Business Paper 2

• Methods of internal (organic) growth


  new products(innovation, research and development)

  new markets(through changing the marketing mix or taking advantage of technology and/or expanding overseas)

  Changing the marketing mixFor example, the price might need to be changed so that the product appeals to the new market. Alternatively, the new market might not know about the brand at all, in which case the marketing mix would need to be changed to encourage people to try it.

  Taking advantage of technologyFor example, a business could use e-commerce to enable customers to buy products even if they do not live near its store. New technology may also mean items are cheaper to produce, so a business might be able to lower prices and target a lower-income market.

  Expanding overseasOperating in this way could give the business access to a brand new market, which could prove extremely successful and increase profitability. However, developing new, unfamiliar markets can be complex and expensive.
• The advantages and disadvantages of internal (organic) growth

  An advantage of internal growth is that it is low risk:

  a business can maintain its own values without interference from stakeholdershigher production means the business can benefit from economies of scale and lower average costs

  A disadvantage of internal growth is that it is slower growth:

  there maybe be a long period between investment and return on investmentgrowth may be limited and is dependent on the reliability of sales forecasts
• Methods of external (inorganic) growth

  MergerA merger occurs when two businesses join to form a new (but larger) businessTakeoverA takeover occurs when an existing business expands by buying more than half the shares of another business
• The four merger and takeover methods

  Horizontal integrationoccurs when two competitors join through a merger or takeover. The new business then becomes more competitive and increases its market share. This gives it more control when negotiating and setting prices.Forward vertical integrationoccurs when a business takes control with another that operates at a later stage in the supply chain.Backward vertical integrationoccurs when a business takes control of a business earlier in the supply chain.Conglomerate integrationoccurs when businesses in unrelated markets join through a takeover or merger. This enables businesses to spread their risk over a wider range of products and services.
• The advantages and disadvantages of external (inorganic) growth

  Advantages of external growth include:

  competition can be reducedmarket share can be increased very quickly overnight

  Disadvantages of external growth include:

  it can be expensive to takeover/merge with another businessmanagers may lack the experience to deal with the other businesses
• What is a public limited company?

  In a PLC, shares are sold to the public on the stock market. People who own shares are called 'shareholders'. They become part owners of the business and have a voice in how it operates. A CEO (chief executive officer) and board of directors manage and oversee the business' activities.
• The advantages and disadvantages of PLCs

  Advantages of being a PLC include:

  the business has the ability to raise additional finance through share capitalthe shareholders have limited liabilitythere are increased negotiation opportunities with suppliers in terms of prices because larger businesses can achieve economies of scale

  Disadvantages of being a PLC include:

  it is expensive to set up, requiring a minimum of £50,000there are more complex accounting and reporting requirementsthere is a greater risk of a hostile takeover by a rival company
• Define economies of scale

  Economies of scale arethe cost advantages that a business can exploit by expanding their scale of production. The effect of economies of scale is to reduce the average (unit) costs of production.
• Internal sources of finance


  Retained profitsRetained profitsare profits held back in the business for reinvestment rather than being issued as dividends.Advantages:cheap, quick and convenient, and there is easy access to the moneyDisadvantages:once the money is gone, it is not available for any future unforeseen problems the business might face

  Selling of assetsAnother internal source of finance is bysellingunwanted assets, such as machinery and equipment.Advantages:convenient, can create space for more profitable uses, and can be quickDisadvantages:the business might not get the full market value of the assets or even sell them at allthe business might also need the assets in the future

  The owner’s savingsA third source of internal finance is the business owner’s own savings.Advantages:cheap, quick and convenientDisadvantages:the owner might not have enough savings or may need the cash for personal use
• External sources of finance

  Loan capitalLoan capitalis a lump sum of capital borrowed from a bank and paid back in instalments.Advantages:regular repayments are made over a period of timeDisadvantages:sometimes it can take a while for a loan to be approved and the business may not even qualify for a loaninterest is applied, so this can be an expensive optionbanks may also ask for collateral (security) in case the business fails to make repayments

  Share capitalShare capitalis money raised when a business becomes a private limited company by offering shares to a select group of people in return for capital.Advantages:does not have to be repaid and no interest is applieda business can choose to whom it offers sharesDisadvantages:profits made by the business are paid to shareholders (these payments are also known as dividends), so control of the business gets diluted

  Stock market flotationStock market flotationis money raised when a business becomes a PLC (public limited company) by offering shares to the public to buy.Advantages:this option can raise large amounts of capital as it is easy for the public to buy shares through a stockbroker or bankthe shares don’t have to be repaid and no interest is appliedthe business can also gain recognition through this methodDisadvantages:it can be complicated and expensive and there is the possibility of losing control, as anyone can buy sharesthe profits are paid to shareholders and the business records are made publicthere is also the risk that some investors will only buy shares to make a quick profit by selling them when the share price increases
• Why do business aims and objectives change as businesses evolve?

  In response to:

  market conditions(A set of variables that dictate how competitive a market is for businesses.)- If a business is in a growing market, over time its aims and objectives may change to focus on growth.- If a business is in a market where there is suddenly an increase in competition, its aims and objectives may have to change to focus on survivaltechnology- For example, a business might create new innovative products or services, increase the amount of revenue it receives through a certain payment method, or develop new manufacturing methods.performance- For example, businesses will often look at where they can make improvements to their sales revenue or profit, the impact of their marketing, or their productivity.If a business has suffered with poor financial performance in the previous year, it may have aims and objectives relating to improving its sales, revenue or profit over the next financial year.legislation- Laws and regulations are legally binding, and businesses must comply with them to keep operating. Legislation may relate to areas such as recruitment, payment, health and safety, and competition.internal reasons- Internal reasons, such as strategic decisions made within a company, can impact a business’s aims and objectives. For instance, if a business decided to enter a new market or develop a new product or service, these changes would be in response to internal reasons.
• What are some common technological developments?

  website developments

  manufacturing developments

  software developments

  mobile technology developments

  contactless, online, and mobile payment system developments
• How do business aims and objectives change as businesses evolve?

  focus on survival or growthTwo types of business primarily focus on survival:- new businesses in their first year of operation- established businesses under threat, for example from their competitorsHowever, over time, as a business becomes more recognised and achieves a secure position in the market, it may change its aims and objectives to focus on growth.

  entering or exiting marketsThe aim of entering new markets is to grow the business overall, develop a new target market, and ultimately grow the business’s market share across multiple markets.

  Businesses also occasionally exit markets. They do this for a number of reasons, for example:- a shrinking market- poor performance of the business products- a new market opening up- the business failing overall

  growing or reducing the workforceThis may include opening new departments, creating new teams and recruiting more staff. By growing its workforce, a business gains more potential for expansion.Reducing the workforce is usually part of a survival strategy for a business. When a business is not performing well or is exiting a market, it may reduce its workforce to help reduce its overall business costs.

  increasing or decreasing product rangeBusinesses often start with a small number of products, but over time they may expand their product range as they grow. When a product is not generating enough revenue or a business is failing, the business will often decrease its product range.
• Define globalisation


  companies operating internationally or on a global scale
• Why do businesses import products?

  Importingrefers to the process of purchasing goods or services from overseas and bringing them into another country.For example, goods are brought into the UK in exchange for money leaving the UK economy. In the UK, most companies import products and services.Sometimes products are imported because they cannot easily be manufactured in the importing country due to the climate, the capacity of businesses or the availability of raw materials. For other items, it is cheaper to purchase products from other countries than to make them in the importing country.
• Why do businesses export products?

  Exportingrefers to a country selling products and services to other countries around the world. When the UK sells products and services to foreign countries, money comes back into the UK economy. One of the UK’s biggest exports is vehicles. Vehicles made by some of the biggest car brands are produced in the UK and then shipped abroad in return for money.
• Impacts of globalisation on business location

  Makes it easier for businesses to relocate abroad - can produce goods in countries closer to the raw materials or cheaper labour -> costs reduced
• Multinational companies


  Multinational companiesorMNCs(also known as transnational corporations or TNCs) are companies that operate in a number of countries around the world. These companies often adapt their products to suit consumers in the different countries while keeping their brand image recognisable around the world.
• Tarrifs


  A tariff is a tax on imported goods and services. Many countries place tariffs on imported goods and services to make them more expensive for businesses and consumers to buy. They do this to restrict demand. By doing this, they aim to promote and protect businesses in the home country. This is known as a protectionist measure.

  
• Trade blocs


  A trading bloc is another potential barrier to international trade. A trading bloc is a group of countries that work together to provide special deals for trading. This promotes trade between specific countries within the bloc.

  
• Why do businesses use e-commerce to compete internationally?

  open 24/7

  cheap to operate compared to physical stores

  gives access to a huge range of potential customers

  easy to sell to overseas customers

  provides access to cost-effective promotional methods, such as social media and email advertisements
• How do businesses change the marketing mix to compete internationally?

  product- styles, fashion trends, sizing, cultural beliefs (eg colours that are considered lucky in one country may be associated with danger in another), dietary requirements (eg some places may require halal or kosher foods) and infrastructure (eg right- or left-hand-drive cars and different types of electrical plug)price- may be affected by tariffs and trading blocs, income levels and disposable income, tax, exchange rates and level of demandplace- access to the internet in certain countries, purchasing preferences in some countries (e-commerce may not yet be popular) and distribution links in certain countriespromotion- cultural and social differences, language and translations
• How are businesses make sure they're ethical?

  Treating workers ethicallyExamples include:paying a fair wageproviding good working conditionsallowing flexible workingTreating suppliers ethicallyExamples include:paying fair priceshaving reasonable expectationspaying bills on timeTreating customers ethicallyExamples include:Exceeding expectations through putting customers at the heart of everything. This can include offering excellent customer service, quality products or services and making the customer feel valued and appreciated.Only providing what customers need – this means ensuring that the business thinks about the needs of the customer and meets these rather than selling a business extra products or services to meet their own profit targets. For example, not selling a customer a mobile phone contract that they will not use.Giving clear and accurate product and service information to allow customers to make informed decisions.
• Possible trade-offs between ethics and profit

  Being ethical will often result in a business incurring higher costs. This is because ethically sourced supplies are often more expensive to buy. Some businesses argue that this would make them less competitive, leading to lower sales and reduced profit margins.

  However, other businesses believe that there does not have to be a trade-off between ethics and profit. These businesses believe that the benefits of doing the right thing far outweigh the costs. These benefits include:

  - motivated workers, who work more efficiently

  - customers who want to support businesses that behave in a socially responsible way

  - investors who want to be associated with businesses that are ethical

  All of these benefits can help to establish a positive reputation, which can increase sales, actually leading to higher profits.
• What are the four main environmental issues that are most likely to influence the activities of a business?

  climate change, pollution, sustainability, waste reduction
• What are the advantages of being environmentally friendly?

  Subsidies and grants– The government offers money to businesses willing to invest in environmentally friendly production methods. This can help to reduce costs.Lower costs– Changes to business activities that lower a business’ impact on the environment can often also lower the business’ costs. For example, retailer Marks and Spencer has introduced driver performance software in its delivery vehicles that has reduced the consumption of fuel by 2.3 litres per hour.Increased sales– Concerned customers who are very aware of environmental issues are more likely to buy from businesses that act in an environmentally friendly way.
• What are the disadvantages of being environmentally friendly?

  Increased costs– Producing goods in an environmentally friendly way can often mean spending more money initially, as it can require research and investment in new production methods.Time consuming– Becoming environmentally friendly can take up a lot of time, particularly in large businesses.Potential for inaccurate claims– A business that wants to use claims about its environmental efforts must make sure those claims are accurate. Inaccurate claims can cause significant damage to the reputation of a business.
• How do pressure groups influence businesses?

  lobbying

  organising a boycott of a business or a particular product

  viral marketing
• What are pressure groups?

  Pressure groups, also called interest groups, are groups of people who share a common interest and try to influence the decisions made by businesses, organisations or governments
• How can pressure groups influence the marketing mix?

  product- change the product, eg using rubber from ethical suppliers to protect the Amazon rainforestprice- change pricing strategies, eg to make ethical products a realistic choice for consumersplace- change distribution methods, eg using delivery vehicles that pollute lesspromotion- change the way a product is advertised, eg promoting environmentally-friendly products
• What is the design mix?

  function– what the product should do and how well it does it, eg a washing machine should wash clothescost– how cost-effective the product will be to manufacture, eg the product should be made and sold profitablyaesthetics– how the product appeals to consumers, eg how the product looks, feels or smells
• What are the phases of the product life cycle?

  
• What does the length of time a product lasts depends on?

  how dynamic the market is - eg, technological products (such as tablets and laptops) have short life cycles as they quickly become out of date as new technology emerges

  
  

  how strong the brand image behind the product is - eg, a new sports shoe from a well-known brand is likely to have a longer life cycle than a new sports shoe from an unknown brand
• Extension strategies


  Product differentiation– This means making a product stand out from its market competitors, usually by highlighting the differences between it and the other products. Ensuring that a product has a unique selling point (USP) is a good way to differentiate it from other products.Reducing the price of the product- By the time a product has reached maturity, it may face competition from other products. When this happens, the business may no longer be able to charge a high price for the product. If the price is reduced, existing customers are likely to continue buying it, while other customers may switch from competing products.Rebranding the product– Tired-looking branding and packaging can put customers off. Refreshing the brand and packaging design can appeal to new customers and convince previous customers to try a product again.Repositioning the product- This extension strategy involves exploring new markets for a product. It is possible to revive a product by testing new uses for it or adding value so that it appeals to a different audience. For example, a business could try introducing a different sized version of the product.Increasing marketing activity- Running new advertising campaigns and sales promotions can attract new customers, remind previous customers that the product still exists and encourage existing customers to buy more of the product.
• What do businesses consider when setting a price?

  The cost of making the product- Price represents the revenue the business receives from selling each unit of its product. If the unit cost of the product is known, setting a price that is greater than the unit cost will ensure that the product is profitable, as long as consumers are willing to pay that price.The quality of the product- Consumers expect to pay more for a high-quality product, as they understand that high-quality products usually cost more to make. Charging a higher price often gives the impression that a product is of a higher quality, even when it may not be.The brand image of the product- Maintaining a brand image requires a high level of marketing activity and a consistent level of quality. These cost money, so a branded product often has a higher price than a non-branded product.The demand and supply of a product- If there is high demand for a product, consumers are likely to be willing to pay more for it. Therefore, businesses can charge a higher price for popular products, unless there are other businesses supplying similar products. If this is the case, they will need to consider their competitors’ prices.
• What are the five pricing strategies?

  Price Skimming:

  Definition: Price skimming involves starting with a high initial price for a product or service and then gradually reducing it over time. This strategy is often used for new or innovative products to capitalize on early adopters willing to pay a premium.

  Example: When Apple releases a new iPhone model, they initially set a high price, targeting early adopters. As demand stabilizes, they gradually lower the price to attract a broader customer base.

  Price Penetration:

  Definition: Price penetration is the opposite of price skimming. It starts with a low initial price and then increases it over time. This approach aims to quickly gain market share by attracting a large number of price-sensitive customers.

  Example: A budget airline might offer low fares initially to attract passengers, and as demand grows, they gradually raise prices.

  Competitive Pricing:

  Definition: Competitive pricing involves setting a price that is similar to competitors' prices. Businesses use this strategy to stay competitive in the market and avoid pricing themselves out of the competition.

  Example: Supermarkets often use competitive pricing for everyday products like milk, bread, and toiletries.

  Loss Leader:

  Definition: A loss leader is a product sold at a loss or minimal profit to attract customers. The goal is to encourage additional purchases of other profitable items.

  Example: A grocery store might sell a popular cereal brand at a loss to get customers through the door, hoping they'll buy other items with higher profit margins.

  Cost-Plus Pricing:

  Definition: Cost-plus pricing involves adding a fixed markup (percentage or dollar amount) to the cost of producing a product. The markup ensures that the business covers its costs and generates a profit.

  Example: A furniture manufacturer calculates the production cost of a chair and the
• What are the key influences on pricing strategies?

  Technology:Innovation: Technological advancements can impact pricing. New technologies may allow businesses to create products more efficiently, reducing costs and potentially enabling lower prices.Digital Disruption: Technology can disrupt traditional business models. For instance, digital platforms often offer competitive pricing due to their streamlined operations.Competition:Competitor Pricing: Monitoring competitors’ prices is essential. Businesses need to stay competitive without compromising profitability.Price Wars: Intense competition can lead to price wars, where businesses continuously lower prices to gain market share. However, this strategy may harm profitability.Market Segments:Segmented Pricing: Different market segments may have varying price sensitivities. Businesses can tailor pricing strategies for each segment.Premium vs. Economy Segments: Some products cater to premium customers willing to pay more, while others target budget-conscious consumers.Product Life Cycle:Introduction: In the early stages, businesses may set higher prices to recover development costs.Growth: As demand increases, prices may stabilize or decrease slightly.Maturity: Intense competition often leads to price reductions.Decline: Prices may drop further as demand wanes.
• What are the appropriate promotion strategies for different market segments?

  AdvertisingAn advert is a paid-for message designed to influence consumer purchases. Adverts do this using emotive language, which is designed to make people feel a certain emotion, including excitement, sadness or fear. For example, ‘buy it now before it’s too late’ creates a fear of missing out.Types of media for advertising include:televisionradioprint, eg newspapers and leafletssocial mediawebsitesbillboards and posters, eg on buses and trainsSponsorshipsSponsorships provide financial support to an event, person or organisation, either through free products or services, or through a financial payment. In return, the business, product or service is prominently displayed.Sponsorship is commonly used at sporting events, conferences, exhibitions and charity events.Product trialsProduct trials are designed to encourage consumers to try a product either for free or at a reduced cost.A product trial may involve offering:free samples, eg food productsfree trials, eg movie streaming servicestrial offers, eg money back on a purchaseSpecial offersSpecial offers are a type of sales promotion. They offer incentives to persuade consumers to make a purchase. Examples include:discountscompetitionsbuy-one-get-one-free offersfree giftsmoney-off vouchersloyalty cardsBrandingA brand image can be used as promotion, so businesses often want to establish a positive brand image. When a new product is launched under an established brand name, consumers may be more likely to purchase it because of their knowledge of the existing brand.
• How can technology be used in promotion?

  Viral marketing on social mediaViral marketing involves producing marketing materials that can be shared, usually on social media. It requires content, such as a video, that appeals to users to encourage them to share it. This can be used to support a campaign, as well as to market a product or service.Targeted online advertisingWebsite owners can track the online activity of consumers who visit their site by using cookies. They can use cookies to build a profile of consumers’ interests. They can then serve adverts for products suited to the individual consumer.AppsMobile applications, or apps, enable businesses to personalise promotional materials and offers for specific consumers. They can also enhance customer convenience, for example, grocery shopping apps, and increase customers’ interaction.Businesses can advertise within an app, and apps also enable innovative interaction with customers. For example, apps enable customers to see products and services and may also allow customers to book appointments, find special offers or track their orders. Many apps use a ‘push’ notification system to interact with customers regularly, giving updates about products and services.E-newslettersElectronic newsletters can be distributed via email to consumers who have signed up to receive them. They are a good way for a business to keep in touch with consumers who have previously purchased, or shown an interest in, products that the business sells.
• What are direct and indirect channels of distribution?

  In a direct channel, the producer sells products directly to customers.Examples include physical shops, websites, or direct mail.

  Advantages of Direct Distribution:Cost savings (no intermediaries)Direct customer interactionGreater control over product presentationDisadvantages of Direct Distribution:Fewer distribution optionsIncreased workloadHigher fulfillment costs .