2. Section 1: Characteristics of successful entrepreneurs
Characteristics of entrepreneurs
What motivates entrepreneurs?
Leadership styles
Section 2: Identifying a business opportunity
What makes a market?
What should firms supply?
Identifying what consumers want or need
Section 3: Evaluating a business opportunity
Researching demand for the business idea
Is there a market for the business idea?
Positioning the business idea
Product trial
Opportunity costs (developing one business idea as opposed to another)
Section 4: Economic considerations
Current economic climate
Section 5: Financing the new business idea
Sources of finance
Section 6: Measuring the potential success of a business idea
Estimation of sales levels, costs and profits
Break-even revenue level
Measurement of profit
Section 7: Putting a business idea into practice
Creation of a business plan
2|Page
6. Section 1 see if their business is in a strong
enough position to fill this gap.
Characteristics of
In order to make a success of the new
entrepreneurs
business venture, the entrepreneur
Identifying an Opportunity must be hardworking, ambitious, firm,
decisive, organised, a good negotiator
It is vital for the success of a business and must be able to recognise an
that it manages to identify an opportunity when it arises.
unsatisfied consumer need in a market
and then produce a product, or provide Keywords: Initiative, creative,
a service, which meets the consumers' resilient, risk-taker, hard-worker, self-
needs. The new product / service can confident.
be protected against competition by
the use of copyrights and patents.
These protect the owner / inventor Find out what these
from having their products, ideas, etc. words mean.
copied and reproduced by other
Watch the dragon´s
people without their permission.
den videos.
Some of the most common reasons for
starting up a new business include the
need for independence; to achieve
your personal ambitions; being bored
with your current job; links with your
hobbies and interests; redundancy
from your previous job.
Many businesses which have started
in the UK over the past 25 years have
failed within the first 3 years of trading.
To reduce the probability of failure, it is
vital that businesses carry out market
research in order to establish if a
profitable gap exists in a market and to
6
7. Motives for being an Bei
entrepreneur ng able to
make a
Keywords: Profit motives: survive, difference
sales maximization, profit by offering
maximisation a service
to the
Non-profit motives: being your own
community such as a charity shop
boss, working from home, helping
or hospice.
others (ethical)
A new business needs its own
name and a product. The
challenge is to make goods and
services that satisfy customers, are
competitive and sell at a price that
more than covers costs.
(Risk)
Problems of Start-ups
What are the benefits of being ethical?
– good publicity, additional sales, Most new businesses will face a
helping others. number of problems when they are
starting up and if these problems are
Why start a business? (Motives) not tackled immediately, then they may
lead to the insolvency and failure of
The skill involved in wanting to start the new venture. Below are listed
and run a business is called some of the major problems faced by a
enterprise. The individual who sets up new company:
their own business is called an
entrepreneur.
There are several reasons why
entrepreneurs are willing to take a
calculated risk and set up a business.
Possible motives include:
Making a profit. A business does
this by selling items at a price that
more than covers the costs of Raising finance and meeting the
production. Owners keep the profit repayments
as a reward for risk-taking and
Raising finance and meeting the
enterprise.
repayments is often cited as the major
The satisfaction that comes from
reason for the failure of many new
setting up a successful business
business ventures. It can often be
and being independent.
7|Page
8. difficult for a budding entrepreneur to cash flow problems
persuade banks and other financial that the business is
institutions to lend money to a new facing.
business, and often they will only lend
the money at a high rate of interest. Paperwork and legal requirements
These repayments can cripple the
business and eventually lead to its All businesses face a variety of
insolvency. paperwork and legal requirements,
and if any of these are overlooked or
As well as the repayments, the bank completed inaccurately, then this could
will insist that some security (or lead to the failure of a new business.
collateral) is provided by the business, Taxation and insurance payments are
so that if the business defaults on the vital for the smooth running and
loan repayments, then the bank will survival of new businesses. Any
take ownership of an asset of the oversight on these payments could
business which will cover the amount land the entrepreneur with a large tax
of the outstanding loan. bill or, perhaps worse, property and
stock which will not be insured against
Having a positive cash flow fire, theft, etc.
Leading on from this previous point, Enticing consumers to try the new
having a positive cash flow is vital for product
the survival of the business. Liquidity is
the financial term given to express the Enticing consumers to try the new
ability of a business to raise cash at product / service can also be a major
short notice. Any new business must problem for any new business,
have sufficient cash available to meet especially if there are already a
its short-term needs (such as paying handful of established businesses
employees, paying suppliers, rent, which dominate the market. Ensuring
utility bills, etc.). that consumers try your product and
then buy it again at a later date
Many businesses have a lot of cash (consumer loyalty) can often only be
tied up in stocks, which are often done through extensive (and costly)
difficult to sell and therefore the advertising and promotional
business may find it difficult to raise campaigns.
cash quickly. Further to this, if the
business gives its customers credit
(i.e. buy now, but pay us at a later
date) then this will simply add to any
8|Page
9. it is not very common in today's
business world.
Leadership Democratic
Leadership is the process of This involves managers
influencing people so that they will and leaders taking into
perform a variety of tasks in an account the views of the workforce
effective manner. It is, therefore, before implementing any new system.
crucial to have a strong leader who
This can lead to increased levels of
can inspire and motivate the
morale and motivation amongst the
employees.
workforce, but it can also result in far
A leader is different to a manager, more time being taken to achieve the
since a manager is often appointed to results since many people are involved
a position of power, whereas a leader in discussing the decision.
may often emerge as the best to cope
in a given situation (i.e. an employee Laissez-faire
who is very competent at computing
This is where
may well be viewed as a leader, even
employees are set
though he may be towards the bottom
objectives, and then
of the organisational hierarchy).
they have to decide how
There are a number of styles of best to achieve them using the
leadership: available resources. This method of
leadership can result in high levels of
Autocratic enthusiasm for the task in-hand, but it
can at times rely too much on the skills
This is often referred to of the workforce.
as an authoritarian
leadership style, and it
basically means that the
people at the top of an
organisation make all the
decisions and delegate very little
responsibility down to their Paternalistic
subordinates.
This is fairly autocratic in its approach
Communication is top-down, with no to dealing with employees, although
opportunity for feedback to the leader. their social and welfare needs are
It can cause much resentment and taken into account when a decision is
frustration amongst the workforce and made that will affect them. The leader
is likely to consult the workforce before
9|Page
10. implementing any decision, but he is feedback.
unlikely to listen to much of the
Be well informed and
knowledgeable about matters
What makes a good leader or relating to the business
manager? Possess an air of authority
For many it is someone who Managers deal with their employees in
can inspire and get the most different ways. Some are strict with
from their staff. their staff and like to be in complete
Be able to think creatively to control, whilst others are more relaxed
provide a vision for the and allow workers the freedom to run
company and solve problems their own working lives (just like the
Be calm under pressure and different approaches you may see in
make clear decisions teachers!). Whatever approach is
Possess excellent two-way predominately used it will be vital to
communication skills the success of the business. “An
Have the desire to achieve organisation is only as good as the
great things person running it”.
Summary of management styles
Description Advantages Disadvantages
Autocratic Senior managers Quick decision making No two-way
take all the important communication so can be
decisions with no Effective when de-motivating
involvement from employing many low
workers skilled workers Creates “them and us”
attitude between
managers and workers
PaternalisticManagers make More two-way Slows down decision
decisions in best communication so making
interests of workers motivating
after consultation Still quite a dictatorial or
Workers feel their social autocratic style of
needs are being met management
Democratic Workers allowed to Authority is delegated to Mistakes or errors can be
make own decisions. workers which is made if workers are not
motivating skilled or experienced
Some businesses enough
run on the basis of Useful when complex
majority decisions decisions are required
that need specialist skills
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11. McGregor
Examined how managers´ attitudes affect how workers behave. He
identified 2 extreme types of managers.
TASK: Find out about McGregor´s theory
1.1.1 Characteristics of Entrepreneurs: Text pp questions
1-5 may 2009 q1
Self-confident, creative, resilient, risk-taker, may 2010 q1
initiative hard-worker.
1.1.2 What motivates Entrepreneurs? 1-5 Jan 2009 q2
Sample paper q9
Profit & non-profit motives May 2010 q9
1.1.3 Leadership Styles: 244-247 Jan 2009 q8
Effective leader, May 2010 q2
styles,
factors affecting,
theory x and y
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14. Section 2: Identifying a demanded than
business opportunity at higher prices,
ceteris paribus.
What is a market?
Basically, when
A shop is an example of a market the price is high demand is low and
vice versa. Ceteris paribus means 'all
Businesses sell to customers in other things being equal'. It is very
markets. A market is any place where important that you state this condition
buyers and sellers meet to trade when using demand curves. I will
products - it could be a high street explain why under "determinants of
shop or a web site. Any business in a demand". First, let's have a look at the
marketplace is likely to be in normal downward-sloping demand
competition with other firms offering curve:
similar products. Successful products
are the ones which meet customer In the diagram above, the demand for
needs better than rival offerings. CDs is fairly low at the relatively high
price of fifteen pounds, but at the
Markets are dynamic. This means that bargain price of five pounds demand is
they are always changing. A business much higher.
must be aware of market trends and
evolving customer requirements
caused by new fashions or changing
economic conditions.
The theory of demand
At higher prices, a lower quantity
will be demanded than at lower
prices, ceteris paribus. At lower
prices, a higher quantity will be
14
15. The determinants (factors) of CD prices are likely to rise in the near
demand future, perhaps due to the lack of
competition in the retail market, so you
It is fairly obvious so far may increase your demand in the
that the price of a good current time period.
is a pretty strong
determinant of its Advertising. Although many of you
demand, but there are probably doubt the effectiveness of
many other things that will affect some of the appalling adverts on the
demand too. TV, one assumes that these
companies would not spend fortunes
Real income. If one's real income rose on these adverts if they did not expect
(real means 'allowing for inflation'), one to see a significant rise in demand for
should be able to afford more CDs. the product in question (Virgin and Our
Price are always trying to sell you CDs
The price of other goods. If the price
via the TV.)
of CD players rose then one would
expect demand for CD players to fall, Population. Quite obviously, a
and so would the demand for CDs. significant rise in the number of people
These goods are complements. If the in a given area or country will affect
prices of rock concerts rose then one the demand for a whole host of goods
would expect the demand for these and services. Note that a change in
concerts to fall. Perhaps those who the structure of the population (we
decided against the concert might buy have an ageing population) will
a CD instead. These goods increase the demand for some goods
are substitutes. but reduce the demand for others.
Tastes and preferences. A slightly Interest rates and credit
obscure but very important conditions. If interest rates are
determinant. As you get older, you relatively low then it is cheaper to
may lose interest in the repetitive borrow money that can then be spent.
music currently in the charts and try This is not so applicable to CDs, but
some original sounds from the 60s, will certainly affect the demand for 'big
70s or 80s. Changing preferences will ticket' items such as cars and major
affect your demand for a product electrical goods. In boom time (like the
regardless of its price. late 80s) it is often easier to obtain
credit regardless of the rate of interest.
Expectations of future prices. If you
think that the price for CDs is likely to The normal downward-sloping demand
fall in the near future, perhaps curve shows the relationship between
because of reduced production costs the price of the good and its
or competition from the US, you may demand, all other things being
delay some purchases which will equal. Those 'all other things' are the
reduce demand in the current time list above: incomes, prices of other
period. Alternatively, you may feel that goods, etc. If you do not make this
15 | P a g e
16. assumption, then you could have a versa. Again, in is important to assume
situation when the price of CDs falls, that 'all other things remain constant'.
but at the same time one's income falls Any change in one of the other
by such a large amount that one determinants of supply will cause the
actually demands fewer CDs. In other curve to shift
words, one does not want to
confuse shifts in the demand While it is fairly obvious why the
curve and movements along a demand curve is downward sloping, it
demand curve. is not so clear why the supply curve
should be upward sloping. Basically,
The theory of supply the producer will make higher profits
as the price per unit sold increases.
Imagine that a brewer produced a
lager and a bitter. Assume, not
unreasonably, that the costs of
production are the same per pint
produced, whether it is a pint of lager
or a pint of bitter. If the price of lager
then rose relative to the price of bitter,
it would seem sensible for the brewer
to transfer resources from making
bitter towards the production of lager,
thereby increasing the supply of lager
as its price rises.
Just like with demand, where it only
became effective if it was backed up
with the ability to pay, supply is
defined as the willingness and ability of
producers to supply goods and
services on to a market at a given
price in a given period of time. With
demand, the downward-sloping curve
reflected an inverse relationship
between price and quantity demanded.
The opposite is true of supply. In
theory, at higher prices a larger
quantity will generally be supplied
than at lower prices, ceteris
paribus, and at lower prices a
smaller quantity will generally be
supplied than at higher prices,
ceteris paribus. So this time we have
higher supply at higher prices and vice
16 | P a g e
17. The determinants (factors) of actually pays the tax. Granted, we end
supply up paying the tax indirectly when the
price of petrol goes up, but the actual
As with the demand curve, there are tax bill goes to the firm. This again,
many things that affect supply as well therefore, represents an increase in
as the price of the good in question. the cost to the firm and the supply
Notice how similar many of these curve will shift to the left. The opposite
factors are in comparison to the factors is true for subsidies as they are
that affect demand. Notice also that handouts by the government to firms.
nearly all of these factors affect the Now the firm can make more units of
firms' costs. Given that the firms' output at any given price, so the
supply curve is its marginal cost curve supply curve shifts to the right.
(see the 'costs and revenues' topic)
then it is of no surprise that a cost Labour productivity.
changing measure will shift the supply
curve. This is defined as the output per
worker (or per man-hour). If labour
Prices of other factors of productivity rises, then output per
production. An increase in the price worker rises. If you assume that the
of, say, hops, will increase the costs of workers have not been given a pay
a brewing firm and so for any given rise then the firm's unit costs must
price the firm will not be able to brew have fallen. Again, this will lead to a
as much beer. Hence, the firm's supply shift to the right of the supply curve.
curve will shift to the left. The same
would be true for changes in wage Price expectations.
costs or fuel costs. Just as consumers delay purchases if
Technology. they think the price will fall in the
future, firms will delay supply in they
The supply curve think prices will rise in the future. It's
drawn above the same point but the other way
assumes a round.
'constant' state of technology. But as
we know, there can be improvements Entry and exit of firms to and from
in technology that tend to reduce firms' an industry.
unit costs. These reduced costs mean If new entrants are attracted into an
that more can be produced at a given industry, perhaps because of high
price, so the supply curve would shift profit levels (much more on this in the
to the right. topic 'Market structure'), then the
Indirect taxes and subsidies. supply in that industry will rise at all
price levels and the supply curve will
When the chancellor shift to the right. If firms leave the
announces an industry then the supply curve will shift
increase in petrol to the left.
tax, it is the firm who
17 | P a g e
18. Case Study director
of the
America
US alcohol retailers find law changes
n
Bevera
hard to swallow ge
License
Jon Genderson is gearing up for a big
es, which represents 20,000 small
increase in internet sales
retailers across 34 states.
The US consumes more bottles of
wine than any other nation in the Prices of alcohol are below sale
world. But almost 80 years after the cost all over England, sometimes
end of Prohibition, buying a drink less than a bottle of water. And
can still be tricky. there's terrible binge drinking. We
look at that and say: 'What's
It's illegal, for instance, to buy vodka in different about our system?'”
Delaware to take to a party in
Craig WolfWine and Spirits
Pennsylvania. And retailers in
Wholesalers of America
Maryland are not allowed to ship
alcohol to anybody living in another He's particularly concerned about new
state. laws in the state of Washington which
take effect in June. State controlled
off-licences are closing, and grocery
stores and supermarkets will be
allowed to sell alcohol instead.
But the biggest threat to small
businesses comes from a measure
which says an alcohol retailer must
operate from stores no smaller than
That's because of the 4,000 or so
10,000 sq feet.
different laws that govern the alcohol
industry and give individual states
unprecedented rights to regulate sales "What's happened in Washington
and consumption within their borders. state is scary," says Chuck Ferrar,
owner of Bay Ridge Wine and
The protections have often favoured Spirits in Annapolis, Maryland.
small businesses, but many now fear
they're under threat from cross-border "[The alcohol industry] is the last
wine sales on the internet, and the end bastion of small businesses, 50% of
of state monopolies that could lead to our businesses are owned by Asian
deregulation. minorities because it's one of the
few remaining industries where
'Scary' somebody can start a small business
"The worst-case scenario is that you and see it grow and thrive.
have a reduction of competition,
removal of small businesses from the "But Washington will drive the small
marketplace or potentially not having business under. And I think it will
small businesses in the marketplace at eventually happen here, that alcohol
all," says John Bodnovich, executive
18 | P a g e
19. will be sold in groceries and But Jon Genderson, managing director
supermarkets." of Schneider's of Capitol Hill, a wine
and liquor store in Washington DC,
Public demand believes wholesalers are opposed
Another big change affecting the because they're worried about
industry is the internet. In 2005 the increased competition in their tier of
Supreme Court ruled that wineries the market.
could ship direct to their customers
anywhere in the country, regardless of "The wholesalers are worried about
individual state legislation. That left these things, but it's change that
many states scrambling to change benefits the consumer and that's why I
their laws. think it's going to happen," he says.
Chuck Ferrar says small retailers will "It's the natural evolution of the
be driven out of alcohol sales in business. It just makes sense and
Washington when things make sense and the
current laws don't make sense I think
"It's coming because the consumer that eventually they'll be changed. I
wants it," says Joe Conti, chief think we're smart enough to make
executive of the Pennsylvania those changes," he says.
Liquor Control Board. "Consumers
will be able to buy from a winery in He says the internet still represents a
California and have it sent to their small percentage of sales, but his
home in Pennsylvania - that will be business is gearing up for the
happening within months. That's a anticipated change.
good thing for the consumer and we
"We're in the process of revamping our
embrace that type of competition." website for a third time, modernising
and making it more interactive. I'm
But the Supreme Court ruling did hoping it will be easier and easier, and
not include small retailers, and the that there will be more and more states
Wine and Spirits Wholesalers of we'll be allowed to ship to," he says.
America (WSWA) remains opposed
to direct shipping. 'Checks and balances'
Moves to deregulate alcohol in the US
"It's a black market because you go to the heart of debates about its
don't have the regulatory power to role in society and the concerns that
find out who is ordering from led to prohibition. Mr Wolf says many
where," says WSWA president
Craig Wolf.
"Once you open the door to direct
shipping and you don't go through a
licensed wholesaler, you don't know
whether taxes are being paid, whether
minors are getting alcohol, and you
don't know if it's an illegal source," he
says.
Americans have grandparents who
19 | P a g e
20. remember what the country was like big retailers controlling the
before controls were established. suppliers.
Californian wineries will soon be able "Prices of alcohol are below sale
to ship direct to homes in cost all over England, sometimes
Pennsylvania less than a bottle of water. And
"There is a fear that if you tinker there's terrible binge drinking. We
and mess with it, you don't know look at that and say what's different
what you're going to end up with - about our system?
and it could be very bad," he says.
"Our's is a much more regulated
"We don't want to cast aspersions system. There are many more
on England - but if you look very checks and balances, not only
carefully at what happened, there between market players but also
was deregulation. There are now from government on the market
24/7 sales there, there's vertical players."
integration there with big box stores
controlling the retail operation - or
1.2.1 What makes a market? 13 may 2009 q1
Buyers & sellers
1.2.2 What should firms supply? 14-15 Jan 2009 q1
Supply, factors of supply
1.2.3 Identifying what consumers want or need: 13-17 May 2009 q3/q4
Demand, factors of demand, Jan 2009 9d
market-orientation. Sample paper q8
20 | P a g e
22. Section 3: Evaluating a business opportunity
Market Research • Technologies that may threaten
existing products
Market research involves gathering • New product development
and analysing data from the
marketplace in order to provide goods Information about Pricing in the Market
and services that meet their needs.
• Estimates and testing of price
elasticity
A wide • Trends in pricing over recent years
variety of • Analysis of revenues, margins and
informatio profits
n used to • Customer perceptions of “just or fair”
support pricing
marketing • Competitor pricing strategies
decisions
can be Information about Promotion in the
obtained Market
from
market • Effectiveness of advertising
research. • Effectiveness of sales force (personal
A selection selling)
of such • Extent and effectiveness of sales
uses are summarised below: promotional activities
• Competitor promotional strategies
Information about the size and
competitive structure of the market
Information about Distribution
• Analysis of the market potential for
existing products (e.g. market size,
growth, changing sales trends)
• Forecasting future demand for
existing products
• Assessing the potential for new
products
• Study of market trends
• Analysis of competitor behaviour and
performance
• Analysis of market shares
Information about Products
• Likely customer acceptance (or in the Market
rejection) of new products
• Comparison of existing products in • Use and effectiveness of distribution
the market (e.g. price, features, costs, channels
distribution)
• Opportunities to sell direct
• Forecasting new uses for existing
products • Cost of transporting and
22
23. warehousing products measuring the effect of each of these
• Level and quality of after-sales on consumers. For example, test
service marketing, where a new product is
launched in a small, geographical area
Primary research and then the response of consumers
towards it will dictate whether or not
This is research designed to gather
the product is launched nationally.
primary data, that is, information which
is obtained specifically for the study in Secondary research
question. It can be gathered in three
main ways - observation, This is the collection of
questionnaires and experimentation. secondary data, which
has previously been
Observation involves watching people
collected by others and
and monitoring and recording their
is not designed
behaviour (e.g. television viewing
specifically for the study
patterns, cameras which monitor traffic
in question, but is
flows, retail audits which measure
nevertheless relevant. Secondary data
which brands of product consumers
is far cheaper and quicker to gather
are purchasing).
than primary data, but it can be out-of-
Questionnaires are a means of direct date by the time that it is researched.
contact with consumers and can take a The main sources of secondary data
variety of forms. Personal are reference books, government
questionnaires (such as door-to-door publications and company reports.
interviewing), postal questionnaires,
The primary and the secondary
telephone questionnaires and group
research will provide the business with
questionnaires (such as asking for the
much data relating to its markets and
attitudes of a group of consumers
its consumers. This data can then be
towards a new product).
used to describe the current situation
Questionnaires can be a very in the marketplace, to try to predict
expensive and time-consuming what will happen in the future in the
process and it can be very difficult to marketplace, and to explain the trends
eliminate the element of bias in the that have occurred.
way that they are carried out. It is
The business may also use the market
important that every respondent must
research data to segment the market.
be asked the same questions in the
same order, with no help or emphasis This involves breaking the market
being placed on certain questions / down into distinct groups of consumers
responses. who have similar characteristics, so as
to offer each group a product which
Experimentation involves the
best meets their needs.
introduction of a variety of marketing
activities into the marketplace and then
23 | P a g e
24. The main ways of segmenting a Quantitative research can also be
market are: used to measure customer awareness
and attitudes to different
manufacturers and to understand
overall customer behaviour in a market
by taking a statistical sample of
customers to understand the market
as a whole. Such techniques are
extremely powerful when combined
By consumer characteristics: with techniques such segmentation
this involves investigating their analysis and mean that key audiences
attitudes, hobbies, interests, can be targeted and monitored over
and lifestyles. time to ensure the optimal use of the
By demographics: their age, marketing budget.
sex, income, type of house, and
socio-economic group. At the heart of all quantitative research
By location: the region of the is the statistical sample. Great care
country, urban -v- rural, etc. has to be taken in selecting the sample
and also in the design of the sample
Effective segmentation of the market questionnaire and the quality of the
can lead to new opportunities being analysis of data collected.
identified (i.e. gaps in the market for a
product), sales potential for products Market research involves the collection
being realised and increased market of data to obtain insight and
share, revenue and profitability. knowledge into the needs and wants of
customers and the structure and
Quantitative vs Qualitative research dynamics of a market. In nearly all
cases, it would be very costly and
Quantitative research time-consuming to collect data from
the entire population of a market.
Quantitative research is Accordingly, in market research,
about measuring features of a market extensive use is made of sampling
and quantifying that measurement with from which, through careful design and
data. Most often the data required analysis, marketers can draw
relates to market size, market share, information about the market.
penetration, installed base and market
growth rates. However, quantitative There are several types of sample
research can also be used to measure that can be used to gather
customer attitudes, satisfaction, quantitative data:
commitment and a range of other
useful market data that can tracked Market research involves the collection
over time. of data to obtain insight and
knowledge into the needs and wants of
customers and the structure and
24 | P a g e
25. dynamics of a market. In nearly all also helps guard against sample bias
cases, it would be very costly and in a way that selecting by judgement or
time-consuming to collect data from convenience cannot.
the entire population of a market.
Accordingly, in market research, Defining the Population
extensive use is made of sampling
from which, through careful design and
analysis, marketers can draw
information about the market.
Designing the sample
Sample design covers the method of
selection, the sample structure and
plans for analysing and interpreting the
results. Sample designs can vary from
simple to complex and depend on the The first step in good sample design is
type of information required and the to ensure that the specification of
way the sample is selected. the target population is as clear and
complete as possible to ensure that all
Sample design affects the size of the elements within the population are
sample and the way in which analysis represented. The target population is
is carried out. In simple terms the more sampled using a sampling frame.
precision the market researcher Often the units in the population can
requires, the more complex will be the be identified by existing information;
design and the larger the sample size. for example, payrolls, company lists,
government registers etc. A sampling
The sample design may make use of frame could also be geographical; for
the characteristics of the overall example postcodes have become a
market population, but it does not have well-used means of selecting a
to be proportionally representative. It sample.
may be necessary to draw a larger
sample than would be expected from What size should the sample be?
some parts of the population; for
example, to select more from a For any sample design deciding upon
minority grouping to ensure that the appropriate sample size will
sufficient data is obtained for analysis depend on several key factors
on such groups.
(1) No estimate taken from a sample is
Many sample designs are built around expected to be exact: Any
the concept of random selection. This assumptions about the overall
permits justifiable inference from the population based on the results of a
sample to the population, at quantified sample will have an attached margin of
levels of precision. Random selection error.
25 | P a g e
26. (2) To lower the margin of error usually usually representative of the
requires a larger sample size. The population as a whole.
amount of variability in the population
(i.e. the range of values or opinions) Cluster sampling - this normally
will also affect accuracy and therefore involves the consumers being grouped
the size of sample. into geographical groups (or 'clusters')
and then a random sample being
(3) The confidence level is the carried out within each location.
likelihood that the results obtained
Stratified sampling - the consumers
from the sample lie within a required
are grouped into segments again (or
precision. The higher the confidence
'strata') based upon some previous
level, that is the more certain you wish
knowledge of how the population is
to be that the results are not atypical.
divided up. The number of people
Statisticians often use a 95 per cent
chosen to be interviewed from each
confidence level to provide strong
'strata' is proportional to the population
conclusions.
as a whole.
(4) Population size does not normally Qualitative research
affect sample size. In fact the larger
the population size the lower the Qualitative market research is about
proportion of that population that investigating the features of a market
needs to be sampled to be through in-depth research that
representative. It is only when the explores the background and context
proposed sample size is more than 5 for decision making. There are two
per cent of the population that the main qualitative methods - depth
population size becomes part of the interviews and focus groups. However
formulae to calculate the sample size.
qualitative research can also include
techniques such as usability testing,
Random sampling - this gives each
brainstorming sessions and “vox pop”
member of the public an equal chance
surveys.
of being used in the sample. The
respondents are often chosen by Depth Interviewing
computer from a telephone directory of
from the Electoral Register. Depth interviews are the main form of
qualitative research in most business
Quota sampling - this method markets. Here an interviewer spends
involves the consumers being grouped time in a one-on-one interview finding
into segments which share certain out about the customer’s particular
characteristics (e.g. age or gender). circumstances and their individual
The interviewers are then told to opinions.
choose a certain number of
respondents from each segment. The majority of business depth
However, the numbers of people interviews take place in person, which
interviewed in each segment are not has the added benefit that the
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27. researcher visits the respondent’s consumer, or part of a team evaluating
place of work and gains a sense of the technology, group discussions can be
culture of the business. However, for an effective way of understanding what
multi-national studies, telephone depth customers are looking for, particularly
interviews, or even on-line depth at more creative stages of research.
interviews may be more appropriate.
Niche Marketing
Feedback is through a presentation
that draws together findings across a This involves a business selling its
number of depth interviews. In some product(s)
circumstances, such as segmentation in small,
studies, identifying differences often
between respondents may be as lucrative,
important as the views that customers segments
share. of a
market. It
The main alternative to depth is the
interviews - focus group discussions - opposite strategy to mass marketing.
are typically too difficult or expensive Many small businesses can identify
to arrange with busy executives. unsatisfied consumer needs in a
However, on-line techniques particular segment within a large
increasing get over this problem. industry, and they can develop
products to meet these needs.
Focus Group Discussions
This allows the small businesses to
Focus groups exist in industries that are dominated
are the by large businesses (e.g. Classic FM
mainstay of in the radio broadcasting industry,
consumer SAGA in the holiday industry).
research. Here However, if larger rivals appear within
several the niche market, the smaller
customers are businesses will often find it difficult to
brought compete effectively with these well-
together to take resourced businesses.
part in a discussion led by a
It is also dangerous for a business to
researcher (or “moderator”). These
offer just one product within the
groups are a good way of exploring a
market, since any larger rivals are
topic in some depth or to encourage
likely to be more diversified and have a
creative ideas from participants.
wider product portfolio. Theses larger
businesses could, therefore, reduce
Group discussions are rare in business
their prices to such a low level that the
markets, unless the customers are
small business cannot compete
small businesses. In technology
profitably.
markets where the end user may be a
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28. Nevertheless, during periods of knowledge = market expertise
economic growth and higher consumer • Can often charge a higher price –
spending, then niche markets can offer customers are prepared to pay for
a very lucrative opportunity to many expertise
small businesses to offer a • Profit margins often higher
personalised, high value-added • Customers tend to be more loyal
service/product.
The main disadvantages of marketing
to a niche include:
What is the difference between • Lack of “economies of scale” (these
niche and mass marketing? are lower unit costs that arise from
operating at high production volumes)
In most markets there is one dominant • Risk of over dependence on a single
(mass) segment and several smaller product or market
(niche) segments… • Likely to attract competition if
For example, in the confectionery successful
market, a dominant segment would be • Vulnerable to market changes – all
the plain chocolate bar. Over 90% of “eggs in one basket”
the sales in this segment are made by By contrast, mass marketing can be
three dominant producers – Cadbury’s, defined as:
Nestle and Mars. However, there are
many small, specialist niche segments Where a business sells into the
(e.g. luxury, organic or largest part of the market, where
fair-trade chocolate). there are many similar products on
offer
Niche marketing can
be defined as: The key features of a mass market are
as follows:
Where a business
targets a smaller • Customers form the majority in the
segment of a larger market
market, where customers have • Customer needs and wants are more
specific needs and wants “general” & less “specific”
• Associated with higher production
Targeting a product or service at a output and capacity (economies of
niche segment has several scale)
advantages for a business (particularly • Success usually associated with low-
a small business): cost operation, heavy promotion,
• Less competition – the firm is a “big widespread distribution or market
fish in a small pond” leading brands
• Clear focus - target particular
customers (often easier to find and
reach too)
• Builds up specialist skill and
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29. Competitive Advantage Create a poster identifying how the
product (Mercedes Class M) or
brand (Gilette) has gained this
competitive advantage.
Eg Apple Ipod and image
Definition: A competitive advantage is
an advantage over competitors gained
by offering consumers greater value,
either by means of lower prices or by
providing greater benefits and service
that justifies higher prices.
How: Location, Value for money,
Brand name, Facilities, Image ,Taste,
Customer service .
Competitive Advantage
Choose one of the methods of how a
company could gain a competitive
advantage over its competitors. Select
a well-known product or brand.
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30. Adding Value operate profitably. Why? Remember
the definition of adding value: where
The increase in the the selling price is greater than the
benefits of a good or costs of making the product.
service which are
created at each stage By definition, a business that is adding
of production. substantial value must also be
operating profitably.
Methods – changing
raw materials,
Quite simply, it can make the
packaging, branding (using
difference between survival and
personalities or famous logos)
failure; between profit and loss.
For example, businesses can add The key benefits to a business of
value by: adding value include:
Building a brand – a reputation for - Charging a higher price
quality, value etc that customers are - Creating a point of difference from
prepared to pay for. Nike trainers sell the competition.
for much more than Hi-tec, even
though the production costs per pair - Protecting from competitors trying to
are probably pretty similar! steal customers by charging lower
prices
Delivering excellent service – high - Focusing a business more closely on
quality, attentive personal service can its target market segment
make the difference between
achieving a high price or a medium
one
Product features and benefits for
example, additional functionality in
different versions of software can
enable a software seller to charge
higher prices; different models of
motor vehicles are designed to
achieve the same effect.
Offering convenience – customers
will often pay a little more for a product
that they can have straightaway, or
which saves them time.
A business that successfully adds
value should find that it is able to
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31. Positioning the Business Idea Identify Gaps in the market –
market mapping.
This is the process of creating an Try to gain a competitive
image for the product in the minds of advantage.
customers.
Add value
Identify the competition.
Market mapping consists of identifying
Identify their strengths and
key variables about a product, plotting
weaknesses. where existing brands or suppliers are
Identify how to differentiate your in terms of combining the variables,
product. then identifying any gaps in the
market”.
Positioning and Market Examples of those dimensions might
mapping be:
High price v low price
Once an entrepreneur has identified Basic quality v High quality
an appropriate segment of the market Low volume v high volume
to target, the challenge is to Necessity v luxury
position the product so that it meets Light v heavy
the needs and wants of the target Simple v complex
customers. Lo-tech v high-tech
Young v Old
One way to do this is to use a “market
map” (you might also see this called Let’s look at an illustrated example of a
by its proper name – the “perceptual market map. The map below shows
map”). one possible way in which the
chocolate bar market could be mapped
The market map illustrates the range against two dimensions – quality and
of “positions” that a product can take in price:
a market based on two dimensions
that are important to customers.
31
32. How might a market map be used?
One way is to identify where there are “gaps in the market” – where there are
customer needs that are not being met.
For example, in the chocolate bar market, Divine Chocolate (a social enterprise)
successfully spotted that some consumers were prepared to pay a premium price for
very high quality chocolate made from Fairtrade cocoa. Green & Black’s exploited
the opportunity to sell premium chocolate made from organic ingredients. Both these
brands successfully moved into the high quality / high price quadrant (see above)
before too many competitors beat them to it.
The trick with a market map is to ensure that market research confirms whether or
not there is actually any demand for a possible “gap in the market”. There may be
very good reasons why consumers do not want to buy a product that might,
potentially, fill a gap.
32
33. Complete a Market Map for a local shop or restaurant in Valencia.
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34. Product trial customers. It is much better if
customers can be encouraged to
The first become loyal to the product – even
step for a better, to recommend the product to
new their friends and family!
business or
product is to Achieving a high level of repeat
attract trial purchase is good news for a business.
purchases. So what is required?
A new Firstly, the product should be of the
magazine may run special offers to get right quality. A sub-standard or low
customers to try the first issue, hoping quality product is sure to disappoint
first-time customers. They are unlikely
that repeat sales are generated. The
magazine will soon close if customers to buy again or recommend the
fail to buy future issues. The aim of a product to others.
special offer scheme is to convert trial Secondly, a business should do all it
purchases into repeat sales. can to develop an effect relationship
Repeat business is all about with existing customers. This includes
encouraging customers who buy for activities such as:
the first time to buy again and again!
A business invests a lot of effort and - Regular communication (e.g. email
newsletters)
cash in trying to get a customer to
purchase a product for the first time.
This is known as product trial. Much - Incentives for loyalty (e.g.
advertising is aimed at encouraging promotional discounts)
customers to try a new product, or
switch from an existing competitor.
- Research into customer needs and
After a new product has been tried wants (e.g. through customer surveys)
once, its success can be measured in
how quickly, how often, and in what
quantity it is repurchased. Repeat
purchase refers to the number or
percent of customers who purchase a
second time, or to how often they buy
again.
The problem with advertising is that it
is very expensive. A business is
unlikely to be successful and profitable
if it has to keep advertising heavily in
order to generate demand from new
34
35. Stakeholders
There are many groups of people
who have an interest, financial or
otherwise, in the performance of
a business - these different
groups are known as
stakeholders. The main
stakeholders are considered to
be:
functions and tasks of the business
Shareholders
(producing output, meeting deadlines
These people have a clear financial and delivery dates, etc.) and over
interest in the performance of the recent years their traditional role has
business. They have invested money started to change. They are often now
into the company through purchasing encouraged to become involved in
shares and they expect the company multi-skilled team-working, problem
to grow and prosper so that they solving and decision making - thus
receive a healthy return on their having a significant input to the
investment. The return that they workings of the business.
receive can come in two forms. Firstly,
Customers
by a rise in the share price, so that
they can sell their shares at a higher Customers are vital to the survival of
price than the purchase price (this is any business, since they purchase the
known as making a capital gain). goods and services which provides the
Secondly, based on the level of profits business with the majority of its
for the year, the company issues a revenue. It is therefore vital for a
portion of this to each shareholder for business to find out exactly what the
every share that they hold (this is needs of the consumers are, and to
known as a dividend). The produce their output to directly satisfy
shareholders are also entitled to vote these needs - this is done through
each year at the A.G.M. to elect the market research. The goods and
Board of Directors, who will run the services must then be promoted in
company on their behalf. such a way as to appeal to the target
market and to inform them of the
Employees
availability, price, etc. Once the goods
This group also has an obvious and services have been purchased by
financial interest in the company, since the customer, it is essential that after-
their pay levels and their job security sales service is offered and that the
will depend on the performance and customer is happy with his/her
the profitability of the business. It is purchase. The business must try to
employees who perform the basic keep the customer loyal so that they
35 | P a g e
36. return in the future and become a since the repayments will now be
repeat-purchaser. significantly higher). However,
businesses can also benefit from
Suppliers government incentives and initiatives,
such as new infrastructure, job
Without flexible and reliable suppliers, creation schemes and business
the business could not guarantee that relocation packages, offering cheap
it will always have sufficient high rent, rates and low-interest loans.
quality raw materials which they
require to produce their output. It is The Local Community
important for a business to maintain
good relationships with their suppliers, Businesses are likely to provide
so that raw materials and components significant amounts of employment for
can be ordered and delivered at short the local community and often will
notice, and also so that the business produce and sell much of their output
can negotiate good credit terms from to the local residents. The sponsorship
the suppliers (i.e. buy now, pay at a of local events and good causes (such
later date). as local charity work) can also help the
business to establish itself in the
The Government community as a caring, socially
responsible organisation. Many
The government affects the businesses develop links with local
workings of businesses in many schools and colleges, offering
ways: sponsorships and resources to these
1. Businesses have to pay a variety of under-funded institutions. However,
taxes to central and local government, businesses can also cause many
including Corporation tax on their problems in local communities, such
profits, Value-Added Tax (V.A.T) on as congestion, pollution and noise, and
their sales, and Business Rates to the these negative externalities may often
local council for the provision of local outweigh the benefits that the
services. businesses bring to the community.
2. Businesses also have to adhere to a Disagreements between stake
wide-ranging amount of legislation, holders
which is aimed at protecting the
Due to the demands placed on
consumers, the employees and the
businesses by so many different
local environment from business
stakeholders, it is no surprise that
activity.
there are often disagreements and
3. Businesses will be affected by conflict between the different groups.
different economic policies, (for Some of the more common areas of
example, if interest rates are conflict are:
increased, then this will discourage
businesses from borrowing money Shareholders and management
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37. Profit maximisation is often the over- complain about the late deliveries of
riding objective of shareholders - raw materials and components from
resulting in large dividend payments suppliers, and the dubious quality of
for them. However, it is far more likely the parts once they have been
that the managers of the business will inspected.
aim to profit satisfy rather than profit
maximise (that is, they will aim to earn The community and the business
a satisfactory level of profits, and then
use the remaining resources to pursue As outlined previously, the local
other objectives such as diversification community can often suffer at the
and growth). This conflict between hands of a large company through the
these two groups is often referred to negative externalities of pollution,
as divorce of ownership (the noise, congestion and the building of
shareholders) and control (the new factories in areas of outstanding
management). beauty. However, if the business faces
strong protests from residents and
Customers and the business from pressure groups concerned about
its actions, then it may decide to
Customers are unlikely to remain relocate to another area, causing
loyal and repeat purchase from the much unemployment and a fall in
business if the product that the have investment in the community it leaves
purchased is of poor quality and/or is behind.
poor value for money. More customers
are prepared to complain about the
quality of products and after-sales
service than ever before, and the
business must ensure that it has in
place a number of strategies designed
to satisfy the disgruntled customer,
reimburse any financial loss that they
may have incurred and persuade them
to remain loyal to the business.
Suppliers and the business
Suppliers are often quoted as
complaining about the lack of prompt
payments from businesses for
deliveries of raw materials, and if this
became a regular problem then the
suppliers may well refuse credit to the
businesses or may even cease all
dealings with them. On the other hand,
many businesses have been known to
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38. Market segmentation -
targeting strategies
Once a firm has successfully identified
the segments within a market, the next
step is to target these segments with
products that closely match the needs
of the customers within that segment.
There are a number of targeting
strategies, including:
Niche/concentration marketing – The main benefit for the firm is that it
this is concerned with targeting one can produce on a large scale,
particular, well-defined group of benefiting from low unit production
customers (a niche) within the overall costs via economies of scale. These
market. lower costs can be passed on to the
consumer in the form of lower prices
Jordan’s, the cereal company, adopted
because, although profit margins on
this approach by targeting groups of
each item sold may be lower, high
customers interested in organic
sales volume should generate large
products at a time when this group of
profits overall.
consumers represented a relatively
small proportion of the overall market. The main disadvantage of mass
marketing is that, increasingly in
Niche markets can be targeted
today’s markets, consumers are less
profitably by small firms who have
interested in standardised products
relatively small overheads and,
and often prepared to pay premium
therefore, do not need to achieve the
prices for products that cater for their
volume of sales required by larger
specific needs.
competitors.
The main disadvantages of niche market segmentation - bases of
segmentation
markets are that the potential for sales
growth and economies of scale may Geographic
be limited, and the survival of the firm
may be seriously affected if sales • Region of the country
begin to decline. • Urban or rural
Mass marketing – this is concerned Demographic
with selling a single product to the
whole market. This strategy is based • Age, sex, family size
on the assumption that, in respect to • Income, occupation, education
the product in question, customers’ • Religion, race, nationality
needs are very similar if not identical.
Psychographic
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39. • Social class Customer circumstances change, for
• Lifestyle type example they grow older, form
• Personality type families, change jobs or get promoted,
change their buying patterns. By
Behavioural marketing products that appeal to
customers at different stages of their
• Product usage - e.g. light, medium life ("life-cycle"), a business can retain
,heavy users customers who might otherwise switch
• Brand loyalty: none, medium, high to competing products and brands
• Type of user (e.g. with meals, special
occasions) Target marketing communications
why segment markets? Businesses need to deliver their
marketing message to a relevant
There are several important reasons customer audience. If the target
why businesses should attempt to market is too broad, there is a strong
segment their markets carefully. These risk that (1) the key customers are
are summarised below missed and (2) the cost of
communicating to customers becomes
Better matching of customer needs too high / unprofitable. By segmenting
markets, the target customer can be
Customer needs differ. Creating reached more often and at lower cost
separate offers for each segment
makes sense and provides customers Gain share of the market segment
with a better solution
Unless a business has a strong or
Enhanced profits for business leading share of a market, it is unlikely
to be maximising its profitability. Minor
Customers have different disposable brands suffer from lack of scale
income. They are, therefore, different economies in production and
in how sensitive they are to price. By marketing, pressures from distributors
segmenting markets, businesses can and limited space on the shelves.
raise average prices and subsequently Through careful segmentation and
enhance profits targeting, businesses can often
Better opportunities for growth achieve competitive production and
marketing costs and become the
Market segmentation can build sales. preferred choice of customers and
For example, customers can be distributors. In other words,
encouraged to "trade-up" after being segmentation offers the opportunity for
introduced to a particular product with smaller firms to compete with bigger
an introductory, lower-priced product ones.
Retain more customers
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40. Opportunity cost
Opportunity cost is one of the most important and fundamental
concepts in the whole of economics. Given that we have said
that economics could be described as a science of choice, we
have to look at what sacrifices we make when we have to make a choice. That is
what opportunity cost is all about.
The definition of opportunity cost is: The cost expressed in terms of the next
best alternative foregone or sacrificed
Take the following example:
I recently bought a new pair of shoes which cost me
£40.
The cost here is being expressed in terms of the amount
of money you had to give up to acquire those shoes.
Because we all have a common understanding of
'money' as being notes and coins that we use to
exchange for the things we want, we can pretty much understand this sentence.
We have to remember that money is merely bits of paper or
metal that we use as a convenient and accepted method of
facilitating exchange - getting what we want. Expressing 'cost' in
terms of the amount of money we have to give up to get what
we want is always helpful in giving us the true 'cost' of
something. For that, we need to use 'opportunity cost'.
What statements like this fail to convey, however, is the true picture of what you are
sacrificing by choosing to buy the shoes. It is more accurate to say something like
'the price I paid for these shoes was £40.' To get an idea of the true 'cost', we would
really need to know something of the sacrifice made in giving up that £40.
£40 can buy a number of things - let us assume that it can also buy the following:
When thinking about how to dispose of your money, you have to make choices and
these represent the choices at this moment in time. These choices represent
different aspects of value. Each of the items might represent some value to you but
they may be different. It is important to remember that you might, in an ideal world
where there were no scarce resources, want all these things.
40
41. TRADE OFFS
In business there are many occasions when
one factor has to be traded off against another.
An entrepreneur might get huge help at the
start from friends, yet realise that these same
friends lack the professionalism to help the
business grow.
The needs of the business may have to be traded off against the friendships. Other
trade-offs may include – giving up a good job and prospects to be your own boss,
giving up the most enjoyable things for profit etc.
1.3.1 Researching demand for the business idea: 143-149 may 2009 q5
Market research: jan 2009 q6
Methods-primary/secondary sample paper q7
Quantitative/qualitative
problems.
1.3.2 Is there a market for the business idea? 152-155 Sample paper q3
Market size & share, May 2010 q 3
growth, May 2010 q 10
mass marketing
niche,
segmentation.
1.3.3 Positioning the business idea. 7-10 May 2009 q8
Competition, May 2009 q11
market mapping, Jan 2009 q3
competitive advantage, Sample paper q9b
adding value. May 2010 q6
differentiation
1.3.4 Product Trial 166 Jan 2009 q9a
Testing, expense, methods, benefits, Sample paper q1
disadvantages. May 2010 q7
1.3.5 Opportunity Costs 48-50 Jan 2009 9e
Trade-Offs Sample paper 9e
Choice – factors,
stakeholders.
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44. Soft drink project
Design a “new” soft drink to be
readily available from December
2012.
Your Project should include
An advert
Marketing Mix:
Identify price, product, place and
promotional aspects
Questionnaire/Interviews/Surveys –
to determine through market
research, the current fashion/tastes
of the soft drinks markets.
Segmentation – whose is your
market/customers? Which groups
would buy your product?
Market Mapping – who are the
competitors and what are the
strengths and weaknesses.
Product trial – How are people
going to try it?
Additional information – market
size, recent trends etc
Added value – how do you
convince people to pay a price for it
when they know it only costs x
amount to produce.
When complete you will have
completed a business plan!
44
45. Section 4: There are several methods that a
government can use to reduce the
Economic considerations
The Economic Environment
Economics is concerned with the
process of satisfying the needs and
wants of the population, by using the
limited resources of the economy
(land, labour, capital and enterprise,
otherwise known as the 'factors of
production') in the most efficient way.
There are generally considered to be
four main objectives of an economy: amount of unemployment in an
economy:
1. A low level of unemployment
2. A low level of inflation Policies to increase demand: such
as reducing taxation or reducing
3. A high level of economic
interest rates.
growth
4. A good foreign trading Retraining incentives offered to the
position unemployed.
Unemployment is defined as the Helping new businesses to set-up,
number of people in the workforce in a and offering incentives to existing
country who are looking for a job, but businesses to relocate to areas of high
cannot find one. unemployment.
The two major measures of Inflation is defined as a general and
unemployment are the 'claimant sustained rise in the average prices of
count' (where people must declare goods and services within an economy
that they are out of work, capable of over a period of time. It is calculated
working, available to work and actively by reference to the Retail Price Index
seeking work) and the 'International (R.P.I), which is a weighted index,
Labour Force' count (where people designed to indicate any changes in
must be out of work, have been the average price level in the UK.
looking for work in the past 4 weeks
and must be available to start work in Inflation can be very damaging to an
the next 2 weeks). economy because it leads to the
reduced purchasing power of the
Unemployment can be very damaging pound, uncertainty about the future, a
to an economy because it can lead to fall in investment and savings, and
falling output, high government increasing costs for businesses.
spending, and falling aggregate
demand.
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46. and businesses, minus the income
earned by foreigners investing in the
UK).
Economic growth is likely to lead to an
increase in the amount of investment
in the economy, as well as an increase
in the number of new businesses
starting up, leading to increases in
output, expenditure and income.
In order to improve the G.D.P. or the
G.N.P. per capita (i.e. in order to
achieve a faster rate of economic
There are several methods that a
growth), then the government must
government can use to reduce the
ensure that the workforce is
rate of inflation in an economy:
adequately educated and trained to
Increasing interest rates to discourage perform their jobs effectively,
high levels of customer spending. significant amounts of investment in
new machinery and production
Reducing the amount of credit techniques are undertaken, and
(borrowing) that is available to natural resources must be used to
customers. their optimum efficiency.
Incomes policies, where pay increases Balance of payments. This is a
are limited, so to deter high levels of record of a country's financial
costs and expenditure. transactions with the rest of the world
over a given period of time (normally
Economic growth. This term refers to
12 months).
a real growth (i.e. accounting for the
effects of inflation) in the income per The current account of the balance of
capita (or income per head) of the payments measures both 'visible' trade
population over a given period of time. (that is, the imports and exports of
tangible goods such as furniture and
It is normally measured by reference to
cars) and 'invisible' trade (that is, the
Gross Domestic Product (G.D.P)
imports and exports of intangible
and Gross National Product (G.N.P).
services, such as banking, shipping,
Gross Domestic Product is the total and insurance). The capital account of
value of a country's output over a the balance of payments measures
period of time (usually 12 months). any flows of capital between the UK
and other countries (purchase of
Gross National Product is calculated shares and other forms of investment).
by adding G.D.P. to the net income
from abroad (i.e. the income earned on The exchange rate is the external
overseas investments by UK citizens price of a country's currency,
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47. expressed in terms of another foreign goods and services cheaper to
currency. import.
For example, £1 = 1.5 euros A fixed exchange rate system
involves the value of the currency
A free-floating exchange rate system being fixed against other currencies
involves the value of the currency and not being allowed to fluctuate in
being allowed to float (fluctuate) response to the demand and supply
according to the supply and demand for it. This involves government
for the currency. intervention on a regular basis, buying
A demand for sterling is created when the currency when its value is
the UK exports goods and services threatening to fall, and selling the
(foreigners must pay for these goods currency when its value is threatening
and services using sterling, which they to rise.
purchase in exchange for their own Under this system, the government
currencies). can devalue the currency if it feels that
A supply of sterling is generated when its value is too high against foreign
the UK imports goods and services currencies, making their goods and
(i.e. the UK must pay for these imports services uncompetitive. This
using the foreign currency of the devaluation of the currency boosts the
country concerned). These foreign international competitiveness of the
currencies are purchased in exchange country's exports, by making them
for sterling on the world currency cheaper for other countries to
market. purchase.
An increase in the value of the pound Alternatively, the government can
is known as an appreciation, and a revalue the currency if it feels that its
fall in the value of the pound is known value is too low against foreign
as depreciation.. A strong pound currencies, making the level of
makes goods and services produced demand too high for their goods and
in the UK more expensive for services and leading to inflation.
foreigners to purchase, but makes
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48. Exchange Rates
recently. Anything that comes from
abroad is now more expensive: parts,
components, finished goods, stocks,
oil, food. Almost all firms import
something, and are therefore likely to
face higher costs. UK customers may
move away from imports and foreign
holidays as they are relatively more
expensive.
- That leads to a wider benefit: the UK
The exchange rate is the price of a
is now relatively cheaper to foreigners,
currency. That’s often a very difficult
providing UK firms with better export
concept to get your head around,
opportunities, as well as more
particularly as ‘common sense’ is
domestic demand.
misinformed by “exchanging” or
“swapping” currencies when you go Evaluation points
abroad on holiday. But if you get
some Euros before heading off for - The impact of changing exchange
France, you aren’t swapping your £s rates will be different on different
for €s. You’re buying them. businesses. Firms with big import bills
will be hit hard. Other businesses that
So the £ is quite literally on sale in the are seeking to expand exports may
foreign exchange market. The graph find demand increasing for their
above points out the basic history you products or services. Firms that were
need to understand. The £ broadly fell planning to ‘offshore’ some of their
in value (it ‘depreciated’) from the production might reconsider (check out
1980s until the early 90s. Our the links below).
currency then sharply appreciated in - The uncertainty of exchange rate
the mid 90s, where it stayed (with change is a big headache for firms,
some fluctuations) before plunging and tends to undermine overseas
again in 2008. investments and makes UK firms think
twice before embarking on any
What does this mean for UK
overseas project.
businesses?
- Exchange rates might not make such
a big difference if firms or their
- In general, a lower value £ means
customers are not price sensitive, of
that imports are more expensive.
course.
That’s part of the reason why there’s
been upward pressure on inflation
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49. 1.4.1 Current Economic Climate: text may 2009 q6
may 2009 q12
Economic Growth, 46-50 jan 2009 q7
Exchange Rates, may 2010 q 13
Inflation
unemployment
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50. Section 5: Financing the new business idea
Legal Structure Partnership
Sole Trader To overcome
many of the
A sole trader is a problems of a
one-person sole trader, a partnership may be
business, commonly formed. A partnership is an association
found in trades of individuals and generally there will
where only small be between 2 and 20 partners.
amounts of finance
are required to set Each partner is responsible for the
up and where there debts of the partnership and therefore
are very few advantages to the you would need to choose your
existence of larger organisations (e.g. partners carefully and draw up an
hairdressing, newsagents, market agreement on the responsibilities and
traders). rights of each partner (known as a
Deed of Partnership or The Articles
Sole traders often employ waged of Partnership). The most common
employees, but they alone have to examples of a partnership are doctor's
provide all the finance (often savings surgeries, veterinarians, accountants,
and bank loans) and bear all the risks solicitors and dentists.
of the business venture. In return, they
have full control of the business and As stated earlier, most partners in a
enjoy all the profits. partnership face unlimited liability for
their debts. The only exception is in a
A sole trader faces unlimited liability Limited Partnership. This is where a
for his/her debts and it is referred to as partnership may wish to raise
an unincorporated business - this additional finance, but does not wish to
means that there is no legal difference take on any new active partners.
between the business and the owner.
To overcome this problem, the
Examples of Sole Traders partnership may take on as many
Sleeping (or Silent) Partners as they
wish - these people will provide
finance for the business to use, but will
not have any input into how the
business is run. In other words, they
have purely put the money into the
business as an investment. These
Sleeping Partners face limited liability
for the debts of the partnership. A
partnership, just like a sole trader, is
an unincorporated business.
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