STUDENT BOOK ANSWERS UNIT 1 MARKETING AND PEOPLE

STUDENT BOOK ANSWERS

UNIT 1

MARKETING AND PEOPLE

1 THE MARKET

ACTIVITY 1

CASE STUDY: US DRYBAR

1. Using this case as an example, explain what is meant by a niche market.

A niche market is a small market segment – a segment that has sometimes gone ‘untouched’ by

larger businesses. Niche marketing is the complete opposite of mass marketing. It involves selling to a

small customer group, sometimes with specific needs. Small firms can often survive by supplying

niche markets. In this case, Drybar targets a niche market. Drybar specialises in the provision of

affordable, high-quality blowouts. This is when a client’s hair is washed and blow-dried into style

without being cut or coloured. Drybar is set up like a bar where clients can relax, watch a film and get

a blowout. This service is different from the majority of hair salons in the market.

2. Explain one possible disadvantage to a business like Drybar of targeting a niche market.

Obviously if a market is very small the potential for sales is limited. There may also be limited scope

for diversification and new product development. Consequently, firms cannot spread their risk. Small

firms operating in a niche market may also be vulnerable. If a firm successfully exploits a niche market

it can still attract competition. Niche markets, by their nature, are very small and unable to support

more than two or more competing firms. As a result, if a large firm decides to enter a niche market

they may find it easy to overrun a smaller rival. If they lose a grip in their chosen market, they are likely

to collapse because they do not have other products or markets as a back-up. This could happen with

Drybar if other providers copy their idea.

ACTIVITY 2

CASE STUDY: ONLINE GROCERY SHOPPING

1. Explain why online grocery retailing is likely to grow in the future.

In many countries, online grocery retailing is currently trailing behind other forms of online retailing.

This is the case in Australia. However, reports suggest that online grocery sales in Australia may rise

from AUD 2600 million in 2015 to AUD 5800 million by 2020. A recent survey showed that 39 per cent

of Australian shoppers may use online grocery shopping in the near future. This may be because of

busier lifestyles and the further integration of mobile technology into our daily lives. People are

increasingly becoming ‘on-the-go’ consumers. Online shopping is convenient and can help busy

consumers save time.

2. Assess the benefits and drawbacks to supermarkets of online retailing.

Supermarkets are keen for online grocery sales to grow. Many have invested in the click & collect

concept which is being introduced around the world. Major retailers in Australia, including Coles and

Woolworths, are investing heavily to roll out the service to the majority of their stores as well as remote

locations, such as railway stations. There are a number of benefits to online selling. Supermarkets can

market their goods to people who prefer to shop from home. From a marketing perspective, it is easier

to gather personal information online from customers so that they can be targeted with other products

and offers in the future. Marketing costs will also be lower. For example, it is much cheaper to send a

marketing message by email to 1000 customers than it is to send 1000 newsletters by post.

Supermarkets with an online facility are open 24/7. There are not many stores that can match this

level of service – although some supermarkets are open 24 hours a day, 5 or 6 days a week. Finally, it

may be possible to reduce some selling costs such as sales staff. Fewer people may be needed in

stores if people are shopping online.

However, there may be some drawbacks. There are likely to be some extra costs, both initially and

ongoing. Supermarkets will have to invest heavily in IT and delivery fleets, for example. Orders will

have to be ‘picked’, which is labour intensive, and systems will have to be developed to deal with

returns, complaints and delivery routes. Overall though, it is likely that the benefits will outweigh the

costs and any supermarket that fails to offer online services is likely to lose a competitive edge.

EXAM PRACTICE

GLOBAL EV MARKET

(a) Define market share. (2 marks)

Market share is the proportion of a market that a particular business or product enjoys. In this case,

Figure 3 shows that global sales of EVs in 2016 were 774 000 units. This was 42 per cent higher than

for 2015 but only 0.86 per cent of the total market for vehicles. This is a very small market share.

However, in 2010 market share was only 0.01 per cent.

(b) Explain one reason why the global car market is likely to grow in the next 5 years. (4 marks)

Most markets tend to grow over time. The global car market is almost certainly a market that is likely

to grow in the next 5 years. The main reason is because of the growing demand for cars that is likely

to come from emerging markets. These include the BRIC countries and other developing nations such

as Mexico, Thailand and Indonesia. Car ownership in these countries is probably very low compared

with most developed countries. Consequently, there is a lot of scope for car sales to people in these

countries in the near future. Disposable incomes in these emerging markets are beginning to rise and

many people will want to buy a car.

In competitive markets like the global car market, firms are under pressure to meet ever-changing

customer needs. Firms need to be prepared for change. One way is to develop a culture of flexibility in

an organisation. A business will need flexible working practices, flexible machinery, flexible pricing and

flexible staff. This might mean that staff have to be trained in a variety of skills and be prepared to

change the tasks they undertake in the workplace. This might help firms to serve customers more

effectively when changes occur.

Businesses must keep in touch with developments in the market. One way to do this is to undertake

regular market research. Research might be aimed at current customers or potential customers in the

market. Firms need to be aware of any changes in customer needs or tastes.

Those firms that invest in new product development are likely to survive for longer in the market.

Although expenditure on research and development is expensive, a failure to innovate could be costly.

A unique new version of a product or a brand new model could rejuvenate sales and help win a larger

share of the market. In the car industry, firms spend very large sums of money in product

development. BMW has enjoyed a larger slice of the small car market by extending the range of its

Mini models. Investment might also be needed in training and flexible machinery. Finally, a car

manufacturer might adapt by finding a niche in the market. A niche strategy is appropriate if groups of

loyal customers can be served profitably. For example, it could be argued that Ferrari has profited

from serving the high-end luxury car niche market. At the moment, the EV market may be described

as niche. However, many car producers are aware that the sale of EVs is likely to be important and

therefore the market may not remain a niche.

If firms cannot adapt quickly to the changing needs of customers, they will lose out to rivals that do

adapt. There are different ways of doing this in the car market and each producer is likely to adapt in a

way which exploits their strengths.

(d) Assess the factors that might affect the growth of the EV market in the future. (10 marks)

One reason why EVs were developed was to serve customers who were increasingly concerned

about the environment. It is often argued that emissions from cars make a big contribution to the

‘greenhouse effect’ and global warming. Also, governments around the world have signed agreements

to reduce carbon emissions and they are keen for growth in the hybrid car market. Indeed, in some

countries, financial incentives have been offered to consumers opting for EVs. The increases in sales

of these cars between 2010 and 2017 is sharp and illustrated in Figure 3.

One of the barriers to using EVs was, and still maybe, uncertainty about recharging facilities. People

are aware of the locations of petrol stations and it is rare to run out of petrol on a busy motorway. In

contrast, a lot people do not know where batteries for EVs can be recharged once embarking on a

long journey. However, locations for charging have increased at least ten-fold and the number of

available grid charged models has increased from 70 to 130 since 2013. Also, the cost of batteries

has fallen by 50 per cent in recent years and renewable sources are now roughly the same cost as

fossil fuels in electricity generation. This bodes well for the future of EVs.

Looking ahead, there is certainly a lot of potential for growth in EV sales since in 2016 it only had a

0.86 per cent share of the global market. However, whether the market will grow depends on future oil

prices, continued pressure to reduce emissions, the effectiveness of marketing strategies used by car

producers and the development of recharging facilities. To conclude, the volumes are still small at the

moment, but with the government incentive schemes supporting the market and car makers unveiling

an even wider range of models, the direction of travel is increasingly clear.

2 MARKET RESEARCH

ACTIVITY 1

CASE STUDY: ONLINE SURVEYS

1. Give one reason why it might be important to find out what people think of a business website.

A badly-designed website could discourage online shoppers from making a purchase. When

searching for products online, people like to look at attractive websites and be able to navigate them

easily. If a website is unattractive, does not contain the right sort of information or is too difficult to

navigate, online shoppers can easily ‘click’ to another. Even for businesses that do not sell their goods

online, an effective website is still important. A company’s website is likely to say something about the

image of that company, so a business will want to project a positive image through its website.

2. Explain whether the online survey would benefit a company selling to: (a) customers in isolated areas (b)

less-developed countries, such as Ethiopia, Bhutan and Haiti.

(a) An online survey would be of benefit to a company selling to customers in isolated areas. It would

allow a company to gather information cheaply – for example, without incurring the cost of travelling to

such customers. This would be particularly the case if a face-to-face interview were the alternative.

(b) An online survey may not be of benefit to a company selling to customers in undeveloped

countries such as Ethiopia, Bhutan and Haiti. This is because many people in these countries do not

have access to computers where they can get an internet connection. However, in Bhutan, growth in

internet access is relatively fast for a less-developed country. In Haiti, mobile internet use is rapidly

rising due to investment from multinational communications companies. Given that those subscribing

in Bhutan and Haiti are more likely to be in the higher-earning sectors of the population, it might be

worthwhile using online surveys.

3. Discuss the advantages and disadvantages of online surveys.

The main advantage of online surveys is that they can be completed and processed quickly: the

respondent keys in the data, which is then fed straight back for immediate analysis. Survey costs are

lower because there is no need for printing, postage and keying in. Online surveys are often fun to

complete because they may be interactive. They can also be accessed 24/7 and completed at the

convenience of the respondent. In addition, online surveys make it easy to give feedback to the

respondents, as results can be emailed to them.

However, there are disadvantages. With an online survey, the sample of respondents may not be

representative. This is because online surveys are only presented to internet users. The views of

others may not be taken into account, even though they may be potential customers.

ACTIVITY 2

CASE STUDY: TEKKONG AND VIRTUAL REALITY

1. Define desk research.

Desk research or secondary research involves the collection of secondary data. This is information

that already exists in some form. It can be internal data, from records within the business, or external

data, from sources outside the business, such as reports, newspapers or company websites.

2. Figure 2 is an example of quantitative data.

(a) What does this mean?

Quantitative data is information that is expressed in numbers. The data can be measured and

presented in graphs, tables and charts. Figure 2 shows quantitative data presented in two pie charts.

It shows the market sizes for four different types of wearable technology (fitness trackers,

smartwatches, wearable cameras and virtual reality headsets) in 2016 and 2020. The data is

expressed in numbers. For example, it shows that in 2016 smartwatches were the most popular type

of wearable technology with a market share valued at US$6300 million. However, in 2020 the market

leader was virtual reality headsets with an expected market share valued at US$4500 million.

(b) Describe one advantage of gathering quantitative data.

One of the main advantages of quantitative data is that it is regarded as being open to less

interpretation that qualitative data. This means that it is easier for a range of different analysts to draw

common conclusions from the data. Time is not likely to be wasted discussing whether the data

means one thing or another.

3. Based on the data in Figure 2, discuss one possible reason why TekKong decided to develop a VR headset.

In 2016, global sales of VR headsets were US$1700 million. Less money was spent on VR headsets

than any of the other the three other items of wearable technology. However, in 2020 sales of VR

headsets are expected to climb to US$14 500 million. This is a huge increase and means that VR

headsets will dominate the market for wearable technology by 2020. Consequently, TekKong believed

that this market would provide a more profitable opportunity for a new product. This is presumably why

TekKong decided to develop their own VR headset for the market, rather than other types of wearable

technology.

ACTIVITY 3

CASE STUDY: BASEL INTERNATIONAL

1. (a) Define random sampling.

Random sampling is where each member of a group or population has an equal chance of being

selected in a survey. The sample is selected at random.

(b) Why are samples used in market research?

Ideally, when carrying out a survey, information could be gathered from every single member in the

target population. The target population includes all those people whose views a business wants to

explore. The target population may be individual consumers, households or other businesses, for

example. However, this may take too long and cost too much money. To overcome this problem,

businesses collect information from a sample of people in the population. A sample is a much smaller

group. However, it is important that their behaviour and views are representative of all those in the

population

A random sample, particularly if it is too small, may not be representative of the whole population. This

could be a serious problem for a company like Basel International. This is because any conclusions

and decisions based on the research results might be inaccurate. This might mean that the business

makes errors in its product development, for example.

2. On behalf of Basel International, information was gathered from 20 000 females in 20 different countries.

Suggest why it interviewed (a) females only; (b) respondents in 20 different countries rather than one

country only and (c) 20 000 people rather than 1000 or 1 million.

(a) Females alone were interviewed because females were the target market in this case. Basel

International felt that the business needed to develop more products for females because its current

product portfolio was heavily biased towards males.

(b) Respondents from 20 different countries were interviewed rather than one as this would have

given a variety of different data about female health. It is possible that health issues vary between

different countries. So, obtaining information from different countries may allow Basel International to

develop products to meet a variety of needs, or different products for different needs. This would be

important to Basel International because it is a multinational company.

amount of information about female health, particularly since the company is aiming to develop

products for the global market. Also, by using a larger sample, it is likely to be more representative

and therefore the information gathered will be more accurate. The survey probably chose a sample

size of 20 000 respondents rather than 1 million in order to limit the costs of the research. Clearly a

market research agency would charge Basel International a higher fee if they had to interview more

people.

3. (a) What is the difference between open and closed questions in a survey?

Closed questions allow respondents a limited range of responses. An example would be ‘How many

days work have you missed through illness this year?’ The answers to closed questions are easier to

analyse and represent numerically. Open questions let people say whatever they want. They do not

have to choose from a list of responses. Open questions are best used if there are a large number of

possible responses. An example would be ‘What type of products would you like to see Basel

International develop in the future?’

(b) Describe one advantage to Basel International of using open questions.

The use of open questions gives respondents the opportunity to provide individual answers. This

means that Basel International can gather a very wide range of information. The number and type of

responses are unlimited. There is also the chance that respondents reveal valuable information that

the business had never considered before. This might result in some unexpected and profitable ideas

for product development.

EXAM PRACTICE

MARKET RESEARCH ON ‘CLICK & COLLECT’ ORDERS

(a) Define primary research. (2 marks)

Primary research, or field research, is used to gather information that does not already exist. It

involves collecting new information from new sources. Primary data is usually gathered by asking

questions or monitoring people’s behaviour. Primary research provides original data, and the

information gathered can be tailored to the needs of the business.

(b) Explain one benefit of using qualitative market research. (4 marks)

Qualitative research involves the collection of data about attitudes, beliefs and intentions. Focus

groups and interviews are common methods used to collect qualitative data. Information gathered

using qualitative research may be richer and more diverse. This is because it gives respondents

opportunities to say anything they wish. A business might find out information that they were not really

expecting.

Retailers might use the information in the Mintel report in a number of ways. The report might

influence their decision making. For example, the report says that 60 per cent of UK consumers only

use click & collect for smaller items that are easy to carry, but 53 per cent say they would like drive-

through points that offer click & collect for a number of retailers, which suggests opportunities to

extend click & collect to heavier and bulkier items. This might encourage retailers to set up joint

ventures to organise drive-through points so that customers could pick up larger items.

The report also states that fifty per cent of consumers say the hassle of returning goods through the

post is one of the main barriers to buying clothes online. Some 31 per cent of consumers prefer to be

able to return their online order to an actual store, and 23 per cent of UK consumers say that an option

to deliver to a store to try on before purchasing would encourage them to buy from one online retailer

over another. This information may prompt online retailers to improve their returns policy and provide

facilities for online shoppers to try on clothes.

The way the data is used may depend on the types of goods a retailer is selling. For example, the

report says that click & collect orders made up 15 per cent of all internet retail sales of goods in 2014.

However, the collection rate is much higher for non-grocery orders than for groceries. This might mean

that grocery retailers (for example, supermarkets) decide that click & collect is not yet a viable option

for them. Finally, different retailers may interpret the information in different ways. For example, in

2015 an estimated 17 per cent of all internet retail sales (or 2.2 per cent of all retail sales) would be

collected by customers. Some retailers may think this number is small and insignificant, while others

may think the opposite.

(d) Assess the usefulness of market research data, like the above information, to retailers. (12 marks)

Businesses spend money on market research because it helps to reduce the risk of failure. Products

that are well researched are more likely to be successful. Market research data can help to quantify

the likely demand for a product and, most important of all, provide an insight into consumer behaviour.

Retailers will be more successful if they can satisfy the needs and wants of consumers. Consequently,

it is important that they try to identify these needs and wants as clearly as possible. This inevitably

means they need to communicate with customers by using market research. A retailer could opt out of

market research and just copy the actions of rivals. However, this might be too risky as they will

always be ‘one step behind’. They would lose market share to any rivals that satisfied customer needs

ahead of them.

The data above is collected by Mintel. Mintel is a world leader and specialist in market research. The

data it collects is likely to be of good quality. For example, the report says that 35 per cent of UK

consumers had used click & collect services in the previous year and 64 per cent said they shop

online more now because more retailers provide click & collect services. Furthermore, 58 per cent said

that click & collect encourages them to visit stores more frequently. For retailers this is useful

information. It could be argued that if more than a third of people have used click & collect services in

the previous year, retailers that fail to set up systems to offer this service will lose out. This is valuable

information for retailers.

However, market research can be expensive. If a firm carries out its own research, it will need to use

valuable resources. There will be an opportunity cost to consider. A retailer could purchase market

research reports from agencies such as Mintel. However, these can also be expensive, with Mintel

charging up to £2,500 for a single report. Also, although carrying out market research can reduce the

risk of products failing in the market, it is not entirely reliable. Market research data may be biased. For

example, if the sample used by a business is not representative, any conclusions drawn on the basis

of the sample will be inaccurate. Additionally, human behaviour is unpredictable. Although people may

indicate their intentions in a questionnaire, what they do in reality might be quite different. People

might change their minds or misunderstand the question. They might also give answers that they think

the interviewers want to hear. Finally, a business might use poor research technique. If questionnaires

are poorly designed or interviewers have not been trained, the quality of the research might be poor.

To conclude, to meet customer needs effectively, a retailer, like any other business, will have to obtain

information from them. Carrying out market research will improve the chances of business success so

it is likely that data (for example, as contained in the Mintel report) will be very useful to retailers.

3 MARKET POSITIONING

ACTIVITY 1

CASE STUDY: SUN PHARMACEUTICAL INDUSTRIES

1. Comment on the pattern of R&D expenditure shown in Figure 2.

Figure 2 shows that the amount of money spent by Sun Pharmaceutical Industries has risen steadily

between 2011 and 2016. It has increased from Rs 3313 million to Rs 23 025 million. This is an

increase of almost 600 per cent. This is a very significant increase over the time period.

2. Explain one benefit to Sun Pharmaceuticals of being product orientated.

One benefit of being product orientated is that Sun Pharmaceutical Industries can concentrate solely

on the development of new, high-quality drugs and medicines. It does not have to ‘waste’ resources

on expensive market research, promotion and advertising. For example, once a new medicine has

been developed, perfected and tested, Sun Pharmaceutical Industries knows that the market already

exists. Also, since the product will be new on to the market, sales are almost guaranteed. Sun

Pharmaceuticals can also obtain patents on new products, which prevent other companies from

copying their new drugs. This means they will have no competition for a period of time.

3. To what extent is Sun Pharmaceuticals product oriented?

Some businesses are product orientated. This means that they are most concerned about the quality

of their products. Their efforts concentrate on the design and manufacture of the product itself. Sun

Pharmaceuticals is an example of a product-orientated business. This is because it focuses most of its

attention on the development of new drugs and medicines. The need for the products Sun

Pharmaceuticals produces already exists. The company does not have to use resources to survey the

market. The amount of money Sun Pharmaceuticals spends on scientific R&D is evidence of its

commitment to the development of products. In 2016 it spent Rs 23 025 million on R&D. More

significantly perhaps is the scale of the increase in R&D expenditure between 2011 and 2016. It has

risen by almost 600 per cent.

ACTIVITY 2

CASE STUDY: ATHLETIC FOOTWEAR

Figure 4 shows a perceptual map for athletic footwear.

1. How might a Taiwanese sports shoe manufacturer use the map in Figure 4?

Perceptual maps can be used to identify gaps in the market. If there was an area on the map where a

business was not positioned, it could be argued that a new entrant (competitor) could come in and fill

the gap. The perceptual map in Figure 4 shows quite a big blank area in the top-right quadrant

(expensive and fashionable). Only one brand, Skechers, occupies this area. If the Taiwanese

company can develop some footwear that is fashionable and relatively expensive, this might provide

the company with an opportunity. However, the fact that there is only one brand currently occupying

this area might suggest that such styles are not in great demand.

The bottom-right quadrant represents fashionable and cheap footwear. This might be very attractive

for consumers but perhaps not workable for a business. This is because it might not be possible to

produce highly fashionable and inexpensive products. However, there are two brands positioned in

this area so there might be an opportunity for the Taiwanese company.

The Taiwanese company might decide to avoid the top-left quadrant where there appears to be a lot

of competition, with six brands occupying the position. The bottom-left quadrant, however, might

provide opportunities for low-cost performance shoes. If it were possible to manufacture such a shoe,

this might be attractive to the Taiwanese company. However, the company would have to consider

whether this position would fit into its current image and strategy. If not, it might opt for another

position and stand up to the competition.

2. Describe one drawback of the Taiwanese sports shoe manufacturer of using the perceptual map in Figure

The use of market maps may have some limitations. For example, perceptual maps are two-

dimensional. This means that only a restricted number of qualities can be analysed on the same map.

In this case, performance, fashionableness and price are the only qualities analysed. Also, the

information needed to plot the maps may be expensive to obtain, needing the use of primary market

research. The map in Figure 4 may be based on one person’s perception. A business would be

unwise to draw conclusions from such a limited number of market perceptions. Gathering data from,

say, 1000 consumers would be time-consuming and expensive. Finally, even if the Taiwanese

company did gather data, there may be a difference between consumers’ perceptions of the benefits

and the actual benefits that are offered by the footwear manufacturers.

3. Assess the position of The North Face brand compared to that of Adidas using the perceptual map in

Figure 4.

The North Face brand is positioned right at the top-left corner of the map. It is perceived to be

expensive and high-performing. In comparison Adidas is positioned right at the centre of the map. It is

mid-priced and perceived to be neither particularly fashionable nor particularly well-performing. It

might be described as a ‘an average reasonably priced product’ which may appeal to many

consumers in the market.

ACTIVITY 3

CASE STUDY: EMIRATES

1. Describe the different customer groups targeted by Emirates in this example.

Most airlines target customers with the methods used by Emirates. Using this approach allows

Emirates to cater for the needs of three different customer groups on its planes. In this example, a

flight from Dubai to Sydney will cost AED 5205 travelling on economy class. Most people when they fly

travel economy class. This will be the largest customer group. Emirates also targets business

customers with its added benefits such as flat-bed seats, personal mini-bars and free Wi-Fi. This is

priced at AED 15 515. The final group targeted by Emirates is very wealthy travellers. The first-class

service is offered to this customer group at a price of AED 20 165 (nearly four times more expensive

than economy class). First class includes a private cabin, as shown in the photograph, and choice

from an à la carte dining menu.

2. Discuss how Emirates might benefit from this method of market segmentation.

By targeting different customer groups Emirates will be able to serve a wider range of customers. The

three different services also meet the specific needs of three different customer groups. Using this

approach means that Emirates can generate more revenue by charging premium prices for business

class and first class. If Emirates only offered economy class, it would miss out on the opportunity to

charge higher prices to those who are willing to pay for a higher-quality service on board a flight. The

additional AED 14 960 generated from selling a first-class ticket instead of an economy ticket is

significant.

Emirates might also gain a competitive edge by serving three different market segments. If its rivals

cannot match Emirates service they are likely to lose customers. The luxury first-class service might

also help to enhance the image of Emirates, which might help to increase sales.

However, if Emirates cannot sell enough first-class and business-class tickets, the space used to

provide these services might be wasted. It may have been better to have more economy seats.

Emirates would have to analyse the number of tickets sold of first- and business-class accommodation

to ensure that it was ‘paying off’.

EXAM PRACTICE

HARLEY DAVIDSON

(a) (i) Define market positioning. (2 marks)

Market positioning is concerned with the perceptions consumers have about products. To simplify the

choice from a vast array of products, consumers categorise them according to a range of factors. In

the case of motorcycles, consumers might include the quality of design, quality of customer service,

the reliability of the bikes, the level of customisation and value for money when categorising bikes. It is

the categories into which consumers place products that define their ‘position’.

(ii) Explain why Harley-Davidson felt the need to reposition its brand. (4 marks)

The Harley-Davidson brand had a distinctive image. It was associated with a powerful, brave and

rebellious rider, and an adventurous lifestyle that was attractive to a significant number of males aged

between 25 and 35. However, eventually strong competition emerged in the market, particularly from

Japan, and Harley-Davidson nearly went bankrupt on more than one occasion. The company faced a

number of problems. For example, rival bikes were often more reliable than Harley-Davidsons, the

Harley-Davidson brand became associated with biker gangs, such as the Hells Angels, and Harley-

Davidsons were eventually perceived as old-fashioned. To resolve these problems the company

attempted to reposition the Harley-Davidson. The motorcycles failed to meet the quality standards that

the customers demanded. The products were also not appealing to the younger market segments. As

a result, Harley-Davidson has addressed its problems and repositioned the brand at the premium end

of the market.

(b) Define psychographic segmentation. Use the example in this case to support your answer. (2 marks)

One approach to grouping customers is to use psychographic segmentation. This involves grouping

customers according to their attitudes, opinions and lifestyles. In this case, Harley-Davidson uses

psychographic segmentation to meet the changing needs of consumers. This is mainly because the

motorcycle is a lifestyle brand. Customers choose a Harley-Davidson over rival bikes because they

love to buy and ride premium motorcycles. It could be argued that many Harley-Davidson owners

belong to a specific culture that ‘loves’ the brand and enjoys being part of a group that own Harley-

Davidson motorcycles.

A business is likely to be more successful if it can gain a competitive advantage in the market.

Competitive advantage is a set of unique features of a company and its products that are perceived by

customers as significant and superior to the competition. In this case, Harley-Davidson has developed

an advantage by offering its customers a wide range of different products and a high level of

customisation from the handle, the stand to the overall looks. This also includes the motorcycle

accessories riders can wear.

(d) Assess the importance to Harley-Davidson of product differentiation in this case. (10 marks)

Product differentiation is used by businesses to gain a competitive edge over their rivals. In highly

competitive markets, where lots of firms produce similar products, firms will try to make their product

unique in some way so that it stands out from the pack. This involves supplying goods and services

that have different features or physical qualities. The differences in products may be real. This means

that products might look different, have different technical specifications or have different capabilities

or performance levels. In this case, Harley-Davidson has differentiated its products by offering its

customers a wide range of different products and a high level of customisation from the handle, the

stand to the overall looks. This also includes the motorcycle accessories riders can wear. The

company has also developed a specific culture for Harley-Davidson bikers through its Harley Owners

Group (HOG). This owners-club holds regular meetings where Harley owners from different regions

can get together and enjoy a lifestyle of passionate bikers. Rival brands may not offer their customers

this opportunity.

The company repositioned itself at the premium end of the market to help the differentiation process. It

resolved the technical issues, improved reliability and quality and focused on its strengths, such as

providing customers with a wide range of exciting bike designs. Harley-Davidson decided to channel

resources from marketing into improving the quality and reliability of its products. It is now enjoying

growth and looking to enter more foreign and emerging markets. Most would agree that people who

ride bikes see Harley-Davidson as something quite different from another manufacturer’s bike. It is

probably a very effectively differentiated product. This is very important and has contributed

significantly to the company’s revival.

4 DEMAND

ACTIVITY 1

CASE STUDY: DIESEL PRICES AND ELECTRICALLY POWERED

VEHICLES

1. Calculate the percentage change in the UAE diesel price between May 2016 and May 2017.

The percentage change is given by:

AED 1.97 − AED 1.6 = 0.37

0.37 ÷ 1.6 = 0.231

0.231 × 100 = 23.1%

2. What is meant by a complementary good?

Some goods are purchased together. In this example, cars and diesel are purchased together. Once a

consumer has bought a diesel car, it is necessary to also buy diesel. In this case, diesel and cars are

complementary goods.

3. Explain how the pattern of prices in Figure 3 might affect the demand for (a) diesel-powered cars and (b)

public transport in the UAE.

(a) The pattern in Figure 3 shows that diesel prices have been rising since May 2016. They have risen

by 23.1 per cent from AED 1.6 in May 2016 to AED 1.97 May 2017. This is a significant increase and

could cause a decrease in the demand for diesel-powered cars since it will be more expensive to run

them. When the price of a good rises, the quantity demanded for it is likely to fall, along with the

quantity demanded for any complementary goods. However, the overall impact in this case might be

more complex. There could be a decrease in the quantity demanded for cars that consume larger

quantities of fuel. Examples might include sports cars and four-wheel-drive vehicles. If this happened

there might also be an increase in demand for smaller, more fuel-efficient cars. There might also be an

increase in demand for petrol cars, which are good substitutes. The overall impact might also depend

on whether the diesel price increases are sustained (stable) and whether they continue to rise further.

(b) The demand for public transport might be affected by rising diesel prices. Public transport may be

a substitute in some circumstances for car transport. For example, a person may have the choice

between driving to work or using the bus. With higher diesel prices, such people might favour public

transport. As a result, the demand for public transport may rise.

EXAM PRACTICE

GLOBAL CARE GROUP

(a) Draw a diagram showing the likely effect on the demand for Global Care Group’s services in the future. (4

marks)

The demand for Global Care Groups services is likely to increase in the future since the number of

people in elderly age groups is predicted to rise significantly. For example, Figure 5 shows that the

proportion of people in Australia aged over 65 is expected to grow from about 8 per cent in 1970 to

around 17 per cent in 2050. As a result, the demand curve will shift from D to D

as shown in the

diagram.

(b) Discuss how the information shown in Figures 4 and 5 might affect demand patterns in Australia. (8

marks)

Figure 4 shows that the population in key Australian cities is predicted to grow significantly in the

future. Perth will see the largest population growth of around 143.9 per cent, from 1.9 million to 4.6

million. However, populations are expected to grow significantly in the other cities – by 64.2 per cent in

Sydney, 80 per cent in Melbourne, 91.5 per cent in Brisbane and 40.8 per cent in Adelaide.

This increase could have a big impact on demand in Australia. As the size of the population increases,

demand for most goods and services will rise. There will be more demand for essential goods and

services like food, housing, transport, financial and personal services, education and healthcare.

There is also likely to be an increase in demand for non-essential goods and services, such as tablets,

holidays, taxis, restaurants, hotels and a wide range of luxury goods.

Businesses might be particularly interested in the trends predicted in Figure 4. The population growth

in the five major cities is not the same. It is expected to be significantly higher in Perth. As a result,

businesses in Australia might target those cites with the greatest population growth potential when

planning their expansion and investment programmes.

Figure 5 shows that the Australian population is getting older. The proportion of people in Australia

aged over 65 is expected to grow from about 8 per cent in 1970 to around 17 per cent in 2050. This is

a significant increase and consequently, there will be an increase in the demand in general for the

goods and services that this age group favours. For example, Global Care Group is likely to see an

increase in demand for its care homes. Indeed, such an increase in demand is being recognised since

the company is already expanding. For example, recently, Global Care Group bought some land next

to the Northam Country Club in Northam. This will be used to create a new retirement village for the

elderly, called Northam Country Estate. Houses in the village will be custom built and residents will

have access to the country club facilities, a shared vegetable garden, golf course and many interactive

activities. The idea is that residents will live independently but share a similar lifestyle with similar

people.

Global Care Group. (10 marks)

The demand for many goods and services can be influenced by changes in external factors. External

factors are those that are beyond the control of businesses. Because they cannot be controlled, the

impact of such changes could be quite influential. To begin with, Global Care Group and similar

companies will benefit from the growth in the older population in Australia. Such companies provide

care homes for the elderly and demand looks set to increase up to 2050 as the number of 60–84-year-

olds grows. This will help Global Care Group and other care home providers to increase revenue and

profit. The growth will also encourage investment in the industry. So, there will be an increase in

demand for construction companies to build new homes and similar increases for furniture and other

related goods. Global Care Group has already started to expand. It recently bought some land next to

the Northam Country Club in Northam. This will be used to create a new retirement village for the

elderly, called Northam Country Estate

However, in this case, companies like Global Care Group might be worried about the potential threat

from new competitors entering the market. The information in Figure 5 suggests that demand for care

home services is going to rise. As a result, some new competitors will be attracted into the market. A

company like Global Care Group might be negatively affected if these new entrants are more efficient,

cheaper and offer better value for money than Global Care Group. However, as Global Care Group is

a not-for-profit organisation, its position may not be under as much threat as those businesses that

pursue profit.

In recent years, many governments around the world have cut government spending. As a result, the

government might cut the number of care home places provided by the public sector. If this were to

happen, private sector providers like Global Care Group are likely to benefit.

Finally, there could be a change in social trends in the future. For example, there may be a trend for

families to provide their own care for elderly parents at home. If this were to happen, demand for the

services provided by Global Care Group might fall. In contrast, the trend might be the complete

opposite. People might be keener to find comfortable accommodation with professional and

specialised services for their parents. Such changes in social trends, along with changes in other

external factors, are difficult to predict. This can make their impact quite difficult when they occur.

5 SUPPLY

ACTIVITY 1

CASE STUDY: FARMBOTS

1. Explain one impact that the introduction of farmbots might have on agriculture.

New technology will be more efficient than older technology. This will help to lower production costs

and will encourage firms to offer more for sale. In agriculture, a number of new machines are being

developed with the capability of raising efficiency and eliminating some of the traditional ‘back-

breaking’ jobs done by farm workers. These new robots can undertake finicky and complex tasks

previously considered impossible by large and cumbersome farm machines. For example, a ‘lettuce

bot’ is capable of hoeing weeds away from the base of plants. A ‘wine bot’ can trundle through

vineyards pruning vines. The introduction of these new machines can improve efficiency by replacing

expensive labour. Farmbots may also be more reliable and able to work in more extreme conditions.

2. Draw a diagram and analyse the effect that the introduction of farmbots might have on the supply of

food.

The introduction of farmbots in agriculture is likely to increase the supply of food in the UK. This is

shown (below) by a shift in the supply curve to the right from S to S

EXAM PRACTICE

GLOBAL OIL SUPPLY

(a) Define supply. (2 marks)

Supply is the amount of a product that businesses are willing to sell in a market at a given price in a

given time period. Generally, if market prices rise, producers are willing to supply more in the market.

This is because they can make more profit at higher prices.

(b) Explain the possible effects of the fall in the price of oil on (i) oil exploration companies and (ii) haulage

contractors (transportation companies). (4 marks)

(i) The oil industry has been strongly affected by the fall in the price of oil. Oil companies that extract,

process and sell oil have seen their revenues drop. However, oil exploration companies have also

suffered. Since the supply of oil has increased, the need for new sources has declined for the time

being. Therefore, the demand for the services of oil exploration companies has fallen. This might have

resulted in some of the weaker exploration companies leaving the market.

(ii) In contrast, businesses that rely on oil for a raw material have benefitted significantly from the fall in

its price. The transport industry, which includes haulage contractors, will have enjoyed the fall in the oil

price. This is because the cost of diesel and petrol (made from oil) have also fallen. This means that

transport costs have fallen, which should have helped to boost the profits of haulage contractors.

In recent years new technology in oil production such as tracer technology (used to measure flows in

reservoirs and assess the economic viability of wells) has helped to reduce costs.

adopted. (4 marks)

The introduction of new technology will help to reduce production costs. As a result, businesses will

supply more and the supply curve will shift to the right. In this case the supply curve for oil will shift to

the right from S to S

when new tracer technology cuts production costs in oil production.

(d) Assess the possible factors that have increased the global supply of oil in recent years. (10 marks)

There is a significant body of evidence in the case study to support the view that the global supply of

oil has increased. A number of key reasons are discussed. For example, one of the reasons for this

was because OPEC has failed to cut the production of oil, which led to over-supply. In the past,

members of OPEC have been able to form agreements that restrict oil production and therefore limit

global supply. This drives up the price. More recently such agreements have not been made. OPEC

countries supply around 80 per cent of the world’s oil. Since OPEC counties supply such a large

proportion of global oil, if they are not able to restrict production, then global oil supply will be

materially affected.

Supply has also increased because Iran, a major world producer, has been allowed to sell more oil in

the market. Iran was subject to sanctions from world powers that prevented it from selling oil. The

sanctions were lifted when Iran reduced its development of nuclear facilities. Iran is a large oil

producer and its contribution to global supply will be significant.

Another reason for the increase in supply has resulted from new sources of oil. In recent years, the

USA has started to extract oil from shale using a process called fracking. For example, in 2017 the

Energy Information Administration reported that crude oil storage in the US rose to 8.2 million barrels

from the previous week — four times higher than expected. US oil production is now growing at

around 9.1 million barrels a day, the highest level in more than a year. The graph in Figure 4 shows

that once fracking started, US oil production rose very sharply and continues to rise today. This could

be having a very significant effect on the global supply – particularly if it carries on growing.

It is difficult to judge which of these factors has had the biggest impact on global supply. However,

since OPEC countries supply 80 per cent of the world’s oil, their activities are hugely significant. If they

were to reach an agreement and limit production, oil prices might rise sharply again and raise raw

material costs right across the global. This is unlikely to be welcomed by world powers.

6 MARKETS

ACTIVITY 1

CASE STUDY: FEEDING LIVESTOCK

1. State the equilibrium price and quantity.

The equilibrium price for large, round hay bales is €25. The equilibrium quantity is 600 000. bales.

2. Using this diagram, explain what is meant by equilibrium price.

In any market, the price is set where the wishes of consumers are matched exactly with those of

producers. This price, called the equilibrium price, is where supply and demand are equal. In Figure 2,

the equilibrium price is €25. At this price, consumers want to buy 600 000 bales and producers want to

sell 600 000 bales. The wishes of buyers and sellers are matched. There is no other price where this

happens.

3. What is the value of total revenue at the equilibrium price?

Total revenue is the amount of money generated by the sale of goods. At the equilibrium price of

€25 600 000 bales are sold, so total revenue is:

TR = P × Q

TR = €25 × 600 000

TR = €15 000 000

ACTIVITY 2

CASE STUDY: COLD QUEENSLAND

1. Explain the shift in the demand curve from D to D

In Figure 4, the demand curve has shifted from D to D

. This shows that demand for gas-fired heaters

in Queensland, Australia increased. The increase in demand was caused by an unusually cold

weather event.

2. What has happened to the equilibrium price and quantity as a result of the shift in demand?

As a result of the increase in demand for outdoor gas-fired heaters, the equilibrium price has risen

from AUD 150 to AUD 200. The number of heaters traded in the market rose from 3000 to 4000.

EXAM PRACTICE

THE MARKET FOR ELECTRICITY IN KENYA

(a) Explain how prices are determined in markets. (4 marks)

In most countries, the prices of goods and services are determined by market forces. In any market,

the price is set where the wishes of consumers are matched exactly with those of producers. This

price is called the equilibrium price. It is the price where demand and supply are equal. At the

equilibrium price the market is cleared. This means that the total amount supplied by producers is

bought up by consumers willing to pay that price.

In a minority of cases, governments may set prices. For example, a government might set the price of

water. This is probably because many water suppliers are state-owned enterprises and therefore the

government has control over prices.

(b) Using a demand and supply diagram, illustrate the impact on the market for electricity in Kenya resulting

from the increase in capacity funded by the government. (4 marks)

Kenya has been increasing the supply of electricity for a number of years. In 2013, it started an

ambitious programme to connect a greater proportion of the population to the electricity network. The

government said it would achieve ‘universal access’ by 2020 and increase the nation’s power capacity

from 1600 MW in 2013 to 6600 MW in three years. The effect of this programme is to shift the supply

curve for electricity to the right from S to S

. In theory, this would cause the price to fall from P to P

and the quantity traded in the market would rise from Q to Q

(i) Use a demand and supply diagram to show what is meant by excess supply. (4 marks)

Excess supply occurs when the supply of a product is greater than demand at current prices. In the

diagram below, which shows the market for electricity in Kenya, the current price is P1. However, at

this price the quantity supplied, Q

, is greater than the quantity demand, Q

. There is excess supply.

(ii) Explain how this excess supply has occurred. (4 marks)

There is a gap between the demand for, and supply of, electricity in Kenya. There is excess supply.

The main reason for this is because the government has invested heavily in building up generation

capacity. For example, it increased power capacity from 1600 MW in 2013 to 6600 MW in 3 years.

This was to support its ambitious programme to connect a greater proportion of the population to the

electricity network. However, demand for electricity did not rise by the amount predicted by the

government. Much of the increase in demand for electricity was expected to come from the

manufacturing sector. However, manufacturing performed poorly and demand did not rise. Some of

the planned exports of electricity did not occur and domestic demand from the newly connected

Kenyan residents was weak. Consequently, by 2017 the supply of electricity was greater than

demand. Indeed, in 2017 demand was 1620 MW and supply capacity was 6600 MW.

(d) Evaluate whether or not the excess supply of electricity will continue in Kenya. (20 marks)

The Kenyan government will hope that the current situation in the market for electricity will be short-

lived. The government has built up the country’s generating capacity to 6600 MW to support its

electricity network development programme but unfortunately demand has only grown to 1620 MW.

This means that excess supply is equal to 4980 MW (if the generators were operating at full capacity).

If this level of excess supply continued it would represent a waste of resources. Obviously, some

spare capacity in power generation is desirable to cope with unforeseen circumstances. However, this

level is far too high.

Although the government has cancelled some of the new power generation projects, such as the 700

MW natural gas power plant near Mombasa, it would be reluctant to close down current capacity. The

answer lies in demand. The government needs demand for electricity to rise.

Increased demand might come from business. Most commercial demand in Kenya comes from the

manufacturing sector but in recent years the manufacturing sector has performed poorly. A number of

larger companies, such as tyre maker Sameer, battery maker Eveready and confectionery producer

Cadbury, have actually ceased production in Kenya. The sector has declined by an average of 10 per

cent per annum in the last 10 years or so. However, in the future demand is likely to pick up. The

global economy started to grow more aggressively in 2017 and hopefully the Kenyan economy will

share in some of this growth.

There may be more demand in the future from domestic producers. Once universal access is

achieved and people buy more appliances that use electricity demand from Kenyan residents may

grow. Demand might also be boosted if the government supports the plan to introduce street lighting

across the country. Electricity retailer, Kenya Power, has expressed an interest in developing a street

lighting programme and would benefit from some encouragement and support.

Another way of increasing demand is to export more electricity. However, some obstacles need to be

addressed before this can happen. The government needs to negotiate with some of its neighbours to

improve the infrastructure required to distribute electricity. At the moment electricity exports have been

held back by the lack of, or existence of, low-capacity transmission lines.

To conclude, eventually, the excess supply in the electricity market will be eliminated. Rising demand

will ‘soak up’ the excess supply. Demand will rise as the population of Kenya grows and as the

economy picks up. However, the length of time this will take is uncertain. It could be many years.

However, if the government can find ways of boosting economic growth and developing the export

market, it might be sooner rather than later.

7 PRICE ELASTICITY OF DEMAND (PED)

ACTIVITY 1

CASE STUDY: CARBONATED DRINKS IN MEXICO

1. Calculate the price elasticity of demand for Agrioslimón.

Price elasticity of demand = Percentage change in quantity demanded ÷ Percentage change in price

Price elasticity of demand = 30% ÷ -20%

Price elasticity of demand = -1.5

2. State whether demand is price elastic or price inelastic.

Demand for Agrioslimón is elastic. This is because price elasticity of demand is greater than 1.

ACTIVITY 2

CASE STUDY: IBADAN PIZZAS

1. Calculate the number of pizzas Rita would expect to sell in 2017 if she cut the price to NGN 1950.

Percentage change in quantity demanded

Price elasticity of demand = ________________________________

Percentage change in price

Percentage change in quantity demanded

−2 = ______________________________

–25%

−25% × –2 = Percentage change in quantity demanded

50% = Percentage change in quantity demanded

Therefore, demand will increase by 50 per cent when the price is cut to NGN 1950.

New demand = 10 000 + (50% × 10 000) = 15 000 pizzas

2. Calculate the change in total revenue resulting from the price change above.

For 2016:

TR = NGN 2600 × 10 000

TR = NGN 26 000 000

For 2017:

TR = NGN 1950 × 15 000

TR = NGN 29 250 000

Therefore, total revenue increases by NGN 3 250 000 as a result of the price cut.

3. Assess whether Rita’s decision to cut price might be successful.

Rita’s decision to cut price is likely to increase demand from 10 000 pizzas to 15 000 pizzas. As a

result, total revenue would rise from NGN 26 000 000 to NGN 29 250 000, an increase of NGN

3 250 000. This suggests that Rita’s decision is a good one. However, before making a final decision,

Rita would need to consider the effect of the price cut on profit levels. Although, total revenue will

increase, she would need to calculate the cost of increasing output from 10 000 pizzas to 15 000

pizzas before making a final decision.

EXAM PRACTICE

ROBBAT ENGINEERING

(a) Define the term ‘elastic demand’. (2 marks)

For some goods, a price change will result in a large change in demand and for others a smaller

change. It all depends on the type of good. If a price change results in a proportionately larger change

in demand, that product is said to have elastic demand. So, for example, if a price cut of 12 per cent

results in a 22 per cent increase in demand, demand for that good is price elastic.

(b) Explain one factor that might affect the price elasticity of demand. (4 marks)

A number of factors can influence price elasticity of demand. One of the most important is the level of

competition that exists in a market. In highly competitive markets, demand will tend to be more elastic.

This means that demand is very responsive to price changes. A firm that raises price can expect to

lose customers and revenue. This is because consumers can switch to a rival’s product. In contrast, in

markets where there is very little competition, demand will be more inelastic. This means that demand

is not very responsive to price changes. A firm that raises prices can expect to raise revenue because

the fall in demand is proportionately smaller than the price increase. Consumers cannot easily switch

to a rival product.

per cent. (4 marks)

Percentage change in quantity demanded

Price elasticity of demand = __________________________________

Percentage change in price

Percentage change in quantity demanded

−

0.8 = __________________________________

Percentage change in price

Percentage change in quantity demanded

−

0.8 = __________________________________

20%

20% ×

−

0.8 = Percentage change in quantity demanded

−

16% = Percentage change in quantity demanded

Therefore, demand will decrease by 16 per cent when the price is increased to MYR 60.

New demand = 100 000 − (16% × 100 000) = 84 000 units

For 2016 TR = 100 000 × MYR 50 = MYR 5 000 000

For 2017 TR = 84 000 × MYR 60 = MYR 5 040 000

Therefore, total revenue is expected to increase by MYR40 000 in 2017.

(d) Evaluate whether or not the price changes made by Robbat Engineering will benefit the business. (20

marks)

Percentage change in quantity demanded

Price elasticity of demand = __________________________________

Percentage change in price

Percentage change in quantity demanded

−

1.2 = __________________________________

20%

20% ×

−

1.2 = Percentage change in quantity demanded

−

24% = Percentage change in quantity demanded

Therefore, demand will decrease by 24 per cent when the price is increased to MYR 42.

New demand = 300 000 − (24% × 300 000) = 228 000 units

For 2016 TR = 300 000 × MYR 25 = MYR 7 500 000

For 2017 TR = 228 000 × MYR 30 = MYR 6 840 000

Therefore, total revenue is expected to decrease by MYR 660 000 over the two years.

8 INCOME ELASTICITY OF DEMAND (YED)

ACTIVITY 1

CASE STUDY: DAR ES SALAAM PAPER

1. Calculate the income elasticity of demand for paper in this case.

Income elasticity of demand = Percentage change in quantity demanded ÷ Percentage change in

income

Income elasticity of demand = 1.5% ÷ 2%

Income elasticity of demand = 0.75

2. Explain whether (a) demand for paper in this case is income elastic or income inelastic and (b) whether

paper is a normal good or an inferior good.

(a) In this case the income elasticity of demand for standard A4 paper is 0.75. This is less than 1,

therefore demand is income inelastic.

(b) Paper is a normal good because income elasticity is positive.

EXAM PRACTICE

CHINESE OUTBOUND TOURISM

(a) Define the term income elasticity of demand. (2 marks)

Income elasticity of demand measures the responsiveness of demand to a change in incomes.

Demand for products may be income elastic or income inelastic. For example, demand for luxury

products or non-essentials tends to be income elastic. This means that demand for them will change

more than proportionately than any change in income.

(b) Calculate the income elasticity of demand for foreign holidays in China between 2010 and 2015. (4 marks)

Between 2010 and 2015, the demand by the Chinese for foreign holidays rose from 57.4 million to an

estimated 135 million. This is an increase of 135 per cent.

Incomes in China (as measured by growth in GDP) rose from US$6100.62 to US$11 064 66. This is

an increase of 81.4 per cent.

Therefore, the income elasticity of demand is given by:

Income elasticity of demand = Percentage change in quantity demanded ÷ Percentage change in

income

Income elasticity of demand = 135% ÷ 81.4%

Income elasticity of demand = 1.66

Foreign holidays taken by the Chinese are a normal good according to the information provided and

the calculation in (b). This is because income elasticity is positive. This means that when incomes rise,

the demand for holidays abroad also rise.

The demand for foreign holidays by the Chinese is income elastic. This is because income elasticity is

greater than 1 (that is, 1.66 in this case). This means that the percentage change in demand is greater

than the percentage change in price.

(d) Analyse two factors that might influence income elasticity of demand. (6 marks)

The value of income elasticity for products will depend largely on whether they are necessities or

luxuries. Necessities are ‘basic goods’ that consumers need to buy. Examples include food in general,

electricity and water. Demand for these types of goods will be income inelastic. Also, demand for any

products that are deemed to be addictive in nature would be income inelastic.

Luxuries are goods that consumers like to buy if they can afford them. Spending on these types of

goods is discretionary, which means that customers can choose whether or not to make these

purchases. Demand for these goods is income elastic. Examples include air travel, satellite television,

fashion accessories and many goods and services in the leisure and tourism industry. It is also argued

that the demand for imported goods is income elastic. It has been found that as developing nations

become better off, their demand for imports rises significantly.

In this case, demand for holidays abroad in China is elastic (1.66). This is to be expected since foreign

holidays are likely to be classified as a luxury good by most people.

(e) Assess how useful income elasticity might be for a business selling holidays to Chinese tourists. (10

marks)

Businesses may be interested in the income elasticity of demand for their products. If businesses

know the value of income elasticity for their products, they can predict the effect on demand of

changes in income. In this case, the income elasticity of demand for holidays abroad in China is

estimated to be 1.66. Therefore, the demand for overseas holidays in China is income elastic. This

means that demand is responsive to changes in incomes. In this case, businesses in China that are

linked in some way to overseas travel will recognise that as incomes keep growing, demand for their

services will rise. Therefore, travel agents and holiday companies that specialise in overseas holidays,

and airlines transporting Chinese tourists, for example, can prepare for rising demand so long as the

trend in Chinese GDP continues.

If the 1.66 value for income elasticity is accurate, businesses in the overseas travel sector can predict

what will happen to demand in the market when incomes rise. This will help these businesses plan for

the future. It might help with their investment decisions for example. The trend in Figure 2 shows the

rise in demand for foreign holidays is quite stable. This will encourage such businesses.

However, although businesses might know that income elasticity of demand for foreign holidays in

China is 1.66, predicting demand for goods which are influenced by the business cycle can be quite

difficult. What happens if growth in the Chinese economy starts to fall suddenly? If there was a sudden

drop in income, knowledge of income elasticity may not be that helpful. However, a well-run business,

knowing that demand for one of its product groups was income elastic, could make plans to deal with

such events. Therefore, knowledge of income elasticities would be useful to businesses in general.

9 MARKETING OBJECTIVES AND STRATEGY

ACTIVITY 1

CASE STUDY: GOLF GTI

1. What is meant by an extension strategy?

Extension strategies are used by businesses to prolong the life of the product. They aim to boost the

sales of a product by making adjustments to it or investing in a new promotion campaign. A business

might try to introduce an extension strategy at the maturity stage, just before sales start to decline.

2. Explain one way in which VW extended the life of the Golf GTI.

The VW Golf GTI has been on the market for over 40 years. However, the model in today’s

showrooms looks a little different from the Golf GTI Mk 1, which launched in 1975. VW has launched

six different Golf GTIs since 1975. The introduction of each new model aims to prolong the life of the

product.

The new models usually contain some new features, technological improvements or styling changes.

The Mk V GTI, launched at the Paris Motor Show in 2004, was the most powerful GTI yet produced.

The vehicle had new springs, dampers and anti-roll bars. The most recent model, the Golf GTI Mk VII

introduced in 2012, had a lighter but stronger platform, was the most fuel-efficient GTI to date, and

was capable of 0–62 mph (0–100 kpm) in 6.5 seconds. VW used changes to the product as an

extension strategy in this case.

3. Explain one advantage to VW of using an extension strategy.

Each time a new version of the model is introduced, VW will expect to see sales pick up. The new,

improved versions are fresher and technologically superior. By introducing new versions every few

years, VW has been able to keep the Golf GTI on the market for over 40 years. Without these

extension strategies, sales of the model would probably have declined. The old Mk l GTI would be out

of date today in many ways.

By using these extension strategies VW can carry on enjoying high revenue streams and avoid the

costs of launching a brand-new model to replace the GTI. Developing and marketing a brand-new

model would be far more expensive than prolonging the life of a popular existing model. For example,

a brand-new model would probably need a whole new production line with new tooling and possibly

even a new factory. This cost is avoided by prolonging the life of the GTI.

ACTIVITY 2

CASE STUDY: CHEEZYBIX

1. Explain how you would categorise the position of Crackles in the Boston matrix using Figure 6.

Crackles can be described as a ‘Cash cow’. Its position in the Boston Matrix shows that, although it

has little potential for future growth, it has a high market share. This means that Crackles can continue

to generate cash for the business for some time yet. It is likely to be a profitable product for CheezyBix

Ltd and there will be less need for investment in the product. The cash generated by Crackles might

be used to develop new products.

2. Explain one way in which CheezyBix might use the information in Figure 6.

A business such as CheezyBix Ltd can use the Boston Matrix to help manage its product portfolio.

ACTIVITY 3

CASE STUDY: CREDIT CARD CASHBACK DEALS

1. Calculate the amount of cashback a customer would be entitled to if £5000 is spent on the card in the

ninth month of ownership.

The amount of cashback is:

(£3500 × 0.5%) + (£1500 × 1%) = £17.50

£17.50 + £15 = £32.50

2. Explain one way in which cashback cards might help to develop customer loyalty.

Customer loyalty can be developed in several ways, such as communicating with customers using

advertising, offering preferential treatment to ‘high value’ customers, providing high-quality customer

service and personalising the relationship between the business and the customer.

However, in this case, American Express is offering customers financial incentives. By offering

cardholders cashback every time they make a purchase, customers are encouraged to ‘stick with the

card’. Many people have several credit cards, but if a particular card offers rewards for continued use,

they are more likely to carry on using it.

Also, in this case, the rewards are tapered up so that higher levels of spending on the card give higher

rewards. For example, the first £3500 spent on the card generates 0.5 per cent cashback, but if

spending reaches more than £7500, the rate rises to 1.25 per cent.

Finally, once people have selected a particular credit card they are likely to retain it for quite a time,

because it often requires some effort to obtain a new card. Once people have opted for the Platinum

Cashback Everyday Credit Card, American Express may have attracted a loyal customer – possibly

for life!

EXAM PRACTICE

ENSCHEDE GRASSMAAIERS

(a) Explain what is meant by the marketing mix. (4 marks)

In order to market its products effectively, a business must consider its marketing mix. The marketing

mix refers to those elements of a firm’s marketing strategy that are designed to meet the needs of its

customers. The marketing mix emphasises four particular elements often referred to as the 4Ps –

product, price, promotion and place. To meet customer needs and to create an effective marketing

mix, businesses must produce the right product, at the right price, make it available in the right place

and ensure that customers are aware of its existence through effective promotion.

In this case, Enschede Grassmaaiers emphasise the quality of their product and after-sales service.

The lawnmowers are extremely well made. They are manufactured from high-quality materials and

components and very rarely breakdown. The mowers often last for 20 years or more. The company

also has a breakdown support team that is on call seven days a week. This means that customers can

contact the company and organise a visit from the service centre on the same day in the event of a

breakdown.

Enschede Grassmaaiers are able to charge a premium price for their ride-on mowers. This means

they charge a high price that reflects the both the quality of the product itself and also the quality of the

after-sales service.

There is little evidence in the case to suggest that the mowers are heavily promoted. However, since

the products are targeted at a niche market, it is unlikely that the machines will be advertised using

mass media, such as television and national magazines. Finally, the lawnmowers are distributed

through specialist dealers throughout most of the Netherlands.

(b) Explain how a business like Enschede Grassmaaiers might benefit from having a specific marketing

objective? (4 marks)

The marketing activities of a business are likely to be more effective if there are clear and specific

marketing objectives. These are the goals that a business is trying to achieve through its marketing.

Although the general role of marketing is to help sell products, it is possible to identify specific

marketing objectives. These objectives may differ between different business organisations. It is also

likely that the marketing objectives of a particular business will vary over time to match its changing

marketing needs. Common examples of marketing objectives are to increase market share, increase

revenue and build a brand. In this case, the directors of Enschede Grassmaaiers aim to extend the life

of their main product for another 20 years. This goal might be achieved by introducing an effective

extension strategy.

Finally, a business is more likely to achieve its marketing objectives if they are SMART. This means

that they should be specific, measurable, agreed, realistic and time specific. It could be argued that

Enschede Grassmaaiers’s marketing objective is SMART. The company aims to extend the life of the

product for 20 years.

Extension strategies are the methods used to prolong the life of a product before it starts to decline.

Extension strategies are popular because they avoid the expense of developing and introducing new

products. Two broad approaches might be used by a business. One is to make some adjustments to

the product. This might involve updating or modifying the product. Another option is to add value to the

product. This might involve adding some ‘extras’ or improving the functionality of a product. Other

common approaches are to extend the product line or change the packaging of the product.

Alternatively, a business may leave the product unchanged and look to promotion as a means of

prolonging its life. A business may try to find new uses for the product, explore new markets such as

exporting, invest in advertising or encourage more frequent use of the product.

In this case some of the extension strategies are probably not appropriate for Enschede

Grassmaaiers. For example, adjusting the packaging, finding new uses or encouraging more frequent

use of ride-on lawn mowers are not really suitable for this particular product. However, the company

could explore the possibility of exporting to neighbouring countries, such as Germany, Belgium and

Luxembourg. The city of Enschede is actually located right on the border with the Netherlands and

Germany, which has a population of 80 million and might be an attractive market. The company might

also consider investing in some promotion. There is little evidence of heavy promotion expenditure in

the case so perhaps this is an option. However, since Enschede Grassmaaiers serves a niche market,

the company will need to use some fairly specialised promotion techniques. Finally, the company

might consider upgrading the lawnmower. One option might be to develop a robotic version. This

might be popular with customers since it avoids the need to ride on the mower. However, a

development like this would need some technical expertise, which Enschede Grassmaaiers may not

have. Therefore, developing the export market or investment in promotion might be the best way to

extend the product in this case.

(d) Assess how the marketing strategies of a business might differ for a business operating in a mass market.

(10 marks)

In this case, Enschede Grassmaaiers serves a niche market. The company targets people that own

properties with large lawns, sports clubs and small farmers. This is quite a specialised market and the

marketing strategies used by the company will be quite different from those used by a business aiming

products at a mass market. For example, Enschede Grassmaaiers is not likely to use national

television or newspapers to advertise its ride-on lawnmowers.

Mass markets are huge, often global and can have millions of potential customers. Unilever, Heinz,

Kellogg’s, Pepsi Cola and Honda are examples of businesses that sell into mass markets. They are

usually very competitive because the rewards for success in these markets can be significant. A wide

range of different marketing strategies might be used in a mass market but some general similarities

might be as follows.

In a mass market, there will be many products competing for customer attention. The most successful

businesses are likely to be those that can differentiate their product in some way. If a business can

develop a unique selling point, that will help their product ‘stand out from the pack’. If a business is

unable to differentiate its product, it will have to rely on other elements in the marketing mix to

compensate.

The prices charged by businesses competing in a mass market are likely to be very similar. This is

quite different from Enschede Grassmaaiers which charges a premium price. Firms in a mass market

may operate in fear of a price war breaking out which will reduce revenue for every competitor. This

helps to explain why businesses are happy to charge the ‘going rate’ in the market. Price leadership is

common in mass markets where the dominant business, perhaps the one with the lowest costs, sets

the price and everyone else follows.

Large sums of money are spent promoting and advertising products in mass markets. In the absence

of price competition firms look to non-price competition to help gain an edge. This means they are

prepared to invest heavily in advertising and promotion because it is such an important part of the

marketing mix in mass markets. An overwhelming majority of adverts on the television are placed by

businesses selling into mass markets. In contrast, Enschede Grassmaaiers probably spends very little

on advertising and promotion.

Businesses serving mass markets will often use multiple channels to distribute their goods. Firms

selling fast moving consumer goods will target supermarkets, wholesalers, independents and any

other outlet that is suited to their particular product. The Internet is used increasingly by businesses to

sell goods and services in mass markets. For example, all banks offer online bank accounts and an

increasing number of supermarkets offer online shopping and delivery or ‘click & collect’ services.

The marketing strategies used by businesses competing in a mass market will depend on a range of

factors such as the size of the business and the nature of the product. However, the strategies chosen

are likely to differ significantly from those used by a company like Enschede Grassmaaiers, serving a

niche market.

10 PRODUCT/SERVICE DESIGN

ACTIVITY 1

CASE STUDY: ERGONOMIC WORKSTATIONS

1. Explain what is meant by an ergonomically designed product.

Ergonomics is the study of how people interact with their environment and the equipment they use –

often in the workplace. Some products are ergonomically designed, which means people can interact

with them without expending any unnecessary effort. In this case, the workstation is designed so that

an employee can sit comfortably. The seat is designed to support the back and is adjustable to

accommodate people with different heights, and there are rests for feet and wrists.

2. Explain the possible benefits to a business of using ergonomically designed workstations.

If people are comfortable in the workplace they are likely to be more productive. As a result,

businesses will benefit from higher levels of output and better-quality work. In this case, office workers

spend a lot of time sitting in front of computers. If their seats fail to support their backs adequately, this

could result in staff absence due to back-related medical conditions. Clearly, higher productivity levels

and lower staff absence will improve profitability.

ACTIVITY 2

CASE STUDY: THE DESIGN MIX

1. Match the following products with the positions (1–5) shown on the triangle which best represent the

design mix in Figure 3. Each of the positions suggests which aspect of the mix may be relatively more

important for particular products. (a) designer shoes, (b) a sports car, (c) a life assurance policy, (d) a dining

room table, (e) a smartphone.

(a) designer shoes – 5

(b) sports car – 3

(d) dining room table – 4

(e) smartphone – 1

2. Explain how cost might affect the design of a package holiday.

Travel companies and tour operators are likely to consider cost as an important element of the design

mix when designing package holidays. A lot of people have a budget to spend on their annual holiday,

so it is important for travel companies to keep their prices within the budget range. When they put the

packages together, they must try to minimise the cost of flights, hotels, transfers and any other

element of the package.

ACTIVITY 3

CASE STUDY: DELL™

1. Explain how Dell reduces waste through its design process.

Dell believes that all materials are valuable and waste should be eliminated. The company has made

some progress in recent years by reducing waste. It has added incorporated waste reduction

measures to its design process. For example, the company uses environmentally friendly materials

such as recycled plastics and exceeds legal requirements when selecting ‘safe’ materials for

production. Between 2015 and 2016, Dell reduced the average energy used to build each item in its

product portfolio by around 16 per cent. Since 2012 the reduction has been 42.8 per cent. Also, the

use of glues and adhesives, which are not easily recycled, have been replaced with new ‘snap-fits’

and other substitutes. These measures, and more, provide evidence which supports the view that Dell

has used its design process to reduce waste.

2. Explain how Dell’s approach reflects social trends.

Society has become increasingly aware of the effects their lifestyles have on the environment. Worries

about global warming, resource depletion and pollution have encouraged many people to adopt more

environmentally-friendly lifestyles. Dell has responded positively to social trends by designing products

and production process which are sensitive to the needs of the environment. For example, Dell uses a

closed-loop plastics supply chain which is able to repeatedly recycle and re-use materials over and

over again. Dell also tries to use reputable third-party eco-labels such as ENERGY STAR, EPEAT and

the 80 PLUS Program when searching for technology to use in its organisation. These are just a

couple of examples which suggest that Dell shares the increasing concerns about the environment.

EXAM PRACTICE

STANLEY MODULAR

(a) Explain how designs that reduce waste benefit Stanley Modular. (4 marks)

Stanley Modular’s building designs and construction methods have reduced waste very effectively.

The main benefit of this to Stanley Modular is lower costs. For example, if fewer materials are used up

in construction, direct costs will be lower. This will help to boost profits or provide an opportunity for

the business to lower prices. Lower prices will help to attract more customers. Generally, lower levels

of waste in a business will help to improve financial performance.

(b) Explain the aspects of the traditional design mix that might be important to Stanley Modular. (4 marks)

It could be argued that cost and functionality are the most important features in the traditional design

mix here. Buildings must be functional. For example, people buy houses primarily for shelter and

comfort, so it would be important for buildings to be warm, secure, storm-proof and well appointed,

with connections to modern utilities, such as broadband and possibly satellite television. Buildings

should also be ergonomically designed and offer convenience to house dwellers.

However, cost will also be important. Stanley Modular has certainly made an effort to build cost

effectively. Their designs have reduced waste in a wide range of areas, which helps to keep down

costs. Many people have to borrow money to buy a house, so they will appreciate lower costs.

Arguably, aesthetics is less important than cost and functionality in this case. Some of the buildings,

such as schools, are designed for the public sector. It will be more important to a government that

schools are designed so that costs are minimised, and that they are fit for purpose.

marks)

Although businesses may have to make an effort to reflect social trends in their designs, there are

likely to be some lucrative benefits. For example, if businesses can reduce waste they will use fewer

resources, resulting in lower costs and higher profits.

Stanley Modular has built a number of waste-minimising measures into its designs, and has cut

transport costs. For example, a three-bedroomed house can be transported to site on a single truck,

with flat-pack panels on the front, roofing on the back and a 4-metre trailer containing the bathroom

modules. More complex parts of the building process require more trips, but far fewer than would be

required on a traditional building site.

Also, in a typical build, 1200 kg of timber is wasted – Stanley Modular only wastes around 10 per cent

of this.

In addition, the use of computer numerical control (CNC) machinery makes a major time saving in the

operation of the Stanley Modular operation, where it is estimated that construction is up to a third

faster in the factory than on site. The use of CNC machinery is also 50 per cent faster than manually-

controlled machinery.

11 PROMOTION AND BRANDING

ACTIVITY 1

CASE STUDY: WORLD WILD FUND FOR NATURE

1. Define above-the-line promotion.

Above-the-line promotion involves paying the owners of media to place an advert. Businesses pay

television companies or newspapers, for example, to have their adverts broadcast or printed. In this

case, the WWF would have paid the owners of poster sites, such as billboards and bus shelters, to

display its posters.

2. Explain one advantage of using posters as an advertising media.

Posters are a favoured advertising media for a number of businesses. The use of posters can have

several benefits. Posters can be used in a national advertising campaign because they can be placed

on sites all over the country. They are also likely to be seen repeatedly by people as they pass them –

perhaps once a day or more. Posters are particularly good for short, sharp messages and large

posters can have a big impact. In this case, the poster is designed to persuade people to think about

global warming. The image is clear and does not require any lengthy written message. Posters are

sometimes used to support other campaigns, such as television advertising.

Some advertising is designed to put pressure on consumers to buy a product – or in this case to

change behaviour. Persuasive advertisements are often designed to appeal to people’s emotions

such as desire, fear and pity. Persuasive adverts may also appeal to people’s respect for authority

and fascination with celebrity.

In this case, the WWF is using a poster campaign to raise awareness about the damage that climate

change, caused by global warning, might do to both wildlife and the human race. The image on the

poster causes a strong emotional response and is probably designed to encourage people to think

about the possible ways they might reduce global warming – such as recycling products, using ‘green’

energy and buying electric cars rather than those that run on petrol or diesel.

ACTIVITY 2

CASE STUDY: SPORTS SPONSORSHIP

1. Define sponsorship.

Sponsorship is a form of public relations where businesses attempt to communicate with interested

parties. It involves making a financial contribution to an event in return for publicity. Many companies

attract publicity by linking their brands with events – for example, major sporting tournaments and

championships. In 2017, around US$62 800 million was reported to have been spent on sponsorship

worldwide, most of which went on sport.

2. Explain the advantages of sponsorship to a company like Rolex.

Sponsors like Rolex benefit from having their name and logo ‘splashed’ everywhere at the event. In

this case, the Rolex logo would be placed in very prominent positions on the golf course, including on

every single tee (where play begins for each ‘hole’). The logo will be picked up by the television

cameras and broadcast, both live and in highlights packages. For example, the US Open Golf

Championship was broadcast around the world, to a massive potential audience. Sponsorship is often

considered a cheap way of getting products advertised on television without having to pay the

television broadcasters.

ACTIVITY 3

CASE STUDY: BLOGGING

1. Explain the potential role played by fashion bloggers in business.

Blogging involves sharing opinions, information, observations and other content online. Bloggers

usually write regular articles, perhaps in a diary form, to express their views and provide updates on a

very wide range of topics. One popular and large part of blogging is fashion blogging. In China,

fashion bloggers are having an increasing influence on the fashion industry.

Fashion bloggers like ‘Li Beika/Becky’, offer information and shopping tips to consumers. In this case,

Li writes about clothes and fashion accessories sold by well-known luxury brands and those available

from little known high-quality independents. Li’s background is in journalism – current affairs and

politics to be precise. Although she has no real work experience or training in the fashion industry, she

has developed the ability to identify trends in the industry, understand what readers like and dislike

and what writing styles attract interest. Every day Li advises readers where and how they should

spend their money. Li has an excellent reputation for spotting fashion trends and knowing outlets from

where products can be purchased.

The role of fashion bloggers like Li is to inform consumers about products in the market and give their

opinions on issues such as product quality, trends, availability and prices.

2. Assess the benefits to businesses in the Chinese fashion industry of using social media in this way.

It is important for businesses in China to know about fashion bloggers because their views can

influence what consumers buy. If businesses can work with bloggers they may be able to persuade

consumers to buy their products. In one of her blogs, Li recommended an Italian handbag brand. It

was only known to few and only available in one store that was in southwest China. As a result of her

blog, the brand saw very rapid sales growth. This is an example of how fashion bloggers can benefit

businesses in the industry.

Also, it is very likely that the cost of working with bloggers is significantly lower than funding other

forms of marketing and promotion such as television adverts, for example. Businesses can select

specific fashion bloggers that are appropriate for their image and product lines. This will help to target

customers more accurately. For example, Li’s target audience on her blogging account is women of

upper- to middle-income class.

So far Li, who had over 700 000 followers by mid-2016, has worked with brands like Gucci, Chanel, Jo

Malone and many others.

EXAM PRACTICE

PROCTOR & GAMBLE (P&G)

(a) Define viral marketing. (2 marks)

Viral marketing involves any strategy that encourages people to pass on messages to others about a

product or a business. It creates the potential for rapid growth in the exposure of a message. Like a

virus, these strategies exploit the process of rapid multiplication that results from people sending

messages to family, friends and colleagues, who then send them on again. In this case, a television

advert produced for P&G to promote Ariel called ‘sharetheload’, went viral in India. The advert

features the challenges faced by a young Indian women attempting to balance the demands of raising

a family with developing a career. The advert critically explores India’s traditional male-dominated

society.

(b) Explain one way in which P&G might have benefitted from its Ariel advert that ‘went viral’. (4 marks)

When messages go viral on the internet they travel very quickly and can reach huge numbers of

people. In this case, the ‘sharetheload’ advert went viral in India. India has a very large population and

the popularity of the advert probably meant that it was seen perhaps by many millions of people.

When the advert went viral, P&G would have benefitted from considerable exposure. The advert

would also have been broadcast free of charge by the people who sent the message to their friends

and family. This ‘free’ advertising would be highly valuable to P&G. It is also possible that the advert

was sent to other countries. This would just add to the benefit.

Many of P&G’s brands are positioned at the ‘top end’ of the market. Much of the company’s marketing

is designed to show quality in the products, which allows P&G to charge higher prices than many of its

rivals. Although P&G invest very heavily in developing and supporting their brands, since they can

charge a premium price these costs are likely to be recovered. People are often prepared to pay a

higher price if they believe that they are buying a quality product. Suggesting that a product is of high

quality is a common way of differentiating it from those of rivals.

(d) Assess the benefits to P&G of having very strong brands. (10 marks)

Many of P&G’s brands such as Ariel, Bounty, Charmin, Fairy, Febreze, Gillette, Head & Shoulders,

Lenor and Olay are powerful and valuable and are purchased by around 5000 million people. P&G has

23 brands that generate sales of between US$1000 million and US$10 000 million each per year.

Marketing such strong brands will bring P&G a number of benefits. A strong brand may add value to a

product in the eyes of customers. Consumers may feel that P&G’s products are of a high quality. As a

result, the business will enjoy higher sales as it exploits its competitive edge.

One of the main advantages of a strong brand is the ability to charge a premium price. Products with

strong brands can be priced higher than those of competitors. This is because of the customer loyalty

that has been built up over a period of time. People are less likely to switch to cheaper brands if they

have developed the habit of buying a ‘favourite’ brand. Many of P&G’s products are positioned at the

top end of the market and do carry premium prices. However, if the brand remains strong and can

hold its position in the market, P&G will be able to charge higher prices for longer. This will generate

more revenue and profit for the business.

Another benefit of a strong brand is lower price elasticity of demand. Firms would prefer their brands

to have a lower price elasticity of demand. This means that a price increase will have less impact on

demand. For example, if a product has price elasticity of demand of

–

1.5, a 10 per cent increase in

price will result in a 15 per cent decrease in demand. However, if price elasticity is lower at

–

0.9, a 10

per cent increase in price will reduce demand by just 9 per cent. Consequently, with a strong brand

and lower price elasticity, P&G may find that fewer customers switch to alternative products if it

decides to raise prices.

Although P&G incurs high costs maintaining its brands, the rewards are significant. In 2015, P&G

enjoyed sales revenue of over US$76 000 million and a profit for the year of over US$7000 million.

Also, the Glass Lion award won at the Cannes Film Festival will help to raise the profile of the

company and may generate some very positive publicity. This is because the advert, which is

associated with one of its strongest brands, addressed issues of gender inequality and suggests that

P&G is a socially-responsible corporation.

12 PRICING STRATEGIES

ACTIVITY 1

CASE STUDY: BANGLADESHI STREET FOOD

1. (a) Calculate the prices charged by Raihan for his three best sellers.

The prices of Raihan’s best-sellers are given by:

Singara – BDT 10 + (50% × BDT 10) = BDT 15 (that is, a mark-up of BDT 5)

Fish somosa – BDT 12 + (50% × BDT 12) = BDT 18 (that is, a mark-up of BDT 6)

Poori bhaji – BDT 8 + (50% × BDT 8) = BDT 12 (that is, a mark-up of BDT 4)

(b) Calculate the total profit (before overheads) made by Raihan from these sales

The profit (before overheads) made by Raihan is given by:

Singara – BDT 5 × 80 = BDT 400

Fish somosa – BDT 6 × 100 = BDT 600

Poori bhaji – BDT 4 × 70 = BDT 280

Therefore, the total profit (before overheads) was BDT 1280.

2. Explain one possible disadvantage to businesses of using cost plus pricing.

Although cost-plus pricing is simple and ensures that costs are covered, the method does have one

notable disadvantage: cost-plus pricing ignores market conditions. For example, the mark-up used by

a business may be far too high in relation to the prices of rival products. This might result in low sales.

In this case, Raihan might need to look at what other street food sellers are charging in the area to

ensure that his prices are competitive.

ACTIVITY 2

CASE STUDY: PLAYSTATION

1. Explain the pricing strategy used by Sony in this case.

The pricing strategy used by Sony for its PlayStation gaming machines is called skimming or

creaming. This involves launching a new product into a market and charging a high price for a limited

time period. The idea is to exploit the popularity of a new product while it is unique. Later in the

product’s life cycle, prices are reduced. This method is common with technical products such as

gaming machines. For example, the PlayStation 3 was launched in 2006 for a price of $599; by 2009,

the price had dropped to $299.

2. Assess the advantages and disadvantages of the pricing strategy used by businesses like Sony.

One of the main advantages of skimming is that high prices are charged to people who are prepared

to pay higher prices. This helps to maximise revenue. When PlayStation 4 was launched, its price was

$399 – a price that some people are prepared to pay, because they want to be the first with the new

product. Eventually the price will be lowered and other customer groups will be drawn into the market

(although in November 2014, Sony said that a price reduction was not imminent). However, in the

future most people would expect the price to fall – especially if Sony plans to introduce a new product

such as PlayStation 5.

The higher revenues from charging a higher initial price will help Sony to recover the cost of research

and development. The higher price also helps to elevate the image of the product.

However, skimming can only be used if demand is price inelastic. A high price cannot be charged if

demand is price elastic because demand will fall too sharply. This method of pricing is only suitable for

certain types of product in specific markets. The product has to be new and fairly unique in order for

people to pay a premium price.

EXAM PRACTICE

ADOBE

(a) Define subscription pricing. (2 marks)

Subscription pricing involves charging consumers a regular fee, usually monthly or annually, for

access to a particular product or service. In this case, Adobe has switched from a more traditional

pricing strategy, where customers are charged ‘one-off’ or ‘standalone’ fees for different software

packages, to a £47 a month subscription fee. The subscription to Adobe's Creative Cloud – a web-

based system – gives customers access to all of Adobe’s software, an online storage system and

project management tools.

(b) Explain one reason why Adobe switched to subscription pricing. (4 marks)

The main advantage of subscription pricing is that customers are tied into long-term agreements with

businesses. Although customers have the right to cancel subscriptions, many do not. Adobe will

continue to receive payment for an indefinite period, which is an attractive proposition. It helps to

improve cash flow and removes some of the uncertainty about future sales levels. Also, an Adobe

spokesman said the move to a subscription system would release the company from its traditional 18-

to 24-month upgrade cycle; instead, improvements would be released as they became available. This

would help relieve some of the pressure on the business to update software by a particular deadline,

providing some flexibility for Adobe.

The subscription pricing strategy was introduced in 2013. Reaction to the strategy has been mixed.

For example, according to information in the case, some customers preferred the traditional sales

approach. This may not be too encouraging for Adobe. However, the pricing system was only

introduced in 2013, so it may be better to evaluate the success of the new strategy a bit further into

the future.

In slight contrast, it was widely reported that, by the end of 2014, there were over 3 million subscribers

to Creative Cloud, and feedback suggested that the satisfaction level was high. This probably

indicates that the new pricing strategy is proving successful.

As subscription pricing becomes more widespread, it could be argued that it will eventually become

the norm. In 2011, Microsoft introduced Office 365, a subscription version of Office applications plus

other productivity programs. Adobe’s introduction of a subscription pricing strategy in 2013 reflected a

growing trend for large software firms to adopt a subscription pricing strategy. Feedback on customer

satisfaction indicated that more customers were comfortable, as part of this trend, with paying for an

online service.

Indications that satisfaction is high among the 3.4 million who have subscribed suggest it might be a

shrinking problem. It often takes time for some people to adjust to new regimes. Adobe is probably

content with success so far.

(d) Evaluate whether subscription pricing or cost plus pricing would be the most suitable pricing strategy for

Adobe. (20 marks)

A wide range of factors can influence the price that a business charges. In the long term, a business

cannot ignore its costs; it has to cover costs and make a profit. In this example, the subscription

charge of £47 per month in the UK for access to Adobe’s Creative Cloud is presumably a price that

will generate a long-term profit for the company. There is no indication that this is an introductory offer.

Even if businesses use strategies that involve lowering prices for a time, costs will always have an

important influence on long-term pricing. This might account for the popularity of cost plus pricing.

Competition in a market will also be a key factor for most businesses. In highly competitive markets,

prices are likely to be very similar. Firms will want to avoid a price war by trying to undercut their rivals.

In some cases, a dominant firm might set the price and all other firms are just happy to follow the

leader. In competitive markets, only those firms with a strong brand or some USP have any chance of

charging premium prices. Adobe is a strong brand, but there are other powerful players in the market

– such as Microsoft. Adobe will have to consider the pricing strategies used by its rivals when setting

its own prices.

Price elasticity of demand is likely to be an important influence. If the demand for a firm’s products is

price inelastic, there will be scope for price increases. For example, if price elasticity was

–

0.8, a

business could raise its price by 10 per cent and demand would only fall by 8 per cent. As a result,

total revenue would rise. In contrast, if a firm’s product is price elastic, it may benefit from price cuts.

For example, if price elasticity was

–

2.7, a 10 per cent reduction in price would result in a 27 per cent

increase in demand. This would increase total revenue. The price elasticity of demand for Adobe’s

products is not given in this case, but Adobe may consider price elasticity before making changes to

its prices.

Changes in social trends may affect pricing in business. For example, it could be argued that today’s

consumers are more aware and better informed than ever before. As a result, they may challenge the

prices that businesses charge. They may ‘haggle’ or spend more time searching for ‘bargains’. They

may also be less tied to particular brands, and consider instead the views and experiences of friends

and colleagues posted on social media sites.

Businesses are having to adapt to selling goods online. Many businesses use traditional pricing

strategies such as cost plus pricing. For others, selling goods online has provided opportunities for

new pricing strategies. In this case, arguably, Adobe has responded to changes in social trends. Most

of Adobe’s sales are made online, and they have now introduced subscription pricing. Adobe is the

latest in a number of large software firms that have adopted a subscription pricing strategy. Microsoft

has also introduced Office 365, a subscription version of its set of office productivity programs. This

may reflect social trends in the way consumers expect to pay for products in the future, as more

shopping is done online.

To conclude, Adobe has adopted a new pricing strategy because it is an online business and wants to

keep up with changes in social trends. However, when setting prices it will always have to consider

costs and the level of competition in the market. These are key.

13 DISTRIBUTION

ACTIVITY 1

CASE STUDY: DRESSMAKING IN FAISALABAD

1. What is the difference between a department store and a chainstore?

A department store is a very large store divided into departments, each one selling a different

category of goods. The departments might be menswear, womenswear, children’s clothes, home and

garden, electricals, sport and leisure, toys and beauty. In contrast, a chainstore is one of a series of

shops owned by one company and selling the same products. The chain might be regional or national.

2. Explain why distribution through multiples might be more profitable for Mansoor Aslam’s business than

independent retailers.

Aslam is keen to widen the distribution network of his family’s business. The aim is to develop

distribution channels with department stores and chainstores. The main advantage of using these

channels is that larger quantities can be sold to the new customers. An order from an independent

retailer might be for five dresses. In contrast, an order from a regional or national multiple might be for

many hundreds. This should help to generate larger revenues for the business. Distribution costs

might also be lower. For example, it should be cheaper to transport a very large order to a distribution

centre or warehouse belonging to a chainstore than delivering separately to dozens (or more) of small

independent retailers in a wide area.

However, large chainstores and department stores would expect to buy dresses from Aslam’s

business at much cheaper rates than independents. They would expect discounts for buying in bulk.

Aslam and his family would have to consider whether supplying customers with large orders at lower

rates is profitable.

ACTIVITY 2

CASE STUDY: AGENTS

1. Explain one motive for using an agent when selling overseas.

The use of agents when selling goods overseas is common. When a business exports for the first time

it may lack the experience and confidence to ‘go it alone’. For example, a UK company trying to

penetrate the Chinese market is likely to face a number of obstacles. Using an agent reduces the risk

and uncertainty of selling abroad.

2. Assess the advantages of using agents when trying to penetrate overseas markets.

The use of an agent may reduce the risk of exporting, and may provide a number of financial benefits.

Using an agent avoids the cost of recruiting, training and paying specialist overseas sales staff; the

agent will bear the burden of these costs. An agent is likely to have a network of contacts that can be

exploited immediately, rather than spending time to develop contacts when ‘going it alone’. Agents

may be preferred to distributors because the seller then has more control over matters such as prices,

display and brand image. Finally, agents have the experience and knowledge needed to sell in places

where culture, trading practices, commercial laws and other customs are different from the UK.

ACTIVITY 3

CASE STUDY: POLISH ONLINE RETAIL

1. Calculate the percentage change in online retail spending between 2014 and 2016.

Between 2014 and 2016 online retail spending in Poland rose from PLN 27 400 million to PLN 38 100

million. The percentage change is given by:

PLN 38 100 million – PLN 27 400 million = 10 700 million

10 700 million ÷ 27 400 million = 0.39

0.39 × 100 = 39%

2. Explain one reason which might account for the change in online spending in Poland.

The significant 39 per cent increase in online spending might be explained by a change in social

trends. It could be argued that an increasing number of people prefer online shopping. There are

some significant advantages of this method. It is cheaper because online retailers often have lower

costs. For example, they may not have to meet the costs of operating shops and stores. Consumers

can shop 24/7 at their own convenience. They do not have to shop during ‘normal’ shopping hours.

Online shoppers usually have a huge amount of choice – they can browse lots of different websites

from suppliers all over the country, or even the world for some products. Finally, people can shop from

anywhere they like if they have access to the internet. An increasing number of people are using their

mobile devices to do their shopping.

3. Assess the advantages to Polish businesses of online distribution.

A business might enjoy a number of benefits from online distribution. To begin with it can offer goods

to a much wider market – in some case it might be able to sell into global markets. A business may

also enjoy lower costs. For example, it may not have to meet the costs of operating stores. Start-up

costs are also likely to be lower if a business is using online distribution only. The cost of processing

transactions is probably lower– many systems are automated and less paper is needed for

documents, such as invoices and receipts. Payments can be made and received online using credit

cards or a money transfer system like Paypal – they do not need to wait for cash. Finally, a business

can serve their customers 24/7 – that is, they are open all the time.

However, there are one or two drawbacks. Businesses will face increasing competition since selling

online is a relatively cheaper method of distribution and can be organised from any location in the

world. Consequently, businesses will face more competition from overseas. There is also a lack of

human contact which might not suit some customers and there is heavy dependence on delivery

services where online retailers often lack control on the quality of delivery. There may also be

technical problems online. For example, websites may crash, viruses may be used to attack services

and internet connections can be unreliable. Finally, there is also a security risk as computer hackers

might gain access to sensitive information. An individual business must assess whether the

advantages outweigh the drawbacks before setting up an online selling operation.

EXAM PRACTICE

UNILEVER

(a) Define wholesaling. (2 marks)

Wholesaling involves linking manufacturers with retailers. A wholesaler is a business that buys goods

from manufacturers and sells them in smaller quantities to retailers. Wholesalers help to break bulk

and provide a storage facility to manufacturers. Unilever uses a range of distribution channels, one of

which is wholesalers.

(b) Explain one reason why Unilever uses door-to-door selling in emerging economies, such as India. (4

marks)

Unilever uses a number of distribution channels, one of which is door-to-door selling. Unilever uses

small-scale retailers in door-to-door selling to distribute goods in hard-to-reach places. Unilever may

use this approach in emerging countries such as India, Vietnam and Sri Lanka because there is a lack

of other retail outlets, particularly in isolated rural regions. In emerging economies, there is often a lack

of infrastructure, even though large regions might be populated by large numbers of people. An

organised network of door-to-door sellers is more able to distribute goods to these customers.

Door-to-door selling in developing countries might also improve Unilever’s image, by providing job

opportunities, recruiting and training people to become part of Unilever’s sales network. This can

involve providing them with extended credit, marketing, sales and accounting training and bicycles or

other equipment. For example, Shakti, Unilever’s door-to-door selling operation in India, provides work

for 65 000 women in poor rural communities. Similar schemes are used in Bangladesh, Sri Lanka and

Vietnam.

Currently Unilever does not target online shoppers as a means of distribution. One reason for this

might be because it is not cost effective. Unilever makes fast-moving consumer goods in huge

quantities and ships them to over 190 countries around the world. It sells to a mass market: probably

over a billion people worldwide buy its products. Distributing low-value goods, such as Knorr stock

cubes or packets of Surf laundry powder, to individual customers online would not be cost effective. It

is far better for Unilever to distribute through retailers, wholesalers and other similar methods.

(d) Assess the factors that might influence a business like Unilever when choosing distribution channels. (10

marks)

The channel of distribution chosen by a business will depend on a number of factors. One of the most

important factors is the nature of the product. Different types of product may require different

distribution channels.

For example, businesses producing high-quality ‘exclusive’ products, such as perfume and designer

clothes, will choose their outlets very carefully. The image of their products is important, so they are

not likely to use supermarkets, for example.

Some products need an explanation or demonstration. For example, technical products or complex

financial products might need to be sold by expert salespeople. These products are likely to be sold by

specialists.

Fast-moving consumer goods, such as breakfast cereals, confectionery, crisps and toilet paper,

cannot be sold directly by manufacturers to consumers. Wholesalers and retailers play an important

role in the distribution of these goods because they break bulk. This is the case with Unilever. Unilever

produces millions of products a day and has to reach, possibly, over a billion customers worldwide. As

a result, it uses a range of wholesalers, distributors and retailers.

Businesses will naturally choose the cheapest distribution channels. They will also prefer direct

channels because, each time an intermediary is used, they will take a share of the profit. Large

supermarkets will try to buy direct from manufacturers because they can bulk buy and get lower

prices. Independents are more likely to buy from wholesalers, and have to charge higher prices as a

result. Unilever does sell directly to large supermarket chains, but it does not sell directly to final

consumers. It is not practical to do so.

Producers selling to mass markets are likely to use intermediaries. Businesses targeting smaller

markets are more likely to target customers directly. For example, a building contractor in a small town

will deal directly with customers. Producers selling in overseas markets are likely to use agents

because they know the market better. Businesses selling goods to other businesses are likely to use

more direct channels. In this case, Unilever is selling into a mass market and therefore often requires

the services of intermediaries, such as wholesalers.

For some producers, it is important to have complete control over distribution. For example, producers

of exclusive products do not want to see them being sold in ‘downmarket’ outlets. This might damage

their image. Most of the products sold by Unilever are directed at mass markets, so image is probably

not a priority.

Unilever’s priority would be to ensure that everyone has easy access to its products. However,

Unilever would not want to be associated with disreputable links in the distribution chain so it would

probably monitor distribution channels carefully.

It should also be noted that Unilever, like many businesses, uses a combination of different channels.

This helps to widen the distribution network and reach a larger number of potential customers. The

most important factor for Unilever is that it sells lots of relatively low-value products to a mass market.

It therefore needs a blanket distribution approach using any channel that is cost-effective.

14 APPROACHES TO STAFFING

ACTIVITY 1

CASE STUDY: W. L. GORE & ASSOCIATES

1. Describe one piece of evidence that could suggest that W. L Gore & Associates treats its staff as assets.

Employers who view their staff as assets will value their employees and have concern for their

welfare. Such employers will therefore try to meet the needs of employees. In this case, staff, who are

called ‘associates’, receive some attractive benefits. For example, after one year of service staff are

entitled to 21 days paid holiday, four weeks unpaid long-term holiday, 35 days fully-paid maternity

leave, 3 days paternity leave and 10 days paid sick-leave. On many of the company’s sites there are a

range of health benefits, such as free breast cancer testing, flu vaccinations, medical facilities and

fitness centres. Employees seem very happy working for Gore. Over 18 per cent of staff have been

employed for more than 20 years. Few would leave tomorrow if they were offered a job elsewhere.

Indeed, staff turnover is well below the global average. Also, according to Figure 1, 91 per cent of staff

say they are proud to tell people they work for Gore and 97 per cent of people say that Gore is a

physically safe place to work.

Employees are trusted by Gore and, provided associates fulfil their work commitments, there are no

set hours of work. Employees are in complete control of their own working day and week (apart from a

small number who are required for specific tasks). For example, staff can opt for flexible working,

home-working, 4-day working weeks, job sharing and gradual retirement. This suggests that staff at

W. L. Gore & Associates are treated as assets – both valued and trusted.

2. Explain one advantage to W. L. Gore & Associates of treating their staff in this way.

Staff appear to be very loyal to W. L. Gore & Associates. Over 18 per cent of staff have been

employed for more than 20 years. Few would leave tomorrow if they were offered a job elsewhere.

Indeed, staff turnover is well below the global average. With such a low staff turnover, Gore will not

need to meet the expense of constantly recruiting new staff when people leave.

The business will also benefit from having a highly motivated workforce. Since staff are valued and

trusted they should be happier and more productive. They are given a lot of freedom and encouraged

to work in teams. They are allowed to organise their own working patterns and can choose from a

range of different working arrangements. This allows them to fit in work with their family and personal

lives. There will be a lot of interaction between staff which should help innovation –crucial in the

technology sector

ACTIVITY 2

CASE STUDY: PART-TIME WORKING

1. Define a part-time worker.

Part-time workers are defined in Economic and Labour Market Review as ‘people normally working for

not more than 30 hours a week except where otherwise stated’. Part-time workers are employed

permanently but work fewer hours than full-time staff.

2. Explain why the proportion of part-time workers varies so much around the world.

Some people prefer to work part-time because it suits their lifestyle. For example, many students take

part-time jobs to help support themselves while at college. The proportion of people working part time

varies significantly around the world. According to Figure 2, it varies from 1.9 per cent of the workforce

in Bulgaria, to 38.5 per cent in the Netherlands. The three countries with the lowest proportion of part-

time workers are all in Eastern Europe – Bulgaria, Russia and Poland. Therefore, according to this

very small sample, there may not be a culture of part-time work in this region compared to other parts

of the world.

Part-time work is most popular in the Netherlands and is particularly popular with women. According to

The Economist around 76.6 per cent of Dutch women of working age spend less than 36 hours per

week working. One reason for this Dutch preference is women arriving late to the labour market. Also,

the influence of Christian values in Dutch politics made it a cultural norm for those women to work part

time so they could still fulfil traditional family roles. The Netherlands is often reported to be one of the

happiest countries in the world. According to surveys, one of the reasons for this is because a high

proportion of people only work part time.

3. Explain one reason why businesses employ part-time and temporary workers.

Many businesses like to employ at least a proportion of their workforce on part-time contracts. The use

of part-time staff provides flexibility for businesses. For example, part-time staff can be employed

during peak hours in restaurants at weekends, for example. This practice helps to keep wage costs

down. Temporary workers are those employed for a limited period only. Many businesses need

temporary workers from time to time. For example, farmers need workers to help out during the busy

harvest period.

With the added flexibility that employing part-time and temporary workers brings, businesses can

expand and contract in response to changes in demand for its products. In contrast, a workforce made

up entirely of full-time staff is difficult to shrink quickly because of the cost, and because of the time it

takes to fulfil legal requirements.

ACTIVITY 3

CASE STUDY: SOUTH AFRICAN CABIN CREW STRIKE

1. What has led to the breakdown in the employer/employee relationship in this case?

In this case, a dispute has developed between the South African Cabin Crew Association (SACCA),

which represents cabin crew workers, and South African Airways (SAA). The breakdown in the

relationship has occurred because the demands of cabin crew workers were not being met. They

wanted their meal allowances on international flights to be increased from US$130 (ZAR 1699) to

US$170 (ZAR 2217). The workers claimed that they needed the increase to pay for meals when they

get to destinations where the living conditions are not the same as those in South Africa.

2. Discuss the possible disadvantages to SAA of collective bargaining.

Collective bargaining involves determining wages, conditions of work and other terms of employment

through a negotiation process between employers and employee representatives such as trade

unions. These bodies represent the views of their members and try to negotiate in their interests.

There are both advantages and disadvantages of this approach to determining wages and conditions

for a business. One problem is that negotiations can result in more bureaucracy and take longer,

which will add to costs for the business. Negotiation processes can be particularly lengthy if the two

bodies are unable to reach an agreement. Another problem is that the owners of a business may feel

that their freedom to manage is compromised. In this case, SAA had to cancel 32 flights, which would

have inconvenienced customers and lost the company revenue and possibly some goodwill. Finally,

another disadvantage is that disagreement during collective bargaining can lead to a strike. This is the

problem here. Cabin crew workers belonging to SACCA wanted an increase in their meal allowance,

but this led to a dispute between SAA and SACCA. The strike lasted for a day and was ended by a

court ruling. However, a spokesperson for SAA said after the court hearing, ‘We are inviting SACCA

back to the negotiating table as soon as possible and would like parties to have open minds when

deliberating and considering options. It is in the interests of all parties to find lasting solutions to the

issues in dispute. We remain confident that a final solution to this matter will be found in the coming

days.’ This suggests that collective bargaining may resume and a settlement eventually reached.

EXAM PRACTICE

SCHLOSS POWER TOOLS

(a) Define redundancy. (2 marks)

Most people leave a job because they are moving on to another job or because they are retiring.

However, some people are forced out of work. They may be dismissed or made redundant. If a worker

is made redundant it means they are no longer required because there is either no work or insufficient

work. Making people redundant is a lawful means of laying off staff.

(b) Explain one advantage to workers at Schloss Power Tools of multiskilling. (4 marks)

Multiskilling means that workers are trained in more than one specific skill. Schloss Power Tools

proposes to train workers in all aspects of production work. This will allow them to move from one

workstation to another more easily. The main benefit of this to the employees is that they will develop

a greater range of skills, so they will be more capable and can demand higher levels of pay. Also,

workers leaving the company may find it easier to get other jobs because they have more to offer and

will have more jobs to choose from. Additionally, the chance to do different jobs in the factory might

make work more interesting, which could improve levels of job satisfaction.

components. (4 marks)

Outsourcing involves getting other people or businesses to carry out tasks that were originally done in-

house. This allows a business to focus on its core capabilities and lets others, who are likely to be

specialists, carry out peripheral work.

Schloss Power Tools is planning to outsource the production of some components to a Chinese

supplier to save €1.5 million per year. This would result in the loss of 12 jobs at the company and may

provoke a reaction. For example, there could be a dispute between employees (or their

representatives) and the directors, which could escalate and result in a strike with major disruption.

Other drawbacks include loss of control and the reliance that Schloss Power Tools will place on

suppliers. For example, if the Chinese suppliers fail to deliver on time, the whole production process

could be held up.

(d) Evaluate whether (i) training production staff or (ii) employing more temporary workers would have the

most impact on improving worker flexibility. (20 marks)

Increasingly, businesses are looking to improve the flexibility of their workforces. In this case, Schloss

Power Tools has made two key of proposals to help improve flexibility. The directors hope to make the

business more competitive and start making a profit again.

One of the main advantages of a flexible workforce is that it can cope more effectively with changes in

demand. For example, Schloss Power Tools plans to make more use of temporary workers during the

spring and summer when demand for its power tools rises. A workforce made up entirely of permanent

staff is less flexible here. To slim down a workforce when demand falls – in the autumn and winter in

this case – can be difficult because of the cost and time it takes to comply with legal requirements.

Schloss Power Tools might also benefit if employing temporary workers is cheaper.

Schloss Power Tools’ proposal to train its workers in a variety of production skills will improve

flexibility. People can be moved more easily from one workstation to another, and the business will be

better able to cover for absent staff, allowing more labour resources to be directed where they are

needed most. Schloss Power Tools is also introducing flexible hours in the company office, so the

business will be able to communicate with suppliers, customers and other stakeholders from 7.00 a.m.

to 8.00 p.m. each day. This should help to improve customer service.

Despite these advantages, there may be some drawbacks for Schloss Power Tools. For example,

some workers may not want to become multi-skilled, because they prefer their jobs as they are or lack

the confidence to learn new skills. This could cause a dispute between employers and employees and

damage the relationship that might exist.

Some office staff may object to the new flexible hours. There may be a problem getting staff to start

earlier and stay later, which could also lead to a dispute.

To conclude, the directors are expecting a negative reaction from the workforce when the proposals

are announced. Therefore, they have agreed to increase wages by the CPI (cost of living) plus 1 per

cent for the next 3 years. This should help to temper the reaction.

Overall, Schloss Power Tools needs to do something about its loss-making position, and it believes

that a flexible workforce is part of the answer. It is difficult to say whether the training of production

staff or the use of temporary workers will have the biggest impact. If workers can master a wider range

of skills, the benefit to Schloss will be significant. Workers will be more skilled and production would

not be held up if a number of workers in the same field of production were absent. Workers might also

be more motivated if they recognise that their employer has invested money in their training. However,

training is expensive and Schloss will need to compare the costs of training with the benefits.

The use of temporary workers will help deal with higher levels of demand in the summer. However,

temporary workers may not be as reliable as full-time staff. Perhaps a better approach would be to

offer overtime rates to existing staff. This gives them the opportunity to earn more money and may

help to motivate them. Therefore, it could be argued that the training of the production staff would

have the most impact on improving worker flexibility.

15 RECRUITMENT, SELECTION AND TRAINING

ACTIVITY 1

CASE STUDY: JOB DESCRIPTION

1. Explain what is meant by a job description, illustrating your answer with examples from Figure 4.

A job description states the title of a job and outlines the tasks, duties and responsibilities associated

with that job. The main purpose of a job description is to show clearly what is expected of an

employee. Extracts from it are likely to be used in a job advert, like the one shown in Figure 4.

In Figure 4, the job description is for a Grade 1 accounts assistant. The job involves helping out the

accounting team recording financial transactions and generating financial information.

Some specific responsibilities include matching, batching and the coding of invoices, investigating

aged debtors, allocating cost codes, matching invoices to purchase orders and arranging payments on

behalf of the company.

The job description specifies the pay range for the job, which is between US$24 500 and $29 000 a

year, depending on experience, and it shows that there is an entitlement of 21 days annual holiday.

If a new job is created, a new job description may have to be prepared. If a business is replacing

someone who is leaving, the job description may be the same. However, when someone leaves, the

job description may be updated.

ACTIVITY 2

CASE STUDY: JOB ADVERTISEMENT

1. Explain one benefit of using external recruitment for The Aspire Park Fitness Centre.

One of the main benefits of external recruitment is that the business will attract a far larger number of

applicants compared to internal recruitment. This means that the employer will have a lot more choice

when making an appointment. It might also mean that better-quality applicants can be attracted.

Additionally, an external candidate might bring some fresh ideas into the business.

2. Discuss the suitability of using a local newspaper to advertise the job shown above.

Businesses often use local newspapers to recruit staff. In this case, a health club is trying to attract

some fitness coaches. Using an advert in a local newspaper means that most of the applicants will be

from the local area. The business might prefer this because it might think its members would prefer to

be coached by a local instructor. Also, local employees might be more reliable because they do not

have to travel so far to get to work. Local staff might provide the business with more flexibility: for

example, the business might be able to call in local staff to help out at short notice.

ACTIVITY 3

CASE STUDY: HONDA

1. Describe two possible training costs that Honda might incur providing its apprenticeship programmes.

Training costs can be very high for businesses. For example, employees often have to be trained in

health and safety issues by law. Businesses may have to pay training providers if they use external

training. Even internal training can be expensive if specialist training staff and equipment is needed. In

this case, Honda appears to take training very seriously and has invested heavily in training facilities.

Honda has purpose-built technical training centres, with practical workshop areas and individual

training rooms. Apprentices receive lots of support, using the latest equipment, in a safe and

supervised environment. The Honda Institute Centre of Excellence has classrooms, computer rooms

offices and a canteen. There is also a ‘Wow Door’. This opens out onto a viewing gallery where you

can see a huge space containing all the latest Honda products and technology that is used solely for

learning. All of these facilities will incur heavy expenditure.

Young people joining the programme work alongside experienced staff. Some of them will be

specialised trainers. The wages of these employees will have to be met. Finally, trainees are paid by

Honda even though they are not making any contribution to output during their period of training. This

is another cost.

2. Explain one reason why some businesses may be reluctant to invest in training.

Businesses are often reluctant to invest in training because of the high costs outlined in the previous

answer. Some firms may lack resources to fund training. They may consider that the opportunity cost

is unacceptable. As a result, resources are used for other expenditures. Some businesses are

reluctant to invest in training because they fear that once an employee has been fully trained, they

may leave the business and take a job with a rival. Consequently, the benefit of any training is enjoyed

by another business. Although Honda is prepared to invest in training, it is possible that some

apprentices leave and find jobs with other motor car companies, for example.

3. Honda apprentices receive a lot of off-the-job training. Assess the advantages and disadvantages of off-

the-job training.

Off-the-job training is training that takes place away from production facilities. In this case, Honda

trains apprentices in purpose-built technical training centres, with practical workshop areas and

individual training rooms. Apprentices receive lots of support, using the latest equipment, in a safe and

supervised environment. The Honda Institute Centre of Excellence has classrooms, computer rooms

offices and a canteen.

One of the advantages of off-the-job training is that trainees cannot be distracted by the work itself.

They can focus entirely on learning the skills and knowledge required. Also, the quality of output is not

affected by trainee mistakes as they learn, and customers and others are not put at risk. It is also

possible for off-the-job training to take place outside normal working hours – in the evenings perhaps.

There are disadvantages of off-the-job training. Trainees do not produce any output so there will be a

loss of potential revenue. Off-the-job training can also very expensive as outlined in the previous

answer. The expense may reduce the profitability of the business. It is also possible that some

aspects of the work cannot be taught off-the-job and trainees may feel that some of the training is not

relevant to them. However, for many businesses such as Honda, the benefits of high-quality off-the-

job training outweigh the drawbacks and therefore investment in this method is justified.

EXAM PRACTICE

MILANO IL MIGLIORE (MIM)

(a) Explain one reason why recruitment is such an important activity for MIM. (4 marks)

Recruitment involves attracting and appointing new staff. A business may need new staff because it is

expanding and more labour is needed, or perhaps people are leaving and they need to be replaced.

Recruitment is important because a business needs high-quality staff. The quality of staff in a

business can have a big impact on its financial performance. Poor-quality staff can lead to low

productivity, poor customer relations and a negative culture in the organisation.

Recruitment is also important because a poor choice of recruit can prove to be expensive. If new

recruits leave, all the costs of advertising, interviewing, induction and training will have to be repeated.

(b) Explain how MIM attempts to overcome the problem of recruiting sufficiently high-quality staff. (4

marks)

When businesses hire new employees they need to attract the best people: those with the right skills

and appropriate experience. Attracting poor-quality staff can have a negative impact on a business, so

it is important to develop an effective recruitment process.

MIM uses an online system to help recruit staff. The whole recruitment process involves three stages.

Applicants apply online and, if successful, are invited to complete a test, also online. If they pass the

test, they are invited to an online video interview. Finally, if they pass the online interview they are

invited to group interviews at local stores, where their suitability for employment is finally assessed.

This is a rigorous process and candidates have to pass many stages to be successful. This thorough

examination of candidates’ suitability helps MIM to recruit high-quality staff.

A significant part of MIM recruitment process is conducted online. Jobs are advertised online (on the

company’s website) and candidates submit their application, complete a test and carry out a video

interview – all online. This system helps MIM to filter applicants, assess personalities and screen

applicants to see if candidates match the company’s values and culture.

One of the main advantages of online recruitment is that applicants can be drawn from a much wider

area – globally if necessary. It is also possible to attract specialists. MIM uses its online system to

recruit buyers, merchandisers and designers. Not only does this allow employers to find candidates

with specific skills, but also it can attract passive candidates who may not be actively looking for

employment. For example, someone browsing the MIM website might be attracted to the recruitment

section, even if they were not looking for a new job.

The cost of using the internet to recruit staff is low compared with other methods. It has been reported

that the costs of posting jobs or searching for candidates on job portals can be up to 90 per cent lower

than the costs of using traditional methods. Online recruiting involves less human interaction, reaches

a far broader audience, files records and provides selection tools electronically. This reduces the cost

for storage, as well as the cost of employees to maintain and administer recruitment and selection

procedures.

The benefits to MIM of using online recruitment are significant. The company has set up a system that

is ongoing, cheap, easy to use and effective. It is likely MIM saves a great deal of money using the

system, and that the quality of staff recruited is generally very good.

(d) Assess the importance of training to a business like MIM. (10 marks)

Although training can be expensive, the benefits generally outweigh the costs. Training appears to be

important for MIM. The company has its own training programme for graduates. MIM claims that the

training and development opportunities provided are revered across the industry. New recruits at MIM

start with an introduction to the whole of the business, so that recruits understand the overall objective

of the business before delving into the detail of their specific business area. Recruits are paired with

more experienced staff members so that they have all the support they need. By offering numerous

training opportunities and encouraging their recruits to learn from colleagues, MIM encourages

promotion in less than two years.

Although it is expensive, a number of stakeholders will benefit from training. For example, managers

at MIM will benefit because workers may be better motivated and more satisfied. This makes them

more co-operative and easier to work with. Workers may also be more flexible which will help

managers in their organisation. Providing training may also improve the image of the business and

make it easier to attract and retain high-quality staff. MIM shareholders will also benefit from

investment in training if productivity improves. Higher levels of productivity mean that costs will be

lower, and the business might gain a competitive edge in the market. This should help to improve the

financial performance of the business leading to higher profits and dividends for the owners.

Training will also benefit workers. When they have been trained, they will be able to do their jobs more

effectively. This should reduce anxieties about their work and provide more job satisfaction.

Additionally, employees are likely to feel valued if their employer is paying for their training; they might

be more motivated, less stressed and enjoy higher levels of job satisfaction. They might also develop

a range of skills that they can use in the future – to gain internal promotion or perhaps seek a better

job.

If training improves the quality of workmanship, customers will benefit from better-quality products.

Also, if staff members who interact with customers are given training in customer service, customers

will benefit from improvements, such as a better service when making complaints.

With so many benefits from investment in training, it could be argued that training is very important to

businesses like MIM. However, training costs are significant. For example, businesses will have to pay

training providers if they use external training. Even internal training can be expensive if specialist

training staff and equipment is needed.

If workers are involved in off-the-job training, they will not be contributing to the company’s

production/output. This will result in lower output levels. Even if workers are trained on the job there

may be a loss of output due to mistakes and slow work associated with ‘learners’.

Finally, businesses are likely to get frustrated if employees leave and join a rival company after they

have invested in training them. Some businesses actually prefer to recruit workers who have already

been trained by others to avoid such costs. However, companies like MIM presumably believe that the

costs of training are outweighed by the many benefits.

16 ORGANISATIONAL DESIGN

ACTIVITY 1

CASE STUDY: CHATUCHAK TEXTILES

1. What is the span of control for the manager of Line B?

The span of control for the manager of Line B is three. The manager has responsibility for three

supervisors.

2. Using Figure 3, describe the chain of command at Chatuchak Textiles, from the chairperson to the

machinists working on all lines.

The chain of command in a business is the path along which orders are passed down through the

hierarchy. In this example, an instruction from the chairperson would pass to the managing director,

then to the production manager, and then on to the three line managers. Each line manager would

pass the instruction on to their respective supervisors, who would then inform the machinists under

their control.

3. Explain one reason why the business might produce an organisational chart.

A business is likely to produce an organisational chart to help clarify the organisational structure of the

business. Organisational charts help to show the roles of different employees and their job titles, the

route through which decisions are made, who is responsible, and who is accountable to whom and for

what activities. A chart will also show the relationship between positions in a business, how

employees communicate with each other and how information is passed on.

In this case, Figure 3 shows part of an organisational chart for Chatuchak Textiles. It includes the

production function, which is responsible for operating three different production lines. The extract

from the chart shows the roles of employees and their job titles. For example, in this case there are

machinists, their supervisors, a line manager, a production manager, a managing director and a

chairperson.

The chart also shows who has responsibility and to whom people are accountable. For example, the

machinists are accountable to their line supervisors and the line supervisors are accountable to the

line managers.

Finally, the chart shows the relationships between different positions in the business. For example, the

managing director provides a link between the chairperson and the functional managers.

ACTIVITY 2

CASE STUDY: VMWARE INC.

1. Define decentralisation. Use the example in this case to illustrate your answer.

Centralisation and decentralisation refer to the extent to which authority is delegated in a business. If

there was complete centralisation, subordinates have no authority at all. In contrast, complete

decentralisation would mean that subordinates would have all the authority to make decisions. In

some organisations, it is common to centralise certain functions. For example, purchasing and IT may

be centralised. In this case study, it is reported that many businesses are beginning to decentralise IT.

This means that businesses are allowing non-specialists, such as production managers and marketing

staff, to make IT decisions for themselves. This means, for example, that IT systems may be

purchased to suit the needs of individual departments in an organisation.

2. Explain why IT departments are unlikely to support the decentralisation of IT.

IT departments are unlikely to support the decentralisation of IT in their organisations. This is probably

because their workload and responsibilities will be reduced and their positions might become

redundant. According to information the case study, 70 per cent of IT managers said that IT should be

more centralised, and 79 per cent argued that they should be in control of core functions like network

security and compliance. Furthermore, 46 per cent said that IT disaster management was too

important to be decentralised and 39 per cent said that data storage should also be their

responsibility. This suggests that the business as a whole may not benefit from the decentralisation of

IT.

3. Assess the possible impacts of the decentralisation of IT on businesses.

One of the main advantages of decentralisation is that it empowers and motivates workers. In the

research carried out in this case, it was found that the decentralisation of IT had contributed to reduce

employee turnover. For example, 53 per cent of respondents said that employee satisfaction had

improved. This is because workers may have been given more responsibility in decision making.

Decentralisation can also improve flexibility in an organisation and speed up decision making. For

example, in this case, 56 per cent of respondents in the research carried out said that they were able

to develop and launch new products more quickly, and 63 per cent said that there was more freedom

in their organisations to drive innovation. This will help businesses to gain a competitive edge in the

market. Another possible benefit is that IT managers will have more time to focus on more strategic

issues. Their workloads will be reduced and there will be less stress for IT staff.

However, there may be some drawbacks to decentralisation. In this case there will be a loss of control

from IT experts over IT developments in businesses and a possible loss of efficiency. For example, 63

per cent of business leaders said that decentralisation was leading to some IT resources being

constructed more than once and 62 per cent said that accountability was becoming a problem. Also,

59 per cent said that in some cases, unsecure solutions were being purchased. Seventy-nine per cent

of IT managers argued that they should be in control of core functions like network security and

compliance. Sixty-four per cent said that IT disaster management was too important to be

decentralised and 39 per cent said that data storage should also be their responsibility.

To conclude, although businesses are looking to innovate, improve efficiency and find ways of

competing in an increasingly dynamic business environment, it is important to embrace new methods

of IT management cautiously. According to a spokesperson for VMware ‘Too often, we’re seeing this

trend (decentralisation of IT) left unchecked and without adequate IT governance, meaning that

organisations across Europe, Middle East and Africa are driving up costs, compromising security and

muddying the waters as to who does what, as they look to evolve.’ This suggests that the

decentralisation of IT may be beneficial but should be managed in a systematic and controlled way.

This will help to avoid serious problems developing.

EXAM PRACTICE

VALVE

(a) Define a flat organisation structure. (2 marks)

Some organisational structures are flat. This means that there a small number of layers in the

organisational structure. In this case, Valve is an exceptional example of a flat structure. There is only

one layer in the organisation chart. There are no managers and all staff have equal status. According

to one Valve employee, D. J. Powers, he doesn’t report to anyone and no one reports to him. With

flatter structures, the chain of command is short but the span of control is wide. This type of structure

means that employees are free from strict, close control in the workplace. They have more freedom

and responsibility. This is certainly the case at Valve.

(b) Evaluate whether or not Valve will benefit from having a flatter organisational structure. (20 marks)

In common with a number of technology businesses, Valve has a flat organisation. However, many

would regard the organisation of Valve as unusual. There are no managers and all staff have equal

status. Employees can sit where they want, work on whichever project they choose and even decide

their colleagues’ pay. Also, once a year they all go on holiday together. According to one Valve

employee, D. J. Powers, he doesn’t report to anyone and no one reports to him. He says ‘We're free

to choose to work on whatever we think is interesting. People ask you questions about what you are

working on. And the response is not to get defensive but to have that conversation and make sure that

we're all invested in each other.’

There are some benefits of flatter structures. With flat structures, communication is better because the

chain of command is short. Communication may be quicker and there is less scope for messages to

be distorted. For example, in a tall structure, a message from a store manager might say ‘Can you ask

Marion if she would like to work an extra 4-hour shift on Sunday.’ But by the time it has been passed

through all seven layers in the hierarchy, Marion might receive a message which says ‘The manager

said you have got to work an extra shift on Sunday morning.’ Clearly, these two messages have very

different tones. In the case of Valve, such messages are not needed. This is because employees are

responsible for their own working arrangements. Employees do not have to report to anyone and they

are free to move around the workplace and communicate directly with anyone they choose.

Communication will be direct and there is no chain of command through which messages would pass.

With flatter structures, management costs are lower because there are fewer layers of management.

Decision making may be quicker because approval from several managerial layers is not required.

Also, employees may better motivated because they are less closely controlled. Indeed, in many flat

structures employees are empowered. They have more responsibility for organising their work and

may be allowed to solve their own problems. This can help to make their work more interesting. One

employee at Valve said ‘I think the fact that we're not managed by people and we're not managing

people and you're able to formulate your own ideas and work with whoever it is to come up with a

project or feature – that's empowering,’

Academics that have studied the effectiveness of flat organisations reckon that one of the main

reasons why they work is because they encourage staff interaction – dialogue and information

sharing. They also attract high quality staff or ‘elite performers’ as one academic put it. However,

Powers suggests that the structure works because it was the way the organisation was originally

designed. It has always been like this. He also says that it might be a mistake to try and introduce

such a flat structure in an organisation that has traditionally been hierarchical.

However, there are some drawbacks with flatter structures. Managers may lose control of the

workforce because the span of control is too high. As a result, discipline may be lacking which could

have a negative impact on productivity. There could also be co-ordination problems if managers are

responsible for too many subordinates. In the case of Valve there does not appear to be problems of

this nature. However, if the company encountered some problems and performance dipped, a lack of

managerial direction might make the situation worse. Some employees might need guidance and

support from senior members of staff during a crisis, for example.

In this case, the flat organisation structure used at Valve appears to be effective. Valve is a privately-

owned company so details about its revenues and profits are not widely distributed. However, it is

reckoned that its most popular product, Steam, controls between 50 and 70 per cent of the US$4000

million downloadable PC games market. It has also been reported that Valve generates higher profits

per employee than both Apple and Google. This provides some evidence to suggest that a flat

structure works well for Valve.

17 MOTIVATION IN THEORY AND PRACTICE

ACTIVITY 1

CASE STUDY: UJJIVAN FINANCIAL SERVICES

1. Explain one reason why motivation is important to a business like Ujjivan.

Businesses will gain a lot if their workforce is motivated. Generally, people will be happier, easier to

manage, more productive, more cooperative and more open to change. In this case, the CEO at

Ujjivan understands the importance of a well-motivated workforce. He believes that customers can

only be happy if the employees are happy. Ujjivan treats employees as important stakeholders.

Consequently, if the workforce is happy, the quality of service that customers receive will be better.

This means that it will be easier for the business to retain existing customers and attract new ones.

This will help to generate more revenue and profit for Ujjivan.

2. Identify two of Herzberg’s hygiene factors at Ujjivan.

Herzberg discovered that certain factors at work would help to give employees job satisfaction, which

he called motivators. He also found that other factors can leave workers dissatisfied. He called these

hygiene factors. In this case it would appear that Ujjivan offers staff a number of benefits that could be

described as hygiene factors. For example, all employees are offered the chance to buy esops (stock

options for employees) depending on performance. Employees are also required to take 10 unbroken

days of holiday each year – this is in addition to their casual leave. The company believes that staff

need time in addition to regular leave to reconnect with themselves and their families. Female

employees also have access to free crèche facilities. This helps new mothers when they return to

work. Such benefits should help to keep levels of dissatisfaction low at the company.

3. Explain one factor that will help to motivate staff at Ujjivan according to Herzberg.

According to Herzberg, motivators include sense of achievement, chance of promotion, chance of

improvement, recognition of effort, responsibility and the nature of the job itself. In this case, one thing

appears very clear. Staff enjoy working for the company and they are motivated by the job itself. One

of the main reasons why employees think Ujjivan is a great place to work is because the work itself is

interesting and satisfying. For example, one employee, management associate Mantasha Mizaj, says

that the best thing about working for Ujjivan is the excitement and energy that you get from working

with such a young workforce, combined with the opportunity to work with experienced seniors. She

also enjoys the meaningful social work that the job involves. It drives her enthusiasm to be part of

Ujjivan. In 2016, the company was ranked third among the top 25 companies to work for in India by

the Great Places to Work Institute in partnership with The Economic Times. This supports the view

that staff are well motivated and enjoy their work.

ACTIVITY 2

CASE STUDY: PAID BY OUTPUT

1. Explain the payment system used in this case.

Some workers are paid according to how much they produce. This system is called piece rates or

piecework. In this example, the machinist is likely to be paid according to the number of garments

completed during a shift. For example, if the employee is paid £0.40 per garment and makes 160

garments in an 8-hour shift, the employee will receive £64 for the shift (£0.40 × 160).

2. Explain which motivational theory this payment system might be based on.

The main benefit of piece rates for businesses is that it rewards productive workers. Workers who are

lazy or slow will not earn as much as those who are conscientious and productive. This system helps

to motivate workers and businesses are likely to ‘get more’ out of their employees.

This payment system might be based on Taylor’s theory of scientific management. Taylor suggested

that, once the ‘best way’ to carry out a task had been identified, workers should be paid according to

what they produce. He reckoned that people should be paid ‘a fair day’s pay for a fair day’s work’. He

said that people are motivated mainly by money, and would work harder to earn more.

3. Explain one possible disadvantage of this method as a means of motivating machinists.

Although piece rates reward workers who are conscientious and productive, the system of payment

has its problems. For example, the quality of output may suffer if people work too fast. They may take

short cuts and make mistakes. In this case, the quality of stitching might be poor – a machinist might

not sew in a straight line, for example, which could spoil the appearance of the garment. Also, workers

might use dangerous practices as they try to work fast. For example, machinists may remove

protective guards to speed up production and therefore risk injury.

ACTIVITY 3

CASE STUDIES: PRP IN FOOTBALL

1. What is performance-related pay?

Performance-related pay (PRP) is a pay system designed specifically to motivate workers. Introduced

in the 1980s and 1990s, it is used in a number of countries around the world to pay white-collar

workers, such as bankers and other employees in financial services. PRP gives workers extra pay for

achieving work-related targets. The extra pay may be a fixed sum or it could be a percentage of a

salary. Some PRP systems make distinctions between levels of achievement. For example, one

employee’s performance might be rated as ‘excellent’ and therefore entitled to a 10 per cent bonus.

Another might be rated as ‘good’ and receive a 5 per cent payment. In this case, footballers at some

clubs are receiving remunerations with a lower basic pay and a larger variable element linked to

performance.

2. Explain one reason why football clubs are introducing performance-related pay.

An increasing number of football clubs around the world are making more use of PRP in their

organisations. One reason for this is to avoid a situation where a highly expensive player ends up

‘seeing out’ his €50 000 a week contract (for example) by playing in the reserves or sitting on the

substitutes’ bench. This might happen because he suddenly loses form or because the player was

purchased by a manager that has now been replaced. This is clearly wasteful for a football club and it

is also something that irritates supporters. The introduction of performance-related pay in football

should help to reduce costs and improve motivation. It will reduce the amount paid to footballers who

fail to perform.

3. Explain one possible problem of using performance-related play to reward footballers.

In football, there are two main approaches to determining PRP. One is to reward individuals for their

contributions on the pitch – individual bonuses for goals scored, the number of ‘assists’ or the number

of ‘tackles’ won, for example. There is a problem here though. Historically, the analytical tools used to

measure player performance lack sophistication. They are not able reward players without affecting

their conscious decision making during games. For example, goal bonuses encourage players to

shoot instead of passing, assist bonuses encourage players to pass instead of shooting, rewarding

pass-completion percentage means players will play too cautiously and rewarding forward passes

means they will take too many risks. Generally, if players’ incentives are linked to such shallow and

one-dimensional measures of performance, they will focus on the numbers and creativity in football

will be stifled.

However, the statistical analysis of player performance is improving. One British company, Opta

Sports, leads the world in analysing live sports data. It gathers information from 35 different leagues

around the world and monitors the games from a live video stream in locations such as London,

Leeds, Munich, Madrid, Milan, Paris, Amsterdam, Montevideo and New York. Three analysts are

employed per match. One covers the home team, one the away team and a third monitors quality

control. For example, when a free-kick is hit into a defensive wall and play continues, the first two will

carry on in their individual roles. However, the third person reviews their footage and assigns the block

to a player in the wall. A spokesperson said ‘We measure passes by using a mouse over a grid of an

overhead view of the pitch and hot keys … There are 16 different types of pass in our categorisation

such as long ball, high ball and through-ball and we’re very clear when it comes to differentiating the

various classifications.’

EXAM PRACTICE

KAPLINSKY MARINE

(a) (i) Define profit-related pay. (2 marks)

Some employers link pay to the profit made by the business. This means that all, or part, of the

earnings received by employees is linked to the profit for the year. In this case, Kaplinsky Marine links

part of employees’ earnings to profit. All staff, after 2 years’ service, receive profit-related pay. In

addition to their basic annual salary, employees receive 0.05 per cent of the profit made by the

business each year.

(ii) Calculate the annual profit-related bonus per employee in 2017. (4 marks)

In 2017, the annual profit-related bonus per employee is given by:

0.05% × 35 500 000 = 35 500 000 ÷ 100 × 0.05 = 17 750

(b) Explain one possible drawback of profit-related pay. (4 marks)

Profit-related pay is often used to help motivate staff. It helps to unite the objectives of shareholders

and employees. If employees work hard and raise their productivity, the business will make higher

profits and their pay will be higher. However, there is one serious drawback with this method as a

motivator. The profit made by a business does not solely depend on the efforts of the workforce. Profit

levels can be influenced by the decisions made by leaders and management. They can also be

affected by external factors such as the state of the economy. If employees work very hard but their

company makes a loss as a result of a poor managerial decision, for example, inevitably there will be

some resentment and dissatisfaction.

In this case, Kaplinsky Marine make luxury yachts. It could be argued that such products are income

elastic. Therefore, a slowdown in the economy could see sales of luxury yachts hit quite hard. This

might have a significant negative impact on the earnings of workers at Kaplinsky Marine.

Employing a flexible workforce has a number of benefits for a business. For example, it can cope with

fluctuations in demand more easily and extend opening hours. However, flexible working may also

help to motivate workers. This is most likely if staff can choose their hours of work, work from home or

take lengthy periods of leave, for example. In this case, Kaplinsky Marine offers term-time only

contracts, 4-day week contracts and unpaid long-term leave. It has also shortened the hours of some

office-based staff in return for extending opening hours from 7.00 a.m. to 7.00 p.m. Office staff work

from either 7.00 a.m. to 1.00 p.m. or 1.00 p.m. to 7.00 p.m. They are free to switch shifts to suit their

personal needs provided the office is fully staffed for the 12-hour working day. Staff are also

encouraged to switch teams and learn new skills – particularly in production. These flexible

arrangements are likely to benefit a number of workers and as a result, employees may feel better

motivated.

(d) Assess the extent to which Kaplinsky Marine meets the needs of employees as identified by Maslow. (10

marks)

Employees have a range of needs and Maslow argued that businesses could motivate people by

satisfying these needs at work. Maslow arranged these needs into a hierarchy and presented them in

the shape of a pyramid. At the bottom of the pyramid was the physiological needs of the workforce –

needs such as food, shelter, drink and rest. Maslow argued that employers could help satisfy these

needs by providing a living wage and good working conditions. In this case, Kaplinsky Marine provide

a free breakfast for all employees. Also, in addition to their basic annual salary, employees receive

0.05 per cent of the profit made by the business each year. This arrangement was agreed in 2011

after an employee vote showed 87 per cent support for its introduction. An internal survey also

showed that 79 per cent of staff were happy with their remuneration and benefits. This suggests that

the physiological needs of workers are being met by the business.

The second level of needs in the hierarchy are safety needs, such as protection from danger,

insecurity and other threats. In this case, Kaplinsky Marine appear to meet these needs. For example,

94 per cent felt that their employment at the company was secure. There is nothing in the case to

suggest that these safety needs were not being met.

The next level of needs is love and belonging. This means that people want to work with colleagues

that support them and get opportunities to communicate with others and perhaps work in teams. In

this case, the workforce is divided into teams of around 20. Each team concentrates on a specific

process, task or business area. For example, design, hull-making, joinery, assembly, fitting, finishing,

administration, marketing and finance. Working in teams will give staff plenty of opportunity to

communicate and build up relationships. Kaplinsky also provides a free fitness centre and sports club.

This will provide further opportunities for staff to mix and develop friendships.

The second highest level of needs are esteem needs. This means that people want to be given

recognition for doing a job well. In a survey at Kaplinsky, 87 per cent felt valued by the company and

88 per cent said that managers/team leaders were supportive and open. Kaplinsky also appreciates

the importance of training in the organisation. Every new employee recruited to a team undergoes a

6–12-month training period and is assigned to a mentor – an experienced member of staff with special

responsibility for mentoring. Investment in training suggests that the company values its workers and

recognises that they have skills which can be developed. This shows that people’s efforts are

appreciated and also rewarded.

Finally, people like to reach their full potential at work. This is a self-actualisation need. At Kaplinsky

the personal development of staff is taken seriously. Ninety-three per cent said the company provided

opportunities to reach their full potential and learn new skills. The mentor system used by Kaplinsky

was introduced to improve training and enrich the jobs of experienced workers. They are sought-after

roles and carry a special allowance. This will help to meet self-actualisation needs.

Evidence in the case suggests that Kaplinsky Marine makes every effort to meet employee needs.

Over many years of trading the company has developed a highly skilled and well-motivated workforce.

The company has created a team of specialists, each highly qualified within their field and who work

with shared passion, enthusiasm and commitment. This suggests that staff here are very well

motivated and that their needs, as described by Maslow, are being met by a responsible employer.

18 LEADERSHIP

ACTIVITY 1

CASE STUDY: DA HINGGAN AIRLINES

1. Assess the advantages and disadvantages to Da Hinggan Airlines of employing an autocratic leader.

Wen Ailing has been described as an autocratic leader. This means she makes all key decisions

herself and expects her management team to implement them without too much question.

The main advantage of this style is that decisions can be taken very quickly. There is no lengthy

consultation and decision-making process, which would use up business resources. This helps to

save the business money. This style also allows a business to respond to events quickly. It might give

a business a competitive edge if a company can respond quickly to changes in the market place, for

example. Autocratic leaders can be overpowering and oppressive, but they can also provide some

security for staff, if they believe in their leader.

Evidence of Ailing’s authoritative approach was witnessed a few years ago when a cloud of volcanic

ash headed towards UK airspace and the government grounded all flights. Ailing said the closure was

too lengthy and proceeded to fly Da Hinggan Airlines planes. It was argued that she called the

government’s bluff and as a result the ban was lifted.

This autocratic leadership style seems to have served Ailing and Da Hinggan Airlines very well. Her

decisions have helped to grow the company. Figure 2 shows that, between 2011 and 2015, Da

Hinggan Airlines’s revenue grew by around 50 per cent, from just under £4000 million to just under

£6000 million. When Ailing was appointed she identified that slow decision making was a problem.

She felt there were too many levels of management, and too many people had to discuss and approve

decisions before change could happen. To stop this being an issue, Ailing took swift action and made

50 people redundant, removing an entire management layer and placing herself closer to key people

in the organisation’s structure.

However, an autocratic leadership style is often criticised. It is argued that this approach means staff

can become too dependent on the leader and that it can lead to low motivation levels. High levels of

supervision are then needed to ensure that employees carry out their tasks effectively.

The style can also lead to conflict. For example, there was a fractious dispute between Da Hinggan

Airlines and the airline’s cabin crew. Although there are no details here, it probably meant that strikes

were threatened and employees very unhappy.

To conclude, when Ailing took over at Da Hinggan Airlines, the company was struggling since it

appeared that competitors were adapting more quickly to market trends. Today, revenues are rising,

and the company’s financial performance is improving. In this case, the advantages of autocratic

leadership probably outweigh the disadvantages.

ACTIVITY 2

CASE STUDY: WARREN BUFFETT

1. Explain the style of leadership used by Warren Buffett.

Warren Buffett has used a laissez-faire style of leadership – in other words, a more ‘hands-off’

approach. A laissez-faire leader provides others with the proper tools and resources needed, and then

backs off. The leader gives little guidance and direction, and allows others the freedom to make

decisions.

2. Explain one reason why this style of leadership has been successful at Berkshire Hathaway.

Berkshire Hathaway is a holding company. It owns many businesses in a wide variety of sectors such

as confectionery, retail, railroad, home furnishings, vacuum cleaners, jewellery and newspaper

publishing, along with several regional electric and gas utilities.

Many of these businesses will have their own distinctive cultures, and each is likely to require a

specific managerial approach. Therefore, Buffett appoints a person whom he thinks has the right

attributes, skills and experience to run each business, then gives that person complete autonomy and

enough resources to meet company objectives. Buffett puts a great deal of trust in his employees,

which creates a motivated and energised atmosphere. However, if these employees need guidance or

support, Warren is always available for consultation.

3. Assess the possible benefits to Berkshire Hathaway of this style of leadership.

The laissez-faire leadership style seems to have worked very well for Warren Buffett and Berkshire

Hathaway. In 2016, the business employed 367 000 people and generated US$223 604 million in

revenue.

One of the main benefits of this style of leadership is that staff members feel trusted and valued. This

gives them confidence and helps to motivate them, creating an energised atmosphere. As a result,

employees work hard because they feel in control and that their efforts will be recognised.

This leadership approach is most effective when employees are highly skilled, experienced, motivated

and capable of working on their own. Buffett has been successful in recruiting such people.

However, laissez-faire leadership is not ideal in many situations. This is particularly the case if

employees lack the experience or knowledge needed to complete the tasks or make decisions. Also,

some people are not capable of setting their own deadlines or managing their own projects. Some

people may lack the motivation they need to get certain tasks done on time. Such people usually need

an extra ‘push’ from the leader.

In this case, though, laissez-faire leadership has worked well. The problems outlined have not arisen

because the right staff have been appointed.

ACTIVITY 3

CASE STUDY: MENOS DE 10S

1. Discuss two changes that might have occurred in Adriana’s business role over the years.

If an entrepreneur sets up a business and it becomes very successful, the role of the entrepreneur is

likely to change as it expands. Running a sole trader business with two employees and a modest

turnover is a different challenge to running a large plc with hundreds of employees and a huge

turnover. The change in role stems from the need to deal with growth. For example, growth in the

number of employees, the number and size of financial transactions, the number and size of

customers, the amount of regulation and the quantity of resources used.

The transition from entrepreneur to leader is likely to require a number of changes in the way the

business is run. This usually means that entrepreneurs have to adapt and perform different functions.

For example, there is a need for formality. Small businesses can be run on an informal basis. They

employ just a few employees and communication between them can be ongoing since they are likely

to be working in close to each other. Decisions can be made quickly because the entrepreneur is

always at hand. However, in a large organisation, where the entrepreneur becomes a leader, there is

a need for formality. Communication between hundreds of employees requires systems and formal

structures. The business is likely to be split up into departments or divisions. There will have to be

formal communication channels which are recognised and approved by all staff. There will be a need

for a formal organisational structure so that the business can be controlled and employees brought to

account. The entrepreneur in a small business will become a chairperson or a senior executive with a

leadership role.

Another likely change is the increasing need to motivate the workforce. As the size of the business

grows there is a need to focus more on the workforce. This is because there are a lot more people to

manage. As entrepreneurs develop into leaders, there is a greater need for motivational skills. Some

people are self-motivated but most people need encouragement and well-defined goals that leaders

have to provide. Workers are also likely to look to the leader for support and inspiration. Leaders also

have to develop the talents of others. In this case, Adriana has tended to employ young and flexible

staff, which she has motivated with her warm and enthusiastic brand of leadership.

(b)2. Discuss two problems that Adriana encountered when making the transition to corporate leader.

Adriana is now considered a highly competent leader. However, the transition from entrepreneur to

leader was not without problems. Initially she was overwhelmed by the increased responsibility. As an

entrepreneur running a small business, Adriana obviously had responsibility to employees. They have

needs which must be met. However, as Menos de 10s grew into a chain, the number of people

employed rose considerably. The livelihoods of these people will often rest on the decisions made by

the leader. This is an enormous responsibility. Adriana may also have had responsibility to other

stakeholders such as shareholders, suppliers and customers.

Adriana also had a problem changing expectations of herself. She realised this during a break that

she took from running Menos de 10s. Entrepreneurs usually have a desire for greater control over

their life, career and destiny. They want more autonomy. They want to do things their own way.

However, a different approach is needed when the business grows. Leaders have to give up some

control. They have to learn to delegate and focus on different things. They have to believe that

specialists will do a better job in certain fields. They cannot do everything for themselves. For some

people, this is extremely difficult. They have doubts, fears and a lack of trust, which could create a

barrier to development. Fortunately, Adriana eventually realised this and changed her approach.

3. Explain two possible methods of coping with stress.

Running a huge business organisation is challenging and often exhausting. This can cause stress and

possibly result in health problems. It is important to reduce stress levels and there are various

strategies that can be used to help. One approach is to take regular exercise. Exercise is known to

improve your health and general well-being. Exercise also releases chemicals in your body called

endorphins. These help to reduce pain and produce feelings of pleasure. Exercise might also help to

reduce anxiety and depression.

It is also important to organise a balanced lifestyle. Busy people need to appreciate the need to take a

proper break from work to relax, spend time with family and friends and pursue hobbies and interests.

If a busy person takes time out to relax and enjoy themselves, they will be in a better frame of mind

when returning to work. They will be more productive and less tired.

EXAM PRACTICE

UPPSALA TRAVEL

(a) Explain one characteristic of an effective leader. (4 marks)

Good leaders need to have a number of key characteristics to be successful. For example, effective

leaders have a positive self-image, backed up with a genuine ability and realistic ambitions. This is

shown in the confidence they have. An example in the UK might be Richard Branson, in his various

innovative business activities. Leaders also appreciate their own strengths and weaknesses. It is

argued that many managers fail to lead because they spend too much time focusing on in short-term

activity. Leaders need to be able to get to the ‘core’ of a problem and make decisions swiftly.

(b) Explain one benefit to Uppsala Travel of Lotta’s style of leadership. (4 marks)

The democratic leadership style used by Lotta has some significant advantages. The main one is that

better-quality decisions might be made, because more people have an input in decision making. If

several people are involved in decision making, there are likely to be more ideas. In this case, Lotta

and four senior managers make the decisions, so key business issues are discussed by five people

with a wealth of knowledge and experience between them. This should lead to a more powerful

generation of good ideas. There will also be more people to analyse and evaluate these ideas. Finally,

Lotta received ideas from her staff through the regular voluntary meetings she held. By using a

democratic leadership style, she was able to tap into the ideas of the whole organisation.

other factors. (20 marks)

(i) Before the management buy-out, when Lotta took charge of Uppsala Travel, it was performing

badly. It had debts of SEK 11.7 million and was struggling due to the economic recession. However,

the management team believed that the previous owners had run the business very badly. They had

made some inadequate marketing decisions and provided very poor leadership. Also, motivation

levels were dire before the buy-out. Between 2010 and 2012, the company made a loss. By 2016,

under the leadership of Lotta, the company’s financial performance improved radically. In 2016, the

profit after tax was SEK 13.35 million. This suggests that Lotta has led the company to success.

There is plenty of evidence in the case study to support this view. Lotta led the company with

confidence and verve. She had charm, was well liked by staff and led by example. All key decisions

made by the business were ‘thrashed out’ at management meetings. In the early days of the buy-out

some of these meetings were hard work and lasted for several hours – sometimes a whole day. At the

end of the meetings, the four senior managers and Lotta would vote on new company policies. Most of

the votes were carried unanimously. She also consulted staff and held voluntary meetings in work

time to get their views and ideas. Lotta had introduced a democratic leadership style, which certainly

seemed to produce results.

(ii) The success of the business may have been the result of a range of other internal and external

factors. Internally, the new website was starting to attract an increasing amount of traffic and bookings

made via the website had doubled in two years. The marketing agency was also producing good

results – it was expert at placing ads that the target market would see. Additionally, the sales team

were probably performing well as a result of the new payment system, which was helping to motivate

staff.

Externally, as the economy started to grow in 2014, consumer confidence improved and the holiday

industry in general picked up. Demographics were working in the company’s favour; the proportion of

people aged over 55 in the Sweden was a fast-growing sector.

So, although Lotta’s leadership style may have been a significant factor in the company’s success, a

range of other factors may also have made a contribution. It is difficult to separate out the impact that

each individual factor makes on a company.

19 ROLE OF AN ENTREPRENEUR

ACTIVITY 1

CASE STUDY: TRAVELIBRO

1. Explain one role played by an entrepreneur when starting a business. Use an example from the case to

illustrate your answer.

Businesses such as TraveLibro are started by entrepreneurs. These are people who have a business

idea and want to profit by investing money in their idea. They do this by acquiring resources,

organising them and setting up a business venture. In this case, Monish Shar and Malhar Gala are

entrepreneurs. They set up a travel social networking portal designed to connect users with fellow

travellers, bloggers, travel agents and other industry partners. One important role played by these

entrepreneurs is taking a risk. They both invested quite large sums of money into the venture. If the

business were to collapse they may risk losing some, or all, of this money.

2. Explain how the roles of Monish and Malhar might change as their business grows into much larger

organisation.

When Monish and Malhar first set up the business, they were both employed full-time. They had to

combine setting up a business with going to work every day. They worked extremely hard – often only

sleeping for 3 hours a night. In the early stages of business development, entrepreneurs like Monish

and Malhar will be heavily involved in the day-to-day running of the business. However, they

employed some staff in 2014 to help out and the business went from strength to strength. TraveLibro

launched its website in August 2015 followed by its app in December 2015. Since then the website

has received over 400 000 unique visits and 20 000 app downloads from users in 49 different

countries.

Assuming that the business continues to grow, the roles of entrepreneurs are likely to change. Monish

and Malhar are less likely to be involved in the day-to-day running of operations and more concerned

with business development. They may also have been involved heavily in recruitment – making sure

that the right type of people were joining the company. They would have been keen to ensure that all

new staff were ‘up to standard’ and may have undertaken some training. They may also have been

very involved in developing new clients such as travel agents and advertisers. Other tasks such as

financial management, marketing and human resource management might have become more

important. It is very common for the role of entrepreneurs to change as the business expands and

develops.

Monish and Malhar are ambitious, so they want TraveLibro to be the world’s biggest travel social

network. If this happens, eventually they will play little role in the day-to-day running of the business.

They will be more focused on managing the direction of the company and designing strategies for the

future.

ACTIVITY 2

CASE STUDY: GOOGLE

1. What is the difference between an entrepreneur and an intrapreneur?

Intrapreneurs are employees, usually in large businesses, who use entrepreneurial skills to find and

develop initiatives that will have financial benefits and promote innovation within a company. These

might be new products, services or systems. However, unlike entrepreneurs, intrapreneurs that fail will

not suffer financially. It would be the employer that carries the financial burden of failure. In this case,

Google introduced a programme called ‘Innovation Time Off’ to help develop an entrepreneurial spirit

in the organisation. Google allowed its employees to spend 20 per cent of their time at work

developing their own individual projects. This approach was to encourage innovation, creativity and

original thinking.

2. Explain the possible benefits to Google of its ‘Innovation Time Off’ programme.

Intrapreneurs can drive innovation in a business and uncover new commercial opportunities. This can

help a business gain a competitive edge and increase profits significantly. In some cases the

discoveries and inventions made by intrapreneurs can have a huge positive impact on a business. A

number of years ago, Google’s founders, Larry Page and Sergey Brin, talked about how they had

empowered their employees to be more creative and innovative by encouraging them to take 20 per

cent of their day to work on ideas that would most benefit Google. This approach resulted in the

development of some of Google’s most successful products. One such project in the case of Google,

started by Paul Buchheit, was the development work for Gmail, particularly the search function and

increased storage capacity. Today, Gmail remains one of the most widely-used email platforms on the

web, driving key traffic to Google’s products. In addition to Gmail, intrapreneurs have developed some

of Google’s most successful products including Google News, Google Maps, Google Talk, AdWords,

AdSense, Driverless Cars and Google Glass.

3. Explain why Google has reduced the role of intrapreneurs in recent years.

Google’s approach to innovation has been modified recently. It now has a more targeted innovation

programme, which is directed by senior management. This is because Google is now a huge global

business. It has a number of highly profitable products that need to be fully exploited to maximise the

financial benefits. As a result, a different approach to innovation is needed compared to the

‘Innovation Time Off’ programme employed when Google was an emerging force searching for new

products. A different culture, and a workforce with slightly different characteristics is needed to

capitalise on its current highly successful products.

However, there are risks to this change. Innovation will now involve fewer personnel selected for

focused projects. This might mean that creative staff will be more difficult to recruit and the flow of

innovative concepts and potential new products will diminish. Google does still encourage individual

employees to pursue their own ideas, but the amount of time and financial support they get is probably

less than it was ten years ago.

EXAM PRACTICE

PIOTR SANTOS

(a) Explain one risk that Piotr has taken in this case. (4 marks)

Entrepreneurs are risk takers: they risk losing any money they put into the business if it fails. In this

case, Piotr risked £12 000 of his savings when setting up his restaurant. Fortunately, the business

became very successful, but if it had collapsed he could have lost the entire £12 000. Also, if he is

operating as a sole trader he would be liable for any debts the business had accrued, because sole

traders have unlimited liability. However, in this case the risk paid off. In 2013, his restaurant made

£48 000 profit.

(b) Explain one factor that could have affected where Piotr decided to locate the restaurant when setting up

his business. (4 marks)

One of the stages in setting up a business is finding a suitable location. The importance of location

depends on the nature of the business. Many entrepreneurs, such as tradespeople, tutors and website

designers, operate from home. However, a shop, beauty parlour, solicitor’s office or a restaurant

needs to be located near the target market.

Piotr spent a lot of time finding a suitable location for the restaurant. He felt it was vital to find exactly

the right place, which would be both attractive and convenient for the Polish community he was

targeting. He contacted 12 estate agents and asked them to help with his search. Eventually he found

some empty premises in a part of the city frequented by the Polish community. It was also on a bus

route that was used by Polish people coming into town. Finding the right location in this case could

have been partly responsible for the success of the business.

marks)

There are a number of barriers that discourage many would-be entrepreneurs from getting started.

These include a lack of entrepreneurial capacity, reluctance to employ staff, ‘red tape’, a lack of ideas,

aversion to risk and fear of failure. In this case, the potential barrier was lack of finance. Piotr had

saved £12 000, but needed a further £8000.

Piotr made appointments with four banks to discuss funding, but his meetings were fruitless: none of

them was interested in lending him the £8000 he needed. He approached the Polish community to

see if anyone would be interested in making a private loan. He had one offer of £5000 but Piotr could

not accept the lender’s terms. He was on the verge of giving up when a friend mentioned peer-to-peer

funding – getting a loan from unrelated individuals online via a specialist website.

Lack of finance is often a barrier to entrepreneurship because the providers of capital and loans may

be reluctant to lend money to entrepreneurs. The failure rate is high for new businesses, and financial

institutions cannot afford to lose money. In 2012, around 400 000 new businesses were set up but 20

per cent failed in the first year. A further 50 per cent were not expected to survive into 2015.

(d) Assess the impact on Piotr’s role in the business as it started to expand. (10 marks)

After the successful launch of the restaurant, Piotr presumably became immersed in the day-to-day

running of the business. For many entrepreneurs, this involves working in production. Piotr was the

head chef, so a lot of his time would have been spent cooking in the kitchen.

However, running a business requires entrepreneurs to undertake a range of other tasks that are

crucial to the success of the business. For example, it would have been important for Piotr to ensure

that the business had enough money to fund its operations. This might involve producing cash-flow

forecasts, making payments and monitoring cash movements into and out of the business.

Piotr would also have been responsible for the paperwork. A business must keep a record of all its

transactions so that profit and tax liabilities can be calculated. It may be necessary to send out

invoices, payment demands and receipts, keep stock records, process wage slips, deal with the tax

authorities and comply with legislation.

Another important task carried out by Piotr would be purchasing. The restaurant would need

resources such as food and beverages. It might also have needed commercial services, such as

cleaning, printing and accountancy. Piotr would have been responsible for this, although he could

have delegated some of the tasks to junior staff if he felt they were capable. Piotr would also be

responsible for his staff, which would involve recruitment, selection and training. These may have

been new skills.

As the business grew, Piotr would have found that his role changed quite significantly. Once he

started to open other restaurants in 2014, he would have been involved in other types of work. He

would have gradually reduced the time he spent in the kitchen, and more of his time would have been

spent on administration and financial management. With four restaurants to run, he would need to

develop strict control systems, to ensure that cash did not go missing, for example. He would also

have needed to recruit more staff – managers for each of the restaurants, for example. These

appointments would have been very important because he would have to trust them.

Piotr was becoming more involved in business development, with plans to open more restaurants and

develop a chain. As a result, he would have spent time searching for new locations, arranging finance

and developing a marketing strategy. For example, as the business grew there may have been a need

to carry out more market research, raise the profile of the business by using social media and invest in

some sophisticated promotions.

20 ENTREPRENEURIAL MOTIVES AND CHARACTERISTICS

ACTIVITY 1

CASE STUDY: KAVINDU KUMARA

1. Discuss whether Kavindu has the characteristics to become an entrepreneur.

It could be argued that Kavindu does possess some of the characteristics needed to be an

entrepreneur. Dilani De Silva, the Head of Year at Kavindu’s school, said in his final school report that

he is full of self-confidence, shows initiative and, when interested, can be extremely determined.

These are three of the important characteristics needed to be an entrepreneur. Successful

entrepreneurs are people who believe that they are going to succeed. They think they have a winning

formula for their business. They can persuade other people, for example, to buy the product or help

finance the business. Entrepreneurs also need to be determined. They need to think that they can

take control of events and turn them into something which will benefit the business. They also need to

be able to take the initiative in situations and be able to change.

Kavindu has demonstrated some of these characteristics. In December 2016, he organised a large

cricket competition in his local village. The event was well publicised. Kavindu put up posters in

neighbouring villages and he persuaded a local newspaper to write an article about the tournament.

On the day of the event, ten teams from neighbouring villages near Galle, Sri Lanka, turned up and so

did several hundred supporters and curious locals. Kavindu had organised a number of food vendors

and stalls to help make some money. The competition was a huge success and Kavindu made SLR

9800.

This is sound evidence that suggests Kavindu can become an entrepreneur – he already has

entrepreneurial experience. Finally, his report also says that Kavindu is a charming young man. He is

loyal, honest, open and friendly. This are very useful qualities to have as an entrepreneur.

EXAM PRACTICE

MAMA’S SPICES & HERBS

(a) Explain one characteristic that entrepreneurs must have to increase their chances of being successful. (4

marks)

Setting up a business is a common activity and many hundreds of thousands are set up every year in

different countries around the world. However, not everyone is suited to becoming an entrepreneur –

possibly because they do not possess the necessary characteristics. One of these important

characteristics is perseverance. Businesses commonly have successes and failures. There is always

an element of risk that a business could struggle or even fail. Therefore, successful entrepreneurs

have to show perseverance. They require the ability to get through the bad times and the setbacks. In

this case, Mikie Monoketsi set up Mama’s Spices & Herbs after a personal crisis. Mikie’s previous call

centre business and marriage both failed at the same time. This shows that she has the ability to

‘bounce back’ and persevere.

(b) Explain one reason why some entrepreneurs run their businesses from home. (4 marks)

Quite a number of entrepreneurs set up their businesses from home. They may be tradespeople, such

as plumbers, painters, small builders or electricians that use their home as a base for their business.

Or, increasingly, they may work from a room or an office at home. For example, self-employed writers,

accountants, software designers, tutors and financial analysts. There are two key benefits for

homeworkers. The time and expense spent travelling to and from work is eliminated. They also enjoy

more flexibility. For example, they can take meals and breaks whenever they want and a parent may

be able to fit work around the needs of their children.

Not only do entrepreneurs need to possess a number of important characteristics to be successful,

they will also need to use a wide range of different skills. To begin with, it helps if entrepreneurs are

qualified to some extent in their chosen line of business. For example, an entrepreneur setting up a

flying school may require piloting experience and an instructor’s certificate. Someone starting a

commercial radio station will need some broadcasting, transmitting and programming experience.

However, it is possible to set up a business in unfamiliar fields. There are also examples of

entrepreneurs entering quite diversified lines of business without any relevant experience.

In this case, Mikie Monoketsi emphasised the importance of good communication and networking

skills. Mikie used gyms to develop partnerships, get connected and meet people to help build her

business. For example, she met a helpful executive producer of a spice manufacturer at a gym who

gave her lots of useful advice. Mikie also appears on television and radio which gives her the

opportunity to explain her vision on health and fitness, demonstrate exercise routines and occasionally

promote her business!

Another important skill which Mikie emphasised was financial management. She said it was very

important to monitor spending and account for every single cost – especially labour, packaging, cost

of sales, and time. Mikie discovered that a failure to record all costs meant that even though she was

increasing sales she wasn’t making more money. She had failed to take into account the samples she

was giving out. Samples are very important in the food industry and their costs must be recorded.

Finally, she also recognised (eventually) that the business could not fund wasteful personal spending.

Such transactions were much reduced when she realised that the business was suffering. To keep up-

to-date with transactions Mikie recorded all expenses in a notebook and invoiced all customers. Once

she started doing this the performance of the business improved.

(d) Evaluate whether Mikie’s motives for setting up Mama’s Spices & Herbs were (i) financial or (ii) non-

financial. (20 marks)

People set up businesses for a wide range of reasons. For example, they may not want to work for an

employer any more, they may want to develop a personal interest into a business or they may have

been made redundant. A very large proportion of entrepreneurs start businesses because they want

to make money. They often think that they could earn far more if they worked for themselves. Profit is

the motivator for many entrepreneurs and most businesses would not exist if it wasn’t for the desire to

make a profit. Two approaches to generating profit can be identified. Some entrepreneurs try to make

as much profit as they possibly can in a certain time period. This is called profit maximisation. These

entrepreneurs are motivated by money and their key focus is the financial return on their efforts. It

might be argued that entrepreneurs that try to maximise profits are likely to take bigger risks. This is

because there is usually a direct relationship between risk and reward.

In this case, Mikie may have had a non-financial motive for setting up her business. She was

passionate about healthy eating and living. She carried out some research into the eating habits of

people living in the neighbourhoods of Diepsloot, Randfontein, Cosmo City and Lion Park. She found

that the spices people used were cheap and contained high levels of salt and other unhealthy

ingredients such as MSG, preservatives and bulking agents. These were considered unhealthy and

likely to contribute to high levels of illnesses such hypertension and diabetes. Mikie also discovered

what people were cooking – skop, mogodu, maotwana, kota (cows head, intestines, chicken feet,

bunny chow), potato chips, fish, braai, stews and curries and fried chicken. This gave Mikie the idea to

create her own set of healthy spices that would go well with these particular foods. However, her

herbs and spices offered better quality with health benefits at an affordable price. This might also be

regarded as an ethical reason for starting her business

It might also be argued that Mikie wanted to run her business because she was independently

minded. A lot of people want to be ‘their own boss’. This is an important non-financial motive for

setting up a business. These entrepreneurs are driven by the desire to be independent. The freedom

to make all the decisions when running a business is very appealing. Some people often dislike being

told what to do at work. According to an article and poll by Startups.co.uk, having the independence to

make your own decisions is considered the key benefit of being an entrepreneur. Nearly 90 per cent of

respondents said this was very important. Information in the case does suggest that Mikie is

independently minded.

Mama’s Spice & Herbs is established and growing steadily. Mikie is diversifying and targeting mainly

women with a range of health products such as Flat Stomach Tea and Flat Stomach Power Oats. The

business is strong and now provides an online shopping facility. Mama’s Spice & Herbs is currently

looking to recruit additional agents in the Western Cape, Northern Cape, Eastern Cape (PE and East

London), Free State, Mpumalanga, Limpopo and North West. Mama’s Spices & Herbs also has a

shop in Fontainebleau. Not only is Mikie making a lot of money for herself, she also helps to inspire

other young entrepreneurs to set up in business. To conclude, there seems to be a combination of

both financial and non-financial motives behind Mikie’s decision to set up Mama’s Spice & Herbs.

However, given the passion that Mikie has for healthy eating and the lengths she goes to promote a

healthy lifestyle, it could be argued that originally the main motivators here are non-financial’.

21 BUSINESS OBJECTIVES

ACTIVITY 1

CASE STUDY: SEARS

1. Using an example from this case, explain one reason why Sears might have pursued survival as a business

objective.

All businesses will consider survival as important. However, from time-to-time, survival may be the

most important objective. For example, a business might struggle to survive if new competitors enter

the market. If the new entrants have better products or more financial resources, existing businesses

may start to focus on survival at the expense of other objectives. The survival of a business might also

be threatened when trading conditions become difficult.

In this case, Sears has two clear problems that are threatening its survival. The slow economic

recovery from a deep recession has hit the store hard because its target market consists of middle-

and low-income consumers. Arguably, this group has been ‘hurt’ the most by the recession. However,

another problem has been stiff competition from ‘leaner’ operators such as Walmart, Home Depot and

Amazon. It was also reported that CEO Eddie Lampert thought that many of the Sears stores were too

large and in the wrong locations. If Sears fails to address these problems, the survival of the business

might well be threatened. Consequently, survival has become a clear business objective in this case.

2. Discuss whether the measures Sears has taken to survive are likely to be successful.

When the survival of a business is threatened, action has to be taken swiftly to stave off collapse. In

this case, Sears has taken a number of measures to help the business survive.

It plans to close more stores, so the number of stores will continue to fall. Sears once owned 3523

stores; in 2015, this figure had reduced to fewer than 2000. Presumably the stores targeted for closure

will be the marginal ones – those making a loss or making very little contribution to the business.

The business also plans to borrow more money – including US$400 million from a hedge fund owned

by Eddie Lampert.

Finally, between 200 and 300 buildings will be sold and leased back to improve liquidity. This will give

the business more cash, but also allow it to retain the use of the buildings.

Although the company has taken some positive measures to help it survive in the market, survival is

not guaranteed. Sears has seen its revenue fall for eight consecutive years, making losses in the last

four of those years; alongside this, competition is intensifying, not weakening.

Perhaps the business needs to invest in modernisation and pay more attention to online shopping, as

well as addressing the competitive pressure from modern retailers.

ACTIVITY 2

CASE STUDY: FANCYTHAT

1. Explain what is meant by a SMART objective.

Business performance is easier to assess if SMART objectives are set. This means that they should

be:

• Specific – stating clearly what is trying to be achieved

• Measurable – capable of numeric measurement

• Agreed – have the approval of everyone involved

• Realistic – able to be achieved given the resources available, and

• Time-specific – have a stated time by which they should be achieved.

In this case, Brad has set a number of SMART objectives. Once the business survived the first year,

his objective was to reach a turnover of AUD 400 000 by 2016. This is an example of a SMART

objective. It is specific (AUD 400 000 turnover), measurable (in money terms), agreed (there is no

reason here to suppose it wasn’t), realistic (it was achieved) and time-specific (achieve by 2016).

Brad also set other SMART objectives relating to his cost-cutting drive. His objective was to cut fixed

costs by 20 per cent and variable costs by 25 per cent, both by the end of the year.

2. Explain how Brad might cut costs in his business.

Businesses can cut costs in a variety of ways. For example, they can lay off staff to cut labour costs,

find new suppliers to get cheaper resources, increase the usage of recycled materials, develop new

working practices that use fewer resources and develop ways of saving energy.

In this case, Brad has distinguished between cutting fixed costs and variable costs. To cut fixed costs

he might target rent, advertising, insurance, leasing charges and other fixed overheads. He might

need to re-negotiate rent or move to new premises and find cheaper leasing companies and cheaper

methods of advertising, for example.

To cut variable costs he might target wages, raw materials, utilities, packaging, distribution and

energy. To reduce these variable costs, laying off staff is probably not an option since his business is

growing. However, he might find some cheaper suppliers of raw materials, energy and commercial

services.

EXAM PRACTICE

SONY

(a) Explain why survival may have been a business objective for Sony between 2009 and 2015. (4 marks)

All businesses will consider survival as important. However, from time to time survival may be the

most important objective. For example, when a business first starts trading it may be particularly at

risk. It often takes time for people to recognise the existence of a new business. Entrepreneurs may

lack experience and there may be a shortage of resources. Therefore, a target for a new business

may be to survive in the first 12 months. A business might also struggle to survive if new competitors

enter the market. If the new entrants have better products or more financial resources, businesses

may start to focus on survival at the expense of other objectives. The survival of a business might also

be threatened when trading conditions become difficult. During the global recession which followed

the financial crisis in 2008, many businesses around the world started to struggle for survival.

In this case Sony struggled between 2009 and 2015. Figure 1 shows that for most of this period Sony

was making losses. The biggest loss was in 2012 when the company lost JPY 4567 hundred million.

This might suggest that while Sony was struggling, their main business objective may have been to

survive in the market. Although Sony is a large multinational, it is still subject to strong competition and

other external events. Businesses cannot carry on trading at a loss forever – eventually they will run

out of money. In this case, the length of time the company was making losses tends to support the

view that it was struggling to survive.

(b) Explain how employee welfare might be a business objective. (4 marks)

Some businesses pursue non-financial objectives. For example, in recent years some have realised

the benefits of meeting the needs of employees more effectively. Therefore, another objective might

be to improve employee welfare. If employee welfare is improved, workers will be happier, better

motivated, more productive, more cooperative, more flexible and less likely to leave. A number of

measures can be taken to improve employee welfare. For example, a business could improve the

working environment by making it cleaner, less noisy and less crowded. It could ensure that staff are

given proper breaks and somewhere comfortable to interact with colleagues during those breaks. It

could also ensure that staff are equipped with the necessary tools and equipment, provide

ergonomically designed chairs for call centre workers, for example. Staff welfare might also be

improved if high standards of courtesy are maintained between all staff members. Improving

employee welfare is also likely to reduce staff absenteeism through sickness, enhance the image of

the business, help to comply with health and safety legislation and make it easier to recruit and retain

good quality people.

Profit is the driving force behind most businesses. Without profit most businesses would not exist.

However, some businesses focus on profit more aggressively than others. They want to make as

much profit as they possibly can. This is called profit maximisation. If a business pursues this

objective, it is usually because the owners have a powerful appetite for more profit. Arguably, this is

most likely to be the case if businesses are owned by institutional shareholders such as pension funds

and investment funds. These owners need to maximise the returns on their investments to meet the

needs of their clients.

If businesses want to maximise profit they will focus on keeping costs as low as possible while raising

prices as high as they can before customer loyalty is damaged. Skim pricing is often used by profit

maximisers. This involves setting the price of products high and selling to customers who are less

sensitive to price. Businesses that sell luxury items, such as designer clothes and expensive

perfumes, to a small but affluent customer base often use profit maximisation strategies. Sony may

use this pricing strategy for some of their products such as its PlayStation consoles. Some of the

products sold by Sony can be targeted at customers who like to own the latest technology, even at

higher prices.

To conclude, profit is likely to be very important for Sony. It is a multinational company and probably

owned by large institutional investors. These are important stakeholders and invest their money in

businesses in the hope of making good financial returns. If the company reduces dividend payments,

or stops paying dividends and the share price starts to fall, institutional investors may withdraw their

support for the company. They may sell their Sony shares and find alternative investments. Sony

made losses for quite a long period of time. However, some evidence in the case suggests that the

company retained the support of shareholders. In 2014, Kazuo Hirai, the Sony CEO, planned to

introduce an extensive cost-cutting programme and in 2015 Sony shareholders showed their support

for the CEO by reappointing him at an AGM. At the meeting, Hirai apologised for the poor financial

performance of the company and said that he and other senior executives would not be taking their

bonuses for the year.

(d) Assess the extent to which customer satisfaction is a business objective for Sony. (10 marks)

Most businesses will try to meet the needs of customers. The benefits are clear. If customers are

satisfied they are more likely to return. Loyal customers are valuable to a business. In order to win

their loyalty, some businesses aim to exceed customer expectations. In general, they may do this by

ensuring that all customer services staff are trained to a very high level in communication. Their

conduct must be polite, professional and friendly all of the time. They may also provide a platform for

customer feedback – an online review system for example. Increasingly, companies are interacting

with customers using social media – this helps to encourage a two-way flow of information.

Businesses may also deal with customer complaints promptly and effectively – to the satisfaction of

the customer and monitor customer service regularly – using mystery shoppers for example.

In order to have effective customer service, businesses must know what customers want, provide

them with it consistently and ask them how the business is doing. In this case, Sony has been seeking

to improve its performance in customer service (CS). In Sony’s 2016 annual report it said that Sony

was introducing measures to improve its CS function. Sony announced an initiative called the Sony

Pledge of Quality – ‘Sony employees will always respect our customers' viewpoints in striving to

deliver product quality and customer service that exceed their expectations.' For CS this meant

improvements in responding to changing customer needs and providing a high-quality repair service.

To help support the pledge and achieve the CS improvements, Sony appointed CS officers to

coordinate global CS operations and introduced key performance indicators, such as improvement in

rate of repair completion within a set period of time. It also set up a network of bases around the world

to meet the CS needs of local customers and provided ongoing training for staff in CS operations. In

addition, Sony provided more convenient and eco-friendly manuals. This will involve switching from

paper to online manuals and using pictures for instructions rather than text (wherever possible).

To conclude, the measures outlined above suggest that Sony takes customer satisfaction very

seriously. The company understands the importance of customer service and has used resources to

improve the quality of customer service. However, it is likely that profit is the most important objective

for Sony – especially after struggling for so long to make a profit. Sony might argue that the

improvements in the quality of their customer service are needed to help to company recover and

make more profit in the future. It is unlikely that customer satisfaction alone would be Sony’s key

business objective.

22 BUSINESS CHOICES

ACTIVITY 1

CASE STUDY: BRAZILIAN BIOFUELS

a. Using this case as an example, explain what is meant by opportunity cost.

When making choices, individuals, businesses and governments will face a cost once their choice has

been made. This is called the opportunity cost. This cost arises because a sacrifice has to be made

when making a choice. In this example, a business has placed its spending desires in order of

preference. Therefore, the opportunity cost can be identified. According to the list, Jemerson EthoFuel

would prefer to allocate the BRL 40 million to the upgrade of production facilities to improve efficiency

by 25 per cent. The opportunity cost of this choice will be the benefit lost from the next best

alternative. In this case it will be the benefit lost from not merging with another biofuel company to cut

costs.

ACTIVITY 2

CASE STUDY: BOEING DREAMLINER

1. What is meant by the trade-off between risk and reward?

One important trade-off is that between risk and reward. It is often necessary to take bigger risks in

order to reap higher rewards. However, with high risk there is the danger of large losses.

In this case, Boeing took a risk by outsourcing the design and manufacture of the new Dreamliner.

This was done to reduce development costs but problems were encountered and the financial

consequences are still being felt.

2. Assess the possible costs incurred by Boeing as a result of outsourcing its design and production of the

Dreamliner.

It has been reported that Boeing’s operations decisions relating to the manufacture of the Dreamliner

were too risky.

The company chose to have the jet designed and built mostly by other companies. This was to reduce

costs significantly. However, as a result, a number of relatively serious problems were encountered.

For example, the original delivery date of 2008 was significantly delayed, with the first Dreamliner

being delivered three years later in 2011. In the fuselage, many of the components failed to conform to

Boeing’s specifications. This was very expensive to rectify and caused delays. In January 2013, the

entire fleet of 50 Dreamliner planes was grounded after planes had problems with their batteries.

Some have suggested that outsourcing the design and production of the Dreamliner was a mistake. In

the absence of cost data, it is difficult to draw a meaningful conclusion. However, if there are further

delays and groundings, there will be both a loss of revenue and increased costs. There is also the risk

that passengers will choose not to fly on the aircraft because of its problems. The potential loss in

revenue this could cause might be the most damaging of all these costs, but it would take some while

for these figures to be known.

EXAM PRACTICE

OBERTAUERN FARM

(a) Explain what is meant by a trade-off when making a business decision. (4 marks)

Businesses have to make several decisions and decision makers are frequently faced with trade-offs.

This means that opting for one choice involves compromising another.

In this case, there is a trade-off between crop yields and environmental damage. Farmers can enjoy

higher crop yields, and therefore more revenue, if they use fertilisers and pesticides. However, the use

of fertilisers and pesticides, which contain harmful chemicals, is known to damage the environment.

Farmers, and society in general, have to decide whether to increase world food output at the expense

of damaging the environment or protect the environment and accept lower yields.

(b) Explain the opportunity cost to Obertauern Farm developing the campsite. (4 marks)

Opportunity cost arises because a sacrifice has to be made when making a choice between different

options.

In this case, Marko and Carina Almer are deciding how to spend the profit made by the business.

They have identified four options, which are placed in order of preference. They have elected to invest

in the development of a campsite on the farm.

The opportunity cost will be the benefit lost from the next best option – buying the holiday home in

Andalucia. This might include a possible income stream from renting it out, a capital gain in the

property and the pleasure they might have had staying there during holidays.

marks)

In this case, Obertauern Farm might try to undertake some market research to find out what

customers think about their plans to ‘go organic’. Obertauern Farm might also be able to generate

some revenue information from its research. It might gain access to cost data so that it can evaluate

as accurately as possible the costs to the business of the decision. The more quantitative data

gathered, the easier it will be to find the ‘right balance’.

(d) Assess the costs to Obertauern Farm of switching to organic production. (10 marks)

The choice between traditional farming methods and organic production may be a difficult one. If

Marko and Carina decide to switch farming methods to organic production, the impact is likely to be

significant.

A number of costs would have to be considered. Initially, it may be necessary to invest in new

machinery and equipment. One of the major costs is the extra time needed for organic farming. For

example, weed control is time-consuming and labour intensive. An important cost will be lower yields.

It is reckoned that the crop yields for organic farming are 19 per cent less than they would be using

traditional methods.

One problem is the extra damage to crops caused by pests. It is also suggested that water use rises

and some organic pesticides, such as copper, can remain in the soil and be harmful. The opportunity

cost, if the switch is made, would be the benefits lost from using traditional methods, such as higher

yields and the time saved in farming techniques.

Although the costs of switching farming methods are significant, there are some benefits. Marko and

Carina will get higher prices for their organic produce, which will help to increase revenue and

compensate for lower yields. Also, the organic food industry is worth over €1300 million a year.

Obertauern Farm may enjoy the benefits of trading ethically because of the environmental benefits,

such as the improvement in natural habitats, healthier food for people and increased biodiversity due

to fewer chemicals that harm bees and other insects.

Before making their final choice, Marko and Carina will have to weigh up the advantages and

disadvantages of the switch. Their decision might depend heavily on how ethically minded they are.

They may be prepared to accept less profit if they are happy in the knowledge that they are making a

contribution to the protection of the environment.