Businesses work on a complex demand and supply based method of producing products and services.
- Supply is the quantity of a good or service that a producer is offering to supply into the market
- Demand is the quantity that the customers are willing to buy at a given price over a given period of time
- External factors, such as income or environmental or ethical change may mean that a product is no longer viable, smoking for example is no longer as profitable as it was as people no longer smoke as much as they used to. Influences may be out of the businesses control.
You may notice demand is present in the what influences the demand section, while it would not be a good idea to present it in an exam, I thought it worth including at the bottom as it technically does effect demand, as people may buy a product to own one before everyone else. Promotion is also a very broad term, this also encompasses things like fasion events, tastes and Economy also includes factors such as income.
Supply and Demand Competition
Supply of a product can generally be negated, as long as there is demand there will usually be a supply. Some mass markets, such as commodity items are often very unchanging and can have extremely thin margins to drive out competitors, this is known as a price war and can sometimes be more destructive to business profits than good as the product becomes devalued by the low price and people become unwilling to pay for the prices needed to pay for the product, however, this can sometimes improve the rate of the moving average as it forces businesses to increase their prices, usually at the same time to a higher-than-original value.That is one example of a price strategy (price war).
If there is no demand for a product, then there most likely will be no supply, as producers are not interested in creating a product that will not sell.
A Supply and Demand graph shows the relationship between the two, the graph can be altered by shifting either to the left or right, depending on whether you want to increase or decrease either, just remember that,
Left is less…
So by shifting either to the left, you are decreasing them. A handy tool for showing equilibrium.
When businesses want to compete with competitors, they may use one of numerous methods in order to encourage the sale of their products.
Psychological Pricing involves selling products and services at prices that people wrongly assume they are cheaper than they are, an example would be selling a product for £1.99, the aim is that the potential customer would often round down, and assume that the price of the product was £1, rather the fact that it is much closer to £2.
- Highly effective for large purchases, such as holidays, as the rounding amount is much larger.
- A study by Marketing Bulletin showed that over 60% of prices in advertising materials ended in a 9.
- A further study also concluded that a lot of customers base what price the product is worth on the left digit, so would assume a product is less than it actually is.
- When a set of prices are listed, it is often displayed with the higest price first, this is because it sets the perceived value of the rest of the products, and lower priced products are therefore considered higher value.
Some customers may not fall for the pricing strategy and could result in lost revenue as the business could have charged for the full perceived amount, and the impact of physiological pricing other than sales data is hard to quantify (not that sales data isn’t a good metric, however because the theory is mostly psychological the business cannot reliability take estimates)
Penetration Pricing involves selling a product for a low price at the start of its product life cycle, the aim of this is to improve sales as customers will take advantage of the low price, after the customers have repeat purchased and familiarised with the product and brand, the business will start to raise the price of the product, the aim of this being that the new customers will continue to buy the new high price product.
- This allows a product to gain market share quickly.
- This allows customers to become familiar with a product and brand.
Some Customers however may not be willing to pay the higher prices.
Some businesses will compete to get the lowest price, and thus engage in price wars, this is beneficial to the consumer as it means that they always get the lowest price however businesses find that they may overall loose revenue.
- This means that the consumer will have a lower price to pay, however they may find that businesses may start to not stock products that are too competitive as they simply cannot compete.
- Competition may become reduces which may be damaging in the long run.
Price skimming involves setting a high price to maximise profits of a particular product, this is most common in technology markets where the demand for products can be extremely lucrative.
- Price skimming only works on new product releases
- Price skimming can work effectively where early adopters are excited to own the product.
A loss leader is someone who sells below the normal price point in order to bring in customers for another motive, such as them browsing other parts of the store or to drive out competition.
When conducting market research businesses need to take risks and may be uncertain on the performance of those risks, however market research allows businesses to minimize the risk.
Market research in a dynamic market can be difficult as it can be hard to gauge what is an acceptable metric and one that will not change or become inaccurate. Businesses invest thousands in trying to calculate what the next big trend will be and even more in advertising.
- Selling Products is the ultimate goal for market research, however it may allow a business to better define its product for market
- Dynamic markets can provide access points for rapidly growing start-ups
- Markets can be dominated by Oligopolies, Monopolies or have low demand, which can mean that a business will struggle to set-up there
- Market research could be very expensive for a business and it has many pitfalls and benefits
There are a number of techniques that businesses can use to identify if they should set-up a business.
- Competitor Analysis, anything that allows a business to know what the otherbusiness competing are up to is competitior analysis.
- Crime Levels, Crime can ruin a business so it is important that a business is in a safe loaction, a jewlers in a poor area won’t do very well.
- Average Wage, wages could contribute to the staffing levels available for the businesses.
- Footfall, people who walk past the business.
- Client Need, Some business may setup new premisises as a client has created a demand.
- Overhead, a rented building with too high overhead may not be viable as a solution.
- Start-up Cost, some businesses cannot create a start-up without initial funding, especially if their project has great risk.
- Population/Target Market, local area business may not be able to set-up a business because the demand is so low.
- Public Opinion, some people may not like the idea of a business setting up in a particular area.
- Local Economy, the local area may not be affluent enough.
- Building Space, some business premises may not be large enough.
Some Market Research Techniques
Businesses can use multiple techniques to find out these aspects, such as:
- Landlord Conversation
Market research does have limitations,
- You cannot constantly keep asking the same customers
- You cannot ask some questions
- Data could be inaccurate
- It is expensive
- It is not always your own data
- It product idea could be stolen
- The market could be fast changing
- There could be leading questions or biased interviews when asking individuals
Marketing is Anticipating, and satisfying, customers wants and needs, efficiency and profitability, Marketing includes
- Market Research
- The Marketing Mix
What is the purpose of Marketing?
- To make profit, essentially by improving sales
- To remind the customer of your product through promotion
- To see what the customer wants by offering their product
- To link the product to the brand and create a brand association
- To communicate and offer competition to other businesses (to compete)
There are two types of business orientations, Business to Business where businesses sell products to other businesses, such as tools, office equipment and building supplies. Business to Customer is more noticeable to individuals as it is more prominent and most common.
Marketing begins by setting a goal or objective that defines what the company wants to achieve, and when it hopes to reach these goals.
They then create a marketing strategy, to outline how they will bring in what they wanted to reach their objective.
What defines a Market?
A market is anywhere that brings together buyers and sellers with a view of exchanging goods and services. The location can be physical, national global, physical or electronic.
A niche market is a small or select group of a larger market. Niche markets generally have a smaller cohort of customers interested in the product, however some businesses sell their products at a high price to compensate for lost sales.
Market size is the total volume or value of all sales of a particular group of products. Market growth is the percentage change in market size over a period of time. Market share is the percentage of the market achieved by one firm, or brand, or product.
Markets can be dynamic, which means they change quickly or stable, where any change is fairly small. Dynamic markets are becoming more and more common as technology advances to new greats, incorporating new techniques mean a business can become obsolete.
The Bank of England sets the base interest rates that the rest of the UK banks will follow, doing so allows them to control the UK inflation rate, which therefore allows them to dictate how much spending and saving occurs.
- A high Interest rate, will mean that savers will prosper as their savings will mature and eventually have more than what they started with.
- A low interest will mean that individuals are more likely to spend and therefore the economy will improve as the pound will strengthen against other currencies.
Businesses are more likely to buy large quantities during low interest times as the products will be cheaper, this also means that they can save on storage costs as the loan repayments will also come with less interest rates, proving a better investment than ones bought during a boom.
Above is a large graph that shows an example of an exchange rate, as you can see a Recession,Bust and Recovery are marked on the graph, during that time several stages will occur that aim to bring the economy back into normality, or a strong pound.
On the second period the beginning of the Recession occurs, at this time businesses will start to notice a drop in profits, and consumers will notice an increase in prices, this is where the UK has entered a recession, additionally unemployment will likely increase as businesses have to recover costs and plan for a rough time ahead. To try to aviod this, the Bank of England will lower the interest rate to try to improve spending.
During the Bust Period, Businesses that are luxury, high value and extravagant expenses will do poorly as potential customers are spending the money they have , business costs on warehouses and factorys however will decrease as the loan repayment percentage return is reduced. The Bank of England will keep the exchange rate low so that customers spend their money to boost the economy.
Then, the UK economy should improve and businesses will start to see more money flowing threough the tills, this is probably because The Bank of England has started to raise interest rates. This is beneficial for the savers, as their money will go further than before, having a higher interest rate, and the spenders who owe loans will see that the repayments for their loans will increase again. This is called a Recovery or Boom.
Just In Time is a lean production technique, It involves ordering a product right as it is about to run out, but before the business has to stop manufacture, this allows a business to work effectively when creating a product that requires a lot of parts and accessories.
|Raw Materials||Work in Progress||Finished Goods|
| Bought from suppliers
Supplier may not be able to meet demand Supplier could not raise prices Used in assembly or as ingredients
Parts for assembly|| Not Sellable
Costs business money to make into product May be a slow process
Wine May cost staff hours if long time delays i.e. building houses|| Needs moving for social events
This table shows the disadvantages of holding stock at different levels of the stock control process.
Why hold stock?
- Fundamentally holding stock allows production to take place
- To satisfy customer demand
- As a precaution against delays from suppliers
- It allows efficient production
- It allows for seasonal changes
- It provides buffer between production process
Main influences on Stock
- The need to satisfy demand such as demand influxes or lower commodity prices.
The a need to manage working capital, stock control for example could mean a product is depleted without being replaced.
Risk of losing value, such as the stock market price. Food and vegetables such as flowers may also decrease in value over time.
Low stock levels
- Lower stock holding posts.
- Lower risk of obsolescence.
- Less capital tied up in stock. So the business is more liquid.
- Consistent with operating on lean production.
High stock levels
- Production is always fully supplied so there are never any delays as the product never runs out.
- Potential for lower costs by ordering in larger quantities.
- The business is better able to handle unexpected changes in demand or the need for higher output as they will have the stocks available.
Within any business there are multiple factors that a customer can imprint on to recognise a brand and associate with quality. Businesses can use the customers intuition to their advantage, targeting on the key aspects of a quality product in order to maximise return. Here is a list of the common points a business can tailor in order to maximise their revenue;
- Profitability, Businesses must decide how much profit each product or service should undertake, whether it be a large return or a small one. Customers may be willing to buy a product purely on its premium price point.
- Customer Service, Businesses may wish to place the quality of their product on par with the quality of its customer service. Poor customer service could reflect badly on a quality product and vice versa.
- Competitiveness, Businesses may wish to use pricing in order to undercut the cost of its competitors. Businesses may also want to take on new locations and footfall in order to maximise profitability.
- Supply Chain, Business may cut costs and use cheaper suppliers, however unethical or environmental considerations could be overlooked and come back to haunt businesses later.
- Reliability, A product that is unreliable or prone to failure may mean that customers look elsewhere for new products, defined obsolescence could damage the perceived quality of the product as well, If it were to fail after a certain time because of a weak part, customers may feel frustrated having to buy new ones.
- Brand Image, For some customers a brand could be vital to what product they purchase, If a brand is damaged, it could affect the sales of businesses massively. Some businesses may also struggle to maintain a positive reputation if the business specialises in cheap services, such as transport or hotels and may not be too affected by bad publicity as the cheap price point means the demand for the product does not change (it is inelastic).
- Quality Control could also mean that products are of a constant high quality and should in tern allow a business to work effectively on producing high quality products for the consumer, who will hopefully repeat purchase. Kaizen and Total Quality Management can allow a business to excel at creating a quality product that is lean and high quality as it forces the product to be a standard that the business expects and what the customer wants.
- Brand Awareness, A customer who does not know a product exist may not buy it, additionally any customer who recognises a product may choose to buy it over a generic product because of it. Advertising and promotion can artificially create the connection between the customer and the brand of trust and safety in a product, that this is the product they should buy.
Capacity utilisation within a business can be easy or hard to calculate, for a printing shop, it is easy to calculate how many sheets they can produce per hour for example and in a metal fabricators, it is easy to calculate how many sheets of metal they can produce per hour, however for a company that has varied demand, it can be very hard to predict how much the business should utilise its capacity, a clearly noticeable example would be an understaffed restaurant, although they have staff working the shift, it is clear that they did not account for the demand that the customers require.
Capacity Utilisation = Actual level of output / Maximum possible output x 100
Productivity = Total output / Number of workers
Capacity utilisation should never be at 100%, as this could mean that if something were to fail, the business may not be able to fulfil the orders, Companies may choose to ask multiple ‘what if?’ questions that may indicate if the business may want to reconsider its utilisation levels.
- What if the employment rate fell?
- What if workers were too highly skilled?
- What if forecasts are not conservative?
- What if costs increased?
- What if minimum wage increased further?
The Impact on EU Trade Imports and Exports vs Capacity Utilisation
For UK Businesses, there is a handy acronym when working with exchange rates, SPICED. ‘ strong pound imports cheap, exports dear ‘. This applies to any companies in the UK who may wish to export or import goods from elsewhere.
If the UK were to leave the EU, the cost of imports/exports could be greater/lesser depending on the trade deals we could secure with countries.
- Specialised workers would find it harder to move freely into the UK.
- Tariffs are not imposed in the EU, tariffs could cost businesses money, however it could be argued that they increase competition.
- The Common Market could potentially be lost.
- The work ethic of some foreign national employees could change.
These factors could all affect the overall capacity utilisation of UK companies.
In Business, production generally has two techniques;
- Labour Intensive Production aims to use a large workforce to complete work by hand, this usually employs a lot of people to create a product. Some products may be seen to have more value if they were manufactured by hand.
- Capital Intensive Production aims to create a product using as little people as possible, the process could be entirely or partially automated and can sometimes be used to assist individuals in manufacture, such as a custom robotic factory worker that moves parts of a product to assembly, or a robot that screws in multiple screws at once. The aim of these tools is to make the job simple or quicker than manual labour, in order to product multiple product in a given time. Production machinery may be very expensive, but aims to be cheaper than labour intensive production in the long run.
Labour Intensive Production
Labour costs are higher than capital intensive production, however they can vary. If the task is simple then automation may not be necessary. Labour Intensive production will generally have lower running cost than capital intensive production, as workers will perform most of the tasks. Firms can benifit from access to low-cost labour as the job will likely be low skilled.
- Businesses can benefit from premium pricing for ‘hand crafted’ goods.
- There is generally better quality if it is not a fast process.
- Labour costs can be lower if businesses hire on temporary contracts. Individuals will not need to operate specialised machinery.
- Some businesses can use a flexible workforce to make sure that locations are staffed efficiently.
- Labour Intensive production allows for improvement easily compared to capital intensive production.
- Observation is easier.
- Lower Break-even output.
Capital Intensive Production
- There is generally a better consistency than manual labour.
- Businesses can loose competitiveness as they are stuck in the same production technique.
- Machinery may become obsolete.
- You can’t make businesses such as a restaurant or hotel capital intensive as customers may feel that their stay was devalued by it.
- May generate resistance from labour workforce when implementing.
- Kanban systems are easier to implement.
- There may be a greater loss if there is a fault.
- Programmed machines do not loose skill and there is no skill shortage for machines.
- Potentially High labour costs if individuals need to maintain complex machines.
- Firms can benefit from access to long term financing.
- Labour is more specialised so individuals are good at their job.
- There is usually longer term benefits.
- Robots do not require pay.
- Costs are mainly fixed.
- There is therefore usually a higher break-even output.
Kanban systems in business allows them to effectively manage their stock internally, essentially for businesses that require large amounts of stock, such as small parts, screws or trolley-based workstations, they will likely use a Kanban system to effectively manage their stock. A typical Kanban asset tag will have the item description, part number and sometimes will include the cost of the unit, should the business want to try to regulate the use of the item.
What is the purpose of Kanban?
- A Kanban system ensures that employees always have access to the tools they need and JIT systems can be implemented easily.
- A Kanban system also allows a business to measure the amount of parts that they do not use when producing a product, and may be able to go to a smaller or higher quantity when ordering.
- The tag system can also work with a three bin system, one on the factory floor, one in the re-stock room, and one at the supplier. This ensures that the bins are always stocked.
- This system can also link in with other elements of lean production.
- Defective products never make it to factory floor as they would not be stocked by the stock control system.
- Some implementations have plates with the items needed laid out so workers can simply pick up the tools they need and assemble to product without having to move or find the item.
- Some implementations also have the production line move along at the pace of the ordered quantity, making staff work harder to keep up with the product. (usually for production lines like planes or cars)
Kanban Asset Tag
Some businesses use the Average cost per unit to judge their effectiveness and efficiency, as Kaizen systems recommend ‘Continuous Improvement’ the average cost per unit provides a metric for them to calculate if they are more or less efficient.
Total production costs in period / Total output in period (units) = Average cost per unit
The rise of E-commerce (electronic commerce) and M-commerce (mobile commerce) has made the re-ordering process of these parts much more accessible for a company.