Advantages and disadvantages in business

brand image

adv:

• Consumers recognize the firm’s product more easily

• Their product can be charged higher than less well-known brands

• Easier to launch new products into the market if the brand image is already established

Organizational structure

Advantages:

• All employees are aware of which communication channel is used to reach them with messages

• Everyone knows their position in the business. They know who they are accountable to and who they are accountable for

• It shows the links and relationship between the different departments

• Gives everyone a sense of belonging as they appear on the organizational chart

niche market

Advantages:

• Small firms can thrive in niche markets where large firms have not yet been established

• If there are no or very few competitors, firms can sell products at a high price and gain high profit margins because customers will be willing to pay more for exclusive products

• Firms can focus on the needs of just one customer group, thereby giving them an advantage over large firms who only sell to the mass market

Limitations:

• Lack of economies of scale (can’t benefit from the lower costs that arise from a larger operations/market)

• Risk of over-dependence on a single product or market: if the demand for the product falls, the firm won’t have a mass product they can fall back on

• Likely to attract competition if successful

• Difficult for business to grow as it only targets a specific group

Multinational companies in home countries (where they started)

Advantages:

• MNCs create opportunities for marketing products produced in the home country throughout the world.- which can increase market share and customer awareness

• They create employment opportunities to the people of home country, both at home and abroad.

• It aids and encourages the economic growth and development of the home country because of repatriation (remittance)

• MNCs help to maintain favourable balance of payments as they export their products abroad so the exports will be higher than the imports.

Disadvantages:

• MNCs transfer capital from the home country to various host countries causing unfavourable balance of payments.

• MNCs may not create employment opportunities to the people of home country if it employs labour from other countries, perhaps due to lower costs or better skills.

• As investments in foreign countries is more profitable, MNCs may neglect the home country’s industrial and economic development.

new product development

Advantages:

• Can create a Unique Selling Point (USP) by developing a new innovative product for the first time in the market. This USP can be used for the product as well as in advertising.

• Charge higher prices for new products (

• Increase potential sales, revenue and profit

• Helps spreads risks because having more products mean that even if one fails, the other will keep generating a profit for the company

Disadvantages:

• Market research is expensive and time consuming

• Investment can be very expensive

mass market

Advantages:

• Larger amount of sales when compared to a niche market

• Can benefit from economies of scale: a large volume of products are produced and so the average costs will be low when compared to a niche market

• Risks are spread. If the product isn’t successful in one market, it’s fine as there are several other markets

• More chances for the business to grow since there is a large market.

Limitations:

• They will have to face more competition

• Can’t charge a higher price than competition because they’re all selling similar products

Sole Trader

Advantages:

• Profit not shared

• maker own decisions

• Own boss ➔ can do whatever you want

• Independence ➔ can work at own pace etc.

• Easy to set up ➔ few formalities ➔ therefore cheaper to set up

Disadvantages:

• Unlimited liability ➔ responsible for debts of the business

• no continuity

• opportunity cost

• Limited sources of resources

Partnerships

Advantages:

• more capital invested than sole traders

• Extra skills / expertise in business ➔ may be able to specialise in aspects of business to provide a better service

• More people to make decisions ➔ more considered approach to running the business ➔ more ideas which may lead to success

• shared risks

Disadvantages:

• partners may disagree ➔ time used up in discussion ➔ decisions take longer

• Profits will be shared ➔ compared to a sole trade where the owner can keep all profits to themselves

• Some partners may not work as hard as others ➔ may demoralise/ lead to arguments

• No continuity

• unlimited liability ➔ the partners will be held responsible for the debts of the business

Public Limited Companies (Plc)

Advantages:

• Limited liability

• Continuity

• can sell shares to the public

• large capital sums

Disadvantages:

• Cost of setting up ➔ with documents

• Need to share profits ➔ with shareholders

• affairs not kept private ➔ need to publish accounts

• May lose ownership if too many shares are bought

Private Limited Companies (LTD)

Advantages:

• Limited liability ➔ if business fails ➔ the owner will not lose personal possessions

• have Continuity

• More capital ➔ by selling shares ➔ may be easier to get bank loans

• Specialised management ➔ shareholder /owners / managers can do the work they are skilled at

• Invited shareholders ➔ able to maintain control

Disadvantages:

• Legal procedure in setting up takes time and

  costs money

• Having to disclose the accounts ➔ financial

  information can be looked at by the public/competitors

• Profits have to be shared with the other shareholders

• Slower decision-making ➔ especially if all shareholders have to be consulted

advantages to Businesses of Having a Well Motivated Workforce

• Increase productivity / workers produce more

  per hour worked / improve performance of workers ➔ could lead to greater profits

• low labour turnover ➔ workers will be happy in their work and will stay loyal ➔ reduce recruitment / training costs

• Lower absenteeism ➔ workers are happy ➔ improves productivity

• committed workers ➔ experienced and likely to be more efficient

• Improved employer / employee relations ➔ strike action is low

• Improved quality of products

• Improved business reputation ➔ easier to recruit the best workers

Ways to Raise Worker Performance

• Higher Pay

  • to encourage workers to work harder ➔ may be short-term benefit

  • but this will increase the business cost

• Bonus / Commission

  • will relate pay to amount / quality of work

  • but may be expected by workers, targets to be set ➔ demotivation if not achieved

• Longer Holidays

  • to provide rest / enthusiasm for work

  • will cost ➔ will mean work not being done ➔ dissatisfied customers

• Promotion / job title

  • gives feeling of importance ➔ reward for work

  • but only limited availability ➔ envy in the workplace

• Health care / insurance

  • encourages workers to stay

  • but cost

• Training / better qualifications

  • worker feels better about self ➔ encouraged to work harder

  • but cost of training ➔ better qualified workers may find jobs elsewhere ➔ increased worker turnover

• Rewards for best workers

  • employee of the week ➔ motivate employee to work harder to get the award

  • but may demotivate others

long chain of command

Advantages:

• narrow spans of control ➔ can help to limit managers’ workloads

• clear and more regular opportunities for promotion of junior employees

Disadvantages:

• communication may be more difficult as it passes through many levels of hierarchy

• decisions can be made slowly as information has to be passed through the organisation

short chain of command

Advantages:

• fewer managers ➔ can help to reduce costs

• junior employees may be motivated by being given more authority

• communication can be quick and effective as fewer levels of hierarchy

Disadvantages:

• managers may have spans of control that are too wide

• the business may have to spend heavily on training to give junior employees the necessary skills

Primary Research

Advantages:

• Up-to-date

• Specific to a business’ own needs / accurate

• Provides answers to exact questions that a firm may be interested in

Disadvantages:

• Can be very expensive to collect

• Can be very time consuming to collect

• Can have problems of bias

Secondary Research

Advantages:

• not expensive to collect and gather

• Enables cost-effective analysis of several data sources

Disadvantages:

• Often out of date

• Might not be available

• Little control over quality

• Problems of interpretation

• competitors also have access to it

Penetration Pricing

advantage:

• The goods have a low price to attract customers who may then stay with the business.

disadvantage:

• When prices rise people may not be willing to purchase – questions over quality

Cost Plus Pricing

advantage:

• Adding profit to cost ensures that a profit is made on each good.

disadvantage:

• May not work in competitive market / depends on margins.

Price Skimming

advantage:

• Attracts early adopters e.g. new football boots, the latest iPhone.

disadvantage

• Some customers unable to / unwilling to pay the high prices.

Psychological Pricing

advantage:

• Can nudge customers to make a purchase

disadvantage:

• Some may not be convinced to buy so revenue may not rise / customers may not be attracted to the business.

Competitive Pricing

advantage:

• Ensures that the firm is price competitive.

disadvantage:

• Customers may be used to buying from competitors so revenue might not change / customers may not switch from rivals.

e- commerce on business

advantage:

• Wider market ➔ so the business will be able to attract more customers ➔ more sales

• Expansion/growth possible ➔ without having to locate/fund new sites

• Keep up with competitors

• Convenience ➔ for customers who cannot travel to the shop

disadvantage:

• Effects on current business ➔ with time ➔ efforts spent with website

• Reputation may be diminished ➔ website crashes, problems with delivery

• Costs of setting More storage space may be needed ➔ so higher warehouse costs

• Some higher costs ➔ maintenance / special

  packaging / delivery / returns

• Possible fraud ➔ related to payments

• no relationship with Customer

e- commerce on customer

advantage:

• Can see images of products so can compare many products

• Prices ➔ many sellers can be compared on one computer

• No need to travel so costs saved

• Wider choice from many sellers

• Order 24/7

disadvantage:

• Goods not inspected to see if goods meet the need

• Images may be misleading so difficult to judge quality

• Delays in receiving goods

• If goods need to be returned there could be additional costs incurred

• Possibility of fraud if goods not sent when

  paying

• Technical issues e.g. reliability, speed

Manufacturer to Consumer

Advantage:

• All of the profit is earned by the producer

• The producer controls all parts of the marketing mix

• Quickest method of getting the product to the consumer

Disadvantages:

• Delivery costs may be high if there are customers over a wide area

• All storage costs must be paid for by the producer

• All promotional activities must be carried out and financed by the producer

Manufacturer to Retailer to Consumer

Advantage:

• The cost of holding inventories of the product is paid by the retailer

• The retailer will pay for advertising and other promotional activities

• Retailers are more conveniently located for consumers

Disadvantage:

• The retailer takes some of the profit away from the producer

• The producer loses some control of the marketing mix

• The producer must pay for delivery of products to the retailers

• Retailers usually sell competitors’ products as well

Manufacturer to Wholesaler to Retailer
to Consumer

Advantage:

• Wholesalers will advertise and promote the product to retailers

• Wholesalers pay for transport and storage costs

• Wholesaler buys in bulk so less storage costs on producer

Disadvantage:

– Another middleman is added so more profit is taken away from the producer
– The producer loses even more control of the marketing mix

Manufacturer to Agent to Wholesaler to Retailer
to Consumer

Advantage:

• The agent has specialised knowledge of the market

Disadvantage:

• Another middleman is added so more profit is taken away from the producer

job production

Advantages:

• Most suitable for one-off products and personal services

• The product meets the exact requirement of the customer

• Workers will have more varied jobs as each order is different

  • improving morale

• very flexible method of production

Disadvantages:

• Skilled labour will often be required which is expensive

• Costs are higher for job production firms because they are usually labour-intensive

• Production often takes a long time

• Since they are made to order, any errors may be expensive to fix

• Materials may have to be specially purchased for different orders, which is expensive

Batch Production

Advantages:

• Flexible way of working- production can be easily switched between products

• Gives some variety to workers job

• more variety to consumers to choose from

• Even if one product’s machinery breaks down, other products can still be made

Disadvantages:

• Can be expensive since finished and semi-finished goods will need moving about

• Machines have to be reset between production batches which delays production

• Lots of raw materials will be needed for different product batches, which can be expensive.

Flow Production

Advantages:

• There is a high output of identical products

• Costs are low in the long run and so prices can be kept low

• Can benefit from economies of scale in purchasing

• Automated production lines can run 24×7

• Goods are produced quickly and cheaply

• Capital-intensive production, so reduced labour costs and increases efficiency

Disadvantages:

• A very boring system for the workers, leads to low job satisfaction and motivation

• Lots of raw materials and finished goods need to be held in inventory- this is expensive

• Capital cost of setting up the flow line is very high

• If one machinery breaks down, entire production will be affected

Technology and Production

Advantages of technology in production

• Greater productivity

• Greater job satisfaction among workers as boring, routine jobs are done by machines

• Better quality products

• More accurate demand levels are forecast since computer monitor inventory levels

• New products can be introduced as new production methods are introduced

Disadvantages of technology in production

• Unemployment rises as machines and computers replace human labour

• Expensive to set up

• frequent updating of systems will be needed- this is expensive and time-consuming.

• Employees may take time to adjust to new technology or even resist it as their work practices change.

break-even charts:

Advantages of break-even charts:

• Managers can find out the profit or loss at each level of output

• Managers can change the costs and revenues and redraw the graph to see how that would affect profit and loss

• help calculate the safety margin- the amount by which sales exceed break-even point.

Limitations of break-even charts:

• assume all units of output produced are sold.

• Fixed costs may not always be fixed if the scale of production changes. If more output is to be produced, an additional factory or machinery may be needed that increases fixed costs.

• assume that costs can always be drawn using straight lines. Costs may increase or decrease due to various reasons. If more output is produced, workers may be given an overtime wage that increases the variable cost per unit and cause the variable cost line to steep upwards.

Quality Control

Advantages:

• Eliminates the fault or defect before the customer receives it, so better customer satisfaction

• Not much training required for conducting this quality check

Disadvantages:

• expensive to hire employees to check for quality

• may find faults and errors but doesn’t find out why the fault has occurred, so the it’s difficult to solve the problem

• if product has to be replaced and reworked, then it is very expensive for the firm

Quality Assurance

Advantages:

• Eliminates the fault or defect before the customer receives it, so better customer satisfaction

• Since each stage of production is checked for quality, faults and errors can be easily identified and solved

• Products don’t have to be scrapped or reworked as often, so less expensive than quality control

Disadvantages:

• Expensive to carry out since quality checks have to be carried throughout the entire process, which will require manpower and appropriate technology at every stage.

• How well will employees follow quality standards? The firm will have to ensure that every employee follows quality standards consistently and prudently, and knows how to address quality issues.

Total Quality Management (TQM)

Advantages:

• quality is built into every part of the production process and becomes central to the workers principles

• eliminates all faults before the product gets to the final customer

• no customer complaints and so improved brand image

• products don’t have to be scrapped or reworked, so lesser costs

• waste is removed and efficiency is improved

Disadvantages:

• Expensive to train all employees

• Relies on all employees following TQM– how well are they motivated to follow the procedures?

Retained Profit

Advantages:

• Does not have to be repaid, unlike, a loan.

• No interest has to be paid

Disadvantages:

• A new business will not have retained profit

• Profits may be too low to finance

• Keeping more profits to be used as capital will reduce owner’s share of profit and they may resist the decision.

Sales of existing assets

Advantages:

• Makes better use of capital tied up in the business

• Does not become debt for the business, unlike a loan.

Disadvantages:

• Surplus assets will not be available with new businesses

• Takes time to sell the asset and the expected amount may not be gained for the asset

Sale of inventories

Advantage: 

• Reduces costs of inventory holding
  

Disadvantage:

• If not enough inventory is kept, unexpected increase demand from customers cannot be fulfilled

Owner’s savings

Advantages:

• Will be available to the firm quickly

• No interest has to be paid.

Disadvantages:

• Increases the risk taken by the owners.

Issue of share: only for limited companies.

Advantage:

• A permanent source of capital

• no need to repay the money to shareholders

• no interest paid

Disadvantages:

• Dividends have to be paid to the shareholders

• If many shares are bought, the ownership of the business will change hands

Bank loans: money borrowed from banks

Advantages:

• Quick to arrange a loan

• Can be for varying lengths of time

• Large companies can get very low rates of interest on their loans

Disadvantages:

• Need to pay interest on the loan periodically

• It has to be repaid after a specified length of time

• Need to give the bank a collateral security (the bank will ask for some valued asset, as a security they can use if at all the business cannot repay the loan in the future.

Debenture issues: debentures are long-term loan certificates issued by companies.

Advantage:

• Can be used to raise very long-term finance

Disadvantage:

• Interest has to be paid and it has to be repaid

Debt factoring:Debt factors are specialist agents that can collect all the business’ debts from debtors.

Advantages:

• Immediate cash is available to the business

• Business doesn’t have to handle the debt collecting

Disadvantage:

• The debt factor will get a percent of the debts collected as reward. Thus, the business doesn’t get all of their debts

Grants and subsidies

Advantage:

• Do not have to be repaid, is free

Disadvantage:

• Come with strings attached

  • Example, to locate in a particular under-developed area.

Overdrafts

Advantages:

• amount overdrawn can be varied each month

• Interest has to be paid only on the amount overdrawn

• Overdrafts are generally cheaper than loans in the long-term

Disadvantages:

• Interest rates can vary periodically, unlike loans which have a fixed interest rate.

• The bank can ask for the overdraft to be repaid at a short-notice.

Trade Credits: this is when a business delays paying suppliers for some time, improving their cash position

Advantage:

• No interests, repayments involved

Disadvantage:

• If the payments are not made quickly, suppliers may refuse to give discounts in the future or refuse to supply at all

Hire Purchase: allows the business to buy a fixed asset and pay for it in monthly instalments that include interest charges.

Advantage:

• The firms doesn’t need a large sum of cash to acquire the asset

Disadvantage:

• A cash deposit has to be paid in the beginning

• Can carry large interest charges.

globalisation

Advantages of globalisation

• Allows businesses to start selling in new foreign markets- increasing sales and profits

• Can open factories and production units in other countries, at a cheaper rate (cheaper materials and labour can be available in other countries)

• Import products from other countries and sell it to customers in the domestic market- this could be more profitable than producing and selling the good themselves

• Import materials and components for production from foreign countries at a cheaper rate.

Disadvantages of globalisation

• now that foreign firms can compete in other countries, it puts up much competition for domestic firms. If these domestic firms cannot compete with the foreign goods’ cheap prices and high quality, they may be forced to close down operations.

• Increasing investment by multinationals in home country- this could further add to competition in the domestic market

• Employees may leave domestic firms if they don’t pay as well as the foreign multinationals in the country- businesses will have to increase pay and conditions to recruit and retain employees.

Leasing

Advantages:

• The firm doesn’t need a large sum of money to use the asset

• The care and maintenance of the asset is done by the leasing company

Disadvantage:

• The total costs of leasing the asset could finally end up being more than the cost of purchasing the asset!

Multinational Companies (MNCs) in domestic countries (where they go to)

Advantages:

• More jobs created

• Increases GDP of the country

• The technology that the multinational brings in can bring in new ideas and methods into the country

• imports will be reduced and some output can even be exported

• Multinationals will also pay taxes, thereby increasing the government’s tax revenue

• More product choice for consumers

Disadvantages :

• The jobs created are often for unskilled tasks. The unskilled workers may also be exploited with very low wages and unhygienic working conditions.

• local firms may be forced out of industry, unable to survive the competition

• Multinationals can use up the scarce, non-renewable resources in the country

• Repatriation of profit- profits earned by the multinational could be sent back to their home country

• As multinationals are large, they can influence the government and economy. They could threaten the government that they will close down and make workers unemployed if they are not given financial grants and so on.

Environmental factors

advantages of business meeting sustainable development:

• Meeting government targets ➔ avoids having to pay fines ➔ reducing costs and potentially increasing profits ➔ avoids bad publicity

• Showing concern for the environment ➔ important for the image of the business ➔ leading to increased sales with those that share concerns

• Consumer pressures ➔ more likely to recommend business ➔ all important for the image of business ➔ leads to increased sales

• Pressure groups ➔ less likely to give unfavourable attention to businesses who employ environmental policies

disadvantages of business meeting sustainable development:

• Business costs of being environmentally friendly impact negatively on profit margins

• Packaging issues such as cost / finding alternatives ➔ increased business costs ➔ impacting negatively on profits or pricing flexibility