MANAGEMENT OF

BUSINESS
FOR CAPE EXAMINATIONS

JEROME PITTERSON

CAPE is a registered trade mark of the

Caribbean Examinations Council (CXC).
MANAGEMENT OF BUSINESS for CAPE
EXAMINATIONS is an independent
publication and has not been authorised,
sponsored, or otherwise approved by CXC.
Macmillan Education
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ISBN 978-0-230-40043-6
ISBN 978-0-230-48319-4 AER
Text Jerome Pitterson, 2014
Design and illustration Macmillan Publishers Limited, 2014
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First published 2014
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Authors acknowledgement: I want to thank God for the knowledge
and strength he has bestowed on me to complete this text successfully.
Sincere gratitude is also extended to my family, for their support
and inspiration throughout this process, and to the students I have
taught for their encouraging words and who are waiting to see
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The author and publishers are grateful for permission to reprint the
following copyright material:
Extract from Functions of the bank by Caribbean Development Bank
Caribbean Development Bank. Reprinted by permission of the Bank.
Extract from Costing by T. Lucey 2000, Cengage Learning EMEA
Ltd. Reproduced by permission of Cengage Learning EMEA Ltd.
Extract from http://www.entrepreneur.com/encyclopedia/business-plan
with permission of Entrepreneur Media, Inc. 2014 by Entrepreneur
Media, Inc. All rights reserved.
Extract from Innovation and Entrepreneurship by Peter F. Drucker
Peter F. Drucker. First published in 2007 by Taylor & Francis Ltd.
Extract from Organizational Behaviour by Stephen P. Robbins and
Timothy A. Judge, 15th Edition, 2013. Reprinted by permission of
Pearson Education, Inc., Upper Saddle River, NJ.
Extract from info@sbaj.org.jm Small Business Association of Jamaica.
Reprinted by permission of the organization.
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Contents
List of figures and tables
7
Introduction 10
UNIT 1 MANAGEMENT PRINCIPLES AND
PROCESSES 11
MODULE 1 BUSINESS AND ITS ENVIRONMENT 12
1 Economic and Legal Structures 12
Types of economic activity 12
Economic sectors and legal structures 14
The private sector 15
The public sector 23
Privatisation 26
Multiple Choice Questions 27
Extended Essay Questions 28
2 Business Objectives 29
Nature, role and importance of objectives 29
Business ethics and social responsibility 32
Obligations of the firm to stakeholders 34
Good corporate governance 34
Importance of business ethics and integrity 34
Code of ethics 34
Governments response to social irresponsibility 35
Multiple Choice Questions 35
Extended Essay Questions 36
3 Decision Making 37
Essential features of information 37
Significance of qualitative versus quantitative
decision making 37
The stages of decision making 38
Factors affecting decision making 39
Multiple Choice Questions 45
Extended Essay Questions 46
4 Caribbean Business Environment
and Globalisation 47
The nature and structure of Caribbean
business organisations 47
Caribbean business culture 48
The growth of multinational corporations
in the Caribbean 49
The impact of trade liberalisation and globalisation 50
3
Protectionism 54
Other barriers to trade 55
Multiple Choice Questions 56
Extended Essay Questions 57
MODULE 2 THE MANAGEMENT OF PEOPLE 58
5 The Functions and Theories of Management 58
The need for and nature of organisations 58
The major management theories 58
The functions of management 64
The roles of management 65
Multiple Choice Questions 67
Extended Essay Questions 67
6 The Organisation and its Structure 68
Classification of organisations 68
Factors influencing the classification of organisations 72
Characteristics of the formal organisational structure 73
Centralisation and decentralisation 75
Multiple Choice Questions 76
Extended Essay Questions 76
7 The Theory and Application of Motivation 77
Factors that stimulate and influence motivation 77
Theories of motivation 78
Financial and non-financial motivational strategies 80
Implications for managers 85
Multiple Choice Questions 87
Extended Essay Questions 87
8 Leadership 88
Leadership theories 88
Theory X and Theory Y 88
The Trait Theory 89
Leadership skills 90
Leadership styles 92
Factors influencing the choice of leadership style 94
Leadership roles 95
Informal leadership 95
Multiple Choice Questions 96
Extended Essay Questions 97
9 Team Management and Conflict 98
The nature of teams 98
4 CONTENTS
Stages of team development 99
Types of formal group 99
Characteristics of effective teams 99
Team or group cohesiveness 100
Evaluation of team work 101
Benefits of team management to the organisation 101
Conflict management 101
Multiple Choice Questions 106
Extended Essay Questions 106
10 Management of Change 107
Factors that may cause change in the organisation 107
Differences between leading and managing change 108
Resistance to change 108
Strategies for managing change 110
The importance of communication in the
management process 111
Multiple Choice Questions 112
Extended Essay Questions 112
11 Communication in Business 113
Types of communication 113
The communication process 113
Channels of communication 114
Factors influencing the choice of channel used 116
Lines of communication 117
Barriers to effective communication 119
Reducing barriers to communication 120
Multiple Choice Questions 122
Extended Essay Questions 123
12 Human Resource Management 124
The role and importance of human
resource management 124
The functions of human resource management 124
Labourmanagement relations 131
Laws affecting health and safety in the workplace 134
Multiple Choice Questions 135
Extended Essay Questions 136
MODULE 3 BUSINESS FINANCE AND
ACCOUNTING 137
13 The Need for Capital and Sources of Finance 137
The need for capital 137
Sources of finance 140
Criteria for seeking finance 140
How to choose from these sources of funds? 143
Money and capital markets and international
financial institutions 143
The money and capital markets 145
Multiple Choice Questions 147
Extended Essay Questions 147
14 Accounting Information and
Financial Statements 148
Why do we need accounting records? 148
Internal users of accounting information 148
External users of accounting information 149
Getting started with accounting 149
Components of financial statements 152
Multiple Choice Questions 158
15 Financial Statements Analysis 159
Financial analysis 159
Importance of financial analysis 159
Ratio analysis 159
Types of ratio 160
Multiple Choice Questions 166
Extended Essay Questions 166
16 Budgetary Accounting 167
Projections 167
The budgeting process 167
Categorisations of budgets 168
Operational budgets 168
Types of budget 168
Budgetary control 170
Multiple Choice Questions 172
17 Investment Appraisal 173
Investment 173
Investment appraisal 173
Analytical methods of appraisal 173
Limitations of investment appraisal 178
Comparison of methods of appraisal 178
Multiple Choice Questions 179
END OF UNIT ASSESSMENT 180
UNIT 2 APPLICATIONS IN MANAGEMENT 184
MODULE 1 PRODUCTION AND OPERATIONS
MANAGEMENT 185
18 The Nature of Production 185
The production process 185
Factors of production 185
What to produce? 186
Production methods 186
Factors that influence the method of production used 190
When to produce? 191
Location of production 191
Multiple Choice Questions 195
Extended Essay Questions 195
19 Forecasting Techniques 196
Forecasting techniques 196

Qualitative forecasting techniques 196
Quantitative forecasting techniques 199
Multiple Choice Questions 202
Extended Essay Question 203
20 Production Design Strategies and
Capacity Planning 204
Product design planning 204
Product design strategies 204
Capacity planning 206
Capacity utilisation 207
Options available to increase capacity 208
Economies and diseconomies of scale 208
Diseconomies of scale 210
Business layout 210
Multiple Choice Questions 215
Extended Essay Questions 215
21 Costing 216
Direct costs 216
Indirect costs 216
Fixed costs 216
Variable costs 216
Fixed costs per unit 217
Semi-variable cost 217
Approaches to costing 217
Including stock 219
Application of marginal costing 220
Make or buy decisions 221
Multiple Choice Questions 223
Extended Essay Question 223
22 Inventory Management 224
Importance of inventory 224
Importance of inventory control 224
Inventory control management 225
Multiple Choice Questions 228
Extended Essay Question 229
23 Lean Production and Quality Management 230
Importance of quality 230
Dimensions of quality 230
Techniques for improving quality 231
Multiple Choice Questions 239
Extended Essay Questions 240
24 Productivity 241
Factors that affect productivity 241
Methods of measuring productivity 243
Methods of improving productivity 243
Multiple Choice Questions 246
Extended Essay Questions 246
CONTENTS 5
25 Project Management 247
Critical Path Analysis (CPA) 247
Decision trees 250
Multiple Choice Questions 253
MODULE 2 FUNDAMENTALS OF MARKETING 254
26 The Concept of Marketing 254
The core marketing concepts 254
Multiple Choice Questions 260
Extended Essay Question 260
27 The Marketing Environment 261
The micro-environment 261
The macro-environment 262
Multiple Choice Questions 265
Extended Essay Questions 265
28 Marketing Research 266
Importance of conducting marketing research 266
Importance of developing a research plan 266
Stages of marketing research 266
Limitations of market research 272
Multiple Choice Questions 274
Extended Essay Questions 275
29 Principles of Segmentation 276
Market segmentation 276
Criteria for effective segmentation 278
Bases of segmentation 278
Consumer buying behaviour 281
The consumer decision-making process
(the buying process) 281
Factors influencing buying behaviour 283
Multiple Choice Questions 284
Extended Essay Questions 284
30 Product Management 285
The concept of product 285
Dimensions of the product mix 286
Product line and extension 286
The Boston Matrix 286
New product development process 289
The product lifecycle 290
Branding and packaging 292
Characteristics of services 293
Multiple Choice Questions 296
Extended Essay Questions 297
31 Pricing Decision 298
Introduction to pricing 298
Factors influencing pricing decisions 299
Pricing strategies 302
6 CONTENTS

Multiple Choice Questions 305 Selection of business types 345

Extended Essay Questions 306 Determining a location 345
Globalisation and trade liberalisation 345
32 Distribution Management 307
E-commerce 345
The role of distribution in the organisation 307
Intellectual property 346
Factors influencing distribution decisions 307
Multiple Choice Questions 347
Types of distribution channel 308
Extended Essay Question 348
Introduction to logistics strategy 309
Types of distribution strategy 310 38 Types and Nature of Assistance Available
Multiple Choice Questions 311 to Small Firms 349
Extended Essay Questions 311 Government agencies 349
Non-government agencies 350
33 Promotion Strategy 312
Financial institutions 350
The concept and objectives of promotion 312
Types of assistance offered to small businesses 351
Tools of promotion 312
Extended Essay Question 352
Multiple Choice Questions 318
Extended Essay Questions 319 39 Preparation of a Business Plan for
a Small Business 353
34 Internet Marketing 320
Feasibility study 353
Development of internet marketing 320
The business plan 353
Opportunities created by internet marketing 321
Elements of a business plan 354
Challenges associated with internet marketing 322
Multiple Choice Questions 359
The importance of e-commerce to
Extended Essay Question 359
business organisations 322
Challenges created by e-commerce 323 END OF UNIT ASSESSMENT 360
Multiple Choice Questions 325
40 Internal Assessment 364
Extended Essay Question 325
Choosing an appropriate topic or title for
MODULE 3 SMALL BUSINESS MANAGEMENT 326 your research 364
Introduction 365
35 The Nature and Characteristics
Literature review 366
of Entrepreneurship 326
Writing your methodology 367
Corporate entrepreneurship (intrapreneurship) 326
Presentation of data 368
Social entrepreneurship 326
Analysis of data 369
Characteristics of successful entrepreneurs 327
Interpretation of results 370
Benefits of entrepreneurship 328
Conclusion and recommendation 370
Drawbacks of entrepreneurship 329
References and citations 370
Multiple Choice Questions 330
Appendices 370
Extended Essay Question 330
Note to teachers 370
36 Economic Systems and Business Growth 331
Glossary 372
The economy problem 331
Types of economic system 331 Answers to Multiple Choice Questions 384
Criteria for measuring size and growth of businesses 334
Index 386
A comparison of small firms and large firms 335
Strategies for growth 338
Multiple Choice Questions 343
Extended Essay Questions 343

37 Major Challenges and Opportunities Faced

by Small Businesses 344
Identifying successful business opportunities 344
Sourcing capital (finance) 344

List of figures and tables
Figures
Figure 1.1 An example of industry in the
primary sector 12
Figure 1.2 An example of industry in the
secondary sector 13
Figure 1.3 An example of industry in the
tertiary sector 14
Figure 1.4 Private-sector organisations 15
Figure 1.5 A sole-trader business 16
Figure 1.6 A public limited company 19
Figure 1.7 A cooperative business 20
Figure 1.8 A franchise 21
Figure 1.9 Public-sector organisations 24
Figure 2.1 The hierarchy of objectives 31
Figure 2.2 Scotiabank 33
Figure 3.1 The stages of decision making 38
Figure 4.1 Business culture factors 48
Figure 4.2 Digicel headquarters, Kingston 51
Figure 5.1 A basic system 62
Figure 5.2 The three levels of management 64
Figure 6.1 Functional organisational structure 68
Figure 6.2 Product organisational structure 69
Figure 6.3 Geographical organisational structure 69
Figure 6.4 Matrix organisational structure 70
Figure 6.5 Team organisational structure 71
Figure 6.6 Network organisational structure 71
Figure 6.7 Virtual organisational structure 71
Figure 6.8 Narrow span of control 73
Figure 6.9 Wide span of control 74
Figure 7.1 Maslows Hierarchy of Needs 78
Figure 10.1 Managing change 110
Figure 11.1 The communication process 113
Figure 11.2 The flow of communication 118
Figure 12.1 The recruitment plan 125
Figure 14.1 The double entry system 150
Figure 16.1 The budgetary process 168
7
Figure 17.1 NPV graph 178
Figure 18.1 The production process 185
Figure 18.2 An example of job production 186
Figure 18.3 An example of batch production 187
Figure 18.4 An example of flow production 189
Figure 19.1 Examples of common trends 199
Figure 19.2 A scatter diagram 201
Figure 20.1 Diseconomies of scale 210
Figure 20.2 Process layout 211
Figure 20.3 Product layout 212
Figure 20.4 Fixed-position layout 213
Figure 20.5 Cellular layout 214
Figure 21.1 Fixed costs 217
Figure 21.2 Variable costs 217
Figure 21.3 Fixed costs per unit 217
Figure 21.4 Semi-variable costs 217
Figure 21.5 A breakeven chart 221
Figure 22.1 Stock control levels 225
Figure 22.2 Simpson Lumber Yard stock control
graph 226
Figure 22.3 A typical economic order quantity graph 227
Figure 22.4 Economic order quantity graph
for Questions 68 228
Figure 25.1 The sections of a node 247
Figure 25.2 Lines representing activity 247
Figure 25.3 Network diagram 248
Figure 25.4 New network diagram 248
Figure 25.5 Three possible situations in CPA 249
Figure 25.6 New diagram, using dummy activity 249
Figure 25.7 Network diagram 249
Figure 25.8 A decision tree 250
Figure 25.9 The revised decision tree 251
Figure 25.10 A more complex decision tree 252
Figure 25.11 Network diagram for Questions 13 253
Figure 26.1 Core marketing concepts 254
Figure 28.1 Stages in developing a research plan 267
Figure 29.1 Market coverage strategies 277
Figure 29.2 The consumer decision-making process 282
8 LIST OF FIGURES AND TABLES
Figure 30.1 The Four Ps 285
Figure 30.2 Attributes of the product 285
Figure 30.3 Dimensions of the product mix 286
Figure 30.4 The Boston Matrix 287
Figure 30.5 New product development process 289
Figure 30.6 The four-stage product lifecycle 290
Figure 30.7 The five-stage product lifecycle 291
Figure 30.8 Extending the product lifecycle 291
Figure 30.9 Secondary packaging 293
Figure 31.1 Price ceiling 301
Figure 31.2 Price flooring 301
Figure 31.3 Penetration pricing and price
skimming compared 304
Figure 32.1 Types of distribution channel 308
Figure 32.2 One-channel intermediary 309
Figure 32.3 Two-channel intermediary 309
Figure 36.1 Market share illustrated in a pie chart 335
Figure 36.2 Diseconomies of scale 337
Figure 36.3 An example of conglomerate integration 339
Figure 40.1 Examples of statistical tools 369
Tables
Table 1.1 Benefits and problems associated
with a change in legal structure 23
Table 2.1 The firms social responsibilities
to stakeholders 34
Table 3.1 The decision-making process 39
Table 3.2 Possible impact of factors on a firms
decision making 44
Table 5.1 Contributions of classical theories to
modern organisations 61
Table 5.2 Contributions of modern theories
to modern organisations 63
Table 5.3 Mintzbergs ten roles for top management 65
Table 8.1 An evaluation of different leadership styles 93
Table 9.1 An evaluation of conflict
management strategies 104
Table 11.1 An evaluation of communication methods 117
Table 11.2 Methods of overcoming barriers
to communication 121
Table 13.1 Advantages and disadvantages of
sources of capital 141
Table 14.1 Transactions illustrating the double
entry system 151
Table 14.2 Cash inflows and outflows 156
Table 15.1 Net profit figures for analysis 159
Table 15.2 Data for calculating investment
or shareholders ratios 162
Table 15.3 Data for calculating efficiency and
activity ratios 163
Table 17.1 KEP Industry initial capital outlays
and annual cash inflows 174
Table 17.2 initial capital outlays and annual
cash inflows for three projects 174
Table 17.3 Initial capital outlays and annual
cash inflows for two projects 175
Table 17.4 Forecasted data for Projects A and B 175
Table 17.5 An extract of discount factors for $1 176
Table 17.6 Investment information for
DGF Company Ltd 177
Table 17.7 Information for NPV/DCF analysis 177
Table 17.8 Comparison of methods of appraisal 178
 LIST OF FIGURES AND TABLES 9

Table 19.1 Data for calculating simple

moving averages 200
Table 19.2 Data for Future Sales Ltd sales forecasts 200
Table 19.3 Data for least squares
regression calculation 201
Table 19.4 Data for Questions 5 and 6 203

Table 21.1 Calculating operating profit under

marginal costing 218
Table 21.2 Calculating operating profit under
absorption costing 218
Table 21.3 Production costs for Great Juices Ltd 222

Table 25.1 Getting ready for school 248

Table 25.2 Getting ready for school (revised timings) 248
Table 25.3 Information for critical path exercise 249
Table 25.4 Information for critical path example 249
Table 25.5 Activities by A Fisher Ltd 250
Table 25.6 Expected values 251
Table 25.7 Data from James Duncans
market research 252

Table 26.1 Overview of business concepts 259

Table 28.1 An evaluation of marketing

research techniques 272

Table 30.1 Possible responses from marketers

to characteristics of services 295

Table 31.1 Information for calculating price

elasticity of demand 299
Table 31.2 Degrees of elasticity 300

Table 33.1 Overview of types of advertising media 314

Table 36.1 The impact of economic systems

on business decision making 333

Table 40.1 Module content related to SBA topics 365

10

Introduction

This textbook is geared towards students studying CAPE

Management of Business Units 1 and 2, including private
candidates. The text is divided into two units and gives
comprehensive coverage of the CAPE Management of
Business syllabus, providing students with a wide knowledge
base of business concepts. Students will be furnished with
the information needed to do well in their CAPE
examinations and the book forms a basis for higher studies.
The text also incorporates some hard to find and explain
concepts and so it is also an excellent resource for teachers.

The text breaks down accounting information so that

students without accounting knowledge from CSEC level
will be able to understand the concepts of Module 3, Unit 1.
However, it also offers challenging exercises for those with a
strong accounting background.

The book gives a number of definitions, examples from

different territories and practice exercises to assess students
understanding of the concepts. Each chapter is summarised
at the end and also incorporates multiple choice questions,
case studies which help students to think critically, and
extended essay-type questions.

The text also contains photographs, artwork and diagrams

to cater for visual learners, as well as worked examples of
accounting questions and tables to break down information
for ease of understanding, studying and remembering.
 11

Unit 1

MANAGEMENT PRINCIPLES
AND PROCESSES
12
Module 1 Business and its Environment
1 Economic and Legal Structures
LEARNING OBJECTIVES:
At the end of this chapter students should be able to:
Identify the different types of business activity
Distinguish among the different types of business
activity
Distinguish between the private and public sectors
Describe the different private- and public-sector
businesses
Outline how each of the businesses is formed
Discuss the benefits and drawbacks of each type of
business
Identify examples of each type of business
Types of economic activity
T
he Caribbean business environment can be divided
into three types of economic or business activity.
These are discussed below.
Figure 1.1: An example of industry in the primary sector
Primary sector
The primary sector incorporates all the extractive industries,
including mining (for example, bauxite), fishing, forestry
and farming. In most cases, the products of the primary
sector are the raw materials that are used for secondary
production. For example, bauxite is used for manufacturing
aluminium and lumber is used in the building of furniture
and houses. The primary sector also includes the fishing and
agricultural industries.
Some Caribbean countries are heavily dependent on the
primary level of activity in order to earn foreign exchange.
Currently, some countries export large amounts of our raw
materials in their natural state instead of exploring the
products that could be produced by using those same
resources. This means that the secondary level of activity is
perhaps not explored as much as it could be. Dependence on
the primary sector presents the country with the following
advantages and disadvantages: