Topic:

 Branding  &  Promotion  

Theme  1:  Section  1.3  Marketing  Mix  and  Strategy  

What  You  Need  to  Know  

• Types  of  branding
• Benefits  of  branding
• Main  methods  of  promotion
• Viral  marketing  &  social  media

Introduction  to  Branding  

A  brand  is  a  product  that  is  easily  distinguished  from  other  products  so  that  it  can  be  
easily  communicated  and  effectively  marketed.  A  brand  name  is  the  name  of  the  
distinctive  product.  

The  key  business  benefits  of  effective  branding  are:  

• It  adds  significant  value  (from  customer  point  of  view)

• Business  is  able  to  charge  higher  prices  +  demand  is  more  price  inelastic

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• Branding  builds  customer  loyalty  &  aspiration

Types  of  Brand   PL

There  are  several  key  types  of  brand:  

Brand  Type   Description   Examples  

Product  brand   Brands  associated  with  specific  products.  Fast   Marmite,  Persil,  
moving  consumer  goods  brands  (FMCG)  are   PotNoodle,  Crest  
some  of  the  best  examples  
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Service  brand   Brands  that  add  perceived  value  to  services,   Dropbox,  Vue,  
either  delivered  face-­‐to-­‐face  or  via  online  &   Uber,  Netflix  
apps  
Umbrella   Brands  that  are  assigned  to  more  than  one   P&G,  Dove,  
(“Family”)  brand   product.  Umbrella  branding  makes  different   Cadbury  
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product  lines  easily  identifiable  by  the  

consumer  by  grouping  them  under  one  brand  
name  
Corporate  &   Promoting  the  brand  name  of  a  corporate   Nestle,  Unilever,  
Own-­‐Label   entity,  as  opposed  to  specific  products  or   BBC  
brands   services  
Own-­‐label   An  example  of  corporate  branding  where  retail   Tesco  Finest,  
outlets  assign  their  corporate  branding  to  a   Essential  
range  of  goods  and  services   Waitrose  
Global  brand   Easily  recognised  and  operating  worldwide.   Ikea,  McDonald’s,  
These  brands  are  based  on  familiarity,   Coca-­‐Cola,  Pepsi,    
availability  and  stability   DHL  

Introduction  to  Promotion  

Promotion  in  marketing  has  two  key  tasks  –  to  inform  (communicate)  and  
persuade.  

The  main  aim  of  promotion  is  to  ensure  that  customers  are  aware  of  the  existence  
and  positioning  of  products.  

© tutor2u [Link]
Topic:  Branding  &  Promotion  
Theme  1:  Section  1.3  Marketing  Mix  and  Strategy  
 
Promotion  is  also  used  to  persuade  customers  that  the  product  is  better  than  
competing  products  and  to  remind  customers  about  why  they  may  want  to  buy.  
 
The  Promotional  Mix  
The  promotional  mix  describes  the  promotional  methods  that  a  business  uses  to  
pursue  its  marketing  objectives:  The  main  elements  of  the  mix  are:  
 
• Advertising  (offline  &  online)  
• Sales  promotion  &  merchandising  
• Personal  selling  
• Public  relations/publicity  /  sponsorship  
• Direct  marketing  
 
Most  businesses  employ  a  variety  of  these  elements  rather  than  relying  on  just  one.  
The  important  thing  is  that  the  elements  must  be  integrated  in  a  cohesive,  consistent  

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and  logical  manner.  Key  influences  on  which  promotional  elements  are  used  (and  
how)  include:  
  PL
Stage  in  the  product’s   Position  in  the  life  cycle  will  require  different  promotional  
life  cycle     methods  
Nature  of  the  product   What  information  do  customers  require  before  they  buy?    
Competition   What  are  rivals  doing?      
What  promotional  methods  are  traditionally  effective  in  a  
market?  
M
Marketing  objectives  &   What  does  promotion  need  to  achieve?  
budget   How  much  can  the  firm  afford?  
Target  market   Appropriate  ways  to  reach  the  target  market  segments  
 
Let’s  look  at  the  key  points  to  remember  for  each  main  promotional  method.  
SA

 
Advertising  
 
Key  points:  
• Paid-­‐for  communication  
• Many  different  advertising  media  (e.g.  mobile  devices,  TV  &  radio,  newspapers  &  
magazines,  online,  social  media,  cinema,  billboards)  
• Consumers  subjected  to  many  advertising  messages  each  day  =  hard  to  get  
through  
• Mass-­‐market  advertising  is  very  expensive  
• Niche  market  advertising  now  much  more  cost  effective  due  to  growth  of  online  
&  mobile)  
 
Benefits  of  Advertising   Drawbacks  of  Advertising  
Wide  coverage   Often  expensive  
Control  of  message   Most  methods  are  impersonal  (although  
Repetition  means  that  the  message  can  be   less  so  for  mobile  &  online)  
communicated  effectively   One  way  communication  
Effective  for  building  brand  awareness  and   Lacks  flexibility  
loyalty   Limited  ability  to  close  a  sale  
© tutor2u [Link]  
Topic:  Branding  &  Promotion  
Theme  1:  Section  1.3  Marketing  Mix  and  Strategy  
 
Personal  Selling  
 
Key  points:  
• Promotion  on  a  person-­‐to-­‐person  basis  
• Uses  two-­‐way  communication  
• Usually  involves  meeting  with  potential  customers  to  close  a  sale  
• Many  methods:  by  telephone,  at  meetings,  in  retail  outlets,  knocking  on  doors  
• Highly  priced,  low  volume  and  highly  technical  products  rely  heavily  on  personal  
selling  
 
Benefits  of  Personal  Selling   Drawbacks  of  Personal  Selling  
High  customer  attention   High  cost  
Message  is  customised   Labour  intensive  
Interactivity   Expensive  
Persuasive  impact   Can  only  reach  a  limited  number  of  

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Potential  for  development  of  relationship   customers  
Adaptable    
Opportunity  to  close  the  sale  
PL
 
Sales  Promotion  
 
Key  points:  
• Tactical,  point  of  sale  material  or  other  incentives  designed  to  stimulate  
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purchases  
• Examples  include  free  samples,  coupons,  BOGOF-­‐style  offers  
• Short-­‐term  incentives  designed  to  increase  sales,  for  example  through  impulse  
purchase  
• Some  promotions  aimed  at  consumers;  others  at  intermediaries  or  to  help  the  
SA

direct  sales  force  

   
Benefits  of  Sales  Promotion   Drawbacks  of  Sales  Promotion  
Effective  at  achieving  a  quick  boost  to   Sales  effect  may  only  be  short-­‐term  
sales   Customers  may  come  to  expect  or  
Encourages  customers  to  trial  a  product   anticipate  further  promotions    
or  switch  brands   May  damage  brand  image  
 
Public  Relations  (PR)  
Public  relations  activities  are  those  that  create  goodwill  toward  an  individual,  
business,  cause  or  product.  
 
Key  points:  
The  main  aims  of  PR  are  to:  
Achieve  favourable  publicity  about  the  business  
Build  the  image  and  reputation  of  the  business  and  its  products,  particularly  
amongst  customers  
Communicate  effectively  with  customers  and  other  stakeholders  
   
Typical  PR  activities:  
© tutor2u [Link]  
Topic:  Branding  &  Promotion  
Theme  1:  Section  1.3  Marketing  Mix  and  Strategy  
• Promoting  new  products  
• Enhancing  public  awareness  
• Projecting  a  business  image  
• Promote  corporate  social  responsibility  
• Projecting  business  as  a  good  employer  
• Obtain  favourable  product  reviews  /  recommendations  
     
Direct  Marketing  
Direct  marketing  involves  the  sending  of  promotional  material  directed  through  
mail,  email,  social  media  or  phone  to  individuals  or  businesses.  The  ultimate  aim  of  
direct  marketing  is  to  trigger  a  “response”  –  e.g.  a  purchase  or  an  enquiry.  
   
Key  points:  
• Allows  a  business  to  generate  a  specific  response  from  targeted  groups  of  
customers  
• Allows  a  business  to  focus  on  several  marketing  objectives  at  the  same  time:  

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o Increasing  sales  to  existing  customers    
o Building  customer  loyalty    
o Re-­‐establishing  lapsed  customer  relationships    
PL
o Generating  new  business  
 
Key  Terms  
 
Brand   A  product  that  is  easily  distinguished  from  other  products  
so  that  it  can  be  easily  communicated  and  effectively  
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marketed  
Sales  promotion   Tactical,  point  of  sale  material  or  other  incentives  designed  
to  stimulate  purchases  
Advertising   Paid-­‐for  communication,  aimed  at  informing  or  persuading  
Direct  marketing   Sending  promotional  materials  and  messages  directly  to  
SA

the  target  audience  

Promotional  mix   The  mix  of  activities  and  approaches  taken  to  promoting  a  
product  
 

© tutor2u [Link]  
Topic:  Economic  Influences  
Theme  2:  Section  2.5  External  Influences    
 
What  You  Need  to  Know  
• The  effect  on  businesses  of  changes  in:  
• The  business  cycle  
• Interest  rates  
• Exchange  rates  (appreciation,  depreciation)  
• Inflation  (the  rate  of  inflation,  the  Consumer  Prices  Index)  
• Taxation  and  government  spending  
 
Economic  Influences  and  the  External  Environment  
Economic  influences  are  just  one  part  –  though  a  very  important  one  –  of  the  
external  environment  in  which  a  business  operates.  
 
• Businesses  must  take  into  account  the  external  environment  in  which  they  
operate  in  order  to  make  effective  decisions;  
• Most  businesses  are  unlikely  to  have  much  control  (if  any)  over  this  

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environment;  
• Businesses  need  to  monitor  their  environment  constantly,  in  order  to  react  to  
any  changes  that  occur;  
PL
• The  most  competitive  businesses  will  anticipate  change,  rather  than  react  to  it.  
 
PESTLE  Analysis  provides  a  useful  way  to  analyse  the  external  environment.  The  
acronym  PESTLE  stands  for:  
 
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SA

 
 
Examples  for  each  element  of  the  PESTLE  framework  include:  
 
POLITICAL   ECONOMIC   SOCIAL  
Competition  policy   Business  cycle   Demographic  change  
Industry  regulation   Interest  rates   Impact  of  pressure  groups  
Govt.  policies   Inflation   Consumer  tastes  &  fashions  
Business  policy  &  incentives   Exchange  rates   Changing  lifestyles  
Govt.  spending  &  taxation  
TECHNOLOGICAL   LEGAL   ETHICAL  /  ENVIRONMENT  
Disruptive  technologies   Employment  Law   Sustainability  
Adoption  of  mobile  tech   Minimum  /  Living  Wage   Tax  practices  
New  production  processes   Health  &  Safety  Laws   Ethical  sourcing  (supply  
Big  data  and  dynamic  pricing   Environmental  legislation   chain)  
Pollution  &  carbon  emissions  
 

© tutor2u [Link]  
Topic:  Economic  Influences  
Theme  2:  Section  2.5  External  Influences    
Business  Cycle  
The  business  cycle  is  all  about  the  rate  of  change  in  the  value  of  economic  activity.  
The  most  common  measure  of  this  activity  is  Gross  Domestic  Product  (GDP).  
 
• The  level  of  demand  in  most  markets  is  influenced  by  the  rate  of  economic  
growth  
• Economies  vary  in  terms  of  their  “normal”  long-­‐term  growth  rate.  A  mature  
economy  like  the  UK  has  a  long-­‐term  growth  rate  of  around  2-­‐3%  
• GDP  growth  will  vary  depending  on  the  stage  of  the  business  cycle  
 

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PL
M
 
 
The  business  cycle  describes:  
 
• The  changes  in  GDP  from  one  quarter  to  the  next  
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• The  traditional  sequence  of  slump,  recovery,  boom  and  recession      

• The  regular  pattern  of  “ups  and  downs”  in  the  economy    
 
The  traditional  sequence  of  the  business  cycle  is  usually  something  like  this:  
 

 
 
 
© tutor2u [Link]  
Topic:  Economic  Influences  
Theme  2:  Section  2.5  External  Influences    
The  main  stages  in  the  business  cycle  diagram  above  can  be  summarised  as  
follows:  
 
Boom • High  levels  of  consumer  spending,  business  confidence,  profits  
and  investment  
• Prices  and  costs  also  tend  to  rise  faster  
• Unemployment  tends  to  be  low  
Recession • Falling  levels  of  consumer  spending  and  confidence  mean  lower  
profits  for  businesses  –  which  start  to  cut  back  on  investment  
• Spare  capacity  increases  +  rising  unemployment  
Slump  /   • Very  weak  consumer  spending  and  business  investment  
depression • Many  business  failures  
• Rapidly  rising  unemployment  
• Prices  may  start  falling  
Recovery • Things  start  to  get  better  
• Consumers  begin  to  increase  spending  

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• Businesses  feel  a  little  more  confident  and  start  to  invest  again  
• But  it  takes  time  for  unemployment  to  stop  growing  
  PL
What  causes  the  business  cycle?  
 
• Changes  in  the  level  of  business  and  consumer  confidence  
• Alternating  periods  of  stocking  (businesses  increasing  their  stocks)  and  de-­‐
stocking  (reducing  the  value  of  stocks  held)  
• Changes  in  the  value  of  consumer  spending  and  business  investment  
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• Changes  in  government  policy  which  can  induce  a  change  in  the  economy    
 
Interest  Rates  
An  interest  rate  is  the  reward  for  saving  and  the  cost  of  borrowing  expressed  as  
a  percentage  of  the  money  saved  or  borrowed.  At  any  one  time  there  are  a  variety  
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of  different  interest  rates  operating  within  the  external  environment;  for  example:  
 
• Interest  rates  on  savings  in  bank  and  other  accounts  
• Borrowing  interest  rates  
• Mortgage  interest  rates  (housing  loans)  
• Credit  card  interest  rates  and  pay  day  loans  
• Interest  rates  on  government  and  corporate  bonds  
 
The  Bank  of  England  uses  policy  interest  rates  to  help  regulate  the  economy  and  
meet  economic  policy  objectives.    
 
The  Bank  of  England  Base  Rate  has  been  very  low  and  stable  for  several  years  –  at  
0.5%  since  2010.    
 

© tutor2u [Link]  
Topic:  Economic  Influences  
Theme  2:  Section  2.5  External  Influences    

 
 
What  might  happen  if  interest  rates  start  to  rise?  Possible  effects  might  be:  
 
• Cost  of  servicing  loans  /  debt  is  reduced  –  boosting  spending  power  

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• Consumer  confidence  should  increase  leading  to  more  spending  
• Effective  disposable  income  rises  –  lower  mortgage  costs  
• Business  investment  should  be  boosted  e.g.  prospect  of  rising  demand  
PL
• Housing  market  effects  –  more  demand  and  higher  property  prices  
• Exchange  rate  and  exports  –  cheaper  currency  will  increase  exports  
 
Exchange  Rates  
An  exchange  rate  is  the  price  of  one  currency  expressed  in  terms  of  another  
currency.  The  forces  of  demand  and  supply  in  the  currency  markets  determine  the  
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price  (exchange  rate).  Just  like  the  commodity  markets  for  oil  and  coffee,  the  price  
of  a  currency  will  reflect  the  amount  of  the  currency  that  consumers  and  
businesses  want  to  buy  (demand)  and  sell  (supply).  
 
The  exchange  rate  determines  how  much  of  one  currency  has  to  be  given  up  in  
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order  to  buy  a  specific  amount  of  another  currency.  

 
For  example  a  £/$  exchange  rate  might  be  1.50.  That  means,  for  every  £1,  you  can  
buy  $1.50  US  dollars  
 
This  is  the  price  of  one  pound,  expressed  in  dollars  i.e.  the  £/$  exchange  rate.  
 
What  happens  when  an  exchange  rate  changes?  Let’s  look  at  a  simple  example.  
 
Set  out  below  are  two  exchange  rates  for  two  months:  
 
£1  buys May September
US  Dollars  ($) $1.60 $1.45
Euros  (€) €1.15 €1.05
 
In  the  table  above,  you  can  see  that  in  May,  £1  would  buy  $1.60,  if  you  wanted  to  
convert  some  pounds  into  US  dollars.    Alternatively,  £1  would  buy  €1.15  euro.      
 
What  happened  to  the  exchange  rate  for  the  pound  between  May  and  September?  

© tutor2u [Link]  
Topic:  Economic  Influences  
Theme  2:  Section  2.5  External  Influences    
The  value  of  £1  fell  against  both  the  US  dollar  and  the  Euro.    For  example,  by  
September,  £1  would  only  buy  you  $1.45,  a  fall  of  $0.15  from  May.  
 
That  means  that  the  pound  weakened  against  the  dollar  (and  the  euro).  
 
Putting  it  another  way,  the  value  of  the  US  dollar  strengthened  against  the  pound.    
 
If  you  were  holding  dollars,  you  would  need  less  of  them  to  convert  into  £1.  
 
Factors  that  determine  effect  of  changing  exchange  rates  on  business  
 
Low  effect  on  business High  effect  on  business
No  export  sales  –  turnover  all  in   Significant  export  sales,  perhaps  in  many  
domestic  (UK)  market currencies
All  business  activities  located  in  UK Overseas  operations,  earning  profits  in  
foreign  currency

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Raw  materials  and  other  supplies  bought   Significant  purchases  from  overseas  
in  UK suppliers
Demand  predominantly  from  domestic  
PL Substantial  demand  from  overseas  
(UK)  customers visitors  to  UK
Demand  is  price  inelastic Demand  is  price  elastic
Higher  costs  can  be  passed  on  to   Higher  costs  usually  have  to  be  absorbed  
customers  to  maintain  margin via  a  lower  margin
 
Exchange  rates  and  price  elasticity  of  demand  
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Price  elasticity  of  demand  is  an  important  concept  for  any  business  where  demand  
may  be  affected  by  changing  exchange  rates  
 
E.g.  price  elastic  demand  
• Stronger  (higher)  exchange  rate  will  increase  selling  price  for  export  customers  
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(e.g.  they  have  to  use  more  US$  for  each  £1)  
• Likely  to  result  in  greater  reduction  in  quantity  demanded  +  overall  reduction  
in  export  sales  
 
Inflation  
Inflation  is  a  sustained  increase  in  the  average  price  level  of  an  economy.  
 
The  rate  of  inflation  is  measured  by  the  annual  percentage  change  in  the  level  of  
prices  as  measured  by  the  consumer  price  index.  
 
A  sustained  fall  in  the  general  price  level  is  called  deflation  –  in  this  situation,  the  
rate  of  inflation  becomes  negative.  
 
The  consumer  price  index  is  the  main  measure  of  inflation  for  the  UK  
 
The  government  has  set  the  Bank  of  England  a  target  for  inflation  (using  the  CPI)  
of  2%.  The  aim  of  this  target  is  to  achieve  a  sustained  period  of  low  and  stable  
inflation.  Low  inflation  is  also  known  as  price  stability  
 

© tutor2u [Link]  
Topic:  Economic  Influences  
Theme  2:  Section  2.5  External  Influences    
The  recent  level  of  consumer  price  inflation  in  the  UK  is  illustrated  in  the  chart  
below:  
 

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What  causes  prices  to  rise?  There  are  two  main  causes  of  inflation:  
 
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Too  much  demand   Businesses  respond  to  high  demand  by  raising  prices  to  increase  
their  profit  margins  
 
Excess  demand  in  the  economy  or  a  market  is  associated  with  the  
boom  phase  of  the  business  cycle  
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Rising  business   Main  causes:  
costs   External  shocks  (e.g.  commodity  price  fluctuations)  
A  depreciation  in  the  exchange  rate    
Faster  growth  in  wages  and  salaries  
 
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What  happens?  
Firms  raise  prices  to  protect  their  profit  margins  –  better  able  to  
do  this  when  market  demand  is  price  inelastic  
“Wages  often  follow  prices”    
A  rise  in  inflation  can  lead  to  rising  inflationary  expectations  
 
The  main  costs  and  consequences  of  inflation:  
 
• Money  loses  its  value  and  people  lose  confidence  in  money  as  the  value  of  
savings  is  reduced  
• Inflation  can  get  out  of  control  -­‐  price  increases  lead  to  higher  wage  
demands  as  people  try  to  maintain  their  living  standards.  This  is  known  as  a  
wage-­‐price  spiral.  
• Consumers  and  businesses  on  fixed  incomes  lose  out  because  the  their  real  
incomes  falls  -­‐  employees  in  poor  bargaining  positions  lose  out    
• Inflation  can  favour  borrowers  at  the  expense  of  savers  –  because  inflation  
erodes  the  real  value  of  existing  debts  
• Inflation  can  disrupt  business  planning  and  lead  to  lower  capital  investment  
• Inflation  is  a  possible  cause  of  higher  unemployment  in  the  long  term  –  
because  of  a  lack  of  competitiveness    

© tutor2u [Link]  
Topic:  Economic  Influences  
Theme  2:  Section  2.5  External  Influences    
• Rising  inflation  is  associated  with  higher  interest  rates  -­‐  this  reduces  
economic  growth  and  can  lead  to  a  recession  
 
Inflation  and  price  elasticity  of  demand  
 
• Remember  that  price  elasticity  of  demand  refers  to  the  responsiveness  of  
demand  to  changes  in  price  
• When  demand  is  elastic,  a  price  rise  leads  to  a  more  than  proportionate  fall  off  
in  quantity  demanded  
• When  demand  is  inelastic,  a  price  rise  leads  to  a  less  than  proportionate  fall  
off  in  quantity  demanded  
• Businesses  with  products  that  have  inelastic  price  elasticity  of  demand  will  be  
less  affected  by  a  rise  in  inflation  
• Some  businesses  will  be  able  to  absorb  price  increases  by  becoming  more  
efficient  
• Price  inflation  will  vary  from  industry  to  industry  –  be  careful  about  making  
generalisations  

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Government  Spending  &  Taxation  –  Fiscal  Policy  
 
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Fiscal  policy  involves  the  use  of  government  spending,  taxation  and  borrowing  to  
affect  the  level  and  growth  of  economic  activity.  
 
The  government  taxes  in  order  to:  
 
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• Raise  revenue  –  to  finance  government  spending  
• Managing  aggregate  demand  –  to  help  meet  the  government’s  macroeconomic  
objectives  
• Changing  the  distribution  of  income  and  wealth    
• Address  market  failure  and  environmental  targets  
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There  are  two  main  kinds  of  taxation:  direct  and  indirect.  
 
Direct  Taxation   Indirect  Taxation  
Levied  on  income,  wealth  and  profit   Levied  on  spending  by  consumers  on  goods  
and  services  
Main  examples:   Main  examples:  
• Income  Tax   – VAT  
• National  Insurance  Contributions   – Excise  duties  on  fuel  and  alcohol,  car  
• Corporation  Tax   tax,  betting  tax  etc  
• Capital  Gains  Tax  
 
Government  Spending  
 
In  the  UK  government  spending  takes  up  around  40%  of  annual  GDP.  Three  main  
areas  of  spending  are:  
 
• Transfer  Payments  -­‐  welfare  payments  made  to  benefit  recipients  such  as  the  
state  pension  and  the  Jobseeker’s  Allowance    

© tutor2u [Link]  
Topic:  Economic  Influences  
Theme  2:  Section  2.5  External  Influences    
• Current  Spending  -­‐  spending  on  state-­‐provided  goods  &  services  such  as  
education  and  health  
• Capital  Spending  -­‐  infrastructural  spending  such  as  spending  on  new  roads,  
hospitals,  motorways  and  prisons    
 
Why  is  Government  spending  so  significant?  
 
• Provide  welfare  support  for  low  income  households  /  the  unemployed  
• Government  spending  is  also  a  means  of  redistributing  income  within  society  
e.g.  to  reduce  the  scale  of  relative  poverty  
• Government  spending  can  also  be  used  as  a  tool  to  manage  aggregate  demand  
(GDP)  as  part  of  macroeconomic  policy  
 

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© tutor2u [Link]  
Topic:  Capacity  Utilisation  
Theme  2:  Section  2.4  Resource  Management  
 
What  You  Need  to  Know  
Meaning  &  importance  of  capacity  
Calculation  and  interpretation  of  capacity  utilisation  
How  to  use  capacity  efficiently  
 
Introduction  to  Capacity  
The  capacity  of  a  business  is  a  measure  of  how  much  output  it  can  achieve  in  a  
given  period.  For  example:  
• A  fast-­‐food  outlet  may  be  able  to  serve  1,000  customers  per  hour  
• A  call-­‐centre  may  be  able  to  handle  10,000  calls  per  day  
• A  football  stadium  could  seat  no  more  than  45,000  fans  at  each  match  
• A  car  production  line  may  be  able  to  complete  50,000  cars  per  year  
Capacity  is  therefore  a  measure  of  “potential”  output.  Of  course,  not  every  
business  will  be  able  to  operate  to  full  potential;  and  sometimes  a  business  will  
find  demand  so  high  that  it  does  not  have  sufficient  capacity.  

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Why  Capacity  is  Important  
How  capacity  is  managed  has  a  direct  effect  on  the  performance  of  a  business.  In  
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order  for  a  business  to  be  able  to  meet  demand  from  customers,  it  needs  to  have  
the  capacity  to  do  so.    Having  capacity  enables  orders  to  be  met  and  revenues  
generated.  However,  a  lack  of  capacity  can  have  a  damaging  effect  on  business  
performance.  For  example,  a  restaurant  will  lose  sales  if  customers  turn  away  
seeing  all  the  tables  full;  a  factory  may  lose  an  order  if  it  is  not  able  to  produce  
the  volume  required  for  a  possible  order.      
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The  Costs  of  Capacity  
Since  capacity  is  all  about  the  output  a  business  can  achieve,  it  is  easy  to  see  
what  costs  are  involved  in  making  that  capacity  available.    The  key  costs  of  
capacity  are:  
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Equipment:  e.g.  production  line  

Facilities:  e.g.  building  rent,  insurance  
Labour:  wages  and  salaries  of  employees  involved  in  production  or  delivering  a  
service  
There  is  an  important  link  between  capacity  and  unit  costs,  since  unit  costs  are  
calculated  using  the  actual  output  during  a  period.  This  link  is  a  key  concept  
called  capacity  utilisation.  
 
Capacity  Utilisation  
Capacity  utilisation  measures  the  extent  to  which  capacity  is  used  during  a  
specific  period.  For  example:  
• A  frozen  pizza  production  line  might  make  75,000  pizzas  in  a  week  
compared  with  its  capacity  of  100,000  per  week  
• A  beauty  salon  could  complete  300  appointments  in  a  month  compared  
with  a  potential  of  500  appointments  per  month.  
 
Where  both  actual  and  potential  output  can  be  measured,  capacity  utilisation  can  
be  calculated  and  it  is  expressed  as  a  simple  percentage  using  this  formula:  

© tutor2u [Link]  
Topic:  Capacity  Utilisation  
Theme  2:  Section  2.4  Resource  Management  
Capacity  utilisation  =  the  percentage  of  total  capacity  that  is  actually  being  
achieved  in  a  given  period  
(Actual  output  /  potential  output)  x100  
 
Example  of  Capacity  Utilisation  Calculation  
Kaur  Components  manufactures  printed  circuit  boards  for  use  in  remote  
monitoring  devices.  Working  a  normal  two-­‐shift  rota,  the  Kaur  factory  is  capable  
of  producing  150,000  circuit  boards  per  month.  In  the  latest  month,  actual  
output  was  127,500  units.  What  was  the  capacity  utilisation  for  that  month?  
Actual  Output:  127,500  units  
Potential  Output  (Capacity):  150,000  units  
Capacity  Utilisation  =  127,5000  /  150,000  =  85%  
 
Capacity  utilisation  is  an  important  concept  because:  
• It  is  a  useful  measure  of  productive  efficiency  since  it  measures  whether  
there  are  idle  (unused)  resources  in  the  business;  

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• Average  production  costs  tend  to  fall  as  output  rises  –  so  higher  
utilisation  can  reduce  unit  costs,  making  a  business  more  competitive  
• Businesses  usually  aim  to  produce  as  close  to  full  capacity  (100%  
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utilisation)  as  possible  in  order  to  minimise  unit  costs  
• A  high  level  of  capacity  utilisation  is  required  if  a  business  has  a  high  
break-­‐even  output  due  to  significant  fixed  costs  of  production  
 
Reasons  Why  Businesses  Operate  Below  Full  Capacity  
Most  businesses  have  some  spare  capacity  –  i.e.  they  operate  at  below  their  
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capacity  (i.e.  less  than100%  capacity  utilisation).    This  happens  for  a  variety  of  
reasons:  
 
Reason   Example  
Lower  than  expected  market  demand   A  change  in  customer  tastes  
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A  loss  of  market  share   Competitors  gain  customers  

Seasonal  variations  in  demand   Weather  changes  lead  to  lower  demand  
Recent  increase  in  capacity   A  new  production  line  has  been  added  
Maintenance  and  repair  programmes     Capacity  is  temporarily  unavailable  
 
If  a  business  operates  consistently  at  a  low  level  of  capacity  utilisation,  this  is  
likely  to  indicate  potentially  serious  issues,  particularly  if  production  costs  are  
mainly  fixed  and  the  business  has  a  high  break-­‐even  output.    Persistently  low  
levels  of  capacity  utilisation  are  likely  to  result  in  the  business  having  higher  unit  
costs  than  other  competitors  that  may  therefore  result  in  the  business  being  less  
competitive.  
 
Drawbacks  of  High  Capacity  Utilisation    
Although  there  are  benefits  of  operating  at  a  high  level  of  capacity  utilisation,  
there  are  also  possible  drawbacks.  Possible  issues  include:  
• There  is  less  time  for  productive  equipment  and  facilities  to  be  
maintained  and  repaired,  which  may  increase  the  likelihood  that  they  
break-­‐down  in  the  future;  

© tutor2u [Link]  
Topic:  Capacity  Utilisation  
Theme  2:  Section  2.4  Resource  Management  
• Employees  involved  in  production  are  out  under  greater  stress  and  
pressure  which  can  be  counter-­‐productive  if,  for  example,  they  become  
demotivated  or  it  contributes  to  an  increase  in  absenteeism;  
• Customer  service  may  deteriorate  if,  for  example,  customers  have  to  wait  
longer  to  be  served  or  to  receive  their  product  
• A  business  is  less  likely  to  be  able  to  respond  to  sudden  or  unexpected  
increases  in  demand  
 
Options  to  Increase  Capacity  
What  happens  if  a  business  finds  itself  with  excess  demand  (i.e.  it  does  not  have  
enough  capacity  to  meet  demand).    In  such  circumstances,  what  can  it  do  to  
operate  at  higher  than  100%  normal  capacity?  Possible  options  might  include:  
• Increase  workforce  hours  (e.g.  extra  shifts;  encourage  overtime;  employ  
temporary  staff)  
• Sub-­‐contract  some  production  activities  (e.g.  assembly  of  components)  
• Reduce  time  spent  maintaining  production  equipment  

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Key  Terms  
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Capacity   The  potential  output  of  a  business  measured  in  terms  
of  units  of  output  over  a  specific  period  
Capacity  utilisation   The  proportion  (percentage)  of  a  business’  capacity  
that  is  actually  being  used  over  a  specific  period  
Spare  (excess)  capacity   Where  actual  output  is  less  than  capacity  
Excess  demand   Where  demand  for  a  business’  products  or  services  is  
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greater  than  the  business  capacity  
 
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© tutor2u [Link]