Most small businesses have very limited resources. Research is costly and can seem like a poor use of time. Some entrepreneurs ignore planning and analysis and instead rely on their gut instinct. They launch products they believe customers want and competitors cannot match. Poor planning is a major cause of business failure.

Businesses are more likely to succeed if their strategy is carefully planned

There is an alternative. A business plan is a report by a new or existing business that contains all of its research findings and explains why the firm hopes to succeed. A business plan includes the results of market research and competitor analysis. Analysis is when a business interprets information.

Drawing up a business plan forces owners to think about their aims, the competition they will face, their financial needs and their likely profits. Business plans help to reduce risk and reassure stakeholders [Stakeholders: These are all the people and groups who have an interest in a business.], such as banks.

Competitive and changing markets

In order to attract and satisfy customers, businesses need to be competitive and make products that are superior to their rivals.

Product variety may help a company to stand out in a competitive market

This is not easy because businesses operate in a dynamic and challenging market place. Business rivals are likely to be at work on creating new products or improving operations to reduce costs and drive down prices. Businesses may need to adapt their products because ever-changing fashion trends mean that customer requirements evolve over time. Success today is no guarantee of future profits.

A competitive market will have many businesses trying to win the same customers. A monopoly is either the only supplier in a market, or a large business with more than 25% of the market.

Competition can make markets work better by improving these factors:

·       Price: if there is only one retailer, products may not be competitively priced. If there are several retailers, each retailer will lower their prices in an attempt to win customers. It is illegal for retailers to agree between themselves to fix a price - they must compete for business.

·       Product range: in order to attract customers away from rivals, businesses launch new varieties of products they believe to be superior to their competitors.

·       Customer service: retailers that provide a helpful and friendly service will win customer loyalty.

Product differentiation – standing out from the crowd

Businesses operate in competition with each other. If the market is large enough to support many firms, a new business can open which imitates an existing idea. ‘Me too’ products can sometimes be successful.

However, businesses become more competitive by making products that stand out from the competition in terms of price, quality or service. This is called product differentiation.

Methods of creating product differentiation include:

·       Establishing a strong brand image (personality) for a good or service.

·       Making the unique selling point of a good or service clear. For example, opening a chain of discount shops with the tagline Quality items under a pound.

·       Other competitive factors, such as a product having a better location, design, appearance or price than rivals.

Companies create logos as part of their brand identity to help differentiate their goods and services

2. Aims and objectives

Businesses have different aims and objectives that can change over time.

Different types of business aims and objectives

An aim or objective is a statement of what a business is trying to achieve over the next 12 months. For example, a business can set itself any of these targets:

A new cafe may just aim to survive its first year

• survival
• increased profit
• growth
• increasing market share

Having an objective is useful because it helps staff to focus on shared aims. A business could instruct its staff to work towards increasing sales by 10% by the end of the year.

Different organisations have different objectives. Some businesses are run to make as much profit as possible for owners. However, not all businesses aim to make profit. Voluntary organisations such as charities are more concerned with providing a service to others.

Setting objectives

In most businesses, the owners decide on the objectives for the business.

When a business first starts trading it has few loyal customers and no reputation. The most likely objective for a start up business is simply survival. As the business grows and begins to win market share, the aim may shift towards expansion and/or increasing profits.

Some owners have a vague idea about their objectives. The best types of objective are SMART. Smart stands for:

• Specific: clearly state what is to be achieved eg increased profits.
• Measurable: the desired outcome is a number value that can be measured, eg increase profits by 10%.
• Agreed: all staff are involved in discussing and agreeing an aim.
• Realistic: the target is possible given the market conditions and the staff and financial resources available.
• Timed: the target will be met within a given period of time, eg 12 months.

An example of a SMART objective is 'to increase profits by 10% within the next 12 months'. SMART objectives allow the performance of a business to be assessed.

While owners have a major say in deciding the aims of a business, other interest groups called stakeholders are usually considered. Stakeholders are any group of people interested in the activities of the business - they could be managers, staff or customers. When owners sacrifice some profit to pay staff an annual bonus, this is an example of stakeholder consideration.

Why business objectives change

An economic recession can cause a business to change its objectives

The aim of a business can change over time. This can happen in response to internal factors, such as business growth, or in response to external factors, such as an economic recession.

A small start up business may aim to survive in the first year. Once successful, the business then sets itself the objective of increasing profits or growing in size.

Alternatively, a profitable business that is hard hit by an economic recession may struggle to maintain the same level of output. Faced with declining sales, a business may change its objective from growth or making a profit, to simply surviving.

3. Enterprise

What is enterprise

Enterprise is a skill. Put simply, enterprise is the willingness of an individual or organisation to:

• Take risks. Setting up a new business is risky. Even if the entrepreneur has carefully researched the market, there's always a chance that customers may reject the product and that a loss will be made.
• Show initiative and 'make things happen'. Successful entrepreneurs have the drive, determination and energy to overcome hurdles and launch new businesses.
• Undertake new ventures. An entrepreneur has to have the imagination to spot business opportunities that will fill gaps in the market.

Enterprise is carried out through the work of an entrepreneur.

Thinking creatively

Creative thinking is the process by which individuals come up with new ideas or new approaches to business. New ideas could result in a new product - for example, a games console. They could also result in a new process that cuts costs or improves quality - for example, a bagless vacuum cleaner.

Fresh ideas give businesses a competitive advantage and help make their goods or services stand out in the market place.

Entrepreneurs can make use of several different thinking techniques to improve their creativity:

• Lateral thinking or thinking outside the box. An example of this would be breaking down the steps taken to serve coffee in a café and asking 'why' at each step to see if a better process can be created.
• Deliberate creativity uses thinking techniques to spark off new ideas. For example, putting on different thinking hats to tackle problems from different angles. 'White-hat' thinking looks at facts and 'black-hat' thinking looks at drawbacks.
• Blue-sky thinking involves a group of people looking at an opportunity with fresh eyes. As many ideas as possible are generated in an ideas generation session where no ideas are rejected as silly.

Part of the process of thinking creatively and coming up with a new business idea is to ask the right questions. For example, looking at a successful product and asking - why, why not, how, where, when, what, what if?

Invention and innovation

Invention is about making new items, or finding new ways of making items. Innovation involves bringing this new idea to the market, that is, turning an invention into a product.

 

A business can use the law to protect its business idea. For example, an entrepreneur can:

• Register ownership of an invention or new process and be given a patent. This can stop rivals from copying the idea for a set number of years.
• Sue for damages if others copy their work - copyright automatically arises for authors creating books, films, music or games.
• Register a trademark. A trademark is a symbol or phrase that a company can register with the government to make their company distinctive.

A patent, copyright or trademark grants legal ownership and is only given for original work.

Important enterprise skills

So what does it take to be a successful businessperson? Typically entrepreneurs are:

• Imaginative and quick to see business opportunities and gaps in the market.
• Planners who take time to research customer requirements, competitors and trends to better understand their market and minimise the risk of failure.
• Determined to succeed no matter how many hours of unpaid preparation are involved.

4. Business structure

Owners have to decide on the best legal structure for their business - opting to run as sole traders, partnerships or private limited companies. As the business expands and starts to employ hundreds of staff in many locations, it may decide to become a public limited company or to offer franchises.

Sole traders

A sole trader describes any business that is owned and controlled by one person - although they may employ workers. Individuals who provide a specialist service like plumbers, hairdressers or photographers are often sole traders.

Sole traders do not have a separate legal existence from the business. In the eyes of the law, the business and the owner are the same. As a result, the owner is personally liable for the firm's debts and may have to pay for losses made by the business out of their own pocket. This is called unlimited liability.

Advantages

·       It is easy to set up as no formal legal paperwork is required.

·       Generally, only a small amount of capital needs to be invested, which reduces the initial start-up cost.

·       As the only owner, the entrepreneur can make decisions without consulting anyone else. 

Disadvantages

·       The sole trader has no one to share the responsibility of running the business with. A good hairdresser, for example, may not be very good at handling the accounts.

·       Sole traders often work long hours. They may find it difficult to take holidays or time off if they are ill.

·       They face unlimited liability [Unlimited liability: Owners are personally liable for all debts. ] if the business fails.

Partnerships

Partnerships are businesses owned by two or more people.

Doctors, dentists and solicitors are typical examples of professionals who may go into partnership together and can benefit from shared expertise. One advantage of partnership is that there is someone to consult on business decisions.

The main disadvantage of a partnership comes from shared responsibility. Disputes can arise over decisions that have to be made, or about the effort one partner is putting into the firm compared with another. Like a sole trader, partners have unlimited liability [Unlimited liability: Owners are personally liable for all debts. ].

Limited companies

A limited company has special status in the eyes of the law. These types of company are incorporated, which means they have their own legal identity and can sue or own assets in their own right. The ownership of a limited company is divided up into equal parts called shares. Whoever owns one or more of these is called a shareholder.

Because limited companies have their own legal identity, their owners are not personally liable for the firm's debts. The shareholders have limited liability, which is the major advantage of this type of business legal structure.

Unlike a sole trader or a partnership, the owners of a limited company are not necessarily involved in running the business, unless they have been elected to the Board of Directors.

There are two main types of limited company:

·       A private limited company (ltd) is often a small business such as an independent retailer in a market town. Shares do not trade on the stock exchange.

·       A public limited company (plc) is usually a large, well-known business. This could be a manufacturer or a chain of retailers with branches in most city centres. Shares trade on the stock exchange (Stock Exchange: A centralised market where business shares are traded)

Franchising

An entrepreneur can opt to set up a new independent business and try to win customers. An alternative is to buy into an existing business and acquire the right to use an existing business idea. This is called franchising.

·       A franchisee, who buys the right from a franchisor to copy a business format.

·       And a franchisor, who sells the right to use a business idea in a particular location.

Many well-known high street opticians and burger bars are franchises.

Opening a franchise is usually less risky than setting up as an independent retailer. The franchisee is adopting a proven business model and selling a well-known product in a new local branch.

5. Expanding a business

Business expansion has potential benefits and drawbacks. Some owners are reluctant to take the risk of growing the business and opt to stay small.

Benefits of a growing business

As a business grows it gains two major advantages over its smaller rivals. Large firms have more influence over market price. They're big enough to be price setters.

Large firms also often enjoy economies of scale. This means that a business has lower unit costs because of its large size. They can buy raw materials cheaply in bulk and also spread the high cost of marketing campaigns and overheads across larger sales.

For example, if a large firm can produce a given type of sunglasses for £20 while it costs its smaller rival an average of £30, then the larger firm has a £10 per unit cost advantage. Larger firms can charge lower prices or enjoy a higher profit margin.

Economies of scale are a major source of competitive advantage for large firms.

Methods of expansion

A business can grow in size through:

• Internal (organic) growth: the business grows by hiring more staff and equipment to increase its ouput (output: the term denoting either an exit or changes which exit a system and which activate/modify a process.)
• External growth: where a business merges with or takes over another organisation. Combining two firms increases the scale of operation.
• Franchising: where a business leases its idea to franchisees. This allows new branches to open across the country and internationally.

Profit or growth?

Owners can face a dilemma in deciding whether to expand. Expansion is risky. There's always the chance that any expansion plans can fail and result in losses rather than profit. Owners are then worse off than before the growth of the business.

The risk of expansion means that some owners are reluctant to chance funds. They opt instead to stay small and earn a relatively risk-free profit.

There is potentially a major drawback to avoiding growth. Small businesses can be at a cost disadvantage compared to their larger rivals enjoying economies of scale

economies of scale: Economy of scale means that big companies can produce things cheaper than smaller companies. There are two reasons for this. First, they can buy in bulk, so can negotiate with suppliers to pay less. Second, the more a company produces the lower the average cost per product will be of overheads (fixed costs, such as buildings). Where similar companies locate together as an industry they can also experience economies of scale. They share the costs of building the necessary infrastructure (eg roads, telecommunications) and the cost of educating the workforce, between them. Also the combined demand from all these companies should mean that supplies are cheaper.. As small firms cannot compete with the low prices set by their larger rivals, they have to compete on service or quality.

Marketing

6. Market research

Marketing is about responding to consumers' needs. It is important to find out what these needs are before launching a new product.

A business conducts market research to help identify gaps in the market and business opportunities.

What is a market?

Businesses sell to customers in markets. A market is any place where buyers and sellers meet to trade products - it could be a high street shop or a web site. Any business in a marketplace is likely to be in competition with other firms offering similar products. Successful products are the ones which meet customer needs better than rival offerings.

Markets are dynamic. This means that they are always changing. A business must be aware of market trends and evolving customer requirements caused by new fashions or changing economic conditions.

Market research

There is far more to marketing than selling or advertising. Put simply, marketing is about identifying and satisfying customer needs.

The first step is to gather information about customers needs, competitors and market trends. An entrepreneur can use the results of market research to produce competitive products.

The first step for a new business or product is to attract trial purchases.

A new magazine may run special offers to get customers to try the first issue, hoping that repeat sales are generated. The magazine will soon close if customers fail to buy future issues. The aim of a special offer scheme is to convert trial purchases into repeat sales.

Market research involves gathering data about customers, competitors and market trends.

Collecting market research

There are two main methods of collecting information:

• Primary research (field research) involves gathering new data that has not been collected before. For example, surveys using questionnaires or interviews with groups of people in a focus group.
• Secondary research (desk research) involves gathering existing data that has already been produced. For example, researching the internet, newspapers and company reports.

Factual information is called quantitative data. Information collected about opinions and views is called qualitative data. Accurate market research helps to reduce the risk of launching new or improved products.

Some businesses opt out of field research and rely instead on the know-how and instincts of the entrepreneur to ‘guess’ customer requirements. They do this because market research costs time and money. Existing business can make use of direct customer contact to help them identify changing fashion and market trends.

Market Segments

Most markets contain different groups of customers who share similar characteristics and buying habits. These collections of similar buyers make up distinct market segments.

Targeted marketing

Breaking down a market into submarkets can lead to a business opportunity. For example, a magazine publisher can target a specialist journal at one group of customers of similar age, gender, class or income.

Another tool used to help identify a business opportunity is a market map. A market map is a diagram that identifies all the products in the market using two key features.

A market map showing a gap in the market

The red circle identifies a gap in the market. There is a business opportunity for a new café offering standard quality products at standard prices.

Competition

A competitive market has many businesses trying to win the same customers. A monopoly exists when one firm has 25% or more of the market, so reducing the competition.

Competition in the market place can be good for customers. Governments encourage competition because it can help improve these factors:

• Price: If there are several retailers, each retailer will lower the price in an attempt to win customers. It is illegal for retailers to agree between themselves to fix a price. They must compete for business.
• Product range: In order to attract and satisfy customers, companies need to produce products that are superior to their competitors.
• Customer service: Retailers that provide customers with a helpful and friendly service will win their loyalty.

7. The marketing mix

A company needs to consider the marketing mix in order to meet their consumers' needs effectively.

Elements of the marketing mix

The marketing mix is the combination of product, price, place and promotion for any business venture.

Marketing Mix

No one element of the marketing mix is more important than another – each element ideally supports the others. Firms modify each element in the marketing mix to establish an overall brand image and unique selling point [Unique selling point: The unique thing about the product that makes consumers buy it. This can be branding, packaging or a feature of the product. ] that makes their products stand out from the competition.

Using the marketing mix

An exclusive brand of jewellery uses the best materials but comes at a high price. Such designer brands can only be bought at exclusive stores and are promoted using personal selling sales assistants. By contrast, cheap and cheerful jewellery for the mass market is best sold in supermarkets and can be promoted using television adverts.

Market research findings are important in developing the overall marketing mix for a given product. By identifying specific customer needs a business can adjust the features, appearance, price and distribution method for a target market segment.

New technologies and changing fashion means goods and services have a limited product life cycle. Ideally, the marketing mix is adjusted to take account of each stage. For example, the life of a product can be extended by changing packaging to freshen a tired brand and so boost sales.

There is no single right marketing mix that works for all businesses at all times. The combination of product, price promotion and place chosen by a business will depend on its size, competition, the nature of the product and its objectives.

The overall marketing mix is the business’ marketing strategy and is judged a success if it meets the marketing department’s objectives, eg increase annual sales by 5%.

Consumer protection

Businesses must never be misleading about their products

The law gives customers protection against unfair selling practices. You do not need to know specific Acts but you do need to understand how fair trading regulations protect consumers.

The consumer has basic legal rights if the product is:

• given a misleading description
• of an unsatisfactory quality
• not fit for its intended purpose

Sale and Supply of Goods Act 1994

This Act says that all products have to be of a 'satisfactory quality'. This means that they have to:

• be safe
• last for a reasonable amount of time
• be fit for their intended purpose
• have nothing wrong with them (unless the defect was noted at the time of sale)

Trade Descriptions Act

According to the Trade Descriptions Act, false or misleading information must not be given about products. For example, accurate information must be given about who made the product.

Fake designer goods that are marketed as genuine are a clear breach of the Trade Descriptions Act.

Consumer Credit Act 1974

This Act protects you when you borrow or buy on credit. The Consumer Credit Act states that:

• Businesses must have licences to give credit.
• No one under 18 is to be invited to borrow or buy on credit.
• Businesses have to state an Annual Percentage Rate (APR). If you sign a credit agreement at home you have several days in which you can tear up the agreement. This is called a 'cooling off period'.

8. Product

A business can adjust the features, appearance and packaging of a product to create competitive advantage.

What is a product?

Brands use packaging and logos to create a brand image

A product is a good or a service that is sold to customers or other businesses. Customers buy a product to meet a need. This means the firm must concentrate on making products that best meet customer requirements.

A business needs to choose the function, appearance and cost most likely to make a product appeal to the target market and stand out from the competition. This is called product differentiation.

How product differentiation is created

• Establishing a strong brand image (personality) for a good or service.
• Making clear the unique selling point (USP) of a good or service, for example, by using the tag line quality items for less than a pound for a chain of discount shops.
• Offering a better location, features, functions, design, appearance or selling price than rival products.

Firms face a dilemma if they choose to launch a premium brand. Improving the quality or appearance of a product adds to the cost of making it. In turn, this means that the business must charge higher prices if they are to make a profit.

An alternative marketing strategy is to produce a budget brand. If a mobile phone has limited functions and a standard design then it can be manufactured cheaply. The low production costs allow for discount pricing.

Product life cycle

The product life cycle diagram shows that four stages exist in the ‘working life’ of most products.

Product life cycle diagram

These are:

1. Launch
2. Growth
3. Maturity
4. Decline

In the launch and growth stages sales rise. In the maturity stage, revenues flatten out.

Getting a product known beyond the launch stage usually requires costly promotion activity.

At some point sales begin to decline and the business has to decide whether to withdraw the item or use an extension strategy to bolster sales. Extension strategies include updating packaging, adding extra features or lowering price.

Product differentiation

A product portfolio is the range of items sold by a business. It can be analysed using the Boston Matrix.

Boston Matrix

Star products have a high market share in a fast growing market.

Cash Cows have a high market share in a slow growing market.

Question marks or problem children products have a low market share in fast growing markets.

Dogs are products with a low market share in slow growing markets.

Firms with just a few items in their product portfolio – or who have all their products at the same stage in the product life cycle[an error occurred while processing this directive] – are in the dangerous position of having ‘all their eggs in one basket’. Such firms may prioritise broadening their product range.

9. Price

A business must take many factors into account before deciding on the price of a product.

Pricing strategies

Remember there is a big difference between costs and price. Costs are the expenses of a firm. Price is the amount customers are charged for items.

Firms think very carefully about the price to charge for their products. There are a number of factors to take into account when reaching a pricing decision:

• Customers. Price affects sales. Lowering the price of a product increases customer demand. However, too low a price may lead customers to think you are selling a low quality ‘budget product’.
• Competitors. A business takes into account the price charged by rival organisations, particularly in competitive markets. Competitive pricing occurs when a firm decides its own price based on that charged by rivals. Setting a price above that charged by the market leader can only work if your product has better features and appearance.
• Costs. A business can make a profit only if the price charged eventually covers the costs of making an item. One way to try to ensure a profit is to use cost plus pricing. For example, adding a 50% mark up to a sandwich that costs £2 to make means setting the price at £3. The drawback of cost plus pricing is that it may not be competitive.

There are times when businesses are willing to set price below unit cost. They use this loss leader strategy to gain sales and market share.

Pricing new products

Half price sales are an example of penetration pricing

A business can choose between two pricing tactics when launching a new product:

• Penetration pricing means setting a relatively low price to boost sales. It is often used when a new product is launched, or if the firm’s main objective is growth.
• Price skimming means setting a relatively high price to boost profits. It is often used by well-known businesses launching new, high quality, premium products.

10. Promotion

There is much more to promotion than advertising. Businesses use various methods to gain publicity.

Customer awareness

Promotion refers to the methods used by a business to make customers aware of its product. Advertising is just one of the means a business can use to create publicity. Businesses create an overall promotional mix by putting together a combination of the following strategies:

Promotional material on a high street in Shanghai

• Advertising, where a business pays for messages about itself in mass media such as television or newspapers. Advertising is non-personal and is also called above-the-line promotion.
• Sales promotions, which encourage customers to buy now rather than later. For example, point of sale displays, 2-for-1 offers, free gifts, samples, coupons or competitions.
• Personal selling using face-to-face communication, eg employing a sales person or agent to make direct contact with customers.
• Direct marketing takes place when firms make contact with individual consumers using tactics such as ‘junk’ mail shots and weekly ‘special offer’ emails.

There is no one right promotional mix for all firms. The combination of promotional elements selected takes into account the size of the market and available resources. Large businesses have the resources to use national advertising. Small firms with limited resources and a local market may instead opt for leaflet drops to promote their activities.

11. Place

As part of its marketing strategy, a company needs to decide where best to distribute a product.

What is place?

Place is the point where products are made available to customers. A business has to decide on the most cost-effective way to make their products easily available to customers.

This involves selecting the best channel of distribution. Potential methods include using:

• Retailers. Persuading shops to stock products means customers can buy items locally. However, using a middleman means lower profit margins for the producer.
• Producers can opt to distribute using a wholesaler who buys in bulk and resells smaller quantities to retailers or consumers. This again means lower profit margins for the manufacturer.
• Telesales and mail order. Direct communication allows a business to get products to customers without using a high street retailer. This is an example of direct selling[an error occurred while processing this directive].
• Internet selling or e-commerce. Online selling is an increasingly popular method of distribution and allows small firms a low cost method of marketing their products overseas. A business website can be both a method of distribution and promotion.

Developing new or improved channels of distribution can increase sales and allow a firm to grow.

People in Business

12. Organising staff

When hiring large numbers of staff, organisation is important. Everyone within the company needs to understand their role.

Structuring a business

As a business grows in size and takes on more staff, managers need to make sure employees understand their role within the company. Organisation is the way a business is structured.

One method of organisation is to set up departments covering the four main areas of business activity:

• finance
• human resources
• marketing
• operations

Organisation charts are diagrams that show the internal structure of the business. They make it easy to identify the specific roles and responsibilities of staff. They also show how different roles relate to one another and the structure of departments within the whole company.

An organisational chart showing the structure of a company

For example, the Marketing Manager in the Midlands can see at a glance that she is in charge of ten subordinates, and that her line manager is the Director of Marketing.

Organisational terms

There are a number of technical terms you need to learn:

• Hierarchy refers to the management levels within an organisation.
• Line managers are responsible for overseeing the work of other staff.
• Subordinates report to other staff higher up the hierarchy. Subordinates are accountable to their line manager for their actions.
• Authority refers to the power managers have to direct subordinates and make decisions.
• Delegation is when managers entrust tasks or decisions to subordinates.
• Empowerment sees managers passing authority to make decisions down to subordinates. Empowerment can be motivational.
• The span of control measures the number of subordinates reporting directly to a manager.
• The chain of command is the path of authority along which instructions are passed, from the CEO downwards.
• Lines of communication are the routes messages travel along.

Types of organisation

The staff structures of a tall organisation and a flat organisation

Tall organisations have many levels of hierarchy. The span of control is narrow and there are opportunities for promotion. Lines of communication are long, making the firm unresponsive to change.

Flat organisations have few levels of hierarchy. Lines of communication are short, making the firm responsive to change. A wide span of control means that tasks must be delegated and managers can feel overstretched.

In centralised organisations, the majority of decisions are taken by senior managers and then passed down the organisational hierarchy.

Decentralised organisations delegate authority down the chain of command, thus reducing the speed of decision making.

One method of reducing costs is to remove a layer of management in a hierarchy while expecting staff to produce the same level of output. This is called delayering.

13. Recruitment

Firms recruit, select and train staff in different ways with varying degrees of success.

Recruiting staff

Without the right staff with the right skills, a business cannot make enough products to satisfy customer requirements. This is why organisations draw up workforce plans to identify their future staffing requirements. For example, they may develop plans to recruit a new IT Manager when the current one plans to retire in eight months time.

Recruitment is the process by which a business seeks to hire the right person for a vacancy. The firm writes a job description and person specification for the post and then advertises the vacancy in an appropriate place.

Job applicants

• Job descriptions explain the work to be done and typically set out the job title, location of work and main tasks of the employee.
• Person specifications list individual qualities of the person required, eg qualifications, experience and skills.

Firms can recruit from inside or outside the organisation.

• Internal recruitment involves appointing existing staff. A known person is recruited.
• External recruitment involves hiring staff from outside the organisation. They will bring fresh ideas with them but they are unknown to the company - will they fit in?

Managers must decide on the best method to assess and select applicants for a job. Application forms, CVs, references, interviews, presentations, role-play and tests can be used to show if an individual is suitable for the specific job on offer.

Many organisations are as concerned about attitude as they are about skill. There is little point in appointing the best qualified or most skilled applicant if they have a poor attitude toward work or cannot operate as part of a team. This is particularly important in small firms with very few staff.

Training

Induction is the training given to new workers so that they understand their role and responsibilities and can do their job.

Staff should learn new skills throughout the course of their career to stay productive. Training improves technical, personal or management skills and will increase staff efficiency. There are two main training methods:

• On-the-job training where experienced members of staff explain a job or a skill.
• Off the job training where outside experts are paid to explain a job or a skill.

An annual staff appraisal is a chance for an employee to discuss their recent work and future training needs with their line manager in a meeting.

Retaining workers is important to a firm because it costs time and money to hire and train a replacement. Appraisal and training helps motivate staff and so improves staff retention.

14. Motivation

Companies can motivate employees to do a better job than they otherwise would. Incentives that can be offered to staff include increased pay or improved working conditions. Motivational theories suggest ways to encourage employees to work harder.

What is motivation?

Motivation is about the ways a business can encourage staff to give their best. Motivated staff care about the success of the business and work better. A motivated workforce results in:

• Increased output caused by extra effort from workers.
• Improved quality as staff takes a greater pride in their work.
• A higher level of staff retention. Workers are keen to stay with the firm and also reluctant to take unnecessary days off work.

Managers can influence employee motivation in a variety of ways:

• Monetary factors: some staff work harder if offered higher pay.
• Non-monetary factors: other staff respond to incentives that have nothing to do with pay, eg improved working conditions or the chance to win promotion.

Payment methods

Managers can motivate staff by paying a fair wage. Payment methods include:

• Time rate: staff are paid for the number of hours worked.
• Overtime: staff are paid extra for working beyond normal hours.
• Piece rate: staff are paid for the number of items produced.
• Commission: staff are paid for the number of items they sell.
• Performance related pay: staff get a bonus for meeting a target set by their manager.
• Profit sharing: staff receive a part of any profits made by the business.
• Salary: staff are paid monthly no matter how many hours they work.
• Fringe benefits: are payments in kind, eg a company car or staff discounts.

Non-pay methods of motivation

Managers can motivate staff using factors other than pay through:

• Job rotation: staff are switched between different tasks to reduce monotony.
• Job enlargement: staff are given more tasks to do of similar difficulty.
• Job enrichment: staff are given more interesting and challenging tasks.
• Empowerment: staff are given the authority to make decisions about how they do their job.
• Putting groups of workers in a team who are responsible together for completing a certain task.

Motivational theories

Managers can make use of a number of motivational theories to help encourage employees to work harder. Maslow argues that staff can be motivated through means other than pay

Taylorism argues that staff do not enjoy work and are only motivated by threats and pay. Managers motivate staff by organising employees' work and paying by results, eg piece rate pay - payment per item produced.

Maslow suggests there are five hierarchies or levels of need that explain why people work. Staff first want to meet their survival needs by earning a good wage. Safety needs such as job security then become important, followed by social, self-esteem and self-fulfilment needs. Moving staff up a Maslow level is motivational.

15. Protecting staff

Employers need to follow certain laws and procedures in order to protect their staff and customers.

Employment rights

To prevent exploitation, the government has passed a number of laws that safeguard staff:

• Workers are guaranteed a minimum hourly wage rate of £5.80 per hour in 2009.
• Race, sex, age or disability discrimination is illegal. Businesses must be careful to treat all workers fairly. They must offer equal pay and promotion opportunities for women and ethnic minorities.
• The EU Working Time Directive sets a limit on the number of hours staff can work in a week.
• Parents are entitled to paid leave from work soon after their children are born. The firms must keep their post open for when they return from maternity or paternity leave.

Redundancy

Businesses operate in a dynamic and competitive market. Workers can lose their job through redundancy if the business suffers a fall in sales. Falling sales means that a business needs fewer staff and some posts are no longer required. Also, low revenues may lead a company to try to cut staffing costs.

Redundancy procedures must be fair, for example firms can use a last-in-first-out method to shed staff. Redundant workers receive compensation according to the number of years with the firm.

Health and safety

Health and safety procedures are put in place to prevent staff from being harmed or becoming ill due to work.

The Health and Safety at Work Act 1974 is the primary piece of legislation covering occupational health and safety in the United Kingdom.

Health and safety procedures need to be in place when using dangerous equipment at work

Health and safety procedures are enforced by the government.

All businesses are required by law to:

• Display a health and safety poster.
• Carry out a risk assessment to identify workplace risks, and then put sensible measures in place to control them. Potential risks include trip hazards and asbestos. The extra paper work increases the total costs of the business.

Businesses are also responsible for ensuring the health and safety of their customers.

16. Communication

Effective communication is important both within an organisation and externally. Effective communication improves business efficiency.

What is communication?

Communication is about passing messages between people or organisations. Messages between a sender and receiver take place using a medium such as email or phone.

One-way communication is when the receiver cannot respond to a message. Two-way communication is when the receiver can respond to a message. This allows confirmation the message has been both received and understood.

Types of communication

There are a number of technical terms you need to learn:

• Internal communications happen within the business.
• External communications take place between the business and outside individuals or organisations.
• Vertical communications are messages sent between staff belonging to different levels of the organisation hierarchy.
• Horizontal communications are messages sent between staff on the same level of the organisation hierarchy.
• Formal communications are official messages sent by an organisation, eg a company memo, fax or report.
• Informal communications are unofficial messages not formally approved by the business, eg everyday conversation or gossip between staff.
• A channel of communication is the path taken by a message.

Effective communication

Communication makes a big impact on business efficiency. Effective communication means:

• Customers enjoy a good relationship with the business, eg complaints are dealt with quickly and effectively.
• Staff understand their roles and responsibilities, eg tasks and deadlines are understood and met.
• Staff motivation improves when, for instance, managers listen and respond to suggestions.

Barriers to effective communication

A balance needs to be struck in communication between management and staff. Insufficient communication leaves staff 'in the dark' and is demotivating. Excessive communication leads to information overload, eg when staff find hundreds of messages arriving in their intray each day.

Too much paperwork or too many emails can lead to miscommunication and inefficiency

Communications fail when a message is unclear or the receiver does not understand technical jargon. Selecting the right medium is important. Messages may never be received if they are sent at the wrong time or to a junk email folder.

The result is inefficiency and higher costs, as more resources are needed to achieve the same result.

Training staff to select an appropriate medium and send clear, accurate, thorough messages will improve the quality of communications, especially if there is an opportunity for feedback.

Impact of ICT

ICT stands for information communication technology. Businesses have gained significantly from advances in computing. For instance, ICT enables:

Advances in ICT and telecommunications mean it has never been easier or cheaper to send messages by email or text. Senders can check that a message has been received and understood. The danger is that this will lead to information overload and staff will have to spend hours reading hundreds of electronic messages.

Staff training that emphasises the need to limit communications can help avoid the inefficiencies associated with information overload.

• Home working and inexpensive call centres located overseas.
• Automated stock ordering where items are reordered to ensure shelves are always full. Less paper work reduces administration costs.
• E-commerce where products are traded and paid for on the internet.

E-commerce opens up international markets to firms as overseas customers can view products for sale online.

A business can develop links with customers through email newsletters.

Production

17. Production methods

Production methods

Entrepreneurs need to decide which production method is best for them. Good customer service is valuable and leads to increased sales.

Job, batch and flow production

Production is about creating goods and services. Managers have to decide on the most efficient way of organising production for their particular product.

There are three main types of production to choose from:

• Job production where items are made individually and each item is finished before the next one is started. Designer dresses are made using the job production method.
• Batch production where groups of items are made together. Each batch is finished before starting the next block of goods. For example, a baker first produces a batch of 50 white loaves. Only after they are completed will he or she start baking 50 loaves of brown bread.
• Flow production where identical, standardisedâ items are produced on an assembly line. Most cars are mass-produced in large factories using conveyor belts and expensive machinery such as robot arms. Workers have specialised jobs, for instance, fitting wheels.

Choosing a production method

The best method of production depends on the type of product being made and the size of the market. Small firms operating in the service sector, such as plumbers or beauticians, opt for job production because each customer has individual needs. Niche manufacturers of items such as made-to-measure suits would also use job production because each item they make is different.

Batch production is used to meet group orders. For example, a set of machines could be set up to make 500 size 12 dresses and then adjusted to make 600 size 12 dresses. Two batches have been made.

Flow production is used to mass produce everyday standardised (all the same) items such as soap powder and canned drinks. Economies of scale lead to lower unit costs and prices. Not many small manufacturers can afford the investment needed to mass produce goods. They instead opt for either batch or job production.

There is usually a trade off between unit costs and meeting specific customer needs. Flow production offers economies of scale and low costs for a one-size-fits-all product.

Customer service

Customer service is the experience a customer gets when using products made by the business. Satisfied customers make repeat purchases and recommend the product to friends, leading to additional word-of-mouth sales.

Customers want to buy goods and services that meet their needs at a price they can afford. For example a café thrives when friendly staff serve tasty, well made meals, in generous portions, at competitive prices.

How to improve customer service

Good customer service is especially important in businesses dealing directly with the public, such as hotels

Successful businesses define the quality or standard of service needed to meet customer needs. For instance, a café can aim to take no more than 5 minutes to serve any customer once they have ordered their meal.

Ensuring that quality standards are met requires:

• Training so that staff understand their role and responsibilities. For instance, asking every customer if they are happy with their meal.
• Innovation or introducing new ideas and methods. For example, altering the menu every three months keeps customers interested and helps a café to stay one step ahead of the competition.
• Listening to customers helps a business adjust its products to better match consumer needs and respond to any problems.

Price versus customer service

Customers compare price with customer service. Few customers expect high quality service when buying low priced items. For instance, travellers using a budget airline accept that they must pay for extras such as an in-flight meal. First class customers expect luxury seats and free champagne. The challenge facing all businesses is to remain competitive. They must keep prices competitive while offering a better service than rivals.

18. Efficiency