External Influences on Business Activity (PESTEL Analysis)

1.6.1 Political and Legal Factors

Government Control of Business Activity

 Controlling what to produce: Bans or restrictions on harmful goods (e.g.,

explosives, CFC aerosol cans).
 Protection of workers: Employment laws regulate dismissal, redundancy,
discrimination, health and safety, and wages.

Employment Laws

 Dismissal: Fair dismissal is allowed for poor performance, destruction of property,

or misconduct. Unfair dismissal includes discrimination, trade union membership,
or lack of warnings.
 Redundancy: Occurs when a job is no longer required; compensation is provided.
 Unfair discrimination: Laws prevent discrimination based on gender, race,
disability, and religion.
 Health & safety: Businesses must provide safety equipment, ventilation, lighting,
and hygienic conditions.
 Wage protection: Workers must be informed of wages, deductions, and
minimum wage policies.

Minimum Wage

 Advantages: Prevents worker exploitation, encourages training, improves living

standards.
 Disadvantages: Increases costs, may lead to job losses, and creates wage
inflation.

Consumer Protection Laws

 Weight & Measures Act: Ensures accurate product weight.

 Trade Description Act: Prohibits misleading advertisements.
 Consumer Credit Act: Requires transparency in loan agreements.
 Sale of Goods Act: Goods must match descriptions and be free of major defects.

Competition Laws

 Restrictive practices: Includes price fixing, predatory pricing, and forced

stocking of full product ranges.
 Government actions: Controls monopolies, encourages competition, regulates
imports, and protects intellectual property.
 Benefits of competition: Lower prices, better quality, and greater variety.

Environmental Laws & Social Audits

 Environmental protection: Laws control pollution, waste disposal, and resource

use.
 Social audit: Evaluates business impact on society, including environmental
performance, health & safety, and customer satisfaction.

1.6.2 Economic Factors

Key Economic Factors

 Economic growth: Increase in production of goods & services.

 Interest rates: Affect cost of borrowing and business expansion.
 Exchange rates: Impact import costs and export competitiveness.
 Inflation rate: Influences purchasing power and business costs.

Government Macroeconomic Objectives

 Economic growth
 Low and stable inflation
 Stable exchange rates
 Wealth distribution
 Low unemployment

Economic Growth & GDP

 Economic growth: Increase in goods & services per capita over time.
 Gross Domestic Product (GDP): Measures total value of production within an economy annually.
 GDP growth: Indicates economic expansion; falling GDP signals economic decline.

Business Cycle Stages

1. Recovery: GDP rises, unemployment falls, businesses regain profits.

2. Boom: Rapid economic growth, high spending, rising inflation, expensive production.
3. Recession: GDP declines for six months or more, demand falls, unemployment rises.
4. Slump: Severe economic decline, business closures, falling asset prices, high unemployment.

Economic Growth, Inflation, Unemployment & Exchange Rates

1. Benefits & Problems of High Economic Growth

Advantages:

 Higher tax revenue for public services.

 Increased employment opportunities.
 Higher sales and profits for businesses.
 Improved living standards (more goods & services).

Disadvantages:

 Depletion of natural resources.

 Resource shortages.
 Reduction in current consumption.

2. Policies to Promote Economic Growth

 Lower interest rates to encourage investment.

 Increase government spending to boost demand.
 Reduce taxation.
 Provide subsidies to firms.

3. Low and Stable Inflation

Definition: Persistent rise in prices or decline in money's purchasing power.

Effects of High Inflation:
  Erodes purchasing power.
 Lowers consumer demand.
 Reduces business competitiveness globally.

Measuring Inflation:

 Consumer Price Index (CPI) tracks monthly price changes.

 Uses a consumer basket of essential goods.
 Formula: Inflation rate = (CPI1 - CPI0) / CPI0 × 100

Causes of Inflation:

1.

Demand-Pull Inflation: Excessive demand vs. supply.

2.

o Causes: Overprinting of money, high government spending, supply shortages.

o Solutions: Cut government spending, raise taxes, increase interest rates.

3.

Cost-Push Inflation: Rising production costs.

4.

o Causes: Wage increases, high import costs, currency depreciation.

o Solutions: Currency revaluation, wage control, tax reduction, subsidies.

Business Strategies During Inflation:

 Reduce labor costs.

 Avoid excessive borrowing.
 Sell goods on cash basis.
 Shorten credit periods.

4. Deflation

 Definition: A fall in general price levels, increasing money’s purchasing power.

 Business Strategies:

o Sell on credit.
o Borrow more for expansion.
o Extend credit repayment periods.

5. Unemployment

 Definition: People willing and able to work cannot find jobs.

 Formula: Unemployment rate = (Unemployed / Labour Force) × 100
 Types:

1. Structural Unemployment: Due to industry decline & changing consumer preferences.

 Solutions: Skills training, government investment.

2. Cyclical Unemployment: Caused by low demand during economic downturns.

 Solutions: Increase government spending, lower taxes, boost exports.

 3. Frictional Unemployment: Temporary unemployment while switching jobs.

 Solutions: Improve job information flow, reduce unemployment benefits.

Effects of High Unemployment:

 Lower economic output.

 Increased crime & social issues.
 Higher government spending on benefits.
 Skills become outdated.

6. Exchange Rates & Balance of Payments (BOP)

 Exchange Rate: Value of a currency against another.

 Freely Floating Exchange Rate: Determined by market forces of demand & supply.

Factors Affecting Foreign Currency Supply & Demand:

 Supply Increases With: Foreign investments, tourism, export payments.

 Demand Increases With: Imports, foreign travel, overseas investments.

Exchange Rate Movements:

 Appreciation: Currency value increases.

o Effects: Cheaper imports, expensive exports, possible BOP surplus.

 Depreciation: Currency value decreases.

o Effects: Expensive imports, cheaper exports, rising external debt.

Impact of Interest Rates on Exchange Rate:

 High interest rates → Currency appreciates (attracts foreign investment).

 Low interest rates → Currency depreciates (reduces investment attractiveness).

7. Balance of Payments (BOP)

 BOP Deficit: Imports exceed exports.

 Effects of BOP Deficit:

o Currency depreciation.
o Loss of foreign reserves.
o Rising external debt.

Solutions for BOP Deficit:

 Tariffs: Tax on imports to reduce demand.

 Quotas: Limit on imported goods.
 Embargo: Ban on imports.
 Devaluation: Reduce domestic currency value.
 Subsidies: Support local firms to lower costs.

8. Macro-Economic Policies

 Fiscal Policy: Adjust government spending & taxation.

 Monetary Policy: Control money supply & interest rates.
 Exchange Rate Policy: Maintain currency stability.
 Trade Policy: Tariffs, quotas, and subsidies to regulate trade.
Fiscal Policy
 Government uses spending & taxation to influence the economy.
 Government Budget = Tax Revenue – Government Spending.
 Types of Fiscal Policy:
o Contractionary (Tight): Higher revenue than spending → reduces aggregate demand →
controls inflation.
o Expansionary (Loose): Higher spending than revenue → increases aggregate demand →
boosts growth.
 Impact on Businesses:

o Direct taxes affect disposable income & company profits.

o Indirect taxes influence product prices.
o Reduced government spending affects firms reliant on government contracts.

Monetary Policy
 Central bank controls interest rates & money supply to stabilize the economy.
 Types of Monetary Policy:

o Expansionary: Increased money supply & lower interest rates → promotes investment &
economic growth.
o Contractionary: Reduced money supply & higher interest rates → curbs inflation.

 Impact on Businesses:

o Affects borrowing costs & consumer spending.

o Influences exchange rates, affecting imports & exports.

Exchange Rate Policy

 Government can allow exchange rates to fluctuate or fix them.
 Types:

o Free Floating: Determined by market forces.

 Pros: Auto-corrects BOP, reduces speculation.

 Cons: Fluctuating import costs, uncertainty in trade.

o Fixed Exchange Rate: Set by the government.

 Pros: Stability aids business expansion & trade.

 Cons: Requires large foreign reserves, no auto-correction for BOP.

o Managed Float: Partly fixed, partly market-driven.

o Monetary Union (Common Currency): Countries share a currency.

 Pros: No currency conversion costs, easy price comparison.

 Cons: High conversion costs, loss of monetary control.

Impact on the Economic Environment

Positive Effects:

1. Job creation.
2. Infrastructure development.
3. Increased tax revenue.
4. Higher local income.
 5. Attraction of new businesses.
6. Social cohesion.

Negative Effects:

1. Unfair competition.
2. Resource pressure → rising costs.
3. Increased external costs (pollution, congestion).

Technological Environment
 Rapid tech advancements affect business operations & demand.
 Impacts:
o Changes in production processes & workforce requirements.
o Improved data access for better planning.
o Lower transportation costs → expanded markets.
o Continuous innovation is essential.
o Negative effects: Pollution, nuclear risks → need for regulation.

Social Environment
 Includes population trends, values, lifestyles, and affluence.
 Impacts on Business:
o Aging population affects workforce availability.
o Birth rates impact industries like healthcare & education.
o Consumer preferences shift due to health consciousness.
o Migration affects labor availability (brain drain).

Corporate Social Responsibility (CSR)

 Business commitment to ethical practices beyond legal requirements.
 CSR Activities:
o Fair wages, health & safety for employees.
o Environmentally friendly production.
o Community development.
o High-quality goods & services.
o Ethical business dealings.

Arguments for CSR:

1. Benefits both business & society.

2. Legal compliance.
3. Improves corporate image.
4. Uses business resources to address social issues.
5. Reduces negative publicity.
6. Encourages positive stakeholder relations.

Arguments against CSR:

1. Focus should be on profit maximization.

2. Increases costs → higher prices.
3. Directors should prioritize shareholders.
4. Businesses lack expertise in social issues.

Social Auditing

 Businesses formally review their societal impact.

 Covers environment, community, human rights, and stakeholders.
  Involves non-financial aspects of business operations.

Role of Pressure Groups

 Organizations influencing businesses/government policies.

 Examples: Friends of the Earth, Greenpeace, Fair-trade Foundation, Jubilee 2000.
 Methods: Media campaigns, demonstrations, boycotts, lobbying.

Business Constraints by Other Businesses

 Businesses rely on suppliers, lenders, and market conditions.

 Challenges: Supply limitations, financial constraints, pricing pressures.

External Influences from Demographic Changes

 Population changes affect business strategies.

 Young consumers: Electronics, fashion, entertainment.
 Older consumers: Travel, health products, investments.
 Workforce impact: Young workers are flexible but need training, older workers are experienced and
loyal.

Market Failure

 Inefficient allocation of resources.

 Causes: Monopoly power, lack of public goods, underproduction of merit goods, overproduction of
harmful goods, environmental damage, wealth inequality, lack of information.

Forms of Market Failure

 Negative Externalities (e.g., pollution, passive smoking).

 Positive Externalities (e.g., education, healthcare).
 Methods to Correct Market Failure:

o Taxation (reducing harmful goods).

o Subsidies (encouraging merit goods).
o Direct provision (government-provided public goods).
o Competition policies (preventing monopolies).
o Regulation (fines, pollution limits).
o Tradable permits (limiting emissions).

Business Objectives

 Measurable targets to achieve business aims.

 Importance: Guides decisions, measures performance, motivates employees, helps in conflict
resolution.

SMART Objectives

 Specific – Clear and precise (e.g., filling 60% of hotel beds).

 Measurable – Quantifiable (e.g., increase sales by 15%).
 Achievable – Realistic and within capability.
 Relevant – Aligns with company resources and goals.
 Time-Framed – Has deadlines for achievement.

Hierarchy of Objectives

1. Aims

 Broad statement of where a business wants to go in the future.

 General intentions rather than specific objectives.
2. Mission Statement

 Formal summary of a business’s aims, values, and purpose.

 Motivates employees and appeals to external stakeholders.
 Should mention industry, products/services, employees, culture, customers, and responsibilities.

Examples:

 Facebook: “To give people the power to share and make the world more open and connected.”
 Ford: “One team, one plan, one goal, one Ford.”

Purpose:

 Informs external groups of business vision.

 Guides employee behavior.
 Motivates employees.
 Establishes business identity.

3. Corporate Objectives

 Specific steps taken to achieve the business’s aims.

 More detailed than a mission statement.
 Rarely expressed in quantitative terms.

Common Corporate Objectives:

 Profit Maximisation: Achieve the highest possible profit.

 Profit Satisficing: Earn enough to satisfy owners but not maximise profits.
 Growth: Expand operations, employees, and market presence.
 Increasing Market Share: Gain a larger portion of total industry sales.
 Maximising Shareholder Value: Increase share prices and dividends.
 Corporate Social Responsibility (CSR): Commit to social, environmental, and ethical
responsibilities.

4. Challenges of Corporate Objectives

 Profit Maximisation: Attracts competitors, conflicts with managers’ sales objectives, other
stakeholders may have different priorities.
 Profit Satisficing: Limited growth potential, insufficient funds for CSR.
 Growth: Can lead to diseconomies of scale and lower short-term profits.
 Increasing Market Share: Requires strong marketing strategies and competition analysis.
 Maximising Shareholder Value: Can conflict with interests of other stakeholders.
 CSR: Can conflict with profit goals, requires financial and time investment.

5. Departmental Objectives

 Each department contributes to achieving corporate objectives.

 Example: Ford’s goal of becoming the largest car manufacturer.

o Product Design: Develop new models.

o Production: Increase efficiency and cut costs.
o Marketing: Boost sales by 15% annually.

6. Individual Objectives

 Personal targets for employees to contribute to departmental and corporate goals.

 Important for performance appraisal.

7. Relationship Between Mission, Objectives, Strategy & Tactics

 Mission & Objectives: Provide focus and direction.

  Strategy: Long-term plan to achieve objectives.
 Tactics: Short-term actions to implement strategy.

Example: Car manufacturer wants to produce 4 million cars by 2018.

 Strategy: Increase efficiency, build a new factory, design new models.

 Tactics: Reward high-performing teams for productivity improvements.

8. Business Decision-Making Process

1. Set Objectives: Define clear goals.

2. Identify & Analyse Problem: Understand the issue before making decisions.
3. Collect Information: Gather relevant data and potential solutions.
4. Evaluate Options: Assess pros and cons of each choice.
5. Make the Decision: Select the best solution.
6. Implement the Decision: Ensure it is carried out effectively.
7. Review & Evaluate: Measure success and make adjustments if needed.

9. Why Objectives Change Over Time

 Change in owners’ priorities.

 Market conditions (e.g., economic downturn).
 Business size and growth stage.
 New management with different strategies.
 Competitor behavior.
 Changes in legislation.

10. Translation of Objectives into Targets & Budgets

 Corporate objectives are broken into smaller targets and budgets.

 Key Performance Indicators (KPIs): Measurable targets to track progress.

Advantages of Targets:

 Motivates employees.
 Improves productivity.
 Encourages teamwork.
 Helps managers identify problem areas.

Disadvantages of Targets:

 Can be demotivating if unrealistic.

 May treat employees like machines.
 Can create a "blame culture."
 Expensive to monitor.

11. Importance of Budgets

 Helps review past activities.

 Controls current operations.
 Aids in planning for the future.

Communication of Objectives and Their Impact on Workforce

 Management by Objectives (MBO): Introduced by Peter Drucker (1945), aligning individual
objectives with business goals.

Ethics in Business Objectives and Activities

 Business Ethics: Moral guidelines governing decisions and behavior.
  Ethical Conduct: Employees must act morally; some ethical issues are covered by legislation.
 Code of Ethics: Should be established for all employees.

Business Ethics vs. Code of Conduct

Business Ethics:

 Ensuring fair business practices.

 No discrimination.
 Avoiding political affiliations.
 Fair treatment of all business stakeholders.
 Environmental protection.

Code of Conduct:

 Honesty and fairness.

 Protecting business reputation and assets.
 Conducting business in owners' best interests.
 Professional behavior at all times.

Unethical Business Activities

 Child labor, exploiting suppliers.
 Unfair lending practices.
 Selling harmful products.
 Tax evasion, pollution.
 Privacy invasion, misleading advertisements.
 Corporate espionage, bribery.
 Animal testing, price gouging.

Benefits of Ethical Business Practices

 Government contracts.
 Attracting skilled employees.
 Increased customer trust.
 Avoiding legal penalties.

Challenges of Ethical Practices

 Lower profits due to fair pricing.
 High wage costs reducing competitiveness.
 No bribes may mean fewer contracts.
 Expensive waste disposal.

Business Objectives

Private Sector:

 Profit maximization, shareholder wealth, meeting consumer needs.

Public Sector:

 Job creation, non-profit operation, providing essential services at affordable prices.

Non-Profit Organizations:

 Member services, employment, welfare, poverty elimination.

Conflicting Objectives
 1. Stakeholder conflicts: Owners seek cost minimization, employees seek higher wages.
2. Short vs. Long-Term Goals: Investments reduce short-term cash flow but benefit long-term.
3. Environment vs. Profit: Reducing pollution requires costly measures.

Stakeholders in Business

Internal Stakeholders:

 Owners, managers, employees—directly involved in decision-making.

External Stakeholders:

 Government, community, customers, competitors, lenders—not directly involved in decision-

making.

Stakeholders vs. Shareholders

 Shareholders: Own company shares.
 Stakeholders: Have an interest but don’t necessarily own shares.

Stakeholder Theory
 Businesses should consider all stakeholders, not just shareholders.

Impact of Business Activities on Stakeholders

Why Businesses Should Be Accountable to Stakeholders

 Builds customer loyalty.

 Positive word-of-mouth improves reputation.
 Enhances product/service quality through feedback.

Responsibility Towards Customers

Benefits to Business:

 Increased customer loyalty and good publicity.

 Better customer feedback for improvement.

Ways to Be Responsible:

 Offer quality, durable, and fairly priced products.

 Avoid exploiting vulnerable customers.

Responsibility Towards Suppliers

Benefits to Business:

 Supplier loyalty.
 Access to credit lines and timely supplies.

Ways to Be Responsible:

 Prompt payments.
 Clear guidance and long-term contracts.

Responsibility Towards Employees

Benefits to Business:

 Increased employee loyalty and motivation.

 Lower turnover and attraction of skilled workers.

Ways to Be Responsible:

 Provide training, fair wages, and fringe benefits.

 Involve employees in decision-making.

Responsibility Towards the Community

Benefits to Business:

 Local acceptance of business activities.

 Increased chances of securing local government contracts.

Ways to Be Responsible:

 Secure employment opportunities.

 Reduce pollution and employ local workers.

Responsibility Towards Government

Benefits to Business:

 Eligibility for government contracts and subsidies.

 Easier approval of new operations.

Ways to Be Responsible:

 Compliance with laws and timely tax payments.

 Full financial disclosure on exports.
Approaches to HRM

1.

Hard HRM

2.
1. Employees treated as resources like machinery.
2. Focus on cost-cutting (e.g., temporary/part-time contracts).
3. Training for business benefit, not employee.
4. Close employee monitoring.
3.

Soft HRM

4.

1. Employees valued as individuals.

2. Focus on personal development and well-being.
3. Training benefits both business and employees.
4. Encourages long-term retention.

HRM and Workforce Flexibility

 Businesses need a flexible workforce due to changing demand.
 Temporary/part-time workers are needed.

Types of Employment Contracts

1. Permanent Contract: No fixed end date.

2. Zero-Hours Contract: No guaranteed work hours, paid only when needed.
3. Part-Time Contract: Fewer hours than full-time employees.
4. Flexi-Time Contract: Work hours convenient for both employer and employee.

Benefits & Limitations of Part-Time Workers

Benefits:

 Lower overhead costs (no health insurance, PTO).

 Attract skilled workers (e.g., parents, retirees).
 Flexible workforce for varying demand.
 No redundancy pay.

Limitations:

 Lower productivity due to less experience.

 Less loyalty, higher turnover.
 More employees to manage.

Full-Time Employment Contracts

Advantages:

 Better training and commitment.

 Less supervision needed.
 More experienced, accurate work.

Disadvantages:

 No new outside ideas.

 Cannot work multiple jobs.
 Expensive during slow periods.

Measurement of Employee Performance

1. Staff Appraisal: Evaluates performance against targets.

o Methods: Interviews, observations, productivity rates.

Benefits of Appraisal:

 Identifies training needs.

 Generates new ideas.
 Adjusts pay levels.
 Determines eligibility for bonuses.

Causes of Poor Performance:

 Lack of motivation.
 Poor leadership.
 Lack of skills/experience.
 Absenteeism.

Labour Legislation
 Protects employees from exploitation.
 HR managers ensure compliance.

Key Areas Covered:

1. Working hours: Max 48 hrs/week (40 hrs for under-18s in the UK).
2. Minimum wage enforcement.
3. Prevention of discrimination.
4. Health & safety regulations.
5. Employment contract regulations.

Employment Contracts
 Definition: A written agreement outlining duties and responsibilities.

Key Contents:

1. Employer and employee details.

2. Working hours and remuneration.
 3. Job description.
4. Contract duration and termination.
5. Leave entitlements.

Importance:

1. Legal requirement (avoids fines).

2. Prevents misunderstandings.
3. Ensures clarity for both parties.

Employee Relations & Trade Unions

 Employees can join trade unions for better wages and conditions.
 Unions represent workers in disputes.
 Laws regulate union activities and the right to strike.

Co-operation Between Management and Workforce

 Involves worker and union leader suggestions for mutual benefit.
 Management recognizes employees' valuable contributions.
 Increased employee participation leads to more cooperation.

Benefits of Co-operation:

1. Less confrontation and fewer strikes.

2. Promotes teamwork and reduces the "them vs. us" mentality.
3. Develops mutual respect and exchange of ideas.
4. Managers and employees understand each other's perspectives.

Workforce Planning
 Analysis and forecasting of required workers and skills.
 Ensures the right number and skills of employees to meet business objectives.
 Involves workforce audit to assess skills and qualifications.

Factors Influencing Workforce Needs:

1. Forecast demand for products.

2. Staff productivity.
3. Business objectives.
4. Legal changes (e.g., working hours, minimum wage).
5. Labour turnover and absenteeism rates.

Trade Union
 An organization of workers aiming to improve pay and working conditions.
 Protects members’ rights and negotiates on their behalf.

Relationship Between Trade Union and HRM:

  Unions ensure employee rights are upheld during employment.
 Unions meet with management to discuss employee issues.

Reasons Workers Join Trade Unions

1. Strength in numbers for better representation.

2. To negotiate better pay, holidays, and work hours.
3. To push for healthier and safer working conditions.
4. Improved benefits for retrenched workers.
5. Access to advice, financial support, and welfare.
6. Closed shop policies.

Benefits of Trade Unions to Employers

1. Ensure employees follow employment laws.

2. Deal with union representatives instead of multiple employees.
3. Union explains to workers when actions are unlawful.
4. Unions encourage employees to further their education, boosting productivity.

Benefits to Employees:

1. Professional representation in negotiations.

2. Protection from illegal dismissal.
3. Updates on relevant employment legislation.
4. Improved wages and working conditions.
5. Financial support and favorable rates.
6. Protection from unfair discrimination.

Collective Bargaining
 Negotiation process between employer and trade union on employment terms.
 Represents group needs rather than individual demands.

Union Agreements

1. Closed Shop: All employees must join the same trade union.
2. Single Union Agreement: Management deals with only one union.
3. No-Strike Agreement: Unions agree to no strikes for greater involvement in decision-making.
4. Productivity Agreement: Management increases benefits in exchange for higher productivity.

Types of Industrial Actions

1. Strike: Employees refuse to work.

2. Picketing: Employees prevent firm operations (e.g., blocking trucks).
3. Work to Rule: Employees work strictly within contract terms.
4. Go Slow: Employees work at a slower pace.
 5. Non-Cooperation: Refusing to follow new rules/procedures.
6. Overtime Ban: Refusal to work extra hours.
7. Lock Out: Preventing non-striking workers from entering premises.
8. Sit-in/Sit-down Strike: Employees report for work but remain inactive.

Employer Methods to Influence Industrial Disputes

1. Threatening redundancies.
2. Changing employment contracts.
3. Closing the business.
4. Using public media for support.

Factors Determining Trade Union Strength

1. High membership.
2. Unified agreement on industrial action.
3. Significant cost to employer due to industrial action.
4. High inflation rate.
5. Low labour cost proportion in total costs.
6. Inelastic demand for products the workforce produces.
7. Increased productivity.

Factors Determining Employer Strength

1. High unemployment.
2. Low profits.
3. Relocation threats to low-cost countries.
4. Elastic demand for products.
5. Stable inflation rate.
6. Unchanged worker productivity.

Organisational Structure
 Organisational Chart: A diagram illustrating the formal framework, authority, and communication
lines within a business.

Importance of Organisational Structure

1. Defines the chain of command (who reports to whom).

2. Clarifies the span of control (number of subordinates reporting to a manager).
3. Shows communication channels.
4. Reveals company structure (e.g., by function, customer, product).
5. Specifies the work done in each job.
6. Identifies decision-making hierarchy.
7. Illustrates authority relationships (line authority, staff authority).

Types of Organisational Structures

1. Hierarchical Structure:

o Pyramid-like structure with many levels of management.

o Advantages: Clear roles, defined chain of command, specialization.
 o Disadvantages: Slow communication, lack of coordination, narrow vision.

2. Span of Control:

o Narrow Span (Tall Organisation): Fewer subordinates per manager, tighter control, slow
decision-making.
o Wide Span (Flat Organisation): More subordinates per manager, faster decision-making,
greater delegation.

Characteristics of Narrow Span (Tall Structure):

 Centralized authority, many authority levels, narrow span of control, long lines of communication.
 Advantages: Close supervision, tight control, faster vertical communication.
 Disadvantages: High staffing costs, slow decision-making, communication delays.

Characteristics of Wide Span (Flat Structure):

 Decentralized authority, fewer authority levels, wide span of control.
 Advantages: More trust, lower supervision costs, quicker communication.
 Disadvantages: Overburdened managers, delegation issues, communication challenges.

Functional Structure:
 Organised by departments (e.g., HR, Finance, Marketing).
 Advantages: Specialization, clear chain of command, simple control.
 Disadvantages: Coordination problems, slow response to change, competition for resources.

Matrix Structure:
 Combines functional managers with project managers for specific projects.
 Advantages: Efficient use of skilled employees, better cooperation, flexibility.
 Disadvantages: Power struggles, costly, control issues.

Organising by Product:
 Structure divides the business into sections based on product.
 Advantages: Specialization per product, clear cost/revenue allocation.
 Disadvantages: Duplication of effort (e.g., separate departments for marketing/finance for each
product).

Consequences of Poor Organisational Structure:

 Low morale, ineffective decision-making, poor communication, lack of coordination, and difficulty
responding to changes.

Causes of Changes in Organisational Structure:

 Changes in product demand, management style, market growth, and diversification.

Formal vs. Informal Organisational Structure:

 Formal Structure: Planned, shows authority, and communication flow (chain of command).
 Informal Structure: Unplanned, arises from personal relationships or cliques at work.

o Advantages: Lighter workload, improved communication, greater cooperation.

o Disadvantages: Resistance to change, interpersonal conflicts.

Chain of Command:
  Route for authority: Passes from top management to employees.

o Long chain of command: Found in tall structures, slows down communication.

o Short chain of command: Found in flat structures, faster communication.

This structure helps define the roles, relationships, and efficiency within an organisation,
with both formal and informal systems impacting communication and decision-making.

Authority
 Definition: Legitimate power to influence people or situations.

Types of Authority

1. Line Authority: Direct authority to give orders and make decisions. Managers have direct
authority over employees at the next level below.
2. Staff Authority: Advisory and supportive, without the right to command. For example, the legal
department offering advice without having authority over employees.
3. Functional Authority: Right to give orders in a department other than your own, like a finance
person overseeing a project.

Delegation
 Definition: Passing authority down the organizational hierarchy to assign duties to subordinates.
 Achieved by: Ensuring subordinates have sufficient skills, clear objectives, adequate authority,
and a clear procedure.
 Advantages:

o Frees up senior managers for important tasks.

o Builds trust and motivates employees.
o Develops and trains staff.
o Allows for promotion readiness.

 Disadvantages:

o Inexperienced employees may fail, damaging the manager’s reputation.

o Loss of control for managers.
o Possible insecurity if subordinates outperform the manager.
o Tension among employees if one oversees group tasks.

Delegation and Accountability

 Responsibility vs Authority: Authority can be passed down, but responsibility remains with the
manager for the task's success.

Conflicts Between Control and Trust in Delegation

 Delegation involves trust from managers and employees, with managers needing to balance
control and trust to ensure tasks are completed to the required standard.

Decentralisation
 Definition: Business delegates important decisions to lower levels.
 Advantages:

o Decisions are made by managers closer to the action.

o Employees feel trusted and get more satisfaction.
o Faster decision-making and adaptation.
  Disadvantages:

o Loss of control and narrow departmental views.

Forms of Decentralisation

1. Functional Decentralisation: Authority given to specialist departments (HR, marketing, finance).

2. Federal Decentralisation: Authority divided between product lines (e.g., truck, car divisions).
3. Regional Decentralisation: Multinationals give local branches authority (e.g., in different
countries).
4. Decentralisation by Project: Decision-making authority assigned to a project team.

Centralisation
 Definition: Most decisions are made at the top levels of the organization.
 Advantages:

o Greater control and consistency.

o Easier communication and unified goals.

 Disadvantages:

o Limits new ideas.

o Rigid structure; slower to adjust.
o Delayed decision-making and inhibits personal development for lower managers.

Communication Summary:

1.

Definition: The transfer of information from sender to receiver, with mutual

understanding.

2.
3.

Methods of Communication:

4.
1. One-way Communication: Information flows in one direction, no feedback required (e.g.,
giving orders).
2. Two-way Communication: Information flows both ways, with feedback (e.g., discussions
between departments).
5.

Vertical vs. Horizontal Communication:

6.

1. Vertical: Communication between different levels in a hierarchy (e.g., manager to

subordinate).
2. Horizontal: Communication between peers at the same level (e.g., team members).

7.

Channels of Communication: Refers to the route taken by information within

the organization.
 8.
9.

Role of Communication:

10.

1. Establishing goals.
2. Developing plans.
3. Organizing resources.
4. Leading and motivating employees.
5. Controlling performance.

11.

Communication Process:

12.

1. Sender: The person who initiates the message.

2. Transmission: The medium (oral, written, visual) used to send the message.
3. Receiver: The person who receives and decodes the message.
4. Noise and Feedback: Noise can disrupt the message; feedback confirms understanding.

13.

Methods of Communication:

14.

1. Written: Letters, memos, reports, emails, websites.

1. Advantages: Records, clarity, wide reach.

2. Disadvantages: Time-consuming, can be misinterpreted.

2. Oral: Meetings, telephone calls, interviews.

1. Advantages: Quick, allows feedback.

2. Disadvantages: No permanent record, can be misheard.

3. Visual: Diagrams, charts, pictures.

1. Advantages: Easy to understand, engaging.

2. Disadvantages: Can be unclear or misinterpreted.

4. Electronic: Email, video conferencing, social media.

1. Advantages: Fast, global reach, instant feedback.

2. Disadvantages: Overload, lack of personal touch.

15.

Flow of Communication:

16.
 1. Downward: From higher to lower levels in an organization.
2. Upward: From lower to higher levels.
3. Crosswise: Between peers at the same level.

17.

Barriers to Effective Communication:

18.

1. Sender Issues: Technical language, unclear message.

2. Medium Issues: Distortion, inappropriate channels.
3. Receiver Issues: Lack of attention or understanding.
4. Feedback Issues: Missing or distorted feedback.

19.

Overcoming Barriers:

20.

1. Use clear, simple language.

2. Choose appropriate communication channels.
3. Ensure feedback and attention from the receiver.

21.

Choosing the Right Medium:

22.

1. Consider cost, speed, information volume, feedback needs, and the need for a permanent
record.

23.

Communication Networks:

24.

1. Wheel Network: One person controls communication.

2. Circle Network: Communication between adjacent members.
3. Y Network: Combines wheel and chain networks.
4. Chain Network: Hierarchical flow.
5. Integrated Network: Free flow of information among all.

25.

Informal Communication:

26.

1. Unofficial, based on personal relationships.

2. Advantages: Fast, builds relationships, can quickly identify problems.
3. Disadvantages: Rumors, lack of control, no record.
 27.

Formal Communication:

28.

1. Official, follows established protocols.

2. Advantages: Smooth, reliable, permanent record.
3. Disadvantages: Time-consuming, inflexible, lacks initiative.

Market Planning
 Definition: A systematic approach to developing marketing objectives and activities to implement
the marketing strategy, resulting in a marketing plan.

Key Questions in Marketing Planning:

1. Where are we now? – Conduct a market audit using PEST and SWOT analysis.
2. Where do we want to go? – Set marketing objectives.
3. How are we going to get there? – Decide on the marketing mix.
4. How do we ensure success? – Monitor progress using performance standards and benchmarks.

Elements of a Marketing Plan:

1. Purpose and Mission: Defines the business’s purpose and mission, providing background
information.
2. Situational Analysis: Includes PEST/SWOT analysis, current product analysis, competitor analysis,
and target market analysis.
3. Marketing Objectives: Set SMART goals (e.g., market share, growth targets).
4. Marketing Mix (4 Ps): Product, Place, Price, and Promotion.
5. Budget: Plan for resource allocation and estimate expected sales vs. expenditure.
6. Executive Summary: A short summary outlining the plan and the time frame for implementation.

Benefits of a Marketing Plan:

1. Aligns marketing activities with corporate objectives.

2. Encourages an integrated approach to marketing.
3. Improves resource efficiency.
4. Prepares the business for change through continuous monitoring and evaluation.
5. Essential for convincing investors of the business’s potential.

Limitations of a Marketing Plan:

1. Costly, particularly for small businesses.

2. Time-consuming to create.
3. Can quickly become outdated due to changing market conditions.

Demand
 Definition: The total quantity of a product consumers wish to buy at a given price and time.
 Price-Effect: Demand typically increases as price falls (and vice versa), influenced by income and
substitution effects.
Factors Influencing Changes in Demand:

1. Income: Higher income leads to higher demand; lower income results in reduced demand.
2. Population Changes: An increase in population boosts demand.
3. Fashion/Tastes: Shifts in preferences influence demand.
4. Income Tax Changes: Higher taxes reduce demand; lower taxes increase demand.
5. Substitute Goods Prices: An increase in the price of one good raises demand for its substitute.
6. Complementary Goods Prices: A price decrease in one complementary good raises the demand
for the other (e.g., cars and petrol).
7. Advertising: Effective campaigns increase demand by attracting new customers or reminding
existing ones.
8. Climate: Weather changes affect demand (e.g., warm clothing in winter).
9. Interest Rates: Lower interest rates stimulate demand by encouraging current consumption over
savings.

Elasticity of Demand:

1.

Price Elasticity of Demand (PED):

2.
1. Measures responsiveness of demand to price changes.
2. PED > 1: Elastic demand (price decrease increases revenue).
3. PED < 1: Inelastic demand (price decrease decreases revenue).
4. Unitary Elasticity: Revenue remains constant regardless of price changes.

Factors affecting PED:

1. Availability of substitutes.
2. Proportion of income spent.
3. Necessities vs. luxuries.
4. Habit-forming goods.

Importance of PED:

1. Elastic demand: reduce price to increase revenue.

2. Inelastic demand: increase price to maximize revenue.

3.

Income Elasticity of Demand (YED):

4.

1. Measures demand responsiveness to changes in income.

2. Positive YED: Demand for luxuries increases with income.
3. Negative YED: Demand for inferior goods decreases as income rises.

5.

Cross Elasticity of Demand (XED):

6.

1. Measures demand responsiveness to price changes of other products.

 2. Positive XED: Substitute goods (e.g., coffee vs. tea).
3. Negative XED: Complementary goods (e.g., cars and petrol).

7.

Promotional Elasticity of Demand (PRED):

8.

1. Measures demand sensitivity to changes in promotional expenditure.

2. Positive PRED: Increased promotion leads to increased demand.
3. Negative PRED: Increased promotion leads to decreased demand.

Promotion:

1. Promotes product awareness, targets segments, builds brand image.

2. Comprises advertising, public relations, and sales promotions.
3. Depends on product nature, market characteristics, product life cycle, and budget.

New Product Development:

1.

Reasons:

2.

1. Stimulates sales, expands into new markets, counters competition, spreads risks, maintains
market position.

3.

Stages:

4.

1. Idea Generation: Through R&D, market research, brainstorming.

2. Idea Screening: Eliminates unprofitable ideas.
3. Developing the Product: Considers features, production methods, and prototypes.
4. Product Testing: Evaluates performance, collects feedback.
5. Test Marketing: Small-scale market launch to gauge reactions.
6. Full-Scale Launch: Introduction to the market with ongoing evaluation.

Research & Development (R&D):

1.

Involves scientific research and development of new products.

2.
 3.

Benefits:

4.

1. Generates new product ideas, increases profitability, reduces failure risk, gains competitive
advantage.

5.

Factors affecting R&D expenditure:

6.

1. Business nature, competitor spending, expectations, risk profile, and government policy.

7.

Reasons for product failure:

8.

1. Inadequate market research, product defects, high costs, distribution problems,

competition.

Sales Forecasting:

1. Importance:

1. Helps production, marketing, HR, and finance departments plan activities.

2. Methods:

1. Trend Analysis: Uses historical data to predict future trends.

2. Moving Average Forecasting: Smoothens data, accounts for seasonal variations.

Coordinated Marketing Mix:

1. Aligns product, price, place, and promotion to achieve objectives.

2. Example: High-quality products targeted at a small market with personalized service.

Globalization and International Marketing:

1. Globalization refers to the worldwide expansion of markets, driven by multinational companies,

reduced trade barriers, and more open international trade.
2. Globalization leads to increased free trade with fewer tariffs and quotas.

Characteristics of Globalisation:

 Expansion of international trade in products and services

  Increased movement of finance and investments between countries
 Growth in international travel and global communications
 Increasing cultural similarities between societies
 Free movement of workers
 Signing of trade agreements (e.g., WTO, free trade areas like NAFTA, EU)
 Rise of global brands (e.g., Apple, Toyota, Coca-Cola)

Effects of Economic Collaboration/Trading Blocs:

 Maximized trade gains for member countries

 Removal of trade barriers increases product variety
 Easier market access for member states’ products and services
 Faster economic growth and improved living standards for member states
 Increased competition leading to better quality goods

Trading Blocs Examples:

 ASEAN (Association of South East Asian Nations)

 APEC (Asia Pacific Economic Cooperation)
 NAFTA (North American Free Trade Agreement)
 EU (European Union)

BRICS Countries (Brazil, Russia, India, China, South Africa):

 Major emerging economies with rapid GDP growth

 Account for over 40% of world population and 25% of world income
 Key markets for global trade and foreign business opportunities

Benefits of Globalisation to Businesses:

 Greater opportunities for selling products internationally

 Increased competition drives international competitiveness
 Wider choice of business locations
 Easier mergers and acquisitions across borders
 Creation of global brands, reducing market differentiation costs (Pan Global marketing)

Limitations of Globalisation to Businesses:

 Increased competition from foreign businesses

 Domestic firms may shut down due to inefficiency
 Risk of foreign takeovers (e.g., Land Rover by Tata)
 Negative public pressure from anti-globalisation groups
 Decreased profitability for domestic firms with increased imports

International Marketing:

 Selling products in foreign markets beyond the domestic one

 Driven by opportunities in rapidly developing countries
 Requires significant market research, distribution setup, and planning

Reasons for Entering International Markets:

 Maximize profits
 Saturation of home market
 Reduce risk of failure
 Poor trading conditions at home
 Legal differences and fewer restrictions abroad
 Escape home market competition
 Meet growth goals

Identifying, Selecting, and Entering an International Market:

  Market research and SWOT analysis are essential for evaluating opportunities.

SWOT Analysis:

 Strengths:
o Strong ethical position
o Excellent research facilities
o Expansion in new markets
o Brand loyalty
 Weaknesses (Controllable):

o Inefficiency due to large size and lack of control

o High advertising budget
o Inexperienced workers

 Opportunities:

o Increasing incomes and population

o Market growth
o Acquiring other companies
o Foreign government support

 Threats (Uncontrollable):

o Economic downturn risk

o Emerging competitors
o Rising inflation and interest rates
o Restrictive government laws

Factors Influencing the Selection of an International Market:

 Product Factors: Consider the product’s suitability for foreign markets.

 Organizational Factors: Assess objectives, risk, and resources.
 Market Factors:

o Market size and growth prospects

o Competition
o Distribution channels
o Costs of setting up distribution
o Political, cultural, and economic factors (e.g., currency stability, tariffs, government
incentives)

Methods of Entering an International Market:

1.

Direct Foreign Investments:

2.

o Set up subsidiaries in foreign countries (e.g., Toyota in South Africa)

o Benefits: Avoid trade barriers, possible government support, full control over profits, lower
transport/labor costs
o Limitations: High setup costs, country-specific understanding required, time-consuming,
subject to government policies

3.

Exporting:
 4.

o Sell goods produced domestically to foreign markets (direct or indirect)

o Direct Exporting Benefits: Full control, cost savings, direct customer feedback
o Indirect Exporting Benefits: Local market knowledge, less cost
o Problems: Lack of local market knowledge, transport/storage issues, potential agency
conflicts

5.

Franchising:

6.

o Franchisees use trademarks, logos, and materials for a fee

o Benefits: Low start-up costs, reduced failure risk, franchisor support, established suppliers
o Limitations: Profit-sharing, high initial fees, control over local promotions, strict rules

7.

Joint Ventures:

8.

o Two or more businesses combine resources to create a new entity

o Benefits: Shared risks, skills, and resources; no trade barriers
o Limitations: Potential conflicts, loss of control, efficiency issues

9.

Licensing:

10.

o Granting a license to a foreign firm to sell products for a fee

o Benefits: Low initial cost, less risk, avoids trade barriers, local market knowledge
o Limitations: Loss of control, fee payments, termination risk

11.

Acquiring Existing Foreign Business:

12.

o Merging or taking over an established foreign company (e.g., Lenovo’s acquisition of IBM
PCs)
o Benefits: Reduced risk, retained customer relationships, quick market entry, skilled staff
o Limitations: High capital required, complex paperwork

Challenges in Entering Foreign Markets:

 Political Differences: Instability, wars, terrorism

 Economic Differences: Falling GDP, rising inflation, operational difficulties
 Social Differences: Population structure, gender roles, marriage importance
 Legal Differences: Varying laws regarding products, advertising, safety, and labeling
 Cultural Differences: Impact of religious beliefs, moral values, language, and color significance

Global Marketing Strategies:

 1.

Pan Global Marketing:

2.

o Single strategy for all markets with uniform products and brand image (e.g., Coca-Cola,
Nike)
o Benefits: Cost savings, consistent brand identity
o Problems: Legal restrictions, brand name translation issues, pricing challenges, cultural
adaptations needed

3.

Global Localisation:

4.

o Adapt products to fit local market needs (e.g., cultural tastes, local regulations)
o Benefits: Maximized profits and sales, tailored marketing mix
o Problems: Higher costs for adaptations, loss of economies of scale

Enterprise Resource Planning (ERP):

1.

Definition: ERP is a software-based system that integrates management

information from all functions in a business into a single computer system to
streamline operations like production planning, marketing, inventory, and delivery.

2.
3.

Benefits of ERP:

4.
1. All employees can track order progress.
2. Easy access to information for all departments.
3. Reduces organizational conflicts.
4. Improves customer relations management.
5. Facilitates raw material procurement through supply chain management.
5.

Limitations of ERP:

6.

1. Very expensive (average cost: $15 million).

2. Not suitable for small firms.
3. Risk of failure due to computer system issues.

7.

How ERP Improves Efficiency:

 8.

1. Inventory Management: Reduces stock holding costs and helps optimize inventory.
2. Costing and Pricing: Helps set prices accurately by integrating material, production, and
employee costs.
3. Capacity Utilisation: Optimizes production by ensuring equipment operates at near full
capacity.
4. Response to Change: Enables quick responses to changes in orders, materials, and
finances.
5. Management Information: Provides up-to-date, accurate information for better decision-
making.

9.

Reasons for Ensuring Capacity Utilisation Doesn't Go Too High:

10.

1. Risk of machine breakdowns and employee mistakes.

2. No flexibility to increase output for special orders.
3. Scheduling and planning challenges.
4. Risk of employee demotivation.

11.

Problems of Too Much Capacity:

12.

1. Increased costs and wastages.

2. Potential losses.

13.

Strategies for Handling Excess Capacity:

14.

1. Rationalisation: Reduce overheads by cutting unnecessary capacity (e.g., closing

factories).
2. Product Diversification: Modify production capacity to manufacture new products.
3. Exploring New Markets: Expand to new geographic regions.

15.

Improving Capacity Utilisation:

16.

1. Rationalisation: Streamline resources and processes to improve efficiency.

2. Acquiring More Resources: Invest in more plant and machinery.
3. Subcontracting: Outsource part of the production process to another company.

1. Advantages: Flexibility, no major capital investment, quick solution.

2. Disadvantages: Potential quality issues, increased unit costs.
 4. Outsourcing: Transfer production processes to external businesses for efficiency.

1. Advantages: Focus on core activities, flexibility, reduced operating costs.

2. Disadvantages: Loss of control, quality control issues, job losses.
3. Offshoring: Relocate functions to countries with cheaper labor.

17.

ERP Suitability: Best for large businesses or firms with complex operations,
requiring integrated management across various departments.

Lean Production Summary:



Definition: Lean production focuses on minimizing waste, improving efficiency,

and enhancing quality by examining all activities and processes to remove
unnecessary steps.




Processes Involved:


1. Inventory Control: Reduces excess stock to prevent space constraints and inefficiency.
2. Employee Roles: Improved employee roles can increase overall efficiency.
3. Defects: Focuses on preventing defects to save time and resources.
4. Utilisation of Resources: Ensures resources are used optimally.
5. Time Factor: Reduces unnecessary movement to save time.
6. Capacity Management: Ensures balanced capacity utilization.


Advantages:

1. Lower storage costs.

2. Fewer defects, leading to higher customer satisfaction.
3. Less money tied up in inventory.
4. Time-saving due to streamlined processes.
5. Fewer workplace accidents, improving safety.

Lean Production Methods:

1. Kaizen Effect: Focuses on continuous improvement with employee involvement for

efficiency and quality.
2. Conditions for Kaizen: Empowered employees, teamwork, democratic management style,
and broad employee involvement.


 Limitations:

1. Training costs for employees.

2. Inability to quickly ramp up supply during sudden demand increases.
3. Possible job losses leading to poor employee morale.
4. Resistance to change among employees.

Key Aims: Zero delays, zero inventories, zero mistakes, zero waiting, zero
accidents.

Just-in-Time (JIT) in Lean Production:

 Definition: JIT focuses on receiving raw materials, production, and delivering products exactly
when needed to minimize inventory and waste.
 Benefits:

o Saves on rent and insurance costs.

o Reduces working capital tied up in stock.
o Decreases obsolescence risks and unsold products.

 Problems:

o No room for mistakes due to minimal inventory.

o Reliance on suppliers' punctuality.
o Vulnerability to employee actions.

Quality Control and Assurance:



Definition of Quality: Quality refers to a product's ability to meet customer

expectations and be fit for purpose.




Benefits of Improved Quality:

o Better brand image.

o Increased customer loyalty.
o Ability to charge higher prices.
o Fewer legal cases and positive publicity.
o Reduced rework costs.

Costs of Improving Quality:

o Market research and inspection costs.

 o Worker training expenses.
o Production stoppages to correct faults.

Methods of Quality Control:

1. Preventive Control: Checks inputs (raw materials) for quality before use.
2. Concurrent/Pro-active Control: Monitors production during the process.
3. Feedback Control: Inspects output after production to address faults.

 Limitations of Quality Control:

o Identifies problems after they occur.

o Difficulty in pinpointing problem sources.
o Relies on inspection skills.

Quality Assurance:


Definition: Ensures that quality standards are met throughout the production
process, focusing on prevention.




Benefits:

o Early problem identification.

o Fewer final inspections needed.
o Easier fault tracing, reducing future costs.
o Increases employee accountability and motivation.

Total Quality Management (TQM):



Definition: A comprehensive approach that involves all employees in quality

improvement, focusing on zero defects and continuous improvement.




Key Aspects:

o Quality Chains: Viewing each production stage as a customer-supplier relationship.

o Quality Circles: Groups of employees who meet to discuss work-related issues and
improvements.
o Internal and External Customers: Internal customers are those relying on other
departments’ work, while external customers are the consumers of the final product.

Benefits:


 o Improved customer satisfaction and brand loyalty.
o Competitive advantage.
o Reduced remaking costs.
o Promotes teamwork.

Costs:

o High training and inspection costs.

o Production disruptions when correcting quality issues.
o Resistance to TQM implementation.

Potential of Kaizen in TQM:

 Kaizen: Focuses on continuous improvement by encouraging employees to make small, regular
improvements. It can enhance both process efficiency and product quality.

BERCHMARKING
Involves management identifying the best firms in the industry and then
comparing the performance standards of
these businesses with those of their own business. The business will
investigate the product/ service or procedure.
The product/service or procedure is then compared with other businesses in
the same field of activity to identify ‘best
practice’ i.e better methods than those currently used. Weaknesses can be
identified, acted upon and new standards
and procedures can be set.
Stages in the benchmarking process
[Link] the aspects of the business to be benchmarked: ask customers
and find out what they consider to be
most important
[Link] performance in these areas e.g reliability records; delivery
records and possibly the number of
customer complaints
[Link] the firm in an industry that are considered to be the best: get
information from management
consultants or government benchmarking schemes
[Link] comparative data from the best firms to establish the main
weaknesses in the business: obtain data from
published accounts; contacting suppliers or customers
[Link] standards for improvement: use or modify standards set by the best
firm
[Link] process to achieve the standards set: introduce a new way of
doing [Link]-measurement: The changes to the process need to be
checked to see if the new, higher standards are being
reached.
Benefits of benchmarking
 Encourages the generation of new ideas
 If workforce is involved in the comparison exercise, then employees may
be motivated by their
participation in the program
 It is a faster and cheaper way of solving problems
 Increased market share when the identified problems are solved
Limitations of Benchmarking
 It can be expensive when the firm fails to recover all the cost incurred in
the comparison exercise
 The business is relying on copying ideas from other firms which then
discourages innovation
 Benchmarking exercise may be misleading if the information obtained is
not relevant or up-to-date.
Link between Quality and Training
Quality Control: employees will need to know how to select samples, what
to do when samples are selected, and
what to do when samples show up unacceptable errors. Training is required
for the employees to be able to handle
all these issues
Quality Assurance: employees will need to know the standards of assurance
and the methods used to achieve the
desired standards. They will also need to know how to react when standards
do not meet assured levels.
Total Quality Management: a business will need to train employees so that
they know how concepts like the
internal customer and quality circles work. They need to understand and
able to implement Kaizen. The culture of
the organisation will need to change. For all of these methods, it will be
essential for managers and employees to
be trained effectively.
International Organisation for Standardisation (ISO)
The ISO is an international body that develops international standards that
cover most areas of technology and
business. A standard is a document that provides requirements and
specifications against which processes, goods,
services and materials are measured to ensure good quality
Examples of ISO standards
 ISO 9 000: quality management
 ISO 14 000 : environmental management
 ISO 22 000 : food safety management
 ISO 26 000 : Social responsibility
ISO 9000: This an internationally recognised certificate that acknowledge
the existence of quality procedure that
meet certain conditions
To obtain the ISO certificate the firm has to demonstrate that it has
 Staff training and appraisal methods Methods of checking on suppliers
 Quality standards on all areas of the business
 Procedures for dealing with defective products and quality failures
 After-sales service
Questions
1.a).What is meant by lean production b)Explain one benefit of lean
production 2.a)What is benchmarking [2]
b)Explain ONE advantage of benchmarking 3.a)What is meant by quality
b).Explain one cost of improving quality 4.a)What is just-in-time production
[2]
b)Explain one reason for adopting a just-in-time approach 5.a)Define
Kaizen? [2]
b)Explain one benefit of Kaizen to a business 6.a)Explain why the
involvement of employees is key to implementing Total Quality
Management (TQM) [2]
b)Outline two features of cell production [2]
[3]
[3]
[2]
[3]
[3]
[3]
[3]
Answer: Occurs when the production is divided into stages undertaken by
teams (cells).
[Link] reasons why workers may resist Total Quality Management
8.a)What is Total Quality Management? b)Explain One reason why staff may
resist total quality management [Link] the link between training and
quality [5]
[2]
[3]
[3]
Essays
[Link] what extent do you think Lean production guarantees the success of
a business? [Link] what extent is improving quality expensive [Link]
the issues that should be considered by a small manufacturing firm
specialising in quality dining tables
before adopting lean production techniques [20]
[20]
[20]
[Link] how a business that owns and operate ten hotels might
attempt to ensure a high quality of customer
service [20]PROJECT MANAGEMENT
Refers to a discipline of planning, organising, securing and managing
resources to achieve specific targets. It entails
the use of modern management techniques to carry out and complete a
project from start to finish in order to
achieve pre-set targets of quality, time and cost. Very often these targets
have been set in response to the need for
the business to change. A project involves a sequence of activities that
have a clearly defined beginning and end
designed to achieve a desirable business outcome. On the other hand an
activity is a clearly identifiable stage or
task, in the completion of a project. A project usually involves individuals
collaborating in a team to achieve a
particular aim. Managing a project therefore involves managing a team of
people to complete a task on time, to a
given standard and within given budget constraints.
Examples of Projects
 Building a new factory
 Organising a staff training day
 Rationalising business operations
 Designing a new piece of computer software.
Project management skills required
 Good communications kills to communicate to people what is being done
and what has to be done
 Good people skills to pick the right team and to keep the team working
well together
 Good planning skills to establish what can be done by when and by whom
 Good management skills to review progress and keep project moving
forward
Why do projects fail?
We know of buildings that took longer to build than planned, major
construction projects that ended up costing far
more than originally planned, new products that nobody wanted etc.
 legal changes which force new standards on a business
 changes to the economic environment, i.e. recession
 political changes in the government
 technological changes
 new competition in the market.
 Insufficient resources allocated
 Poor planning
 Lack of consultation with the customer
 Lack of effective management.
 Poor quality control
Impact of project failure
 Business may have to make penalty payments if the project is late
 Business may lose money if cost are higher than planned
 The business may have its reputation damaged and lose future customers
 The customer is dissatisfied and may, in turn, let down its customers
 Customers might face financial [Link] Analysis
A planning tool that identifies all of the activities in a project and allows
analysis of the project in terms of
completion times and other key features. It is a method of organising the
different activities involved in a particular
process in order to find the most efficient means of completing the task.
The main aim is to complete the project in
as short a time as possible. To do this a firm will determine the exact order
in which activities have to be
undertaken and identify those which can be undertaken simultaneously to
save time.
Important elements of network analysis
 Identify all the different tasks involved in the process
 Estimate the expected length of time each task will take
 Determine the order in which tasks must be completed.
Critical Path Analysis ( or network analysis)
Refer to a planning technique that identifies all tasks in a project, puts them
in the correct sequence and allows for
identification of the critical path. CPA indicates the shortest possible time in
which a project can be completed.
Thus the critical path is the sequence of all the activities that must be
completed to achieve this shortest time or
the sequence of activities that are critical to completing the project on time.
Critical activity is an activity within a
project that cannot be delayed without delaying the overall project.
Steps to be followed when implementing critical path analysis
 Identify the objective of the project e.g opening a new branch within 5
months
 Put the tasks that make up the project into the right sequence and draw a
network diagram
 Add the durations of each of the activities
 Identify the critical path:- those activities that must be finished on time for
the project to be finished in the
shortest time
 Use the network as a control tool when problems occur during the project.
Network Diagrams/ Network Charts
Refer to a diagram that shows, in a logical progression, the activities
involved in a project together with their
time sequence. All the activities involved in the project are shown, in the
order in which they must be
undertaken and the times each one will take.
When drawing a network diagram the following features are used:
 A circle (called a node) represents the start and end of each activity
 A straight line represents the activity itself
 Arrows to show the sequence of activities/ the flow of the logic of
sequences
 Critical activity is shown by a pair of double lines (
Key terms
Earliest Start Time (EST): the earliest possible time an activity can start
relative to the beginning of the
project. To calculate EST work from left to right.
EST = earliest start time of the activity before + duration of the activityIf
the is a choice choose the largest number
Latest Finish Time (LFT): the latest possible time an activity can finish
relative to the beginning of the
project. It shows the latest an activity can be finished without holding up
the whole project. To calculate the latest
finish time work from right to left
LFT of the activity = LFT of the next node - duration of the activity
If there is a choice choose the smallest number to use
Minimum Project Duration: the shortest possible time within which a project
can be completed
Illustration
Illustration: The objective of this project is to construct a building in 29
days. The tasks to be performed in
order to construct the building have been broken down into ten main
activities from digging the foundation up to
roofing. The duration of the activity is shown in the table below and the
network diagram for this diagram is shown
in the figure below
Activity Duration
A 6 days
B 3 days
C 10 days
D 4 days
E 3 days
F 7 days
G 11 days
H 9 days
I 8 days
J 5 daysFigure
Solution
Note:
Calculation of EST
EST NODE 1 = 0 EST NODE 2 = 0+3= 3 daysEST NODE 3 = 0+4= 4 days
EST NODE 4 = 0 +6= 6 days
EST NODE 5 = 6+10= 16 days/ 3+11= 14 days (choose largest number =
16 days)
EST NODE 6 = 3+3 =6 days/ 4+7= 11 days (choose largest number= 11
days)
EST NODE 7 = 16+5=21 days/11+9=20 days (choose the largest number
=21 days)
Calculation of LFT
LFT NODE 8 = 29 days LFT NODE 7 = 29-8= 21 days
LFT NODE 6 = 21-9= 12 days LFT NODE 5 = 21-5= 16 days
LFT NODE 4 = 16-10= 6 days LFT NODE 3 = 12-9 =5days
LFT NODE 2 = 16-11=5 days/12-3= 9 days (choose the smallest number =5
days)
LFT NODE 1= 6-6= 0 days/ 5-3= 2days/ 5-4= 1 day (choose the smallest
number = 0 days)
Calculation of the minimum project Duration (MPD)
MPD= the LFT of the final activity
= 29 days ( in the illustration above)
Determination of the Critical Activity
This is an activity within a project that cannot be delayed without delaying
the overall project. Critical activities can
be identified by nodes which have EST which is equal to LFT (EST=LFT).
What it means is that the earliest time an
activity can start is the same as the latest time the preceding activity can
start. Completion of critical activity in time
is necessary to ensure the project as whole is completed in the shortest
possible time.
Determination of Non-Critical Activities
These are activities that can be delayed without delaying the whole project.
Non-Critical activities can be identified
by nodes which have EST which is less than LFT (EST ‹ LFT). i.e B;D;E;F;G
and H
Critical Path
Refers to a sequence if critical activities. In the question above the critical
path is from ACJI. i.e they have a pair of
short parallel lines
Summary: Importance of critical path analysis
 The earliest the whole project can be completed
 Activities that are critical to the completion of the project and this is
where the managers must focus their
attention on. i.e A; C; J and I Activities that non-critical i.e B;D;E;F;G and H
Question
Illustration: The objective of this project is to construct a building in 34
days. The tasks to be performed in
order to construct the building have been broken down into eleven main
activities from digging the foundation up
to roofing. The duration of the activity is shown in the table below and the
network diagram for these activities is
shown in the figure below
Table
Activity Duration
A 4 days
B 6 days
C 7 days
D 3 days
E 8 days
F 5 days
G 10 days
H 11 days
I 12 days
J 6 days
k 3 days
Figure
[25 marks]
Float Time
Using the EST and LFT it is possible to calculate the float of an activity. Float
time refers to the time an activity can
be delayed without either delaying the next activity or the overall project.
There are two types of float timea)Free Float: Refers to the maximum time
an activity can be delayed without delaying the next activity in
the sequence.
Formula:
Free Float = EST of the next activity- EST of this activity- duration.
Illustration
Free Float = EST of the next activity- EST of this activity- duration.
=26-6-11
= 9 days
NB: Free float is zero for a critical activity
Total Float: refers to the maximum time an activity can be delayed without
delaying the overall project.
Total Float = LFT- EST- duration
Illustration
Total Float = LFT- EST- duration
= 24- 6- 11
= 7 days
NB: Total float is zero for a critical activity
DUMMY
Refers to an artificial activity used to ensure the logical representation of a
project in not ambiguous. Sometimes
when constructing network diagrams the relationships get so complex and
to be able to draw then you need a
dummy. This is an activity that has no time or costs involved, it is included
in the diagram to help show the
relationships between real activities. The dummy has no other impact on
any other aspect of the CPA other than
resolving ambiguitiesExample:
S follows M and N
T follows N
A network to show this:
It is ambiguous in the sense that it’s like T also follows M. T follows N not M.
Thus a dummy is required to eliminate
the ambiguity involved.
Logical Presentation including a dummy
The importance of CPA as a management tool
 It is important in calculating project duration. This means that delivery
dates can be estimated and
negotiated and other operations can be planned
 It enables the managers to know when activities should start. This means
that mangers can allocate
resources to activities at the right time. This helps co-ordination
 Knowing latest finish times. This means that managers are able to monitor
progress and see the possible
consequences if activities are running late
 Knowing the critical path. This means that managers can focus on the
timely completion of these with
greater priority than non-critical activities
 Knowing floats on non-critical activities. This means that managers are
able to assess the significance of
delays to non-critical activities. Where there are significant floats managers
can divert resources from those
non-critical activities to critical activities to ensure the latter are completed
on [Link] of CPA
 Guess work is common for new projects as there will be no previous
experience.
 The manager may have a good project plan but the project may fail if the
employees are less skilled and
less motivated. All projects must be managed properly if they are to be
completed on time.
 The ability to complete a project on time will depend on the reliability of
suppliers. If raw materials are
delivered late, this may prevent the next activity starting on time.
 Critical path analysis simply shows the quickest way to complete a
project; it does not guarantee that this is
the right project to be implemented in the first place.
 The project can be done quickly but the quality may be poor.
Subordinates may cut corners to get the
project done on time.