giving workers the power to make their own decision. However this maybe abused by
some employees.
3. Job enrichment
This is making the job more interesting by enriching the content of the job with a variety of
tasks that are interesting.
4. Job rotation
This is where employees are not specialized in doing one task but moved from one task or job
to another. This is to reduce boredom.
5. Recognition
Verbal or written appreciation of good performance may encourage employees to work hard
since they feel that their work is valued.
6. Team working
This is where more than one person is involved in solving problems. Team work would
motivate workers because it provides with their social needs.
7. flexible working
This is allowing employees to work at times and places that suits them e.g. working at home

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rather than t the office.
ADVANTAGES-these are the disadvantages of financial incentives.
DISADVANTAGES-these are the advantages o financial incentives.
Staff Turnover
This is the number of employees or workers leaving the business in one year.
Causes Of Labour/Staff Turnover
1. poor pay
Employees may feel under paid by the current employer and quit to find “greener pastures”
(better pay)
2. Lack of job security
Employees may leave a company in search of more secured jobs if there is a threat of losing
their current jobs.
3. Lack of growth
If an employee feels stagnated with no opportunities to advance in their career such as
through promotion and training, they might leave in search of career advancement.
4. Poor working conditions
Companies that provide dangerous and insecure work environments may lose workers who
fear for their life or health.
5. Old age
Some people may leave the company because they have attained retirement age.
Effects Of High Labour Turnover
1. High cost of recruitment
High labour turnover increases the cost or recruiting and training new workers for the job.
2. Disruption of production
When employees leave the organization this interferes with the production schedules as the
firm finds new replacement. This may lead to loss of sales orders
3. Loss of reputation
Potential employees may avoid joining companies with high labour turnover as they may feel
many people are already leaving because they are dissatisfied.
Benefits of labor turnover
1. It is provides an opportunity for the company to bring in new workers with new ideas.
2. It provides an opportunity for the company to downsize by reducing their capacity where they
don’t replace leaving workers to reduce losses.
Motivation Theories
These are the ones that provide suggestions on how workers can be motivated.
These are;
1. Taylor’s scientific management theory
2. Herzberg’s two factor theory
3. Maslow’s Hierarchy of Needs theory
4. X and Y theory
5. Elton Mayo Human relations theory

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Taylor’s Scientific Management Theory
According to Fredrick Taylor’s theory:
1. workers naturally dislike work and must be closely supervised
2. That workers are only motivated by money i.e. their personal gains.
3. The workers should then be specialized in one task that they are trained in.
4. they should be paid on piece rate i.e. per piece
5. People can be treated like machines. They have no any social or human needs.
NOTE: A leader who applies this theory may tend towards autocratic style o leadership.
Weaknesses of Taylor’s Scientific Management Theory
1. He assumes people are motivated by money only which is not true as people may be
motivated by other non-financial factors.
2. It may encourage poor quality products or services as workers hurry to produce more to earn
more.
3. It provides tasks that are boring and repetitive because of specialization of workers.
4. He treats human beings like machines yet they are social beings.
Herzberg’s Two Factor Theory
This is a theory that analysis employee motivation to work based on two factors.
1. Hygiene factors
2. Motivator factor
The following table presents the top six factors causing dissatisfaction and the top six factors causing
satisfaction, listed in the order of higher to lower importance.
Factors Affecting Job Attitudes
Leading to Dissatisfaction(hygiene factors) Leading to Satisfaction(motivators)
 Company policy
 Supervision
 Relationship w/Boss
 Work conditions
 Salary
 Relationship w/Peers
 Achievement
 Recognition
 Work itself
 Responsibility
 Advancement
 Growth
Hygiene Factors
Therefore hygiene factors are factors that make the working environment pleasant but not sufficient
enough to make workers motivated. According to Herzberg employees may be happy and satisfied
with the good working conditions but may not be motivated to do more for the business.
Motivator Factors
1. Empowerment
This involves delegating tasks to employees to allow them to make decisions. This will make
them feel important and more motivated.

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2. Promotion
This is giving workers an opportunity to advance in their careers through promotion
employees and will feel a sense of achievement.
3. Job rotation
This is where employees are moved from one production activity to the other. This will
reduce boredom. However this may cost the company more on training workers in the new
roles.
4. Flexible working
This is allowing employees to choose when and where to work from. e.g. Work from home or
work at their time to choice.
Maslow’s Hierarchy Of Needs Theory
Masl ow ’s h i erarc h y of n eed s
This is a theory that tries to explain the relationship between motivation and the different levels of
human needs.
Maslow's theory consisted of two parts:
(1) The classification of human needs,
(2) Consideration of how the classes are related to each other
Classification of human needs
Maslow believed that these needs are similar to instincts and play a major role in motivating
behaviour. Physiological, security, social, and esteem needs are deficiency needs (also known as D-
needs), meaning that these needs arise due to deprivation. Satisfying these lower-level needs is
important in order to avoid unpleasant feelings or consequences.
Maslow termed the highest-level of the pyramid as growth need (also known as being needs or B-
needs). Growth needs do not stem from a lack of something, but rather from a desire to grow as a
person.
Five Levels of the Hierarchy of Needs
There are five different levels in Maslow’s hierarchy of needs:
1. Physiological Needs
These include the most basic needs that are vital to survival, such as the need for water, air, food
and sleep. Maslow believed that these needs are the most basic and instinctive needs in the
hierarchy because all needs become secondary until these physiological needs are met.
2. Security Needs
These include needs for safety and security. Security needs are important for survival, but they
are not as demanding as the physiological needs. Examples of security needs include a desire for
steady employment, health insurance, safe neighborhoods and shelter from the environment.
3. Social Needs
These include needs for belonging, love and affection. Maslow considered these needs to be less
basic than physiological and security needs. Relationships such as friendships, romantic
attachments and families help fulfill this need for companionship and acceptance, as does
involvement in social, community or religious groups.
4. Esteem Needs
After the first three needs have been satisfied, esteem needs becomes increasingly important.
These include the need for things that reflect on self-esteem, personal worth, social recognition

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and accomplishment.
5. Self-actualizing Needs
This is the highest level of Maslow’s hierarchy of needs. Self-actualizing people are self-aware,
concerned with personal growth, less concerned with the opinions of others and interested
fulfilling their full potential.
How does the Hierarchy Work?
 A person starts at the bottom of the hierarchy (pyramid) and will initially seek to satisfy basic
needs (e.g. food, shelter)
 Once these physiological needs have been satisfied, they are no longer a motivator. The
individual moves up to the next level
 Safety needs at work could include physical safety (e.g. protective clothing) as well as
protection against unemployment-job security, loss of income through sickness etc)
 Social needs recognise that most people want to belong to a group. These would include the
need for love and belonging (e.g. working with colleague who support you at work, teamwork,
communication, company treats )
 Esteem needs are about being given recognition for a job well done. They reflect the fact that
many people seek the esteem and respect of others. A promotion at work might achieve this
 Self-actualisation is about how people think about themselves - this is often measured by the
extent of success and/or challenge at work
Maslow's model has great potential appeal in the business world. The message is clear - if
management can find out which level each employee has reached, then they can decide on suitable
rewards.

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Problems with the Maslow Model
There are several problems with the Maslow model when real-life working practice is considered:
i. Individual behaviour seems to respond to several needs - not just one
ii. The same need (e.g. the need to interact socially at work) may cause quite different behaviour in
different individuals
iii. There is a problem in deciding when a level has actually been "satisfied"
iv. The model ignores the often-observed behaviour of individuals who tolerate low-pay for the
promise of future benefits.
There is little empirical evidence to support the model. Some critics suggest that Maslow's
model is only really relevant to understanding the behaviour of middle-class workers in the
UK and the USA (where Maslow undertook his research).
Mayo- Human Relations Theory
Elton Mayo believed that workers are not just concerned with money but could be better motivated
by having their social needs met whilst at work (something that Taylor ignored).
He introduced the Human Relation School of thought, which focused on managers taking more of an
interest in the workers, treating them as people who have worthwhile opinions and realising that
workers enjoy interacting together.
Mayo conducted a series of experiments at the Hawthorne factory of the Western Electric Company
in Chicago
He isolated two groups of women workers and studied the effect on their productivity levels of
changing factors such as lighting and working conditions.
He expected to see productivity levels decline as lighting or other conditions became progressively
worse
What he actually discovered surprised him: whatever the change in lighting or working conditions,
the productivity levels of the workers improved or remained the same.
From this Mayo concluded that workers are best motivated by:
Better communication between managers and workers ( Hawthorne workers were consulted over
the experiments and also had the opportunity to give feedback)
Greater manager involvement in employees working lives ( Hawthorne workers responded to the
increased level of attention they were receiving)
Working in groups or teams. ( Hawthorne workers did not previously regularly work in teams)
In practice therefore businesses should re-organise production to encourage greater use of team
working and introduce personnel departments to encourage greater manager involvement in looking
after employees’ interests.
His theory leans towards a paternalistic style of management.

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Reduction of labor costs
There are a number of ways a firm can reduce it labour costs this includes:
1) Flexible employment:
This is where the firm employs workers on part-time to enable them hire workers when and
only when need arises.
2) Flexible working, e.g. by having multi-skilled workforce with different skills who can do
more than one job to help in responding to change
3) Reducing staff costs e.g. dismissal, redundancy of workers.

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