business unit 2
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buss 2 powerpointTRANSCRIPT
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BUSINESS STUDIESUNIT 2
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USING BUDGETSA budget is a financial plan for the future concerning the revenues and costs of a business over a given period of time.
Why are budgets used:
- Establish priorities and sets out targets
- Provides direction
- Assign responsibilities
- Allocate resources
- Delegate without loss of control
- Motivate staff
- Monitor performance
- Control revenues and costs
- Communicate targets
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USING BUDGETSHistorical budgeting:
- Using last years figures as a basis for the budget
- Realist and based on actual results
- Circumstances may have changed
- Doesn’t encourage efficiency
Zero-Based Budgeting
- Budgeting costs and revenues are set to zero.
- Budget is based on new proposals for sales and costs
- More time consuming and more complicated
- Potentially more realistic
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USING BUDGETSA variance arises when there is a difference between actual and budget figures.
Favourable Variances
- Actual figures are better than budgeted
- Costs lower than expected
- Sales higher than expected
Adverse Variances
- Actual figure is worse than budgeted figure
- Costs are higher than expected
- Revenue is lower than expected
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USING BUDGETSDrawbacks and limitations of budgeting:
- Are only as good as the data being used
- Can lead to inflexibility in decision making
- Need to be changed as circumstances change
- Takes time to complete and manage
- Can result in short term decisions to keep within the budget
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MEASURING AND INCREASING PROFITProfit is financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something.
Why businesses should increase profits:
- Earn better returns for investors
- Stop the business from suffering losses
- Improve internal sources of finance
- Provides a better return on investment
Ways to increase profit:
Sales
Less Variable Costs
Less fixed Costs
Net Profit
Increase quantity or raise selling price
Reduce variable cost per unit
Increase output (economies of scale)
Reduce overheads
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MEASURING AND INCREASING PROFITStrategies:
Selling more:
+ Higher sales= higher revenues+ Better use of production capacity+ Result in higher market share- Depends on elasticity of demand- Sales value may fall if price falls- Can you physically sell more?- Competitors are likely to respond- Marketing efforts may fail- Fixed costs may rise (higher marketing)
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MEASURING AND INCREASING PROFITStrategies:
Increase selling prices:
+ Higher price=high sales value+ Customer may perceive product as higher quality+ No need for extra capacity- Depends on elasticity of demand- Number of sales may fall- Customers have to remain loyal- Competitors are likely to respond- Customers may switch to competitors
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MEASURING AND INCREASING PROFITStrategies:
Increase production:
+ Greater quantity of product to be sold+ Spread fixed costs over a greater number of units+ Economies of scale- Extra output might no be sold- Business might not have spare capacity- Fixed costs might rise- Quality may fall
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MEASURING AND INCREASING PROFITStrategies:
Reducing fixed costs and overheads
+ Feeds directly to higher profits+ Reduces breakeven output+ Potential for substantial savings- Cutting costs may affect quality- Might reduce ability of increasing sales- Intangible costs e.g. redundancies may lead to low morale
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IMPROVING CASH FLOWMain causes of cash flow problems:
- Low profits
- Too much production capacity
- Too much stock
- Allowing customers too much credit
- Growing too fast
- Unexpected changes
- Seasonal demand
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IMPROVING CASH FLOWWays to improve cashflow:
Short term:
- cut costs
- reduce current assets (stock and debtors)
- increase current liabilities (delay payments)
- sell surplus fixed assets
Medium to long term:
- improve efficiency & productivity
- increase equity finance
- increase long-term liabilities
- reduce spending on fixed assets
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IMPROVING CASH FLOW- Managing cash flow tied up in stocks
- Debt Factoring
- Handling cash flow problems with customers
- Sale of assets
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IMPROVING ORGANISATIONAL STRUCTUREFactors that determine the organisational structure:
Size of the business
Type of the business
Management and leadership style
The competitive environment
Changing the organisational structure:
+ Growth for the business
+ Reduce costs and complexity
+ Motivate employees
+ Improve customer service
- Manager and employee resistance
- Disruption
- Costs
- Negative impact on quality
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IMPROVING ORGANISATIONAL STRUCTURENarrow span of control:
- Allows for closer supervision of employees
- More layers may be required
- More effective communication
Wide span of control:
- Gives subordinates the chance of more independence
- More appropriate to reduce labour costs (reduce number of managers)
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IMPROVING ORGANISATIONAL STRUCTURETall hierarchies- many layers of hierarchy and narrow span of control.
- Allows tighter control
- More opportunities for promotion
- Takes longer for communication through the layers
- More layers=more staff= higher costs
Flat hierarchies- few layers of hierarchy and wide span of control
- Less direct control and more delegation
- Fewer opportunities of promotion but staff have greater responsibility in their role
- Vertical communication is improved
- Fewer layers=fewer staff=lower costs
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IMPROVING ORGANISATIONAL STRUCTUREDelegation- is the assignment to others of the authority for particular functions, tasks and decisions.
Advantages:
- Reduces management stress and workload
- Allows senior management to focus on key tasks
- Subordinates are empowered and motivated
- Potentially better use of resources
- Good method of on-the-job training
Disadvantages:
- Cant delegate responsibility
- Depends on the quality or experience of the subordinates
- Harder in a small firm
- May increase workload and stress on the subordinates.
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IMPROVING ORGANISATIONAL STRUCTUREDelayering- involves removing layers of management from the hierarchy of the organisation
Advantages:
- Lower labour costs
- Faster decision making and communication
- Stimulate employee innovation
Drawbacks:
- Less opportunity for promotion
- De-motivating effect (redundancies)
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EFFECTIVENESS OF THE WORKFORCEStaff Turnover
Percentage of staff who leave during a period
Staff turnover= number of employees leaving during period x100
Average number employed during periodCosts to a business when higher labour turnover:
- High recruitment and training costs
- Increased pressure on remaining staff
- Disruption to production
- Harder to maintain standards of quality
Factors affecting the level:
- Industry practice
- Employee loyalty
- Economic conditions
- Size and ownership of the business
- Financial rewards
- Working conditions
- Recruitment standards
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EFFECTIVENESS OF THE WORKFORCELabour productivity
Output per employee
Labour productivity= output per period (units)
number of employees at workFactors affecting the level:
- Quality and extent of fixed assets
- Skills, ability and motivation of the workforce
- Methods of production
- External factors (reliability of suppliers)
Ways to improve:
- Set and measure to targets
- Streamline production
- Invest in equipment
- Invest in employee training
- Make the workplace productive
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EFFECTIVENESS OF THE WORKFORCEAbsenteeism
Production of staff who are absent from work
absenteeism= number of staff absent during a period x100
number employed during the periodFactors affecting the level:
- Industry practice
- Employee loyalty
- Economic conditions
- Size and ownership of the business
- Financial rewards
- Working conditions
- Recruitment standards
Ways to improve:
- Understand the causes
- Set targets and monitor trends
- Clear sickness and absence policy
- Provide rewards for good attendance
- Consider the wider issues of employee motivation
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RECRUITMENT, SELECTION AND TRAININGInternal recruitment:
- Jobs are given to staff already employed within the business
- Involves promotion and reorganisation
Advantages:
- Cheaper and quicker to recruit
- People already familiar with the business and how it operates
- Provides opportunities for promotion within the business
Disadvantages:
- Business already knows strengths and weaknesses of candidate
- Limits number of potential applicants
- No new ideas can be introduced from the outside
- May cause resentment from other colleagues
- Creates another vacancy which needs to be filled
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RECRUITMENT, SELECTION AND TRAININGExternal recruitment:
- Job centres
- Job advertisements
- Recruitment agencies
- Headhunting
- Personal recommendation
Advantages:
- Outside people bring new ideas
- Wider pool of workers to find the best candidate
- People have a wider range of experience
Disadvantages:
- Longer process
- More expensive
- Selection may not be as effective
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RECRUITMENT, SELECTION AND TRAININGOn-the-job training- an employee receives training whilst remaining in the workplace. E.g demonstration, coaching, job rotation or team projects.
Advantages:
- Generally cost effective
- Employees are actually productive
- Opportunity to learn whilst doing
- Training along side real colleagues
Disadvantages:
- Quality depends on the ability of the trainer and time available
- Bad habits might be passed on
- Learning environment might not be suitable
- Potential disruption to production
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RECRUITMENT, SELECTION AND TRAININGOff-the-job training- An employee receives training away from the workplace. E.g courses, day release or webinars
Advantages:
- Wider range of skills or qualifications can be obtained
- Can learn from specialists with expertise
- Employees can be more confident
- Motivate employees as the business has spent money on them
Disadvantages:
- More expensive
- Lost working time and potential output
- New employees may still need some induction training
- Employees now have new skills and may leave for better jobs.
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RECRUITMENT, SELECTION AND TRAININGInvestment in training:
Advantages:
- Better productivity
- Higher quality
- More flexibility through better skills
- Less supervision required
- Improved motivation (empowerment)
- Better recruitment and employee retention
- Easier to implement change
Disadvantages:
- Poor management may still be a problem
- Poor job design
- Ineffective or inefficient equipment
- Poor production organisation
- Inappropriate recruitment
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MOTIVATING EMPLOYEESMotivation is the will to work, it comes from enjoyment of work or desire to achieve certain goals.
Methods of motivation:
-financial (eg. Salaries, bonuses)
-non financial (responsibility or praise)
Advantages of a motivated workforce:
- Better productivity
- Better quality and customer service
- Lower levels of absenteeism
- Lower levels of staff turnover
- Lower training and recruitment costs
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MOTIVATING EMPLOYEESMotivational theorists:
- Taylor (scientific management)
- Mayo (human relations management and hawthorne effect)
- Maslow (hierarchy of needs)
- Herzberg (two factor theorem-hygiene+maintenance factors)
- Mcgregor (theory x and y)
- Drucker (importance of objectives)
- Peters (involving employees and
recognising champions)
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MOTIVATING EMPLOYEESFinancial incentives to work:
- Wage
- Salaries
- Bonus system
- Commission
- Profit sharing
- Performance related pay
- Share options
- Fringe benefits (eg company car)
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MOTIVATING EMPLOYEESNon- Financial for employees:
- Empowerment
- Praise
- Promotion
- Job enrichment
-more interesting and challenging tasks
-workers get the chance to further themselves
-Herzberg’s approach
- Job enlargement
-giving workers more work of a similar nature
-job rotation
- Better communication
- Working environment
- Team working
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OPERATIONAL DECISIONSImprove efficiency in productivity:
- more training
- Improved motivation
- Better equipment
- Better quality raw materials
- Less wastage
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OPERATIONAL DECISIONSCapacity utilisation- the percentage of total capacity that is actually used or achieved in a given period.
Capacity is the maximum output that a business can produce in a given period of with the available resources.
Capacity utilisation= actual output
maximum possible output
Why firms don’t operate at full capacity:
- Low demand
- Increase not used as it is new and recent
- Inefficiency
Problems of working at high capacity utilisation:- Negative effect on quality
- Employees suffer
- Loss of sales
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QUALITYQuality is the fitness for use, the product/service meets the needs and expectations of customers which achieves a desired minimum standard.
Effects of poor quality:
- Loss of customers
- Cost of remaking the product
- Cost of replacements and refunds
- Wasted materials
- Competitors gain customers
Ways to help manage quality:
- Quality circles (groups of employees who discuss the quality)
- Continuous improvement (Kaizen) (continually examining production)
- Benchmarking (using data to compare with industry and practice)
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CUSTOMER SERVICECustomer service- is the way the organisation looks after the customers.
Why customer service is important:
- Package of benefits that the customer buys
- Way to differentiate the product
- Helps keep loyal customers
- Customers feel valued and recommend
- Source of customer feedback and forgive and tell
- Helps attract and retain employees
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CUSTOMER SERVICETo give good customer service:
- Listen
- Build trust
- Take complaints seriously
- Get it right first time
- Make the most of your staff
- Go the extra mile
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WORKING WITH SUPPLIERSA supplier is a business or individual that provides goods and services to another business.
A good supplier can improve business competiveness:
- Lower purchase costs
- Better quality
- Improved customer service
- Increased productivity
- More flexible capacity
- Get given trade credit
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USING TECHNOLOGY IN OPERATIONS- Robots
- Stock control
- Automation
- Design software systems
- Communications
Advantages:
- speed, accuracy and efficiency
- Reliable quality and less waste
- Repetitive or hazardous tasks can be done
- Reduces unit cost
Disadvantages:
- up-front investment
- De-motivating for displaced staff
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EFFECTIVE MARKETING AND THE MARKETING MIXMarketing is the process of identifying, anticipating and satisfying customer needs profitability.
Effective marketing on customers:
- Customers are looking for value
- Are prepared to be loyal
- Their tastes change frequently
Orientations of marketing:
- Production (based on what the business is good at)
- Marketing (business responds to customers needs and wants)
Why segment the market:
- Better matching of customer needs
- Enhanced profits
- Better growth opportunities
- Customer retention
- Target the customers
- Gain share of the market segment
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EFFECTIVE MARKETING AND THE MARKETING MIXNiche marketing is where a business targets a smaller segment of a larger market, where customers have specific needs or wants.
+ Less competition
+ Clear focus
+ Builds up specialist skills and knowledge
+ Charge a higher price (profit margins are higher)
+ Loyal customers
- Lack of economies of scale
- Dependent on single market
- Attract competition if successful
- Vulnerable to market change
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EFFECTIVE MARKETING AND THE MARKETING MIXMass marketing is where a business sells into the largest part of the market where there are many similar products offered by competitors.
- Customers form the majority in the market
- Customers needs and wants are more general
- Higher production output
- Success is linked with low cost operation or market leading brands
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PRODUCTSThe product is the most important part of the marketing mix because without the good product the other elements are less effective
Product life cycle:
-development (expensive and no income)
-introduction (low capacity utilisation)
-growth(start economies of scale)
-maturity (rivals enter the market)
-Decline product loses popularity
Product extension
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PROMOTIONPromotion is the way in which a business communicates with existing and potential customers to encourage demand.
What promotion depends on:
-stage in product life cycle
-nature of product
-competition
-marketing budget
-marketing strategy
-target market
Ways of promotion:
- Advertising (paid for)
- Sales promotion (point of sale good for short term)
- Direct marketing (direct mail, email or telephoning)
- Personal selling (meeting with potential customers)
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PRICEPrice is the money charged for a product or service.
Factors that affect price:- Costs of production
- Competitors prices
- Customer perception
- Firms objectives
- Customer demand
- Target market
- Stage in product life cycle
Pricing Methods:
- Price skimming
- Penetration pricing
- Physiological pricing
- Cost plus
- Loss leader
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PLACEPlace refers to the way in which a product or service is distributed from the producer to the final consumer.
Distribution channels move a product from production to consumption.
- Retailers
- Wholesalers
- Distributors
- Agents
Selling direct: (direct mailing or e-commerce)
-retains profit margin
-deals direct with customer
Influencing factors:
- The market
- The business
- The nature of the product
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MARKETING AND COMPETITIVENESSCompetitiveness is the ability of a business to deliver better value to customers than competitors.
Examples: (USP)
- Lower prices
- Better customer service
- Easier access
- Higher quality
- Better design or style
Market structures:
- Perfect competition (homogeneous goods, eg, CDRs)
- Monopolistic (competition producing differentiated goods, eg, restaurants)
- Oligopoly (competition between small number of suppliers, eg, banking)
- Monopoly (Single supplier, eg, water and gas)