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This may seem a very straightforward question. The location of a business refers, in this context to its physical location; literally referring to the ground upon which the organisation mainly operates. We can examine this matter on a macro- or a micro-scale, the relevance of which will be different for different types of business.
Macro-decisions are those concerning the location and physical organisation of a business in 'big' terms. For some companies, this will mean determining the countries, or even the continents in which the business will operate. For others, it may refer to which parts of this country the business should operate in. Such matters are generally considered to be strategic as they can have a significant effect on the success or failure of the business.
Micro-decisions, as the name suggests, refer to location decisions taken once the macro-decisions have been made. It might be that a company decides to build a factory in Europe (the macro-decision), but it then needs to be decided which European country and which city in the chosen country is most suitable. For smaller companies, micro decisions would concern the street on which to locate, or even which part of a given street.
Factors in business location
With the foregoing in mind, we must now turn our attention to the factors that a business takes into account when deciding where to locate. These factors will be equally applicable for both macro- and micro location decisions, depending upon the individual business.
There are a number of factors that can help to determine business location. The contribution that each factor has will naturally vary from case to case. The most significant factors are shown in Figure 6.1.
6.4 Availability of appropriate labour
Labour, as one of an organisation's key inputs, is necessarily an important factor in location. The key consideration here is the availability of appropriate labour rather than the availability of labour per se.
Some businesses in, for example, heavy industries (e.g. shipbuilders, steelworks, etc.) require relatively large numbers of skilled and semiskilled workers. Furthermore, in practice, much of this labour is male. It follows that businesses of this type would be located in regions where the key labour input is plentiful. Of course, one could plausibly argue that the employer attracts the key labour input to its vicinity. Other types of business require staff with key intellectual skills, such as science, computing or accountancy. This is one reason for the concentration of banking and finance in the City of London.
In addition to the availability of labour inputs, business location is sometimes influenced by government regulation. Some organisations are guided in their choice of country of location by the degree of regulation of the workforce in the country. In some countries, employers must, by law, make more provisions for employees than in others. Countries with less regulation of the workplace may attract more relocation than those with more. This is one of the reasons why the UK government refused to subscribe to the terms of the Social Chapter of the Treaty on European Union 1992 (Maastricht Agreement) - a charter increasing employee rights in the workplace.
14.1 What is law?
When we consider how legal matters affect businesses and other organisations, we should consider it to be essentially a part of the political environment. However, its complexities and importance necessitate a more detailed discussion. This is the objective of this chapter.
Definition and purpose of law
A system of rules
In any society, the complex interrelationships between legally responsible parties, such as people and companies, need to be regulated. It is generally understood that limits must be placed upon activities to prevent miscreants and other irresponsible people from abusing their freedom in a democratic state. Such acceptation leads to the enforcement of 'rules'. However, not all rules carry the same weight. A distinction needs to be drawn between legal rules and other types of rules. We sometimes use the term 'rules' to describe norms of behaviour in society. We may consider ourselves to be breaking 'social rules' if we act in an antisocial manner, such as dressing in an unconventional way, or if we are rude or insulting to others. Within organisations, rules are imposed to facilitate normal functioning and may take the form of rigid procedures and limits of behaviour, such as a rule that receipts must be provided to support all expense claims.
Legal rules are different from social and other rules. They are characterised by the fact that they are enforceable by the judiciary which acts on behalf of the state. So whereas the de facto rule 'do not swear in the office' is not enforceable by the state, the rule 'do not steal cars' is. It is a matter of legal and philosophical debate at which degree of seriousness a rule becomes enforceable in law by the state. The rule 'do not walk on the grass' in a public park may, for example, be a rule which some individuals feel should be enforceable in law where others may consider it a matter of utter inconsequence.
As the law is primarily designed to serve the citizens of a state, it is reasonable to expect that legal rules should vary according to differing national customs and societal expectations. In traditional Islamic law for example, adultery is considered to be illegal (breaking a legal rule) as it is in contravention of the Qu'ran (Koran). In consequence, the act, if discovered, is (theoretically) punishable by the Islamic state. In contrast, the sensibilities of citizens in western nations like the UK renders adultery an act which may contravene most people's social or ethical code, but is not considered being punishable by the state. This is not to say that adultery may not lead to indirect legal action in the event that the offended spouse elected to seek a divorce.
The purpose of law
Legal rules serve essentially the same purpose as other types of rules. It does not take a lot of imagination to conceive of the chaos that would arise if football was deprived of its rules and the same is true of society at large. Laws serve three broad purposes:
To permit individuals to engage in lawful activities without apprehension or molestation by others;
To restrict unlawful or otherwise disturbing individuals and behaviour;
To constrain individuals to comply with legally required activities, such as the payment of taxes.
The normal functioning of society rests upon the assumption that the majority of people agree to comply with the law, in the same way that the normal functioning of a football match relies upon each player complying with the rules. It follows that the majority must view the laws that affect them as reasonable and fair - a situation theoretically guaranteed by having a democratically elected legislature.
14.4 Business law
The legal regulation of business in the UK has increased over recent years. Whilst some aspects of law that affect business are ancient, such as the ancient common laws concerning contract, others have arisen from such factors as employees' increased expectations from employers and the UK's supranational influences, particularly the EU. The result of increased regulation is a complex legal environment which some have argued imposes an inconvenient cost burden upon businesses. There is an active political debate regarding the extent to which business should be regulated, particularly with regard to the regulation of employment policies and employers' obligations towards employees. The political right have tended to oppose greatly increased regulation whilst the European left has tended to espouse a contrary philosophy.
All areas of law that we have considered can affect business - both civil and criminal laws apply to business. Furthermore, the tranche of laws that we need to consider includes both common laws and statute legislation. Recent trends have seen an increase in statutory legislation.
In considering this area of law, we will discuss it as it affects the various aspects of business practice. No discussion of this nature can possibly be exhaustive, but it is hoped that readers will gain an appreciation of the types of law that can influence and regulate business practice.
This area of law affects the legal status of limited companies and hence has no direct bearing on unincorporated organisations, such as sole proprietors and partnerships. The conditions placed upon limited companies and their prescribed legal modus operandi is enshrined in a raft of Companies Acts - statutes of Parliament.
Company law has tended to evolve and change as the activities and situations which needed to be legislated for changed over time. The earliest pieces of company law were introduced in the nineteenth century. The Companies Act 1844, the Limited Liability Act 1855 and the Joint Stock Companies Act 1856 established the notion of a non-human business entity comprising many investors and members and introduced the important concept of limited liability (see Chapter 4).
A new Companies Act is passed by Parliament when it feels the need to update the law to account for changes in business activity or in the business environment. Each one builds upon the provisions of the previous Acts, but unless it is a consolidated Act, does not replace or repeal earlier Acts. The interpretation of Companies Acts is made rather more complex by a number of important common law precedents - decided cases which amend the meanings of the Acts.
The tranche of company law is necessary because of the privileges and responsibilities associated with holding limited liability. Accordingly, all limited company activities are regulated by either statute or common law including:
The constitution and nature of limited companies and limited liability;
Rules governing the issuing of shares and responsibilities towards shareholders;
Responsibilities of directors and the company secretary;
Procedures in the unfortunate event of insolvency.
Businesses use contracts in a wide variety of contexts. Examples include employees' contracts of employment and sales and purchases being subject to contracts of sale and supply. Contracts, which are a matter of common law, contain four legal components. The law cannot enforce a contract unless all four components are evident. The four components are as follows:
There must be an offer. This is a declaration that the offering party intends to be legally bound by the terms of the offer. The offer may be in writing, or, importantly in the case of some contracts, the offer may be verbal (spoken rather than written). In some cases, an offer may be implied by conduct. The law accepts defective or that the other party has failed to honour it in terms of the substance of the offer or acceptance.
The law, personnel and employment
The area of laws as they affect the employment and management of people cover a wide range of activities and practices. Included in this category are laws which cover:
Terms and conditions of employment;
Sex and racial discrimination;
Employment of ex-offenders;
Employment of disabled workers;
Equal pay for 'equal jobs';
Dismissal and redundancy.
Some of the most important pieces of employment legislation are discussed below. The most significant piece of employment law in recent years is the Employment Protection (Consolidation) Act, 1978, a wide ranging piece of legislation that provides that, among other things, employees be furnished with written terms and conditions of employment within 2 months of starting. This document should contain the general details of the employment agreement, such as the identity of the two parties, rate of pay, holiday entitlements, job title, etc. Other important employment law issues are discussed below many types of offer, but in all cases, they must be clear and unambiguous. An offer can be cancelled at any point up to the time that it is accepted.
There must be an acceptance of the offer. The acceptance of the offer must also be clear and unambiguous and must be on the same terms as the offer (i.e. it does not contain any amendments or additions). The combination of an offer and an acceptance constitutes an agreement, but this is not yet a contract.
There must be consideration - the legal term for payment. It should be understood that payment need not necessarily be financial; it can be an exchange or swap of payment in kind.
There must be an intention to create legal relations. This is an agreement to be legally bound by the contract. This is the key difference between informal agreements and contracts. In order to create a legally binding agreement, both parties in the contract must have legal capacity - that is, they must be entities which are legally able to make contracts, such as individual people or businesses. In the case of a limited company, the company has legal capacity whilst for non-incorporated businesses; the proprietor is recognised as having capacity.
12.1 Business and technology
The growth of technology
The growth and expansion of technology has been one of the key characteristics of the twentieth century. Although the scientific heritage goes back many hundreds of years, the development and application of technology and its effects on social and business life, has been enormous since the early years of this century. In the year 1900, the world was very different than it is today. It was a world that had never conceived of flight, television, antibiotics, anaesthetics or computers, and in which the telephone and the motorcar were in their infancy Such a massive set of changing circumstances has had a profound effect on almost every part of personal and business life. Technological change has brought about the possibility of global communications, inter-planetary transport, the worldwide development of businesses and the greatly increased speed (manufacturing and distribution), and quality of manufactured products. In this chapter, we will consider the ways in which businesses use technology and how its development has changed organisational life and may continue to do so in the future.
What advantages does technology offer a business?
The starting point of our discussion is to examine the benefits that the various types of technology have brought to business.
Technology can help a business to reduce costs. One of the most obvious ways in which this has been done is to replace manual tasks with automation. Much of the work that was previously performed by armies of line workers in a factory or by teams of clerical workers in an office can now be carried out by machines of various types.
Technology offers the business an opportunity to increase quality through the removal of human error, and the introduction of more consistent procedures. The reduction of errors by increased automation offers the possibility of greater customer confidence and lower costs through reduced error corrections.
Technology enables business to make significant increases in productivity. Productivity refers to the business's ability to produce output with a specific level of resource. The employment of technology renders the business more efficient - machines can work longer hours with no breaks; they never 'ring in sick' nor go to the bathroom. In short, more work output can be produced for the same cost, or less, than if the work was performed by humans.
Technology can help businesses to accelerate processes. The more rapid transmission of information coupled with the mechanisation of many tasks means that decisions can be made faster and goods can be produced more rapidly than previously.
Technology facilitates the making of better and more accurate decisions. We know from our own experience at home that we are more informed about complex issues than ever before through such media as radio, television and other electronic means of communications. In business, the rapidity and accuracy of information transmission has enabled managers to have possession of the information they need to make informed decisions.
Corporate finance and accounting
Accountants and accounting technicians
An accountant is a person who has gained a professional qualification from one of the main accountancy bodies. Entry to such bodies is by examination and passing all of the papers for a given body can take several years (the Association of Chartered Certified Accountant, e.g. currently requires that each candidate passes 14 papers to gain admission as a professional member). The bodies recognised in the various parts of the UK are as follows (brackets indicate designatory letters of professional members):
Association of Chartered Certified Accountants (ACCA)
Chartered Institute of Management Accountants (CIMA)
Chartered Institute of Public Finance and Accountancy(CIPFA)
Institute of Chartered Accountants in England and Wales (ICAEW)
Institute of Chartered Accountants in Scotland (ICAS)
Institute of Chartered Accountants in Ireland (ICAI).
A second important type of employee in the accounting department is the accounting technician. These are people who have qualified as members of the Association of Accounting Tech managing the accounting function. Accounting technicians form an important part of the administration in many accounting departments.
The diversity of the jobs that are performed in the accounting function means that both accountants and accounting technicians are usually assisted by other administrative and clerical staff.
Types of accountant
Accountants are found in all sectors of business and governmental activity. Any organisation that uses money (i.e. all but a tiny minority) has a potential need for accounting professionals. Generally speaking, accountants do one or more of four things:
They report on the financial performance or financial state of an organisation;
They manage finance and financial information and they advise non-financial managers based on their knowledge;
They audit (check and approve) financial information by carrying out procedures to ensure the veracity of financial statements;
They advise on business and money-related matters, such as investments, taxation and forecasting.
Accordingly, there are four broad types of accounting:
Financial accounting, producing financial reports;
Management accounting, assisting with the management of the organisation;
Auditing, checking the financial statements and accounting systems of an organisation;
Consultancy and specialist accounting.
The majority of accountants work in the first three areas. These are the 'bread and butter' accountancy areas. A minority act as advisers or consultants in specialised areas. In addition to specialise in such things as tax, some accountants work in accounting law or in mergers and acquisitions whilst others work in areas, such as international finance, banking and insurance. This chapter cannot possibly be exhaustive in its discussion, but it hoped that the discussion acts as an overview of the subject. Readers should bear in mind that although the accounting areas are considered separately, the tasks may be performed by the same person in smaller companies.
As their title suggests, management accountants are engaged in accounting as it relates to helping to manage the business. Their task extends to the preparation of information that helps other (non-accountant) managers perform their jobs with the maximum possible information 'at their fingertips'. In consequence, it will be the management accountant that managers approach to receive advice of such things as investment (e.g. in new machinery), staffing levels, marketing spending, and the funding of research and development programmes. In most companies, all senior managers will consult or be consulted by the management accountant on a regular basis.
As a professional who understands the company's financial affairs and who is also in possession of a wide range of planning and forecasting skills, a management accountant can carry out several management tasks for or on behalf of other managers. The most common are described below:
Management accounts: The issuing of financial information on (usually) a monthly basis to inform managers on the financial state of the business to facilitate understanding and to promote intelligent decision-making.
Costing: The process of determining the costs associated with the organisation's products and services. There are a number of approaches to costing; the approach adopted depends upon the type of information wanted by the management. It may be that a manager wants to know the cost of materials in a product or it may be that the full cost is required including the share of fixed costs attributable to the product's production.
Cash-flow forecasting: The setting of revenue and payments estimates on a monthly basis for a forthcoming period of time (typically a year). By doing this, a business can see how cash balances vary from month to month and also highlight any months where there is a net cash outflow, in which case a way must be found for making good the shortfall.
Budgeting: The practice of setting income and expenditure expectations for a forthcoming period of time. A spending or expenditure budget represents an expectation or a limit at which spending departments, such as operations, should aim towards.
An income budget applies to those departments that raise money for the organisation. Hence, there may be a sales budget or a fund-raising budget (for charities). Budgets are set internally as a means of control where the value of a budget is set (usually) in negotiation with the departmental manager to whom it applies.
Variance analysis: This provides a means of comparison of actual performance against budget. Variances against budget are typically calculated monthly and can be good or bad news to the management accountant. - Adverse variances are those which are unfavourable to the business, that is, expenditure above budget or income below budget.- Favourable variances are those which are good news, that is, expenditure below budget or income above budget.
Investment appraisal: This appraisal is the responsibility of the management accountant and involves evaluating the financial viability of investments proposed by departmental managers. It may be, for example, that the manufacturing director wishes to purchase some extra factory space or a new machine. The management accountant will calculate the returns from the investment (in increased sales or reduced costs as a result of the purchase) and compare this against the price of the investment. If the price of the investment can be repaid within an acceptable time period, the accountant will probably approve the investment and release the cash. If, however, it looks like the investment will not give significant benefits to the business, it is likely that the accountant will recommend that it is not approved.
Competitor analysis: This analysis involves gaining intelligence on a company's competitors by analysing financial information in competitors' published accounts. Whilst this task could theoretically be done by anybody, the management accountant is often best suited for the task. He or she wills usually 'pick through' competitors' accounts to see how the competitor looks against his own business. In a management technique called benchmarking, accountants analyse the performance of the leading competitor in an industry (e.g. the most profitable) and seek to learn how the superior performance has been brought about. This can help to inform the practice of departmental managers in the business as they
29.3 Financial statements
When accountants (usually financial accountants) report on a company's performance, they must do so using strictly defined formats. The three mandatory reporting statements are, as we have seen, the profit and loss statement, the balance sheet and the CFS. The law requires that each statement be constructed using specific rules so that observers know that they are making a meaningful comparison when they study the accounts of more than one business. The old Statements of Standard Accounting Practice (SSAPs) are being replaced with instruments called FRSs. Companies are thus bound to work within the provisions of these standards when reporting on financial matters.
What is a balance sheet?
The balance sheet is a statement which lists the assets, liabilities and equity of a business at any specified time. In simple terms it is a 'snapshot' of the financial health of the business at that point in time and most companies will prepare a balance sheet every 6 or 12 months.
The term 'balance sheet' derives from the two-way process of detailing the sources of finance on one side of the balance sheet and how it has been used on the other side. Every entry for an item of incoming finance must have a corresponding entry for usage, hence the term 'double entry'. It must always balance.
Items in the balance sheet: assets side
Fixed assets include 'tangible assets' that is, the value of money invested in plant, machinery, buildings, fittings, vehicles and land. They also include the value of longer-term investments.
Current assets refer to the value of money tied in things which enable the business to operate in the relatively short term.
There are three categories of current asset:
- Stocks are items stored by the business to be processed or to sold,
- Debtors refer to the amount of money owed to the company,
- Investments refer to the value of short-term investments,
- Cash is simply money which is immediately available either in a bank account or in literal notes and coins.
Current liabilities refer to the value of money that the business owes to its suppliers for goods supplied or for services rendered.
These are sometimes called creditors and fit into two categories:
- 'due within one year' are loans or debts due for repayment with a year;
- 'due after one year' are loans and debts due for repayment over the longer term.
The CFS is the third compulsory financial statement. The CFS is unique in that examines only movements of cash in and out of the company over the course of the financial year. In this respect, it is different from the balance sheet in that the balance sheet refers to just the last day of the financial year and that it records the value of assets as well as cash on the day in question.
It follows from the statement's raison d'être, that it should be structured in such a way as to show each area of inward and outward cash movement. This is indeed the case. The general form of the CFS is as follows:
CFS: British Telecommunications plc
The following statement is simplified from the BT Group plc accounts
for the year to 31 March 2004
Items in the CFS
Net cash inflow from operating activities shows cash injections from normal trading. This is often simply the cash gained from profits after all outgoing costs (e.g. dividends) have been paid.
Returns on investment and servicing of finance shows the amount of cash gained or lost as a result of investments and debts. The company pays servicing costs on its debts (rather like a mortgage holder pays a monthly instalment on a mortgage), but it receives income from any investments it has made, such as bank deposits.
Free cash flow refers to cash receipts less payments from trading activities before corporate transactions, dividend payments and financing.
Financing concerns the provision of cash to the business for use over the longer term and can include such things as ne long-term loans (cash income), loan repayment (cash outgoing) or proceeds from the sale of new shares in the company (cash income - a process known as a rights issue).
Taxation is cash paid on all of the company's taxable income. This includes tax on profits and on income from investments. The completed CFS shows a net inflow or outflow of cash over the course of the financial year in question. It follows that a positive figure is significantly more favourable than a negative figure.
Prices and costs: what is the difference?
In common language, we tend to use the terms 'price' and 'cost' interchangeably. In strict business and economic terms, there is a clear difference. Put simply: the seller's price is the buyer's cost.
In the above example, we saw that the price of a tin of baked beans
was 45 pennies. When ASDA bought the beans from its supplier (e.g.
Heinz), it would incur a cost by buying it. The cost to ASDA would be
some amount less than its asking price so that by selling the beans, it
could make a profit. To you, the buyer of the beans, the ASDA's price
of 45 pennies becomes a cost (to you) of the same amount.
Hence, a business will often speak of its costs to mean the total
amount of money needed to operate the business. It will use the prices
charged for its products to (hopefully) cover the costs it had incurred.
Costs of call center
When examining business costs, a business first identifies the monetary
value of the total costs that the business has incurred and then it attempts
to see how the total cost is made up.
The first component of the total cost is the fixed cost. Fixed costs are
those which do not vary with an organisation's output. In other words,
they must be paid even if the business does not make or do anything.
Examples of fixed costs in most businesses include (Figure 16.1):
â- rent on the factory, land, offices, etc.
â- local authority taxation;
â- some staff/employee costs;
â- water rates (if it is not metered);
â- repayments on any loans that the business may have
The second component of total cost is the variable cost. Variable costs are
those which do vary with organisational output: if the business makes
nothing, it incurs no variable costs. Examples include:
â- raw material costs;
â- some labour costs (those employed on a piece-rate basis);
â- energy costs (e.g. needed to operate machines);
â- transportation costs.
Hence we arrive at a very simple mathematical definition of total cost
Total cost = fixed cost + variable cost or TC = FC + VC
In examining costs, economists tend to distinguish between what are
termed short-run and long-run costs. In the short-run, it is assumed that
production inputs like rent on property are fixed in that the company
cannot immediately terminate the use of the property, and thus reduce
its costs of the rent. It is thus considered as a short-run fixed cost. In
the long-run, however, the fixed costs can be reduced by giving up use
of the property (or selling a machine, building, etc.). What was a shortrun fixed cost can thus become a long-run variable cost.
Most calculations in micro-economics are based on the short-run
basis. When we enter a discussion of economics in the longer run, it
can get very complicated as all fixed costs can become variable eventually (i.e. in the very long-run).
Average and marginal costs
Economists, in analysing the costs of a business use the terms average
and marginal costs to get a better understanding of how costs are
incurred by a business. Let us first define the terms.
The average cost of a business describes is the cost, on average, attributable to each unit of output (e.g. each can of beer, washing machine, car,
etc.). Whilst businesses may know some costs, (e.g. the material cost) of
each item it makes (but in practice even this is often unknown), it can allocate fixed costs to an item by performing a simple calculation. We find the
average cost by dividing the total cost by the output in units or quantity.
The marginal cost is the total cost incurred by the business for each extra
unit of output it produces. Initially, we would expect the marginal cost
to fall as output (quantity) increases. This is because each extra unit
produced 'dilutes' the fixed costs by that little bit more and although
the variable cost attributable to each unit may remain relatively constant, the total cost per unit incurred is likely to fall.
When output rises past a certain level, however, the marginal cost
usually starts to rise. At the point at which it starts to increase, the business is beginning to increase its total costs faster that it can recover
them through simply producing more units. This is due to short-run
diseconomies of scale that creep into a business through having to, say,
purchase a new machine to make more units. The point at which marginal cost is at its lowest is, therefore the point at which production is
at its most efficient.
Marginal cost is defined as:
where the symbol (delta) denotes a change in, so TC means the
change in total cost.
The costs schedule
The best way to understand how these costs all fit together is to construct a table (Table 16.1). You are given the following information.
Using the information and equations we have already learned, we can
now fill in the rest of this table. Fixed costs, by definition will stay the
same for all quantities produced. Total cost can be obtained by adding
together the fixed and variable costs. Average cost can be obtained by
dividing the total cost by the quantity. Marginal cost, in this case, can be
calculated by subtracting the previous total cost from the current one.
The completed table is thus shown as Table 16.2.
The purpose of the price
The price that a business charges for its goods and services has a number of purposes.
It is a means of covering the costs that the business has incurred in
bringing the product to the market. Such costs may typically include
the cost of the materials in the product, the costs of labour, rent on
premises, transport costs, marketing or advertising costs, packaging
costs, etc. In this respect, the price charged ensures that the seller does
not make a trading loss.
It is a means of gaining wealth and of making a profit if the price
charged includes a net surplus over all costs incurred. Profits are used
to reinvest in the business (e.g. buying more equipment) and to pay
the owners of the business a return, such as the giving of dividends
We use the term 'profit' in a number of ways in ordinary conversation. In economic
terms, the profit is the surplus a business is left with once a price has been achieved in a
business transaction and all the costs have been paid.
It can represent the cash surplus on one business transaction, in which case we
express it as:
Profit = price -total cost
The price can sometimes be a signal to the buyer. A buyer often makes
the assumption that 'you get what you pay for'. In this regard, a low
price will communicate certain features of the product to the buyer
(e.g. cheap and cheerful, functional, basic, etc.) whereas a high price
will have the opposite effect (e.g. quality, premium, luxurious, etc.).
The term revenue is sometimes referred to as sales value, turnover, or
income. It is the total sales for a business over a period of time and is
total revenue = price *quantity sold
Average and marginal revenues
In the same way that we calculated average and marginal costs, there is
also value in calculating the same for revenues.
Average revenue (AR) is the revenue that a business earns from each
unit at any given level of output
By understanding the information we have so far discussed, we can introduce the concept of break-even point - the quantity beyond which the
business's revenues exceed its total costs. We can intuitively see that if a
business has no output, it is still incurring its fixed costs, such as rent and
local authority taxation. Using the equation Ï€ =TR - TC, it is clear that
if TR = 0 (because nothing is being sold) and TC (which is partly fixed
cost) is a positive figure, then Ï€ would be a negative figure, that is a loss.
The break-even graph in Figure 16.4 is explained as follows. At
zero output, the business incurs the full burden of fixed cost, but no
variable cost. There is, of course, no revenue. The loss on operations is
the value of the fixed costs.
As output rises, the business begins to incur variable costs and hence
total cost rises parallel to variable costs (because total cost equals variable cost plus fixed cost, which remains constant). Revenue rises at a
faster rate than costs due to the price being in excess of costs with a view
to more then covering variable costs. For simplification purposes, the
total revenue line makes the assumption in this case that an increase in
quantity does not produce a reduction in price. We know this to be
something of a simplification, but it enables us to understand the principle of break even.
At the break-even point, output reaches a level at which the total
revenue earned from all units produced overtakes total cost. Production
below the quantity at break-even point incurs an overall loss to the
business whereas at levels above it, an overall profit is made.
Marketing and business products
Marketing has been interpreted in many different ways, and we should
dispense at once with the notion it is simply about advertising and issuing press statements - it is much more. In the modern environment,
marketing can be seen as the process of matching the abilities of the
organisation to the existing and future needs of its customers, to
achieve the greatest benefits for both parties. The result is an exchange
in which the organisation receives income through meeting customers'
needs, and the customers receive benefits that satisfy, or perhaps even
exceed, their expectations. The term exchange refers to the act of giving
something in return for receiving something, which may be in the
form of a tangible or intangible product or service.
Consider the following two definitions of marketing:
Marketing is the management process which identifies, anticipates and
supplies customer requirements efficiently and profitably.
The Chartered Institute of Marketing - CIM.
Marketing is not only much broader than selling â€¦ It encompasses the
entire business. It is the whole business seen from the point of view
of its final result, that is, from the customers' point of view.
Peter Drucker (1999).
These two definitions show us two complementary approaches to marketing. Firstly, the Chartered Institute of Marketing (CIM) see it as a
management process, that is, something that management does. A management process involves procedures and systems put in place to implement marketing within the organisation. Secondly, Drucker proposes
a wider definition than the CIM in that it encompasses the entire business and we can see marketing as a philosophy of business. The marketing
philosophy is one that is geared to doing everything with the benefit of
the customer in mind.
Organisations that adopt marketing as an underlying philosophy of
business are said to be marketing-oriented organisations. Such organisations focus on customer needs and, by establishing and maintaining
close customer relations, are able to understand their current and
future requirements. They are therefore prepared to make the necessary adaptations to their operations to meet changing market opportunities. This is in contrast to organisations which are based primarily
around a different functional competence of the business. A heavy
engineering facility (e.g. a shipyard or a steel-milling business), for
example, will often be oriented towards its operations department and
said to be production oriented. This is because of the nature of the products produced and the imperatives to maintain operational quality and
reduce costs. Other organisations may be described as sales- or financially oriented, and we cannot say that one approach is right or wrong -
we can simply say that the orientation should be chosen as that which
most appropriate for the organisation and its products.
The marketing concept
The marketing concept signifies that the customer is of paramount importance to the organisation, and that corporate goals can only be achieved
by meeting and exceeding customer expectations better than the competition. This philosophy requires an integrated approach where all
of the organisation's policies and activities are focussed to that end, and
all of the employees assume responsibility for the creation and maintenance of first class customer service. In other words, the belief that the
customer is central to the well-being of the organisation must run
through all departments irrespective of their specific functions. The role
of the marketing department in such an organisation is that of product or
service champion and co-ordinator of activities. The marketing concept
is very much in line with the philosophies of Total Quality Management
and Six Sigma, which are explained in more detail in Chapter 24.
28.2 The marketing function
The role of the marketing department varies according to the needs and
situation of the organisation. Some are very large and elaborate whilst
others have none at all or perhaps just one marketing person.
Furthermore, the responsibilities of the marketing function also vary
greatly. Some marketing functions include research and development
(R&D) and sales whilst other merely look after any press releases or promotional activities undertaken. In one respect, therefore, it is impossible
to generalise as to the precise activities of a marketing department. This
chapter deals with what may be considered to be an idealised marketing
department, or one which carries out all of the activities assigned to it
by noted theorists and academics who specialise in the marketing field.
This activity is central to the marketing function and follows the analyses of market research information, ideally via a marketing information system (MIS), which, according to Kotler and Armstrong (2003), is
'an organised way of continually gathering and analysing data to provide marketing managers with the information they need to make decisions'.
planning managers are concerned with the identification of market
opportunities, the selection of target markets, and the preparation of
plans for market, product or service development. They may also be
involved with the preparation of action plans for achieving sales targets.
The marketing mix
With an understanding of its customers, an organisation can effectively
develop its marketing mix, which is the term used to describe the framework for the tactical management of customer relationships. It comprises the set of controllable variable activities that can be blended to
provide competitive advantage and influence the desired responses of
the buyers in the target markets.
To enable a simpler understanding of the role of marketing in a
business, writers in this field have traditionally used the '4 Ps' model to
describe the marketing mix:
â- Product: The product's distinguishing features (e.g. quality, brand name, uniqueness, packaging, etc.).
â- Price: The amount of money to be paid for the product (and its perceived value to
the customer), credit terms, discounts, etc.
â- Place: The distribution channels and transportation, or how the goods will actually
get to the customer.
â- Promotion: The means of raising product awareness (e.g. publicity, advertising, sponsorship, etc.)
â- People: The employees may be in effect the personification of the 'service' (e.g. waiters, hotel receptionists, etc.).
â- Process: A key part of the service may be how it is delivered to the customer (e.g.
demonstrating professionalism, courtesy, understanding, etc.).
â- Physical evidence: The environment in which the service is delivered (e.g. clean and
tidy, hygienic, appropriate décor for the nature of business, etc.).
Marketing sets prices
The ways in which businesses attach prices are complicated. The price
that a product is given by its producer has a number of determining
â- the cost of production;
â- the price of competitive products;
â- the customer's expectations of what the price should be (the
utility the customer attaches to the product);
â- temporary tactics to influence the volume of sales (e.g. shortterm price reductions to shift slow-moving stock);
â- the elasticity of demand of the product.
With such a complex set of determinants, the price attached to a product depends in large part on the stage of the product on the product
life cycle and the product's price elasticity of demand (i.e. how responsive the quantity demanded is to changes in the product's price, see
Part of the marketing process is to attach a price to products sold.
Usually working alongside an accountant, the marketing specialists will
be aware of the prices that the target market will be willing to pay for
the product. Careful marketing research will tell the marketing department the price that will yield the maximum long-term profit for the
product and the price chargeable will almost certainly inform the
design function as it produces the product at its inception. It may be,
for example, that the price chargeable for a small family car, mainly
targeted as a 'second' vehicle, is around £8000-9000. Working backwards, the price will guide the design function as it designs the car.
Pricing decisions at the point of a new product launch are a little more
complicated than pricing existing products. On the one hand, there is
good reason to attach a high price to the product to start recovering
the new product's development costs. On the other hand, a high price
may deter consumers from trying the product and so a lower price may
help the product to become established.
The approach taken will depend in large part on the number of consumers that are expected to buy the product, its distinctiveness or uniqueness, and its price elasticity of demand (i.e. how responsive demand is
to price). There are two broad introduction pricing strategies.
Price skimming involves attaching a relatively high price to the product at its launch. It is an appropriate when the early buyers of the product comprise a small part of the total market and who are prepared to
pay the high price to enjoy the product's benefits (i.e. it has a price
inelastic demand). It also relies on the presupposition that there are few
competitors to match the product's benefits. Price skimming is used in
sectors, such as pharmaceuticals and military equipment. If appropriate, new consumers are encouraged to buy the product with phased
price reductions as time passes.
Price penetration involves the attachment of a relatively low price to
the new product with a view to attracting a broad customer base early
in the product's life. Price increases may then be applied as a loyal customer base is established. Penetration is appropriate when the product's demand is responsive to price (price elasticity) or when the product
is entering a competitive market and market share is consequently a