Business & Economics Department
AQA GCSE BUSINESS STUDIES
UNIT 2 – EXPANDING A BUSINESS
REVISION NOTES
1
Contents Page
Topic
Page Number
Expanding a Business
1.
2.
3.
4.
5.
6.
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28.
29.
30.
31.
32.
Reasons for Expansion
Reasons for not Expanding
Methods of Expansion
Conflict between stakeholders
Ways to defend stakeholder interests
Private Limited Company (Ltd) V Public Limited Company (PLC)
Changing business aims and objectives
Ethical Business
Social Costs & Benefits
Costs and Benefits of being ethical?
Location
Factors considered when choosing location
Costs and Benefits of locating abroad
Marketing Mix
Marketing Mix – Costs and Benefits of increasing you Product Portfolio
Marketing Mix – Product Life Cycle & Extension Strategies
Marketing Mix – Factors affecting pricing decisions and pricing strategies
Marketing Mix – Methods of Promotion, and factors to take into account when
choosing promotion
Marketing Mix – Channels of Distribution
Finance
Costs and Benefits of different sources of finance – Expanding Business
Profit and Loss account
Gross Profit Margin & Net Profit Margin
Balance Sheets
Current Ratio & Acid Test Ratio
People in Business
Organisational Structures
Centralisation & Decentralisation
Recruitment of Staff
Training & Appraisal of workers
Motivating and retraining staff
Remuneration Methods
Operations Management (Production)
Main features of Flow Production
Advantages & Disadvantages of Flow Production
Lean Production – Kaizen, JIT, Cell Production
Benefits & Costs of Growth – Economies/Diseconomies of Scale
Quality Assurance – Causes of quality problems & Methods of maintaining quality
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3&4
4&5
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5&6
6&7
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7
7
7
8
8
9
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10
10 & 11
11
11
12
12 & 13
14
15
15
16 & 17
17 & 18
18
19
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19 & 20
21
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Expanding a New Business
Reasons for Expanding & Potential Risks
Reasons, benefits and risks of expanding a business
Reasons for business growth
Benefits
Risks
To increase sales
This should lead to an increase
Profits will not increase if the
in profits.
business has had to lower its
prices too much in order to sell
more.
To increase market share
If the sales of the business grow
If other businesses are
faster than total sales in the
increasing sales at an even
market, its share of the market
faster rate, then market share
will increase.
will fall.
Take advantage of economies
of scale
Become more secure and
benefit from some customers
preferring to deal with large
businesses
This means that retailers will be
much more prepared to stock
the products of this business.
If it is possible to reduce costs
of each item produced as a
business grows then it is
benefiting from economies of
scale.
(e.g. buying materials in large
quantities leading to bulk
discounts).
It is widely thought that larger
businesses are more secure
than smaller ones.
It is often much more difficult
to manage a large business and
this could increase costs of
each item produced.
Large businesses can make
losses and be forced out of
business too.
Some customers think that
such businesses will be around
for the lifespan of the products
they are buying,
Reasons for not Expanding
1.
2.
3.
4.
To Keep control of the business
To offer a personal service to customers
To avoid too much risk i.e. loss of capital investment (money)
To avoid increased worry and workload
Methods of Expansion (Internal Growth)
1. Organic Growth
(a) Open new branches
(b)Offer franchises
(c) Expand through internet selling
Benefits of Organic Growth



Slow and Steady so less risky of failure
No need for a loan so no interest as expansion achieved through retained profits
Easier to manage and control
3
Disadvantages of Organic growth



Too slow for some owners
Market share could fall if other businesses are expanding more quickly
No gains from merging i.e. shared ideas, increased capital etc.
Franchising – this is an example of organic growth
2. Inorganic Growth (External Growth)
Also known as external growth can be achieved by either a merger or takeover. There are four different types of
integration methods:
Horizontal Integration – When 2 competitors at the same stage in the production process join together
+reduces competition so there will be one business instead of two
+Lead to substantial increases in market share
+Benefit from economies of scale i.e. lower average cost through expansion
Forward Vertical Integration – When a firm lower down in the production process joins with a firm higher up in the
production process
+Reliable outlet for products.
Backward Vertical Integration – When a firm higher up in the production process joins with a firm lower down in the
production process
+Offers reliable supplies of materials.
Conglomerate Integration (also known as diversification) – When a firm joins with another firm in completely unrelated
business.
+Spreads risk over more than one industry.
Disadvantages of Inorganic Growth
-It can be expensive to take over another business
-Interest on any loans taken out to pay for merger
-Problems of managing and controlling a much larger business
-With vertical and conglomerate managers may lack the experience of these other businesses.
Conflict between stakeholders
Stakeholder group
Owners
Possible benefits
There should be higher level of
sales and profits
Workers
There might be more
opportunities for promotion
and, possibly, greater job
security
Customers
Prices may be lower. The larger
business can benefit from
economies of scale if it can
insist on lower prices from
suppliers
More orders might be received
Suppliers
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Possible drawbacks
If the owners are the managers
as well, there might be more
responsibility and stress
There may be job losses if jobs
are duplicated in a merger or
takeover as only one person is
needed for that job.
Shareholders will expect costs
to be cut
Prices could rise. With a
mergers or takeover, there
might be fewer competitors, so
the business could raise prices
The expanding business may
from the larger business
Bank
Lending more finance to
expanding business makes this
a more profitable account
Government
Strong and expanding business
pay more tax to government
insist on lower prices from
suppliers as it is now a more
important customer. It could
even threaten to cancel
contracts if suppliers do not
lower the prices
There may be increased risks
for the bank. If a bank loan is
used for growth and expansion
is not successful the business
might not be able to repay the
debt
If a monopoly is created then
the public interest could be at
risk
Ways to defend stakeholder interests
Stakeholder group
Workers
Customers


Use trade unions to negotiate the best possible settlement for
workers who do lose their jobs

Negotiate for higher pay, as expanding businesses may become
more profitable
Check prices carefully following expansion - are cost savings being
passed on?


Suppliers

Bank


Government
Ways to defend stakeholder interests
Try to stop any job losses following merger or takeover

Use customer groups and their websites to put pressure on larger
businesses to offer good value to consumers
Insist on reasonable prices for products supplied and prompt
payment. However, this might not be effective if the large
business threatens to use other suppliers. A small supplier to a
larger business may be in a weak position
Keep a close watch on the business bank account. Is the loan or
overdraft limit being reached?
In some cases the bank might ask for a senior manager to sit in on
the business’s Board of Directors meetings
Government will be concerned if a merger or takeover creates a
monopoly. The Competition Commission can be asked to
investigate and might recommend that a merger or takeover be
stopped.
Private Limited Company (Ltd) V Public Limited Company (PLC)
Limited company: a business recognised as a legal unit that offers investors (shareholders) limited liability.
Private limited company (Ltd): a company that cannot sell shares to the general public. It is not listed on the Stock
Exchange.
Public limited company (Plc): a company able to sell shares to the general public by being listed on the Stock Exchange.
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Limited liability: investors (shareholders) in a limited company can only lose their investment in the business if it fails; they
cannot be forced to sell assets to pay off the business debts.
Shareholders: part owners of a limited company - they own shares in it and are entitled to vote.
Advantages and Disadvantages of Being a LTD
Advantages
Has more status than a sole trader or
partnership. Some customers and suppliers will
have more confidence in the business as it has a
clear legal identity.
Attracts private investors known to the owners
to buy shares in it by giving them limited liability.
Original owners often remain as directors and
senior managers so they will continue to run the
business.
Limited liability for all shareholders, unlike the
unlimited liability faced by sole traders or
partners in a partnership.
Disadvantages
Cannot be listed or quoted on the Stock
Exchange so cannot offer shares for sale to the
general public.
Scope for expansion into a really large business is
limited.
Share prices are not quoted daily so
shareholders cannot be sure what their shares
are worth.
Accounts are available to the general public at
Companies House so it is possible to find out
how a private limited company is performing.
Advantages and Disadvantages of a Public Limited Company (PLC)
Advantages
Able to raise substantial capital for expansion by
selling additional shares.
Disadvantages
The original owners often lose control as a high
proportion of shares are sold. Is this risk worth
the extra finance raised?
Professional directors and managers are
appointed to run the business may have
different aims to those of the shareholders.
Higher status than a private limited company. It
will attract more publicity as it has thousands of
shareholders who want to read about the
company performance.
Share prices are listed on the Stock Exchange so
shareholders can work out the value of their
shares. They can buy additional shares or sell
those they own easily. This is not so easy for
shareholders in private limited company.
Limited liability for shareholders, as for private
limited company shareholders.
Must disclose all main accounts to the public.
These are often greatly publicised in the media,
with much more public scrutiny than with
private limited companies.
Company can be taken over if a majority of
shareholders agree to a bid from another
business.
Changing business aims and objectives




Profit growth – Profits will be used to pay dividends to shareholders and invest back in the company to achieve
further growth
Increasing market share
-This will increase the status and reputation of the business.
-This will give the business more power of suppliers i.e. negotiate lower prices.
-This may make the business a “dominant business” so they can set high prices and make more profits.
Increasing shareholder value
-This will increase the share prices
-Increased dividends can be paid out to shareholders
Managerial Objectives
-Directors may aim to increase their status by running a large business
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-Directors may aim to increase their salaries and their perks
-Directors may aim to gain publicity from well publicised decision, such as takeovers and expansion abroad
International Growth
Social Costs & Benefits
Ethical Business – A business aim to “do the right thing” according to the values and beliefs of managers, even if this is
not the most profitable way
Social Cost – The costs to society from the activities of a business e.g. pollution.
Why should a business behave ethically?
 Laws on environmental protection have become stricter
 Consumers are demanding that businesses tackle climate change
 Consumers want firms to behave ethically so a business can increase its reputation if it does so
 All the above will mean greater profits and increased reputation
Being ethical can reduce short term profits



Paying above the minimum wage is expensive and will increase the price of your products
Not forcing suppliers to reduce prices if it will mean they will go out of business will also increase your prices
Not paying bribes or giving gifts to win contracts can mean lost sales.
Being ethical can increase long term profits




Other ethical businesses will want to business with you
Workers will be more motivated if they feel they are treated and paid well
The government is more likely to give contracts to businesses that are ethical
Suppliers will develop a good relationship with a business that treats them fairly.
Location
The “best location” is one that maximises sales revenue and minimises costs.
Factors considered when choosing location





Cost of the site
Labour costs i.e. cost of employing workers
Skills and expertise of workers
Transport costs and proximity (closeness) to suppliers
Proximity to target market
Costs and Benefits of locating abroad
+Lower site or land prices
+Lower labour costs
+Avoid trade barriers i.e. by being in the EU you don’t have to pay a tariff (tax on imports)
+Take advantage of fast growing economies i.e. China and India
-Language differences
-Transport costs will increase if good need to be shipped back
-Bad publicity may follow if in a location that is known for child labour
-UK jobs may be lost if businesses re locate.
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Marketing Mix
Marketing Mix – Costs and Benefits of increasing your Product Portfolio
Product portfolio/mix - A product portfolio is the range of products that a business sells.
Benefits of selling a wide range of products
 Sell products that support the original product e.g. a florist may sell a variety of pots and vases
 To attract new customers by aiming at a different target market
 To diversify in order to reduce risk
Problems of selling a wide range of products
 Many managers have to be employed to take decision.
 Bad publicity for one product may harm the company’s image
 The cost of developing and selling different products
 Some products may fail of the company has not done sufficient market research
Product Life Cycle & Extension Strategies
Four stages in a product life cycle:
Introduction
The product is launched onto the market. This might be expensive as the firm advertises in order to promote the product
Growth
Consumers become familiar with the product and repeat custom is built up
Maturity
Sales reach a peak and start to level off. Competition becomes stronger
Decline
Product sales start to fall and the firm will decide on an extension strategy or discontinuing the product.
Extension Strategies – used when a product reaches maturity to try and extend its period of maturity and stop it going into
decline
 Targeting new markets
 Revitalising the image of the product
 Rebranding
 Redesigning
 Repackaging
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
These may be supported with a new promotional campaign
How extension strategies impact other departments
 The production department will need to carry out research and development
 The finance department will need to budget a new advertising campaign
 The marketing department will need to organise and plan a new marketing campaign
 The human resources department may need to employ people with specific skills
Marketing Mix – Factors affecting pricing decisions and pricing strategies
Why price is important?



It affects whether people can afford to purchase the product
It affects how competitive a product is compared to rival products
It affects a product’s image. A low price may suggest it has low quality.
Pricing Strategies





Competitive Pricing – When a business charges a price that is similar to their competitors
Price skimming – When a business charges a high price for their product but then lowers it when competitors release
substitute products
Price penetration – When a business charges a low price to capture sales and increase markets shares. Once the
business has a brand loyalty they can increase their prices.
Cost-plus pricing – This involves working out the cost of making the product then adding a profit mark up
Loss leader – When a business sells one product at a loss to get customers into the shop to purchase it. When a
customer is in they usually purchase other related products. An example is printers and printing cartridges, the printer
is sold for a loss and but the cartridge is sold at a high price to make up for the loss on the printer.
Marketing Mix – Methods of promotion and factors to take into account when choosing promotion
Promotion has several important roles to play in marketing a product:
1.
2.
3.
4.
Informs consumers of new products
Creates a brand image and a sense of identity
Supports other marketing decisions, such as reduction in price
Helps a business achieve sales growth
Methods of Promotion
Advertising – businesses can advertise on TV, billboard and use celebrities in shows
Sales promotion – includes games, competitions, special offers, buy one get one free (BOGOF). They encourage consumers
to buy more of a product or choose this product rather than competitors.
Direct marketing – this involves contacting consumers directly through E mail, telemarketing and direct mail.
Celebrity endorsement – when a business pays a celebrity to endorse/recommend their products
Sponsorship – businesses sponsor events such as the Olympics to gain publicity. Other example include the Football
Premier League.
Selecting a promotional mix
Some businesses use more than one form of promotion. There are various factors that affect the promotional mix
 Cost and affordability
 Nature of the product – a business selling computer products will advertise differently to a business that sells furniture
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
Nature of the market – if the customers are known to the business there is less need for extensive advertising. When
the market is spread over a wide geographical area and the identities of the target market are unknown then
advertising will be more appropriate.
Competitors promotion - if competitors spend a lot on advertising then this will lead to a business doing the same
Marketing Mix – Channels of Distribution
There are a variety of channels of distribution used by retailers to gain access to potential customers. These include:
•
Wholesalers
•
Retailers
•
Telesales
•
Mail order
•
Internet selling
Wholesalers
A wholesaler is a business that provides a link between the manufacturer of goods and the retailer. They buy large
quantities of goods and sell these on to retailers in smaller amounts.
Retailers
A retailer is a business that buys from a manufacturer or wholesaler and sells on to the general public. Large retailers can
hold a great deal of power over their suppliers, reducing the price a business might receive for its goods.
Telesales
This is a method of direct marketing, usually over the telephone, but also through other face to face media such as web
conferencing. As firms grow they often make use of call centres to ‘cold call’ telephones nationwide. Although this can
lead to a poor reputation it can also increase sales revenue.
Mail order
Consumers use catalogues from home and then order the items that they wish to buy. The firm do not have the expense of
a store but do have to pay for warehouse facilities and the cost of the catalogues. The modern version of this is the online
catalogue. Associated costs include technology, storage and distribution of the goods.
Internet selling
This has seen rapid development over the last decade. Firms have found it easier to grow through the internet as it is
relatively cheap to set up and run. An internet site can target the whole globe.
Finance
Costs and Benefits of different sources of finance – Expanding Business
Source of finance
When most used
Retained profit
For long-term expansion
Selling unwanted
assets
To pay for expansion or to
pay off debts
Benefits
Disadvantages
No interest and does not have to Many businesses may expand
be repaid
but still not be very profitable.
Profits may be too low to finance
No loss of control to new growth
owners/shareholders
When profits are low business
growth will be slow so loans or
share issues might be better
options
No interest paid and the finance The asset is no longer owned
raised does not have to be repaid
The asset may still be needed by
No loss of control of the business
the business so there will be
leasing costs
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Share issue
Loan
To pay for long-term
expansion (e.g. buying
another business
For short-or long-term
purposes (e.g. to buy
machinery or to pay for
increases in stock)
No interest has be repaid
Dividends will be expected by
shareholders
Share capital does not have to be
repaid
May be loss of control by original
owners
Lower interest rate than overdraft Must be repaid this could be at
or unsecured loan
short notice if the bank is
worried about the future of the
No loss of control of the business
business
Property is used as security will
be given up by business if debt
cannot be repaid
Interest costs may be high
Profit and Loss account
A sample Profit and Loss Account for Nuts and Bolts Ltd
£ms
Sales Revenue
650
Cost of Sales
325
Gross Profit
325
Expenses
247
Net Profit
78
Sales Revenue – The amount of money generated from sales: Selling Price X No of Goods Sold
Cost of Sales – The costs directly related to making the product i.e. raw materials
Gross Profit = Sales Revenue – Cost of Sales
Expenses – Also known as overheads include electricity, gas, phone bills etc.
Net Profit = Gross Profit - Expenses
Gross Profit Margin & Net Profit Margin – Profitability Ratios
1. Gross Profit Margin
GROSS PROFIT * 100
SALES (TURNOVER)
2. Net Profit Margin
NET PROFIT (Before Tax) *100
SALES (TURNOVER)
E.G Nuts and Bolts
Gross Profit Margin = 325/650 *100 = 50% this means for every £1 worth of sales revenue the company earns 50p gross
profit. In order to increase the gross profit margin the company has to either increase sales or reduce cost of sales by
finding cheaper suppliers
Net Profit Margin = 78/650 *100 = 12% this means for every £1 worth of sales revenue the company earns 12p net profit.
In order to increase the net profit margin the company will have to reduce expenses or increase sales. They may increase
sales by promoting their business or extended their product portfolio.
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Balance Sheets
£
Fixed Assets
land and buildings
motor vehicles
Machinery
Current Assets
Stock
Debtors
Cash at bank
Current liabilities
Creditors: amounts
falling due within one year
Overdrafts
Dividends
Unpaid tax
320
0
0
320
90
20
55
165

Fixed Assets – owned by a business over a
long period of time

Current Assets – Assets that can be turned
into cash quickly
Current Liabilities – What the business
owes and will have to pay back within
12months
Net Current Assets or Working Capital –
Current Assets minus Current Liabilities
Long Term Liabilities – What the business
owes and will have to pay in more than 12
month time.



85
0
0
0
85
Net Current assets
80
Total assets less
current liabilities
400
Long term liabilities
Creditors: amounts falling due
after more than one year
mortgage
20
110
Net Assets
270
Capital and Reserves
Capital
Retained profit and reserves
Definitions
200
70
270
Current Ratio & Acid Test Ratio
These ratios are concerned with the short-term financial health of a business.
It measures the ability of an organisation to meet its short-term liabilities from its current assets.
1.Current ratio - expressed as a proportion to 1
CURRENT ASSETS
CURRENT LIABILITIES
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If the ratio is so low that it is becoming hard for the business to pay the bills, the company will try to bring more cash
into the balance sheet:
This could be done by:
 Selling under-used fixed assets
 Raising more share capital
 Increasing long-term borrowings
2. Acid Test Ratio – expressed as a proportion to 1
CURRENT ASSETS - STOCK
CURRENT LIABILITIES

The ratio examines the business liquidity position by comparing current assets and liabilities, but it omits stock from
the total of current assets.

The reason for this is stock is the most illiquid current asset i.e. it is the hardest to turn into cash; it can take a long time
to convert stock into cash.

Furthermore, stock may be old and unsellable.
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People in Business
Organisational Structures






Organisation -This is the way in which a business is organised so that it can achieve its objectives
Hierarchy - This is the structure of the different levels of authority in a business.
Organisation Tree -This is a diagram which shows the internal organisation of a business.
Chain of command -This is the route by which decisions are passed between different levels of the organisation.
Span of control -This is the number of subordinates for whom a manager has direct responsibility.
Subordinates - workers in the hierarchy who work under the control of a more senior worker.
Flat Structure
Tall Structure
Short chain of
command
Long chain of
command
Narrow span of control
Wide span of control
Tall Structure
Advantages
+Narrow Span of control makes it easier for managers to monitor subordinates
+Better promotional prospects
+The chain of command shows a clear line for communications and authority.
Disadvantages
- Decisions take longer to be put into action
-Junior staff may feel remote and under-valued
Flat Structure
Advantages
+Fewer managers are needed, as workers have more responsibility.
+The shorter chain of command means more efficient decision-making
+Increase in motivation level as workers have more responsibility
Disadvantages
-Managers are responsible for many people
-The manager can lose control because of wide span of control
-Managers have to rely on subordinate staff to implement decisions
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Centralisation & Decentralisation
Centralisation – a type of business organisation where decisions are made at the centre or core of the organisation and
then passed down the chain of command.
Decentralisation – a type of business organisation where decision making is pushed down the hierarchy and away from
the centre of organisation
Advantages of centralisation
• Senior management have more control of the business e.g. budgets.
• Senior managers can make decisions from the point of view of the business as a whole.
• Communication may improve if there are fewer decision makers.
Disadvantages of centralisation
• Local management’s experience and expertise are not taken into account
• Local staff can become de motivated
• Change will occur slowly
Advantages of decentralisation
• It empowers and motivates workers
• It also frees time for managers to concentrate on more important tasks.
• It provides subordinates with greater job satisfaction by giving them more say in decision-making, which affects their
work.
Disadvantages of decentralisation
• Scope of economies of scale are limited
• Corporate image may not be consistent across outlets or branches
Recruitment of Staff
Benefits of recruiting the best workers




High Productivity
High Quality output or customer service
Higher profits resulting from the first two benefits
Workers will be less likely to leave as they will be doing a job that they are good at
How to recruit the best workers?
There are four important stages in the recruitment process:
1. Job Analysis – finding out exactly what the job involves. This stage of the process must find out:
-Exact task and duties
-The skills needed
-The training that might be required
-How a person’s work will be analysed and appraised i.e. “mystery guest visit” or performance management
2. A firm that wants to recruit someone will have to come up with a job description. They then write a personal
specification.

Job Description
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A written description of what the job consists of. It includes the formal title of the job, the main purpose of the job and
the main duties.

Personal Specification
The person specification lists the qualifications, experience, skills and personal qualities of the ideal candidate
3.




The Job Advertisement
The job advert is to get as many suitable people as possible to apply for the job.
The business needs to decide what it should contain, where it will be put and for how long.
There are many different places that a job advert may be placed e.g. local & national press, job centres, trade journals,
and employment agencies.
The advert should describe the job and the skills required. It will often indicate pay and how the person can apply
4.



Selection Process
Written application to help shortlist – CV and a covering letter or application form
An interview
Psychometric Tests – aptitude test, personality tests, group tests.
Methods of recruitment


Internal Recruitment – when a business looks to its own existing employees to fill a post
External Recruitment - when a business seeks to get someone outside the organisation to fill a post
Benefits of internal and external recruitment
Benefits of internal recruitment
Gives existing workers a chance of promotion or
an opportunity to do another job. This should
provide motivation and an incentive to do well
The workers will not need any induction training
as they know how the company works
The skills and personality of internal candidates
should already be well known
Should be quicker and cheaper than recruiting
externally
Benefits of external recruitment
Gives much wider choice of potential applicants
External candidates could be better qualified and
of higher quality
Prevents breaking up existing teams within the
business and avoids jealously created by an
internal candidate being promoted over the
heads of other workers
Avoids creating another vacancy in the business
that will then have to be filled
Training & Appraisal of workers
Benefits to a Business of Training Staff




Workers are more able to cope with changes i.e. advances in technology
Increased productivity and efficiency i.e. they can do a range of jobs
Reduced chances of products being poor quality
Increased motivation because they feel they are being invested in
Costs of Training Staff



Financial costs of training
Workers are not producing whilst training so loss of output and hence profit
Workers may leave once they are trained if offered better pay
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Types of Training
1. Induction Training
Includes learning what the business does, who does what within the business, health and safety procedures, the role
tasks of supervisors and computer systems.
+helps workers feel part of the company
+reduces risks of accidents through ignorance
+Worker feels more familiar with the business and key personnel
2.



On the Job Training – Learning by Doing
The person learns to do their job by being shown how to do it and then practising.
It is cost effective for the employer because the employee continues to work while learning
A problem is that it is often taught by a colleague so bad working practices can be passed on
3.





Off the Job Training
This happens when the person learns away from the workplace.
It can be done internally (the business has a separate training division) or externally if it happens outside the business
Often a higher quality because it is taught by qualified people
Expensive
Best used when introducing new skills or training people for promotion
Staff Appraisal
How do manages know workers are doing well or not? Are workers contributing as much to the business as they could?
These questions can be answered by using a system of appraisal.
Appraisals are usually done by managers senior to the workers. The workers may be asked to complete a detailed
questionnaire about how they think their performance has met previously agreed targets. The benefits of appraisals are:






Provide feedback to the worker
Make suggestions for improving performance
Increase motivation as workers feel the company is interested in them
Set workers objectives for the future – these should be agreed with the worker
Identify training needs and potential promotion
Basis for pay increases
There are three main methods of appraisal:



Superiors – the worker’s senior manager assess performance based on their knowledge of the recent work done.
Self- appraisal – individuals carry out an assessment of their work and progress, which can be checked and agreed with
a superior
Peer appraisal – carried out by a colleague at the same level within the organisation.
Motivating and retraining staff
Benefits of motivated staff



Increased productivity and efficiency of workers
Improved quality
Less likely to leave the organisation
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


Increased reputation for the company as workers speak highly of the firm
Increased profits for the business due to quality and productivity
More skilled workers are likely to want to work for the company
Three main methods to motivate staff
1. Staff training
The general view is that when a business offers well run and appropriate training opportunities for staff there will be a
significant increase in motivation. Untrained staff may feel they have low value and low status.
2. Styles of management
The way people are managed and led have a great impact on their motivational levels. Two extreme management
styles are:
 Autocratic - a management style characterised by issuing orders and demanding unquestioning obedience.
 Democratic - managers make decisions that are supported by the majority of staff, preferably thorough a
consensus of opinion.
3. Remuneration Methods
Which method of paying employees is most likely to motivate them to produce high quality output levels?
Advantages, disadvantages and impact of different methods of pay
Pay method
Piece rate - a fixed
amount
for
producing
each
unit of work
Main advantage
Should lead to higher
output if workers are
only motivated by the
chance of earning more
money.
Hourly wage rate
Workers can calculate
how much they should
receive each day or
week.
Salary
fixed Provides pay security annual sum, paid workers know exactly
monthly
how much they will
receive each month
Profit sharing - a
share of annual
profits is given as a
bonus in addition
to basic pay
Main disadvantage
Possible impact on motivation
May lead to poor quality if Assumes
workers
are
only
workers rush jobs just to increase interested in pay. Some may be
output.
motivated by job security, social
factors, the chance of promotion
and recognition by management
Does not provide any direct Provides more pay security than
incentive to increase output or piece rate, which is important to
put in extra effort.
most workers. It also encourages
staff to work overtime.
No direct link between daily This is the most commonly used
effort and pay. Works best with pay method for permanent
an appraisal system to determine managerial staff, so when offered
salary level for the next year.
to other workers it gives status and
security.
If annual appraisals are used,
workers may work hard to achieve
annual targets so that a higher
salary might be offered.
Makes workers more What happens when a loss is May help to keep staff in the
responsible towards the made? There might be some lack business if they consider that
company and keen to of pay security, such as during profits are likely to increase.
help it increase profits.
recession.
Should have a positive impact on
long-term
responsibility
and
motivation.
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Operations Management (Production)
Main features of Flow Production




Large scale production – The cost needed for flow production is only worthwhile if you are producing large quantities
Standardised Products – The key feature of flow production is that all the products are identical
Specialisation – This is where workers are divided into separate tasks or jobs that allow workers to become skilled at
one of them
Division of labour – Breaking a job down into small, repetitive tasks that can be done quickly by workers on machines
specialised in this one task
Advantages of Flow Production



Low cost per unit - due to high levels of output (see economies of scale)
High amount of automation – this leads to consistent quality of products
Less nee d to hold stock – unlike batch production, production is continuous so it is not necessary to hold stock of
complete items for a long time
Disadvantages of Flow Production



Set-up cost are high – buying the equipment is very expensive
Workers are demotivated – doing the same task every day can become boring
The standard product cannot be changed – to do so you will need to make changes to the machinery which is costly
and time consuming.
Lean Production – Kaizen, JIT, Cell Production
Lean production – a production approach that aims to use fewer resources by using them more efficiently
Kaizen – A Japanese word which means continuous improvement. In practical terms, workers are encouraged to make
suggestions for small and frequent improvements. These small improvements will add up to have a huge increase in
efficiency. Many businesses now have a “Kaizen Group” in which workers and supervisors meet regularly to suggest and
discuss improvements within the business.
There are three lean production methods you need to know:
1. Just-in-time
This is when a business orders supplies so they arrive when they are needed and making goods only when they are
ordered.


Arranging with suppliers that all supply orders are only brought to the business on the day required, not days or
weeks in advance
Producing to order not for stock. This means only making products when they have been ordered by a customer not
just to add to stock of unsold good.
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Advantages and disadvantages of JIT manufacturing
Advantages
Disadvantages
Cuts stock-holding costs and increases efficient
use of factory space
Customers have to wait for goods to be made as
completed goods are not held in stock. Some
customers may prefer to buy from stock.
Capital (money) that was used to pay for stocks
can now be used more efficiently in other parts
of the business
Costs of ordering supplies could increase as so
many small orders are made rather than one
large delivery of supplies.
Improves efficiency of cash flow by reducing the
time between paying for supplies and receiving
payment from customers
Requires very reliable suppliers and transport
systems - any hold- ups or problems with either
of these could lead to output being stopped as
supplies have not arrived.
Close contact with suppliers at all times leads to
better, more efficient supplier relationships (e.g.
willingness to supply goods at very short notice).
2. Cell Production
Unlike flow production instead of each individual worker just doing one repetitive task, the job is split into complete units
of work that can be done by teams or “cells” of workers. For example, a team of workers can assemble a complete washing
machine rather than each worker just adding one part to it as it passes by on a production line.
Advantages of Cell Production
+Increased motivation because workers work in teams (Cells)
+Workers have greater skills because they need to understand the entire production process
+Competition between cells can increase efficiency and quality
Disadvantages of Cell Production
-If workers are paid piece rate this may increase labour costs for the business
3. Lean Design
Producing new designs as quickly as possible e.g. the launch of the Apple iPhone before any of its competitors
Features of Lean Design



Saving time in developing and launching new products means that firms can charge a high price and make substantial
profits, before lowering prices as competitors come into the market
Teams of designers working on different parts of a product simultaneously, before bringing all parts together in the
final product
This time saving approach is much easier that it used to be, thanks to computer aided design (CAD) programs.
Examiners Tip: Remember when discussing Lean Production think about how this affects training and motivation.
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Benefits & Costs of Growth – Economies/Diseconomies of Scale
1. Economies of Scale
When the average cost of production falls as your output increases e.g. your costs = £1000, if you produce one good your
average cost is £1000 (1000/1). If you produce 1000 goods your average cost is £1 (£1000/1000). So as output increases
your average cost falls.
Internal Economies of Scale
-
Bulk Buying/Purchasing economies of scale – the more you buy the cheaper it is
Financial economies of scale – big firms are less risky so get a lower rate of interest on loans
Managerial economies of scale – big firms employee the best people so they are the most productive
Technical economies of scale – big firms have the best machines so they can produce more
Marketing economies of scale – large firms produce more so they can spread their marketing costs
Risk bearing economies of scale – large firms diversify into other markets so have less risk
Too Many Footballer Ruin Premier Matches
2. Greater market share – this will mean they can increase their dominance over the market so charge a higher price and
gain greater brand loyalty
3. Increased revenue – by growing a business will have a wider customer base, they may even diversify their product
range which all increases the firms revenue and hence profit.
Disadvantages of Growth
Diseconomies of scale – When the average or unit cost increases when output increases.
There are several examples of diseconomies of scale when a business grows:
1. Poor communication
The organisational structure has more levels when a business grows so messages from the top to the bottom of the
organisation take longer. Messaged can become distorted or even arrive too late.
2. Poor motivation
Many workers may feel uninvolved because they are either too remote or managers can be far away and difficult to
contact.
3. Poor co-ordination
Most large businesses have operations in many locations and countries:


It becomes difficult to make sure that all major decisions fit in with the aims of the head office. Conflicting decisions
could lead to wastage and higher costs or duplication of resources, for example similar research being done in more
than one of the company’s bases.
Complex production processes with parts and components being made in so many different locations. Any hold up or
transport problems could cause a loss of output in other plants owned by the business.
Quality Assurance – Causes of quality problems & Methods of maintaining quality
Quality Product – A good or service that meets customers’ expectations and is therefore fit for purpose
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Main causes of quality problems
1. Poorly motivated workers
If workers in an expanding business are not well managed or well-motivated then they may not been keen to produce a
good product or provide a good quality service.
2. No clear responsibility for quality
Whose job is it to make sure high quality levels are met? If there is no clear guidance about this then good or services may
fail the quality test.
3. Lack of consistency
A shop with many branches may fail to give consistent quality customer service. One shop may change or exchange
unwanted goods with no time limit another may not.
4. Outsourcing
This is when a business uses another firm to make parts of a product or to provide customer service which can lead to low
quality. The outsourcing firm may not work to the same standards so strict quality check may be necessary.
5. Inspection costs
Unless every worker is made accountable for quality (see TQM), then inspectors or checkers will be needed to regularly
check that quality standards are being met. In retail these might be “mystery shoppers” who report back on levels of
quality.
Main methods of maintaining quality
1.




Setting agreed quality standards
Banks – maximum waiting time to see a cashier or to have a telephone call answered
Fast Food Delivery - maximum time for deliveries to be made
Jet Engines –maximum failure rate of each component
Batteries – minimum number of hours of continuous operation
2. Total Quality Management (TQM)
–A strategy that aims to make every employee responsible for quality.
–Employees think about the needs of the customer at all times
–Emphasis is on getting things right the first time
–Quality circles: groups of workers from various departments meet to identify problems and find solutions.
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