10.3 - Disadvantages of Employing People and the Usage of Advisors and Consultants

The decision to employ people directly should not be taken lightly. There are both advantages and disadvantages to this method and these need to be fully considered before any hiring decisions are finalised.

The limitations of employing people include:

• Money costs - the recruitment process costs money and time
• Administrative costs - including tax-related matters
• Hiring inexperienced candidates
• Great deal of paperwork involved - including keeping track of staff, holiday entitlements, sick leaving amongst others

The limitations of advisors and consultants include:

• Lack of adaptability of proposal to suit the business
• Failure to implement favourable long-term change
• Lack of original ideas and focus
• Lack of enthusiasm for the business
• It can be expensive

Activity 27 - If your business is seasonal, which types of employees should you seek?

10.2 - Usage of Advisors and Consultants

Business employ the services of advisors and consultants who offer specialist services on key issues pertaining to the business. In order for these services to be used, a business must realise it lacks certain expertise and therefore must seek that expertise externally.

The areas of specialisation which the consultants cover include:

• Financial and management controls
• Information technology
• Quality management 
• Human resources
• Marketing
• Manufacturing and business services

In reality, however, any sector of business will likely have an employment agency supplying it. This would be the definition of a niche market that someone would have filled. 

From the very outset, the role of the consultant and advisor needs to be clearly defined. The objectives should be set out in writing before the consultant begins their work. 

Consultants are taken on for both long and short periods, with the fee decided and the reference terms agreed. 

Consultants need to work in unison with the business employees to effectively accomplish the goals, objectives and plans of the business. 

10.1 0 Employee Types in Small Businesses

Permanent Staff

Permanent employment is usually the major type of employment used by most businesses. It offers better working conditions and stability to the employee. However, it does not give employers flexibility to increase or decrease workload as is needed because of the nature of the contract between the employer and employee; you cannot easily get rid of permanent workers to reduce costs in the short term. The employer would need to notify the employee in advance before the termination of the contract, as well as giving notice periods, severance pay, and might need to demonstrate that selection for redundancy has been fair and without any kind of bias.


Temporary Staff

This is a very flexible way to employ people but it often leads to a workforce that lacks loyalty as they know their employment is only temporary.

The business can reduce or increase it's staff requirements easily and it can terminate contracts of employments without as much hassle as with the permanent employees.

There are laws which have been enacted lately to enhance the rights of temporary workers and to improve their working conditions.


Full-Time Staff

These are staff that work a full standard working week throughout the year except their holiday entitlement periods. In this type of employment the contract needs to state the the holiday entitlement, number of required hours for work, overtime availabilities and amount payable. In many ways, this category is very similar to permanent staff.


Part-Time Staff

This offers the benefit of flexible working patterns to fit into the schedule of the employees. The hours are less than full-time. Equal rights accrue to the part-time workers as it does to the full-time worker.

Women make up the majority of the part-time workforce in the United Kingdom, accounting for around 60% of the total.


Activity 26 - Identify the advantages and disadvantages of the different types of employee. 

Section 10 - Employing People in Business

Introduction

In this section we will examine the human resource. 

The size and type of any business will determine what type of human resources that business requires, and indeed how many. 

By type, we mean:

• Temporary Staff
• Fixed-Term Staff
• Permanent Staff
• Part-Time Staff

In recent years, there has been a significant growth in the use of consultants and advisers. These have specific expert knowledge which the company might lack and can be highly beneficial to a business, but they tend not to be cheap. 

There are benefits and drawbacks of each 'type' of employee, and the business owner needs to consider carefully what types are required for the business to thrive. 

A successful business will understand the risks involved in employing workers and will use the type that maximises its advantage. Therefore, it needs to identify the risk factors and drawbacks to the respective types and determine the best one for its business. 

9.2 - Factors Affecting Start-Up Locations - Market, Government Intervention and Qualitative Factors

Market

There's fierce competition for consumers, and this requires businesses to differentiate themselves from each other, One way of doing this is the chosen location. In places where supermarkets fail or aren't present, the corner shop will tend to thrive as they meet the needs of the local customers who're not prepared to travel.


Government Intervention

Business start-ups are frequently motivated by the level of suport offered by the government. The government makes certain areas more appealing to start-up businesses. Such areas can be called enterprise zones, regeneration areas and assisted areas. To stimulate the growth of businesses in such areas, the government invests numerous resources and gives grants to new businesses looking to get established in those specific areas. These forms of assistance include grants, lower rent incentives and interest-free loans. There are nine regional development areas in the United Kingdom which have the responsibility for:

• Promotion of business entrepreneurial activities
• Provision of training for the local workforce
• Job creation
• Enhancement of business efficiency

Governments tend to be most proactive in assisting businesses to locate new premises in derelict areas, former factory sites and unused lands.


Qualitative Factor

These are factors that do not revolve around finance and money. These factors are more concerned with other benefits such as:

• Social
• Moral
• Environmental
• Expansion
• Local Amenities 

New businesses will often be attracted to areas where the quality of life is high. Availability of shops, restaurants, entertainment and leisure facilities are factors which the entrepreneur will also take into consideration. 

Areas that are environmentally friendly are becoming increasingly desirable given the modern need for businesses to be environmentally responsible and sustainable. 

Areas with a low crime rate are also attractive. In these areas, the risk of theft, burglaries and other incidents such as vandalism are reduced. High crime areas tend to keep customers away because of a general fear of those areas. 

Expansion of the business is part of every enterprise's growth plan. Therefore, it will be attracted to an area that will stimulate business growth. 

Local amenities that are essential for businesses are very important. Communication, support services, broadband services, network supply, infrastructural facilities always encourage establishment of a new business. 

9.1 - Costs, Technology and Infrastructure

Business start-ups always need to consider the cost, technology and infrastructure of a location when they are deciding where to set up their new venture. Costs are inevitable in business and they key is to keep them low.

Technology is vital and enables the business to keep up the pace in its competitive marketplace. Infrastructures create strong incentives for a business to have its base in a particular location.

Cost, technology and infrastructure can be either push or pull factors. A push factor will motivate the business to be more aggressive and competitive to reduce costs. Pull factors are incentives that attract the business to certain areas.

Push cost factors include high overhead expenses such as office rent and congestion charges. Pull cost factors include low labour costs, government led incentives like low-cost loans and subsidised rent.

Push technology factors include non-availability of broadband services while an example of a pull technology factor is the excellent communication and network system in a location due to a high concentration of technology businesses. Hence the benefits to the business are immense and affordable.

Push infrastructural factors include poor road or rail networks or the lack of a local airport. Pull infrastructural factors include excellent support services, and communication systems.


There are other factors that affect the location of a business. These include:

• The Workforce - The business needs to have access to the best and highly skilled employees
• Land - Affordability of rent, scarcity and high poverty prices affect the choice of land
• Raw Materials - This will reduce the costs of travelling to the source of the resource. Furthermore, it's time efficient
• Proximity to the market - The distance to the target is very important. It reduces transportation costs and enhances the quality of the products. For instance, with goods that have short shelf life duration, it's a smart idea for the business to be close to the target market for it's produce

Despite the above factors already mentioned, there are businesses that are not particularly affected by push-pull factors. 

These include mobile businesses that supply intangible goods, online businesses that do not require a physical location and businesses that remain in a location regardless of the degenerative conditions of the area over a period of time. The last point is referred to as industrial inertia. 

Activity 25 - Think about a type of business in your area. What push and pull factors do they experience?

Section 9 - Location of a Business

Introduction

The location of a business, particularly a start-up, plays a major role in it's future success or failure. 

The ideal location should aim to maximise the profits while keeping the cost and expenses to a minium. 

Any business needs to have a market available, as well as a local skilled workforce. Without customers, the business would cease to exist. Hence choosing a location with the best market audience is a winning formula. 

Government incentives can also play a major role in the location of a business. Nissan, for example, built a plant in Sunderland partly because of government loans and grants. The role of technology and infrastructure and costs are discussed and their impact on choosing the right location.

Activity 24 - Can you think of an example of a business which chose the wrong location? What happened to them?

8.4 - Ordinary Share Capital

Limited companies issues shares to investors as means of raising capital. In return, the investor receives a portion of the company which is equivalent to the amount of shares purchased. The business uses it's flotation of share to make the shares available to the general public for sale.

There are two types of shares:

• Ordinary Shares
• Preference Shares

Ordinary shares are sold to the investor who in return receives a portion of the profits that the company makes. This is given in the form of a dividend which changes annually to reflect the performance of the business. 

Preference shares are given to preferencial investors at a fixed dividend rate, regardless of the performance of the business. These preferential shareholders are always paid before the ordinary shareholders. 

Issuing ordinary shares tends to reduce the power of ownership of the original owners of the business as it reduces their relative shareholding. Unless the business owners retain 51% of the business, they could risk loosing control of the whole business to it's shareholders. 

Businesses can acquire finance through internal and external sources. Internal sources include retained profits and the owners' funds. External sources can include mortgages, hire purchases etc.

8.3 - Personal Sources

Owners of small businesses often invest their own money into their business. This money could come from:

• Personal Savings
• Inherited Funds
• Selling of Personal Assets
• Taking out personal Bank Loans

They do this because they want the business to survive and grow. It's quite challenging for a small business to get credit for financing it, hence the reliance on personal funds. 

The ultimate risk is that any business can fail and the owner loses their personal assets. 

Activity 23 - What is the major risk of an individual investing their own money rather than acquiring finances from another source?

8.2 - Bank Loans and Overdraft

A bank loan can be taken out by a business to finance it's activities. The business can borrow a specified sum of money from the bank with regular and set repayments for a specified period of time.

The bank charges an interest on this loan and will often require collateral to secure the loan, in the event of failure to repay the loan. Longer term loans have higher interest on them.

Bank overdrafts are another option, but these tend to be smaler in scale and designed to fet over short term cash flow issues.

The overdraft is a set limit and and that is the maximum the business can withdraw from it's bank account for it's business activities.

It's vital that any business that takes out a loan or an overdraft meets its repayments.

The business needs to decide carefully which is appropriate; loans or overdrafts, as they will each carry out different conditions. Overdrafts, for example, tend to carry much higher interest rate payments.

Business owners need to think carefully about cash flow issues, and how to manage (I.e. loans, overdrafts etc). Many perfectly good businesses fail because they do not manage their cash flow effectively.

8.1 - Venture Capital

This is a source of finance that is provided to the business that guarantees long-term share capital.

Venture capital is provided by private investors both to start up and to expanding businesses.

In exchange for the capital, the private investor receives a share of the business. In addition, the investor receives a return on the investment (ROI) that depends on profit from the growth of the business.

Venture capitalists tend to have a major influence in any business in which they invest. They can be very demanding in terms of the control they wish to exert.

The business owner needs to weigh this potential interference when bringing venture capitalists on board. It also needs to be considered, that the venture capitalist might bring expertise that the business doesn't possess.

Another factor which the owner should consider is the percentage of profit demanded by the venture capitalist. The greater the venture capitalist invested, the higher the expectations on return on investment. They can ultimately control the company.

Section 8 - How to Raise Finance for Business

Introduction

Even after the initial business capital is secured, a business needs to continually have the finance to carry out its day-to-day activities. 

These sources of finance are from:

• Loans 
• Share Capital
• Venture Capital 
• Personal Sources

The type of business, the state of the economy and the stage of development of the business affects the sources of finance that are available to the business. 

There are the sources of finance available for all types of businesses, the actual route chosen will depends on a number of factors. 

With established companies, it's easier to secure funding from multiple sources at low risk for the financiers and lenders. However, smaller businesses are seen as a greater risk and can find it more difficult to obtain credit. 

Activity 22 - Do some quick research on Venture Capital, what is it?

7.5 - Not-For-Profit Business

With these businesses, profit is not the main driver. They are generally philanthropic, social and charitable in outlook. Any form of profit or surplus goes toward the cause that the business represents. These organisations can have any of the following legal structures and governing bodies:

• Unincorporated Associations - These have a constitution of rules and the members of the governing body are trustees
• Trusts - These have a deed or declaration of trust that will be the governing document. The members of the board of a trust are the trustees
• Companies Limited by Guarantee - These will have a memorandum of association and a governing body consisting of the directors of the company

Any charitable organisation which is also a company will have directors and trustees as the voting members. 

Charities

Charities need to have a well defined purpose that would need it to be legally classified as charitable. These can range widely from famine relief to educational development. Registered charities do not have political motivations or directions of any kind that are not encouraged to incline in such directions. 

It's important to note that:

• Charities are established primarily for charitable reasons
• They are independent
• They are not set up to make profit

Societies

These are established for non-commercial purposes without personal gain, charitable reasons and participation is sports events and cultural activities. 

Cooperative societies have limited liability and are incorporated organisations. They have shares which members can buy in order to support the business. These shares are not sold on the stock exchange. When a member leaves a cooperative society, the amount of shares which they have, need to be sold back to the society. 

Any profit generated by the society is shared as dividends to the members. 

Pressure Groups

These are established with the major objective of influencing political decisions. They are involved in research, political lobbying of the government, seeking to influence decision-makers and enhancing public awareness of political issues. These work outside of the government and are not political parties. 

Due to their political interaction they also try to influence the businesses, make an environmental impact and try to enhance corporate responsibility to the community and environment. 

These groups also interact with consumers to secure better value for money from the business.  

7.4 - Public Limited Companies

The public limited company has limited liability. In order to set up this type of company, the business requires a minium of £50,000, two people need to sign the memorandum of association and there needs to be a minimum of 7 shareholders.

The shares of public limited companies are traded on the stock exchange. The business will have an annual general meeting which can be attended by the shareholders. In these meetings, the directors present the accounts and annual reports of the company to the shareholders. At these meetings, shareholders can vote on certain issues and elect new directors for the company.

Small to medium sized public limited companies can be listed on the Alternative Investment Market (AIM). It attracts investors to such companies which are not as established as the major companies listed on the main stock exchange.

Hence the AIM market lists smaller companies with £50,000 investment capital and more. On the London stock exchange, the companies listed are multi million and multi billion pound companies. Hence the criteria is higher and smaller to medium companies are encouraged to list on the AIM.

Shareholders are not involved in the daily running of the business. Therefore, the exclusive and non-exclusive directors of the company are the decision makers. Non-exclusive directors (NEDs) are specifically employed for their expertise and tend to work on a part-time basis.


Liability and Legal Issues of a Public Limited Company

The amount of liability of an individual shareholder of the company is limited and only money invested in shares of the company can be lost if the company is in financial difficulty.

It will not affect the private assets of the shareholders as only the business assets are liable. Neither managers nor shareholders are liable personally for the business.

The legal issues are similar to those of a private limited company. The name of the company must be included in all it's stationary and clearly displayed outside it's offices and places where it operates in business.

Furthermore, it must display it's registration details on all stationary including registration number, place of registration and registered office.

The company must contact HM Revenue and Customs for tax and VAT purposes.

Lately, the Registrar of Companies must receive the duly completed and signed documents which are needed for registration.

Every legal structure has their benefits and setbacks. It's important that any business must understand the legal implication which they choose.

7.3 - Private Limited Companies

A private limited company is a business that does not have it's shares traded on the stock exchange. It's  a limited liability company and these vary in size with large sales revenue, number of employees, and profit. Private limited companies can be very large and some can be small or medium-sized. 

Liability and Legal Issues of a Private Limited Company

A private limited company can raise finances easily because of it's limited liability status. Investors tend to be more confident in this type of business because their exposure to liability is limited. In the event of financial difficulties, only the company is held liable. 

There are shareholders in this type of company. Each shareholder owns a portion of the company which is equivalent to percentage of shares they purchase. With the limited liability status, the shareholders are not held responsible for any debts which the company may incur. Instead, shareholders will only loose the value of their investment which they have in the company. 

Several legal issues are to be carefully considered before deciding on a private limited company. The include:

• Election of the board of directors at an Annual General Meeting by the shareholders
• Setting up of the company. This is known as incorporation of the company
• Fining by the law for breaking any of it's legal obligations
• Registration of the company with the Companies House. This enables it to operate as a separate legal entity

When a company becomes incorporated, it will have a memorandum of association and the articles of association. This memorandum includes:

• Name of the company
• The registered office
• Status indicating the limited liability status of the shareholders
• Activities of the company
• Authorised capital of the company which is the type of share issued by the company and the amount of each type which it can issue

The articles of association include:

• How profits will be shared
• Number of dictators, their rights and duties to the company
• Frequency and procedure of Annual General Meetings
• Voting rights of Shareholders

Activity 21 - Why do you think a company would choose to be anything other than limited liability?

7.2 - Partnerships

Partnerships are between individuals who choose to own a business on a joint ownership. The number of partners must be between 2 and 20. Most partnerships have unlimited liability, and every partner is responsible for the business.

Ordinary partnerships are the most common which businesses engage in. Since all parties involved are partners, there's an equal sharing of profit. Capital is mostly equally shared and the roles which are played each partner are of equal importance to the business.

Partnerships are beneficial when it comes to borrowing money from the banks. This is because, if there's ever a problem, the bank can draw on the assets of all the partners for the repayment. Sole traders can enter into partnerships because of the shared liability and borrowing privileges which as sole traders, they cannot benefit from.

Skills, expertise and knowledge of partners can help the business immensely. With more ideas and scope for creativity, the partnerships can be a profitable venture for all parties.

A deed of partnership is a contract which states the details involved in the partnership and the role of each partner. It includes the following information:

• Name of partners
• Purpose of forming a partnership
• Capital invested by each partner 
• Profit and loss sharing
• Number of votes by partners in meetings
• Details of how the partnership can be wound up or terminated
• Withdrawal of share of profits by partners
• Process for exiting or entry into the partnership for new and existing partners

Liability and Legal Issues of Partnerships

Partnerships can have more than 20 partners, but some must be sleeping partners who do not actively participate in the running of the business. Such partners have limited liabilities. Nevertheless, one of the partners must have unlimited liability. 

Partnerships can also be limited liability partnerships where all the partners who are involved in the business have limited liability. 

The legal issues that surround partnerships are similar to the sole traders. A few legal documents are required to establish a partnership. It needs only 2 people to set up. With the ordinary partnerships, there's no need for accountants and solicitors. However, in practice, partnerships are drawn up by a solicitor. Also, accountants are used to sort out issues pertaining to tax. 

Limited liability companies are rather complex and there's certainly a need for auditors to regularly check the account which are sent to the Registrar of Companies. 

Limited liability companies will also find it easier to borrow money from financial institutions that with sole trader businesses. 

When a partner exits a partnership, it should automatically come to an end and a new partnership should be formed by the remaining partners in the business. It's usually quite difficult to exit a partnership and there are issues relation to the division of capital. 

In a partnership, the partners cannot transfer their shares without the consent of the other partners. 

The deed of partnership should also clearly define the responsibilities of the partners in the business. 

7.1 - Sole Traders

A sole trader is an individual who is the owner of the business. Sole traders work for themselves and re not employed directly by any other businesses. An sole trader can be referred to as self-employed. Sole traders can be engaged in an almost limitless range of potential activities, including:

• Beauticians
• Plumbers 
• Writers 
• Models

It's estimated that there are over 3 million sole traders in the United Kingdom. Sole traders are very opportunistic and are essentially entrepreneurs in many ways. When they see a potential niche, they attempt to exploit it. 

Liability and Legal Issues Affecting Sole Traders

Sole traders are completely liable for every aspect of their business. There's legally no distinction between the funds of the sole trader business and the potential funds of the proprietor. This is called Unlimited Liability. In the even that a sole trader business takes out a loan which it's unable to repay, then it would be totally liable and would have to use personal savings, investments and assets to repay the loan. By law, a sole trader must keep accurate accounting records for the business. 

Consumer protection is another legal issue that affects sole traders. The business needs to provide the best standards for every consumer. Regardless of any costs incurred, the business has to be responsible in every way and where necessary will need to utilise personal assets when it becomes necessary. 

Section 7 - Making the Right Choice of Legal Structure for Business

Introduction 

In this section we will look at the various types of legal structures which a start-up business can utilise:

• Sole Trader
• Partnerships
• Private Limited Liability Companies
• Public Limited Companies 

With each legal structure, there are different levels of liability and legal issues involved. 

Each business will determine for itself which is the most appropriate structure for themselves based on various pros and cons of each type of structure. 

Each legal structure has it's strengths and also it's drawbacks. The various issues involved are discussed in the unit and the most appropriate solutions are provided. 

Whatever the structure, the business should be aware of the surrounding legal issues and be well informed about how to run businesses optimally with such legal structures. 

6.5 - Importance of Growth, Share and Size of Makets

Market growth is the percentage incremental increase in the size of a market. For example, we might say a market is growing at 10% per annum.

The market size measure the total sales by business that supply products or services to that particular market.

Both market size and market growth can be measured by value and volume.

The measurement by value refers to the growth rate as being determined by the amount of units the business sold.

Economic factors like interest rate, price of other products and services, disposable income of customers and inflation can affect the size and growth of a market. Market share is the proportion of the total market which a specific product or business controls. It's measured by volume of value. The market strategy of a business is evaluated by the amount of market shares it holds.

The market share is usually used by businesses to ascertain it's success or failure. In comparison to it's competitors, a business would use the market share position to clearly see who the major performers are whether or not it's in the league.

6.4 - Types of Market Segmentation

Now that you understand the concept of a market, lets look at smaller groups within a market, which have similar wants and needs. Businesses come up with a marketing mix which enables them to provide a variety of services for different segments in a market. 

Market segments can be categorised into the following groups:

• Family size and type
• Age
• Rate of Product Use
• Lifestyle
• Location
• Gender

The benefits of market segments include its high level of precision in clearly defining markets. Market segments enable the optimisation of market resources. Market segments are essential as they help discover potential opportunities in the market and how such great market gaps can be filled. 

Market segmentation has drawbacks which will affect a business. A major drawback is the increase in cost of production of goods and services. A business may have planned for a specific range or a few set products. However, with different market segments, it will have to customise it's products to satisfy the demands of those various segments. 

Market segments need to be sustainable over a long period of time so that the business can have definite guarantee that it's not in it for the short-term and lose out in the long-tern. The ability of market segments to be profitable is important. No business would risk investing in a segment that isn't going to bring an valuable returns to the business. 

6.3 - The Role of Demand

Demand is a term that defines the amount of products and services which customers are prepared to buy. Witha limitless desire of wants and needs, demand identifies with the scarce nature of goods and services. Hence it focuses on the exact number of goods and services that will be sold instead of on perceived desires of the customers.

There is a more accurate measure of the demand of a product or service because the sales figures provide factual evidence of the customer behaviour towards the products. Furthermore, their willingness to pay for the product helps reinforce the demand.

When a product is high in demand, it could be limited in supply. However, aslong as the people are wiling to pay for the product, it would be available in the market. Although in this case, frequently at a premium price.

On the other hand, when there is a large amount of products or services available which exceeds demand, these will be sold at a low price so that people will be attracted to buy the products.


Relationship of Demand and Price

Price and demand are inseparably linked for almost every product or service. With essential goods and services, the demand for these goods remain high despite the cost. These types of goods include basic items like water, groceries and other similar products. People need food to survive and a scarcity of food does not deter people from buying it. Even when the price is high, it will be purchased (unless there are cheaper alternatives readily available).

Expensive products and services tend to have a lower demand. In order to make such products attractive and stimulate the demand, businesses make available various long-term payment plan options and also encourage the use of credit.


Relationship of Demand and Competition

The greater the intensity of competition in a market, the greater the impact on price. Businesses innovate themselves in various ways to maintain high levels of demand and retain their customers. With tough competition however, established businesses with trusted brands that consumers are loyal to still thrive well in such environments. This is known as brand loyalty.

As long as customers trust a brand they will often be prepared to pay a higher price for it, as long as they remain satisfied with that product. Once the brand stops satisfying their needs, they will switch to another brand. The major reason for such a switch in brand is the price. Once there is a better value available, customers will go for it. Therefore competition between brands can affect demand.

Demand is also affected by close substitutes competing with each other for customers. Hence, when a customer moves between similar products to satisfy their needs, then the demand is also affected.


Relationship of Consumer Income and Demand

A consumer's disposable income will affect the demand for products and services. The higher a consumers income, the greater will be the spending power of the consumer. However, when the income is lower, there will be a reduction in spending power. In effect, the amount a consumer is willing to spend on goods and services depends on their disposable income.

Every business must be aware of the need to advertise it's existence and it's products or services. Regardless of the high standard of quality of goods, when the marketing strategy is poor, the demand will be relatively poor.

Seasonal fluctuations can also affect demand. Due to the nature of certain businesses, there are periods during the year which are busier than others.

6.2 - Types of Markets

There are different types of markets including:

• National Markets
• Local Markets
• Electronic and Physical Markets

National markets are all over the country and international in scope. Most high street retailers cater for the national market. Non high street businesses also have a national presence and cater for the national market, these businesses offer both tangible and intangible products and services. Specific financial service products offered have specific markets which they cater for. 

Local markets are made of small businesses and individuals that are within a geographic location of small businesses that can meet the needs of these customers. Businesses like electrical, building and roofing tend to meet the customers needs for people and small businesses based in the same area. The development of the internet has made it possible for any business to have an online presence which they can use to attract customers not necessarily based in the same geographic location. 

Electronic markets provide intangible services across geographical boundaries which make it a more competitive market. Business can provide a wide variety of services across the internet, pay online and not have to physically go into a shop on the high street. Many businesses are tapping into the electronic market and can generate an immense volume of customers whom they can satisfy their needs. 

6.1 - Nature of Markets

A market can be defined as all the current buyers of a product and/or service, in addition to the opportunities to develop potential buyers for the market.

It does not depend on the location or base of such buyers.

The market for goods and services is the total value or volume of products and services which provide a high level of satisfaction for a specific customer need.

Individual products and services in their own way can not be classified as markets. However, it's a collection of products and services which can satisfy a particular need.

The needs are those of the customer. Therefore in trying to meet the needs of a customer who's interested in a specific market, there must be a combination of goods and services which together can optimally meet the client need.

Broad categorisations are not relevant to a business trying to correctly identify a customer need. The tendency could be to replace the industry with the market. However, an industry is too large and therefore cannot help a business to identify specific customer needs. Hence, there's the need for specificity and smaller collection of products that can satisfy the needs of the client.

Section 6 - Understanding Markets

Introduction

There are different types of markets and all these play important roles in attracting the relevant customers who are interested in such markets. 

Demand is a focal concept in business and economics. How does it affect businesses and the market? What is it's relationship with price and competition? Demand is very important and affects businesses and consumer habits alike. 

Markets almost always have various segments which have similar wants and needs. 

Businesses need to be aware of the market segments and know how to rightly address them. Market segments are beneficial in many ways, just as they have drawbacks which we will discuss. 

The market size and how to calculate growth of a market and market share are also covered in this unit. 

5.6 - Market Research Data Analysis

So far we have examined the processes of conducting market research. However, once the information has been collated, the next stage will be to analyse and evaluate the data, to interpret and apply the results.

There is no standard way of analysing and evaluating data. To a larger extent, the method in which the data was collected determines how it is analysed and evaluated. Simple questionnaires can be analysed and evaluated quickly and easily. Complex questionnaires need more time as they may involve statistical analysis which is costly. With statistical analysis, some analytical methods focus on trends and other focus on information.

Below is a summary of the stages involved in data collection, analysis and evaluation:

• Extracting information from the questionnaire and compiling all the acquired information into a single document. This is the collation process
• The construction and checking process involves taking the individual questions and graphically representing them by construction of graphs to check the information provided
• Error checking process involves checking the questionnaires for errors
• The cross-checking and initial presentation need to be followed by another collation process
• Looking at trends, links and patterns in questionnaires, questions and individual questionnaires
• Comparison process which involves comparing raw data with existing data
• Identifying and highlighting changes, errors and shifts
• Presentation process involves a final presentation of the data in the format it should be in

5.5 - Methods of Sampling and the Factors which Influence them

Businesses need to choose the right method of sampling for market research purposes. In doing so, a number of various factors need to be considered. These include:

• Target Market - An awareness of who purchases your products and services is vital if the data gathered is to be meaningful. There is usually little point in gathering the thoughts of people who have no interest in your product, although the views of people who might purchase your product are, of course, very important. 
• Nature of Product or Service - This is also relevant to the nature of your product. Again, you must be aware of what your product is and who purchases it if you are to gather accurate data from the right people. For example, when research needs to be conducted for specialist products or services, the sample needs to be composed of respondents interested in such products. 
• Finance - Finance is an important factor in choosing sampling methods. There are expenses to be incurred in conducting market research and these expenses must be worthwhile. In other words, they must benefit you and produce results. 
• Risks Involved - The risks involved in the type of sampling would determine whether or not it's practical and effective to engage in such techniques of sampling. A typical example is during the prototype stages and early product development stages. 

5.4 - Size and Types

A sample is a selection of a number of people whose views and opinions are considered to be representative to a much larger target group. Samples are required as it's not possible to collect information from every single person within your target group.

A chose sample group must be reliable, representative and accurate.

The sample size needs to be considered carefully as it is a small number representing the total population of a group. This is referred to as random sampling. In the course of conducting your own market research, a sample of people is acceptable, aslong as the members of the sample can be proven to be representative of a larger target group.

There are two methods used in sampling:

• Probability Sampling - Here it is assumed that in the representative population, every individual member has an equal chance of selection to be part of the sample group. Methods of this type of sampling include stratified sampling, random sampling, cluster sampling and systematic sampling. 
• Non-Probability Sampling - This is not based on a random selection of members of the sampling. Judgement sampling, convenience sampling, snowball sampling and quota sampling are examples of this type of sampling. 

Activity 19 - Why can't you simply choose people off the street to take part in a focus group?


There are various implications of using sampling methods:

With the use of different types of sampling, there are issues of reliability, cost and accuracy. Random sampling costs tend to be high because of it's large nature and scope. It can be time consuming, both to complete the survey and data analysis of the result.

There are sampling methods chosen as a result of their time efficiency. For such samples, accuracy is not paramount and hence the outcomes of such samples are not expected to be very technical and systematic. Whichever method of sampling is used, it should be a reflection of the group targeted for research and must be able to stand up to scrutiny. 

5.3 - Qualitative and Quantitative Research

Qualitative Research 

Businesses use this method to understand the thought process that guides the customers in their choices and habits when buying products and services. Through evaluating, the business can understand the decision making process of the customers.

Qualitative research involves the use of focus groups and in-depth interviews. Market researchers can then draw conclusions based on the attitudes and behaviours which govern customer decision making habits and can form a theory based on their responses.

Quantitative Research

This method is employed by businesses in making the right decisions. It uses formal methods for the purpose of forecasting, measuring and describing quantity through various methods of sampling.

• Quantitative research measures a market. It then quantifies the derived measurement with selected data. The data usually relates to the market share, penetration, market size or the growth rate of the market. 
• Quantitative research gives key insights into the attitudes of customers and their levels of awareness. It assists businesses to understand their customers better.
• This research method can target specific market segments and provide important details about such segments. Businesses need to have such details in order to optimise their budgets and make the most of the implemented strategies for marketing products and services. 

Variations between Qualitative and Quantitative Research

Qualitative and quantitative research are both vital market research methods that focus on strengthening the business decision making process and understanding the consumers thinking and behavioural process. Hence they vary in several ways as summarised below:

Quantitative research involves greater sample size and reflects the population to a greater extent than qualitative research which deals with a smaller group. 

Quantitative research is less intensive than qualitative research. The interviewer can ask very in-depth questions to secure answers to help the research process.

Quantitative research results are much more objective than qualitative results.

In qualitative research, the gathering of data is less rigid than quantitative, which tends to be very thoroughly planned. 

Motivation, traits of attitude, and behaviour are understood in greater details when conducting qualitative research.

Activity 18 - Explain the difference between qualitative and quantitative research.

5.2 - Pros and Cons of Research Methods

It is often the case that data obtained from market research can be inaccurate, misleading and flawed. When this occurs, the business will receive incorrect information and might develop a business plan that isn't suited to the needs of the customer.

• When mistakes are made, it leads to the making of wrong decisions
• The research data is sometimes incomprehensive and doesn't reflect the target group
• The choice of market research  can be completely wrong
• Valuable data can be lost because of poor feedback from respondents
• As markets change quickly, research data may easily become obsolete and irrelevant 

From technique to technique, unique benefits and limitations apply. A business needs to identify the best method for a specific market research, after careful consideration of its advantages and setbacks. 

Activity 17 - Can you think of any primary market research organisations? Several are often mentioned during election times.

Electronic Surveys

These are a relatively cheap and time saving method of collecting market data. Customers and website users participate in surveys and leave their feedback. It's becoming increasingly popular because of its speed. Yougov is an example of an electronic primary market research organisation. 

The major drawback of this method is the lack of control that the business has over selecting the respondents. In other words, the respondents choose themselves online and can provide false or misleading information. 

Focus Groups

Focus groups are not very expensive an they are quick to conduct. Individuals who represent a large market are interviewed and provide valuable information to the business. However, it requires a good moderator to ensure the discussion stays on the right track. 

Observation

This method of market research is very action orientated. Whereas a lot of market research pays attention to what people say when they are consciously interviewed, observation studies the behaviour of people without them knowing it; hence the responses are very reliable. 

Surveys

Surveys are done via telephone, post and face to face.

• Telephone surveys - these have a relatively good rate of response although it can have restrictive questions
• Postal survey - there is no bias from interviewer, it has wide coverage and has no pressure element. It is also cost-effective. However, the percentage response rate is low and slow. 

5.1 - Methods of Primary and Secondary Research

A business conducts market research to identify relevant information in relation to customer, products and markets.

It's usually necessary for business growth, development and survival to carry out market research regularly as the markets, customers and the business environments are constantly changing.

Through market research, a business can identify it's strengths, follow current business trends, seek to enhance available opportunities and improve the areas it struggles with.

Market research involves collecting information and investigating key factors:

• Future impacts of the environment on business
• The marketing mix
• The overall business environment

Market research can tell you a great deal about the attitude of customers to your own company and products, information you might not already appreciate or realise.

Activity 15 - Which do you think is better, Primary or Secondary research?

Primary Research

This process involves gathering new data and generally uses a specialist market research agency in order to conduct the research. The data gathered is now and up to date.

Field research is the mode of collection of primary research information. It requires the market researchers to get involved in the project and directly interact with the main targets of the market research. Such targets that are needed to participate in the market research are called the respondents or subjects of the market research. 

A lot of time an effort needs to be invested in primary research. Since it's the main focus of the market investigation, every activity involved in the project revolves around the data collected in the field research. Hence it's important the the information is accurate and reliable. 

Typical examples of primary research include:

• Focus groups
• Surveys
• Experimentation
• Discussion panels
• Observation
• Field trials

Focus groups select individuals who meet specific pre-set criteria and invite them for a group conversation. The intention is that they are representative of a larger target audience, for example existing or potential business customers, distributors or other members of the business' network suppliers, distributors among others. 

Market research agencies use survey tools to gather and collate information for the market research project which they are conducting on behalf of the business.

Surveys could be conducted face to face, electronically or via telephone. Surveys target specific groups and use the views and feedback of the respondents to collect relevant data to the market research. 

Experimentation uses respondents of a certain targeted group to test newly developed products or prototypes, before the products go to market. 

Discussion panels rely on the expertise of individuals in a particular business field. Through their wealth of knowledge about the field, they provide tremendous experience and valuable input to the research product. 

Observation is used to study the behavioural characteristics of the respondents over a period of time. With the use of technological advancements, it can now be doing using security/discrete cameras, in addition to face observations. 

Field trials follow up on the information gathered from group discussions and actually try the outcome of the responses.

Activity 16 - Do you think primary research data is always reliable?


Secondary Research

Secondary research makes use of previously collected data which it then uses as the basis of conducting market research.

The findings of this information can then be used for the purposes of marketing. Statistical publications are a common form of secondary research.

Published texts including journals, newspapers, magazines, e-zines and census data are all examples of secondary research data.

There are two types of sources of secondary research data:

• External data - from sources outside the business
• Internal data - from information which the business possesses, for example on products, sales, customers, accounts

Trade journals, company reports, the internet, universities, libraries and official statistics are sources of external data. 

Internal data sources include sales figures, information from products, data records, website monitoring, account records, loyalty schemes and Electronic Point of Sale (EPOS). 

Section 5 - How to Conduct Market Research for Business Start-Ups

Introduction

In this section we will look at market research and how it's conducted. In order to provide the best and most useful products and services, a business must know what customers need. This is one of the functions of market research.

There are two main methods of conducting market research:

• Primary method - This is the collection of new data
• Secondary Method - This is the use of existing data

These methods each have advantages and disadvantages, so the business must be fully informed of the pros and cons of the methods they choose for the purposes of conducting market research. Volume and quality are two major factors in deciding which methodology is best for any market research project. This introduces the relevance of qualitative and quantitive research and how these are utilised by market researchers.

Market sampling, sizes and types are needed when focusing on target groups and making sure that the research is the most representative of that group audience. There are a number of of processes which influence the use of market sampling, as well as risks that should be avoided.

Once the collection of market research information is complete, the analysis of information then takes place in stages. The data is thoroughly examined and evaluated through a range of statistical techniques.