BUSINESS & MANAGEMENT

(HIGHER LEVEL)
IRP Notes
 CONTENT
UNIT TITLE PAGE
Unit 1: Business organization and environment
1.1 Introduction to business management 2
1.2 Types of organization 3
1.3 Organisational objectives 5
1.4 Stakeholders 8
1.5 External environment 10
1.6 Growth and evolution 11
1.7 Organizational planning tools 23

Unit 2 : Human resource management

2.1 Functions and evolution of human resource management 30
2.2 Organisational structure 41
2.3 Leadership and management 48
2.4 Motivation 53
2.5 Organizational (corporate) culture (HL only) 60
2.6 Employer and employee relations (HL only) 64

Unit 3 : Finance and account

3.1 Sources of finance 71
3.2 Costs and revenues 77
3.3 Break-even analysis 78
3.4 Final accounts (HL only) 83
3.5 Profitability and liquidity ratio analysis 90
3.6 Efficiency ratio analysis (HL only) 93
3.7 Cash flow 96
3.8 Investment appraisal (some HL only) 99
3.9 Budgets (HL only) 104

Unit 4 : Marketing
4.1 The role of marketing 109
4.2 Marketing planning (including introduction to the four Ps) 114
4.3 Sales forecasting (HL only) 119
4.4 Market research 121
4.5 The four Ps (product, price, promotion, place) 127
4.6 The extended marketing mix of seven Ps (HL only)
4.7 International marketing (HL only) 142
4.8 E-commerce 146

Unit 5 : Operations management

5.1 The role of operations management 149
5.2 Production methods 153
5.3 Lean production and quality management (HL only) 158
5.4 Location 164
5.5 Production planning (HL only) 171
5.6 Research and development (HL only) 176
5.7 Crisis management and contingency planning (HL only) 179
 UNIT 1:
BUSINESS
ORGANIZATION
AND
ENVIRONMENT

1
 1.1 THE NATURE OF BUSINESS ACTIVITY
What is business? – Any organisation that uses resources to meet the needs of customers by
providing a product (goods) or services that they demand
Resources Inputs

Land - includes land,

Labour - manual and skilled
renewable and non-renewable
labour make up the workforce
resources of nature, such as
of the business
coal, crude oil and timber

Enterprise - this is the driving

Capital - this consists of the
force of a business, provided
finance needed to set up a
by risk-taking individuals,
business and pay for its
which combines the other
continuing operation as well
FOP into a unit that iis
as all of the man made
capable of producing goods
resources used in FOP
and services

Business sector
Primary sector -
industries that extract
natural resources so that
they can be used and
processed by other firms
e.g: farming, mining
Secondary sector - Firms
that manufacture and
process products from
natural resources
e.g: durable & non-
durable goods

Quarternary sector -
Tertiary sector - Firms
Provides services that are
that provide services to
specifically focuses on
consumers and other
knowledge
businesses
e.g: e-service, services
e.g: financial, leisures
involving IT

Business functions

Operations
Marketing
Human resource management -
department - Finance department - management - ensuring adequate
Responsible for
Responsible for Recruits, selects and resources are
market research and
monitoring the cashflow trains staff, providing available for
analysing the results
of the business, keeping motivation for staff production, maintain
to identify customer
and analysing accounts. to work. Also train production and
needs. Use
Ensuring appropriate workers, at times quality levels.
appropriate strategies
funds are available to dismiss them, and Control the quantity
to promote, price,
make the products or determine of flow of the stock
package, and
services. appropriate & look for ways to
distribute the
compensation. produce goods or
products/services.
services efficiently.

2
1.2 TYPES OF ORGANISATION
Types of Sole trader Partnership Limited company
organisation
Features  Owned by  More than  Business has separate legal entity
one person one owner  Owner are shareholders
 Business  Each
is close to the owner contributes
customer to capital, share,
decision-making
and profit
Advantages  Owner has  Extra capital  Limited liability
fully control  Additional  Share can be sold to increase capital
 Easy to set skills
up  Shared
 Owner workload
keeps all profit
 Does not
have to publish
financial
accounts
Disadvantag  Unlimited  Unlimited  High setup cost
es liability liability  Profit is shared among internal
 Shortage of  Shared profit stakeholders
finance  Disagreement  Disagreement can cause conflict
 Lack of can cause
continuity conflict

Types of company

Types of limited company Private Limited Company Public Limited Company

Features  Share cannot be traded in
stock market
 All shareholders must agree
for transfer of shares
Advantages  Limited liability
 Greater sources of finance
 Have continuity
 Any member of general
public can become
shareholders
 Shares can be listed in stock
market
 Greater source of finance
 Huge capital for expansion
 Easier to obtain loan/credit

Disadvantages  Legal requirement  Involve high-cost floatation

 Loss of privacy as account can be very expensive
statement needs to be  Loss of control
published
Example  FashionValet Sdn Bhd  Google Incorporated.

3
For-profit social enterprises
Type of Cooperatives Micro-financiers Public-private
organization partnerships (PPP)
Features - Business owned and - Providing small - Created between
controlled equally by amounts of finance to business in private &
those who use its those who have no public sector
service work. access to it. - construction of
- Earnings are shared facility with social
as dividends. aim
- Membership is
open.
Advantages - Business fulfilling - Money is lent with - favourable legal
the needs of small interests. status is achieved
shareholders. - Help individuals to - strong communal
establish business. identity
- benefits to
stakeholders
community
Disadvantages - Conflict between - Too small amount - decision-making is
members may arise. money is lent. complex & time-
- Long decision- - Business consuming
making process. established from - there may be
- Less incentives to microfinance tends to insufficient capital
invest additional remain very small. for growth
capital. - there may be
- Records must be insufficient capital
kept for long time. for financial strength

Example Koperasi Kolej Saadhana Microfin Skanska

MARA Banting Society (construction of
Berhad Eurotunnel)

Public sector and private sector

Sector Public Private
Features - Owned or funded by - Owned by private
government. individuals or
- Can change to private shareholders.
sectors through - Profit is a measure of
privatisation. success and a motivator
for further investment.
Objectives - Provide services to public - Main objective is to make
at lowest possible cost. profit.

Examples Hospitals, government BMW Corp., Apple Inc.

agencies

4
Non-profit social enterprises
Non- governmental organization (NGO)
 Private institution that is independent of the government.
 Use public relations to achieve goals.
 Workers are made up of paid staff and volunteers.
 Volunteers may have individual interest.
 Source of funds may come from membership fees, sales or services, donations or even
government’s grants.
 Example: Save The Whales, National Rifle Association
Charities
 Non-for-profit organisation.
 Generally enjoy tax exemption & donors generally enjoy tax relief.
 Normally subjected to some form of government supervision.
 Exempted from paying taxes.
 Donors will get tax relief.
 Fewer incentives to contribute.
 Example: Dreamcatcher Foundation

1.3 ORGANISATIONAL OBJECTIVES

Importance of setting objectives in an organisation
 Direct, control and review the success of the business activity.
 Create the sense of purpose and motivation in workforce.
 Provide a framework for decision-making.
 Become a target for workers to achieve.
Mission and vision statements

Mission statement

• A statement of a business's core aims designed to attract interest

from outside groups and motivates employees.

Vision statement

• A statement of what the organisation wants to achieve in long term.

• Purpose:
• Inform outside groups about the mission and vision of the
business.
• Motivate employees by creating the sense of direction and the
purpose of work.
• Guide employees behavious if the statements involve ethics.

5
Objectives, strategies, tactics and the relations

Operational
Strategic
objectives
Vision (summary of objectives Tactical objectives
aims) Day-to-day goals,
Long-term goals, Medium or short-
set by floor
Long-term and set by senior term goals, set by
managers and
highest aspiration managers to guide middle-managers
sometimes workers
the company
themselves

SMART Objectives
S Specific Objectives are clear & well-defined
M Measureable Objectives can be measured to see whether it has been achieved or not
A Achievable Objectives are realistic & can be achieved
R Relevant Objectives can be used & relevant to the business
T Time-specific Objectives are set within a sufficient time-frame

Why set ethical objectives?

Ethical objectives are targets based on moral code that determines decision making for a
business. Exploitation can be towards workforce, environment, suppliers or consumers.
Advantages Disadvantages
- Prevent boycotts from the public. - Increase costs, e.g: buying from fair-trade
- Promote good image of the business. suppliers, installing filters for
- Get free advertising by word of mouth environment.
due to good image. - Lose out opportunities of contracts by not
- Prevent expensive court cases. taking bribes.
- Easy to deal with government to get - Become less competitive if competitors
government contracts. are not ethical.
- Attract well-qualified, ethical and - Not fixing price with competitors lead to
motivated staff. lower prices and profits.

6
Corporate social responsibility, environmental audits & social audits

Corporate social
responsibility (CSR)
•Business consider the
interests of the society by
taking responsibility of the
impact of their decisions
and activities on customers,
employees, communities
and the environment.
•Importance of CSR:-
Obeying the laws, interacts
responsibly & honestly to
customers, reduces impacts
on environment
Environmental audits
•Audits to assess the impact
of a business to
environment.
•Hard to measure.
•Give favourable consumers'
reactions
•Free publicity
•Gives direction to business
Social audits
•Independent report on
impact of a business on the
society covering health and
safety record, sources of
supplies, customer
satisfactions and
contributions to the
community.
to achieve ethical
objectives, good public
image, set targets to
improve social
performances.
•Time and money
consuming.

SWOT Analysis
Strengths
Opportunities S – O: growth strategies
- Produces the most
positive short-term
strategy
Threats S – T: Defusing strategies
- Designed to eliminate
threats
- Neutral & medium to
short-term strategy
The Ansoff matrix
Weaknesses
W – O: Re-orientation
strategies
- Positive & long-term
strategies
W – O: Defensive strategies
- Most negative short-term
strategies needed by
business to survive

Product
Market Existing
Existing Market penetration
- Increase market share
- Sell more existing
products in the same
market
New Market development
- Looking for a new
market/market segments
- Sell the existing products
in the new markets
New
Product development
- Development of the new
products for existing
market
- Depending on how loyal
the customers are to the
original products
Diversification
- Introducing new
products into a new
market

7
1.4 STAKEHOLDER
Definition : Stakeholder refers to people or groups of people who can be affected by, and
therefore have an interest in, by action by an organization.
Internal stakeholders External stakeholder
 Employees  Suppliers
- Pay and other financial benefits - Speed of payment
- Working conditions - Level and regularity of orders
- Job security - Fairness of treatment
- Training and career progression  Customers
opportunities
- Value for money
 Managers
- Product quality
- Maximize their own benefits
- Service levels
- Profit maximization
 Special interest groups
- Employment security
- Banks and other creditors-security
- Higher retain profit for further of their loans and ability of the
investment business to repay them
 Shareholders - Pressure groups – change the
business policy towards pollution or
 Maximize share dividend payments testing of chemical on animals
 Achieve a rise in the value of the share  Competitors
price
- Fairness of competitive practices

Possible areas of conflict between stakeholders

Business Impact on employees Impact on local Impact on customers

decision/ community
activity
Expansion of  More job and career  More jobs for local  Better service
the business opportunities residents and provided by bigger
increased spending in business with more
X More complex other local businesses staff
lines of
communication after X External costs caused X Larger business could
expansion by increased traffic be less personal and
and loss of green therefore offer inferior
fields for amenity use customer service.

Takeover of a  The larger business  If the business  The larger business

competing firm may be more secure expands on the may benefit from
(horizontal and offer career existing site, local job EOS, which could
integration) promotion vacancies and lead to lower prices
opportunities incomes
8
 X Rationalisation may
occur to avoid waste and
cut costs – jobs might be
lost
might increase.
X Rationalisation of
duplicated offices or
factories might lead to
closures and job losses
X Reduced competition
could have the opposite
effect – less customer
choice and higher prices

New IT  Training and  Local businesses  More efficient and

introduced into promotion providing IT services flexible production
production opportunities might be could benefit from methods might
methods offered increased orders improve quality and
offer more product
X Fewer untrained X Specialist workers variety
staff will be required may not be available
and those unable to locally, so more stuff X IT reliability problems
learn new skills may may need to commute could cause supply
be made redundant delays

Possible ways to overcome stakeholder conflict

Method of conflict Advantages Disadvantages

resolution
Arbitration – to resolve An independent arbitrator will
industrial disputes hear the arguments from both
between workers and sides and decide on what they
managers consider to be a fair solution.
Both sides can agree beforehand
whether this settlement is binding,
that is they have to accept it.
Neither stakeholder group will be
likely to receive exactly what they
wanted. The costs of the business
might rise if the arbitrator proposes
higher wages or better work conditions
than the employer was originally
offering.

Worker participation- to Workers have a real contribution Some managers believe that
improve to make to many business participation wastes time and
communication, decisions. Participation can resources, e.g. in meetings that just
decision-making and motivate staff to work more ‘talking shops’, and that the role of the
reduce potential efficiently. manager is to manage, not the workers.
conflicts between Some information cannot be disclosed
workers and managers, to staff other than senior managers e.g.
e.g, works councils, sensitive details about future product
employee directors. launches.

Profit sharing schemes The workforce is allocated a share Paying workers a share of the profits
– to reduce conflict of annual profits before there are can reduce retained profits (used for
between workers and paid out in dividends to expansion of the business) and/or
shareholders over the shareholders. Sharing business profits paid out to shareholders, unless
allocation of profits and profits can encourage workers to the scheme results in higher profits due
to share the benefits of work in ways that will increase to increased employee motivation.
company success long-term profitability.

9
Share ownership These schemes, including share
schemes – to reduce options (the right to buy shares at
conflict between specified price in the future) aim
workers, managers and to allow employees (at all levels
shareholders including directors) to benefit
from the success as well as
shareholders. Share ownership
should help to align the interests
of employees with shareholders.
Administration costs, -ve impact on
employee motivation if the share price
falls, dilution of ownership – the issue
of additional shares means that each
owns a smaller share. Employees may
have to stay with the company for
certain no. of years before they
qualify, so the motivation effect on
new staff may be limited.

1.5 THE EXTERNAL ENVIRONMENT

Environment refers to various conditions (including ecological) external to the business.
Common tool for contingency plans is STEEPLE analysis.

FACTORS INFLUENCES FACTORS INFLUENCES

SOCIAL Lifestyle POLITICAL Political stability
Education Trade policies
Social mobility Regional policies
Fashion or tastes Lobbying/Electioneering
Demographics
TECHNOLOGY Technological improvements LEGAL Regulations
New technology transfer Employment laws
Infrastructure Health and safety legislation
ICT Competition laws
Research and development
ECONOMIC Economic/Business cycle ECOLOGICAL Depletion of renewable
Rate of economic growth resources
Rate of inflation Global warming
Rate of unemployment Organic farming
Exchange rate Carbon footprints
Interest rates
ETHICAL Corruption
Transparency
Codes of business behaviour
Fair trade

Impact of changes in any STEEPLE factors:

1. Impacts on objectives and strategy.
2. Response of business will be a function of their relevance to its current strategy and
objectives.
3. Being an early adaptor and having first mover advantage opportunity.

10
1.6 GROWTH AND EVOLUTION
Growth of a business refers to the expansion in size of its operations.
How is growth measured?
 Value of firm’s sales turnover
 Firm’s market share
 Value of firm’s capital employed
 Number of employees hired by the firm
Reasons why businesses seek to grow

ECONOMIES OF SURVIVAL
LARGER
SCALE AGAINST
MARKET SHARE
RIVALS

GAIN MORE
SPREAD RISKS
PROFIT

Lower average costs of production as a

firm operates on a larger scale due to an
improvement in productive efficiency

ECONOMIES OF SCALE

INTERNAL

1. Technical economies
Large firms use sophisticated machinery intensively for mass production
2. Financial economies
Large firm can borrow massive sums of money at lower rates.
3. Managerial economies

11
 Large films split up management roles by employing specialist managers.
4. Specialized economies
Division of labour in stages of production
5. Marketing economies
Large firms benefit from lower average costs by selling in bulk.
6. Monopsony economies
Large firms that have buying power(monopsonists) negotiate with suppliers for huge
discounts on bulk purchases.
7. Commercial economies
Buying resources in bulk.
8. Risk-bearing economies
Enjoyed by large firms with diversified products. If one product fails, another
products’ success can cover the loss of the failed product.

EXTERNAL

1. Technological progress
Increases the productivity of trading within the industry.
Eg: e-commerce has saved many costs.
2. Improved transportation and communication networks
Help ensure that deliveries arrive on time.
3. More and better trained labour
Through government supported training programmes or repoutable education.
4. Regional specialization
An area or country that has a highly regarded reputation for producing a particular
good service.

12
Diseconomies of scale

When a business becomes too large, they experience decreasing returns to scale as the result
of higher unit costs as a firm continues to increase the size of its operations.

Internal diseconomies of scale

 Managers may lack control and coordination as the span of control increases and
causes problems for management.
 Poor working relationships in oversized businesses.
 Inefficiency and procrastination amongst the workforce.
 The amount of bureaucracy increases.
 Complacency with being a large and dominant market leader can be a problem.

External diseconomies of scale

 Too many businesses will result in scarce land thereby increasing market rents.
 Traffic congestion will be a result from too many businesses operating in a location.
 Demand of local workers will increase as a result of many businesses opening in a
location, therefore firms will have to offer higher wages to attract new worker.

How do firms deal with

diseconomies of scale?

Reduce level of output Remove productive

efficiencies

13
SMALL VERSUS ORGANIZATIONS

The size of a market can be measured through

 Market share
 Size of workforce
 Capital employed
 Total Revenue
 Profit
 Market value

ECONOMIES OF SCOPE

An economic theory stating that the average total cost of production decreases as a result of
increasing the number of different goods produced.

For example, McDonalds can produce both hamburgers and French fries at a lower average
costs than what it would cost two separate firms to produce the same goods. This is because
McDonalds hamburgers and French fries share the use of food storage, preparation facilities
and so forth during production.

Benefits of being a large firm

I. Brand recognition allows businesses to market their products to a wider audience.

II. Larger firms are more trusted due to image and record of reliability.
III. Convenience is offered to consumers because larger firms provide a wider range of
facilities to enhance shopping or ordering.
IV. Large firms will be able to offer more discounts, thus increasing customer loyalty.
V. More choice is available from large businesses.

However, there are always barriers to entry that prevent firms from becoming a large firms.

Benefits of being a small firm

I. Cost control
II. Government aid
III. Personalized services
IV. Financial risk
V. Local monopoly power
VI. Flexibility

14
VII. INTERNAL GROWTH (ORGANIC GROWTH)

The highest level of growth achievable for a business without obtaining outside financing.

Eg: opening new branches, shops or factories financed through the profits of the business.

Changing
price
Improve
training
Advertisi
and
ng
developm
ent

ORGANIC
GROWTH
Increasing
Improvin
investmen
g products
t

Offering
Selling in
credit
different
payment
locations
terms

BENEFITS AND LIMITATIONS TO ORGANIC GROWTH

BENEFITS
 Better control and coordination
 Relatively inexpensive
 Maintains corporate culture
LIMITATIONS
 Diseconomies of scale
 Overtrading
 A need to restructure
 Dilution of control and ownership

15
EXTERNAL GROWTH (INORGANIC GROWTH)

A growth in the operations of a business that arises from mergers or takeovers, rather than an
increase in the company’s own business activity.

Faster
way to
grow
and
evolve
Spreadi Reduce
ng risks GENERAL competi
across BENEFITS tion in
markets OF market
EXTERNA
L
GROWTH
Sharing
of good Greater
practice market
and share
ideas

1. JOINT VENTURES

Two or more businesses agree to work closely together on a particular project and create
a separate business division to do so.

 Both companies agree to set up a new legal entity

 Usually involves a 50:50 split of costs, responsibilities and profits.

16
 ADVANTAGES DISADVANTAGES
 Synergy  Culture clash
-pooling of experiences, talents and -different styles of management and
resources from different firms culture . The firms might not blend
 Spreading of costs and risks together.
-financial costs, risks and losses shared
by firms in joint venture.  The blame game
 Entry to foreign markets -Errors and mistakes might make both
-by forming an agreement with an firms blame one another.
overseas firm.
 Relatively cheap  Failure
-cheaper than takeovers and acquisitions -The business failure of one of the
 Competitive advantages partners would put the whole project at
-reduced competition in market risks.
 Exploitation of local knowledge
-for firms that expand internationally,
can take advantage of each other’s local
knowledge and reputation.
 High success rate
-friendly and receptive collaboration

2. STRATEGIC ALLIANCE

Agreements between firms in which each agrees to commit resources to achieve an

agreed set of objectives.

 Firms share the costs of product development, operations, and marketing.

 Affiliated businesses remain independent organizations.

Main purposes of strategic alliance :

 Gain synergy from different strengths
 Pooling resources from different firms
 Gain credibility
 Brand awareness
17
 3. MERGERS AND TAKEOVERS (ACQUISITIONS)

Merger  an agreement by shareholders and managers of two businesses to bring both

firms together under a common board of directors with shareholders on both businesses
owning shares in the newly merged business.

Takeover  when a company buys over 50% of the shares of another company and
becomes the controlling owner – often referred to an ‘acquisition’.

Why do business become takeover targets :

 They have growth potential but insufficient funds for growth.

 They are seen as rivals that have potential growth.
 They have a widely recognized brand but having financial issues.

HORIZONTAL : FORWARD VERTICAL :

Intergration with firm in the Intergration with a business in
same industry and at same stage the same industry but a customer
of production. of the existing business.

Type of
intergratio
ns
BACKWARD VERTICAL :
CONGLOMERATE :
Intergration with a business in
Merger with or takeover of a
the same industry but a supplier
business in a different industry.
of the exisitng business.

Advantages and Disadvantages of Mergers and Takeovers

Advantages Disadvantages
o Greater market share o Loss of control
o EOS o Culture clash
o Synergy o Conflict
o Survival o Redundancies
o Diversification o Diseconomies of scale
o Regulatory problems

18
DEMERGER

When a company sells off a signicant part of its business.

Why would a company demerge?

 Offload unprofitable sections of the business

 Avoid rising unit costs and efficiency by being too large
 Diseconomies of scale
 Raise cash to sustain operations of existing parts of the business.
 Help management have a clearer focus

Management buy-out

A defensive strategy that business use when facing a hostile takeover.

o A management buyout (MBO) is a form of acquisition where a company’s existing

managers acquire a large part or all of the company from either the parent company or
from the private owners.

Brand Acquisition

When a company decides to buy just one of the brands from the target firm.

FRANCHISES
 A type of license that a party (franchisee) acquires to allow them
to have access to a business’s (the franchisor) proprietary
knowledge, processes and trademarks in order to allow the party to
sell a product or provide a service under the business’s name.

19
FRANCHISOR

Advantages Disadvantages

o Parent company will experience rapid
growth without risking amounts of
money.
o No need to worry about running costs :
staff wages, recruitment.
o Difficult to control the activities of the
franchisee
o It is slower method of growth compared
to mergers and acquisitions

FRANCHISEE

Advantages Disadvantages

o Benefit from large scale o Very expensive to buy a

advertising used by
franchisor.
o Relatively low risk because
the franshisor has tried and
tested formulas for the
business.
franchise.
o Have to pay a % of their
profits to franchisor,
therefore lowering profits.

PORTER’GENERIC STRATEGIES

 Outline ways that any business can gain a competitive advantage

 Every successful business must have a competitive advantage to prevent profits being
eroded by rivals.
 Three general strategies to sustain a competitve advantage.

20
 DIFFERETIATION COST LEADERSHIP FOCUS

When a firm makes Become the lowest

When a firm targets a
its mass-market cost supplier in the
niche or single
products distinct from market. Eg. : Air
segment of the market
those of its Asia is the largest

competitors. Focus is low-cost airline

on quality rather than carrier in South

cost of product. East Asia

Eg. : Apple

THE ANSOFF MATRIX

Products
EXISTING NEW
MARKET PRODUCT
EXISTING

PENETRATION DEVELOPMENT
Market

MARKET DIVERSIFICATION
NEW

DEVELOPMENT

21
\Market Penetration
 Existing products in existing market.
 Low risk growth strategy.
 Improving a firm’s marketing mix.
 Advantage : focusing on familiar market & products.
 Limitations : Aggressive competition from other firms.

Product development
 New products in existing markets.
 Medium risk growth strategy.
 Relies heavily on product extension and new product development.
 Suitable for products that have reached the decline stage of their product life cycle.
 To prolog firm’s life.
 A reason for acquiring another firm.
 Useful for business that use brand extension strategies.
Market Development
 Existing products in new market.
 Medium risk growth strategy.
 By using new distribution channels ; new location or overseas. However, quite risky if
firm is unfamiliar with the local market.
 Is not high risk because because firm is familiar with the product that is marketed.
 A success of a product in a market segment does not guarantee its success in other
market segments.
Diversification
New product in new market.
High risk growth strategy.
Able to gain market share in established markets.
Firm will be able to spread its risks.
Suitable for firms that have reached saturation in their markets.
Very risky bcs business in unfamiliar with the market and product.
Time consuming and costly.

22
GROWTH AND EVOLUTION AND BUSINESS STRATEGY

1. Unique selling point.

o Technique that makes a product stand out from others.

2. Diversification.
o Helps business spread risks.

3. First mover advantage.

o Allows a business to establish good reputation and loyal customer base before others
launch their products.

4. Market leader.
o Customers will be more willing to pay at higher prices.

5. Branding
o A well-known and recognized brand is an opportunity for business growth.

1.7 ORGANIZATIONAL PLANNING TOOLS

Fishbone diagram
 To help identify quality problems

 Also called a cause and effect diagram or Ishikawa diagram

 Usually used with small groups of managers / quality circles

 A visualization tool for categorizing the potential causes of a problem in order to

identify its root causes.

 4 Ms of manufacturing: method, manpower, machine, materials

 4 Ps of service: places, procedures, people, politics

 4 Ss or administration: surroundings, suppliers, systems, skills

 To draw :
1. Write the problem statement at the center right of the paper. Draw a box
around it and draw a horizontal arrow running to it.

2. Write the major categories of causes of the problem as branches from the main
arrow. If this is difficult use generic headings: (methods, machines,
manpower, materials, measurement, environment etc)
3. Write sub–causes branching off the causes.
4. Continue to ask “Why?” and generate deeper levels of causes.

23
Advantages Disadvantages

Determine the cause of some problem Doesn't solve any problems

Convenient and easily understood way of Only help in identifying possible causes of
thinking problems

Listing possible causes of the problem that Does not offer any possible solutions or any
is being faced analysis of the likelihood that a given cause
is the real one.

Works best when it is completed by a team. Makes all possible causes look equally
plausible and equally important

Motivating – brings people together Divisive and leads to argument

Flexible – for any situations Knowledge and honesty required to justify

assertion

Visually attractive Requires follow up process

24
Decision tree

 Used as a quantitative tool for making decision

 Provide logical process

 Decisions are represented by squares and outcomes or chances represented by circles

 chances estimated by assigning probability values

 expected values of each decision are calculated to reach the best decision

 To draw :
1. constructed from left to right
2. branches consists of : decision nodes, chance events/outcomes

Decision nodes : used when a decision has to be taken

Chance nodes : used to show the possible outcomes of a decision

3. A chance event must have probability, summation of all values = 1

4. Actual values placed at the end of every branch (forecasts of cash flow )
5. Expected value (EV) = Actual value x Probability
6. Minus cost to get expected profit
7. Decision must be based on the branch that produce the best value
8. Rejected decisions are cut by symbol //

25
Advantages
Sets out problems clearly
Encourage logical approach
Shorten time to make decision
Risks and costs are considered in making
decision
Makes calculation easier
Scientific and does not rely on imagination
or intuition
Allows informed decision
Flexible – can be applied to many situation
Visually attractive
Disadvantages
Forecasting error may occur
Estimated probabilities and outcome may be
not reliable
Ignores qualitative data
Data can easily be manipulated in favour of
certain department
External environment is not taken into
account
Does not help in reducing risks of decisions
Complex for multiple outcomes and
interrelated choices

Force-field analysis
 Uses management of change concept to work for arguments for and arguments against
the decision.
 To draw:
1. Change factor is highlighted
2. Brainstorm driving (positive) factors and restraining (negative) factors
3. Give each factor a weight corresponding to the factor’s importance
4. Greatest total figure indicates the action to be taken
Benefits Limitations
Clear answer for a difficult decision Involves interpretations
Flexible – can be applied to many situations Based on estimates of the value of each factor
Simple and visually attractive Mainly qualitative, not quantitative

26
Gantt chart
 To help plan work schedules

 Commonly used for production projects that have multiple tasks

 To determine the most efficient use of resources

 Gives the project managers a clear overview of the whole project

 Progress measured against key deadlines

Benefits
Clear picture of current progress
Clear picture of overall project
Flexible – to all situations
Simple and visually attractive
Allows managers to plan the use of
resources - efficient
Shows time estimated for the project
Limitations
Based on estimated timings
Difficult to follow for complex project
Mainly qualitative data
Cannot separate interdependent task
Focus to meet deadline – affects quality

27
The value of the tools to an organization
 Each can be useful

 They have different uses – not applied at the same time & for the same reasons

 Limitations – borne in mind

 Should be used together with other tools – depends on the circumstances & way it has
been applied

Tool Fishbone Decision tree Force field Gantt chart

diagram analysis
Major area of Quality Effective Management of Day-to-day
focus improvements direction from a change project
and holistic variety of management
options
Time frame Short-term Medium to long Medium to long Short to
response to term planning term planning medium term
problem projects
Level of Tactical Strategic Strategic Tactical
planning
Part of decision Initial - Final – based on Initial - Ongoing
making brainstorming all information brainstorming
possible
Data used with Quantitative Qualitative Quantitative Quantitative
Departments Mainly Mainly All Production
production (but production &
can be used by marketing
other
departments
too)

28
 UNIT 2:
HUMAN
RESOURCES
MANAGEMENT

29
2.1. THE FUNCTIONS AND EVALUATION OF HUMAN RESOURCE
MANAGEMENT
Human Resource (or Workforce) Planning
Analyzing and forecasting the numbers of workers and the skills of those workers that will be
required by the organization to achieve its objective
Two main stages
1. Forecasting the number of employees 2. Forecasting the skills required
required
Depends on: Depends on:
 Forecasting demand for the firm’s  The pace of technological change
product ( influenced by market  The need for flexible or multi-skilled
conditions, seasonal factors, staff
competitor’s actions and trends in
consumer taste
 The productivity levels of staff
 The objectives of the business

Labour Turnover
Measures the rate at which employees are leaving an organization

Number of employees leaving in one year

X 100
Average number of people employed

Drawbacks of high labour turnover Potential benefits of high labour turnover

 Cost of recruiting, selecting and  Low-skilled and less-productive staff
training new staff might be leaving and replaced with
 Poor output levels and customer service better workers
due to staff vacancies before new  New ideas and practices are brought
recruits are appointed into an organization by new workers
 Difficult to establish loyalty and
regular, familiar contact with customer
 Difficult to establish team spirit and
stable work groups

Drawbacks of low labour turnover Benefits of low labour turover

 New people or graduates who have
fresh ideas and current knowledge
about the market are not hired.
 Workers with specialist knowledge
or expertise are not employed as
existing lower skilled employees
which can be time consuming
 Current, long – term employees are
 Higher and constant productivity as
employees know and trust each other
thus there is high team spirit and
cooperation.
 Employees are likely to be more loyal
to the company and more willing to
devote their personal energy to the job.

30
 less open to change, hindering or
slowing down the growth of the  The company to focus its time and
cooperation. energy on the operations instead of
recruiting and training new stuff.

 Recruiting cost is low as there is no

need to recruit or train new staff.
 Keeping experienced employees means
you maintain familiar contacts for your
customers as customers are more
comfortable with long term employees.

Internal and External factors influencing human resource planning

Internal Factors influencing HR planning:

•Changes occur in business in order to better meet the strategic objectives or

when a businesses merge or acquires
Changes in business •Thus, the current HR plan will need to change to meet new demands of the
organization and changes.
business strategy

•If labour force unifies, the business will have to meet the working
requirements demanded by the union.
Changes in labour •If power of labour decreases, business may have more flexibility with worders.
relations

•A business with limited finance are not able to pay high wages; affecting
recruitment and retention of workers.
Changes in business
•A business with bigger finance may be able to pay higher wages and provide
fincance pension or benefits; affecting recruitment (easier) and retention (more loyal)

External Factors affecting HR plan

31
 Demographic Changes Labour Mobility
(refer table) (refer table)

Demographic changes:
Example
Natural Population growth
Migration
ageing population increases
Opportunities
 May be easier to
recruit effective
employees as working
population increases
 Easier to recruit
effective employees
from other countries at
lower pay
 Highly qualified
employees might be
recruited from other
countries
 Older employees are
more loyal and reliable
than younger workers
 Older employees have
more experience and
‘people’ skills that
younger employees
may have not yet
developed
Constraints
 Increased birth rates
may take years before
having an impact on
working population
 “Brain Drain” of
qualified and
experienced staff to
other countries may
reduce competitiveness
 Immigrants need more
training in terms of
language and cultural
issues
 Older employees may
be less flexible and
adaptable (e.g. to the
introduction of new
workplace
technologies)

Labour Mobility:
Occupational Mobility of Labour
 Extent to which workers are willing and able to move to different jobs requiring
different skills
 High occupational mobility of labour helps a country achieve economic efficiency.

In developing countries In emerging market countries

Relatively low occupational mobility of labour Relatively high occupational mobility of labour
because: because:
 High level of home ownership (  Low home ownership
workers are reluctant to pay to move  Low skill levels mean that workers can
houses) undertake low – skilled jobs in many
 High-skill levels in one occupation may different industries
mean that workers are not equipped to

32
 deal with machines, processes and
technologies in other industries and
occupation

Geographical Mobility of Labour

 Extent to which workers are willing and able to move geographical region to take up
new jobs
 Policies to increase labour mobility
 Relocation grants for key public sector workers
 Job centres and other government offices to advertise job vacancies nationally
 Training and retraining programmes for the unemployed
 However high geographical mobility between rural and urban area can lead to
overcrowding and poor living conditions in towns and cities

Components of Human Resource Planning

There are 4 parts of the HR plan
1. Recruitment
2. Training
3. Appraisal
4. Termination or Dismissal

Recruitment

1. Identification

Identify the details of the job and the details of the type of Weigh up advantages and disadvantages of internal and
person required to do the job external reqruitment and make a final decision.

2. Application

The business will have to decide when, how and where to find Weigh up disadvantages and advantages of using a internal or
the best applicant. An application or resume will be requested. external agency and make a final decision.

3. Selection Process

The business needs to shortlist the applicants by testing or interviewing. a final deciosn will be made

33
Training
 Induction - training that focuses on making a new employee familiar with the way the
business functions and with lines of authority
 On-the - Job – When employees are trained while they are doing their normal job.
 Off – the – Job – when employees are given time off from work to attend training
away from the job
 Cognitive training – aids employees develop their thinking and processing skills
 Behavioural Training – aids employees develop their interpersonal skills and
intrapersonal skills

Example of types of training:

Appraisal
The process of assessing the effectiveness of an employee judged against preset objectives

Formative Summative
based on formal and informal methods to monitor, meaure the level of an employee's success or
support and provide guidance for improvement to proficiency in meeting predeterminded
'form' the employee benchmarks

Types of Appraisal

360 - Degree Feedback

Performace - appraisal sumative assesment are Self - appraisal
collected from people 'all around' employees the employees self - evaluates his job
(people who have dealt with employees) performance

34
 Formative Appraisal: Summative Appraisal:
To asses a lecturer, feedback are given by the - Assigning a grade to a final exam
students to guide improvements in the ongoing - Critique of a Senior recital
teaching and learning context. - University Faculty Course Evaluations

Example of types of Appraisal

360o Feedback:
The performance of the employee or manager is Self - Appraisal:
evaluated by six parties (top management,
Employees answer a set of questions regarding
immediate superior, peers, subordinates, himself
his/her performance.
and customers). Feedback of his performance is
given from everyone around him

Termination or Dismissal
Termination: Employees can ‘terminate’ or leave the business at the end of their contract for
a variety of reasons
Dismissal: Being removed or ‘sacked’ from a job due to incompetence or breach of discipline
Unfair Dismissal: Ending a worker’s employment contract for a reason that the law regards
as being unfair
Redundancy: When a job is no longer required so the employee becomes redundant through
no fault of his or her own
Voluntary Redundancy: Employees chose to be made redundant Reduces stress and
animosity between the business and the employee
Involuntary Redundancy: Employees are unwillingly made redundant due to the agreement
Employment Patterns and Practices
Factors changing the working environment
 Privatization and the move away from public – sector to private – sector employment
 Increased migration of the potential employees in a country or region and across the
globe
 Increasing participation of females in the workforce
 Changing educational opportunities
 Increasing urbanization and the consequent rise in stress levels
 An ageing population and increasing average age of the workforce

35
 1. Changes in work practices

Work Practices in Decline:

Full - Time Work Permanent Contracts

Employees work the maximum Employees hired for positions without

hours per week accepted by law predetermined time limit

Work Practices on the Increase:

Three-day weekend
The employees works 4 days to have 3 days off

Casual Fridays
•Employee are allowed to wear less fromal clothes on a Friday so that it is
easier to go away at the weekends

Flexitime
•Work involving a set of number of hours of an employee's own choosing
•Works core number of hours in the office, the rest up to the employee

Homeworking
•Works core number of hours in the office, the rest at home
•Employee who workd from home

Teleworking
•Workin taking place from home or a telecommunication centre
•Works core number of hours in the office, the rest from home

Freelance
•someone who is self - employed workd for several different employers at the
same time

Temporary
•Work on a fixed-term contract usually of a temporary nature

Part -time woker

•Employees work less than the full - time weekly maximum hours

36
 2. Changing in work preferences

Many employees are adapting their work routine to suit changing lifestyles. The methods are
as follows:

3. Changing in work patterns:

Definition: The types of jobs required by business and the type of jobs people want.

•Primary, secondary, and tertiary

Employment •As a country develops, the job secotrs shifts focus from the primary sector to
sector the seconsary. Once the country has developed, the focus will be most on
tertiary sector.

•When net birth rate falls, the size of future work force will fall
• As people live longer, the average age of workers tend to rise
Ageing
•Firms will be more willing to appoint and retain older employees
population
•More flexible in keeping staff beyond retirement age
•Women and part-time employees will also be sought after

•Firm can employ various combinations of core, part-time and peripheral

staff
Flexible work •Firms shift to hiring more flexible workers to cater to their availability
structures •Key employees of an organization will need to be recruited for their
outstanding skills and experience
•Firms will be less likely to invest in training, except for their core staff

37
 •People working from their own home
Home working •Wireless broadband technology allows employees to operate in almost any
location

•Working away from the employers or customers by using electronic forms of

Teleworking: communication due to technological advances of ICT
•Prevents commuting problems

Portfolio •Person employed in a number of different jobs. They have large variety of
Worker experiences.

Part-Time
Employees •People who are working part-time jobs. It gives employees greater labor
flexibility, but they are less loyal to a business.

Outsourcing, Offshoring & Re-shoring as HR strategies

Offshoring: The moving of various operations of a company to another country for reasons
such as lower labor costs or more favorable economic conditions in that other country.
Re-shoring (in-shoring): the transfer of a business process of operation back to its country
of origin
Outsourcing: When a business subcontracts a process or service to another business
organization

Benefits of outsourcing Limitations of outsourcing

Cost savings as HR salaries and
administration costs can be a substantial
overhead business
Access to HR specialist and experts on
matters of employee law, pension
regulations, data protection laws
Business can now focus its HR resources on
more important, strategic HR issues
Business can focus on core, important
objectives
can be costly (there are hidden cost such as
shipping, the cost of selecting a vendor (costs
include documenting requirements, sending out
RFPs and evaluating the responses, and
negotiating a contract), the cost of laying off
domestic workers after outsourcing is carried
out (redundancy payments)
Culture clash
Decisions are taken outside business that does
not integrate its decisions or activities with
other departments of the business

38
Benefits of offshoring Limitations of offshoring
Cost saving – lower wage rate, lower cost of Distance, different language create
materials communication barriers
culture clash

Innovation in the HR plan

A business committed to being innovative must have a greater focus on the HR plan as
innovation comes from people. The business will not be successfully innovative unless it
recruits and retains the right people. Developing a supportive and stimulating environment ( a
vital part of HR planning) will help the creative process.
Cultural Differences affecting the HR plan

 Business that adapt their HR plan to suit a more varies cultural workforce are more likely to be
successful with a diverse workforce
 Geert Hofsted developed the concept of power distance to indicate the acceptance of
inequality by a society:
 Power distance refers to the way in which power is distributed and the extent to which the less
powerful accept that power is distributed unequally.

39
 Impact of diverse workforce

Ethical Issues in HR Plan

40
2.2: ORGANIZATIONAL STRUCTURE

Organizational Structure - Represent the roles and responsibilities of a business,

reporting the lines between individuals in the structure.
Organizational Chart – a diagram that outlines the formal roles, responsibilities and
reporting lines.

Terminology:

• how many levels of responsibility are in the buss.

• level indicates the LINE MANAGER (authority to
make decision, bear responsibility for the
Level of outcome)
Hierarchy • Personal Assistant (PA) is NOT INCLUDED - staff
manager : authority to communicate the decision
but no responsiblity for the outcome
• Staff manager : secretarial & administrative staff

• formal route by which decision must travel

through an organization
Chain of • travel from the top of organization to the
downwards (commands)
Command • PA would likely pass the messages

• how many subordinates are directly under the

Span of Control authority of a manager & whom managers are
responsible for.

41
 • manager gives authority for particular decision but
not the responsibility of the outcome
Delegation • likely happens when the span of control is wide
• narrow span would make tighter control on decision

• All major decision-making is maintained within a

small group of managers operating close to the head
of business.
Centralization • associated with business that have many levels of
hierarchy & narrow span of control
• have effective control of the subordinates, leadership
would be autocratic

• Senior manager would maintain core strategic

decision, other decision-making authority is
delegated to middle managers
Decentralization • associated with business that have fewer level of
hierarchy, wider span of control
• key managers allow greater freedoms to their
subordinates, leadership would be democratic

• Relative importance of rules & procedure

• Bureaucratic organization : many rules & procedure,
set ways of doing things.
Bureaucracy • Well-established business, operating for many years
• require paperworks, have 'red tape' to show likely
procedure

• Business reduces the level of hierarchy by removing

the layers of management
• reduce bureaucracy & increase decision-making
De-layering capability of middle managers
• reduce costs - don't have to employ many levels of
managers

42
TYPES OF Organizational Chart
TALL ORGANIZATIONAL STRUCTURE

many level of hierarchy

narrow spans of control

Tall organizational structure :
centralized decision-making
Traditional structure form of a
business, common in well-
long chains of command
established business
autocratic leadership

limited delegation

FLAT ORGANIZATIONAL STRUCTURE

few levels of hierarchy

Flat organization structure :
Modification of the more
wider spans of control
traditional structure, became
popular with business set up in
decentralized decision-
making 1960 or with those attempting to
reinvent themselves
shorter (though more diffuse)
chains of commands

democratic leadership

increased delegation

43
ORGANIZATIONAL STRUCTURE BY HIERARCHY

Senior
Manager

Middle
Manager

Junior
Manager

Supervisor

Workers

ORGANIZATIONAL STRUCTURE BY FUNCTION –grouped by department, organized

by seniority

Board of
Directors

Production Marketing HR Administration Finance

ORGANIZATIONAL STRUCTURE BY PRODUCT – what business produces

Board of
Directors

Technical
Fiction Educational Current Affairs Translations
Manuals

44
ORGANIZATIONAL STRUCTURE BY REGION – where the business operates

Board of
Directors

Asia Americas Europe Africa Oceania

Changes in organizational structure

 PROJECT-BASED ORGANIZATION
- Designed to be more flexible & responsive to market demands.
- Business’ human resources are organized around many projects.
- Have project managers who run teams of employees focusing on individual
projects. The team is split up and reassembled to begin another project.
- Each team is focused on completing its own project, different departments
borrows their members to complete the project.
- Common in construction or IT – business under contract to run a number of
different projects at the same time.

Operation
Finance Marketing HR Administration
Management
Project
4 employees 2 employees 1 employee 1 employee 1 employee
Manager 1
Project
3 employees 2 employees 2 employees 2 employees 1 employee
Manager 2
Project
3 employees 2 employees 1 employee 1 employee 1 employee
Manager 3

45
  SHAMROCK ORGANIZATION
- Based on the model suggested by the Irish management theorist, Charles Handy.
- “Business can be more flexible by taking advantage of the changes in the external
environment & its impact on workforce planning.”
- Business can reduce costs, gain competitive advantages & increase response time
by trimming their workforce to retain only a multi-skilled core (concerned with
creation or delivery of a product or service).
- Other supporting, non-central functions are outsourced wherever possible.

First leaf -core managers, technicians and employees

essential to the business

Core Second leaf – contractual fringe. Non-core activities are

subcontracted out to specialist business.

Third leaf – flexible workforce made up of part-time,

temporary and seasonal workers.

COMMUNICATION
- Integral to how a business function, successful business communicate effectively
with both internal & external stakeholders.
Formal communication : channeled through the organizational structure.
Informal communication :outside the ‘proper’ channels.

Background noise: anything noise

from wrong choice of media to
something outside the control of
either party
Sender encodes the
message by deciding
Receiver gets the
the form of message;
Media message and
choose appropriate
decodes it
media

Feedback

46
FORMS OF COMMUNICATION
VERBAL – Relies on spoken words
Formal verbal communication Informal verbal communication
 Interview  Face-to-face conversation
 Meetings  Gossiping
 Lectures  Telephone conversation (unrecorded)
 Presentations
 Telephone conversation (recorded)

Advantages Disadvantages
 Very quick (two way of  Time-consuming
communication)  Ambiguous (no written records)
 Feedback & clarification can be  Not always be truthful
gathered  Not reliable
 Little cost involved  Might use wrong language – no
 Facial relations, body language, tone message
of voice can be judged

VISUAL – Relies on sight

 Formal visual communication  Informal visual communication
 Presentation  Body language
 Videos  gestures
 Notice boards
 Signs
 Sign language
 Symbols
 Maps

 Advantages  Disadvantages
 Permanent  Difficult to the limited sight or
 Recognizable communication is not positioned
 immediate properly
 Less effective when the image needs
interpretation
 Different culture might respond
differently to the same image

47
WRITTEN – Relies on written words
Formal written communication Informal written communication
 Reports  Memos
 Letters  Emails
 Notices  Texts
 Bulletins  Blogs
 Forms
 Press release

Advantages
 Effective
 Can be kept for reference
 Can be amended or revised
 Fast to produce, short & specific but
not useful for long messages or
complicated info (memos)
Disadvantages
 Can be time-consuming to produce &
response from receiver
 Feedback is not immediate
 “Tone” of the message may be lost
 Considered impersonal

2.3: LEADERSHIP AND MANAGEMENT

The Functions of Management.

Planning

Organizing
Controlling

Functions

Coordinating Commanding

48
 1. Planning – Set the strategic, tactical and operational objectives. Start with managers.
2. Organizing – To achieve objectives, must have sufficient resources. Too many
resources occupied too much capital. Too few resources mean that objectives cannot
be met.
3. Commanding – Clear job specifications for all individuals. Instructions from
managers. Necessary guidance and overseeing of employees from managers to ensure
the organizational goals are met.
4. Coordinating – Bring together various resources to achieve bigger objectives. Ensure
the flow of output from the activities of business run smoothly. Avoid wasteful effort,
money and redundancy of work and time of research.

5. Controlling – The power of making decisions based upon given situations and
requirement of recent conditionseg: scale of operations @ quantity and quality.
Management responsibilities to appraise performance and take action if target is not
achieved.

Management vs Leadership

Managers Leaders
1. Instruct and coordinate 1. Motivate and inspire
2. Task-oriented 2. Relationship-oriented
3. Technical expertise 3. Rely on instinct
4. Have authority – make an 4. Have vision – make followers through
organization function their vision
5. Not to challenge organization 5. Lead to systemic change and
innovation by approaching in
different way

Leadership styles

Autocratic
 Hold as much power as they can.
 Least consultation time with employees.
 Structured environments – high dependency on managers.
 Detailed instruction and closed supervision.

49
Democratic
 Encouragefull participation of employees in decision-making (communication
in two-way principle).
 Have positive emotional connotations.
 Managers need to have good communication skill for explaining clearly the
issues and better understanding on the response or feedback from workers.

Paternalistic
 Views employees as “family” although they have considerable authority over
them.
 Provide sense of safety.
 Often get total loyalty from employees.

Laissez-faire
 Concern on employees freedoms in terms of setting their own goals, making
decision and problem solving (literally means ‘let them do it’).
 Universities style – the world of expertspractice this style for producing
maximum effective work on original project especially for scientific
discoveries.
 Individual practitioners who demand considerable freedoms.

Situational
 Different situations require different styles of leadership.
 It depends mostly on nature of the employees and circumstances.
 Style of leadership is influenced by the subordinates’ experience and skill,
previous result, culture or environment.

50
Advantages and Drawbacks
Leadership style Advantages
 Quick decision making
 Close oversight
 Eliminates slack-off
Autocratic workers
 Less stress by managers
( total control)
 Typically excellent as
solving complex issue
 Team tend to be
Democratic
supportive and strong
 Foster creative and
effective environments
 Effective when
employees are highly
motivated and capable of
working on their own
Laissez-faire
 Help staff feel more
satisfied
 Able to accomplish task
with little guidance
 Feedback being invited
thus boosting morale
 Overall staff turnover
decreases
Paternalistic
 Decisions taking
employees’ best interests
into account
 Employee’s loyalty
 Practical approach which
is easy to understand and
apply
Situational  Prescriptive and shows
leadership effectiveness
 Emphasizes leadership
flexibility
51
Drawbacks
 Demotivate staff who want
to contribute
 Decisions not benefit from
staff input
 Resentment among group
members
 Consultation process may
lead to procrastination
 Not function well in an
authoritarian role
 Sensitive issue may lead to
invest time in smoothing
things
 Appreciation of workers is
lacking – lead to loss in
security
 Lack of feedback may
demotivate employees
 Lack of cohesiveness
within group
 Not ideal if lack of
knowledge and experience
 Low staff motivation if
loyal connection is not
established
 Increase the dependency on
leader
 Dissatisfaction among
members might occur if
bad decisions are made
because of self-interest by
manager.
 Varying the style may
difficult for some workers
 Become uncertain
 Not having guidance how
it can be used in group
settings
Ethical considerations

 Leaders should be willing to take blame for bad outcomes to the organization – by
protecting employees from excessive or unwarranted criticism (PERSONAL RISK)
 Adopting ethical objectives though it have financial cost towards organization
 Managers are often criticized – because of their style of bureaucratic and “rule
followers”
 Managers’ action of sacking employees who did major error – to prevent further error
that could cost business money
 However, if not through right or fair considerations, managers are deserve the
criticism of focusing more on their own career rather than organization
 Putting own interests ahead of others’ are UNETHICAL

Conclusion

– Ethical decision-making and leadership are the basic of ethical organizations, CSR and
sustainability of the business. Effective leaders focus on what’s right and exemplify to their
people that they are there to help, and not to exploit the vulnerabilities of others. A desire of
serving others and make positive difference.

Cultural Differences

5 dimensions of relevant cultural influenced:

 Power Distance Index (PDI)

– Fundamental issue here is how society handles inequalities among people. Large
degree of PDI means people in society accept hierarchical order in which everybody
has a place. Low PDI indicates people strive to equalize distribution of power.

The higher the power distance, autocratic leaders are preferred.

The lower the power distance, democratic leaders are preferred.

 Individualism VS Collectivism
– (Anglo-American cultures) or (Japanese culture) likely to have social framework in
which individuals are expected to take care of themselves and close family.
Collectivism represents society which individuals can expect their relative or group
member to look after them.

52
  Uncertainty Avoidance Index (UAI)
– An attempt to cope with anxiety by minimizing uncertainty. Strong UAI maintain
rigid beliefs and behaviour codes. Weak UAI maintain more relax attitude which
practice counts more than principles.
 Masculinity VS Femininity
– Possession of qualities associated with men with more competitive and assertive for
masculinity while femininity is stand for modesty, caring and more consensus-
oriented preferences.
 Long-term VS Short term orientation
– High score in this dimension means that the business would fosterpragmatic
approach which is virtues towards future rewards or thrifts. Scoring low implies the
business prefer to maintain tradition and norms with suspiciously views change in
society.

2.4 MOTIVATION
 Extrinsic motivation –Occurs when we are motivated to perform task to earn a reward
or avoid punishment.
 Intrinsic motivation – Involves engaging task because it is personally rewarding,
perform task for own sake rather than desire for some external reward.

Motivation Theories

Frederick Winslow TAYLOR

 Applying scientific methods under controlled situation to maximize output

 Time-and-motion study (famous approach) – breaking a job into its component and
measure the time taken of each task performed.
 Skill removed and therefore, low cost of employing and little training required
because each worker have specific role that movement is limited thus minimize time
wasted.
 Believed in theory of ‘economic man’ – people only motivated by money, therefore to
stimulate extra effort is by the chance of earning extra money.
 Wage levels based on output. ‘Piece rate’ system – paying workers a certain amount
for each unit produced.
53
 Select

Observe

Record time taken

Identify quickest
method

Training

Supervise

Pay

Abraham Maslow

 Classify main needs that human have – our needs determine our action.
 Maslow’s hierarchy’s interpretation:
I. Basic needs @ Physical needs – Food, shelter, water, rest
II. Safety needs – Protection from threats
III. Social needs – Relationship
IV. Esteem needs – Status, Respect, Recognition
V. Self-Actualization – Full Potential
 Reversion is possible
 Noted: When material needs already satisfied, offer of more money will not increase
productivity.

54
Frederick Herzberg

 Motivating factors – aspect of worker’s job that lead to positive satisfaction.

 Hygiene needs – aspect of worker’s job that potentially can cause dissatisfaction.
 Job satisfaction from five main factors (motivators):
 Achievement
 Recognition
 The work itself
 Responsibility
 Advancement

 Job dissatisfaction from five main factors (hygiene factors):

 Company policy and administration
 Supervision
 Salary
 Relationship with others
 Working conditions

John Adams

 Equity theory – employees feel demotivate because their inputs are greater than their
outputs. To become motivated, employers should attempt to achieve fair balance
between what employee gives and what they receive in return.
 Comparing between other employeesbecomes a measurement to the treatment of the
imbalance received.
 Inputs include efforts, loyalty, commitment and skills.
 Outputs include financial rewards, recognition, job security and sense of achievement.
 BALANCED – fair treatment lead to positive attitudes and high motivation.

Daniel Pink

 Argued the old reward and control system is ineffective as tasks today are more
complex and challenging.
 Old reward system diminishes employees’ capacity to be creative as they focus on
reward and not solving problem thus limit the chance for workers to explore personal
interest that might give benefit to business.

55
  Proposed (STD) – self-determination theorythat set to allow for:
 Autonomy – environment that permits employees to shape their own lives by
giving meaningful feedback and encouragement.
 Mastery – opportunities allowing employees to study, innovate and create new
things or ideas themselves or in team. A sense of progression.
 Purpose – sense of work that come from the person itself genuinely for benefit
of their personal lives and the world.

Financial Rewards

Salary

Most common form of payment – salary level is fixed each year.

It determines the status of the post in the organization.
Salary band depend on job grade
Precise income within each band depends upon experience and progress.

Wages

Time rates – paid for number of hours per week

Piece rates – paid for each unit produced

Commission

Paid by results – no basic or flat-rate payments

Profit-related pay

Bonus received based on profits of the business makes – paid as proportion of basic
salary.

Performance-related pay

Bonus paid in addition to basic salary – usually for workers that ‘output’ is not
measurable in quantity such as management, supervisory and consultant. Paid
according to the degree that exceeded the targets.

Employee share ownership schemes

Offer shares in business to workers when firm declares profit.

Break down ‘them & us’ culture

56
Fringe payments

Non-cash forms of rewards, eg: company cars, private health insurance, discount on
company products.
Usually to give status to higher-level employees by added benefit in terms of tax-free
reward as addition to normal payment systems.

Advantages and Drawbacks

Financial
Advantages Drawbacks
methods
 Security of income.  Not related to effort.
 Status required.  Lead to complacency.
 Aids in costing – not vary (1  Regular appraisal needed to
Salary year). assess so that workers not
 Jobs where output not take granted of fixed salary
measureable. that they chose not to work.
 Encourages greater effort and  Output need to be
faster working. measurable and
 Advance in determined labour standardized.Lead to falling
cost for each unit. quality and safety levels.
Wages
 Able to set price for the  Only settle for certain pay
product. level.Little security over
pay level.

 Increased sales.  Might sell products that are

 Can control labour costs. not customer’s best
interests.
 Employees not have control
Commission over results.

 Have substantial value.  Angry if some perks are

 Pre-tax basis is cheaper than taken away.
Fringe
after-tax salary.  Might cause division
payments
among staff
 Provide incentive for  Quickly sold share back by
employees to work harder. workers reduce hoped for
Employee long-term motivation
share impact.
ownership  Both salaries and savings
schemes tied to viability of business
as workers are now part of
owners.

57
 Financial
Advantages Drawbacks
methods
 Encourage a sense of  Productivity might be
belonging. affected.
 Have desire to commit to the  If profit falls, lead to
Profit-related
success of business. demoralizing loss.
pay
 Strive to achieve higher
performance and cost savings.
 Motivated by opportunity to  When cognitive tasks
make extra money by involved, increased control
performing better than targets. over staff makes
Performance-
 Target setting help give productivity decreased.
related pay
purpose and direction of work  Subjective factors such as
to individual. favouritism by managers
lead to division in business.

Non-financial Rewards

Job enrichment

 Tasks more meaningful and rewarding.

 Less supervision and high responsibilities.
 Greater sense of ownership.

Job rotation

 Employee rotated through different divisions over a period of time.

Job enlargement

 Giving more tasks to do due to shortage of staff.

Empowerment

 Power to make decisions based on given resources and information.

Purpose or opportunity to make difference

 Usually for non-profit organization – to meet some social or environmental need.

 For profit organization – CSR is to give good image to the company.

Teamwork

 Working cooperatively with a group to achieve a goal.

58
Advantages and Drawbacks

Non-Financial Advantages Drawbacks

methods
 Employees typically prefer  Lack of training leads to
Job enrichment have responsibilities that lower productivity.
challenging.  Increase workload
 Conflict with non-
participants
 Provides training and  Must go through periodic
Job rotation acquisition of new skills. productivity dips as new
 Lead to new opportunities division require new
with business. understanding
 Employee prefer some  However, if nothing more
Job variation in tasks given than additional duties, it
enlargement will lead to dissatisfaction
 Employees be part of  Decisions made by
Empowerment change process in terms of inexperienced employees
new skills are not fully productive
 Able to make difference by  Employees may lose focus
Purpose or connecting to purpose of the on profit-making objectives
opportunity to organization
make difference  Intrinsically motivating
 Strive to high-performance  Team failures lead to
Teamwork  Energized working dissatisfaction
condition  Miscommunication weaken
 Creates sense of group overall productivity
cohesion & common
purpose

Motivation and rewards in different cultures

 When workers are naturally lazy and cannot be trusted – payment by results and close
supervision need to be adopt.
 If culture views workers as part of organization, then production has to give chance
for workers to participate in decision making.
 So much depends on attitude and beliefs of managers on important decisions made on
and which business culture they want to adopt.

59
2.5: ORGANIZATIONAL AND CORPORATE CULTURE
Organizational/ Corporate Culture
 Attitude, experiences, beliefs and values of an organization. They are considered elements
of corporate culture.

Types of organizational structure

Charles Handy introduced four distinct organizational cultures:

Power Culture Role Culture

Task Culture Person Culture

1. Power Culture
• Exist when few individuals retain essential power
• Control comes from these individuals and spreads out across the organization
• Have few rules and procedures
• People are usually judged by their results rather than how those results are achieved
• Swift decision making are often made but may not be in the long-term interests of the
organization
• Family business and merchant banks often have power cultures
• Individuals who do not fit in are unlikely to work there long

2. Role Culture
• Employees have clearly defined roles and operate in a highly controlled and precise
organizational structure
• Organization are usually tall hierarchical bureaucracies with a long chain of command
• Power comes from a person’s position
• Position and corporate procedures play dominant roles in decision making which is
slow and detailed
• People avoid taking risks
• Civil services, military organizations and nationalized industries often have role
cultures

60
3. Task Culture
• A situation when short-term teams address specific problems
• Power within a task culture shifts from person to person, since different people with
different skills can lead the team at different times
• Many people like task culture because they like to work in a rapidly changing
environment
• A strong team spirit with great emotional energy can emerge
• However, divisive decisions can seriously hurt the team
• Passion for a team can be highly constructive or destructive
• Task culture often features the crossing lines of a matrix structure
• Management consultancies, schools and drama departments may have a task culture

4. Person Culture
• Exist where individuals believe themselves to be superior to the organization and just
want to do their own thing
• The organizations are where employees simply go to work and they see themselves as
separate from it (as free spirit)
• Professional partnership (e.g.: architecture firms, university departments, etc.) can be
predominantly person culture
• Difficult to manage as there is fewer corporations and there may be lack of
communication as people do their own thing.

Edgar Schein
Schein described three levels of organizational structure
1. Organizational attributes 2. Professed Culture 3. Organizational Assumption

1. Organizational Attributes
• Things you sense when you enter an organization

Example:
When entering a government building in a communist country, stern signs or warnings are
everywhere. There is always a picture or statue of a dominant figure and people speak in
hushed tones and conformist fashion while outsiders are viewed with suspicion.
2. Professed Culture
• Organization profess their culture with slogans, statement or images that project a certain
image
• These slogans, statements, o images give clues to how the organization operates.
• Websites of most large organizations give clear statements about commitment to
employees, customers, charities and other stakeholders.
• These are elements of professed culture

61
3. Organizational Assumption
• People who worked in an organization know how things are done in the organization
despite the ‘official’ organizational structure and literature state otherwise. This is known
as organizational assumption.
• The best way to understand organizational assumption for new workers is to work closely
with someone who has been with the organization for a long time.

Culture Clash
If an individual joins an organization and does not share its values and beliefs, it is highly
likely that person will not stay there long.
Reasons for Culture Clashes:

Different comfort level with Different orientations to tasks

diversity:
Some organizations are used to
diversity, some are ethnocentric.
and to people:
some business are task oriented,
some are relationship oriented
Diferent sense of time:
In some cultures; time is fixed
and punctuality is vital.
Others have a fluid - sense of
time.

Different leadership style:

Different degrees of formality:
some organizational are highly
fomral while some ar informal.
Differnt languages:
When two organization merge,
Miscomuunication may occur for
there will be a clash of leadership
people who speak different
style which will affect both
language.
employees and employers

Different practices:
Practices are different between
different organizations,
especially organization from
different countries.

62
Consequences of Culture Clashes:

•Employees may not understand the values and aims of the new organization or the new leader, thus,
Lack of are not focused on organizational aims
Focus

•Employees focus their attnetion and energy on the merger instead of their jobs, decreasing productivity
Preoccupati
on with the
and job performance
merger

•Employees focus on their differences rather tan similarities in each other.

Sense of •some employees may think they have fallen out of favour with the new leaders
Division

Sense of •Employees feel isolated and ignorant of what is happening as managers focus on new strategies
Isolation

•Employees feel that the managers are not concerned for their well-being
Unresponsive
Management

•Workers are not efficiently producing as they are unfamiliar with new norms and procedures
Lower
Productivity

•Dissatisfied workers with new merger may quite job

Higher
Labour •This is troublesome especially if the purpose of the merger is to have greater human capital
Turnover

Conflict in •The stress of the merger and culture clash can induce conflicts
the
workplace

•Profits are loss due to lower productivity and lack of coropration due to conflicts
Decreased
Profitibality

•If problems with merger is to severe with no action taken, the profits can fall untill the business fails or
Bancruptcy backrupts.
or Failure

63
Organizational Cultures and Individual
Business with high – performing cultures attract high – performing individuals or transform
people into high performing individuals
New employees can ‘feel’ the culture thus strive to fit in with the high – performing culture
Some individuals say they cannot ‘feel’ the culture or do not share the same culture.
This will cause :
 The individual stands up for his or her beliefs, and possibly loses his or her job, because
he or she refuses to engage in actions that he/she thinks are wrong.
 The individual compromises on his or her beliefs by turning a blind eye to what he or she
believes is wrong and tries and/or avoids doing anything which makes him or her feel too
guilty.
 The individual tries to influence the organization to change its values or behavior.

2.6: EMPLOYER AND EMPLOYEE RELATIONS

● Employees are usually represented by a trade union (labor union) and employers are
represented by managers
● A trade union is an organization that consists of worker‐members who unite to protect
the rights and welfare of its members. Trade union will:
○ Negotiate on behalf of all of their members in a business. This puts workers in
a stronger position than if they negotiated individually to gain higher pay deals
and better working conditions.
○ Collective industrial action could result in much more influence over
employers during industrial disputes.
○ Legal support to employees who claim unfair dismissal or poor conditions of
work.
○ Pressurise employers to ensure that all legal requirements are met, e.g. health
and safety rules regarding the use of machinery.
Benefits of trade union to management:
■ Employers would be able to negotiate with one officer from the union
rather than with individual unions.
■ The union system could provide an addition, useful channel of
communication with workers.
■ Unions can impose discipline on members who plan to take hasty
industrial action that could disrupt a business - this makes such action
less likely.
■ The growth of responsible, partnership unionism has given employers
an invaluable forum for discussing issues of common interest and
making new workplace agreements.

64
 EMPLOYEES’ METHOD EMPLOYERS’ METHOD

Collective Bargaining
▪ Situation of when the management team and workers have representatives who negotiate
on the terms & conditions of employment
▪ Employees have other means of resolving labor disputes
● Pros : better sense to have a representative rather than having to meet individual
employees
● Cons : This system might not work; an industrial dispute might arise

Strike ● PR (public relation) - campaign to try

● Common way in which the workers
take action; when the workers stop
working to force the employers to
fulfill their demands
Overtime ban :
● When the employees refuse to work
overtime
Slowdowns/go slows
● Deliberately work below their potential
Work to rule
● Work strictly by the company rule book
– and following every rule in the
organization might bring a standstill
put forward its case
● Threats of redundancy - put pressure on
unions to agree to a settlement of the
dispute, but they might inflame
opinions on the employees side and
could be looked upon as ‘bullying’;
lead to poor publicity for the employer.
● Changes of contracts - if employees are
taking advantage of their employment
contracts to work to rule or ban
overtime, then new contracts could,
when the old ones are due for renewal,
be issued that insist on higher work
rates or overtime working.
● Lock-outs - short-term closure of the
business or factory to prevent
employees from working and being
paid. Some workers who are not keen
on losing pay for long periods may put
pressure on their union leaders to agree
to a reasonable settlement of the
dispute.
● Closure - very extreme measure &
would only be threatened or used if the
demands of the union would, if agreed
to, lead to a serious loss being made by
the business or factory.

65
 SOURCES OF CONFLICT

change different interest

• internal / external change can • workers have lesser stake in
cause stress business so might focus on the
individual goals

different values poor communication

• lack of acceptance / understanding • lack of communication might lead
would cause conflict to misunderstanding
• culture of workers differs from
management team

poor performance external factor

• workers who are not doing the job well • i.e economic environment,
will affect the other part of organization; migration of labour, political
lead to conflict
change
• when problem is addressed -
reprimanded, demoted, sacked = conflict

insufficient resources
• employees have mindset of competition for the
resources
• insufficient resources affect the employees' pay
• workers or managers might demand for higher pay

66
 APPROACHES TO CONFLICT RESOLUTION

Conciliation & Arbitration

•Process that involves the independent third party to resolve a dispute
•Conciliation: the use of a third party in industrial disputes to encourage both employer and union
to discuss an acceptable compromise situation
•Arbitration: resolving an industrial dispute by using an independent third party to judge and
recommend an appropriate solution
•Aim : to bring together groups in dispute and help to find resolution
•Both parties will align their positions by providing evidence, which will be assessed and
judgement will be made

Employee participation & industrial democracy

•Industrial democracies involves partial or complete participation of workers which implies the
workers' control over industry - linked to the workers' ownership of production or producer
cooperatives
•Appointment of workers or trade union representatives to company boards or governing
participation
•Industrial democracy takes the form of 'worker participation', such as collective bargaining (trade
union negotiate with managers)
•Consultation & communication (less stress on power-sharing); managers retain all responsibility
about decision but also arrangements to consult the employee representatives before making
changes

No-strike agreement
•Occurs when trade union has agreed not to undertake industrial action unless procedural steps
have first been taken
•Union has agreed to rule out any possibility of taking industrial action - usually when
management has agreed to certain conditions

Single union agreement

•Only one union representative will negotiate with managers
•reduce difficulty of negotiating with several union; reduce competition between unions to get
higher pay
•avoid disruption to organization - when there are only one union in various union who have
problem with management team - might lead to disruption of one whole organization

67
 REASONS FOR RESISTANCE TO CHANGE

•employees are happy with current situation, want to maintain status

Discomfort quo

•changes often makes employees afraid simply because they do not

Fear know what will happens

•employees often perceive that implementing change will require

Insufficient them to do more work without raising the pay
reward

•employees might not have skills necessary to perform in the changed

Lack of job skills environment

•employees feel that they do not have control over their life when the
Loss of control managers insist the change

•some employees do not believe in the managers

Mistrust

•employees do not know why business needs to change

Poor
communication

•change in the needs of business that was brought to the company

Poor timing might not fit to the needs of employees

•employees might have bad experience with change in another

organization
Prior experience •employees may have bad experience at an earlier time with his or
her current employer

•employees who work for a group of people might refuse to change in

Social support order to maintain social relationship

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 POSSIBLE HR STRATEGIES TO REDUCE IMPACT OF CHANGES

First step : assessing potential effect of the change; assessing the

employees' potential reaction; determining the degree of which
managers can control the change process

develop a vision for the change process and the

desired outcomes

forecast & allocate the necessary resources to

implement the change

involve employees in the change process from the

outset so that they would not be surprised; they
do not feel powerless

regularly communicate to all appropriate

stakeholders how the change process is unfolding

train employees in advance of those changes that

affect them directly, which should allow them to
see the benefits of changed immediately

routinely communicate the benefits of change

be aware of the stress that change can cause &

support employees as much as possible; before,
during & after change

69
 UNIT 3:
FINANCE AND
ACCOUNTS

70
3.1 SOURCES OF FINANCE Start-up Capital:

1. FINANCE IS REQUIRED FOR: Capital needed by an entrepreneur to set up a

 Start-up capital business.
 Working capital Working Capital:
 Business expansion
The capital needed to pay for raw materials,
 Research and development day-to-day running costs and credit offered to
customers.

Working capital= current assets-current

liabilities

2. CAPITAL AND REVENUE EXPENDITURE

 Capital expenditure is the purchase of assets that are expected to last for more than
one year. (buildings, machinery)
- Fixed asset: A long-term tangible piece of property that a firm owns and uses in
the production of its income and is not expected to be consumed or converted into
cash any sooner than at least one year's time.
- Collateral: Property or other assets that a borrower offers a lender to secure a loan.
If the borrower stops making the promised loan payments, the lender can seize the
collateral to recoup its losses.
 Purpose: an amount spent to acquire or improve a long-term asset such as equipment
or buildings. Usually the cost is recorded in an account classified as Property, Plant
and Equipment. The cost (except for the cost of land) will then be charged to
depreciation expense over the useful life of the asset.
 Revenue expenditure is spending on all costs and assets other than fixed assets.
(wages, salaries and materials bought for stock)
 Purpose: an amount that is expensed immediately—thereby being matched with
revenues of the current accounting period.

3. SOURCES OF FINANCE
 Internal money raised from the business’s own assets or from profits left in the
business.
 External money raised from sources outside the business.

Internal Sources of Finance:

 No direct cost to the business

 There may be an opportunity cost (leasing charges)
 Does not increase the liabilities or debts of the business
 No risk of loss of control
 Not available for all companies
 Can slow down business growth

71
a) Retained profits
- Some of these profits will be taken in tax by the government, paid to
owners/shareholders.
- If any profit remains, it is kept in the business and becomes a source of finance.
- Advantages:
- Doesn't add to debt profile.
- Doesn’t sap profits with interest payments.
- Allows to maintain full control of business.
- Disadvantages:
- Slow
- Risk of missing business opportunities while building up the necessary funds.
- The business also needs cash to fund ongoing operations.
b) Sale of assets
- Assets that are no longer fully employed could be sold to raise cash.
- If they still intend to use, but do not need to own, the assets might be sold to a
leasing specialist and leased back by the company.
- Raises capital but adds to the fixed cost.
- Advantages:
- Making profit
- Reducing debt
- Disadvantages:
- Tax consequences
- Reduced value
c) Managing working capital more efficiently
- Managing working capital by cutting back on current assets by selling stocks or
reducing debts owed to the business may reduce the firm’s liquidity (its ability
to pay short-term debts) to risky levels.
d) Personal fund
- Advantages:
- Already have them.
- Acquisition costs are minimal.
- Disadvantages:
- Threat of losing everything.

External Sources of Finance:

Short-term finance

 Money needed for the day-to-day running of a business.

 Provides working capital.
 Lasts for one year or less.
 External short-term sources of finance are usually expected to be paid with 12
months of a trading or financial year.

72
a) Bank overdrafts
- Bank agrees to a business borrowing up to an agreed limit when required.
- Most flexible
- The bank allows the business to ‘overdraw’ on its account at the bank by
writing cheques to a greater value than the balance in the account.
- Carries high interest charges and banks can force the firm to pay it back.
- The company must pay all its debts before withdrawing.
b) Trade credit
- Delaying the payment of bills for goods or services received.
- Discounts for quick payment and supplier confidence are often lost if the
business takes too long to pay its suppliers.
- Advantages:
- Available capital.
- Immediate replenishment.
- More business.
- Disadvantages:
- Bad debt.
- High costs.
c) Debt factoring
- Selling of claims over debtors to a debt factor in exchange for immediate
liquidity- only a proportion of the value of the debts will be received as cash.
- a financial arrangement in which a factoring company takes responsibility for
collecting money relating to a business's invoices, and immediately pays that
business part of the total amount owed on the invoices.

Medium-term finance


Money mostly used to purchase assets such as equipment or vehicles that have
useful lifespans for a specific period of time.
 Duration period of between one year and about five years.
a) Leasing
- Used to obtain fixed assets with a medium life span/
- Hire purchase is a form of credit for purchasing an asset over a period of time.
- An asset is sold to a company which agrees to pay fixed repayments over an
agreed time period – the asset belongs to the company.
- Leasing involves a contract with a leasing or finance company to acquire, but
not necessarily to purchase, assets over the medium term.
- Not cheap but improves the short-term cash flow.

Long-term finance

 Funding obtained for the purpose of purchasing long-term fixed assets or other
expansion requirements of a business.
 Duration from more than five to around 30 years.

73
a) Long-term loans
- Loans that do not have to be repaid for at least one year.
- Offered either at variable or a fixed interest rate.
- Have to provide security or collateral for the loan.
- The right to sell an asset is given to the bank, if the company cannot repay the
debt.
b) Debentures (long-term bonds)
- A type of debt instrument that is not secured by physical assets or collateral.
Debentures are backed only by the general creditworthiness and reputation of
the issuer.
- Bonds issued by companies to raise debt finance, often with a fixed rate of
interest.
- The buyers may resell to other investors.
- Types of debentures:
- Convertible debentures: Convertible bonds or bonds that can be converted
into equity shares of the issuing company after a predetermined period of time.
- Typically have lower interest rates than non-convertible corporate bonds.
- Non-convertible debentures: regular debentures which cannot be converted
into equity shares of the liable company. Since they are not able to convert,
they usually carry higher interest rates than convertible debentures.
c) Sale of shares – equity finance
- Private limited companies can sell further shares to existing shareholders.
- Advantage: Not changing the control or ownership
- ‘Go public’ and share sells to the wider public.
- Rights issue: Existing shareholders are given the right to buy additional shares
at a discounted price.
- Advantage: Raises capital relatively cheaply.
- Short-term effect: Reduction in the existing share price, lose shareholder
confidence.

Advantages of debt finance:

- Ownership does not change.
- Loans will be repaid eventually, so there is no permanent increase in the
liabilities of the business.
- Lenders have no voting rights at AGMs.
- Gearing of the company increases. Gives higher returns to the shareholders.

Advantages of equity capital:

- It never has to be repaid.
- Dividends do not have to be paid every year. However, interest on loans must
be paid when demanded by the lender.

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 Other sources of long-term finance

a) Grants
- Offered by governments or agencies.
- Often come with ‘strings attached’. (location & number of jobs)
- If these conditions are met, grants do not have to be repaid.
- Usually to encourage employment or development in a certain field.
b) Venture capital
- Risk capital invested in business start-ups or expanding small businesses, that
have good profit potential, but do not find it easy to gain finance from other
sources.
- Venture capitalists generally expect a share of the future profits or a sizeable
stake in the business in return for their investment.

Finance for sole traders and partnerships

 Bank overdrafts
 Loans
 Credit from suppliers
 Borrow from family and friends
 Use savings and profits made
 Take on partners
 Grants
Runs the risk of losing all property owned if the firms leave.

 Microfinance
- Provide small capital sums to entrepreneurs.
 Subsidies
- A benefit given by the government to groups or individuals usually in the form
of a cash payment or tax reduction. The subsidy is usually given to remove
some type of burden and is often considered to be in the interest of the public.
 Business angels
- An angel investor or angel (also known as a business angel, informal investor,
angel funder, private investor, or seed investor) is an affluent individual who
provides capital for a business start-up, usually in exchange for convertible
debt or ownership equity.

Making the finance decision

Factors influencing finance choice:

 Purpose
- Need to match the source of finance to their specific requirements.
- Long-term loan capital may be appropriate when purchasing a fixed asset,
while trade credit may be suitable if raw materials are needed urgently.

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 Cost
- Need to consider thoroughly all the costs associated with obtaining a source of
finance.
- Interest payments, administration costs, opportunity cost.
 Amount required
- For small amounts- short-term sources of finance.
- For large amounts- long-term sources of finance.
 Status and size
- Public limited companies can obtain finance from various sources.
- Sole traders will not be able to. (Smaller and less well known)
- Large organisations have added collateral that they can use to negotiate for
lower interest rates from financial institutions.
 Flexibility
- The ease with which a business can switch from one source to another.
- The availability of sources of funding in such a short period also determines
how flexible it is.
 State of the external environment
- Involves factors that the business has no control of.
- Example: increase in interest rates or inflation
 Gearing
- The relationship between share capital and loan capital.
- If a company has a large proportion of loan capital to share capital it is said to
be high geared.
- A company that is low geared has a smaller proportion of loan capital to share
capital.
- High-geared businesses are viewed as risky by financial institutions. (reluctant
to lend money)

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3.2 COSTS AND REVENUES
Cost: Total expenditure incurred by a business in order to run its operations
Revenue: A measure of the money generated from the sale of goods and services
Profit: The difference between revenues and costs. Positive difference= successful business
Types of Costs:

1. Fixed Costs : Costs that do not change with the amount of goods or services
produced
- Expenses that must be paid by business
- Time related
- Remain fixed although there’s a change in output in short run
- Examples: rent, insurance, salaries, interest payments

2. Variable Costs : Costs that change with the number of goods or services produced
-Expenses that change proportion to business activity
-Volume related
-Need to have sales (units produced) in order to have variable costs
-Examples: costs, sales commissions, packaging, and energy usage costs

TC= TFC + TVC

3. Semi-Variable costs : Costs comprising both fixed and variable components

-Remain fixed for a given level of production or consumption, then become variable
when set level is exceeded
-Also known as Semi-fixed costs or mixed costs
-Example: Labor costs; fixed costs when salary is paid, variable costs is when
payment for overtime is made
4. Direct costs : Costs that can be identified with the production of specific goods and
services
-Direct costs that includes raw materials, direct labor, and packaging costs
-Example: cost of flour in making bread, cost of labor used in car production
5. Indirect costs : Costs that are not clearly identified with the production of specific
goods or services
-Also known as overheads or overhead costs
-Examples: rent, office staff salaries, audit fees, legal expenses, insurance, advertising
expenditure, interest on loans

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 Total Revenue
Definition: Total amount of money a firm receives from its sales

TR= P x Q
(Price per unit x quantity sold)

-Also known as sales revenue or turnover

-Total revenues include all income received whether sold in cash or credit
 Rental income: Rents collected from property invested in
 Sale of fixed assets
 Dividends
 Interests on deposits : amount of earnings accumulated in banks when
there’s favorable interest rates
 Donations
 Grants and subsidies

3.3 BREAK-EVEN ANALYSIS

CONTRIBUTION
» Determines the overall profitability brought about by given products in a business
» Not the same as profit
» Used to calculate the amount of products need to be sold to cover a firm’s costs
» Contribution per unit

Contribution per unit = price per unit – variable cost per unit

» Total contribution – calculated when more than 1 unit is sold

Total contribution = total revenue – total variable cost

OR
Total contribution = contribution per unit x num. of units sold

» Profit
» The positive difference between total revenue and total costs

Profit = total contribution – total fixed costs

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BREAKING EVEN
 Break-even point  total costs = total revenue
 Business neither makes profit or loss

Break-even chart
» Graphical method to measure the value of a firm’s costs and revenues against a given
level of output
» X-axis – output/units of production
Y-axis – costs & revenue
Costs/revenue ($) profit
TR
TC
Break-even
point
VC
R=C

loss FC

Output/sales
0 Q (B.E
quantity)

» Fixed cost (FC) are constant – needs to be paid no matter what level of output
» No units of output = no variable costs (VC), so it starts from zero (origin). The higher
the number of output produced, the higher the VC. In most cases, VC may not be
included.
TVC = VC x Q (number of output)

» Total costs (TC) line begins at FC line. It follows the same trend as VC
» TR starts at zero as no output = no revenue. More units of output produce  more
revenue
» Break-even point = where TC intersects TR. Break-even revenue/costs and break-
even level of output can be read
» The left of the break-even point = loss
» The right of the break-even point = profit

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Margin of safety / Safety margin

Margin of safety = current output – break-even output

» The measure of the difference between break-even level of output and actual level of
output
» The greater the difference, the greater the safety net/profit earnings
» (+)ve value – profit
(-)ve value – loss
Costs/revenue ($)

TR
Profit
B.E TC
point

R=C
Safety
margin
FC
loss

0 Q (break- Q1
Output/sales
even (current
output) output)

» When Q1 > Q  gives a positive value (favourable)

» When Q1 < Q  gives negative value (unfavourable)

Calculating break-even quantity

1. Using contribution per unit

Break-even quantity = fixed costs

contribution per unit

2. Using TC = TR method
Total revenue (TR) = Total costs (TC)

Profit / Loss

Profit = total revenue (TR) – total costs (TC)

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TARGET PROFIT
Target profit output
» The level of output needed to earn a specified amount of profit
» Target profit  the expected profit
» Target price  price of each output to be sold to obtain profit

Target profit output = fixed costs + target profit

contribution per unit

» Can also be calculated using break-even chart

» Can also calculate target profit & target price

Break-even revenue
» The revenue required to cover both the fixed and variable costs for a firm to break
even
» Break-even revenue = break-even cost

Break-even revenue = fixed costs

contribution per unit x price per unit

EFFECTS OF CHANGES IN PRICE OR COSTS

» Break-even chart can show the impact of changes in price/cost on break-even
quantity, profit and margin of safety
» New positions after the changes can be compared with the previous positions to
provide future direction in the business

Changes in price
» An increase in price will lead to
o Shift TR upwards – sales revenue has increased at all levels of output
o Lower level of break-even output
o Higher profits at every output level
o Increase in margin of safety (MOS)
Costs/revenue ($) TR2
TR1 Lower profit
Higher
TC
profit

R 1 = C1
R 2 = C2

MOS1

BEQ2 BEQ1
0 Output/sales
MOS2

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Changes in cost
» Increase in FC
o Upward parallel shift of TC line
o Increase in TC by the same amount at every level of output
o Break-even quantity increase, profit decrease
o Decrease in MOS
Costs/revenue ($)
TR Smaller profit
TC2
TC1
R 2 = C2
Bigger profit
R 1 = C1
FC2
FC1
MOS2
BEQ1 BEQ2
0 Output/sales
MOS1

» Increase in VC
o Increases the gradient of TC line
o Break-even quantity rises
o Reduces MOS

Costs/revenue ($)
TR
TC2
TC1

R 2 = C2

R 1 = C1

MOS2

BEQ1 BEQ2
0 Output/sales
MOS1

BENEFITS OF BREAK-EVEN ANALYSIS

 Provide easy and visual means of analysing a firm’s financial position at various
levels of output
 Can determine the profit/loss, margin of safety, break-even quantity & break-even
revenue/cost
 Can be used as a strategic decision-making tool (eg: deciding on key investment
projects)
 Formulae can also be used to give more accurate results

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 LIMITATIONS OF BREAK-EVEN ANALYSIS

 Assumes all the output produced by firms is sold with no possibility of stocks being
built up or held
 Assumes that all revenue & cost lines are linear (represented by straight lines)
 Semi-variable costs aren’t represented on break-even chart – more complex
 Unreliable/inaccurate data may influence the results

3.4 FINAL ACCOUNTS

» Final accounts – financial statements compiled by business at the end of a particular
accounting period

PURPOSE OF ACCOUNTS TO...

Shareholders
o Interested in knowing how valuable the business is becoming throughout its
financial year
o Keen to establish how profitable the business is – access safety of their
investment
o Checks on efficiency of business in investing capital
o Also interested in director’s performance – to replace or further motivated?
Managers
o To set targets – used to judge & compare their performance within financial
years
o Helps in settling budget monitors & controls expenditure patterns in
various departments
o Assists managers in strategic planning for more effective decision-making
Employees
o Signals that their job will be secure higher pay
o However, higher profitability does not necessarily mean high salaries leads
to trade unions
Customers
o Interested in availability of stock (constant supply)
 Determines how dependent they should be on the business & how
secure
o If a firm lacks security customers will go elsewhere where supply is
reliable and guaranteed
Suppliers
o To negotiate better cash/credit terms with firms
o Key concern: security of business + ability to pay debt

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 Government
o Checks if firm abides the law regarding accounting regulations
o Sees how much tax it pays
 Loss-making firm – increase unemployment, affects the economy
(govt grave concerns)
Competitors
o Compares their financial statements with other firms – how well they perform
financially
Financiers
o Banks that checks on creditworthiness of the business – how much money
they can lend
 Depends on gearing of business
o Offers any financial facilities

Local community
o Interested in profitability & expansion potential
 May create job opportunities, lead to growth in community, increases
standard of living & economy growth
o Concern whether environmentally friendly

PRINCIPLES & ETHICS OF ACCOUNTING PRACTICE

» Should observe & comply with particular code of ethics/conduct
» The Association of Chartered Certified Accountants (ACCA) – a global body for
professional accountants that offers business-relevant qualifications to people seeking
careers in accountancy, finance and management

» The fundamental principles

o Integrity – all members should be straightforward and honest in all
professional and business relationships
o Objectivity – should not allow bias, conflicts of interest or influence of others
compromise their professional/business judgments
o Professional competence & due care – ensure clients and customers receive
competent professional service
o Confidentiality – respect confidentiality of information acquired from
business relationships
o Professional behaviour – must comply with relevant laws and regulations,
avoid actions that may discredit the profession and behave with courtesy and
consideration

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THE MAIN FINAL ACCOUNTS

Profit and loss account

» a.k.a income statement
» shows records of income & expenditure flows over a given time
» establishes whether business makes profit @ loss

Trading account
shown at top part – establishes gross profit
cost of goods sold = direct costs of goods that are actually sold during a time period
sales turnover = total value of sales made during the trading period

Gross profit = sales revenue – cost of sales

cost of
*sales revenue sales
= sales is calculated
turnover | cost of sales =by
cost of goods sold

Cost of sales = opening stock + purchases – closing stock

Profit and loss account

2nd part of the statement
Expenses comprise indirect costs/overheads – not directly linked to the units sold

Net profit before interest and tax (NPBIT) = gross profit – expenses

Net profit before tax (NPBT) = net profit before interest and tax - interest

Net profit after interest and tax = net profit before tax – corporate tax

Appropriation account
Final part of the statement
Shows how net profit after interest and tax is distributed
o As dividends to shareholders
o As retained profit

Retained profit = net profit after interest and tax - dividends

Example US$ million

Sales revenue 800 TRADING ACCOUNT
Cost of goods sold - 250
Gross profit 550
Expenses - 300
PROFIT AND LOSS
NPBIT 250
ACCOUNT
Interest - 20
NPBT 230
Tax - 40
NPATI 190 APPROPRIATION ACCOUNT
Dividends - 50
Retained profit 140 85
 Balance sheet
» a.k.a statement of financial position – used to calculate a firm’s net worth
» gives the firm an idea of what it owns and owes & how many shareholders have
invested in it
» shows firm’s sources of financial
» basic requirements:
 total assets (what it owns)
 total liabilities (what it owes)
 equity (how the assets are financed)
 assets = equity – balanced

Assets
Resources of value a business owns or owed to it.
Fixed assets
 Long-term assets, lasts for more than 12 months
 Tangible (that are physical in nature, eg: buildings, vehicles etc) and
intangible (that are non-physical in nature, eg: services)
 Purchased for business use & has monetary value
Current assets
 Short-term assets, lasts up to 12 months
 Includes cash, debtors, stock
 Cash – money received from the sale of G&S, held by bank or business
 Debtors – individuals/other firms that bought goods on credit & owe the
business money
 Stock – inventory, includes raw materials, semi-finished goods, finished goods

Liabilities
Legal obligation of a business to repay its lenders/suppliers at a later date
Long-term liabilities
 Long-term debts & payable after 12 months
 Eg: long-term bank loans, mortgage, debentures

Current liabilities
 Short-term debt, payable within 12 months
 Eg: creditors, bank overdraft, tax, dividends, interest, short-term borrowing

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 Amount of working capital (net current asset) a business has is important
 Indicates whether business can pay off D2D* bills/running costs
 Measures the short-term financial health & efficiency of a business

Working capital = total current assets – total current liabilities

Total assets less current liabilities = (fixed assets + current assets) – current liabilities
OR

Total assets less current liabilities = fixed assets + working capital

Net assets = (total assets less current liabilities) – long term liabilities

*D2D – day-to-day

Equity
Known as shareholder’s equity/funds
Share capital
 Original capital invested into the business through shares bought by
shareholders
 A permanent source of capital
 Does not include the daily buying/selling of shares
Retained profit / reserves
 Profit ploughed back into the business obtained from profit and loss account
 Includes profit made by business in previous years

Equity = share capital + retained profit

Balance sheet is
Net assets = equity
balanced

INTANGIBLE ASSETS
Lacks physical substances @ non-physical in nature
Very valuable to a firm’s long-term success or failure
Patents
 Provide inventors with exclusive rights to manufacture, use, sell or control
their invention of a product
 Provided with legal protection from others copying their ideas
 Anyone wishing to use the patent holder’s idea must apply and pay a fee
 Legal life – 20 years (but also depends on useful life of patent)
 Eg: pen with scanner, steel kidneys, rubber horse shoes

87
 Goodwill
 The value of positive/favourable attributes that relate to a business
 i.e good customer base & relations, strong brand name, highly skilled
employees, desirable location & good reputation
 usually arises during acquisition – valued as amount paid by purchasing firm
over and above book value of the firm being bought
Copyright laws
 Provide a creator with exclusive right to protect the production & sale of their
artistic/literary work
 Only applied if the original ideas are put to use, eg: published novel, music
album, computer software
 Lasts for 50 – 100 years after the death of creators
Trademarks
 Recognizable symbol, word, phrase or design that is officially registered and
identifies a product/business
 Helps distinguish one product with another
 Can be sold for a fee, lasts for a 15-year renewable period
 Eg: Coca-Cola, KFC, Nike’s swoosh, McDonald’s M

DEPRECIATION
Decrease in value of a fixed asset over time
Non-cash expense that is recorded in the profit & loss account
Two reasons why assets depreciate:
 Wear & tear – repeated use of fixed assets causes to fall in value and more
money needed to maintain them
 Obsolescence – existing fixed assets fall in value when new/improved versions
are introduced in the market
Two methods to calculate depreciation
– straight-line method & reducing-balance method

Straight-line method
Requires:
 Expected useful life of assets (length of time to be used before replaced)
 Original cost of assets, i.e. the purchase/historical cost
 Residual/scrap value of assets i.e. an estimation of its worth/value over its
useful life

Annual depreciation = original cost – residual value

expected useful life of asset

Advantages of straight-line depreciation

 Simple to calculate – a predictable expense
 Suitable for less expensive items (eg: furniture)
88
 Disadvantages of straight-line depreciation
 Not suitable for expensive assets – does not cater for loss of efficiency or
increase in repair expenses (eg: machinery)
 Inflate the value of some assets – may have lost the greatest amount of value
in 1st/2nd years (eg: motor vehicles)
 Doesn’t take into account the fast-changing technological environment that
may cause fixed assets to obsolete quickly

Reducing-balance method
Adopts an accelerated depreciation technique – depreciation declines over time
 Net book value – asset’s net value, calculated by [ depreciation – cost of asset ]
Net book value in Y1 = cost of original asset – (cost of original asset x rate of depreciation %)

 Rate of depreciation - % fall in value of an asset over its useful life

Depreciation rate = 1 – x 100%

n – expected useful life of asset

Advantages
 More realistically matches the cost and revenue of the business
 Provides more accurate measure of depreciation
 Increases non-cash expenses immediately – lowers income tax in early years,
thereby improving cash
Disadvantages
 More complex method of calculating depreciation
 Charges a high amount of depreciation in early years, which is not realistic for
some less expensive assets

RATIO ANALYSIS

 A financial analysis tool used in the interpretation and assessment of a firm’s financial
statements.
 Helps in evaluating a firm’s financial performance by determining certain trends and
exposing its various strengths and weaknesses.
 Aids in decision making.

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3.5 PROFITABILITY RATIOS
Profit Margin Ratios

 Used to assess how successful the management of a business has been at converting sales
revenue into both gross profit and net profit.

Gross Profit Margin

Gross profit margin (%) =

Possible strategies to improve GPM:

 Increase prices for products in less competitive markets.

- Increase sales revenue
- Drawbacks: Damage image (ripping consumers off)
 Source cheaper suppliers of materials.
- Reduce cost of sales
- Drawbacks: low quality
 Aggressive promotional strategies.
- Persuade customers to buy its products.
- Drawbacks: Increased costs
 Reduce direct labour costs.
- Ensure that staff are more productive or are able to sell more units of the goods
produced.
- Unproductive staff may need to be shed.
- Drawbacks: demotivate staff

Net Profit Margin

Net profit margin (%) =

Possible strategies to improve NPM:

 Check on the indirect cost to see where unnecessary expenses may be avoided.
- Example: reduce expenditure on expensive holidays for senior managers.
- Drawbacks: Demoralize managers who have been used to expensive holidays.
 Negotiate with key stakeholders with the aim to cut costs.
- Example: With landlords for cheaper rent, with suppliers for product discounts.
- Drawbacks: Cheaper rent- move to another location which may not be ideal, with a
poorer customer image.

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EFFICIENCY RATIOS

 Used to assess how well a firm internally utilizes its assets and liabilities.
 Also help to analyse the performance of a firm.

Return on Capital Employed (RoCE)

 Measures the profitability & efficiency of a business.

 Assesses the returns a firm is making from its capital employed.
Return on capital employed (%) =

Capital employed = (non-current assets + current assets) – current liabilities OR non-current

liabilities + shareholders equity
OR
Capital employed = long term liabilities + share capital + retained profit

Possible strategies to improve RoCE:

 A firm should try to reduce the amount of loan capital while still ensuring that net profit
remains unchanged or does not fall.
 However, the loan capital may be needed to purchase essential fixed assets, which will
help generate more profit.
 A firm might declare and pay additional dividends to shareholders. This will have the
effect of reducing the retained profit.
 Drawback: Reducing retained profit leads to less ploughed-back profit for future
investment.

Method to increase profit margins:

- Increase gross and operating profit margin by reducing direct costs.
- Increase gross and operating profit margin by increasing price.
- Increasing net profit margin by reducing overhead costs.

LIQUIDITY RATIOS

 Measures the ability of a firm to pay its short-term debt.

 Liquidity is a measure of how quickly an asset can be converted into cash.
 Liquid assets include cash and others such as stock and debtors that can be quickly turned
into cash.
 Liquid assets = current assets – stocks

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Current Ratio

Current ratio =

 This ratio makes a comparison of a firm’s current assets to its current liabilities.
 Recommended range- 1.5:2
 This range will allow for the availability of sufficient working capital to pay off the short-
term debts.
 A current ratio of below 1:1 means that current assets are less than the current liabilities.
 A high current ratio should be avoided.
 A high current ratio could mean:
- There is too much cash being held and not being invested, for example by converting
to non-current assets.
- There are many debtors, increasing the possibility of bad debt.
- Too much stock is being held, leading to warehouse storage costs.

Possible strategies to improve current ratio:

 A firm might reduce bank overdrafts and choose instead to seek long-term loans.
- Advantage: This helps to reduce the current liabilities and improve the current ratio.
- Disadvantage: Increasing long-term loans could increase the interest payable and the
gearing ratio of the business, affecting its efficiency and future liquidity position.
 Sell existing long-term assets for cash.
- Advantage: This increases the available working capital for the business.
- Disadvantage: If the long-term assets are needed back the business will face the cost of
leasing them.

Acid Test (quick) Ratio

Acid test =

Liquid assets = current assets – stocks

 A more stringent indicator of how well a firm is able to meet its short-term obligations.
 This is because it removes stock as part of the current assets.
 By removing stock the business gets rid of the least liquid of current assets to focus on the
most liquid of them. In some cases, there is no guarantee that stock can be sold.
 This ratio indicates to creditors how much of a firm’s short-term debts can be met by
selling its liquid assets at short notice.
 An acid test ratio of less than 1:1 could mean that the business may be facing a liquidity
crisis (inability to pay short-term debts).
 A high acid test ratio has the same implications as a high current ratio except that there is
no stock to be considered.

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Possible strategies to improve acid test ratio:

 Sell off stock at a discount for cash.

- Advantage: This will help improve the liquidity position of the business and avail
more working capital to pay off its short-term debts.
- Disadvantage: Selling stock at a discount may reduce the revenue generated. (Reduce
profits)
 Increase the credit period for debtors to purchase more stock on credit.
- Drawbacks: May lead to increased bad debts in the business.

3.6 EFFICIENCY RATIO

1. Stock turnover
2. Debtor days
3. Creditor days
4. Gearing ratio

Stock turnover ratio

-Measures how quickly a firm’s stock is sold and replaced over a given period
-There are two ways in calculating this:

a) Consider how many times in a given period a firm sells its stock

Stock turnover ratio(number of times) = cost of goods sold/ average stock

*Average stock= (opening stock + closing stock)/2

Example: A firm has a cost of sales of $400000. It started the year with goods worth $150000
and closed the year with $50,000 worth of goods. Calculate its stock turnover ratio.
Average stock=$150000+ $50000/2
=$100000
Stock turnover ratio= $400000/$100000=4 times

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 b) Consider number of days it takes to sell the stock

Stock turnover ratio (number of days) = average stock/ cost of goods x 365

Stock turnover ratio= $100000/$400000 X 365

= 91.25 days

 High stock turnover ratio= firms sells stock quickly, earn more profit than sales,
goods do not become obsolete quickly, shows a firm has good control over its
purchasing decisions
 However, this ratio is not relevant to service industries that do not hold ‘tangible’
goods as their stock for example luxury car companies
 Stock turnover ratio is important in assessing the EFFECTIVENESS OF WORKING
CAPITAL MANAGEMENT

How to improve stock turnover ratio:

 Dispose slow moving or obsolete goods

 Offer a narrower, better selling range of products especially when the firm has a wide
range of products
 Keep low levels of stock in order to reduce costs of holding stock
 Adopt the just-in-time (JIT) production which is stocks of raw materials are ordered
only when needed

Debtor days
-Measures the number of days it takes on average for a firm to collect its debts from
customers it has sold goods to on credit
-Referred as debt collection period
-Assess how efficient a business is in its credit control systems

Debtor days ratio (number of days) = debtors/total sales revenue x 365

Example: A firm’s total sales revenue amounts to $16million while the total number of
debtors equals to $2 million. What is its debtor days ratio?
Debtor days= $2 million/$16 million x 365
= 45.625 days

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  Shorter debtor days, business have working capital to run its day-to-day operations,
the better for business
 Credit periods range between 30 days to maximum of 120 days
 Long credit periods may put business into cash flow problems, liquidity crisis

How to improve debtor days ratio:

 A firm can provide discounts or other incentives that encourage debtors to pay debts
earlier
 Firm impose stiff penalties for late payers: fines
 Firm stop further transactions with overdue debtors until payment is finalized
 Firm resort to court action for consistent late payers

Creditor days
-Ratio measures the average number of days a firm takes to pay its creditors.
-Assess how quickly a firm is able to pay its suppliers

Creditor days ratio (number of days) = creditors/ cost of goods sold x 365

Example: A business owes its creditors $700000 with a cost of sales of $7 million. Calculate
its creditor days
Creditor days ratio: $700000/$7 million x 365 = 36.5 days

 Extend period may strain firm’s relation with suppliers, which leads to financial
problems
 Other stakeholders may perceive firm has financial problems and do not want to
invest in

How to improve creditor days ratio:

 Have a good relationship with creditors which may enable firm to negotiate for an
extended credit period
 Effective credit control by assessing the risk of paying creditors early or later

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Gearing ratio
-Measures extent to which capital employed by a firm is financed from loan capital.
-Capital employed includes loan capital, share capital, and retained profits

Gearing ratio= loan capital/capital employed x 100

Example: A business has a loan of $10 million with a capital employed of $25million. What
is its gearing ratio?
Gearing ratio = $10 million/$25million x 100 = 40%

 Assess level of debt a business is burdened with

 High gear ratio (>50%): viewed as risky by financiers, they do not foresee any
dividend payments occur in future because main obligation is to pay firm’s long term
loans
 Low gear ratio: viewed as ‘safe’ but may offer minimal returns as the firms won’t
borrow much for future growth

How to improve gearing ratio when it is too high:

 Seek alternative sources of funding that is not ‘loan related’

 Decrease or not declare and issue dividends to shareholders to increase amount of
retained profit

3.7 CASH FLOW

Difference between profit and cash flow
Cash flow: Money that flows in and out of a business over a given period of time
Cash inflows: Monies received by business over a period of time
Cash outflows: Monies paid out by a business over a period of time
Profit: Positive difference between sales revenue and total costs
Insolvency: A situation where a business runs out of cash but may still be profitable

Net cash flow= cash inflow-cash outflow

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Example: One month a business sold $10,000 worth of goods, incurring a total cost of
$4,000. The business offered customers one month’s credit of 50 percent of sales.
Net cash flow= (50% of 10,000) - $4,000 = $1,000

 Business incurred profit of $6,000, positive cash flow of only $1,000

 Cash flow is lower than profit figure

How to differentiate profit and cash flow:

a) Insolvency can happen to a business when there is:

- Poor collection of funds due to long credit period given to customers
- Paying suppliers too early and have less for operation
- Purchasing capital equipment and many non-current assets at the same time
- Overtrading-purchase too much stock with cash that is tied up with business
b) Positive cash flow when business have:
- Sourced from bank loans
- Gained from the sale of firm’s fixed assets
- Obtained from shareholder’s funds

Working capital cycle

Working capital = current assets-current liabilities

Definition: The period of time between payments for goods supplied to a business and the
business receiving cash from their sale

 Current assets > current liabilities = sufficient working capital

 Current liabilities > current assets = working capital problems, face insolvency,
liquidity crisis (a business that is not able to pay its short-term debts)
 Current assets: debtors, stock, cash
 Current liabilities: monies business owes that business must pay in the short term
 Working capital management: An assessment of the way the current assets and
current liabilities are being administered
 Working capital cycle should be KEPT SHORT to maximize on working capital, such
as shortening the credit period to customers and suppliers

Purchase of materials
Cash received from debtors Production of goods
Goods sold on credit
Example of working capital cycle

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Cash flow forecast
Definition: A financial document that shows expected month by month receipts and payments
of a business that have not yet occurred.

 Cash inflows: cash sales from sales of goods or business assets, payments from
debtors, cash investments from shareholders, borrowing from banks
 Cash outflows: purchasing materials/ fixed assets for cash, cash expenses dividend
payments

Cash flow forecasts term:

 Opening cash balance: Cash that business starts with every month
 Total cash inflows: A summation of all cash inflows during a particular month
 Total cash outflows: A summation of all cash outflows during a particular month
 Net cash flow: Difference between total cash inflows and total cash outflows
 Closing cash balance: Is the estimated cash available at end of month

Benefits

 Useful planning document for anyone wishing to start a business

 Provide a good support base for businesses that intend to apply fund from financial
institutions
 Help managers identify in advance periods if business need cash
 Assist in monitoring and managing cash flow.

Strategies to solve cash flow problems

Reduce it

 Business negotiate with suppliers or creditors to delay payment

 Delay purchasing of fixed assets
 Business decrease specific expenses that won’t affect production capacity
 Source cheaper suppliers which can reduce costs on materials

Improve it

 Insist customers to pay cash only for goods purchased

 Offer discounts or incentives that could encourage debtors to pay early
 Diversify its product offering

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Additonal sources of finance

 Sale of assets
 Arranging a bank overdraft
 Sale and a leaseback
 Debt factoring
 Grants and subsidies

Limitations of cash flow forecasting

 Unexpected changes in the economy

 Poor market research
 Difficulty in predicting competitor’s behavior
 Unforeseen machine or equipment failure
 Demotivated employees

3.8 INVESTMENT APPRAISAL

What is investment appraisal?

 The quantitative techniques used in evaluating the viability or attractiveness of an

investment proposal.
 Attempts to assess and justify the capital expenditure allocated to a particular project.
 Aims to establish whether a business venture is worth pursuing and whether it will be
profitable.
 Assists businesses in comparing different investment projects.
 Evaluating the profitability or desirability of an investment project.

QUANTITATIVE INVESTMENT APPRAISAL

Payback Period

 Length of time it takes for the net cash inflows to pay back the original capital cost of the
investment.

If a project costs $2 million and is expected to pay back $500 000 per year, the payback
period will be four years.
This can be compared with the payback on alternative investments.

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Year Annual net cash Cumulative cash
flows ($) flows ($)
0 (500 000) (500 000)
1 300 000 (200 000)
2 150 000 (50 000)
3 150 000 100 000
4 100 000 (including 200 000
residual value)

Importance of payback of a project:

 Managers can compare the payback period of a particular project with other alternative
projects so as to put them in rank order.
 As a general rule, the shorter the payback period of a project, the better it is for the
investing business.
 The business may also have decided on an internal payback period or “cut-off” that an
investment should not go below.

Advantages:

 Quick and easy to calculate.

 Results are easily understood.
 Results can be used to eliminate projects that give returns too far into the future.

Disadvantages:

 Does not measure the overall profitability of a project.

 This concentration on the short term may lead businesses to reject very profitable
investments just because they take some time to repay the capital.
 It does not consider the timing of the cash flows during the payback period.

Average Rate of Return (ARR)

 Measures the annual profitability of an investment as a percentage of the initial

investment.

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Year Net cash flow
0 ($5 million)
1 $2 million
2 $2 million
3 $2 million
4 $3 million (including residual
value)

The four stages in calculating ARR:

1. Add up all the positive cash flows = $9 million
2. Subtract costs of investment = $9 million - $5 million
= $4 million (total profit)
3. Divide by lifespan = $4 million/4 = $1 million (annual profit)
4. Calculate the % return to find the ARR
= $1 million/ $5 million x 100
= 20%
OR

 Criterion rate or level: The minimum level (maximum for payback period) set by
management for investment appraisal results for a project to be accepted.
 For example: If the criterion rate was 15% for the above business, the ARR is 5% above
this rate and would still be considered a desirable project to pursue.

Advantages:

 It uses all of the cash flows.

 It focuses on profitability.
 Result is easy to understand and is easily compared with other projects.
 The result can be quickly assessed against the predetermined criterion rate of the
business.

Disadvantages:

 It ignores the timing of the cash flows.

 As all cash flows are included, the later cash flows, which are less likely to be accurate,
are incorporated into the calculation.
 The time value of money is ignored as the cash flows have not been discounted.

Net Present Value (NPV)

 The difference in the summation of present values of future cash inflows or returns and
the original cost of investment.

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 Present value is today’s value of an amount of money available in future.
 The present value of a future sum of money depends on:
- The higher the interest rate, the less value future cash has in today’s money.
- The longer into the future the cash is received, the less value it has today.
 A fixed amount of money paid in the future is worth less than a fixed amount paid today.
 To get the present value we use the discounted cash-flow method.
 This is a technique that considers how interest rates affect the present value of future cash
flow.
 It uses a discount factor that converts these future cash flows to their present value today.
 To do this:
1. Multiply discount factors by the cash flows. Cash flows in year 0 are never discounted
as they are today’s values already.
2. Add the discounted cash flows.
3. Subtract the capital cost to give the NPV.
Year Cash flow Discount Discounted
factors @ 8% cash flows
(DCF)
0 ($10 000) 1 ($10 000)
1 $5 000 0.93 $4 650
2 $4 000 0.86 $3 440
3 $3 000 0.79 $2 370
4 $2 000 0.74 $1 480

Total DCF= $11 940

Original investment= ($10 000)
NPV= total present value – original cost
NPV= $1 940
 The NPV is a positive value of $1 940, signifying a viable project that should go ahead. If
the value was negative then it should not be pursued.
 An increase in discount rate reduces the NPV because future cash flows will be worth less
when discounted at higher rates.

Advantages:

 It considers both the timing of cash flows and the size of them in arriving at an appraisal.
 The rate of discount can be varied to allow for different economic circumstances.
 It considers the time value of money and takes the opportunity cost of money into
account.

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Disadvantage:

 It is reasonably complex to calculate and to explain.

 The final result depends greatly on the rate of discount used, and expectations about
interest rates may be inaccurate.
 Net present values can be compared with other projects, but only if the initial capital cost
is the same.

QUALITATIVE INVESTMENT APPRAISAL

 The impact on the environment and the local community.

- This revolves around the environmental and social impacts of a project, whether it is
beneficial to the community and if there are any negative impacts towards the
environment.
- This is important to a business not only in terms of ethics but also to maintain the
image of the business.
 Aims and objectives of the business.
- The project managers must check to see if the project is in line with the business’
aims and objectives.
 Risk.
- Before pursuing a project, all risks must be taken into account, not just financial risks
but also environmental, social, political, technological and competition risks.

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3.9 BUDGETS
 A quantitative financial plan – estimates revenue & expenditure over a specific future
time period
 Enables the efficient allocation of resources within the specific time period
 Budget holder – the person involved in the formulation and achievement of a budget
– ensures that specified budget allocations are met

IMPORTANCE OF BUDGETS FOR ORGANIZATIONS

• managers ensure budget help provide a sense of
direction/purpose
PLANNING • anticipates future problems & devising possible
solutions

• budget holder feel empowered & trusted -

boosts their morale
MOTIVATION • feel recognized as part of the organization team
- increase productivity

•help to prioritise how resources will be used

RESOURCE •set certain boundaries - ensure available
ALLOCATION resources are not overstretched but used for
specified purposes based on designated needs

•help bring people from different departments

together to work for a common purpose
COORDINATION •help reach uniform budget agreements

• as monitoring & evaluation tools to check how

funds are used in each department
CONTROL • ensures doesn't exceed budget - lead to serious
financial debt problems

COST & PROFIT CENTRES

Cost centres
Part of business where costs are incurred & recorded
Help managers collect & use cost data effectively
Eg: electricity, wages, advertising, insurance
By department – eg: finance, production, marketing, HR – each has specific cost
centre
By product – ensure each product is a cost centre – eg: telephones, computers,
televisions
By geographical locations – located in different parts of the world – eg: McDonald,
Coca-Cola

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Profit centres
Part of business where both cost and revenue are identified & recorded
Enable comparisons be made to judge the performance in various sections of the
business
Eg: Toyota – identify most profitable car models

Role of cost & profit centres

Aiding decision-making
 Provides managers with financial information about different parts of the
business
 Assist them in deciding whether to continue @ discontinue producing
particular products
Better accountability
 Help hold specific business sections accountable
 Eg: managers who perform poorly can be identified & held accountable for
their efficiency

Tracking problem areas

 Enable particular problem areas in a business to be detected
 Eg: a high customer complaints can be checked by the cost centre – lead to
quick solutions being sought
Increasing motivation
 Provides departmental managers & staff with incentives (promotion, bonuses)
to enable them to achieve set targets
 Increases morale & motivation
 Empowering & delegation also helps improve motivation
Benchmarking
 Check areas of most/least efficiency by comparing performances in various
cost & profit centres
 Help improve overall efficiency in the business

Problems of cost & profit centres

Indirect cost allocation
 Difficult to allocate indirect cost specifically to particular cost
 May allocated unfairly, distorting the overall business performance
 Eg: advertising, rent, insurance
External factors
 Factors beyond the control of business
 Eg: competition
 Competition in one centre may be higher than in another – negatively
influencing the performance of that centre

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 Centre conflicts
 Managers/staff may consider the performance in their own centre to be more
superior than others
 Lead to unhealthy competition – for firm’s resources & lack of sharing vital
information
Staff stress
 The pressure of managing cost & profit centre may be very high if they lack
skills
 Lead to demotivation

VARIANCE ANALYSIS
Variance – the difference between budgeted figure and the actual figure
Calculated at the end of a budget period once the actual amounts are determined
Variance analysis – a budgetary control process of accessing the differences between
budgeted amount and actual amount
Can either be favourable or adverse

Favourable variance
When the difference between budgeted amount and actual amount is financially
beneficial to business

Adverse variance
When the difference between budgeted amount and actual amount is financially costly
to the firm

THE ROLE OF BUDGETS AND VARIANCE IN STRATEGIC PLANNING

Strategic planning – an organization’s systematic process of defining its future
direction & deciding how to allocate resources accordingly, to fulfil this vision
In defining its future position, it first needs to know its current position and the
available opportunities before pursuing its desired course of action
Course of action involves formulating key goals/objectives derived from the vision &
putting in place some steps to achieve them

Advantages of using budgets & variance in strategic planning

 Help control revenue and expenditure by regulating how money is spent to minimise
losses and wastage of resources
 Provide realistic targets that are clear understood by all stakeholders to aid in the
attainment of an organization’s goals
 Help in coordination of various business departments – improving flow of
communication
 Should be set based on SMART criteria

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  Compare actual performance to budgeted performance to help assess organizational
performance
 Assists in detecting the causes of any deviations in the budget
 Provides an objective way of appraising budget holders responsible for their various
departments

Limitations of budgets in strategic planning

 Do not consider any unforeseen changes in the external environment (eg: increases in
raw material costs)
 Significant differences between budgeted and actual results make the budget lose its
importance as planning tool
 Mostly based on short-term, only looks at current budgeted amount. So long term
future gains (eg: sudden increased sales potential) could be lost
 Highly unspent budgets result in unjustified wasteful expenditure
 Setting budget without involving other people could lead to resentment & affect their
motivation level

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 UNIT 4:
MARKETING

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4.1 ROLE OF MARKETING
MARKETING: The management process of getting the right product to the right
customer at the right price to the right place and time. (Oxford, 248)

Marketing is the process of planning and undertaking the conception, pricing, promotion and
distribution of goods and services to create and maintain relationships that will satisfy
individual and organisational objectives. (Cambridge, 241)
However, all marketing decisions are affected by other business functions:-

 Finance and Marketing

o Marketing costs money; work together in setting the appropriate budgets.
o Departmental Conflict:-
 Marketing might want to spend more than the budget allocated, but
finance department may advise that it sticks to the budget
 HR and Marketing
o Marketing information can enable more effective workforce planning in the
HR department.
o Influenced demand and supply of labour in an organization.
o Ensuring that right salesperson are hired
 Operations management and Marketing
o Ensuring that products developed meet the specifications of the customers.
o Market research will help the marketers in determining the needs and wants of
the consumers.

The marketing of goods and services

Goods Services
Are tangible, i.e. can be touched
Are intangible, i.e. cannot be
touched
Can be returned if you did not Cannot be taken back, e.g. bad
like what you bought haircut
Can be stored and consumed Cannot be stored and will need to
later be consumed immediately
There is ownership of the There is no ownership of the
product product
Goods are easier to compare Services are more difficult to
compare

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Market Orientation VS Product Orientation

Product – oriented approach Market – oriented approach

Inward looking Outward looking
Focused on making product first Focused on carrying out market
then trying to sell it research first and then making
products that can sell
Product led and assuming that Market led and focused on
supply creates its own demand establishing consumer demand
(Say’s law)
Produce innovative products and Supplying products that meet
tempt the customers to buy consumer needs and wants
Market Oriented Approach

Benefits Limitations
Market research; increased
confidence – reduced risk of Costly
failure
Difficult to meet consumer’s
Access to market information;
needs with its available
respond more quickly to changes
resources
Firms will be in a strong position Uncertainty about the future
Product Oriented Approach

Benefits
Associated with high quality
products
Firms can succeed in industries
where the speed of changes is
slow; good reputation
Has control over its activities
Limitations
Firms ignores the needs of
market; high risk
Costly; spending money on R&D
without considering consumer
needs
Not yield any promising results

COMMERCIAL MARKETING
Marketing activities that determine consumer needs and wants before using appropriate
strategies to market product.

 Business will supply what is demanded

 Value – free, not involve making moral judgements
 Strategies used in commercial marketing need to be tailored specifically to the type of
product the commercial is selling

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SOCIAL MARKETING
A marketing approach aimed at influencing a positive change in individual behaviour and
improvements in societal well – being.

“The use of commercial marketing concepts and tools in programmes designed to

influence individuals’ behaviour to improve their well – being and that of society”
-Social Media Institute (SMI)-
 It ensures that businesses make good marketing decisions based not only on consumers’
wants and firm’s requirements, but also on consumers’ and society’s long-term interests
and welfare
 Examples:
o Public Health Campaigns
o Environmental Campaigns
o Human Rights
o Family Planning

Advantages

 Gives firms a competitive advantage; consumers will perceive as socially responsible

 Can charge premium prices; goods benefits society

Limitations

 Major problem; Getting people to change their habitual behaviour

SOCIAL MEDIA MARKETING (SMM)

The use of the Internet through social networking websites to market a firm’s product or
service

Benefits

 Enables a firm to get direct feedback from customers; Social customer relationship
management
 Low – cost, larger target audience
 Enhances firm’s brand

Limitations

 Difficult for a business to stand out from the crowd; rely on other marketing
techniques

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Characteristics of the market in which an organization operates
Market Size

 This represents the total sales of all businesses in a given market.

2 ways of measuring market size

1. By volume – this measures the number of goods bought by customers
i. Formula to calculate market size by volume:

2. By value – this measures the amount spent by customers on the total number of goods
sold by businesses. Total revenue expressed in monetary terms.
i. Formula to calculate market size by volume

3. Market Growth is the percentage change in the market size over a given period of
time.
i. Example: an increase in sales revenue resulting from the sale of TV from
US$50 million to US$80 million indicates a 60% growth in the market.
ii. Formula:

4. Market Share % =

Measuring market share; indicates market leader.

Benefits of being a market leader:-

 Increased sales; higher profits

 Economies of scale
 Brand leader; good promotional tools

Limitations when interpreting market share:-

 Different results may be obtained in the same time period

 Changes in the time period and market can influence market share results
 Type of products also influence the market share results

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 NON – PROFIT
PROFIT ORGANISATION
ORGANISATION
Develop marketing strategies
For social marketing reasons.
that will ultimately be profitable
E.g. church, some schools
to the business
Marketers would run campaigns
Applying marketing mix to to encourage the public to donate
achieve objective money or support a certain
causes
Use a market – led approach;
Use more complex marketing
focus purely on the needs and
strategies.
wants of consumers

Marketing objectives of NPOs

 Social marketing
 Enhancing image and reputations of their organisations
 To gain competitive advantages of their rivals in the private sector
 Ethical all time; High degree of social Responsibility

How marketing strategies evolve as a response to changes in customer preferences?

 To adapt with changes in customer preferences, business will adapt various marketing
strategies to meet customer’s demands
 To improve businesses’ profitability by rebranding and penetrating new markets, or by
diversifying
 Example: BMW
o They apply complete change in their marketing strategy.
o Product development; fuel-efficiency cars (customer’s preferences)
o Market penetration; China and India
o Disadvantages: loses loyal customers
o Advantages: Increased market share in other areas
 Businesses must adapt to the changes to remain relevant
 Failure to adapt can result in a loss of profitability or even total failure
 Whether it is a change in marketing methods, or reconfiguration of the marketing
mix, marketing strategies can and must adapt to changing in customer preferences

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How the concepts of innovation, ethics and culture influence marketing practices &
strategies?

 Innovation:
o Cause changes in the marketing strategies for their products; 4P’s
o Products will become more innovative in design and features
o Price penetration for innovative products; example: Huawei, selling their iPhone-
liked smartphones at a relatively low price
o Place will become more easy to access with the existence of e-commerce
o Promotional strategy will become more interesting with the help of new
technology; plus to adapt with a more innovative environment
 Ethics:
o Major impact on the way business brand themselves and their products (Products,
Promotion)
o Business will plan how to adapt with local culture, religion and norms. (Place)
o To respect their culture, religion and norms is considered ethical and if business
failed to do so, it will ruined their image as they behave unethical
o Business will make sure they set the most proper price in order to be ethical
 Cultural differences
o To meet consumer’s demand, business need to adapt with local culture
o If the business failed to identify the local culture, thus operating against their
culture; they will not managed to increase sales
o Moreover, if business clashes with local culture, the business will be unfavourable
for the consumer
 Business must adapt their marketing practices and strategies to meet changes as a result of
innovation, ethics, and culture if they are to maximize revenues and profits on a global
scale

4.2 MARKETING PLANNING

Marketing Planning – the process of formulating marketing objectives and devising
appropriate marketing strategies to meet those objectives.
Elements of marketing planning:-

 Marketing objectives ; SMART

 Key strategic plans; steps that provide an overview of how the marketing objectives
will be achieved
 Detailed marketing actions; providing information on the specific marketing
activities that are to be carried out
 The marketing budget; including the finance required to fund the overall marketing
strategy

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Benefits of Marketing Planning

1. Identifying problems and seeking solutions to them

2. SMART objectives improve the chances of success of a firm’s marketing strategy
3. Improves coordination (sharing marketing planning with other departments)
a. Provides the whole organization with a clearer picture
4. Devising a marketing budget; ensures that resources are not wasted on unprofitable
activities
5. Improves employee’s motivation and inspire confidence in them

Limitations of Marketing Planning

1. May become outdated if organizations are not quick to consider changes

2. The process may consume considerable resources; time, expertise and money
3. Failure to prioritize marketing objectives; difficult for firms to tell whether they are
meeting them

THE FOUR “Ps” OF THE MARKETING MIX

A collective term that includes the key elements that ensure the successful marketing of a
product

 Product – Good/service that is offered in the market

 Price – amount consumers are charged for a product. Indicates the value consumers
perceive the product to have.
 Promotion – Various ways in which consumers are informed about and persuaded to
purchase a product
 Place – Product’s location or channels of distribution used to get the product to the
consumer

AN APPROPRIATE MARKETING MIX

Characteristic of an appropriate marketing mix:

 be well coordinated; elements consistently complement each other

 be clear, focused, and not abstract nor ambiguous
 consider the market it is aiming to sell the product to
 look into the degree of competition that its product faces
 target the right customers
 Ensures that consumers’ needs and wants are adequately met
 Requires business to produce the right product, charged at the right price, available at
the right place and communicated trough the right promotion channels

If the marketing mix is not clear and focused;

o a firm could risk potential loss in sales

o will affect its long term profitability
o Consumers may not identify with the product and therefore will not buy it

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Examples of inappropriate marketing mix
o Advertising expensive cars in a colourful children’s magazine
o Selling an exclusive perfume in a stall where second hand clothes are sold

MARKET SEGMENTATION, TARGETING AND CONSUMER PROFILES

Market Segmentation
Segment refers to sub – group of consumers with similar characteristics in a given
market.

Market Segmentation is the process of dividing the market into smaller or distinct groups
of consumers (to meet their desired needs and wants)

 Demographic Segmentation – Varying characteristics of the human population

in a market
o Age
o Gender
o Religion
o Family characteristics ; e.g. OINK(One Income, No Kids)
o Ethnic grouping
 Geographic Segmentation – Market is divided into different geographical sectors
o Regions in Country where consumers reside
o Climatic Condition
 Psychographic Segmentation
o Social and Economic Status; e.g. high – income earning
o Values; e.g. peoples moral beliefs need to be considered

ADVANTAGES of Segmentation

 Help business in identifying existing gaps and new opportunities domestically and
internationally
 Increase sales and profits (Products for a specific group of consumers)
 Minimizes waste of resources
 Diversify and spread the risk in the market; increase market share

However; segmentation can be costly in terms of R&D, production and promotion.

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TARGETING
The process of marketing to a specific market segment

Target Market – A group of consumers with common needs and wants that business decides
to serve or sell to

 Undifferentiated Marketing (Mass marketing)

o A large or broad market that ignores a specific market segment
o Targeting entire market

 Differentiated Marketing (Segmented Marketing)

o Targeting several market segments
o Develop appropriate marketing mix for each segments

 Concentrated marketing (Niche Marketing)

o A narrow, smaller or more specific market segment
o Easier to become expert market
o Good strategy for smaller firms that may have limited resources
o May serve market niches where there are few competitors
o Take advantage of opportunities that may have been overlooked by larger
firms

CONSUMER PROFILES

 The characteristics of consumers of a particular product in different markets based on

their gender, age, and income levels, among other characteristics
 Enable firms to target their products effectively to the right consumers, using
appropriate marketing strategies
 A firm aware of its target market has a cost – effective method of selling its products
as it will make savings on promotion costs

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POSITIONING
Product positioning map/ perception map – A visual representation of how consumers
perceive a product in relation to other competing products
High
Quality
BMW

Low Honda High

Price
Proton

Low
Steps in positioning Example of positioning map
1. Marketers need to identify product aspects that consumers find important. (e.g. quality,
price, image)
2. Firm will need to choose the key features on which to develop its positioning strategy
3. Firm should communicate its desired position to its target customers with the support of
its marketing mix

The importance of a position map

 Help a firm to establish which are its close competitors or threats in the market
 Helps identify important gaps or opportunities in the market that firm could fill by
creating or offering new products
 Simple and quick way of presenting usually sophisticated research data
 Helps a firm in targeting specific market segments to best satisfy consumer needs and
wants

UNIQUE SELLING POINT OR PROPOSITION (USP)

A products’ feature that differentiates it from other competing products in the market (added
value)

The importance of having a USP

 Helps to establish a firm’s competitive advantage in its product; attract more

customers
 Leads to customer loyalty; customer can identify something special about the product

Examples:
Product: Apple is world renowned for its unique product quality in its iPad, and Mac
computer products
Price: Xiaomi have lower price even though its features are similar to iPhone

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Place: Coca – Cola has managed to differentiate itself well globally by having a wide range
of retail outlets providing its product close to its customers

Promotion: Nike’s “Just Do It” slogan is a powerful promotional tool for the company
because it emphasizes the action element, which is an effective strategy in encouraging
customers to go ahead and buy Nike’s product.

4.3 SALES AND FOREFASTING

o Sales forecasting
 The process of predicting what a firm’s future sales will be
 Uses quantitative methods to estimate the future sales levels and trends or a
specified time period
 Accurately predicting future reduces uncertainty, helps in management of
stock and cash flow, and ensures better planning growth
 Sales forecasting information assists a business in making intelligent business
decisions
o Time Series Analysis – quantitative method that predicts future sales levels from past
sales data
 The trend – visible pattern noted after inputting the past sales data, indicate
the rise and fall of sales on a period of time
 Seasonal fluctuations – changing in demand because of the varying season in
the year, are usually repeated and occur within one year or less
 Cyclical fluctuations – variations tied to the business cycle in the economy
(sales on the rise during growth but declining during recession)
 Random fluctuations – notable changes/fluctuations that stand out from a
given trend (sudden increase in the demand for ice-cream during a rare warm
day in winter)
o Moving average – useful indicator in sales forecasting for identifying and
emphasizing the direction of a trend, more accurate and complex method

Year 1 2 3 4 5 6 7 9
Sales 400 600 800 650 700 850 950 1,200
(US$000
)

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 Calculating a three-year moving average
1. Calculate the mean sales for the 1st three years;
Mean sales =
=
= 600,000
2. Do the same for the next three sets of data;
=
= 683,333
3. Continue for the next three sets
Calculating a four-year moving average
1. Summation of sales of years 1,2,3,4;
=
= 2,750,000
2. Summation of sales in years 2,3,4,5;
=
= 5,200,000
Calculating variations
o Calculated by getting the differences between actual sales and the trend values

1 2 3 4 5 6 7 8
Sales 400 600 800 650 700 850 950 120
(US$000 0
)
Eight- 5,200 5,750 6,150 6,850
year
moving
total
Trend(fo 650 18.75 768.7 865.7
ur-year 5 5
moving
average)

Extrapolation
 Once the trend line has been drawn, this line can be extended using “line of
best fit” (extrapolation)
 Shown by dotted line, to predict future sales

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 o Benefits of sales forecasting;
 Better cash flow management – consider cyclical & seasonal variation
factors, financial managers can better plan to improve the liquidity position of
a business
 Increased efficiency – assists the production department in knowing the
number of goods to produce and in planning for the amount of stock required
in the future
 Better workforce planning – accurate sales forecasting help HR
department in planning the number of staff required in the future
 Improved marketing planning – marketers will gain greater awareness of
future trends and be able to adjust their marketing strategies accordingly in an
effort to increase their market share
o Limitations of sales forecasting;
 Time-consuming – long time to calculate (complex nature)
 Ignores qualitative external factors – political, social, economic factors can
influence the accuracy of sales forecast

4.4 MARKET RESEARCH

o Market research – process of collecting, analysing and reporting data related to
particular market, including data on consumption of goods and services and on
competitors’ behaviour
o Purpose of market research
 Identify consumers’ needs and wants, aiming to understand consumers’
satisfaction levels and pattern in purchase behaviour
 Assists business in predicting the future of the business
 Reduce the risk of product failure
 Measures the effectiveness of the marketing strategies
 Provides current /latest information regarding activity in the market (keep up
to date as first mover advantage)
o Market research methods
1. Primary market research
 also known as field research
 involves the collection of first-hand information from the market
 commonly to find out specific buying patterns of consumers
 attempt to anticipate any changes in their spending behaviour over a
given time period
 firms may carry out this research themselves or seek the help of market
research agency
 advantages – the organization that collects the data will be the first one
to assess it (advantage over rival)
 drawbacks – expensive because research process takes time & requires
specialized knowledge

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 2. Secondary market research
 Collection of second hand information
 Known as desk research
 Involves analysing data that already exists in some form
 Advantages – quicker and cheaper methods than field research , most
of the information is readily available
 Drawbacks – information collected may be out to date & have been
collected for purposes other than the specific needs of the researching
organization, the sources of data may not be reliable
o Primary market research methods and techniques

a) Surveys
 Questionnaires sent out to a particular targets audience to enable the researcher
to gather useful information
 Contain different types of question – ‘yes’ or ‘no’ answer, multiple choices , or
open-ended questions
 Consumer survey – focus on getting specific information, asking their opinion
on a particular product or issue
 Common ways:
 Mail-alumni survey distributed via direct mail
 Telephone-a researcher calling a customer to ask for opinion on certain product
 Online-workshop leaders may use online surveys as an evaluation tool to seek
participants’ opinion

ADVANTAGES DISADVANTAGES
 Enable researchers to  Poorly constructed and
collect a large amount of data administered surveys can
in short period undermine otherwise well-
intended research

 Easily and completely  Inaccurate reflection on

answered by customers how the respondents truly
feels, with biasness

 Collect information on a  Large samples used will be

wide range of aspects costly and time consuming

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b) Interviews
 A conversation during which the interviewer asks the interviewee questions in order to
gain information whether one on one, face to face or by telephone

ADVANTAGES DISADVANTAGES
 Provide detailed information  Can be time consuming

 Achieve a high response rate  Some interviewers may

be biased

c) Focus groups
 Small number of people brought together to discuss a specific product or idea
 Comprises individuals represent the customers of the business of a specific segment of
customers
 Participants respond to questions prepared by the researchers, freely shared their
opinions, ideas and reactions

ADVANTAGES DISADVANTAGES
 Small group of  Opinions from a small
individuals, cheap and group may not reflect it
easy way
 Measure reaction of  May not be honest on their
customers to a firm’s personal opinions
new product or to the
firm’s strategies
 Help identify key  More costly to carry out
product requirements as than surveys
well as other needs
 Provide insights on the
current position of the
firm’s competitors

d) Observation
 Is a fundamental and basic method of getting information by carefully watching and
trying to understand certain things or people’s behaviour
 Can be used by supermarkets to check how quickly consumers notice their displays or
how long they may spend queuing as they wait to pay
 Govt’s traffic department can observe the flow of traffic in certain areas and help
provide recommendations for improvement

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 ADVANTAGES
 Direct method of
collecting data
 Large number of
individuals
 Cost-effective way
DISADVANTAGES
 Need to be combined with
other methods
 Non - verbal response

o Secondary market research methods and techniques

a) Academic journals
 Publications of scholarly articles written by experts
 The articles should be well referenced to provide the exact source of the
information given
 Written for the sole purpose of providing and distributing knowledge and not as a
money-making opportunity

ADVANTAGES DISADVANTAGES
 Information are more  May not be best source
reliable for general-interest
topic
 A good sources for  Can be time consuming
those in need of
original research
 Less time to publish
than books

b) Media articles
 Include newspapers and magazines

ADVANTAGES DISADVANTAGES
 Cheaper than  Difficult to communicate
communicating via events in real-time.
television
 Reliable resources  Newspapers can be biased
 Widely available  Could be considered a waste
of paper and energy
resources

c) Government publications
 Articles produced by govt on a wide variety of topics
 Provide businesses with useful information on the population census in a country

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d) Market analyses
 Include commercial publications or market intelligence reports that gather data about
particular markets
 Highly detailed reports carried out by specialist
 Can be sourced at various local business libraries, but quite costly

o Differences between qualitative and quantitative research

QUALITATIVE QUANTITATIVE RESEARCH

RESEARCH
 Opinions, attitudes/beliefs  Numerical data
 Information is open to a  Information less interpreted
high degree of
expectation
 subjective  objective
 Why?  How many?
 Researcher part of the  Researcher is separate
process
 Provides multiple realities  Provides one reality

o Sampling methods – a sample of a small group of people selected to represent the

population under research
 Quota sampling – Involves segmenting a given population into a number of
groups that share certain characteristics

ADVANTAGES DISADVANTAGES
 Quick & cost effective  Not always represent the
population
 Findings are more  Biasness of the interviewer
reliable

 Random sampling – respondent selected randomly

ADVANTAGES DISADVANTAGES

 Equal chance of  too small; not consists of

being selected the target population

 Reduces bias

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  Stratifies sampling – made up of many different groups who are subdivided
into segments or strata that share similar characteristics

ADVANTAGES DISADVANTAGES
 more  not easy to select
representative of relevant strata from a
the target population of very
population similar characteristics

 Cluster sampling – when the population is geographically dispersed


ADVANTAGES DISADVANTAGES
 Quick & cheap  Results obtained may
method not be the
representative of the
whole population &
may be biased

 Snowballing – involves surveying the first group/individual who then suggests

other groups who could participate, members of the initial group use their contacts to
refer to other people that they know, hence the snowball effect.

ADVANTAGES DISADVANTAGES
 Cost-effective  Potential of getting
method of obtaining biased sample, since
information through friends sharing similar
referrals lifestyles may refer
each other

 Convenience sampling – groups are selected based on their easy access and
proximity to the researcher

ADVANTAGES DISADVANTAGES
 Fast, easy and cheap-  May be biased & not
the groups are represents the entire
already available population

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 o Results from data collection-ensure data collection methods are appropriate
and offer a high degree of accuracy
 Benefits of property collected data
a) Ability of research to answer accurately the RQs posed
b) Ability to repeat & validate a particular study when needed
c) Increased accuracy of findings resulting in efficient use of
resources
d) Good opportunities for other researchers to pursue areas needing
further investigation

4.5; 4.6 THE SEVEN PS (PRODUCT, PRICE, PROMOTION, PLACE, PEOPLE,

PROCESSES, PHYSICAL EVIDENCE)

1. Product.
Any goods (tangible) or service (intangible) that offered in the market to fulfil consumer
needs and wants.
The product life cycle: The course a product passes from its development to its decline in the
market.

Stage 1: Development
numbers of stakeholders brainstorming to come out with anything that can satisfy consumers
needs and wants.
Generating ideas

Leave out poor ideas and accept the good ones

Screening Ideas

First/ trial
Physical examination
Creating Prototype

First launch, still in testing phase

Test market

Full launch
Used all element in marketing mix
Commercialization

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Stage 2: Introduction.
- Sales are low, no customers aware yet.
-Cash flow negative.
-Brand-new technological products might use price skimming.
-Penetration pricing might be as strategy to compete with competitors.
-In an effort to increase awareness of the product,informative advertising is used.

Stage 3: Growth.
-Product well received by market.
-Sales volume and revenue start to increase.
-Cash flow becomes positive.
-Penetration pricing can now increase to maximized profits.
-Price skimming can now reduce slightly because of increased competitions attracted by the
profits.
-Advertising becomes persuasive to convince consumers to buy more.
Discussion can be done regarding products improvement and development.

Stage 4: Maturity.
-Sales continue to rise but slowly
-Product well established
-Cash flow positive
-Competitive or promotional pricing strategies (keep competitors at bay)
-Promotion= Sales growth, brand loyalty and reminding role
-wide range of distribution outlets
-Plan new product developments, while some introduce expansion strategies

Stage 5: Saturation.
-saturated when competitors entered the market.
-Sales at highest points and begin to fall.
-Cash flow still positive.
-Prices will have to reduced, so competitive pricing is used.
-Aggressive advertising in an effort to maintain sales.
-Profits are high and mostly stable.
-Start use extension strategies.

Stage 6: Decline.
-Cash flow begins to fall but is still positive.
- Products have lost appeal in the eyes of consumers due to new product introduced to replace
old model.
-Promotional activities are reduce & keep minimum.
-Price lowered and sell of any existing stock.
-Non profitable distribution outlet closed.
-weak products are withdrawn from the market.

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Extensions strategies.
-An attempt by firms to stop sales from falling by lengthening or extending the product’s life
cycle.
-Done in maturity or saturation stages.

Common methods:
1. Sell existing products into new markets.
2. Find new uses for the products.
3. Change the product’s packaging.
4. Target different market segments.
5. Develop new promotional strategies.

Importance:
1. To long-term success of the business.
2. Prevent the markets from decline in sales for the mature products.

Limitations
1. Not always easy to determine where exactly in its life cycle the products is.
2. Not always accurate may have influence on any future sales.

The Boston Consulting Group (BCG) Matrix.

Definition: An analysis method of firm’s product portfolio regarding its market share and
market growth.
A process that evaluates the products making up a business

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 Market share
High Low
Stars. Questions marks.
High

-successful products. -Larger amount of

-high level of money needed
investments. -Products are operating
-Gain market share; in a fiercely competitive
Market Growth

attracting new market.

customers. -Good marketing
-Products mature strategies.
cash cows. -Develop into star or
eliminated.
Cash cows. Dogs.
Low

-Invest less -Not growing/declining

-High sales and very markets.
profitable. -Generate little income.
-Generate good -Low prospects for the
amount of cash. firm and may need to be
-Can charge slightly replaced.
higher prices to -Cash flow problems.
increase profit
margins.

BCG Matrix strategies

1. Holding strategy: focus on products with a high market share, to maintain their
current position and some investment needed.

2. Building strategy: turning problems children into stars. Money from the cash cows
should invest in promoting. Distributing the products to increase market shares.

3. Harvesting strategy: milking the benefits of products with a positive cash flow.
Products provide the necessary finance; can be used in investing in other portfolio
products.

4. Divesting strategy: poor-performing dogs are phased out or sold off. Resources freed
up from this will need to be used well in boosting the performance of other products
in the portfolio.

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Limitations of Boston Matrix
1. Little advice or information for future planning.
2. Time-consuming and complex exercise for business to define their products (according to
market share & market growth) .
3. Does not necessarily equate to high profits.

Branding
Brand = name, symbol, sign or design that differentiate a firm’s products from the
competitors.
Branding
1. Process of distinguishing one’s business product from another.
2. Can add great value to the product.
3. Strongly influenced how customers view or perceive the products

Aspects of branding

1. Brand awareness
- Ability of consumers to recognize the existence and availability of goods & services.
- Creating brand awareness helps promote the products.
- Usually very little difference between one firm’s & competitors’ product & important
of promoting.
- Greatest brand awareness will sell more than its competitors’ product.
2. Brand development
- Improve and strengthen the image of a product.
- Increase power of its name, symbol, or sign.
- Leading to higher sales and market share.
- Business may invest more in promotional campaigns.
- Example: free samples

3. Brand loyalty
- When consumers become committed to a firm’s brand and willing to make repeat
purchases over time.
- Brand preference = consumers who prefer one brand over another.
- Brand ambassador = consumers who will market a particular brand by talking positively
about it among their colleagues, friends and relatives. Free marketing (word of mouth.)

Type of loyalty
1. Shift loyal.
2. Split loyal.
3. Switches.

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4. Brand value
- Definition: How much a brand is worth in terms of its reputation, potential income, and
market value.
- Refers to how much brand worth in terms of reputation, potential income and market
value.
- Consumers willing to pay a high price to obtain such brand that they prefer.
- This is an expression of a brand’s personality.
- Product more attractive than competitors because its special.

Importance of branding
1. For start-up business= giving customers clear image so it can be recognized
immediately. If not meet the expectations of the consumers, will result in decreased
sales.
2. Well-known brand = can use price skimming. Consumers will associated such brands
with consistently high quality. Enable business to make good sales and even high
margins of profit.
3. Consumers made judgments based on the way they present them such as choosing
right colour.
4. Provided legal protection to prevent the product being copied by competitors.

5. Enabling the business to have a sense of ownership to the products.

6. Effective branding enables sense of personal identification and emotional
connection among consumers.

Importance of packaging
1. Provide physical protection.
- Protected products from being spoilt or damaged during transportation.
- Good cover against dusts, direct sunlight and temperature.

2. Offers convenience.
- Easy for consumers and distributors to handle the products.
- Include ability to reuse, recycle and easily dispose.

3. Provides information.
- Information on particular ingredients and how to use the items.
- May be legal requirement for the companies producing cigarette and alcohol.

4. Reduce security risks.

During transportation, help deter intentional tempering with the products.

5. Aids promotion.
- Eye catching.
- Generate impulse buying or unplanned purchases by potential buyers.

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 2. PRICE.
Amount paid by consumers for a product. Price is a vital component of the marketing mix as
it impacts on the consumer demand for the product.

Factors determining the price decision

1. costs of production
2. competitive conditions in the market
3. competitors’ prices
4. marketing objectives
5. price elasticity of demand
6. Whether it is a new or an existing product.

Pricing strategies
COST-BASED PRICING = firm asses their costs of producing or supplying each unit, then
add an amount on top of the calculated cost.

Methods of cost-based pricing

1. Cost-plus pricing
- Adding a fixed mark-up for profit to the unit price of a product.
- Often used by retailers who take the price that they pay the producer or wholesaler for
a product, and then just add a percentage mark-up.
- Example
o Cost of bought-in materials: $40
o 50% mark-up on cost = $20
o Selling price: $60
- Advantages
o Simple and quick.
o Good way to covers costs and makes a profit.
- Disadvantages
o Fails to consider market needs.
o Competitors’ prices are not considered.

2. Penetration pricing
Setting a low initial price for a product with the main attracting a large number of customers
quickly and gaining a high market share
- Use in mass marketing.
- Advantages:
o Encourage customers to buy more.
o High sales volume and market share.
o High sales volume, lowering costs.
o Increase in stock turnover.

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 - Disadvantages:
o High volumes not necessary means high profits
o Customers perceive as low quality
o Only suitable in market that price sensitive.
o Risk losing potential customers when increase their price.

3. Price skimming.
Set higher prices when introducing new products to the market.
Obtain short-run profits to recoup its high R&D costs.

Advantages
1. High price with high value or quality enhanced brand image.
2. Obtain initial high revenues recovering R&D costs.

Disadvantages
1. High prices discourage some customers to buy products.

4. Psychological pricing
Firms consider how pricing affects consumers’ perception or value of products.
Example: charge RM1.99 instead of RM 2.00

Advantages
1. Selling slightly lower price can obtain large revenues.
2. Looks at consumers’ perceptions.

Disadvantages
1. Inconvenient when some businesses require whole numbers. Example transport
business

5. The loss leader.

- Charging a low price for a product, usually below average cost to attract consumers to
buy other higher-priced products
- Larger supermarket set low price on certain products and then high prices on other
products to cover costs

Advantages:
1. Attract many customers and benefits from higher overall profits.
2. as promotional strategy to encourage customers to switch brand instead of competitors’
brand.

Disadvantages:
Competitors undercutting them by using unfair practices

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6. Price discrimination
Charging different prices to different groups of customers for the same product

Conditions:
1. Business has price-setting ability (firm can vary its price in market that is not very
competitive)
2. Have different price sensitivities (price change result in consumers buying patterns change)
3. Market separate to ensure product not easily traded (eg: ticket prices for children & adult
differ)

Advantage:
1. Time-based price discrimination benefits to consumers( off-peak cheaper) and producers
(peak hours expensive).

Disadvantage:
1. Business need to be certain about type of elasticity of their consumers demand.

7. Competitive pricing.
- Charging a price that is in line with or just below the competitors’ prices.
- Destroyer/predatory pricing = charging lower prices than competitors to driving them
out of the market.

Advantages:
1. Consumers benefits low prices
2. Dominant firms gain higher sales revenue as the result of high prices changed.

Disadvantages:
1. Predatory is form of anti-competitive behaviour because used to restrict competition.

3. Promotion.
Main aim: To obtain new customers or to retain existing ones.
-Concerned with communicating information about firm’s products to consumers
Promotional objectives:
1. Creating awareness or informing new and improved products.
2. Convincing.
3. Reminding the customers about existence of product.
4. Enhancing brand image.

Above-the-line promotion
A paid form of communication that uses independent mass media to promote firms’ products

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Advertising
Passing on information about a product to a particular target audience

1. Informative advertising.
- Provide information about a product’s features, prices, or other specifications.
- Able to increase consumers’ awareness and enable them to make rational decisions.
- Example government campaigns to discourage cigarette.
2. Persuasive advertising.
- Convincing customers to buy one firm’s product.
- Impulse buying = makes customers make unplanned purchases for a product.
- Example slimming product provides pictures before and after use.
3. Reassuring advertising.
- Remind customers they made right purchasing decision & they should continue
purchasing it.
- Focus on existing customer.

Below-the-line promotion
A form of communication that gives a business direct control over its promotional activities
and not depend on use of independent media.
-Business direct control over its promotional activities.

1. Direct marketing (e.g. catalogues)

-Eliminates use of intermediaries and save money
-However customers can regard the information as junk.

2. Personal selling
-Personal contact, face to face or by telephone.
-Commonly use in selling expensive products.
-However, expensive when need to pay commission to sales representative.

3. Public relations
-Publicity or sponsorship, press conference.
-Invite media and provide information about a social responsibility project to be launched.

4. Sales promotions
- Money-off coupons:
-discount provided to customers when a product is purchased such as in newspapers,
leaflets, or magazines.
- Point-of-sale displays:
- used for attractive arrangement or display of products at the location where the
business sells the items.
- Main objective: To draw attention of consumers and encouraging impulse buying.
- Free offers or free gifts:
- free samples through food taste sessions outside supermarkets.
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- Competitions:
- enter a draw where they stand a chance to win a prize.
- BOGOF (buy one get one free):
- attract new customers or assist in eliminating excess stock.
- Often in maturity or saturation stages

Purpose on promotional strategies:

Attention, Interest, Desire, Action (AIDA)

Promotional mix

Consideration:
1. Cost: Does the marketing budget support the use of particular promotional methods?
2. Legal framework: Has law been taken in account?
3. Target market: specific segment of the market.
4. Stage in product life cycle: which promotional methods most appropriate.
5. Type of product: nature of the product.

Impact of new technology on promotional strategies

1. Social media
Any medium where content is shared or where individuals chat

2. Social networks
Place where social interaction such as sharing, discovering, or advertising.

3. Social networking service

Platform to build social networks or social relations among who are share interests, activities,
backgrounds and etc.

4. Social media marketing

Social media marketing is the use of technology to build relationship, drive repeat business
and attract new customers by individuals sharing with other individual.

5. Viral marketing
A form of peer-to-peer communication where individuals are encouraged to pass on
promotional messages within the social networks.
Main objective: To increase brand awareness through replicating a viral-like process.
Key goal: To create infectious, viral messages that appeal to their target market with high
social networking potential.

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The benefits of new technology on promotional strategies
1. Wide reach: able reach out more customers.
2. Engagement.
3. Market information: provide useful & measurable data on trends.
4. Cost savings: less expensive.
5. Brand recognition: repeat sharing and spreading the information increase brand
awareness.
6. Speed: reach wide audience in short space of time.

Limitations
1. Accessibility problems: not all regions have internet and computers.
2. Distraction: pop-ups advertising make customers annoyed.
3. Larkers: Individual who just sits tight and absorbs information, not active promote.

GUERRILLA MARKETING
A low – cost unconventional marketing strategy that has an innovative and significant
promotional effect

Traditional Marketing Guerrilla Marketing

Primary investment is money
Forms a model for big business
Success is measured by sales
What can I take from
customers?
Mass Media
Primary investments are time,
effort, and creativity
Focuses on small businesses
Success is measured by profits
What can I give to the customer?
Various marketing weapons

Types of non – traditional

Advertising works
marketing succeed
How many profit? How many relationships ?

Principles of guerrilla marketing (APENS)

 Activity – firms need to have awareness of the available opportunities

 Presence – firms should look for ways to make their business known to the market
(e.g. email, radio, graffiti etc.)
 Energy – Every contact, every day is an opportunity to market their company (360-
degrees marketing)
 Networks – be on the lookout for new contacts and focus on building relationships
 Smart ensure that they don’t offend customers

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Methods used in guerrilla marketing

 Peer – marketing
 Product give – away including free demonstrations and consultations
 SMS Texting and video messaging
 Roach baiting and buzz marketing; actors act as normal customers
 Intrigue
 Live Commercials
 Bill Stickers

The Benefits of Guerrilla marketing

 Low – cost
 Flexibility, Accessibility, Simplicity
 Identified target market
 Communication tool
 Interaction opportunity

The Negative effects of Guerrilla marketing

 Denting the brand image; if directed to wrong group of people, it will seriously hurt
the brand image
 High negative attitudes; main goal is to evoke a range of negative emotions. Overuse
of fear – related marketing may lead to high negative attitude towards the brand and
the whole society
 Negative impact on social life
 Ethical Issues

4. Place.
-Concerned with how the product is distributed to make it available to consumers.
-The distribution system includes getting the right product to the right place at the right time.

Reasons:
1. Refers not only locations of the business but also location of the customers
2. Enables businesses to come up with the best ways to distribute their products efficiently.
3. Helps businesses to store and market their products and enhance their brand image by
using intermediaries.
4. Internet allows wide range of customers.

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Types of distribution channel
1. Zero intermediary channel
-Sold directly from the producer to the customer.
-Examples: Agricultural products and airline ticket bookings,
e-commerce

2. One intermediary channel

-Use one intermediary such as retailer or agent.
-Examples: expensive products such as furniture, Nakumatt supermarket chains.

3. Two intermediary channel

-Two intermediaries usually wholesalers and retailers.
-Useful when selling goods over long geographical distances.

Dist. Advantages Disadvantages

Channel

-Low cost -Promotion done by

Zero
Intermediary

-Fast producer which

-Ideal for perishable could be
products expensive(incurs all
-Producer is the key storage & delivering
decision-maker. costs) and time-
consuming
-Promotion done by -Retailer’s profit
One
Intermediary

retailers. mark-up (expensive)

-Cost holding stock -Reduces producer’s
incurred by retailers. responsibility for
-Convenient place to promoting products.
sell the products to
the customers.

-Reduce cost to the -Two profit mark-up

Two
intermediary

producers when (more expensive)

wholesaler incurs -Reduces producer’s
storage costs. responsibility for
-Wholesaler breaks promoting products.
the bulk for the
retailer.
-Appropriate for
selling over long
distances.

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 5. People
- Human capital in terms of skills, attitudes, and abilities necessary in the production of goods
or the provision of services.
-Crucial aspect to select, recruits, hires, and retains the best people because involved in
decision-making on regular basis.
-”Got the right people, on the bus and the wrong people off the bus”.
-Business should ensure their staffs have the right attitude, skills and appearance at all times.
-In restaurant, waiters need to dress appropriately and smile.
-People have important role to play in service delivery and maintaining good customer
relationships.
-People form a transactional link between the organization and its customers.
-customer relationship management (CRM) ensures that staff are trained to deliver good
customer service.
-However, culture is the limitation.
-Culture my dominate others in the organization and may have differing beliefs and opinions.
-Motivated workforce need to strengthening the employee-customer relationships to increase
the productivity of workers and gain more profit.
-Marketers need to learn and understand the cultural dimensions of the customers to satisfy
the customers’ needs fully.

6. Processes
-The procedures and policies pertaining to how an organization’s product is provided and
delivered
-keywords “how easy it is to do business and how products is delivered to the customers”
-Business need to deliver fast and efficient.
-They need to define clearly the shape their processes will take so that all stakeholders are
fully aware of what to do.
-Including for identifying customers requirement, handling customers’ complaints and
handling orders. (Process identifiying customers needs and wants).

Ways to improve processes:

1. Any measure taken to speed up the delivery of products to customers.
2. Provide easy and varied payment methods such as internet, paying cash or paying on
credit.
3. Provision of after-sales services.
4. Informing customers how long their products or services will take to be prepared.

However, may be time-consuming, complex, expensive, and lack of experience to ensure

right process.

7. Physical evidence.

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-The tangible or visible touch points those are observable to customers in a business.
-Facilities, infrastructure, and service delivery.
- An important differentiator in service marketing.
-Consumers can try, touch, or smell the product before purchasing.
- However, difficult for consumers to evaluate the service being offered regarding quality and
value for money.
- Difficult to position new products with a service element because intangible nature.
-Business need to ensure that the testimonials customers pass on to others about their product
are good.

4.7 INTERNATIONAL MARKETING

o International marketing – marketing of goods and services across national boundaries:
products from one country marketed to another country

Methods of entry into international marketing

o Internet
a) new set up company taking advantage of the low cost involved in marketing
their products abroad
b) existing company using the internet as an additional channel to enhance
current marketing methods
c) trading over internet – e-commerce
o Exporting
a) can be done by both directly and indirectly
b) direct exporting – country commits to market its products abroad on its own
behalf; the business has control over its products and operations abroad
c) indirect exporting – hiring an export intermediary or agent in the home
country to market the domestic firm’s product abroad (e.g piggybacking)
o Direct investment
a) Aka foreign direct investment – business set up production plants abroad
business will gain access to the local market
b) making products easily available to customers, becomes well versed in local
market knowledge & is able to adapt its products accordingly to suit
consumer needs & wants

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o Joint venture
a) Business arrangement (2 or more parties agree to invest in a particular
business project)
b) These parties – share resources, responsible for the cost, profits & loss
c) Participants have their independent business interests separate from the
newly formed joint venture
o International franchising
a) Franchisor grants the franchisee permission to use its brand, trademark,
concepts & expertise in exchange for a franchise fee and a percentage of the
sales revenue as royalty

Opportunities of entry into international markets

o Larger market
a) Provides a greater reach for the products increase customer base
b) Enables business to gain higher sales & profitability
c) An effective extension strategy when a product is in the saturation stage in
the home country but enters new market
o Diversification
a) An opportunity for businesses to spread their risks by investing in another
country
b) Reduces dependence on gaining sales revenue from just the home market in
case of key risks – economic downturn
o Enhanced brand image
a) Greater brand prestige that can drive brand loyalty
o Gaining economies of scale
a) By selling more products abroad reduce average COP more competitive
b) Take advantage by increasing its profit mark-up and gain higher profits
o Forming new business relationship
a) Make new contacts with various stakeholders provide opportunities for
increased efficiency & profitability for home businesses

Threats posed by entry into international markets

o Economic challenges
a) Inequitable distribution of income in many countries
b) Developing countries – very low income per capita/ purchasing power
lack the income to buy the products marketed
c) Fluctuating exchange rate & differing interests rates also pose planning
problems
o Political challenges
a) Unstable political regimes
b) Easy tendency or government to change regulations
c) Increased threats of global terrorism and civil unrest
o Legal challenges

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 a) Different laws
b) International marketers must also adhere to the various consumer protection
laws and intellectual property rights exist in other countries
o Social challenges
a) Differences in the demographic/population structures
b) The composition of the population in a country in terms of gender /number of
immigrants
o Technological challenges
a) Some developing countries lack the access to internet
b) Limited infrastructure, poor communication system

The strategic and operational implications for international marketing

 Staff need to be clear of the mission, vision, values and objectives of the
organization keep them motivate and inspired
 Long term- conflict between stakeholders may arise (senior manager in foreign
subsidiary may consider increasing market share as strategic issue while manager
at home country headquarters may view it as operational issue)
 Success in global operations
 perceive the changes in the international environment
 develop strategies that will enable them to respond accordingly
 Doodle (2000)suggested 3 key aspects; have a clear international
competitive advantage, should incorporate an effective relationship
strategy achieved through strong customer relationship, a well-managed
organization should continuously emphasize a culture of learning

 Early identification of global changes together with thorough analysis of the

external environment – market research & STEEPLE analysis
 Sustainable competitive advantage
 Need to have management foresight and emphasize organizational learning
 Need to understand that international markets are dynamic and need constant
monitoring and evaluation
 If markets change marketing strategies and tactics should also change
 Innovation – how we market the products, using different approaches

The role of cultural differences in international marketing

 Businesses recognize the varying cultural differences globally in marketing their
products stand better chance of gaining a competitive advantage
 Language – some words when translated gave a different meaning, confusing and
even offensive
 Different roles of men and women – women usually used to advertise summer
wear by wearing bikinis in Europe and the USA but in United Arab Emirates
women need to cover their body

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  Local tastes & preferences – McDonalds India cannot serve beef burger because
Hindu religion does not allow people to consume beef
 Ethics and culture – chewing gum is banned in Singapore (considered unethical)
however, may countries allowed it

The implications of globalization for international marketing

o Competition
 Globalization many foreign businesses getting access to domestic market,
therefore firms in local markets have to use aggressive marketing campaigns
to compete with the larger foreign multinationals
 Deregulation /liberalization of markets – increased global competition
o Changing consumer tastes and expectations
 Beliefs, values & ideas transferred from one country to another – changing
the business operation
 Customers expecting to see their cultural dish available in many countries
 Traditional food in some countries are disappearing, being replaced by
westernized dishes
o Location decisions
 China and India – low cost labour
 Use the extra money to market their products and reach a wider customer
base
o Economies of scale
 Overseas expansion – able to spread their fixed costs over an increased output
lower average cost, gain profits
 Gained better negotiation power with suppliers in their countries of operation

4.8 E-COMMERCE
o Features of e-commerce
 Ubiquity – accessible at home, hotels and offices 24/7
 Customization – individuals can personalize their messages & decide how they will
be delivered to others
 Global reach – aka worldwide web, the internet traverses many national boundaries
 Integration – internet allows the combined use of audio, video & text messages to
deliver a marketing message
 Universal standards – one set of internet standards globally
 Interactive – 2 ways communications between business-customers
 Information richness – completed & detailed promotional messages (video,
internet, audio, text messages)

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o Effects of changing technology and e-commerce on the marketing mix
 Product : e-commerce provide wider customer base, stock wide range of
products to meet demand higher sales profitability
Allow product viewing & customization to suit specifications greater
customer satisfaction (products delivered according to individuals need)
 Price : easy price comparisons, get access to the most competitive global
prices leading to good savings
Increased use of direct selling approach (reduced distribution costs),
affordable products to customers
 Promotion : online advertising (pop-up advertisement, banners, viral
marketing) faster & more cost-effective
Provide multiple ways of promotion
 Place : reduced the need of intermediaries cost savings
Searching the products from various global locations
o Types of e-commerce
 Business-to-business (B2B) : a type o e-commerce where a business trades
with another business, producers transacting with wholesalers with retailers in
a chain of distribution, cater the needs of other business, volume of
transactions usually large
 Business-to-consumer (B2C) : e-commerce carried out from a business to a
particular end user (customers/consumers)more visible to the public, wide
range of final users
 Consumer-to-consumer (C2C) : e-commerce that allows for transactions from
one customer to another, provide opportunities to interact & exchange with
one another

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 ADVANTAGES DISADVANTAGES
FIRMS  Wide target  High set-up cost
 Cost-effective  Increase spam &
method unethical marketing
 Reduce cost opportunities
 May not be suitable
for some business
(motorcycle)
 Concerns of the
customers on the
internet security
 Threats; online
fraud
 Vulnerable to
competitors
CONSUMERS  Convenient  Pop-up & spam
 Increased choice advertisements
 Good services  Connectivity of the
increase their internet
satisfaction  Too much
information in
search engine

147
 UNIT 5:
OPERATIONS
MANAGEMENT

148
5.1 THE ROLE OF OPERATIONS MANAGEMENT

Operations management

Refers to the activities of producing the right goods and services in the right quantities at the
right quality level, all in a cost effective and timely manner

Factors of
Production Output
Production

-people
(value added)
Goods & services
-money

-material/
machine
Operations can be seen in all 4 sectors

Primary sector

-mining

-harvesting

Quaternary Secondary
sector sector
OPERATIONS
-business -industrial
consultation manufacturing

Tertiary sector

-open heart
surgery

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Operations and other business functions
Operations are closely linked to the other functions

OPERATIONS HUMAN RESOURCE

D h “wh ” q n Operations are done by people
h g nz n’ bj directly or indirectly

E.g. Manufacture cars or cutting E.g directly cutting hair or

hair indirectly controlling a machine

FINANCE MARKETING

Operations need funding Operations produce goods and

services that needs to be
Finance needs to be carefully marketed, promoted and sold to
budgeted and monitored the right customers at the right
E.g pay salary and fix machines price at the right time

Relationship between operations and other departments and provide valuable

recommendation

The operation manager has experienced

economies and diseconomies of scale

They can help identify some strength and

weaknesses of the organization

E.g machinery obsolescence or costs of

maintainance for the future

The operations manager can also The operations manager may

advise on which product extension know which production costs
strategies may be easily could be cut to save money for
implemented future use

The operations manager can suggest which

forms of financial rewards to be given may be
suitable or not

HR manager might not appreciate some of

these as some do not follow the theory of
business exactly

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 Operations and the production of goods and services

Goods High physical High service content Services

content but with but with some
some services physical products

Mobile phone, Cosmetic surgery Airline travel Music concert

smartphone

Consumer gets the Consumer gets the Customers travel Assuming that
product but there “new” nose, breasts from A to B they consumers don’t buy
may also be after- or wrinkle-free face may have a meal the T-shirts or the CD
sales service (for but there is and watch a film, all or even the sponsor’s
example in case of extensive treatment part of the soft drink, they only
malfunction or when before and after the experience that the pay for the pleasure of
updates are needed) operation airline offers the music

Operations management and sustainability

In general, operations management is about planning, organizing and controlling the different
elements and stages of the production process, from choosing the most appropriate raw
materials and equipment, to ensuring that the finished product is of the standard required.

The input-output methods reminds us of the responsibilities of an operations manager.

If the finished product is not of their usual standards (for example, if the product is defective),
the operations manager will have to identify which stage in which the error occurred.

The operations manager also have to take several other factors into account:

1. Economic factors
2. Social factors
3. Ecological factors

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Economic factors refer to the fact that the budget must be respected:

 Wastage must be kept to a minimum and whenever possible, further savings should be
made, for example, through greater efficiency.
 The aims is to use the available resources and raw materials to their best advantage-
ultimately ensuring profitability over the long term
 This is known as economic sustainability

Social factors refer to the fact that more organizations are becoming aware of their
responsibility towards their workers(internal stakeholders) and towards local
communities(external stakeholders)

 They seek to ensure that their employees are fairly treated, that their working conditions
are excepted and that the quality of life for local people is not negatively affected by the
decisions taken by the organization.
 For example, the expansion or relocation of a company)
 This is known as social sustainability

Ecological factors refer to the fact that more and more managers understand the negative
impact that their organization may have on the natural environment especially different forms
of pollution such as

 Air pollution (from carbon monoxide and CFCs)

 Water pollution (industrial waste near factories, mills, and mines)
 Noise pollution (industrial noise that may affect workers themselves)
 This is known as ecological sustainability

Economics sustainability, social sustainability and ecological sustainability are called “the
three pillars of sustainable development”
This combination is called the “triple bottom line”

Ecological Social
sustainability
sustainability

Economic
sustainability

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This “triple bottom line” stresses the fact that business decisions should not only consider
financial aspects (i.e breaking even and making money for shareholders) but the well-being
of local communities and the natural environment. However, the “triple bottom line” remains
an ideal rather than a reality, as economic aspects largely drive most commercial
organization.

5.2 PRODUCTION METHODS

The main methods of productions

Type Definition Example

Job (customized) Production of a special “one-off” Custom-made cars with individual

production product made to a specific order
(for one individual customer)
accessories.
A personalized wedding cake
following the bride and groom’s
own design, favourite colours and
required size

Batch production Production of a group of identical
products (the word “batch” refers
to the fact that the items in each
group go together from one stage
of production to the next)
Car models with differing features
for each model.
A series of cookies in different
flavours: chocolate chip, peanut
and coconut

Mass production Production of a high volume of Cars that are made to a standard
identical, standardized products. design

Flow production, process Identical, undifferentiated cookies

production and line production are produced for a mass market
alternative terms that stress one
particular aspect of the mass-
production process.

Cellular production Cellular manufacturing (also called Producing washing machines

“cell production”) is a form of
mass production in which the flow
is broken up by teams of workers
who are responsible for certain
parts of line.
where each component is produced
separately and later combined to
produce a finished product

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Job Production

 Production method normally associated with the highest end of the market, where the
emphasis is on quality and originality, and the producer can charge premium prices
 Production is market-oriented
 The client decides precisely what the product should be
 Also known as customized production (made for a specific customer)
 Requires clear objectives and careful planning, leads to longer development phase of
product life cycle
 Client may require - and expect - greater consultation during the process and after the
product has been created

Advantages Disadvantages

The mark-up is likely to be high This production method can be expensive,

requiring skilled workers and non-standardized
materials

Clients get exactly what they wanted It is likely to be time-consuming, as there is

much more consultation with the client than
when using other production methods

This production method is likely to motivate There is a possibility that the products might fail
skilled workers working on individual projects because of the lack of knowledge of the client.
This may reflect badly on the company

It can be flexible production method This method may be very labour intensive and
reliant on skilled workers

Batch production

 Associated with the middle of the market, where the emphasis is on quality and
affordability
 Products are still market-oriented
 Customers are offered customized products but using a range of standardized)
 The components for the product needs to be interchangeable

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Advantages Disadvantages

May achieve economies of scale on its budget May lose production time as machines are
by bulk-buying recaliberated and/or retooled (“down time”)

More choices for customers - more market Businesses may need to hold large stocks (in
share case of unexpected orders)

May be useful for trialling products - The sizes of batches are dependent on the
especially through smaller quantities capacity of machinery (or labour) allocated to
them
May help deal with unexpected orders

Mass production

 All about quantity

 Production of a high volume of standardized products
 Usually by a continuous flow of raw materials along an assembly line
 Labour is usually unskilled; main role is for quality control or robotic function
 Machines operate the production process as they produce many in one go
 The production must rely on large, reliable orders for the final product
 Large “sunk cost” in setting up this method and this investment must be recouped by
selling a high volume of the standardized products
 The production is sold at low end of the market in large quantities
 The term “flow production” stresses the fact that the business uses a continuous flow of
material along an assembly line (common image of a Taylorist factory with long
conveyor belts routing the product through the different stages of production without any
pause)
 The term “line production” and “process production” stresses the idea of a line (where
the end product is gradually created, step by step) and of a process (i.e. A progression
through different stages in a particular order)

Advantages Disadvantages

Once set up, the system needs little Set-up costs will be high
maintenance

The business can cater for large orders, thereby Breakdown costs are costly, as the whole
achieving considerable economies of scale assembly line may have to stop

Labour costs may be low as the jobs required The business is very dependent on a steady
are relatively unskilled and with fully demand from a large segment of the market
automated process they are even replaceable

The business ca respond to an increase in The system is inflexible: if there is a sudden

orders very quickly, as the process has already change in demand, the business will be holding

155
been set up large stocks of unwanted products

The production process can be demotivating for

workers doing robotic activities

Comparison of the main production methods

Job production Batch production Mass production

Set-up time Long (new-set up for Set-up time can be very long set-up time to
every new job) reasonably fast synchronize the whole
process

Cost per unit High Medium Low

Capital Flexible as it depends A mixture of machine, but Involve large numbers of

(machinery) on specific use based on general-based general-purpose machines
machines designed for a specific
function

Labour Highly skilled Workers are semi-skilled and Workers are unskilled
workers- may be craft need to be flexible and need minimum
workers training

Production Likely to be long Once set up, production can Production is swift
time be swift

Stock Low quantities of raw High quantities of raw High quantities of raw
materials and finished materials are needed (buffer material and finished
stock but a high stocks) stock and a low amount
amount of work in of work in progress
Medium amount of work in
progress
progress and finished stock

Cellular manufacturing

 Also known “cell production”

 A form mass production in which the flow is broken up by teams of workers who are
responsible for certain parts of the line
 This is a more recent attempt to improve mass-production techniques by allowing teams
of workers to operate as self-contained units (called “cells” or “pods”) with more
autonomy and responsibility, in order to motivate them more

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Changing production method

 It is difficult and costly for a business to change their production method

 They may need to retool the machines, redeploy human resources and refinance new
system
 A business may decide to re-engineer itself where the company completely reworks
itself, not only by changing the production process but also the entire organization of the
business

Changing production method would have implications for all the business functions

Human Resource (HR)

 Some workers may be redeployed, retrained, or even let go, so human resource would
need careful management
 Refining roles and responsibilities of workers and middle managers would require
careful planning

Marketing

 Production runs can reflect the orientation of a business as well as the choice of product
available to the consumer, so the image or perception of the business may be altered
 Distribution channels may be altered, which may lead to differing response times
 Changes in costs of production could be passed on to the consumer through the changes
in price (which are likely to mean an increase, at least in a short term, to pay for the
transition costs)

Finance

 Changes in production method will have an impact on stock control which affect costs
 Changes could take time and may interrupt current production, causing delays in the
working capital cycle
 Any change will need financing, whether it is short term or for significant developments
that may require major long term funding

What is the most appropriate method of production for a given situation?

The most appropriate method will vary from business to business - there is no one correct
method

157
Factors affecting the method of production

 The target market - the business may be producing high volumes of a low-cost product
for a very large market with little disposable income
 The state of existing technology - this can limit how flexible production can be
 The availability of resources - fixed capital, working capital and human capital
 Government regulations - a business may have to meet certain targets for recycling and
waste emissions

 Once a business has a particular production method in place it is not easy to change
because of the opportunity cost involved
 However it may be possible and suitable to combine different methods, integrating the
advantages of each different model and making the business more productively efficient
 For example, a Thai restaurant might have a continuous supply of a staple food such as
green curry, but would produce batches of a less popular dish, such as Tom Yam soup
and would even be able to make a special order on demand
 Likewise, Apple might mass-produce its most famous iPhones and iPads, but could also
have have limited editions of luxury gold-plated models
 This way, the business can achieve economies of scale from the mass produced products,
while satisfying the need for changes in demand for more customized and higher-end
products
 There is no single recipe suggesting that a particular business should adopt a particular
production method: there are always advantages and disadvantages to be compared and
contrasted before a recommendation can be made

5.3 LEAN Production and QUALITY management

WHAT IS LEAN PRODUCTION?

- An approach to operation management that focuses on cutting all type of waste in

production process. (e.g waste of time)
- Originated from Japan (Toyota)
- This approach cuts all elements that don’t directly add value.
- Applied mostly in automobile industry

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 1. Identify TYPE OF WASTE.

TIME Time wasted due waiting for raw material.

TRANSPORTATION Movement of half constructed cars in factory do not add anything
to production process.
PRODUCTS Defects that needed to be repaired
SPACE Too much stock stored (overproduction)
INVENTORY Too much raw material being stored before used
ENERGY Under-utilization of machines
TALENTS Not using the optimal workers’ skill and knowledge

- Waste is defined broadly and not only substance or scrap. (Cut waste = Improve
efficiency)
- Physical Resources can be used efficiently (especially without space storage)
- Human Resource can be deployed more efficiently (reducing unproductive travel
time)
- Financial Resource can be used efficiently (less holding stock = less expenses)

METHODS OF LEAN PRODUCTION

There are several methods can be used if business choses to adopt LEAN PRODUCTION

1. Continuous improvement (kaizen)

2. Just-in-time
3. Kanban
4. andon

Continuous improvement (kaizen)

Kaizen originated from Japan meaning continuous improvement. Simplest form, involve of
suggestions boxes or competitions to find area to improve. In sophisticated level, may
involve:

1. Include all level of hierarchy. ( whole organization accept and adopt the change)
2. No blame should be attached if problem arise. ( to encourage employees give
suggestion)
3. Systemic thinking to think of the whole process and not some part of it.
4. Focus is on the process and not the end product.

The main difficulty is to maintain the momentum for a long period of time as it requires high
level of commitment and sense of loyalties from all employees.

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 JUST-IN-TIME

A business may hold stock for reasons. To respond to sudden change in demand (buffer
stock) or to take advantage of bulk buying but incur cost. Controlling stock level is very
important and this process is knows as STOCK CONTROL.

 JIC (Just In Case) : holding reserve of both raw material and final product in case of
sudden increase in demand.
 JIT (Just In Time) : avoiding stock by being able to get supplies when necessary.

JIT is a traditional method of stock control. But for lean production, JIT is preferable as it
do not deal with buffer stock and leads to less waste (space) and money in business can be
used for other purpose.

KANBAN

 From Toyota and supports JIT.

 Kanban card is a message, gives instruction on what to do next.
 Aimed to ensure a regular and steady flow without waste of time or resource.
 Not to control stock, but to facilitate lean production.
 Modern- computerized (innovated) to help production process.

ANDON
 Referred to signal (visual and electronic) that inform workers of a problem delay for
production.
 When problem happen, workers trigger the ANDON and repair team will come to sort
the problem.
 Problem can be resolved ASAP.
 Advantages of ANDON:-
o Workers of production chains are quickly notified.
o Supervisors need less time to monitor production
o Feedback for all team.
o Whole organization learn from its problem and mistakes (enables KAIZEN)
Traditionally, ANDON alerts were simple. Red means problem.

CRADLE-TO-CRADLE DESIGN AND MANUFACTURING

- Design and manufacturing based on sustainability development.
- Cradle to cradle = products after being used can be recycled all over again to create
same new product.
- C2C criteria:-
o Reutilization of material itself
o Amount of energy necessary for recycling process
o Amount of water needed in the recycling process
o CSR of the company.

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Quality control and Quality assurance.
o Features of quality control and quality assurance
What determines your choice to purchase a bicycle, skateboard, magazine, or even a
snack? Imagine if the appearance of a sandwich or the reputation of a company that
you bought your skateboard bearings from was sketchy? Would you go ahead, buy
and eat the sandwich or buy and use the skateboard regardless of the physical
appearance or reliability of the bearings? I would not either!

o Quality control is at the heart of an consumers willingness to purchase a product or

service. If a business has a good image and reputation for quality, the likelihood that
consumers will be loyal and repeat their purchases is very high. Take you favorite fast
food restaurant, if you have one. At some point you will expect the same level of
quality to be matched at every outlet. Businesses take the concept of quality control
and Total Quality Management very seriously. So will we!

o Methods of Managing Quality

o Quality circle
Businesses seeking to maintain and improve on the quality of their products
implement Quality circles as an approach to controlling and resolving
production related issues. The quality circle is comprised of a group of
workers who come together in teams and make decision on how to address the
issues and problems they have identified. Management if supportive of the
Quality circle will not only motivate the staff involved but also reap the
benefits of the model. Quality control can be costly however the benefits far
outweigh the costs.

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 o Benchmarking
Who is the best player on your sports team? Who is the fastest runner? Which student
in you class is the best performer? If you aspire to match the level of any one of those
we have mentioned, then they have become your benchmark.

Businesses also have the same strategy. By determining what the industry standard is, who
the industry leader is and using this information to target performance, business is able to
attract consumers who expect this as a minimum level of quality.
Benchmarking is part of the competitive nature of the market and is very specific.

1) The first stage is in determining what the business want to benchmark. This could be
within any function of the business, for exampling in Human Resources Management:
salaries, wages, benefits, or dress codes among others. In Operations and Management:
Quality, timeliness, equipment and inventory among others.

2) The second stage is determining who your benchmark should be and collecting as much
information that is available. By identifying the industry leaders this information becomes
easy for any business to access.

3) The third stage is to apply the information gathered and try to not only match the industry
leader but to in turn become the benchmark standard itself.
Total quality management (TQM)

Ultimately a business would seek a level of quality control that not only ensures consumer
satisfaction at all levels, but consumer loyalty and an image and reputation that independently
secures the business.

o Total Quality Management or TQM is a process that looks at quality management

from the pre-purchase stage to the post-purchase stage. The management of quality at
the pre-purchase stage involves image, reputation and the consumer’s perception of
the product prior to purchase. The brand name and reputation play a very important
role in TQM. The post-purchase stage of TQM is in the effort to determine if the
quality of the product will draw loyalty from the consumer and thereby generate
repeat consumption.

Every function of the business, all activities and all individuals are taken into account
when TQM is applied. TQM is a holistic approach and organizes on a business-wide
scale the efforts of all individuals, departments and activities to put in place and make
permanent a system in which the business continuously improves on the deliver of
high-quality products and services to consumers.
TQM is costumer focused from start to end with customer relations conducting post
sale surveys and service; employee involved through empowerment and process
centered.

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 o The impact of lean production and TQM on an organization
With competition in business being increasingly global, businesses that fail to
implement lean production and TQM policies are at a distinct disadvantage. The
competitive costs of not implementing these processes exceed those of
implementation. However, occupational injuries, job strain and stress, are increasingly
linked to lean production work pace and demand. In a well balanced business
environment the benefits of applying of lean and TQM policies are clear.

The importance of national and international quality standards

Quality standards in national and international settings serve to guide consumers and
producers alike. Organizations such the International Organization for Standardization,
the European Foundation for Quality Management, the Alliance for Performance
Excellence and the Canadian ; National Quality Institute all serve to ensure compliance with
set standards through certification that recognizes guidance in quality management.
Consumers can determine if business is in compliance and in turn businesses can market their
products and services as being in compliance.

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5.4 LOCATION
Location: Refers to geographical position of a business with several factor; nature of the
business, nature of the product and human resource (supply of workforce)
Relocation: occur when managers need to consider moving to another premise.
Location/relocation  crucial for a business success

Location decision  choosing new sites or relocation (important decision made by

management team.
Three key characteristics:

strategic in nature -
long term strategic
& have impact on
the whole business

highest management
difficult to reverse - levels and are not
costly delegated to
subordinates

Location
decision

Optimal location – a business location that gives the best combination of quantitative and
qualitative factors
 maximize the long-term profits
Compromise between conflicting benefits and drawbacks

Factors influencing location decisions.

Quantitative Factors – these are measurable in financial term and will have a direct impact on
either the costs of a site or the revenues from it and its profitability.

 Costs, government supports, law, taxes.

Qualitative Factors – non-measurable factors that may influence business decisions.

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 inertia: home
town
contacts
labour pool: family
quantity markets
quality

Infrastructur
e: transport
networks
Factors in type of land
services
utilities locating
business
Suppliers competition

Government: Costs: land

support laws labour
taxes tansport

Quantitative factor: Costs a key determining factor and depend on the type of business.

 Land – large business  need large area, increase

o Best office and retail sites may be so expensive.
 Labour – technical business  more expert worker. (skilled worker)
 Transport – producing in large quantities of a physical product, transport costs could
be crucial.
o Bulk increasing (buy product that is big), make sense to set up close to market.
o Bulk decreasing (buy in large quantities, make sense to set up close to source
of the raw materials

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 Problems Disadvantage to the business

•High break-even level of production

•Low profits - or even loses
High fixed
site costs •fixed costs will be high if operating at low-capacity utilisation

•Low contribution per unite produced or sold

High •Low profits - or even loses
varibles •High unite varible costs recude competitiveness
(FOP) costs

•Problems with recruiting suitable staff

Low •Staff turnover lokely to be a problem
unemploy •Pay levels may have to be raised to attract and retain staff
ment rate

•Average consumer disposible incomes may be low - leading to relatively low demand for
High income elastic products (YED)
unemploy
ment rate

•Raises transporta costs for both materials and finished products

Poor •Relatively inaccessible to customers
transportati •Difficult to operate a just-in-time (JIT) stock management system due to unreliable delivers
on

Competition

 Finding gap in the market – not far from direct competitors

 Cannibalistic marketing – set more than one branch in a location
o Each new branch eats up some of the profits of the existing outlets
o Until eventually there are so many outlets that there is no more possible extra
trade to be generated.

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Cannibalistic market

...until eventually although

The outer circle is a city. The
small circleis the first franchise
and its sphere of influence
(where its customer come
from)
the franchisor is doing OK -
the company is covering lots
So another outlet is opened of the market - the invidual
and as yet there is no problem
franchisee find themselves
- so another outlet is opened... losing custom

Type of land

 Different types of land will not only incur different costs, but will also vary in their
suitability for the business in question.
 Climate, weather, temperature. Eg: ski need snow and due to global warming might
need to consider other places

Markets

 Traditional distribution channel: confectionary shops & convenience stores have to be

convenient to customer (set up close/near to customer)
 Changes due to e-commerce, not only physical market  requires only an efficient
distribution system.
 Quantitative factor: reduce financial cost of location

Familiarity with the area

 Advantage: owners know some knowledge of the location and the local network
(supplier, customers)
 Disadvantage: restrict ability to expand, may let go other appropriate place.

Labour pool

 Demographic  quality of workers (qualification and skills)

 Unemployment rate on the area. ↑ unemployment may means business can hire at
lower salary.
 Social factor  increase in number of women in workplace.

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Infrastructure

 Infrastructure  existing transport networks for people and products, electronic

network (telephone, computers, Internet  benefits: minimize the expenses, more
efficient, cost effective)
 Eg: education, health care, housing, police.
 Good infrastructure  welfare and motivation for staff
 Consider carbon footprint  people are more environmentally aware  people
become more environmentally conscious.

Suppliers

 Availability of range of good, reliable local suppliers

 For JIT system of stock control is important  greater degree of coordination than
otherwise

Government

 Business support may be available; grants, subsidies, soft loans, tax rebates
 Law: labour laws health and safety regulations, to rules on advertising, restriction on
sales  impacts to business. Uncertainty of policies as it can change in time  risky
and costly
 Quantitative: Taxes: amount of money a business is liable to pay in tax  major
effect on where a business may wish to locate. How much profit can be retained after
corporate tax, local council tax, income tax, capital gain tax, etc to reinvested by the
firms.

National, regional or international

 Progress in communication led to changes in where businesses set up.

 Easier to communicate and transport large volumes of materials  business do not
only think first in terms of their own locality when locating or relocating.
 Regional differences which still ensure that domestic business can locate within a
certain area, but the distinction between local, domestic, regional and international is
changing.
 Increasing importance of regional trading blocs has had a major impact on location
decisions.

The impact of globalization on location

Affecting 4 areas

 Operations management
 Marketing
 Human Resource
 Finance

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 Pull factor
Improved communications
-easier to transport and
comunicate with suppliers and
customers
Dismantling of trade barriers
-WTO (reduce trade
barriers)Reduce costs such as
adminiistrative tax, tariff, quotas
--> easier access to other countries
without/less legal restrictions.
Deregulation of the world's
financial markets
-transfer of sums of money very
easy, has facilitated quicker start-
ups for many businesses
-Internet banking --> easier tracking
the company finance, digitization of
the world's financial markets -->
investors to cross borders.
-helps build up collaboration (joint
enture, strategic alliance)
Increasing size of multinational
companies
-the size, influence the world's
biggest company (conglomarate)
makes it easier for them to
persuade countries to allow them
to set up.
-enormous power and influence of
MNC can create momentum for
other businesses in the same field.
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Push factor
Reduce costs
-setting up production facilities
abroad, may be able to reduce
costs by moving closer to the raw
materials or using cheaper labour.
-may achieve production EOS
-take account of mor favourable
tax regimes, acieve financial EOS
Increase market share
-hope to tap a new market (market
development)
-risk: language barriers, different
cultural practices and etiquette,
historical tensions between
countries, local law and politics;
labour law, time differences and
challenges of working across
many time zones, trustworthy
partners.
-reward: extremely high,
especially if the business has first
mover advantages in a large
market
Use extension strategies
-extend the life cycle of the product
when product reached it's saturation
point
Use defensive strategies
-growth and expansion are key
drivers for business, and fear that
rivals might steal a lead can act
as a catalyst for locating
overseas.
Outsourcing and Offshoring
Outsourcing – practice of using another business to complete part of the work.

 Business focus on its core activity

 Business can outsource activities such as:
o Catering, transport, administrative duties and examination invigilation, staff
recruitment and training, excursions, visits, and expeditions, security, cleaning
and maintenance.
o Marketing – using an advertising agency
o Production – licensing a producer to make your product
o HR – employing an agency to “headhunt” potential staff
o Finance – hiring accountants to run an external audit
 Help business cut costs – achieve EOS due to specialization

Advantages Disadvantages
reduce costs by losing
employees and other business become more
assets dependent on supplier

Business focus on its less control of the final

core activities product

Quality of the core dilution of the brand

products/activities could be a problem
should improve - focus

delivery time can be

reduced

transfer of expertise

Offshoring – extension of outsourcing: in the case of offshoring a business outsources outside

the home country.

 Improved global communication  growth area in the modern business environment

 Advantages and disadvantages of outsourcing apply – but the international aspect
usually intensified them, in particular as follows:
o Cultural differences between companies (national and corporate culture)
o Communication could be difficult (different language and time zones)
o There may be issues of quality & ethics (sweetshops  diabetic)

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In housing and reshoring

 Reverse outsourcing – stop outsourcing & start performing peripheral activities

internally again
 Regain full controls @ reduce costs of taxes, labour and transportation.
 Taking back jobs lost to subcontracting overseas, in order to refocus on quality end
market

5.5 PRODUCTION PLANNING

The supply chain process – wide system of connected organizations, information, resources,
and operations that a business needs to produce goods and provide services to its customers.

Raw
materials Manufacturing Customer

Supplier Distribution Consumers

Operation

 Flow from raw materials to the finished product purchased by the end customer, via
the different stages of manufacturing
 Flow of information (orders) from consumer to supplier – orders with specification.

Supply chain has two dimensions:

1. Logistic – hardware of the supply chain

2. Information and communication – software of the supply chain

If the supplier of the supplier is not able to deliver its product, it may block the entire chain.
For example, when the raw materials which are produced by the primary manufacturer do not
supply to the secondary manufacturer, then the secondary manufacturer cannot manufactured
the secondary manufactured product and cannot distribute to customers and consumers as
there is no product made.

Just-in-time (JIT) and just-in-case (JIC)

JIC – traditional method of stock control which means holding reserve of both raw materials
and finished products in case of sudden increase in demand

JIT – modern method of stock control which means avoiding holding stock by being able to
get supplies only when necessary and to produce just when ordered.

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 JIT
Stock is only brought in from suppliers as
and when required Low level of stock (zero)
Beneficial for the working capital – use more
of its money for its day-to-day activities
Reduce costs (storage and wastage)
Reduces the chances of holding stock that
cannot be sold (obsolescent stock)
Reduce chances of damaged or ruined stock
Creates more space - alternative production
plans
Creates a closer relationship with suppliers
(they may need to run JIT too)
JIC
Stock is brought in and stored with a reserve
and kept back from daily use just in case of
need
Reduces pressure on the cash flow
Reduce costs (bulk buying)
Meet the sudden changes in demand
Provide spare parts too
All stock is ready to use – no waiting for
customers
Advantages that suppliers will not charge a
premium price

Stock control
Stock raises two issues in terms of cost:

1. The cost of not having stock when required – cost of lost orders and expensive
emergency deliveries
2. The cost of holding too much stock – especially the cost of storage and damage
o Cost of holding stock – if we do not have any stock, there is no cost, but then
the cost rises as we store, more and more units.
o Cost of stock out – if we have a small amount of stock, then the cost of having
a sudden surge in demand could be substantial, but this will go down as more
stock is ordered and bought in.
o Total cost – by combining the two sets of costs, we can see the minimum point
of the total cost. This is called the “economic order quantity” (EOQ); it is the
amount that should be ordered for a given time period. The EOQ is one of the
oldest calculations in the area of operation management and stock control.

7 Element of stock control:

 The initial order: the first amount of stock

 The usage pattern: how much stock is used over a given time period.
 The maximum stock level: the maximum amount of stock held at any one time
 The minimum stock level: the amount of stock that is kept back as a reserve (buffer
stock). The amount of stock should never go lower than this level  production of
finished goods is not possible.
 The reorder level: the level at which stock has to be reordered as a form of trigger or
signal.
 The reorder quantity: the amount of stock that is ordered

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  The lead time: the amount of time it takes between ordering new stock and receiving
it.

Based on the Stock control diagram, a firm will set its own minimum and maximum stock
level to adapt with changes of demand and the firm’s ability to keep stock respectively. A
manager will set a period of time when he wanted to reorder when the stock is at the reorder
level. The manager will estimate the time taken for the stock to come which is the lead time
which is he/she still wanted to have at least the minimum stock in between the time of
receiving the stock. However, this diagram does not show the changes in demand but the
pattern may be forecasted to take account of seasonal differences and occasional surges in
demand.

Optimal stock level

Optimal stock level – Factors that must be taken into account before calculate the optimal
level

the market

the human the final

resource product

Calculate
optimal level

the finance the stock

the
infrastruct
ure

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Market

 Whether the market is growing, the number of sales, there are competitors, the size of
market is shrinking.

Final product

 Nature of product, the price, type of product, dependency on supplier.

Stock

 Perishable? Expired date? The size of the stock? Storage space?

Infrastructure

 Reliable or need to stockpile? Weather or other factors influence the ability of the
suppliers?

Finance

 Have money at the right time? Possibilities for credit do the suppliers allow? Bulk
buying is going to save?

Human resource

 Implication for resourcing changes in stock holdings

Use EOQ and stock controls charts and diagrams  business get some ideas of the correct
amount of stock to order and when? However, it is difficult to judge precisely.
Capacity utilization rate

 Find out the efficiency of the facility used (maximum capacity)

 Impossible to achieve 100% capacity utilization

 Businesses that should aim for high capacity utilization will be ones where profit
margins are low, eg: fast-food outlet & budget airlines  cannot afford to lose any
opportunity to sell their product & need to market it accordingly.
 Five-star restaurants & business-class travel  no need and may not wish to aim for
high-volume sales

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Productivity rate

 Efficiency of production
 The productivity rate is the ratio of output to input in production; added value of the
business

 Productive rate ↓( input too high/output too low)  strategy could enable the factory
to cut down on waste and to increase efficiency
 Productivity rate ↑ - good but investigate how the factory could be even more
productive using its resources.

Cost to buy (CTB) and cost to make (CTM)

 Discuss to outsource or not

 Determine whether the cost of buying the raw materials needed is cheaper of the cost
of make it by the firm themselves are cheaper. ( whether to outsource/offshoring or
in-housing/ reshoring.

Cost to buy


 P = price, Q = Quantity

Cost to make


 FC = fixed cost, VC= variable cost, Q=quantity

Evaluate CTB & CTM

 CTB < CTM, firm should outsource

 CTB>CTM, firm should in housing

Limitation

 Ignore other factors such as reliability of the supplier, legal issues, qualitative factors

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5.6 – RESEARCH AND DEVELOPMENT
Research and development is a form of innovation directly associated with the technical
development of existing products or process, or the creation of new ones.

Large businesses spend big amount of money on R&D, specializing in R&D with engineers
and researchers whose creativity is essential for the organization.
Importance of research and development

1. Help extend the product life cycle = developing new ways to use existing products or
by indicating new strategic directions for the company for example Apple , from PCs
to iPods, iPhones and iPad.

Effective R&D requires : good planning, teamwork, communication, and leadership.

Successful R&D can give ADVANTAGES

 Give the business a competitive advantage, can offer customer high quality products
and offers greater product value.
 Extend the life of an existing product, new improvements for the product.
 Open up new market, target for new market segments
 Enhance the prestige of the company – being a known innovator
 Motivate the workforce – designing new products, appearing at the cutting edge of
innovation
 Lead to improvements in quality
 Reduce costs, as products need to be manufactured at a lower average total cost
(ATC)
PROBLEMS of R&D

 Opportunity cost, as the money could be spent on other departments in the business
for other purposes.
 R&D may be in the wrong direction, as the new product didn’t suite the current
market.
 R&D is time consuming, as the R&D workforce is tied to a project for years, without
any return on investment (ROI) for the company during that time.
 R&D can be competitive, as most companies try to focus more on R&D to fulfil
customers’ preferences.
 R&D can be bureaucratic and non-productive – it involves many procedures and time-
consuming on just to innovate one product.
 There may be ethical issues involved, for example the genetically modified crops,
stem cell research or animal testing for cosmetics.

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 Marketing Aspects of R&D
-Quality can be improved through kaizen or total quality management approach.

- if business fail to innovate, they may lose market share to competitors who constantly
innovate or against new entrants.
- R&D allows business to find gaps in existing market, or open up new market.

- can develop goods and services that address customers’ unmet needs, through market
research.

- marketing department and the R&D department should work together to conduct market
research

- one of key functions of market research is identify customers’ unmet needs and their current
needs and wants.
PATENTS

- Set of exclusive rights granted by sovereign state to an inventor for a limited period of
time.
- This to protect their idea.
- Patent does not stop anyone producing similar products, but they must not be exactly
the same, they must have different features.
Copyright

- Similar to patent
- Originally applied to written material but has now been extended to cover other
artistic forms of media such as music, films etc.
Trademarks

- A final form of intellectual property rights.

- Split into two general forms, conventional and non-conventional
- Conventional = logos, slogans, designs and phrases.
- Non-conventional = colour, label, match and shape of the letters.
-
*All these 3 intellectual property rights helps businesses to:
1. have first mover advantage
2. increase profit margins
3. safeguard continuity of production
4. develop brand loyalty
5. have time to develop new products
6. financially benefit from its creativity, innovation and R&D.

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Types of innovations (4 Ps of innovation) :
Product Innovation
Innovation that happened on the product.
New products are created, or improvements
to existing products.
Eg : Producing flat-screen tv or new models
of smartphones.
Refers to “what” process.
Positioning innovation
Perception of the product itself
Positioning means “relationship to
competitors”
Focus more on the environment and
competitive context.
Eg : Lucozade, used to be medicinal drink,
but later reposition and rebrand as an energy
sports drink.
Forms of creativity
Adaptive
Forms of creativity that transfers and
applies existing forms of thinking &
problems solving to new scenarios @
different situation
178
Process Innovation
Innovation on the way the product is made
Some parts of the manufacturing or service
delivery are improved.
Eg : Just-in-time system.
Refers to “how” the process takes place.
Paradigm innovation
The impact that the new product have on the
whole industry
Focus more on the impacts, short-term and
long-term, on the new product or services.
Eg : in 1990s, no-frills airlines and budget
air travel created a massive change to
established airlines. They spawned a whole
set of new business opportunities by buying
property in other countries.
Innovative
Forms of creativity that generates new
forms of thinking, addressing problems
from an unusual perspectives.
Factors affecting R&D

Organizational structure Bureaucratic, the innovation is limited. If

democratic, it fosters risk taking & view
creative input.
Technology It plays a leading role in the development of
ideas.
The level of competition More competition, will cause business to
create the competitive advantage.
Finance In many firms, this may be limited &
restrict the number of new innovation that
can be made.
HR Related field of available workers to
innovate, will have an impact on their
ability to innovate.
Ethical concerns Testing new cosmetic production on
animals @ animal testing. Business is
focused on CSR, then R&D spending on
benefits of the society.

5.7 CRISIS MANAGEMENT AND CONTINGENCY PLANNING

CRISIS MANAGEMENT

 The steps taken by an organization to limit the damage from a crisis by handling,
retaining and solving it.
 Crisis may be triggered by :
1. Human activity for example financial crisis
2. Industrial accidents such as nuclear tragedy in Bhopal and Chernobyl
3. Natural disasters such as tsunami and earthquake.
 Crisis not just happened on a global scale, but can also happened in a local/internal
scale.
 Four related factors affect crisis management : -
Transparency : stakeholders want to be kept informed of what is happening, about the
real issues, real problems. The business must be honest and open about the crisis
happened. Being honest to the stakeholders is also considered as part of the corporate
social responsibility (CSR)

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Communication : senior managers need to communicate in an objective way, despite
being bias in delivering the information. The person in charge to communicate must be
well-prepared and have good communication skills.

Speed : the time taken needed to respond to the people regarding the crisis, must be
faster. The manager need to act promptly in both actions (in the factory or field) and in
their communications (such as through press conference or media release). This can be a
challenge as a rushed decision made may not be the best one.

Control : managers need to take fast action regarding the crisis to prevent further
damage and keep the situation under control. This is about minimizing further impacts, be
it in environmental, social or economic.

CONTINGENCY PLANNING

 Immediate steps that need to be taken by an organisation in dealing with crisis or

emergency.
 It is about being prepared, a backup plan if the crisis happen for real.

Benefits
- Reassures staff and
customers that safety is
priority
- Minimizes the negative
impacts.
- Public relations response is
much more likely to be
speedy and will have a
better response with the
managers.
Limitations
- Costly and time consuming
(not for planning, but also to
train the staff)
- Constantly needs to be
updated.
- Staffs training needs to be
increased if labour turnover is
high.
- Avoiding is always better
than planning for the
disaster.

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 Edited & Published by:

Mohamad Aiman Hamzah Bin Mohamad NAsir

R14B