CHAPTER 1 : BUSINESS AND IT’S ENVIRONMENT (AS & A LEVEL)

Purpose of business activity

Business is a major economic activity. It can be defined as the production of goods and
services needed by people in this world to meet their basic needs. Its purpose is to identify and
satisfy the needs and wants of the people with the overall aim of earning profit.
To produce the goods and services the business will be using scarce
resources( resources that are limited in supply)

Economic resources( Factors of production)

Business enterprises are established where entrepreneurs combine productive resources
(factors of production) to produce an output. These four factors can be categorised as
Land: All natural resources provided by nature such as fields, forests, oil, gas, metals and other
mineral resources. It includes renewable and non-renewable resources. The reward for land is rent

Labour: The people who are used produce goods and services. Labour is rewarded with a wage/salary

Capital: Finance, machinery and equipment needed to produce goods and services. NB there is also
intellectual capital which refers to the intelligence of the workforce. It refers to the ability of the
workforce to develop new ideas, find new solutions to problems and spot business opportunities. The
reward for capital is interest
Enterprise: The skill and risk taking ability of the person who brings together all the other factors of
production together to produce goods and services. Usually the owner or founder of a business. In
return the entrepreneur will make a profit (or a loss)
Division of labour / Specialisation
Because there are limited resources, we need to use them the most efficient way possible. Therefore,
we now use production methods that are as fast as possible and as efficient (costs less, earns more) as
possible. The main production method that we are using nowadays is known as specialization, or
division of labour.

"Division of Labour is when the production process is split up into different tasks and each task is
done by one person or by one machine

Specialisation: is when a person, firm or economy concentrate only on the tasks it is best at.

Pros:
Specialized workers are good at one task and increases efficiency and output.
Less time is wasted switching jobs by the individual.
Machinery also helps all jobs and can be operated 24/7.
-repeating the same job can make the worker more skilled
-the business can enjoy economies of scale

Cons
Boredom from doing the same job lowers efficiency.
No flexibility because workers can only do one job and cannot do others well if needed.
If one worker is absent and no-one can replace him, the production process stops.

-Breakdown of a machine at one stage will affect all successive stages

-Use of machines may lead to unemployment

Goods and services

Goods –are divided into consumer and capital goods
i. Consumer goods: these are the tangible goods which are sold to the
general public. This include durable and non durable goods. Durable
goods such as machinery, garments and mobiles can last for a
longtime while non durable goods such as edible things soon become
damaged.
ii. Capital goods: they are physical products, manufactured specifically
to be sold to other industries for production of other goods and
services like commercial vehicles.

Services: They are non tangible products for the public to satisfy their wants.
They could be commercial or personal services. Commercial services include
banking, insurance, transportation which are done on a large scale. Personal
services are one to one services such as hair dressing, teaching, lawyer etc
NEEDS AND WANTS
NEEDS- are the things that we cannot survive without
-The basic human needs can be classified as:
(a) Social -entertainment
(b) Physical -food, warmth, shelter
(c) Status -sense of achievement, good job, large house etc
(d) Security -privacy, steady job, secure homes etc

WANTS-: are the things that we can survive without e.g cell phones, radios, jewellery etc Human
wants are unlimited but the resources to satisfy them are limited in supply. This gives rise to the basic
economic problem

Nature of economic activity

The nature of economic activity is that there are limited resources to satisfy
unlimited wants. Due to the limited resources everyone has to make choices
(individuals, businesses, governments)

Economic Problem
We have unlimited Needs and wants and there are limited resources. In economic terms we say the
resources are scarce. Scarcity refers to the fact that people do not and cannot have enough income,
time or other resources to satisfy every desire. Faced with this problem of scarcity, human beings,
firms and governments must make a choice.
Problem of choice: businesses must make a choice on how to use scarce resources to fulfil their
wants. Business must choose on whether to use labour or capital to produce their products. The
business must also choose the types of goods to produce. When something else is chosen, it means
something else is given up (sacrificed). Thus choice leads to opportunity cost.
Opportunity Cost-: this is the next best choice given up in favour of the alternative chosen from two
choices. E.g If a business has a choice of purchasing new machinery and new premises. If the business
chose to buy new machinery because of its greater utility, then the premises will be the opportunity
cost.

Concept of creating / adding value

Creating Value: the increasing the differences between the cost of purchasing
bought-in materials and the price the finished goods are sold. To add extra
features to a product and the customer is willing to pay more after the value has
been added.

Added value
-refers to the difference between the selling price of a product and the cost of
the raw materials used to make it.

Ways of adding value

There are different ways through which businesses can add value to their products and services.
Creating a brand: Brands represent quality and sometimes status. Consumers are prepared to pay
more for products which have a strong brand attached to it. Why does a pair of Nike sell costlier than
its counterpart Puma, though the cost of production may not be much different.
Advertising: Through advertising the business can create a strong brand loyalty among its customers
and in the process charge more for its goods or services.
Providing customised services: Business providing better quality personalised services to their
consumers add more value. Consumers are willing to pay a little extra for customised services
Providing additional features: A product or service with additional features or functionality can
make the consumers pay extra. This is very often seen in different version of a car model. Toyota has
12 versions of its Innovation model. The basic engine and build is the same, but the price increase as
additional features are added.
By offering convenience: Consumers love convenience. If you get a product or service without much
effort then you might happily pay a premium for it. For example, free home delivery of your weekly
grocery.
Benefits to a business of adding value
There are a number of benefits a business derives through adding value to its products or services.
First of all, it can charge more to its customers. This leads to more profitability for the business in
the long run.
A business can differentiate itself from its competitors. By adding more value to its goods or
services a business can stand out among its competitors as producer providing superior or premium
quality.
A business can save the cost on advertising and other promotional activities once it has created a
perception of high quality and brand loyalty among its customers. Thus, adding value helps cost
cutting in the long run.

Business environment is dynamic

- Business environment is divided into two categories and these include the
internal and external environment. Internal environment refers to the
operating environment of the business. Elements of the internal
environment are controllable and these include the firm’s organisational
structure, leadership and management style, organisational resources,
vision, mission, organisational culture. External environment is divided
into market and macro environment. Challenges from this environment
are not easy to control. This environment is dynamic i.t its elements keeps
on changing. Some of the elements includes the Physical environment,
Global/ International environment, Political environment, Economic
environment
NB Business environment is dynamic (ever changing) and the businesses
must adapt to the challenges and formulate strategies to cope with these
challenges

What a business needs to succeed

Labour- the business requires different types of workers i.e skilled, unskilled,
temporary or permanent etc
Land.- the business requires the site for buildings. The business also need
renewanle and non renewable resource to produce goods
Capital- the business is need of money to buy factories and machinery
Customers- these are economic agents which then purchases products made
by firms
Suppliers- the business will get raw materials or other services from other
businesses
Government-the government will provide roads, school, law and order and the
business will benefit in one way or the other
Why business fail early on (Why 9 out of 10 small businesses fail?)
Lack of experience
Many a report on business failures cites poor management as the number one reason for failure. New
business owners frequently lack relevant business and management expertise in areas such as finance,
purchasing, selling, production, and hiring and managing employees.

Insufficient capital (money)

A common fatal mistake for many failed businesses is having insufficient operating funds. Business owners
underestimate how much money is needed and they are forced to close before they even have had a fair
chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales

Poor location
Whereas a good business location may enable a struggling business to ultimately survive and thrive, a bad
location could spell disaster to even the best-managed enterprise.

Poor inventory management

Poor inventory management might lead to too much of cash being blocked as stock. Excess stock also
brings in additional cost burden of maintaining it and the risk of getting obsolete or damaged.

Over-investment in fixed assets

Blocking too much of cash in fixed assets can again pose danger for the business and can contribute to
business failure.

Poor credit arrangement management

Business might take too much of debt and might find it difficult to service them. Poor credit management,
forward planning and cash flow problems might contribute to it.

Personal use of business funds

Owners of small business usually don’t differentiate between business funds and their own funds. The risk
of utilizing business funds for personal use by the owner might lead to cash shortage for the business.

1.1.2 THE ROLE OF THE ENTREPRENEUR

Who is an entrepreneur?: An entrepreneur is an individual

who organizes and operates a business or businesses, taking on financial risk to do so.
A more technical definition of entrepreneur is ‘a person who brings together the factors of productions to
produces goods and services.’ It is one of the factors of production.

Characteristics of successful entrepreneurs

Self motivation
They are also often very passionate about their ideas that drive toward these ultimate goals and are
notoriously [Link].

Positive attitude
There might be initial hurdles and failures in ventures. A successful entrepreneur learns from his mistakes
and does not get dismayed by initial failures. He always sees the light at the end of the tunnel and continues
with his journey. Positive attitude also helps in making a strong team which might be very instrumental in
the ultimate success of the venture.

Risk taker
"nothing ventured, nothing gained". Successful entrepreneurs are risk takers who have all gotten over one
very significant hurdle: they are not afraid of failure.

Excellent leadership qualities

A successful entrepreneur must have excellent leadership qualities. It earns the trust and respect of his
team by demonstrating positive work qualities and confidence. They foster a positive environment and then
proliferates these values through the team.

Innovator
Successful entrepreneur are innovators and usually have an ‘out of the box’ approach to solving problems.
They usually identify gaps in consumer demands or needs which have been ignored for long. They welcome
change and are consistently innovating with the changing demand patterns.

Dependable
Successful, sustainable business people maintain the highest standards of integrity because, at the end of
the day, if you cannot prove yourself a credible business person and nobody will do business with you, you
are out of business. Therefore, a successful entrepreneur should have Strong sense of basic ethics and
integrity. In short, he should be dependable.

Resourceful
Most new businesses have limited resources such as money, information and time. Successful
entrepreneurs figure out how to get the most out of these resources. They are masters at stretching a dollar
and making a few resources go a long way.
Communicators
A successful entrepreneur must be a good communicator. Excellent inter-personal and networking skills go
a long way in business success.

Achievement oriented
Successful entrepreneurs are achievement oriented. They value accomplishment and the intrinsic rewards
that go along with achieving difficult goals.

Role of business enterprises in the development of a country

Business enterprises provide employment
They pay taxes
They increase the GDP of the country
They satisfy the needs and wants of the people
They bring foreign currency if the products are sold outside the country
Reducing poverty levels

Major challenges faced by entrepreneurs

 Identifying successful business opportunities
 Sourcing capital
 Determining suitable location
 Competition from established firms
 Building customer base

1.1.3 SOCIAL ENTERPRISE

SOCIAL ENTERPRISE
Refers to a business with mainly social objectives that reinvests most of its profits
into benefiting society rather than maximising returns to owners. Social
enterprises are businesses whose primary purpose is the common good.
They use the methods and disciplines of business and the power of the
marketplace to advance their social, environmental and human justice
agendas.

THE RANGES AND AIMS OF SOCIAL ENTERPRISES

Basically these are the characteristics of social enterprises
They operate for the well being of the society
Making profit is not the main aim
Main aim is to solve social problems faced by people
Profit is kept to provide more services
They normally provide education and health
Generate the majority of their income through trade

Triple bottom line

Social enterprises have three main objectives. These aims are often referred to
as the triple bottom line. Triple bottom line is used to measure the performance
of a business:
a. Economic (Profit)
b. Social (People)
c. Environment (Planet)

Benefits of Social Enterprises

Social enterprises produce higher social returns on investment than other
On one hand, they produce direct, measurable public benefits. A classic employment-focused social
enterprise, for example, might serve at least four public aims:

 Fiscal responsibility: It reduces the myriad costs of public supports for people facing barriers, by
providing a pathway to economic self-sufficiency for those it employs.
 Public safety: It makes the community in which it operates safer, by disrupting cycles of poverty,
crime, incarceration, chemical dependency and homelessness.
 Economic opportunity: It improves our pool of human capital and creates jobs in communities in
need of economic renewal.
 Social justice: It gives a chance to those most in need.

1.2 BUSINESS STRUCTURE

1.2.1 ECONOMIC SECTORS/ THE LEVELS OF BUSINESS
ACTIVITY
-There are millions of businesses around us. Business can be categorised in three broad categories
or stages.

Primary Sector
It is the first stage of production. All those businesses which are related with extraction of raw
material from Mother Nature such as mining, fishing, farming, and quarrying are known as Primary
Sector businesses. Raw materials that are extracted are send to the secondary sector.

Secondary Sector
They convert raw materials into finished or semi-finished goods. All businesses which manufacture
and process the raw materials which can be used by the end consumers are known as Secondary
Sector businesses. These include building, construction, compute assembly, shoes factories, textile
factories etc.
 Tertiary Sector
Whereas all the businesses which provide services and assist both the primary and secondary sector
businesses can be classified as Tertiary sector businesses. These include transportation, insurance,
hospitals, educational institutes, showrooms etc.
A business may exist in all the three sectors also. For example. British Petroleum has its own Oil
wells and it extracts raw oil, this is primary sector activity, this oil is converted into petroleum and
other by products. This is secondary business activity. After processing the oil into useable product
BP sells it to end consumers through its network of Petrol pumps. This comes under the tertiary
sector.

1.2.2 BUSINESS STRUCTURE

Differences between Private and Public Sector

Private Sector
This sector comprises businesses owned and controlled by individuals or groups of individuals. Such
businesses are commonly found in the free market economy. Their main aim is to make profit through the sale
of private goods. Examples of business found in the private sector include:
i) Sole trader
ii) Partnership
iii) Private Limited Companies
iv) Public Limited Companies
v) Co-operatives

SOLE TRADER
Refers to a business in which one person provides permanent finance and, in return, has full control of the
business and is able to keep all of the profits. It is owned by one person. However the owner may employ
other people. Examples are hair salons, bus operators, grocery stores etc.

Formation: No legal formalities are required

Ownership: owned by one person

Legal status : The business is not a recognised as a legal person. It is referred to as an

unincorporated business

Liability : The owner of the business suffer from unlimited liability. If the business fails the owner
may loose personal possessions (personal property)

Continuity : The business come to an end when the owner dies

Tax Issues: it does not pay corporate taxes, but rather the person who organized the business pays
personal income taxes on the profits made, making accounting much simpler

Advantages
1 –easy to form (less capital and legal requirements)
2 –owner has direct control of the business (makes decisions that best suit his/her conditions
3 –all profits go to the owner
4 –enjoys major exemptions from Government legislation
5 –no double taxation
6 –has personal contact with both customers and employees
7 –easy to terminate

Disadvantages
1 –unlimited liability
2 –can raise little capital
3 –limited management expertise
4 –poor quality decision making
5 –difficulty in attracting qualified employees
6 –lack of continuity when the owner dies

2 Partnerships

-a business owned by at least two but not more than twenty people. The partners agree to carry on
business together, with shared capital investment and , usually, shared responsibilities. To enter into a
partnership, partners can have a verbal agreement or otherwise write a Partnership Deed/Agreement
which is a document setting out the following details:

a) amount of capital contributed by each member

b) salaries/wages to be paid to each member
c) rights and obligations of the partners
d) procedure for partnership dissolution) profit/loss sharing ratio
e) Name of firm - includes the name of the business entity.
f) Date of writing - includes simply the date that the contract was written.
g)Duration of partnership - includes how long the partnership should last. It is automatically
assumed that the death of one of the contracting parties breaks the contract, unless otherwise
stated.
h)Business to be done - includes exactly what will be done in this partnership. This section
should be very particular to avoid confusion and loopholes.

Formation: fewer legal formalities are involved

Ownership: owned by at least two to a maximum of twenty partners

Legal status : The business is not a recognised as a legal person. It is referred to as an

unincorporated business

Liability : The partners suffer from unlimited liability. If the business fails the owner may lose
personal possessions (personal property)

Continuity : The business come to an end when the key partner dies

Tax Issues: it does not pay corporate taxes, but rather the partners who organized the business pays
personal income taxes on the profits made, making accounting much simpler
Advantages
1 –easy to form (same as sole proprietor)
2 –more capital available
3 –diversity of skills and expertise
4 –quality decisions are made
5 –personal contact with employees and clients
6 –risk is spread over a number of people
7 –relative freedom from government control
Disadvantages
1 –unlimited liability i.e all of the owner’s assets are potentially at risk
2 –disagreements may easily lead to winding of the business
3 –all partners responsible for the acts of each other
4 –lack of continuity when the key partner dies or become insane
5 –profit/loss sharing ratio not necessarily equal
6-the partnership often face intense competition from large firms
7-the owner , by taking on a partner, will lose control of the business

Limited companies
Also known as Joint stock companies. These are businesses where a number of owner(shareholder) pool
in their resources to do a common business and to share the profits and losses proportionally.
In a limited company, the debts of the company are separate from those of the shareholders. As a result,
should the company experience financial distress because of normal business activity, the personal assets
of shareholders will not be at risk of being seized by creditors. Ownership in the limited company can be
easily transferred, and many of these companies have been passed down through generations.

General features of Joint Stock Companies / limited Companies

1 –separate legal entity
2 –shareholders have limited liability
3 –owners are called shareholders (buy shares)
4 –shareholders receive dividends as payments
5 –the Board of Directors manages the affairs of the company
6 –the company is governed by Memorandum and Articles of Association
7 –shareholders hold Annual General Meetings (AGMs)

NB: A share is defined as a certificate confirming part ownership of a company. This certificate also
entitles the shareholder the right to dividends. Shareholder- a person or institution owning shares in a
limited company

a)Private Limited Companies

Refers to a small to medium-sized business that is owned by shareholders who are often member of
the same family. This company cannot sell shares to the general public. They have two but not more
than fifty shareholders. The right to transfer shares is limited. The business should submit financial
statements and auditors reports to the Registrar of Companies

Formation: There are complex legal formalities. Two documents should be drafted by the founders
of the company and these documents include the memorandum and articles of association
Ownership: owned by at least two to a maximum of fifty shareholder

Management and Control: it managed and control by the board of directors

Legal status : The business is recognised at law as a legal person. It is referred to as an incorporated
business

Liability : The shareholders enjoy limited liability. If the business fails the shareholders’ personal
assets cannot be taken. They only lose the capital they have invested in the business.

Continuity : There is continuity

Tax Issues: there is double taxation. The shareholders pay tax on their incomes and the business also
pay corporate tax

Advantages
1 –shareholders have limited liabilities
2 –more capital can be raised
3 –greater status than an unincorporated businesses
4 –easy to transform into public limited companies
5 –do not have to publish annual accounts in the press

Disadvantages
1–not easy to form (up to six months)
2–has to fill complex tax forms
3–cannot raise capital through the stock exchange
4- quite difficult for the shareholders to sell shares

b) Public limited companies

-a large business, with the right to sell shares to the general public. The share prices are quoted on the
national stock exchange. They have at least two shareholders to no maximum limit. Shares are freely
transferable. The public can be invited to subscribe to shares and debentures through a prospectus. Can
only start business after complying with all the requirements of the Companies Act. Annual
accounting reports (financial statements) are supposed to be published in the press. Must keep a
register of investors and directors’ shareholding

Formation: There are more complex legal formalities. Three documents should be drafted by the
founders of the company and these documents include the memorandum of association, articles of
association and the prospectus

Ownership: owned by at least two to no maximum limit of shareholder

Management and Control: it managed and control by the board of directors

Legal status : The business is recognised at law as a legal person. It is referred to as an incorporated
business
Liability : The shareholders enjoy limited liability. If the business fails the shareholders’ personal
assets cannot be taken. They only lose the capital they have invested in the business.

Continuity : There is continuity

Tax Issues: there is double taxation. The shareholders pay tax on their incomes and the business also
pay corporate tax

Advantages
1 –easy to raise capital through floating shares on ZSE
2 –can operate on a large scale
3 –unlimited life
4 –employees can become shareholders-increases loyalty
5 –managers and directors have room to work independently therefore prove their expertise in their
areas of specialization
6-shareholders enjoy limited liability
Disadvantages
1 –difficult to form
2 –files always open for inspection by members of the pubic
3 –decisions take time to make due to large size of the company
4 –no personal touch between employees and customers
5 –conflict of interest-shareholders are usually interested in expanding the business

5 Co-operatives
-Is an association of persons united voluntarily to meet common economic, social and cultural needs.
Usually members join together to purchase or sell goods that they cannot afford individually.

Main features
1 –formed by people who want to work together
2 –is voluntary
2 –members make equitable contributions
4 –risks and benefits are shared equally
5 –are democratically controlled
6-the name ends with Co-op

Formation
Members should have a common goal. These members will then draft the constitution and the
management committee is elected usually at an annual general Meeting

There are different types of co-operatives:

Housing cooperative
Retailers' cooperative
Worker cooperative
Consumers' cooperative
Agricultural cooperative

Advantages
 It is easy to form e.g any ten adults form a co-operative
  No legal formalities are involved
 Membership is open to everyone
 Members enjoy limited liability
 Members get goods and services at reasonable prices
 There is continuity
 Surplus is shared amoung members
 State patronage ( government provides special assistance to the co-operatives to enable them to achieve
their objectives successfully
 They are usually tax exempted

Disadvantages
 unable to raise large amount of financial resources
 It is managed by members who may be lacking the required management skills
 Can be affected by conflict since it is an association of people from different social, economic and
academic background
 Absence of rewards discourage the members to put maximum effort in the society

Franchising
Refers to an agreement where one party (the franchisor) grants another party (the franchisee) the right to use its
trade mark or trade name as well as certain business systems. The franchisee sells the franchisor's product or
services, trades under the franchisor's trade mark or trade name and benefits from the franchisor's help and
support.
In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales
revenue. The franchisee owns the outlet they run. But the franchisor keeps control over how products are
marketed and sold and how their business idea is used.

Well-known businesses that offer franchises of this kind include: Pizza, Bata, McDonalds, Nandos etc

Contractual Obligation
 A franchise agreement should be drafted and signed by both parties. This is a legal contract in which the
franchisor gives the franchisee the right to use the business’s trade mark.
 The franchisor is not allowed to open a similar business nearby
 It must specify the franchise fee as well as monthly royalty payment
 The agreement lays out details of what duties each party needs to perform
 It also state the duration of the franchise contract

Advantages to the franchisee

 Franchisee benefit from pre-opening support e.g site selection, design, financing
 Franchisor assist in training staff
 Franchisor advertise goods on behalf of the franchisee ( saves money)
 Franchisee enters into an existing market which increases the chances of business success.
 Risk is reduced and is shared by the franchisor.
 Relationships with suppliers have already been established.

Disadvantages to the franchisee

 The franchisor might go out of business, or change the way they do things.
 The franchise agreement usually includes restrictions on how you run the business. You might not be
able to make changes to suit your local market.
 The franchisee must pay initial fee and continuing fees to continue to use the trade mark
 The franchisee cannot sell goods from other suppliers
 Breach of contract can result in a penalty charge
Advantages to the franchisor

 It’s a source of income to the franchisor (royalties received)

 Risk of the business is spread amoung different franchisees
 A network of outlets gives the business a far better chance of success
Disadvantages to the franchisor

 Other franchisees could give the brand a bad reputation.

 Franchisor must provide the franchisee with on-going support which then requires constant research
 Setting up a franchise requires a lot of money

Joint Ventures
It occurs when two or more businesses agree to work closely together on a particular project and create
a separate business division to do so. Joint Venture is not a long term business relationship but a short
term relationship based on a single business project. The business is not a separate legal entity. Once
the joint venture has met it’s goals, the entity ceases to exist. An example include Sonny and Ericson
formed Sonny Ericson to produce handsets.

Joint Venture Agreement Should cover:

 The parties involved

 The objectives of the joint venture
 Contributions made by each party
 Dispute resolution procedure
 How the joint venture is terminated
 Non-disclosure agreements
 Day to day management
Advantages

 Provide companies with the opportunity to gain new capacity and expertise
 Allow companies to have access to new technology
 Access to greater resources, including specialised staff and technology
 Sharing of risk with a venture partner
Disadvantages

 The business failure of the partner would put the whole project at risk
 Styles of management and culture might be so different that the two teams do not blend well
together
 The parties don’t provide enough leadership and support in the early stages
 Errors and mistakes might lead to one blaming the other for mistakes
 Strategic Alliances
A strategic alliance is an agreement between two companies that have decided to share resources
to undertake a specific, mutually beneficial project. A strategic alliance is less involved and less
permanent than a joint venture. The main purpose is to allow two organisations, individuals or other
entities to work toward common or correlating goals. Unlike a joint venture, firms in a strategic
alliance do not form a new entity to further their aims but collaborate while remaining apart and
distinct.

Examples of Strategic Alliances

An agreement with a Local University- finance is provided by the business to allow new specialist
training courses that will increase the supply of suitable staff for the firm
An agreement with a supplier- to join forces in order to design and produce components and
materials that will be used in a new range of products.
An agreement with the competitor- to reduce the risk of entering a market that neither firm
currently operates in.

Holding Companies
Refers to a business organisation that owns and controls a number of separate businesses, but
does not unite them into one unified company. They are not a different legal form of business
organisation, but they are an increasingly common way for business to be owned.

Family Owned Businesses

Refers to businesses that are actively owned and managed by at-least two members of the same family.
Decision making is influenced by multiple generations of a family related by blood.

Strengths of family business

 Stability- family positions typically determines who leads the business and as a result, there is
longevity in leadership. Family leaders stay usually stay in the positions for many years until a
life event such as illness, retirement or death results in change
 Commitment- since the needs of the family are at stake, there is a greater sense of commitment
and accountability. The family owners often show dedication in seeing the business grow,
prosper and get passed on to future generations. This level of dedication is almost impossible
to generate in non-family firms
 Flexibility- you won’t hear “Sorry but that’s not my job description”. In a family business, family
members are willing to wear several different hats and to take on tasks outside of their formal
job on order to ensure the success of their company.
 Long term outlook- non family firms think about hitting goals this quarter, while family firms
think years, and sometimes decades, ahead. This ‘patience’ and long term perspective allows
for good strategy and decision making
 Decreased costs- family members working at family businesses are willing to contribute their
own finance to ensure the long term success of the organisation. This could mean contributing
capital or taking a pay cut. This advantage comes in handy during economic down turns, where
it is necessary to personally suffer in order for the firm to survive.
 Weakness of family businesses
 Family conflicts- deep seated, long lasting bitter fights and quarrels can affect every single
person within the firm and can draw divisive lines. These conflicts are usually difficult to solve
and result in a premature ending of the business.
 Unstructured governance- governance issues such as internal hierarchies and rules, as well
as the ability to follow and adhere to corporate laws, tend to be taken less seriously at family
businesses. There is little interest in setting clear and formal business practices and procedures
and this situation can lead to inefficiencies
 Tunnel vision- there lack of outside opinions and diversity on how to operate the business.
Family members are given jobs for which they lack the required skills, education and experience.
This has got far- reaching effects on the success of the business.
 Issues of fair remunerations can be ‘a can of worms’- the issue of wages and salaries can
be a highly sensitive subject. The question is how the pie is going to be divided. Paying family
members and dividing the profits amoung them can be a difficult affair. Many people usually
feel that they are underpaid and family members too. We have family members who comments
like this, ‘uncle Jack sits around and gets more than I do’

Public Sector
Refers to all the businesses that are owned by the government on behalf of the public. They can be
district councils or public corporations. They are established by an Act of Parliament. They are corporate
bodies with a separate legal entity -they are managed by a Board appointed by the Minister -the Minister
can be questioned by parliament over activities of the corporation
Advantages

 They provide important goods and services at reasonable prices

 Provide employment to the majority
 Implement government policies e.g charge low prices to reduce inflation
 They are a source of income to the government
Disadvantages

 They are inefficient and very wasteful due to the lack of profit motive
 They tend to provide poor quality goods and services due to the absence of stiff competition
 Lack of motivation amoung workers leads to inefficiency
 They suffer from excessing political interference

Public Sector and Private Sector contrasted

Usually the aim of public sector business is to provide services to the community. For example if the transport
system is owned by the government and it is running a bus service to an interior village and it is not getting
enough customers, the government might still continue it as its main objective is to provide service and not
to maximise profits. Whereas private sectors business give priority to profits and may end the service if it
does not find it profitable to run the service.
Secondly Public sector strives to create employment whereas Private sectors main aim is to become efficient
and cut cost and in this process they might cut jobs.
Public sector business usually locates in regions where there is underdevelopment so as to create jobs and
income for local population. Private sectors might not keep these things in consideration and will look for
external economies of scale.

Privatisation involves selling state-owned assets to the private sector

Advantages of Privatisation

1. Financial Resources

The main advantage of privatization is to generate financial resources for the government in
order to generate resources disinvestment of public sector enterprises.

2. Optimum Utilisation of Resources

It has been observed that the public sector has failed in the optimal use of national
resources. The private sector may success in the optimum use of resources by maintaining
efficiency.

3. Fostering Competition

Most of the public Enterprises enjoy the status of monopoly. It results in inefficiency and
losses. Privatization creates a situation of competition for public Enterprises and they are
forced to improve their efficiency.

4. Reduce Fiscal Burden

Privatization reduces the fiscal burden of the state by relieving it of the losses of the public
enterprise and reducing the size of the bureaucracy.

5. Economic Democracy

Privatization helps to control government Monopoly. It helps to attract more resources from
the private sector. It emerges economic democracy by private participation in Economics
sphere.

6. Better Industrial Relations

Privatization may increase the number of workers and the common man who are
shareholders. This could make the Enterprises subject to more public vigilance.

7. Reduction in Political Interferences

The process of privatization reduces political interferences in the public sector enterprises by
giving more representation to the private sector in the management of Public Enterprises.
8. Reduction in Bureaucracy

Public Enterprises become synonyms bureaucracy. They can be made from bureaucracy by
the process of privatization.

9. More Productivity

The private sector can improve productivity by maintaining efficiency in its operations.

Advantages and Disadvantages of Privatization

Disadvantages of Privatisation

1. Problem of Price

The government usually want to sell the least profitable Enterprises, those that the private
sector is not willing to buy at a price acceptable to the government.

2. Opposition from Employees

Disinvestment tends to arise political opposition from employees who may lose their jobs,
from politicians who fear short-term unemployment consequence of liquidation of cost
reduction by private owners, from bureaucrats who stand to lose patronage and from those
sections of the public who fear that national assets are being concerned by foreigners, the
rich or a particular ethnic group.

3. Problem of Finance

In the developing countries under the developed capital market sometimes makes it difficult
for the government to float shares and for individual buyers to finance the large purchase.

4. Improper Working

The main disadvantage of the private sector is that it has fallen much short of what this
sector is capable of or what it has achieved in some other countries. The private sector is not
interested in cost reduction and quality production.

5. Independence on Government

There has been an excessive Regulation and control of the private sector by the government.
This has prevented and competition from becoming a generalized phenomenon of the
economy.

6. High-Cost Economy

Another problem with the private sector is that its cost, in general, are large and the price of
products are unduly high.
7. Concentration of Economic Power

The private sector emerges Monopoly and the concentration of economic power in the hands
of [Link] private sector operates on the principle of maximization of the Monopoly profits. It
is harmful to consumers and society as a whole.

8. Bad Industrial Relations

An unfortunate aspect of the private sector is the recurrence of industrial disputes which

9. Widespread Sickness

The private sector Industries such as Textiles, engineering, Chemicals, iron, and steel and
people are suffering from the problems of industrial sickness.

1.3 Size of business

The businesses are classified as small, medium and large businesses. Thus the businesses are compared
using their sizes..
Importance of Business Size
Stakeholder Importance
Government -the government may want to give assistance to small firms

-The government may want to charge different tax rates to different firms

Investors -they may want to compare with its close competitors

-they want to know how safe it is to invest in a given business

Customers -customers may prefer to deal with large forms since they are the most
reputable and are less likely to cease production in the near future

Workers -workers also want to be employed in large firms since they are concerned
about job security

Banks They use business size to determine the maximum loan they can give to the
business

1.3.1 Measurements of business size

In the world around us there are some businesses which are small and some are big. But how do we
categorize these businesses as big or small. We can consider the following factors:

 The number of employees: Small business employ fewer workers than large businesses since
they operate on a small scale. European Classifications of business into small , medium and large
firms is shown in the table below
 Business category Number of employees
Small/ micro 10 or fewer
medium 11-50
Large 0ver 50

However the method is not suitable if one business uses capital intensive method of production. i.e business
which use more machinery and technology may have few employees but they still might be big. Example
Microsoft has less employees but still it the biggest business on earth.

 The amount of capital invested: Big business have large capital investments in form of properties
and equipment owned. All these properties are bought capital employed. Capital employed refers to
the total value of all long-term finance invested in the business. However this method is not
appropriate when one firm uses a labour intensive method. A business which might not use a lot of
investment in machinery and investment in properties may still be big. Take the example of software
companies and consultancy firms like McKenzie & Co.
 The sales turnover: Bid firms have a very high sale turnover than small firms. They have a good
reputation, they have more outlets and they can afford to advertise their products. However a
business may be going through a bad phase and may not have huge sales does it make the business
small? On the other hand large sales turnover may be seen for a small business that sells small but
high value items e.g an artists may sell CDs for a dollar each but to over a million fans
 Market capitalisation: refers to the total value of shares issued by the company. A higher market
capitalisation applies to big firms.

Market capitalisation= current share price x total number of shares issued

However this method is appropriate when one firm is not operating on the stock exchange. Stock exchange
markets are very volatile and share prices change every day does it alter the size of the business every
day?

 Market share: Big firm have a higher market share than small firms. Market share is usually
measured as a percentage. Market share refers to the sales of a business as a proportion of total
market sales.

Market share = (total sales of a business/ total sales in the market) X 100

However a business may not be a market leader but still may be huge whereas if the market is itself very
small, a major market share won’t make a business big.

NB: One cannot use measure business size by its profits because profit depends on too many factors not
just the size of the business

Conclusion: So while deciding the size of business as big or small a combination of factors needs to be
considered.
What is a small business?
A small business is a business that is independently owned and operated, with a small number of
employees and relatively low volume of sales.
Different countries have slightly different description for a small business.
For example, in United States a business have less than 100 employees is considered as a ‘small business’,
whereas it is under 50 employees to qualify as a ‘small business’ in European Union.
In Australia, a small business is defined as 1-19 employees.
Small businesses are normally privately owned corporations, partnerships, or sole proprietorships.
Apart from number of employees other criteria for classifying a business as ‘small’ are:

 Amount of capital employed

 Annual Sales turnover

 Value of assets

Importance of small business in the economy

As we all know that small firms are important for the economy.

 Create jobs: Small businesses employes majority of the workforce in any country.
 They can grow to become big: Every business starts small. These small business today will become
bog firms tomorrow
 Small businesses are flexible and respond easily to changes in demand: they are owned by one
or two individuals hence they are more flexible and adaptable in day-to-day operations
 Small firms often cater to local demands: local or regular customers can place their individual orders.
Small firms provide niche products and services which a larger firm might overlook.
 In difficult economic times, such as a recession, small business can be an important source of
providing employment.
 Improves efficiency in the economy: Small firms provide competition to larger firms through providing
customised goods and services.
 Give informal credit: they offer credit facilities to well-known customers
 Boost economic growth: they increase the production of goods and services in the economy. Thus
the Gross Domestic Product (GDP)of an economy will increase.

Disadvantages of small firms

 Lack of capital: they don’t have enough capital to stock enough goods
 They sell inferior goods: they operate usually in the rural communities where they sell poor quality
goods and sometimes expired food items
 Managed and run by employees who are less skilled: small businesses lack the resources to
hire skilled and experienced personnel
  Risk of failure is high: customers are unwilling to buy from small firms and the skilled employees
are reluctant to join small firms
 Difficult for them to raise finance: small business often struggle to get loans from financial
institutions and this will stifle business growth
Small businesses face the following problems
 Under capitalisation
 Poor debt management
 Lack of managerial skills of the owner
 Cannot retain experienced staff
 Usually find it difficult to attract skilled staff
 Poor stock management

How can small business survive?

Small firms survive by being different (product differentiation). They can survive by

 Segmenting the market by income. They can target niche market segments of high income customers,
position their product as a ‘premium brand’ at a high ‘premium price’ eg Morgan sports cars
 Small firms have the advantage of being able to respond quickly to change - they do not have the
bureaucratic procedures often a feature of large firms where decisions are made only after endless
meetings. This means they can be quick to exploit new market trends.
 The Internet also allows small firms direct access to consumers, by passing intermediaries. The web
gives small firms the opportunity of international marketing.
 Small independent firms can join together to form a buying group to negotiate discounts on joint orders.
 Small firms can survive by selecting a premium niche and offering an exclusive brand’ that exactly meets
the customer requirements of their target segment. They will need to be totally customer orientated.
 Keep well documentation for accounts receivable financing when unexpected expenses arrive.

Business and Economic structure

Economic System refers to the way a country decides what to produce, how to produce and for whom
to produce. There are three groups which make up an economic system, and these are individuals,
firms and the government. There are also three types of economic systems and these are:
i. Free market economy/ Capitalist/ laissez faire
ii. Command/ Planned economy
iii. Mixed economy

Free Market Economy

Refers to an economy where economic resources are owned largely by the private sector with very
little state intervention. The central thought of this system is that it should be the producers and consumers
who decide how to utilise the resources. Thus, the market forces decide what to produce, how much to
produce and for whom to produce.

Features
 All resources are privately owned by people and firms.
 Profit is the main motive of all businesses.
 There is no government interference in the business activities.
 Producers are free to produce what they want, how much they want and for whom they want to produce.
 Consumers are free to choose.
 Prices are decided by the Price mechanism i.e. the demand and supply of the good/service.

Advantages
 Free market responds quickly to the people’s wants: Thus, firms will produce what people want
because it is more profitable whereas anything which is not demanded will be taken out of production.
 Wide Variety of goods and services: There will be wide variety of goods and services available in the
market to suit everybody’s taste.
 Efficient use of resources encouraged: Profit being the sole motive, will drive the firms to produce
goods and services at lower cost and more efficiently. This will lead to firms using latest technology to
produce at lower costs.
 There is consumer sovereignty: that is, a market economy allocates scarce resources
according to consumers' wants. "The consumer is king". P Samuelson

Disadvantages
 Unemployment: Businesses in the market economy will only employ those factors of production which
will be profitable and thus we may find a lot of unemployment as more machines and less labour will be
used to cut cost.
 Certain goods and services may not be provided: There may be certain goods which might not be
provided for by the Market economy. Those which people might want to use but don’t want to pay may
not be available because the firms may not find it profitable to produce. For example, Public goods, such
as, street lighting.
 Consumption of harmful goods may be encouraged: Free market economy might find it profitable
to provide goods which are in demand and ignore the fact that they might be harmful for the society.
 Ignore Social cost: In the desire to maximise profits businesses might not consider the social effects
of their actions. There is a lot of environmental degradation.

The centrally planned economy

-an economy where the economic resources are owned, planned and controlled by the state.

Centrally planned economies are characterised by:

a) Government ownership of the means of production.
b) Government provision of goods and services.
c) Production is for use rather than for profits.
d) Non-price rationing mechanisms, that is, goods are distributed according to need and not ability to pay.
e) Government control and planning is through a central planning board credited to control coordinate and plan
all economic activities.
Advantages
a) It is sometimes suggested that centrally planned economies are likely to have greater
equality in the distribution of income and wealth. The government will provide grants
to the need e.g the old age pensions, unemployment benefits
b) There is provision of public and merit goods. Public goods are directly produced by
the government e.g defence, street lighting. There government will also provide
subsidies to firms that produce merit goods e.g education and health
c) It is claimed that centrally planned economies are likely to be far more stable than
market economies. Prices are kept under control and thus everybody can afford to
consume goods and service.
d) The production and consumption of demerit goods which impose relatively large
social costs on society can be eliminated or prevented. The government use laws to
prevent the production of demerit goods like tobacco and alcohol.

Disadvantages
a) There is nobody who has power over the government such that even if it fails, it is
answerable to nobody.
b) Where there are no incentives, people are not motivated to work.
c) Without competition producers will be inefficient and produce poor quality goods.
As result, resources will be utilized inefficiently.
d) Complications in planning for the whole economy arise, that is, planning is a
difficult task and there are too many stages of decision making - bureaucracy or red
tape.
e)Poor quality goods due to lack of stiff completion.

Mixed Economy
A mixed economy is an economic system that incorporates aspects of more than one economic system.
This usually means an economy that contains both privately-owned and state-owned enterprises or that
combines elements of capitalism and socialism, or a mix of market economy and planned economy
characteristics. This system overcomes the disadvantages of both the market and planned economic
systems.

Features
 Resources are owned both by the government as well as private individuals. i.e. co-existence of both
public sector and private sector.
 Market forces prevail but are closely monitored by the government.

Advantages
 Producers and consumer have sovereignty to choose what to produce and what to consume but
production and consumption of harmful goods and services may be stopped by the government.
 Social cost of business activities may be reduced by carrying out cost-benefit analysis by the
government.
 As compared to Market economy, a mixed economy may have less income inequality due to the role
played by the government.
 Monopolies may be existing but under close supervision of the government.

Business Growth
Refers to an increase in the scale of operations, expanding production and increasing the sales and
profit of a firm

Reasons why a business want to grow:

 To increase profits- the chances of business success rises when the business grows both internally
and externally
 To reduce risk- business growth where the business introduces new products that are totally
different from the existing ones lowers the risk of failure
 To dominate the market- a business which is a market leader has the power to set prices
 To reduce costs- increasing the output leads to the enjoyment of economies of scale. Economies
of scale refers to the cost saving advantages enjoyed by a business as a result of large scale
operations.
 To fulfil the objectives of the management- it can be a planned move by the management to
spread the wings of its business into new markets.

Types of Business Growth

i. Internal Growth (AS-LEVEL)
ii. External Growth (A-LEVEL)
Internal Growth

Expanding the business from within by using its own internal resources. It involves expanding the business
through increasing the number of employees, increasing production of existing products, opening new
outlets and increasing quantities of goods sold. It is also referred to as organic growth. An example of
internal growth is where a retail business open more shops in towns and cities where it previously had none.

Advantages of internal/organic growth

 It can be financed through internal funds e.g returned profits

 Less risky than taking over other businesses
 Allows business to grow at a more sensible rate
  Builds on a business’ strengths
Disadvantages of internal/organic growth

 Slow growth and the shareholders may prefer more rapid growth
 Growth achieved may be dependent on the growth of the overall market
 Harder to build market share if the business is already a market leader
 The business can be affected by liquidity problems (cash problems)
.

External Growth
Refers to growth achieved through integration i.e mergers and takeovers. Integration can occur between
two firms in the same or different industries. Integration leads to rapid expansion which might be essential
in a competitive and expanding market.

TYPES OF INTEGRATION/ MERGERS

a)Horizontal Integration: it occurs when two firms which are in exactly the same line of business
and at the same stage of production process joined together. It is the joining of competitor or rival firms ie
firms selling the same types of goods e.g OK supermarket and TM supermarket

Advantages

 It reduces the risk of failure

 To enjoy economies of scale
 Eliminates competition
 To have more power over suppliers
 Easy to manage as compared to conglomerate mergers
 To strengthen financial base

Disadvantages

 Managerial problems will set in when the business become very big
 Previous relations with suppliers or distributors of one firm might suffer
 Horizontal integration leads to monopoly and higher prices

b).Vertical Integration

It occurs when two firms in the same industry but at different stages of the production process join together
to form one business. For instance, a firm in a primary sector joins with another in the same industry but in
the secondary sector. Vertical integration can be forward or backward

i)Forward Vertical Integration: it occurs when a business joins with another which is in the same industry
but at a next stage in the production process ie joining with a customer of existing business. A car
manufacturer joining with a retailer (showrooms) Thus a firm in the secondary sector joining with another
firm in the tertiary sector.

Advantages

 Greater control over promotion and pricing of the products

 Eliminate the profit margin expected by the firm in the next stage of the production process
 Increases the capital base

Disadvantages

 Lack of experience in this sector of the industry

 Lack of control over the suppliers
 Management problems may set in

ii)Backward Vertical Integration: occurs when a business joins with another business which is
operating at a previous stage of a production process. The business joins with another which used to be the
supplier e.g retailer merging with the manufacturer. This is a movement from tertiary sector to a secondary
sector

Advantages

 Give greater control over the quality, price and delivery times of the supplier
 Eliminates the profit margin demanded by another supplier
 Increases profitability of the business

Disadvantages

 Lack of experiences of managing a supplying company

 Supplying business may become complacent due to having a guaranteed customer
 Lack of control over the customers

c).Conglomerate/ Diversification Mergers: this integration is between firms in completely

different lines of business or industries. A firm will be trying to explore different opportunities to minimise or
diversify risk. Eg a car manufacturer joining with a hotel business.

Advantages

 Reduces risk of losses

 Profit margins can be increased due to other businesses
 Market share can be increased

Disadvantages

 Risk of failure might increase due to lack of experience in the new market
 Entry problems might occur
  If the business is new then it’s difficult to lower down the prices as compared to established firms

REASONS FOR MERGERS

 Expectations of higher profits: synergies usually increases the profitability of the new business
formed. Synergy- literally means that the whole is greater than the sum of individual parts. It means
that the two businesses when they merge, their profitability, efficiency and effectiveness would
increase to more than the combined profitability of the separate businesses
 To reduce competition: the new business formed won’t waste a lot of money on promotion and
other adverting programmes
 Easy and quick way to expand: businesses can easily increase their market share in a short period
of time
 To enter international markets: local business can join with foreign business so that it will be easy
for local to penetrate foreign ground.
 Asset striping: to get access to an asset of a rival firm at lower price. The asset stripper aims to
buy another company at a market price lower than the firm’s total asset price. After grabbing the
asset, the business will then sell-off profitable parts of the business and shuts down the unprofitable
parts of business
 To comply with the law: legislations usually in the financial sector may require business to join in
order to comply with the minimum capital requirements

NB de-mergers occurs when a business sell off a significant part of its existing operations. A company
choose to break-up to raise cash to invest into the remaining sector. Another reason could be to concentrate
its efforts on a narrow range of activities. Last but not least, to avoid costs and inefficiencies when a firm is
very large.

Take overs
Refers to the assumption of control of another (usually smaller) firm through purchase of 51% or more of
its voting shares or stocks. It occurs usually on public limited companies because their shares are traded
openly and anyone can buy them. When a takeover is complete, the company that has been bought loses
its identity and becomes a part of the buying company. The buying company is known as the acquirer
(bidder) and the company which is bought is known as the target

Why some business stay small?

 Type of industry the business is operating:- in some industries it is not viable for the firms to expand since they
will be offering personal services e.g hair dressing, plumber, car repairs etc If they were to grow too large, they
would find it difficult to offer the close and personal service demanded by customers
 Market size:- the number of customer will determine the size of the firms. If the number of customers is small,
the businesses in that industry will remain small.
 Owner’s objectives: some owners prefer to keep their firm small. Owners sometimes wish to avoid the stress
and worry of running a large firm.
1.6 External influences on business activity

External environment factors

PESTEL analysis stands for "Political, Economic, Social, and Technological, Environmental and
Legal analysis". It is a part of the external analysis when conducting a strategic analysis or doing
market research and gives a certain overview of the different macro-environmental factors that the
company has to take into consideration.

1.6.1 Political and legal

A range of political decisions can help to determine the business environment. For example, many countries
operate minimum wages which can result in businesses paying increased costs for labour. Additionally,
businesses face a variety of laws which constrain many of their activities including the emission of noxious
gases and contributions to employees’ pensions

How government controls business activity?

Governments control the business activities is many ways both direct and indirect. We have already covered
government’s economic policies. However, government can control business activities in a more direct way.
These are as follows:

a)Controlling what to produce

In order to safeguard the interest of the community government may ban or limit the production of certain
goods and services. For example, selling of guns, explosive and dangerous drugs are illegal in many
countries. Moreover, Goods which harm the environment are also totally banned or strictly controlled in
many countries, e.g. aerosol cans that use CFCs which has been banned because of their damaging effect
on the ozone layer.

b)PROTECTION OF WORKERS
DISMISSAL
 Occurs when an individual is fired from a job due to indiscipline or insubordination
 An employee is dismissed totally from the job if the employer feels that the employee’s
behaviour is unreasonable
  However the reason for dismissal should be fair
 When the employee is dismissed due to his/her own fault then no financial benefit is given
REASONS FOR DISMISSAL
 In ability to do the job
 Continuous negative attitude towards work
 Deliberate destruction of an employer’s property
 Bullying of other employees
UNFAIR DISMISSAL
 Occurs when a female member of staff is dismissed for falling pregnant
 Occurs when a worker is dismissed on a discriminatory reason e.g race, gender, religion or
political affiliation
 Employee being fired for being a member of a certain trade union
 When no warnings were given before hand

UNFAIR DISMISSAL AND THE LAW

 If a worker is unfairly dismissed, he/she can report to the Employment Tribunal, Labour Court
or Trade Union etc
 The business can be asked to give the person his/her old job and to pay some financial
damages to the victim

REDUNDANCY
 Occurs when the employer has to lay off employees in-order to save costs
 When a job is no longer required, thus the person doing that job becomes unnecessary
through no fault from his/her side
 Employees made redundant will be given compensation for the loss of income
 When firms are retrenching workers, they usually use the ‘Last-in-First-out (LIFO) method

REASONS FOR REDUCING SIZE OF THE WORKFORCE

 To save money by employing less workers
 When the product made by employees is no longer required i.e decrease in demand for the
product
 When the business is now using machines (automation)
 In the mining sector when minerals are exhausted (finished)

UNFAIR DISCRIMINATION
 The practice of unfairly treating a person or group of people differently from other people
 In the work place it occur when workers are discriminated on the basis of gender, race,
political orientation, religion, culture, language etc

UNFAIR DISCRIMINATION AND THE LAW

a) Gender Discrimination Act- people of different genders must have equal opportunities
b) Race Relations Act-people of all races and religions must have equal opportunities
c) Disability Discrimination Act-it must be made suitable for disabled people to work in
businesses
d) Equal Opportunities Policy-that is what everything is all about

HEALTH AND SAFETY AT WORK

 Laws protect workers from dangerous machinery
 The business must provide safety equipment and clothing eg overalls, safety shoes, helmet,
gloves etc
 The business should ensure that there is adequate ventilation (fresh air to the room) and
lighting
 Should provide hygienic conditions and washing facilities
 Provide breaks in the work timetable
WAGE PROTECTION
 The employee must be aware of how frequently wages are paid
 The employee must be aware of what deductions will be made from his or her wage e.g
income tax, pension
 Must be aware of the basic salary
 The business has got the responsibility to the employees fair wages
 The government usually set a minimum wage to protect workers from unscrupulous
employers.

N.B A minimum wage is the lowest remuneration that employers may legally pay to workers.
Equivalently, it is the price floor below which workers may not sell their labour services

ADVANTAGES OF A MINIMUM WAGE

 Prevents strong employers from exploiting unskilled workers who could not easily find work
 Encourages employers to train unskilled employees to increase efficiency
 Encourage more people to look for jobs (it reduces voluntary unemployment)
 Low paid workers can now spend more . i.e improvement in their standard of living

DISADVANTAGES OF A MINIMUM WAGE

 Increases costs and prices of finished goods
 Employers who cannot afford these wages might make employees jobless
 Higher paid workers will demand higher salaries so that the previous salary gap is maintained.

c)Consumer Protection legislations

Most of the countries have consumer protection laws aimed at making sure that businesses act fairly towards
their consumers: A few examples are
Weight and Measures Act: goods sold should not be underweight. Standard weighting equipment should
be used to measure goods.
Trade Description Act: deliberately giving misleading impression about the product is illegal.
Consumer Credit Act: According to this act consumers should be given a copy of the credit agreement and
should be aware of the interest rates, length of loan while taking a loan.
Sale of Goods Act: It is illegal to sell products with serious flaws or problems and goods sold should conform
to the description provided.

d)The law and business competition

Restrictive practices done by firms
 Refusal to supply a retailer if they do not agree to charge the prices determined by the
manufacturer
 Full-line-forcing- is when a major producer forces a retailer to stock the whole range of
products from the manufacturer
 Market sharing agreements and price fixing
  Predatory pricing-when a firm tries to block new competitors by charging very low
prices for certain goods

Government attempt to encourage and promote competition between businesses by passing laws that:
 Investigate and control monopolies through anti-merger policies
 Limit or outlaw uncompetitive practices between firms
 control the entry of imports
 promote inventions through enacting patent laws and copyrights

Benefits of free and fair competition

 Wider choice of goods and services than when just one business dominates a market
 Lower prices
 Quality goods

e)Law and the environment

Social Audit
-a report on the impact a business has on society. This can cover pollution levels, health and safety record,
sources of supplies, customer satisfaction and contribution to the society.

1.6.2 Economic factors

These include economic growth, interest rates, exchange rates and the inflation rate. These factors
have major impacts on how businesses operate and make decisions. For example, interest rates affect a
firm's cost of capital and the extent to which a business grows and expands. Exchange rates affect the
costs of exporting goods and the supply and price of imported goods in an economy

Government macroeconomic objectives:

 Economic growth
 low and stable inflation
 stable exchange rates
 transfer of wealth
 low unemployment

a)Economic Growth
-refers to the increase in the amount of goods and services produced per head of the population over a period
of time. Or an increase in the capacity of an economy to produce goods and services compared from one
period of time to another. The level of economic activity is determined using business cycles

Gross Domestic Product (GDP)- refers to the total value of goods and services produced within an economy
in a year. The economy is said to grow when its GDP is increasing. Problems arise when a country’s GDP fall.

Business Cycle
The business cycle or economic cycle refers to the fluctuations of economic activity about its long term
growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output
(recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These
fluctuations are often measured using the real gross domestic product.
There are four main stages in a trade cycle or business cycle.
A period where the real GDP start to increase again from a slump.
it is also known as the recovery stage
GDP is rising
Unemployment is falling
Growth Business are experiencing rising profits
‘Feel good’ factor among the people as their incomes are rising.
Refers to a period of very fast economic growth with rising incomes and
profits
Boom Results from too much spending.
Economy experiences rapid inflation
Factors of production become expensive
refers to a period of six months or more of declining real GDP.
it is also known as the downturn which results from too little spending.
Recession GDP is falling
Demand in the economy will fall leading to closure of firms and high
unemployment
Business cannot expand since they will be making losses
a very serious and prolonged downturn can lead to a slump where real
GDP falls substantially and the house and asset prices falls
Slump High level of unemployment.
Business will rapidly close down creating serious consequences for the
economy.

Benefits and Problems of high economic growth rate to an economy.

Advantages

 It increases levels of tax revenue which the government can spend on public services
 Increases employment opportunities for the people
  Businesses experience higher sales and profits
 Improvement in the standards of living ( more goods and services for consumption)

Disadvantages

 It leads to the depletion of natural resources

 Can lead to resource shortages
 Decrease in current consumption

Polices used by the government to promote economic growth

i. Lowering interest rate to promote investments

ii. Increasing government expenditure to boost aggregate demand in the economy
iii. Reducing taxation
iv. Providing subsidies to firms
b)Low and Stable Inflation

Inflation is defined as the persistent increase in the level of consumer prices or a persistent decline in
the purchasing power of money caused by an increase the supply of domestic currency and credit
beyond the proportion of available goods and services. Over the long term, inflation erodes the
purchasing power of your income and wealth. This means that, as you save and invest, your
accumulated wealth buys less and less. High rate of inflation leads to lower purchasing power for
consumers resulting in lower demand for goods and services. Moreover, a higher inflation rate will make
business uncompetitive in the international market leading to lower sales for the business.

How to measure Inflation

 Every month the Government surveys prices and generates the current consumer price index
(CPI)
 This allows the government to compare current figures with past figures
 Consumer basket is established ( a sample of goods which are usually bought by people and
this goods have a direct impact on the people’s standards of living)
 Weight are assigned to the goods to reflect the importance of each good in the consumer basket
 A base year is also established. This a year where there is low/no inflation. The CPI in the base
year is usually 100
 If the current CPI is 120 then the inflation rate will be 20% in comparison with the inflation
rate which prevailed in the base year.

Formula:

Inflation rate = (CPI1 - CPI0)/CPI0 x 100

Causes of Inflation

Demand-Pull Inflation: This inflation occurs when the government / consumers / business try to
purchase more output than the economy is capable of producing. Thus inflation results when the
macro economy has too much demand for available production.
Major drivers of demand pull inflation

 Unnecessary printing of more note and coins by the central bank

 Excessive government expenditure
 Supply shortages
Policies to designed to solve demand –pull inflation

 Reduce government expenditure and increase taxation (fiscal policy)

 The central bank must raise interest rates and reduce the supply of notes and coins in the
economy (monetary policy)
 The government to work on supply bottlenecks
Reducing demand –pull inflation and the impact on businesses

 High interest rates will discourage investments

 Aggregate demand will fall and the firms may decide to relocate to other countries
 Businesses may begin to offer less expensive goods
Cost-Push Inflation: Cost-push inflation is inflation due to decreases in supply, primarily due to
increases in production cost

Major drivers of cost-push inflation

 Increase in wages
 Increase in the world price of imported raw materials
 Lower exchange rate pushing up prices of imported raw materials
 Increase in the cost of production
Policies to designed to solve cost-push inflation

 High exchange rate policy (revaluation of domestic currency)

 Discourage high wages by limiting trade union powers
 Come up with cheaper local resources
 Reduce indirect taxation
 Provide subsidies to firms
Reducing cost -push inflation and the impact on businesses

 High interest rates will discourage foreign direct investments

 High exchange rate will make exports less competitive on the world markets
 Workers become less productive when the wages are reduced
Business strategies in period of inflation

 Try to reduce labour costs

 Avoid excessive borrowing
 Sale goods on cash basis
 Reduce the credit period to customers
 Avoid unnecessary expansion programs
Deflation

Refers to a fall in the average or general price level of goods and services. The purchasing power of
money will be increasing. Thus one dollar will be buying more goods today than it did yesterday.
Deflation occurs when the inflation rate falls below 0%.This should not be confused with disinflation, a slowdown
in the inflation rate. Inflation reduces the real value of money over time.

Business strategies in period of inflation

 Sale goods on credit basis

 Borrow more money for expansion
 Increase the repayment period to credit customers

c)Unemployment
Refers to a situation where people who are able and willing to work cannot find a job. It only caters for
people in the working population who are willing and able to work.

Formular:

Unemployment rate = unemployed / labour force x 100/1

Labour force/ economically active group = 15 years to 64 years

There are a number of types of unemployment:

 Structural unemployment
 Cyclical unemployment
 Frictional unemployment

Structural unemployment

 Occurs when the economy changes and industries die out e.g important industries like the
mining and secondary industries
 It also due to changes in the consumer tastes and expenditure patterns
 Structural unemployment can affect businesses in the local area

Solutions

 Training is needed to give the unemployed workers new skills

 The government to invest in declining industries

Cyclical unemployment

 Caused by the business cycle

 Unemployment which result from low demand for goods and services in the economy during a
period of slow growth or recession
 Cyclical unemployment can lead to a decrease in sales meaning businesses need to look for
new markets
 Solutions

 Increase government expenditure and reduce taxation (fiscal policy)

 Increase the supply of notes and coins and reduce interest rates (monetary policy)
 Maintain a competitive exchange rate so that the demand for exports does not fall
(exchange rate policy)

Frictional unemployment

 Caused when people are temporarily out of work as they are changing jobs. What it means is
that the jobs are available somewhere in the country but it takes time for unemployed to for the
unemployed to apply for the jobs, to attend interviews and to relocated to those areas.
Frictional unemployment is not a problematic type of unemployment .

Solutions

 Improve the flow of information by setting up job centres or employment agencies

 Reduce the unemployment benefits
Effects of high unemployment

 Decrease in the output of goods and services in the economy

 Lower living standards for the unemployed
 Increase in social problems e.g crime and other social ills
 The government has to give the jobless people unemployment benefits
 The skills of the unemployed people become increasingly out dated
Inflation and Unemployment trade off

Reducing demand pull inflation will lead to cyclical unemployment and reducing cyclical
unemployment will lead to demand pull inflation.

Stagflation

Refers to a period where there is a high rate of inflation and high rate of unemployment.

d)Stable Exchange Rates

Exchange rate refers to the value of a nation’s currency in terms of another currency i.e. £1=$2. An
exchange rate is set by demand and supply of a currency in a free market economy. In a command
economy the exchange rate is determined by the government through its central bank.

Freely floating exchange rate

Refers to the exchange rate determined by the forces of demand and supply. Equilibrium exchange
rate is determined where the demand for the currency is equal to the supply of the currency.

Factor determining the supply of foreign currency

  Foreign investors starting businesses in Zimbabwe
 Foreign tourists spending money in the country
 Foreign buyers of domestic goods and services (exports)
 foreign governments repaying loans obtained from Zimbabwe
Factor determining the demand for foreign currency

 Domestic firms or individuals buying foreign goods and services (imports)

 Domestic population travelling abroad
 Domestic people investing abroad
 Domestic government repaying loans abroad
Exchange rate fluctuations
The exchange rate can move up or down due to the changes in the demand or supply conditions. Thus
the exchange rate can appreciate or depreciate.

Exchange rate appreciation: refers to a rise in the external value of currency measured by its
exchange rate against other currencies. E.g from £1=$2 to £1=$4. The pound sterling had appreciated
in value while the Zim dollar had depreciated in value

EFFECTS

 Imported raw materials becomes cheaper

 Demand may shift from local goods to foreign produced goods
 Can lead to balance of payments (BOP) surplus ( exports become expensive and imports
cheaper)
Exchange rate depreciation: refers to a fall in the external value of currency measured by its
exchange rate against other currencies. E.g from £3=$2 to £3=$1. The pound sterling had depreciated
in value while the Zim dollar had appreciated in value

EFFECTS

 Imports become cheaper and exports dearer

 Can lead to BOP deficit. A situation where imports exceeds exports
 External debt of the country will increase
 Local goods becomes less competitive in the domestic economy
Exchange rates create uncertainty because:

 If a deal is agreed in foreign currency firms may receive more or less than expected due to
changes in exchange rates
 Changes to exchange rates can affect prices and sales overseas
 Competitors can respond in unexpected ways to exchange rate changes

Changes in the UK’s interest rates will lead to changes in the exchange value of the pound.

 If interest rates rise the value of the pound will rise so the pound will now buy more US
dollars, Japanese Yen, Euros etc.
 If interest rates fall the value of the pound will fall so the pound will now buy less US dollars,
Japanese Yen, Euros etc
  If interest rates are higher than rates in other countries the UK will become more of an
investment opportunity.

Investors will exchange their currency into sterling to invest it in UK banks to earn high rates of
interest on their savings.

This will increase the demand for Sterling which will appreciate in value

If interest rates are lower than rates in other countries the UK will become less of an investment
opportunity.

 Investors will exchange their currency from sterling to invest it in Foreign banks.
 They will withdraw £ in the UK to buy foreign currency.
 This means an increased supply of sterling will be available in the world’s currency market
causing the £ to depreciate

Balance of Payments Equilibrium

-the government must also aim to have balance of payments equilibrium. i.e exports should be equal to
imports. Balance of Payments is a national account which records the movement of goods and services
into and out of the country. It has two main accounts:

i. Current account: records the movement of goods and services between a country and all its
trading partners
ii. Capital account: records the outflows and inflows of financial capital
BOP deficit

-occurs when the imports are greater than exports

Effects of a BOP deficit

 Depreciation of domestic currency

 Depletion of foreign currency reserves
 Foreign investors will be reluctant to invest in the country
 Rising external debt
Ways of correcting a BOP deficit

Tariffs: tax levied on imported goods to increase their prices and reduce their demand in the domestic
economy. They are also known as customs duties

Quotas: physical limit on the quantity of goods to be imported

Embargo: total ban of the imports

Devaluation: a deliberate attempt by the government to reduce the external value of domestic
currency

Subsidising local firms: this will make the production of domestically produced goods cheaper.
Macro Economic Policies
To achieve its objects the government will use macro economic policies. Macro economic policies are
defined as the set of government rules and regulations to control or stimulate the aggregate indicators
of an economy. These policies are designed to work on the whole economy

Fiscal Policy

Fiscal policy is the use of government spending and taxation to influence the economy. When the
government decides on the goods and services it purchases, the transfer payments it distributes, or
the taxes it collects, it is engaging in fiscal policy. The primary economic impact of any change in the
government budget is felt by particular groups i.e A tax cut for families with children, for example,
raises their disposable income. Discussions of fiscal policy, however, generally focus on the effect of
changes in the government budget on the overall economy. The term "fiscal policy" is usually used to
describe the effect on the aggregate economy of the overall levels of spending and taxation, and more
particularly, the gap between them.

Government Budget/ National Budget = Tax revenue – Government spending

Government budget deficit- arise when the value of government spending exceeds revenue from
taxation

Government budget surplus occurs when taxation revenue exceeds the value of government spending

Types of Fiscal Policy

Tight or Contractionary Fiscal Policy
Fiscal policy is said to be tight or contractionary when revenue is higher than spending (i.e., the
government budget is in surplus) . The government will deliberately reduce its expenditure and raise
taxation. The overall result will be a reduction in the level of aggregate demand so as to curb
inflationary pressure and BOP deficits. This policy is usually used by the government when the
economy is booming and is in the danger of overheating

Loose or Expansionary Fiscal Policy

loose or expansionary occurs when spending is higher than revenue (i.e., the budget is in deficit). The
government will deliberately increase its expenditure and reduce taxation levels. Aggregate demand
will increase hence national output and employment will increase. This policy is usually used by the
government when the economy is in a recession

Impact of Fiscal Policy on businesses

 Direct taxes will affect consumers’ disposable income. Disposable income refers to income
after tax
 Direct taxes also affect company profits
 Indirect taxes will increase retail prices of goods and the impact on either consumers or
businesses will depend on the elasticity demand for each product
 Reduced government spending will affect businesses that provide goods and services directly
to the government i.e firms that used to benefit from government tenders

Monetary Policy
Monetary policy is the process by which the monetary authority of a country controls the level of interest rates
and the supply of money with the purpose of promoting stable employment, prices, and economic growth.

Type of Monetary Policy

Loose or Expansionary Monetary Policy

It occurs the government through its central bank increases the supply of notes and coins and lower the level of
interest rate to increase the level of aggregate demand in the economy. An increase in money supply will
decrease interest rates and investment is promoted. A rise in investments will increase aggregate demand in
the economy hence national output and employment will increase. Expansionary monetary policy is used when
the economy is in a recession

Tight or Contractionary Monetary Policy

It occurs the government through its central bank decreases the supply of notes and coins and raises the level
of interest rate to decrease the level of aggregate demand in the economy. A decrease in money supply will
increase interest rates and investment is discouraged. A fall in investments will decrease aggregate demand in
the economy hence inflationary pressure is reduced. Tight monetary policy is used in a boom where the inflation
rate is very high.

Impact of Monetary Policy on Businesses

 Interest rates affect the cost of borrowing to the businesses which then affect its profitability
 Interest rates affects consumer borrowing and this may lead to fall in demand for goods and
services
 Changes in interest rates may affect the exchange rate which then affect the ability of firms to
buy raw materials from outside.

Exchange Rate Policy

The government can also try to influence the economy by adjusting the external value of domestic
currency. The government can choose to fix the exchange rate or to allow it to float (or to be
determined by demand and supply factors) or to join a monetary union where member countries uses a
common currency

Free Floating Exchange Rate

The exchange rate is determined by the operation of the price mechanism. The interaction of the
demand for and supply of foreign currency will determine the equilibrium exchange rate.

Advantages
 Automatic correction of BOP disequilibrium.
 Reduces need for the foreign currency reserves
 May reduce speculation as the exchange rate move freely up or down

Disadvantages
 Fluctuating prices of imported raw materials and components, making costing of products
difficult
 Fluctuations in export prices and overseas competitiveness, which lead to unstable levels of
demand
 Uncertain over profits to be earned from trading abroad or from investing abroad.
Fixed Exchange Rate
An exchange rate that is determined by the government. The government will set an exchange rate
then make an effort to support it to prevent the exchange rate from moving up or down.

Advantages
 Stable exchange rate provide a basis for business expansion
 Stability encourages increased trade

Disadvantages
 Large reserves of foreign currency are required to support the exchange rate
 There is no auto-correction of BOP deficit

Managed Float or Dirt Float Exchange Rate System

Refers to a situation where the exchange rate is allowed to fluctuate between the set exchange rate
bands. Thus it is partly fixed and partly determined by market forces.

Joining a Common Currency or Currency Zone

An economy may join a monetary union which uses common currency

Advantages
 Planning is made easy since one currency is used
 No extra cost of converting domestic currency into foreign currency
 Comparison of prices from different countries becomes easy

Disadvantages
 Conversion costs from one currency to the common currency could be high in terms of dual
pricing and the changeover of notes and coins
 Local central bank will lose its independence to control money supply

Impact on the Economic Environment

Positive effects
1) Job creation
2) Boost to the local economy –development of infrastructure e.g. roads, water, sewerage,
communications, buildings etc
3) Increased tax income for the government
4) Increased income for the local people
5) Attraction of other firms into the area
6) Greater social cohesion

Negative effects
1) Expansion at the expense of rivals – unfair competition
2) There will be pressure on resources which may push up costs e.g. rent, rates, wages etc
3) Increase in external costs e.g. congestion, pollution and noise

Technological Environment
The technical environment in which business operates is subject to change and the successful
organization is the one that is willing and able to adapt to these environmental changes. Technical
breakthroughs have a powerful effect on business. It is the combination of the right technology and
marketing that leads to the communicational success of products.
-Technical changes can also cause changes in demand for a firm’s products. For example, the
introduction of colour TVs resulted in low demand for black and white TVs.
-Changing technology also results in changes in the processes of production and in the size and type of
workforce required e.g. computerization of the office reduces the number of workers required but
places government emphasis on skills and quality of staff. In factories, automation has reduced the
skill element in the work.
-The technological element allows the manager to access more accurate data that enables him to plan
better.
-The technical changes in transport have helped to lower the costs of moving goods and opening new
markets. Until recently, it was not possible to move perishables from areas of production to areas of
consumption without deep freezing.
According to Phillip Kotler, technology affects business in the following ways:
1) The accelerating pace of technical changes is bringing about fundamental changes in working life
and shorter product life cycles.
2) Opportunities for innovation appear limitless. This entails new products, new Processes and new
ways of working.
3) Increasing expenditure on R& D is not an option but is essential for modern business organizations.
4) The impact of technology can be very harmful to the society (global warming, nuclear power, toxic
substance etc) thus there is need for greater regulation.
5) Continuous product improvement is essential, though minor and less risky changes are Preferred.

Social Environment
-include the cultural aspects and include health consciousness, population growth rate, age
distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a
company's products and how that company operates. For example, an ageing population may imply a
smaller and less-willing workforce (thus increasing the cost of labour). Furthermore, companies may
change various management strategies to adapt to these social trends (such as recruiting older
workers).
-Businesses operate within society. It is of utmost importance that the manager is aware of the
characteristics of the social element of the environment. The size and age distribution of the
population, its standard of living, facilities for training and education, availability of housing and
health care all affect business operations.
-A growing population is beneficial to firms in increasing the size of the potential market.
-Trends in the birth rate can affect business especially those in the health sector and early childhood
education.
-Age composition of the population can assist businesses in niche marketing, that is, concentrating on
a particular age group of the market.
-Lifestyles, values and benefits, and religious backgrounds are significant to businesses because of
their impact on labour and the purchasing behaviour of people in the society.
-Increasing affluence has led to a more health-conscious society. This has led manufacturers of foods
to face the challenge of producing more nutrition health foods.
-The population is also affected by migration. The negative impact of this has been brain drain as
professionals like doctors; nurses etc are leaving the country for greener pastures in neighbouring
countries and overseas.

Corporate Social Responsibility

Corporate social responsibility focuses on what an organization does that affects the society in which it
exists. CSR refers to a set of policies designed to demonstrate the commitment of a business to the
well-being of the society and others by taking responsibility for the impact of business decisions on all
stakeholders. CSR commits a business to a way of operating that goes beyond what is required by law
-A socially responsible firm that operates in an ethical way has concern for the environment and
undertakes philanthropic activity on behalf of the disadvantaged in the society.

Social responsibility programmes

 Making sure the employees receive fair treatment, fair wages, access to health and safety at
work, fund training programmes
 Using environmentally friendly production methods
 Championing community programmes like infrastructural development
 Providing quality goods and services
 Treating other business partners fairly i.e embracing a fair and responsible approach to
procuring and delivering goods and services
Arguments for Social Responsibility
1. The creation of a better social environment benefits both society and business.
2. To comply with the law
3. Social involvement creates a favourable image for the company.
4. Businesses have the resources to help solve social problems.
5. Businesses and society are interdependent.
6. Social involvement discourages additional government intervention.
7. it reduces the risk of negative publicity
8. To respond to the demands from stakeholders, particularly customers and pressure groups
Arguments against Social Responsibility
1. The primary task of business is to maximize profit by concentrating on commercial activities.
2. Social involvement results in higher prices to customers.
3. Company directors have a duty to shareholders.
4. Businesses lack the social skills to deal with the problems of society.

Social Auditing
This involves a business formally reviewing and accounting for the impact on society of its operations.
It can include its impact on the environment, its effect on the local community, its attitude to such
things as human rights and its attitude to stakeholders including employees. The business is now
accounting to non-financial aspects of the business and deals with social matters that are not
necessarily measured in financial terms

The role of Pressure Groups

These are also stakeholders to the businesses. Pressure groups refers to an organisation created by
people with a common interest or aim who put pressure on business and government to change
policies so that an objective is achieved. They include organisations such as the Friends of the Earth
that have been set up to highlight and sometimes oppose developments that may cause changes to the
environment.

International Examples of Pressure Groups

 Friends of the Earth
 Green Peace: campaigns for greater environmental protection by both businesses adopting
green strategies and government passing tighter anti-pollution laws
  Fair-trade Foundation: aims to achieve a better deal for agricultural producers in low income
countries
 Jubilee 2000: campaigns western governments to reduce or eliminate the debt on developing
countries
The ways in which Pressure Groups use to achieve their objectives
 Publicity or campaigns through media i.e frequent press releases
 Demonstrations and meetings
 consumer boycotts: the consumers will stop buying a particular product for a long period of
time
 lobbying the government to change the law or to put in place laws

How businesses are constrained by other Businesses

The businesses are also affected by the operations of other businesses. Thus the business rely on other
businesses and its activities are greatly influenced by these businesses. E.g wheat farmer will be a
supplier of a bread making business.

Challenges from the other businesses

 the supplier may only be able to supply a limited quantity at a given price
 the supplier may be facing difficulties
 the supplier will have some influence over the price the customer pays
 the lenders may place restrictions on the amount and use of finance

External Influences from a Demographic Change

Refers to a change in the human population in terms of age, gender, education and ethnicity etc.
Ethnic- of or relating to races or large groups of people who have the same customs, religion, origin
etc The demography of a country is important to businesses because it can help determine the best way
to target products and marketing. It also has impact on manpower planning and other workforce issues

Young people Older people

Usually buy Usually buy

 music  holidays and travel

 electronic including mobile phones  properties with facilities for the elderly
 fashion clothes  health products
 entertainment  investments
On the job On the job

 lower cost  more loyal

 more flexible  less likely to move
 likely to change jobs frequently  more experienced
 more innovative  more hard-working
 more up to date
 demand more training
Market Failure
Occurs when the market fails to achieve the most efficient allocation of resources. The resources are
not allocated in the best possible manner. Public goods are not produced at all in a free market
economy yet they give a lot of benefits to the society e.g defence and street lighting. Merit goods are
under-produced of which they are equally important to the society e.g education and health. Demerit
goods are products which are very harmful to the society yet they are over produced. E.g tobacco and
alcohol

Market failure is thus caused by

 Abuse of monopoly power

 Lack of public goods
 Under provision of merit goods
 Overprovision of demerit goods
 Environmental degradation
 Inequality in distribution of wealth
 Problems of information

Forms of market failure

a)External Cost/ Negative externalities- these are spill over costs to the parties which are not directly
involved in a market transaction. These are cost of economic activity that are not paid for by the producer
or consumer, but by the rest of the community. The external costs are not reflected in the price of most
commodities and as a result more of that product is consumed.

Examples of external costs

 Effects of air and land pollution

 Passive smoking
 Effect of water pollution
NB Goods that confers external cost to the society are overproduced. External costs are added to private
costs we get social costs

SC = PC + EC

b) External Benefits/ Positive externalities

Arises when third parties gains from an economic activity for no payment. Such products are under
produced and under consumed. E.g A horticulturalist can benefit freely from a bee-keeper nearby. If external
benefits are added to private benefits we get social benefits (SB)

SB = PB + EB

Methods used to correct market failure

 a) Taxation- to reduce the production of demerit goods the government can introduce indirect taxation.
Indirect taxation increases the cost of producing goods and less of the product will then be produced
b) Subsidies- to encourage the production of enough merit goods the government must give subsidies
to private firms. Subsidies reduces the cost of production and increases the supply of goods.
c) Direct provision- public goods cannot be produced by private firms since they are not profitable at
all. The government will have to directly produce public goods like defence and street lighting
d) Competition policies- the government can investigate and act against monopolies. Anti-monopoly
laws should be introduced.
e) Regulation- the government can impose fines on polluting businesses or impose strict limits on
pollution levels
f) Tradable Permits-This gives each firm a quota of greenhouse gases that it can emit over a specified
interval of time. Then the market takes over. Those polluters that can reduce their emissions
relatively cheaply may find it profitable to do so and to sell their emissions permits to other firms.
Those that find it expensive to cut emissions may find it attractive to buy extra permits

1.4 BUSINESS OBJECTIVES

Refers to stated, measurable targets of how to achieve business aims or the targets that must be achieved
to in order to realise the aims of the business. Objectives can be seen as the more specific and quantifiable
aims, designed to assist in the achievement of the goals identified in the mission statement. Objectives must
state what the organisation is trying to achieve, how this can be done, when it must be done and how they
will know that it has succeeded

Importance of business objectives

 They clarify to everyone what the business is working to achieve

 They aid in decision making and choice of alternative strategies
 They enable checks on progress and corrective action
 They provide means by which performance can be measured
 They motivate employees
 They can be broken down to provide targets for each part of the organisation
 They provide shareholders with a clear idea of the business in which they have invested
 They facilitate the resolution of conflict between departments
Objectives should be SMART

S- specific M- Measurable A-achievable

R- realistic T- time specific/ time framed

S-SPECIFIC: Objectives should be more precise. Having a bunch of vague statements isn’t very helpful at
all. You must make your project tangible by saying how you are going to go about it. For example, a hotel
might have an objective of filling 60% of its beds a night during October. Thus the issue of accommodation
is specific to Hotels. It answers the questions, ‘What is to be done’. We quickly get to understand what the
business is doing.
M-MEASURABLE: Define your objective using assessable terms. Express it in terms of quantities,
frequency, quality, costs, deadlines etc. It refers to the extent to which something can be evaluated against
some standard. E.g to increase monthly sale by 15%

A-ACHIEVABLE: It is pointless to have objectives that are impossible to achieve within the time period set.
Achievable answers the questions, “Can a person do it”, “Can the measurable objective be achieved by the
person?”, “Does he/she has the experience, knowledge or capacity of fulfilling the expectation?”,

R-REALISTIC/ RELEVANT: The objective should be challenging, but it should also be able to be achieved
by the person using the available resources. Thus the objectives should be realistic when compared with
the resources of the company and should be expressed in terms relevant to the people who have to carry
them out. E.g a target of reducing cleaning materials by 15% to a cleaner.

T-TIME FRAMED: An objective should have end points and check points built into it. They must have a time
limit of when the objective should be achieved. Time specific answers the question,”When it will be done?”
e.g by the end of the month or by the end of the year

HIERARCHY OF OBJECTIVES

AIMS

Refers to a broad statement where a business wants to go in the future. Aims states what you want or your
overall intention in the project. It is generally broader than an objective.

MISSION
A formal summary of the aims and values of a company. It explains the organisation’s purpose, what it
stands for and why it exists. It is a statement of the business’s core aims, phrased in a way to motivate
employees and stimulate interest by outside groups (or aims of the business in a motivating and appealing
way)

Mission statement should explicitly state things related to its business, such as industry, products or
services, employees, culture, customers and the adherence to things like quality, efficiency, pricing, social
responsibility.

Examples of Mission Statements

FACEBOOK: to give people the power to share and make the world more open and connected
FORD MOTOR COMPANY: ‘One team, one plan, one goal, one Ford’

Purpose of the Mission Statement

 Quickly inform groups outside the business what the central aim and vision are
 Help to guide and direct individual employees behaviour at work
 To motivate employees
 They help to establish in the eyes of other groups what the business is all about
CORPORATE OBJECTIVES

Refers to a detailed plan of a step you plan to take in order to achieve a stated aim. Mission statements and
aims should be complemented with corporate objectives because they specific details for operational
decisions and they are rarely expressed in quantitative terms. Thus aims and mission statements should be
turned into objectives that are specific to the business that can be themselves be broken down into strategic
departmental targets. Corporate objectives provide more details about the course of action or strategy to
follow

Corporate Objectives include:

 Profit maximisation
 Profit satisficing
 Growth
 Increasing market share
 Survival
 Corporate social responsibility (CSR)
 Maximising shareholders value

a)Profit Maximisation: It is the main aim for most of private firms. Profit maximisation refers to the greatest
positive difference between total revenue and total cost. Total revenue is obtained by multiplying price per
unit and the total number of units sold. Profit is very important for businesses because it is used for rewarding
the investors (owners of the business). Profit is also used for business expansion in the future ( ie to finance
internal growth)
Challenges faced by firms as they pursue this objective

 Maximising profit may encourage new competitors to enter into the industry and the chances for
business success will be reduced
 This objective can conflict with that of mangers who aim to maximise sales
 Other stakeholders may give priority to other issues besides profit maximisation

b)Profit satisficing: the objective will be to achieve enough profit to keep the owners happy but not to
maximise profits. This objective is pursued by owners of small businesses who wish to have more leisure
time. The business will be satisfied by making a certain level of profit.

Challenges faced by firms as they pursue this objective

 The business won’t be having money to grow in the future

 The business may lack funds to implement social responsibility programmes

c)Growth: growth involves increasing the operation of the business expanding to other regions or countries.
It is also measured by the number of employees, number of products sold etc. Growth benefits managers
in terms of higher salaries. Growth helps the business to avoid takeovers. Furthermore, the business will
benefit from economies of scale and it becomes more appealing to new investors.

Challenges faced by firms as they pursue this objective

 Rapid growth can lead to diseconomies of scale e.g financial diseconomies; managerial
diseconomies etc
 Growth can lead to lower short term returns to shareholders since it can be achieved through
lowering prices

d)Increasing market share: market share refers to the proportion of a company’s sales to the total sales
in the market. Eg Your company sales 60 toys in a month and there are a total of 100 toys sold in a month.
Thus your company has 60% market share. Market share is related to business growth. Thus increasing
market share indicates that the marketing mix of the business is proving to be more successful than that of
its competitors. Increasing market share reflects to the firm as a brand leader (customers will be loyal to
certain brands offered by the firm)

e)Maximising Shareholders Value: It is an objective usually for public limited companies. Management
will be concerned about increasing the company’s share prices and dividends paid to shareholders. Thus
the interests of shareholders will be considered as first priority. Increased shareholders value is achieved
through profit maximisation

Challenges faced by firms as they pursue this objective

 The objective conflicts with the objectives of other stakeholders

f)Corporate Social Responsibility (CSR): refers to a set of policies designed to demonstrate the
commitment of a business to the well-being of society and others by taking responsibility for the impact of
business decisions on all stakeholders. Some businesses have objectives which are based on their beliefs
of how one should treat the environment and people. CSR applies to those businesses that considers the
interests of society by taking responsibility for their decisions and activities on consumers, employees,
communities and the environment. Some business activities are very damaging to other stakeholders. Thus
governments and some international organisations like European Union (EU) must ensure that businesses
take responsibility of their actions on people and the planet

Benefits of being socially responsible

 The business can be given government contracts/ tenders

 The business can easily attract highly skilled and experienced personnel
 Business will gain public acceptance and reduced risk of negative publicity
 Employees committed to the same values
 Customer loyalty

Challenges faced by firms as they pursue this objective

 It conflicts with the profit maximisation objective

 Time is wasted on social responsibility programmes
 The business won’t have enough money for expansion
 Greater criticism and loss of loyalty if things go wrong

Departmental Objectives

Ford Car Company’s main aim is to become the largest car maker in the world and each department must
have some means of helping the company achieve that. Departments like product designing, production
and the marketing department will have different roles to play to help Ford achieve its main aim. For a car
manufacturing business, the departmental objectives may include:

Product design: produce designs for a new range of cars that will appeal to the family car market

Production: improve production processes to increase production and reduce costs

Marketing: Create a marketing mix in order to increase sales volume by say 15% per year

Individual Objectives

These are the objectives set for an individual in an organisation. They are basically day-to-day objectives or
targets for each person. This helps ensure that each individual knows what they need to do to achieve
departmental objectives. Individual objective are important for the appraisal of each and every employee.

Relationships between Mission, objectives, strategy and tactics

Mission and Objectives

Mission statements and objectives provides the basis and focus for business strategy ie The long-term plans
of action of a business that focus on achieving its aims. Without a clear objective, a manager will be unable
to make important strategic decisions. The setting of clear and realistic objectives is one of the primary roles
of senior management. Before strategy for future action can be established, objectives are needed. Thus
setting mission and objective gives a business a sense of purpose and direction

Strategies and Tactics

Mission statements and objectives alone cannot guarantee business success. They have to be developed
into actual courses of action known as strategies and tactics.

Strategy: is a plan setting out how a business as a whole will achieve its overall long-term objectives. For
example the business objective of a car manufacturer could be, “To manufacture 4 million cars by 2018.”
The strategies to achieve such an objective could include:

 Increasing efficiency
 Building a new factory
 Designing new models of cars
For strategies to work well in the business they need to be complemented with tactics. At tactic is a short-
term plan for day-to-day operations of a business with the aim of contributing towards the overall strategy.
For example, in order to achieve productivity improvements the workforce might get prizes for the teams
that make the biggest improvements to productivity.

NB Tactics refer to a short-term course of action for the day-to-day management of a business for trying to
meet part of an overall strategy

Business Decision making.

Objectives not only give a sense of direction to a business, they are essential for making decisions. Without
setting relevant objectives at the start of this process, effective decision making for the future of the business
becomes impossible.

Stages in the decision making process

 Set objectives: it is impossible to make decisions in the future if the objectives are not clear or if
they are non-existent.
 Identify and analyse the problem: managers make decisions to solve a problem. It is imperative
that you must understand the problem before finding a solution for it, otherwise, you might make a
wrong decision.
 Collect relevant information: gather data about the problem and possible solutions. It is always
important to analyse all possible solutions to find which one is the best
 Analyse/Evaluate all options : consider the advantages and disadvantages of each option or
possible solution
  Make the final decision : make a strategic decision. Select the best option with more advantages
and few disadvantages
 Implement a decision: this means that the manager must see to it that the decision is carried out
and is working according to plan
 Review and evaluation of the decision: review its success against the original objective. If the
decision didn’t work, then a corrective action must be done for the objectives to be achieved
How and why objectives might change over time

 Change in owners’ priority: the owners shift from one object to the next as time unfolds
 Change in market conditions: in a recession the business may aim for survival
 Change in size of the business: owners’ objective could be growth in early stages and then profit
maximisation as the business becomes well established
 Change in management: when new management comes in, they can introduce new changes which
could be new objectives
 Change in competitor behaviour: the business can change its objectives in responses to changes
made by the competitors
 Change in legislation: a change in government laws can force a business to come up with new
objectives in a new environment

Translation of objectives into targets and budgets

This statement simply means a process by which objectives are translated into targets and budgets. Thus
corporate objectives should be broken down into individual targets. Target or key performance indicators
(KPIs) refers to a detailed operational objective for a specific area of a business to be achieved by a specific
date. Once targets have been set for individuals or groups they can be monitored and adjusted to increase
the chances of achieving overall objectives, and can be used as a motivational tool. Communication is very
important to make the employees aware of the business objectives. Targets can also be used in the
budgeting process. A budget refers to a plan expressed in financial terms for targets to be achieved, financial
resources to be made available. Employees must be involved in the setting of targets. Unrealistic targets
will, however, lead to unobtainable and misleading budgets.

Advantages of targets

 Employees will be motivated to work harder

 Productivity of employees and managers will improve
 Encourages team work which then reduces mistakes at the business
 Managers will always be in touch with employees and this helps employees to meet deadlines
 Help managers to identify problem areas
 An easy way to translate corporate objectives into individual and other subsidiary objectives
Disadvantages of targets

 Can be demotivation especially if they cannot be achieved or an employee fails to achieve them.
There can be many reasons for failing to reach a target.
 Can dehumanise a job. People are treated like machines rather than as humans
  Can lead to ‘blame culture’
 Difficult and expensive to monitor
Importance of Budgets

 Reviewing past activities

 Controlling current activities i.e helping the business to stick to the objectives
 Planning for the future
COMMUNICATION OF OBJECTIVES AND THEIR LIKELY IMPACT ON THE WORKFORCE

Targets in business have been a valuable management tool for a long time. In 1945, Peter Drucker
developed the idea of Management By Objectives (MBO). This is a method of managing staff by defining
objectives for individuals members derived from the overall objectives of the business.

How ethics may influence business objectives and activities

Business ethics refers to moral guidelines that govern business decisions and business behaviour. These are
rules and guidelines on staff behaviour that must be followed by all employees’. Employees must behave in a
morally acceptable manner. Some managers operate their business along strict ethics rules, they want their
employees to do the right thing. Business ethics apply to all aspects of business conduct ad are relevant to the
conduct of individuals as well as the entire organisation. Ethics involves the choice that people make and
sometimes ethical issues are covered by legislation. A code of ethics should be drawn up

Differences between business ethics and code of conduct

Business ethics

 Making the business gains in a proper manner

 Avoiding discrimination on staff and stakeholder groups
 Not linked to political parties
 Being fair to all who have business relationships with the company
 Protecting the environment
Code of Conduct

 Upholding the principal of honesty and fairness

 Protecting the properties and reputation of the business
 Conducting business in the best interest of the owners
 Behaving appropriately at all times towards others
Unethical business activities

 Buying supplies from businesses that use child labour

 Exploiting suppliers in poor countries by demanding and paying low prices
 Lending to people and businesses who will struggle to repay the loans
 Wilful selling of harmful products to the people
 Not paying a fair wage
 Avoiding paying tax
  Polluting the environment
 Newspapers prying into people’s private lives
 Target advertisements for sweet at children
 Getting business secrets from competitors
 Encouraging top employees to move from a competitor
 Paying bribes to get contracts
 Failure to give correct or accurate information
 Testing cosmetics products on animals
 Over charging tourists
Benefits of acting ethically

 The business will be offered with government contracts

 The business may attract qualified and experienced staff
 The business may get more customers
 Avoiding expensive court cases on ethical related crimes
Challenges of acting ethically

 Charging lower prices leads to lower profits

 Paying fair wages in harsh economic environments may raise wage costs and this reduces the firm’s
competitiveness
 Not taking bribes may lead to lower sales
 Disposing of waste material can be costly to the business
Business objectives in the private sector and public sector
Private Sector
 To earn high profits
 To maximise wealth of shareholders
 To fulfil needs and wants of the people
Public Sector
 To create employment
 To operate even if no profit is generated
 To provide certain products such as electricity, transport, defence etc
 To provide goods and services at affordable prices

Objectives of Non-profit organisations

 To provide services to members
 To provide employment
 Operating for the welfare of members e.g schools, hospitals
 To eliminate poverty in communities

Conflicting Objectives
Often time two or more objectives will clash and we call these conflicting objectives

Common conflicting objectives

1. Clash between key stakeholders: owners of a company’s objectives may clash with those of
managers or employees. Owners may want the business to minimise costs while employees may
demand for a pay rise. Another example is that of growth versus profit. Thus achieving higher
sales in the short term, probably by cutting prices, will lead to a reduction in short term profits
 2. Clash between short term and long term objectives: a business may decide to accept lower
cash flows in the short term whilst it invests in new products, plants or equipment

3. Clash between environment and profit: for example if a company wants to reduce its pollution
contribution, it will need to spend a heavy proportion of its profits.

1.5 Stakeholders in a business

Refers to individuals or groups interested in the activities of the business. Stakeholders are interested in a
business for various reasons and will be directly affected by its decision or by its performance. Examples of
stakeholders include owners( shareholders); managers; employees; customers; suppliers; lenders;
government; local community and special interest groups( pressure groups). Stakeholders use a variety of
information for decision making purposes, and the information that is available to stakeholders will depend
on whether the stakeholder is an internal or external stakeholder.

Internal Stakeholders

Are those that are directly affected by the business’s performance. They are also known as primary
stakeholders. They have a large influence on how the company is run. For example the company’s owners
will take part in important business decisions. Managers and employees also influence the company’s day
to day operations by various business decisions that they make.

External Stakeholders

Are individuals or groups that are not directly affected by the business’s performance. These parties are not
directly involved in decision making and other business affairs and, therefore, may or may not be affected
by the company’s decision or operations. External stakeholders include the government entities, the general
public, competitors, customer, pressure groups politicians, analysts, stock brokers, potential investors etc
For example, government entities such as internal revenue will use business’s information for assessing tax
payments; potential investors will use the information to make investment choices, media will use them for
public awareness purposes, and analysts and stockbrokers will use them to advice clients or potential
investors.

Differences between stakeholders and shareholders

Shareholders: hold shares in the company. They own part of the business

Stakeholders: They have an interest in the company. They do not own part of the company unless they are
shareholders

Stakeholders Theory/ Stakeholders Concept

An idea that business should not only focus on shareholders’ interest but should consider interest of all
stakeholders e.g managers, suppliers, customers, employees, government and pressure groups (eg
environmental lobbyists)
Roles, Rights and Responsibilities of Stakeholders
Stakeholder Roles Rights Responsibilities
Suppliers -supply goods and -to receive payment in -to supply the goods and
services -to allow the time services in time and in good
business to offer its condition.
products to its own -to be treated fairly by
customers those powerful customers

Customers -buy goods and services -to receive goods and -to pay for the goods
from sellers services that are not received in time
harmful to their health
-provide revenue to -avoiding false claims
sellers -to be compensated when
a problem occurs -honesty i.e stealing

Employees -provide manual and -to be treated fairly -to be honest

mental effort to the
business -to be paid a wage -have the necessary skills
described in their contract and experience required
-produce goods and of employment
services -to perform any other duties
to be allowed to join a delegated
trade union
-to observe the ethical code
of conduct

Lenders -to provide loans to the -to be repaid on the - provide agreed amount of
business agreed date money on the agreed date
for the agreed time period
-to receive interests on
loans

Local -provide local services -to be consulted about -to co-operate with the
and infrastructure to the major changes e.g business on expansion and
community
business expansion plans other plans

-impose fines on -to provide services such as

businesses that operate public transport
illegally

Government -pass laws to control -to take licences of -to treat businesses fairly
business activities businesses that operate
outside the law -to prevent unfair
-promote economic competition
stability -ban the sell of illegal
goods and services -to establish trading links
with other countries

STAKEHOLDERS AND THEIR OBJECTIVES

Stakeholders Who they are objectives
Owners -invest capital in the business and get profits -maximise profits
from the business
-growth of the business

Workers -employees of the business who give in their -job security

time and effort to make a business
successful -job satisfaction

fair wages for their effort

managers -employees of the business who manages a -high salaries

business
-job security
-they lead and control the workers to
achieve organisational goals -status

-growth of business

customers -these are the people who buy the goods -safe and reliable products
and services of the business
-value for money

-to receive after sale services

Government -manages the economy -successful businesses

-collect tax from businesses -employment to be created

-monitors the working of businesses in the -more tax revenue

economy
-laws being followed

The community -community refers to all the people who are -they expect more jobs
directly or indirectly affected by the actions
of the business -environmental protection

-social responsible products

-ethical business practices

Suppliers -people or organisations who provides the -to get a fair price for their goods
business with inputs and services

-long term contracts

-prompt payments

Banks /lenders people or organisations who provide the -interest and principal to be paid
business with funds
-growth of credit industry
IMPACT OF BUSINESS ACTIVITIES ON STAKEHOLDERS

How and why a business needs to be accountable to its stakeholders

Benefits to the business for being responsible to customers

 The business will benefit from customer loyalty

 The business will enjoy good publicity when customers give word of mouth recommendations to
others
 Good customer feedback which helps to improve further goods and services
NB: customer focus: customers should be the business’s top priority. Paying a lip service to customers’
concerns may lead to loss of good image and even legal action

Way in which a business can become responsible to customers

 Business must offer quality goods

 Businesses to offer well designed and durable goods
 To sell goods at reasonable prices
 Businesses not to take advantages of vulnerable customers e.g high-pressure selling tactics
Benefits to the business for being responsible to suppliers

 Benefits from supplier loyalty

 Suppliers may be willing to open credit lines
 Suppliers will be prepared to meet deadlines and requests for special orders
Way in which a business can become responsible to suppliers

 Prompt payments to suppliers

  Giving suppliers clear guidance on what is required
 Offering suppliers long-term contracts
 Buy stock regularly
Benefits to the business for being responsible to employees

 There is employee loyalty

 Low labour turnover
 The business can easily attract highly qualified staff’
 Employees will be motivated and their productivity will increase
Way in which a business can become responsible to employees

 Business to provide training opportunities

 To give employees fair wages
 Involve employees in decision making
 Give employees fringe benefits e.g company house, company car etc
Benefits to the business for being responsible to community

 Local communities are more likely to accept some of the negative effects caused by business
operations
 Local councils often give contracts to business with a record of good behaviour towards the
community and its environment
Way in which a business can become responsible to community

 Offer secure employment

 Avoid adverse environment effects such as pollution
 Employing local people
Benefits to the business for being responsible to the government

 Business may receive valuable government contracts

 Business may benefit from government subsidies
 Licences to set up new operations are more likely to be awarded to business that meet their
responsibilities
Way in which a business can become responsible to government

 Obeying government laws

 Paying taxes in time
Declare all incomes to the government generated by exporting businesses
4. OPERATIONS AND PROJECT MANAGEMENT (AS LEVEL)

4.1 The nature of operations

-It is also referred to as production management. Production is the transformation of inputs into outputs. Thus
production takes place when a business takes inputs, carries out a production process and produces output. In
other words, it is the conversion of resources such as raw materials or components into goods or services.
Operations management decisions involve making effective use of resources (inputs), land, labour and capital to
provide outputs in the form of goods and services.
-Production can be done at primary, secondary or tertiary levels. The inputs of production differ from one
organisation to another. The outputs of one organisation can be the inputs of another firm.

-operations management seeks to ensure that goods/ services are made with the required quantity, required
standard and at the right time and in the most efficient manner. Thus it is concerned with acquiring the necessary
inputs, allocating and utilising them in such a way as to maximise output

– Operations management and planning is concerned with:

○ which resources are needed to complete the production/service process.
○ how the work/process will be organised and scheduled.
○ who will perform the work.

Objectives of an operations management department

To design, create, produce goods and services for an organisation and its customers effectively.
To direct and control the transformation process so that it is efficient and effective and adds value.
To procure appropriate inputs in a cost effective way.
To effectively manage an appropriate inventory level.
To focus on quality, speed of response, flexibility, type cost of the production process.
Achieve an effective labour/capital production mix.
To incorporate latest technological approaches into the production process.

THE DIAGRAM BELOW SUMMARIES PRODUTION

Transformation process
An activity (process) or group of activities that takes inputs and converts them into outputs.

INPUTS

i. Raw materials- the basic materials that can be used to make or create something e.g wheat is a raw
material in bread production
ii. Land- refers to the site on which production takes. It also refers to all the free gifts of nature e.g minerals,
climate
iii. Labour- refers to the physical and mental effort put into the production process. Production process is said
to be labour intensive if labour cost constitutes a larger fraction of a firm’s total costs. There are three
types of labour:- unskilled labour, semi-skilled labour and skilled labour
iv. Capital:- refers to the tools, machinery, computers and other equipment that businesses uses to produce
goods and services. All man-made items used in the production of other goods i.e machines, buildings,
computers, vehicles, roads [Link] Production process is said to be capital intensive if the cost on capital
constitute a larger proportion of the firm’s total cost
NB- Intellectual Capital - is defined as the amount by which the market value of a company exceeds its
tangible assets (physical and financial) – the collective knowledge and skills of a company.
Intellectual capital is the intangible bank of expertise, skills and competencies within a
business that can give the production process a distinctive competitive edge.

INTELLECTUAL CAPITAL- total market value of business asset- total net book value of assets

VALUE-ADDITION and OPERATIONS DECISIONS

Refers to the differences between the cost of purchasing raw materials and the price at which finished goods are
sold. In other words it is an increase in value a business adds from one stage of production to another. When inputs
are transformed into outputs, they will end up with a higher value than their starting point. As each stage of
production process takes place, value is added to the starting inputs because these have to be transformed, adding
value. The role of operations decisions is to achieve a desired value added, in terms of productive efficiency in
reducing unit costs (minimising inputs in relation to outputs) and in terms of financial value (sales revenue and profit).
The operations decisions should lead to efficiency and effectiveness so that customers’ needs are met by the value
added through the productive process

Value added and Marketing

Value addition can be looked at from the point of view of customers. Marketing is the process of meeting customers’
needs, and the process of adding value is making sure that that production process is effective in doing this. Adding
value in marketing is giving something to customer that is of high value to them but is low cost to producer. Added
value marketing gives customers what they really want by making the product have improved performance or better
looks, giving advice on using it, making it more easily available to the customer, providing discounts as well as
quality assurance.

PRODUCTIVITY
-It is a measure of efficiency of production. It shows the relationship between output of a system and factor
inputs. It is also defined as the ratio of outputs to inputs during production. There are two types of
productivity:-

i. Labour Productivity- refers to the number of units produced per worker

Labour Productivity= total units produced/ total workers involved

ii) Capital Productivity- units of output produced per unit of capital resources employed.

Capital productivity= total output produced/ capital employed

ILLUSTRATION
FIRM ITEMS UNITS PER CAPITAL NO OF TOTAL
MONTH EMPLOYED EMPLOYEES WAGES
A Chairs produced 1000 $500 100 $300
B Shirts produced 500 $200 25 $250
C cakes 300 $200 20 $200

Calculate
(i) Firm A’s - Capital productivity
- Labour productivity
(ii) Which firm is more efficient in terms of the utilisation of labour.

METHODS TO IMPROVE PRODUCTIVITY

a) Improve the training of staff to raise skills level:- employees with relevant skills are more
productive
b) Improve worker motivation- use financial and non-financial motivators to encourage employees
to work extra harder.
c) Purchase more technologically advanced equipment- the firm can introduce new machinery
and latest production systems i.e robot-controlled production systems.
d) More efficient management- good leadership improves the overall efficiency of the business

Differences between efficiency and effectiveness in business operations

EFFICIENCY
-it is defined as doing the right thing. It involves the production of output at the highest ratio of output to
input. Efficiency is measured by the productivity of the factors of production. E.g total output / units of
inputs

EFFECTIVENESS
-is defined as doing the thing right. It involves meeting business objectives by using inputs appropriately to
meet customer needs. Efficiency is one part of effectiveness. For any business the relationship between
efficiency and effectiveness depends on the market segment it is aiming at e.g volume, exclusive designer
range etc
Differences between Labour intensive and Capital intensive method of production
Labour intensive Capital intensive
 Costs of labour are a higher proportion of  Costs of capital are a higher proportion of
total costs than costs of capital total costs than costs of labour
 E.g hand worked farm  E.g an oil refinery
Benefits Benefits
 Can produce one-off unique products  Mass production requires large scale
 Well suited to deliver personal services output using repeated task. Machine can
 Lower productions costs especially when deliver this much more quickly than labour
labour is cheaper in that area  Enables the business to enjoy economies
 Low start-up costs of scale
 Relatively easy to vary labour force (recruit/  Increased labour productivity
retrench)  Skills level may be lower so costs are less
and it is easier to recruit employees.
Limitations Limitations
 Cannot produce large-scale output quickly  Difficult to produce a range of varied one-
 Limited economies of scale off products
 Employees can disrupt production easily  Difficult to deliver personal services
due to industrial action or absence  High start-up costs. Cost of capital may be
 Legal constrains may make it difficult to too high for a business to buy machinery
vary labour force  Machine break down can be a big
 Training costs may be very high challenge to the business
 Employees using machines can be bored

Factors that could influence a decision to change to more capital intensive

production methods.
– Relative prices of the two inputs may change – labour costs significantly increase.
– Cost of capital machinery may reduce.
– Technological development may allow production process (or parts of it) to be mechanised.
– Competitors may force a business into capital intensive approach.
– Business may become large enough/profitable enough to purchase capital machinery.

Benefits of operations management

Operations management is concerned with orchestrating all resources to produce a final product or
service and as such it is constantly seeking to make the transformation process of inputs into outputs
more efficient.
○ reducing costs.
○ reducing wastage.
○ increasing productivity.
○ taking out activities that do not add value.
○ improving design.
○ improving quality.
○ designing more efficient work methods.
○ better product development.
○ more efficient inventory management.

4.2 Operations planning

OPERATIONS DECISIONS
-decisions taken by operations manager can have a significant impact on the success of business. These
decisions are often influenced by marketing factors, availability of resources and technology.

a) Marketing Factors- there is a link between operations department and marketing department.
Operations manager requires information pertaining to estimated market demand when planning
future production levels. Thus the operations manager will try to match supply to potential demand
(operations planning)
NB-operations planning involves preparing input resources to supply products to meet expected
demand

Important elements of operations planning

-reducing wastages
-producing the range of product that are forecast to be demanded
-employ and keep an appropriate number of staff
-keep sufficient inventory
b) The availability of Resources- the production department use resources to produce goods and
services. These resources include land, labour, capital equipment and raw materials. Thus the
availability of raw materials or lack of them can influence a number of important operations
decisions. The business must decide on the best location, nature of the production method ( robot-
controlled equipment)
c) Technology- the provision of services and also the manufacturing of goods has changed. Firms
now use digital technology and there two main forms i.e CAD and CAM

COMPUTER-AIDED DESIGN (CAD)

-involves the use of computer programs to create 2 or 3 dimensional graphical representations of
physical objects. It is most used in architectural designs and on computer animations. It can
provide special effects on movies and advertising.
-CAD is also used in furniture manufacturing and the software is used to calculate the optimal size
or shape of the product. Engineering department also uses CAD to analyse the components of
various structures.

BENEFITS OF CAD
 Lower product development costs
 Increased productivity
 Improved product quality
 Good visualisation of the final product and its constituent parts
 Errors are minimised i.e it is more accurate

LIMITATIONS OF CAD
 Complexity of programs
 Need for extensive employee training
 It is more expensive i.e computer software used are very expensive
 Computer programs can be affected by virus

COMPUTER-AIDED MANUFACTURING (CAM)

-involves the use of computer software to control machine tools and related machinery in the
manufacturing of components or complete products. Processes in a CAM process are controlled by
computers. Thus a high degree of precision and consistency can be achieved than a machine controlled
by men.
BENEFITS OF CAM
 Quality products are produced
 Faster production and increased labour productivity
 CAM can be combined with CAD to produce a wide range of products
 More flexible production allowing quick changeover from one product to another

LIMITATIONS OF CAM
 High costs of hardware, programs and employee training
 Hardware failure can be time-consuming to solve
 Computer system can be easily affected by virus
 Small firms cannot afford it

FLEXIBILITY AND INNOVATION IN PRODUCTION

a) Operational Flexibility- refers to the ability of a business to vary both the level of production and
the range of products following changes in customer demand. The level of demand is not constant,
it may increase or decrease. Thus the business must be able to respond quickly to changes in
demand.

Way to achieve operational flexibility

 Buy more equipment
 Construct or buy new buildings
 Maintain the efficient stock levels
 Employ part-time or temporary labour force

b) Process Innovation-: refers to the use of a new or much improved production method or service
delivery method

Elements of process innovation

 Use of robots in manufacturing
 Faster machines to manufacture microchips for computers
 Use of bar codes and scanner for tracking inventory
 Use of internet to track the exact location of parcels being delivered worldwide and improve
the speed of delivery.

Benefits of process innovation

 Being able to get more accurate and reliable information on the performance of various
departments
 Being able to save time i.e less paper work is involved
 Increased professionalism and image to suppliers and customers
 Increased productivity
 Reduction of costs in the long run i.e in the short-run the costs of acquisition are high
 Cheaper production methods makes the business more competitive

NB: Process innovation involves the use of automation/ robotics. Automation- refers to the use of
electronics and machinery to control a production system. Robotics refers to the use of robots/ machinery
that resembles a human being in the operations it can perform in a production system.
PRODUCTION METHODS (OPERATION METHODS)
Each firm must carry out production designing. Production design refers to the scheduling of production which
involves organising the activities in a manufacturing plant or service industry to ensure that the product or service
is completed at the expected time. There are four basic ways of production design namely job, batch, flow
production and mass customisation.

The method chosen will depend on the following factors:-

a) Nature of product- unique products require jobbing, group of identical products require batch and identical
products requires flow production
b) Size of business- small businesses use jobbing and batch while large firms use flow. This is because flow
production is expensive to set up.
c) Size and location of the market- the firm must take into cognizance the volume of output required. If the
demand is high but not in large quantities, batch is used. Mass marketing requires flow production.
d) Demand of the product- less frequent demand requires jobbing while larger and fairly steady demand
requires flow production.
JOB PRODUCTION

Used when a single product or small orders are completed by one/ a group of people from start to finish to meet
the customer’s individual requirements. Thus the products are customised (produced according to the customer’s
specifications)

Each order is different and it may not be repeated at all. It is usually used by small and new firms to make products
like wedding cakes, wedding gowns, building plan etc

It is the most expensive form of production, very labour intensive (requires few machines) and requires highly
multi-skilled labour.

ADVANTAGES

 Product can be tailored to meet customer needs

 It is suitable for personal services e.g hair cuts
 The workforce has greater involvement with the product. This increase job satisfaction.
 The product meets the exact requirements of the customer. This result in guaranteed customer satisfaction.
 Use of skilled staff results in the production of quality products
 High employee motivation. This is because there is no monotony since each task is different from others
DISADVANTAGES

 Need a highly skilled workforce, competent supervisors and management. Specialists are costly to attract and
to keep at a business
 Production takes long. This is because there is no automation or use of complex machines. It is usually done
manually.
 Special materials are required leading to high cost of production. Only quality material is required.
 Products are specially made to order and any error is very expensive.
BATCH PRODUCTION
-a method of production where items are made in groups with similar characteristics. Each item in a group of
products passes through a stage of production at the same time.

- it is the production of a limited number of identical products to meet customer order or specifications and each
order is called a batch.

-It falls between job and flow production. It is commonly used by bakeries, furniture manufacturers etc

ADVANTAGES

 It gives variety to workers’ jobs. This is because workers work on different batches that may require different
skills. This removes boredom from work
 It allows more variety to be produced. This will increase consumer choice
 Materials can be bought in bulk. This will give bulk discounts to the business
 Unit cost is lower than Jobbing. Producing more goods reduces average cost of production
 Production can be easily changed from one product to another
DISADVANTAGES


No product will be completed before another, lead time

Increase in costs since there is need for a very efficient control system in planning production

Warehouse space will be needed for stock of raw materials and components.

Machines have to be reset between production batches. This will result in delayed production and output is
lost
FLOW PRODUCTION

-It is also known as mass/ continuous/ serial or repetitive production.

-It is the production of large quantities of a product in a continuous process. The products produced are identical or
standardised

-It uses a series of repetitive processes so that each item moves on to the next stage as soon as a process is
completed. Products pass along a conveyor belt or assembly line. It requires a high degree of standardisation and
specialisation

-It is more capital intensive- it requires more machines, robots and automation than people. It is also very
expansive to start because of the need to buy expensive machines and automation.

-The following products are produced using flow or mass production: chemicals, fuels, packaged food products,
cars, televisions etc

ADVANTAGES

 Automation allows goods to be produced quickly

 Mass production enables the business to enjoy the economies of scale which leads to lower prices
 Automated production lines can operate 24 hours a day and 7 days a week
  Time is saved since goods move on conveyor belts
 Promotes specialisation. Repetition of the same task makes the employee more skilled
 Materials can be bought in bulk. This will give bulk discounts to the business
DISADVANTAGES

 If one machine breaks down, the whole production line will have to be halted
 It is very costly. This is because machines and automation are very expensive to buy
 Repetition of the same task can be boring to the worker
 It is not flexible. Once production lines are set it is difficult to switch to other methods
 High warehousing costs since the mass produced goods must be stored before delivery to consumers
 Use of machines puts people out of their jobs
 Only suitable for products with a large market and high demand
MASS CUSTOMISATION

-It’s a flexible mass production system enabling customers to specify what features of a product/ service they
want. This process combines the latest technology with multi-skilled labour force to use production lines to
make a range of varied products. This allows the business to move away from the mass- marketing approach
with high output of identical products. The businesses will now use focused or differentiated marketing which
allows for higher added value. Few changes to the products are made using flexible computer aided production
systems to produce items to meet individual customers’ requirements at mass production cost levels

ADVANTAGES

 Accurate records are kept. This is because of the use of computers to keep records
 Greater job satisfaction as boring and routine tasks are now being done by computers
 New products are produced as new methods of production are introduced
 Better quality products are produced due to better production methods
DISADVANTAGES

 It is very expensive to set up. Computers, robots and machine are very expensive
 Technology will become out-dated. Technology keeps on changing
 Employees may need to be retrained to use the new technology. This adds to business costs
 Increased unemployment as workers will be replaced with machines

Problems of changing operations methods

Setting up an operation method takes time, planning and capital. To change from one method to another would
mean taking apart the machinery and equipment and redesigning the whole production system. It would also mean
that it might be necessary to redesign the product. It would be extremely difficult and very expensive to produce
some batch produced products by flow production

BUSINESS LOCATION
Business have to make the important decision of the best place to locate in order to operate well. The location of
the business can affect its costs, its demand, its image and its ability to attract employees to work for it. Thus
location choices should not be taken lightly and will involve decisions at the most senior level. Influence on the final
location depends on the type of business, size, demands of the production process and the market.

FACTORS AFFECTING CHOICE OF LOCATION

a) Market :- a factory must be closer to its customers to reduce transport costs. Perishable goods must reach
the market as fast as possible. Heavy products must also be manufactured near customers
b) Raw materials and Components :- if the raw materials are heavier to transport than the final product, the
firm must locate near raw material source to reduce transport cost. E.g sugar cane is heavier than the
manufactured sugar. Where mineral is processed from ore, the ore is much heavier than the final product.
c) Availability of Labour :- Workers operate machine and do all of the management and manual work. If a
process requires skilled labour, it is best to locate near people with the required skills. If the manufacturing
requires more unskilled labour, it is best to locate where there is high unemployment
d) Infrastructure and communication :- business need to be located near to transport system such as roads,
rail, inland water ways, sea-ports and air-ports. Good transport system enables the business to be easily
accessible by suppliers and customers
e) Power and Water supply :- uninterrupted supplies of water and electricity can be a competitive advantage
to some industries where power and water are critical inputs e.g steel manufacturing
f) Government Influence :- Land is allocated to businesses by the government. It may also offer grants to
businesses to encourage them to locate in certain areas. On the other hand, the government can also refuse
businesses to locate in a certain area or may put restriction in certain areas. Governments have planning
regulations which determine where to build and what to build.
g) The costs of a particular location relative to other options :- the cost of land, for example, will vary from
area to area. The cost of land in major towns is very high than in small towns. Thus locating in small towns
can be a better option for small firms.

BENEFITS OF THE BEST (OPTIMAL) LOCATION

 Lower costs- decrease in transport costs leads to higher profits
 Improves the firm’s competitiveness- being closer to customers may boost sales and profits since
the firm is able to sale at lower prices
 Overcoming trade barriers- to overcome trade restriction a firm may locate itself in a particular
country rather than exporting goods to that country.
 Attracting suitable job candidates- the firm will have access to the right job candidates at the right
time.
 Lower taxes- by locating itself in the designated areas, the firm may be exempted from paying taxes
or pay taxes at concessionary rates
BUSINESS RELOCATION
Relocation can be defined as a change in the physical location of a business OR the
movement of a business from one area/region to another. Relocation can occur within or between
countries

Reasons why a business may want to change its location

 Infrastructural development in other locations

  Cheaper labour costs in other locations
 Changing objectives and strategies of the business
 Changing of location of suppliers or customers
 Change in government policies
Relocation costs
Changing location may involve costs such as:

 Finding and training new employees

 Finding new customers and suppliers
 Administrative costs of the change
 Redundancy payments
 Adjusting to the new set-up
Industrial Inertia: occurs when a business stays in its current location even though the factors that
led to its original location no longer apply. The costs of moving will be exceeding the costs of staying.
Large-scale industries like iron and steel production often display industrial inertia.

THE OPPORTUNITIES AND PROBLEMS OF ENTERING NEW MARKETS ABROAD

Opportunities of entering new markets abroad

a) Sales growth- new markets increases a firm’s sales. This may boost company sales revenue as
new customers are buying the product
b) Increased profits- The new markets abroad may result in more profits to the business. Increased
sales volumes mean more profits to the business
c) Improved business image- a good image locally and internationally may result because the
business is selling in foreign and competitive markets, the business products will be seen as of high
quality
d) Earn foreign currency- foreign currency obtained can be used to acquire new machinery in foreign
countries
Problems of entering foreign markets

a) Cultural differences- different countries have different cultures. The firm needs to understand the
culture of the country they intent to enter for them to be successful.
b) Lack of knowledge- the business may lack marketing knowledge of the new country or market e.g
consumer preferences, goods offered by competitors, advertising methods and distribution
methods
c) Lack of foreign currency- the business may not have sufficient foreign currency to pay for
workers, taxes, rentals and advertising
How to overcome such challenges

a) Form joint ventures- the business can join with an existing local business. The business will have
knowledge from the local business who understands the local market.
b) Use local agents and local dealers- the business can engage local dealers to distribute and
market the goods for business. The local agents have local marketing information and they know
the best methods to distribute the goods
 c) Primary and Secondary research- essential information about the products, customers, markets
is obtained through conducting market research.
ECONOMIES AND DISECONOMIES OF SCALE
-businesses can expand by employing more of a few or all of the factors of production.
-scale of production is changed when all the factors of production are changed.
-Large scale operation leads to a fall in the average total cost (cost per unit). On the other hand, when the
organisation continues to grow beyond a certain optimal level, unit cost may begin to increase
-Thus large scale operations may result in a decrease (economies of scale) or increase (diseconomies of scale) in the
unit cost
ECONOMIES OF SCALE
-refers to the cost saving advantages that a business can exploit by expanding their scale of production. Thus
making things cheaper because they are bigger. The effect is to reduce the long run average cost of production over
a range of output.
-economies are divided into internal and external economies of scale
INTERNAL ECONOMIES OF SCALE
-internal economies of scale arises from the growth of the firm itself. Thus the average cost will decrease as the
firm employees more capital and labour
SOURCES OF INTERNAL ECONOMIES OF SCALE
a)Purchasing Economies of Scale
Large firms receive discounts when they buy raw materials in bulk. Thus the cost of acquiring raw materials will
decrease leading to a fall in the unit cost/ average cost. A 5% trade discount will lead to a 5% decrease in the cost of
production and the cost per unit

b)Marketing Economies of Scale

A large firm can spread its advertising and marketing budget over a large output. Advertising is charged per total
time on airplay (TV/ Radio) or space (Newspaper) not on the size of the business. As the firm grows in size, the
average marketing cost will decrease

c)Financial Economies of Scale

Large businesses may be able to access finance at lower interest rates because of the growth of the business. Large
businesses are usually rated by the financial markets to be more ‘credit worth’ and have access to credit facilities
with favourable rates of borrowing

d)Managerial Economies of Scale

Large scale manufacturers can afford to employ skilled workers to supervise and to carry out production. Effective
leadership can also lead to an improvement in worker motivation. Skilled workers will also help reduce wastages.
Employees also become experts due to the length of experience in a market and the cost per unit will decrease

e)Technical Economies of Scale

Large scale businesses can afford to invest in very expensive and specialist capital machinery. For example, a
National Chain Supermarket can invest in technology that improves stock control and helps to control costs. It
would not be viable or cost efficient for a small corner shop to buy this technology.

The LAW of increased dimensions –this is linked to the cubic law where doubling the height and width of a tanker
or building leads to a more than proportionate increase in the cubic capacity. It is an important aspect in the
distribution and transport industries

f)Risk Bearing Economies of Scale

A large firm is able to provide a wide range of products in different markets. This lowers the risk of putting all eggs
in one basket. McDonalds hamburgers and French fries share the use of food storage and preparation facilities.

EXTERNAL ECONOMIES OF SCALE

External economies of scale exist when the long term expansion of an industry leads to the development of
ancillary (something additional) services which benefit all or some of the businesses in the industry. External
economies partly explain the tendency for firms to cluster geographically.

SOURCES OF EXTERNAL ECONOMIES OF SCALE

a)Supply of raw materials- as the industry grows, suppliers of raw materials will be willing to locate themselves
close to the manufacturers. This will reduce transport costs to the manufacturers in a given industry.
b)Better transport network- as the industry grows, there will be massive infrastructural development in the area.
The development of transport networks cut costs and also saves time.
c)Research and Development Facilities- businesses can benefit from researches done by local universities
d)Economies of information- business in the same industry may share vital information about the market or about
the economy in general. This reduces the cost of acquiring information to a single business.
e)Trade Magazines- enables all firms in an industry to advertise and disseminate information cheaply.

Diagram : Internal and External Economies of scale

DISECONOMIES OF SCALE

Diseconomies of scale leads to a rise in the long run average cost. Average cost rises due to firms expanding beyond
their optimum scale (Optimum-right size)

SOURCES OF INTERNAL DISECONOMIES OF SCALE

a)Managerial Diseconomies of Scale- monitoring the productivity and quality of output from thousands of
employees in big corporations is imperfect and costly.

b)Administrative Diseconomies of Scale- these are associated with the bureaucratic structures of large firms where
long channels of communication and complex administrative procedures delay effective action. Instructions from
the top management may be partly or completely distorted if they are to follow a long channel of communication
down the organogram.

c)Over-specialisation- workers in large firms my feels a sense of alienation and subsequent loss of morale. If they
do not consider themselves to be an integral part of the business, their productivity may fall leading to wastage of
factor inputs and higher costs.

EXTERNAL DISECONOMIES OF SCALE

-refers to a rise in the average costs which is independent of the firm’s output. They arise due to the growth of the
whole industry. These occur when too many firms have located in one area.

SOURCES OF EXTERNAL DISECONOMIES OF SCALE

a) Shortage of Labour- as the industry grows, shortage .of labour may crop up. Firms have to bid wages higher
to attract and retain new workers As the wage rises due to labour shortages, the cost of production to all
firms in an industry will increase.
b) Formation of Trade Unions- growth of an industry may lead to the formation of industrial unions. Such
Trade unions may ask for higher wages for their members which then increases the production costs.
c) Pressure on Raw materials- increased demand on raw materials and other components may lead to a rise
in the unit cost. Geographical concentration of firms in an area may lead to a rise in the rentals, interest
rates.
 d) Disposal of Waste material becomes costly- when the industry grows, dumping sites will be shifted to the
peripheries of a town or business centre. Firms can also be forced to acquire more advanced equipment to
reduce and dispose waste. The government can also increase pollution taxes as the industry grows

Diagram: Internal and External Diseconomies of Scale

4.3 INVENTORY MANAGEMENT

STOCK MANAGEMENT
-it also kwon as stock control. Stock management occurs when the purchasing department aims to
minimise cost of stock by maintaining adequate levels of stock. Thus the purchasing department must
obtain the right quality at the right time in the right quantity, from the right source at the right price.

Reasons for holding stock ( or purpose of stock control)

 Stock of raw materials is kept in order to meet production requirement
 Stock of work-in-progress is maintained in order to continue the production process and
allowing greater flexibility and better utilisation of time and machinery.
 Stocks of finished goods are maintained in order to meet customers’ demand on time
 Stocks of equipment and spares are kept in order to support sales and production
 To control cash tied up in stocks
 To control wastage and pilferage (stealing of small items/amounts at a time)

TYPES OF INVENTORY
1) Raw materials-: the basic materials from which a product is made and they are usually bought
from outside.
2) Work-in-progress-: unfinished project that is still being added to or developed or partially
completed goods
3) Finished products-: goods that have completed the manufacturing process

COSTS OF HOLDING HIGH LEVEL STOCK

 Opportunity cost as capital is tied up in stored stocks
 Storage costs will increase
 Increase in spoilage
 Rise in administrative and finance costs e.g insurance
 Wastage of resources in a period of lower demand in the market
 Risk of theft
COSTS OF HOLDING INADQUATE / LOW LEVEL OF STOCK
  Lost sales which are known as out-of-sale costs
 Idle production resources i.e the machines will be operating below capacity
 Ordering costs will increase since the firm places more number of orders in a given period
 The advantage of bulk buying cannot be achieved

BENEFITS OF HOLDING HIGH LEVEL STOCK

 The firm can enjoy the benefit of bulk buying
 There is production flexibility since the business will be having enough stock at any given time
 Machine and factory plant will be operating at full capacity at all times
 Enough stock will be available to support production and sales
BENEFITS OF HOLDING LOW LEVEL STOCK
 Storage costs are reduced
 Insurance costs are minimised
 Capital is not unnecessarily held or kept in stocks
 Minimum wastages in a period of reduced demand
 Risk of theft and spoilage is reduced

MANAGING INVENTORY
-involves the stock control techniques

a)BUFFER STOCK
-refers to the reserves of stock kept to cater for eventual stock out or uncertainties. To avoid the risk of
running out of stock, the business must have reserved stock
-this technique is used to avoid stock out costs which are:-
 Lost production
 Lost contribution from lost sales
 Loss of customer good will
 High unit costs associated with urgent purchases
 Loss of bulk buying discounts

b)RE-ORDER LEVEL
-refers to the level of stock at which a new order is placed with the supplier. The quantity of this order or
the re-order quantity will be influenced by the economic order quantity (EOQ)
-EOQ refers to the quantity of materials ordered at cash point to minimise the total annual stocking costs
or the least cost quantity of stock to re-order taking into account delivery costs and stock holding costs.

-EOQ depends on -: -interest on capital

-storage costs
-wastage costs
-insurance costs
c)OPTIMUM STOCK LEVEL TO BE HELD
-refers to the right quality and quantity of stocks to be kept at the business to promote the smooth running
of production.

 TOTAL STOCK COSTS= stock holding costs + out of stock costs

d).INVENTORY CHATRS- is a tool used to control stock

MAXIMUM STOCK- refers to the highest amount of stock kept and it is limited by space and the financial
costs of holding higher levels

 Maximum stock = EOQ + Buffer Stock

MINIMUM STOCK- is also known as buffer stock. This is the minimum number of stock that should be
held to ensure that production still continue in case of delay in the delivery of raw materials
RE-ORDER LEVEL- this is the level of stock at which a new order is placed with the supplier. The quantity
of the new order will be influenced by the EOQ

LEAD TIME- it is the amount of time it takes for a stock purchased to be received, inspected and made
ready for use. If more time is required between ordering new stocks and their delivery then a higher
minimum stock is needed

f).JUST-IN-TIME
-it is a stock control system in which material is scheduled to arrive exactly when it is needed for
production and in the exact quantity. Raw materials are reduced to zero and finished goods inventories
are minimised by matching production to demand. Thus JIT does not require any Buffer Stocks to be held.
The components arrive just at the time that they are needed and the finished goods are delivered to
customers as soon as they are completed
NB- JIT is basically a Japanese approach towards production

Requirements for JIT Production

i).Employee Flexibility- employees of the firm should be multi-skilled and should be able to switch jobs
quickly so that excess stocks of raw materials won’t build up.

ii)Flexibility of Machinery- modern, computerised machinery is required for JIT production as it can
produce a wide range of products just by changing a single software
iii)Excellent relationships with suppliers- it should be possible for suppliers to be able to supply raw
materials at short notice.
iv)Accurate demand forecast- this will enable the business to produce a reliable production schedule
which would help in the calculation of precise number of goods to be produced over a certain time

v)Extensive use of IT- computerised records of sales and stock levels would allow minimum stocks to be
held. Electronic communication with suppliers would enable accurate delivery of supplies

vi)Strict quality control/ zero defect- since there are no spare stocks, therefore goods have to be
produced correctly the first time otherwise customer orders will not be completed on time.

BENEFITS OF JIT
 The right quantities are produced or purchased at the right time
 Improvements on product quality
 Improved customer service
 Reduction in storage costs
 Less chance of stock being out-dated or obsolescent
 Less stock reduce the risk of damage and wastage
 Higher profits due to overall decrease in costs

DISADVANTAGES OF JIT
 It is associated with high start-up cost
 Advantages of bulk buying are lost
 Delivery costs rises as frequent small orders are delivered
 Administration costs rises as so many small orders need to be processed
 Doesn’t work when demand is unpredictable

Examination Questions
November 2013
4 (a) Distinguish between capital intensive production and labour intensive production.
[2]
(b) Briefly explain two factors that could influence a decision to change to more capital intensive
production methods. [3]
4 (a) Define the term ‘intellectual capital’. [2]
(b) Briefly explain how intellectual capital could increase the value of a business. [3]
6 Discuss the important factors that will need to be considered by a business in deciding where to locate a
new adventure and amusement park.
[20]
June 2014
4 (a) Define the term ‘operations management’. [2]
(b) Briefly explain how changes in technology could affect the operations management of a business. [3]
7 (a) Explain the differences between batch production and flow production methods. [8]
(b) Discuss the implications for a manufacturing business of changing from batch production to flow
production.
[12]
4 (a) Define the term ‘value added’. [2]
(b) Briefly explain two ways operations management could contribute to the success of a business. [3]
3 Explain factors that could affect the level of inventory held by a business. [5]

June 2015
2 (a) Define the term ‘business relocation’. [2]
(b) Briefly explain two factors that could cause a business to relocate. [3]
4 (a) Define the term ‘diseconomies of scale’. [2]
(b) Briefly explain two causes of managerial diseconomies of scale. [3]
2 (a) Define the term ‘process innovation’. [2]
(b) Briefly explain two ways a manufacturing business could use process innovation to improve
efficiency and effectiveness. [3]

November 2015
2 (a) Define the term ‘buffer inventory’. [2]
(b) Briefly explain two reasons why inventories of finished goods need to be carefully managed. [3]
4 (a) Define the term ‘intellectual capital’. [2]
(b) Briefly explain how the input of capital (including intellectual capital) can contribute to the effectiveness
of business operations. [3]
2 (a) Define the term ‘process innovation’. [2]
(b) Briefly explain two ways in which process innovation could improve the operational efficiency of a
business. [3]

Specimen paper 2016

3 Explain the difference between efficiency and effectiveness in business operations. [5]
5 (a) Analyse the importance of inventory management to a retail business. [8]
(b) Discuss the factors which could influence the successful operation of Just-in-Time (JIT) inventory
management.
[12]
March 2016
2 (a) Define ‘productivity’. [2]
(b) Briefly explain two ways of improving manufacturing productivity in a business. [3]
June 2016
4 (a) Define ‘inventory management’. [2]
(b) Briefly explain two reasons why a business might decide to hold a high level of inventory. [3]
3 Explain the costs and benefits to a business of a decision to hold low levels of inventory. [5]
3 Explain why efficiency is important to a manufacturing business. [5]

November 2016
5 (a) Analyse the benefits and limitations of a labour intensive production process for a business. [8]
(b) Discuss the importance of ‘intellectual capital’ for a university.
[12]
6 Discuss ways in which the operations management department of a car manufacturing company could
help the business survive during an economic recession.
[20]
4 (a) Define ‘transformation process’ [2]
(b) Briefly explain two objectives of an operations management department [3]
March 2017
4 (a) Define the term ‘economies of scale’. [2]
(b) Briefly explain two causes of diseconomies of scale. [3]
OPERATIONS AND PROJECT MANAGEMENT (AL)
4.2.1 Enterprise resource planning (ERP)
Refers to a software based system that integrates management information from all functions in a business into a
single computer system that serves all those functional needs. Thus it is a method of integrating production
systems so that product planning, manufacturing, marketing, inventory and delivery are all linked together in an
automated integrated way. ERP involves the use of carefully designed computer software and other techniques to
improve the efficiency of an organisation. It integrates management information from all functions in a business
into a single system that serves all the functional needs. This enables a business to use one set of information (e.g
sales requirement) and the ERP software then orders materials, arranges employees, set up machines, and notifies
customers of delivery details. ERP tries to make information flow freely within the organisation and between it and
outside stakeholders like customers, suppliers and government. Typically, ERP systems are supplied in modules
which match functions like finance and marketing. These modules will replace standalone computer packages in
these areas and all of them will access a central database so information can be shared. The modules allow
different functions to maintain their own systems but now they will all be linked, so communications will be easier.
Putting in more modules will increase the integration but will increase the costs, the amount of change and the risk
of losing data in the transition

ERP in getting a meat pie to a customer

Benefits of ERP

 all employees will be able to find out at any time the progress of an order
 employees are able to know where the products are and what flows of money are involved (production
management)
 all the departments have the same information
 helps to reduce organisational conflicts
 the business will know the details of the customers who buy their products (customer relations
management)
 enables the business to easily obtain raw materials (supply chain management)
Limitations of ERP

 ERP systems are very expensive. The average cost of ERP system is $15 million.
 ERP cannot be used by small firms
 The method can be affected by computer system failure
How ERP can improve Efficiency
 Inventory management: inventory refers to the stocks a business holds. It can be raw materials, work in
progress or finished goods. ERP enables all departments to know exactly what inventory is held, how much
raw material is needed, how much unsold stock exist. This can be used to reduce stock holding costs so that
efficiency is increased
 Costing and pricing: ERP enables the precise cost of each order to be calculated, so it is much easier to set
a price that will yield a profit. Costs of employees, materials, production and fixed costs are built into an
integrated system. ERP reduces the administrative cost of setting a price to the customer and therefore
increases efficiency.
 Capacity Utilisation: refers to the proportion of full capacity being produced by the business.

Capacity Utilisation = Current output x 100%

Maximum output

Illustration: A school with 500 places for learners with only 400 learners at the school. Capacity utilisation
is 80%
In manufacturing businesses, it enables the business to know exactly what orders there are, what orders
might be coming in, when the orders must be fulfilled and what materials are needed for them. Because all
departments have this information, production can be planned to ensure that the equipment is being used
as near to full capacity as possible as often as possible, with all the materials ordered and stocked to make
this possible. All of this reduces the cost of production, so efficiency is increased.
 Response to change: ERP enables all departments (functional areas) to know what is happening in each of
the areas. It will indicate changes in orders, employees profiles, prices of materials, hold-ups in production
and financial shortfalls or surpluses. This means that the business is able to respond to changes quickly and
with the best possible overall approach. Quick responses reduces the cost of identifying and reacting to
change, so efficiency is increased.
 Management Information: ERP covers all the functional areas in a business so management will know at
the time what is happening. This means that decisions can take account of all the functional areas and be
 based on accurate up-to-date information. This ready availability of information reduces the cost of
obtaining it so increasing efficiency
Examples of how ERP can improve efficiency

 Accurate sales and order information allows optimum amount of inventory

 Orders can be tracked by process and finance arrangements can be matched to supplies needed
 Everyone has the same financial information, not slightly different biased versions
 Real-time information is available to all so decisions-making is improved
 Security is improved as there is only one system that deals with all aspects of production.
What reasons are there for ensuring capacity utilisation does not go too high
 Machines break down and people make mistakes when they work as hard as they can and for long hours
 There will be no possibility of increasing output to meet any special orders
 Scheduling and planning may be difficult
 Employees, including managers, may feel under pressured and become demotivated

Problems of too much capacity?

 Increasing costs
 Increased wastages
 Leads to losses

Strategies taken by a firm when there is too much capacity

a)Rationalisation: organising resources and working methods in a better way so that the result is greater
efficiency. This often involves reducing capacity by cutting overheads, for example by closing a factory or a
production line. This will reduce costs and increase capacity utilisation but the business will have to make
employees redundant.

b) Make major changes to the production capacity to produce new products. This could be very expensive and
may take a long time.

c)Explore new markets overseas. It is sometimes the case that out-dated products in some countries may be
acceptable in others.

Ways of improving capacity utilisation

a) Rationalisation
b) Acquire more resources to expand capacity. Make the production facility bigger. Invest in more plant,
machinery and equipment
Advantages
 An opportunity to update equipment and procedures
 The firm may end up enjoying economies of scale
 Long term benefits
 Disadvantages

 Can be expensive with large capital investment

 There will be too much capacity if demand subsequently fell
 May take time, and be disruptive. Customers may not want to wait.
c) Subcontracting: involves paying another business to undertake part of the functions required to produce a
product or service. Thus production is transferred to other business that may have far more efficient
production capacity, and so may be able to produce cheaper than in-house. An example is that a builder
will pay an electrical business to install all the electrical cables and fittings in house.
Advantages of subcontracting
 No major capital investments
 Offers great flexibility in relation to future changes in demand
 Quicker solution than capital investments

Disadvantages of subcontracting

 Potential loss of control over quality and output

 Unit costs may increase as the subcontractor will want to make a profit
 Contact between the business and subcontracted firm can be terminated any time.

d) Outsourcing: using another business (third party) to undertake a part of the production process
rather than doing it within the business using the firm’s own employees. Outsourcing is a special type of
subcontracting. Subcontracting involves the transfer of a task to another business while outsourcing
involves the transfer of functions to another business.
Advantages of outsourcing
 It enables the business to focus on its core activities
 Offer more flexibility than expansion of facilities
 Greater scope for growth without high capital investments
 Possibility of reduced operating costs
 Third party may do the job better
Disadvantages of outsourcing

 Third parties may have access to sensitive information which may put the business at risk
 Quality may be more difficult to control
 May be uncertainty over delivery times and reliability of delivery
 Could be difficult and expensive to reverse the process if circumstances change
 Loss of jobs within the business
NB: Offshoring: occurs when the business relocates some of its functions overseas, usually to businesses in a
country with cheaper labour.

Questions

[Link] what enterprise resource planning(ERP) is ? [4]

[Link] the advantages of ERP [6]

[Link] the main advantages of ERP [6]

[Link] type of business would ERP be most appropriate for [6]

[Link] the factors a medium-sized electrical goods manufacturer might take into account when deciding
whether to introduce enterprise resource planning (ERP) [12]

[Link] three advantages of outsourcing the accounting functions of a small manufacturing business. [6]

LEAN PRODUCTION: is the use of resources as efficiently as possible to minimise waste and
improve quality. It involves the introduction of new processes and technology to reduce waste and inefficiency in
production. Lean production tries to reduce the time taken to develop a product and to make it available to
consumers. Lean production also removes any activity which do not adds value to the product or service. A
business achieves this by examining all of its activities and processes and finding ways in which to improve on the
methods employed.

Lean production focuses on the following processes

 Inventory control: if there is too much stock more space will be used up hindering efficient production of
other goods
 Employee roles: if they can be developed and improved the whole process can be more efficient
 Defects: any fault requires the goods to be fixed and time will be wasted inspecting the goods
 Utilisation of resources: resources should not be wasted
 Time factor: machines and workers must not be unnecessarily moved. Movement is a waste of time.
 Capacity management: capacity must not be underutilised or over utilised.
Advantages of Lean production

 Less storage costs of raw material, components and finished goods. The firm will only keep the required
stock
 No defects or need for replacement. All goods produced will be defect free. This will increase customer
satisfaction
 Less money is tied in inventory. Only few stocks will be held, hence only less money is kept in stock
 Time is saved. This is because unnecessary processes have been removed. All processes that do not add
value are removed.
 Few accidents at work place. This result in improved worker health and safety. This is because of few
movement in machinery and workers in the factory
Lean Production Methods

Kaizen Effect: a Japanese word that means that a business should seek continuous improvements. The basic idea is
that the employees of an organisation are the best people to know how a task should be undertaken. The Kaizen
idea is that employees should be given the responsibility of working out how their jobs can be changed so that
efficiency and quality can be improved. It is achieved through new processing ideas from workers. Small groups of
workers meet regularly to discuss processing problems and possible solutions to the problems. Kaizen eliminates
waste by removing unnecessary movement at the work place and by improving factory layout. This increase factory
space and free employees from unnecessary jobs.
Conditions for Kaizen to work at a business

 Employees must be empowered to make the necessary improvements

 Team working should be part of the organisation’s culture
 Management or leadership style must promote democratic style
 All staff should be involved, no matter how seemingly insignificant their contribution.
Limitations of lean production

 Employees may require training which can be costly to the business

 The business may not be able to increase the supply of goods when demand increases in the near future
 Lean production can lead to job loses which can make the business unpopular
 Sometimes employees may be unwilling to take on responsibility. Employees may be resistant to change.
Summary: Lean production aims for:-

 Zero delays
 Zero inventories
 Zero mistakes
 Zero waiting
  Zero accidents
Just-in-Time (JIT) in the context of lean production

It is believed that stock control on its own can be inadequate and there can be waste, particularly money which
could better employed elsewhere. JIT production involves managing the flow of raw materials, work-in-progress,
finished products and production systems so that these items are available exactly when they are needed and not
before. An effective lean production will minimise inventories and flows throughout the process by ensuring
purchases, production and deliveries to customers have as much co-ordination of flows as possible.

Benefits of JIT production

 The business can save rent and insurance costs

 As inventory is only obtained when it is needed, less working capital is tied up in stock
 There is less likelihood of products becoming obsolete or out of date
 Avoids the build-up of unsold finished products that can occur with sudden changes in demand
Problems of JIT production

 There is little room for mistakes as minimal inventory is kept for reworking faulty product
 Production is very reliant on suppliers, and if deliveries are not on time the whole schedule can be delayed.
 There is no spare finished product available to meet unexpected orders because all products are made to
meet actual orders.
 The firm is vulnerable to action taken by employees
Quality control and assurance

What is quality?

 Refers to fitness of a product or service for its purpose

 The ability of a product or service to meet customer expectations
 Quality does not mean producing a high quality product. Quality is meeting customer’s expectations.
Quality is determined by consumer expectation. Thus it is in the interests of all businesses to know the
quality levels that customers expect and to have systems in place to minimise the risk of customers being
dissatisfied with the quality that they receive. To achieve quality, managers must therefore set targets
based on customer needs and then make sure that the targets are being achieved.
KEY CONCEPT 3: CUSTOMER FOCUS

Quality is about making products and services which are ‘fit for purpose’. In essence this means meeting customers’
minimum expectations.

Benefits of improved quality

 The product establishes a good brand image. Customers prefer to buy brands that are of high quality and
this will increase sales
 It builds brand loyalty. Customers will be loyal to the company’s products that they will not be willing to
buy competitor’s products
 Higher prices can be charged. Customers are willing to pay more for quality products. This may boost
business profits.
 Less legal cases from customers. Satisfied customers will not sue the company.
  The business can benefit from positive publicity from its customers. Customers will only say good things
about the company.
 Reduces the cost or reworking the product.
Possible costs involved in improving quality

 Market research must be done to establish customer expectations

 Inspection may be expensive in a quality control system
 Workers must be trained which may increase costs
 Production may need to be stopped to trace and correct faults
Three Elements of Quality

 Quality control
 Quality assurance
 Total Quality Management (TQM)
QUALITY CONTROL

A refers to a system for improving quality based on inspecting finished products to find any faults that exist and
remove them. It involves inspecting (through testing and random sampling) of a product or service before it is
provided to the customer. This is to ensure that the products produced are of quality and that the products are
defect free.

Methods of Quality Control

Preventive Control: it is control maintained on the inputs to ensure that raw materials are defects free. All inputs
are checked for quality before use. When the product is designed the designers should take into account the
customers’ quality requirements. Processes (such as manufacturing, providing a service) should be designed to
achieve this level of quality.

Concurrent Control/Pro-active control: it is the monitoring of an on-going production process. Quality checking will
be done while the process is running. Products are regularly inspected/ tested to see if quality standards have been
meet.

Feedback Control/ Post action control: This is the checking of outputs for errors so that the next production
process can be corrected. Faulty products/ service need to be corrected and design or processes adjusted to ensure
that the problem is not repeated.

Limitations of Quality Control

 It finds problems only after they have happened

 It is difficult to identify the process that will be causing problems
 Quality control process relies on the skills of those involved in the inspection process.
Quality Assurance

A system for making sure agreed standards are met at each stage of a process in order to ensure customer
satisfaction. Thus, it is the checking of products or services to see if they meet minimum quality standards
throughout the production process. Quality assurance put more emphasis on preventing mistakes. An important
part of this approach is that employees check their own work rather than relying on someone else to check it for
them at the end of the process. It stresses the need for employees to get it right first time. The purpose of quality
assurance is to make sure that the customers are satisfied. This will increase sales, increase value addition and
profits.

At General Motors, for example, employees are told, ‘don’t accept errors don’t build errors and don’t pass them
on’.

Requirements for quality assurance

NB: Quality control focuses on the end result: quality assurance focuses on the processes to ensure that the end
result meets an agreed standard.

Benefits of Quality assurance

 Problems should be identified before the end of the process thereby saving costs of putting things right
 There is little need for final inspection thus saving the costs of an inspectorate
 When there are problems it should be easier to trace back to where the fault is occurring in the processes,
saving future costs or problems
 Improves accountability since employees are responsible for quality at every stage of production
 There are greater opportunities for employees to take pride in their work thus improving motivation
 The business can get industry or government awards which improves the reputation of the business

Total Quality Management

Refers to an approach to quality that aims to involve all employees in quality-improvement. It is the continuous
improvement of a product through involving all workers in quality control focusing on quality at each production
stage. TQM recognises that all employees are of equal importance, including the factory floor, the office staff, the
cleaners, the maintenance staff and the delivery drivers. The way in which customers are dealt with when they ring
up, the accuracy of invoices sent out and the reliability of the vans all have an impact on how customers view the
firm. It is not just the people who directly make or provide the product who matter. TQM approach considers that
employees should always aim to improve the quality of what they do. People should be committed to zero defects
principle. Zero defect principle seeks to achieve perfect products every time.
SUMMARISED VERSION
TOTAL based on participation of all people involved in a business, including employees on the
lowest level of the business to top management
QUALITY TQM aims to improve the quality of goods, services, systems and processes in a business
MANAGEMENT The process of supervising or managing all activities needed to ensure a business produces
goods and services of consistently high standard

Key aspects of TQM

Quality Chains: setting up a procedure so that parts of the procedure can be identified as ‘internal
customers’. Each stage of the process behaves as part of a supplier/ customer relationship.

Quality Circles: refers to groups of employees who meet regularly to discuss work-related issues and
problems and to identify potential improvements. These groups are empowered to put their ideas into practice,
making improvements at their stage in the quality chain. They usually meet to discuss ways in which they can
improve the quality of their work and cut out waste.

Internal customer: businesses are set up as if each stage of a process is a new ‘customer’, providing checks
and balances in the process. Thus the business must be aware of the fact that they have internal and external
customers

 Internal customers: people within the organisation who depend upon the quality of work being done by
others. Employees need to think of the requirements of all the people they produce work for and ensure
they are providing exactly what is required.
 External customers: the people from outside the business who buy the product.
Elements of Total Quality Management
1. Top management commitment and involvement –‘leadership through quality’
2. Customer involvement –“focus groups”
3. Design products for quality –“designing for robustness”
4. Design production processes for quality
5. Control production processes for quality
6. Developing supplier partnerships
7. Customer service, distribution and installation
8. Building teams of empowered employees –quality circles
9. Benchmarking and continuous improvement. Benchmarking is the practice of establishing internal
standards of performance by looking at how world-class companies run their business.
Benefits of TQM

 Improved customer satisfaction

 Repeated sales due to brand loyalty
 High profits
 All a higher price to be charged
 The firm will gain a competitive advantage over its rivals
 It will be easy for the business to introduce new products in the future
 Avoiding heavy penalties when customers complain
 Cut on costs of remaking the product
 Promotes team work
Potential costs of TQM

 Training of staff which may be expensive

 Inspection costs may increase
 Stopping production to trace and correct quality problems will disrupt output
 Resistance to implement TQM from staff
 Market research to establish expected customer requirement needs to be done.
The potential of Kaizen in TQM
Although the origins of Kaizen are in improving production processes to achieve greater efficiency, it can clearly be
applied to a product or service to focus on quality. Indeed the best uses of Kaizen will aim to improve both the
process and quality at the same time. Kaizen is a Japanese word meaning continuous improvement. The Kaizen
approach tries to get employees to improve what they do in some small way every day of every week of every year.

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 things
[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 [2]
b)Explain one benefit of lean production [3]
2.a)What is benchmarking [2]
b)Explain ONE advantage of benchmarking [3]
3.a)What is meant by quality [2]
b).Explain one cost of improving quality [3]
4.a)What is just-in-time production [2]
b)Explain one reason for adopting a just-in-time approach [3]
5.a)Define Kaizen? [2]
b)Explain one benefit of Kaizen to a business [3]
6.a)Explain why the involvement of employees is key to implementing Total Quality Management (TQM) [2]
b)Outline two features of cell production [3]
Answer: Occurs when the production is divided into stages undertaken by teams (cells).
[Link] reasons why workers may resist Total Quality Management [5]
8.a)What is Total Quality Management? [2]
b)Explain One reason why staff may resist total quality management [3]
[Link] the link between training and quality [3]
Essays
[Link] what extent do you think Lean production guarantees the success of a business? [20]
[Link] what extent is improving quality expensive [20]
[Link] the issues that should be considered by a small manufacturing firm specialising in quality dining tables
before adopting lean production techniques [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 penalties.
Network 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 activity
If 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 days
Figure

Solution

Note:
Calculation of EST
EST NODE 1 = 0 EST NODE 2 = 0+3= 3 days
EST 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 time
a)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 ambiguities
Example:

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 time.
Limitations 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.
Questions 1.

Media Marketing
MM is planning a new marketing campaign for a chocolate bar. It has collected the following information

Activity Description Weeks’ Sequence of activities

duration
A Design leaflets 2 start of project
B Negotiate advertising with television channels 3 can be done at same time as A
C Get materials for producing chocolates bars 4 can be done at same time as A
D Make chocolates bars and build up stocks 6 must follow C
E Get leaflets printed 3 must follow A
F Make TV adverts 5 must follow B
G Distribute chocolate bars to shops 3 must follow D
H Post leaflets 1 must follow E
I Start advertising on television 2 must follow F
J Launch product 3 must follow G; H; I
1.a) Draw a network [6]
b).Identify the minimum project duration [4]
c).Identify the critical path [2]
d) Calculate the free float and total float for activity E [2]
e). Evaluate the usefulness of CPA to the management of MM [10]
[Total 24]
Question 2

Activity Proceeded by Duration

A - 3
B A 5
C - 2
D B 10
E C;D 4
F - 1
G F 12
H E 3
I E;G 5
J H;I 3

1.a) Construct the network diagram given the data in the table. [6]
b) What is the critical path? [3]
c) Calculate the duration of the critical path [2]
d) Calculate the total float and free float for each of the activities in the network. [10]
e) To what extent will critical path analysis guarantee that this project will be successfully completed [14]
[Total 35]

Short answer questions

[Link] is a project [2]
b)What does a node show [2]
2.a)What is network diagram [2]
b)Explain ONE benefit of constructing a network diagram [2]
3. a)What is the critical path on a network diagram [2]
b)What is the effect of a critical activity overrunning? Why? [2]
[Link] is meant by a dummy activity [2]
5.a)What is meant by the earliest start time? [1]
b)What is meant by free float? How is it calculated [3]

Essays
1.a)Explain why efficient project management is important for a business operating in a competitive market.[8]
b)Evaluate the usefulness of critical path analysis to a construction business building a new sports complex to a
completely new design [12]
[Link] the usefulness of critical path analysis to an operations manager when planning the relocation of
production facilities to another country. [20]
[Link] extent does using network diagrams ensure the success of a project? [20]
[Link] what extent is effective project management the key business success these days [20]
 MARKETING
Refers to a process or system of researching into identifying customer needs and applying suitable prices,
product, place and promotion strategies in order to satisfy those needs profitably. It is a business function which
aims to link the business to the consumer and aims to get the right product having the right price to the right
place at the right time. Marketing is not only advertising and selling of goods and services. Market research is
done to find out what customers want or might want and what price they are prepared to pay for a product.
Marketing will then involve making sure that the design and production teams produce what consumers want
at a cost that will enable a price to be set so that the business can make profit.

Marketing Objectives

Refers to the goals or targets a business has that are concerned with marketing methods or issues. They
specify the results expected from marketing efforts and should be consistent with overall organisational/
corporate objectives. Basically, they are goals set for the marketing department. Effective marketing needs to
have a clear sense of direction.

Criteria for good marketing objectives

 Must express realistic expectations

 Must be expressed in clear, simple terms so that all marketing personnel understand exactly what they
want to achieve
 Must be measurable
 Must be time framed
Examples of marketing objectives

 Increasing sales revenue or sales turnover by 5% by December 2020

 To increase market share by 10% by end of 2019
 To increase promotional budget by 7% by end of 2019
Relationship between corporate objective and marketing objectives

In Nestlé’s case, marketing objectives support the corporate objectives and all of them work together
Importance of marketing objectives

 They provide sense of direction for the marketing department

 Progress can be monitored against these targets
 Assist in decision making
 Can be used in making marketing strategies ( long term plans established for achieving marketing
objectives
Demand and Supply

The primary goal for the marketing department is to meet customer wants profitably. Marketing staff must be
aware of how the free market works to determine the price. In a free market economy, price is determined by
the forces of demand and supply. Market is a place or system that enables producers of a product or service
to meet potential buyers and exchange these for money.

Demand

Refers to the units of a product that consumers are willing and able to buy at a given price in a given time
period. According to the law of demand, more units of a good are bought hen the product’s own price
decreases, ceteris paribus. Ceteris paribus means that ‘other things remaining constant’ Consumers’ demand
determines what producers should produce.

Demand curve: Refers to a graph which shows the relationship between quantity demanded and prices.
Demand curve is a graphical representation of demand schedule. It is the locus of all the points showing various
quantities of a commodity that a consumer is willing to buy at various levels of price, during a given period of time,
assuming no change in other factors
When price decreases from P0 to P1, consumers increase their purchase of the product from Q0 to Q1. This is due
to income effect and substitution effect of a price change

Income Effect: low prices increases real income and consumers can now buy more

Substitution Effect: low price makes the consumers to switch over from substitutes to this product which is now
cheaper

Shift in the demand curve

Usually demand curves are drawn based on the assumption that all other factors except price remain the same. But
there might be instances when demand may be affected by factors other than price. This will result in the change in
demand although the price will remain the same. This change in demand may cause the demand curve to SHIFT
inwards or outwards.

 Shift of demand curve OUTWARDS shows an increase in demand at the same price level. It is known as
INCREASE IN DEMAND.
 Shift of demand curve INWARDS shows that less is demanded at the same price level. It is known as a
FALL IN DEMAND.
Factors Influencing Demand

i) Price of the product: price of the product is a key factor determining the demand. If the price
falls then demand will rise as the product becomes more affordable to customers so they buy
more of it. When products increase in price people will buy less of them and demand falls
ii) Price of other Products: some products are substitutes and others are complements.
Substitutes include butter and margarine. When the price of butter increases, people will buy
more margarine and less butter. There is a positive relationship between the price of one
product and the demand for a substitute good. When they are complements like tennis balls
and tennis rackets, a rise in the price of tennis balls will lead to a decrease in demand for tennis
rackets
iii) Advertising and promotion: a successful advertising campaign will create new customers and
remind existing customers to buy the product. The demand for the product will increase due
to promotional activities like by-one-get-one-free.
iv) Income level: as people gain higher incomes they will demand more of most products. People
will buy more of normal goods when income increases e.g meat. Demand for inferior goods
decreases as income increases e.g second-hand clothes.
v) Change in the size and composition of population: a rise in the population size will lead to an
increase the demand for goods and services.
vi) Weather conditions: in a hot day people will buy more ice creams and less of them on a cold
day
vii) Change in fashion and taste: Commodities for which the fashion is out are less in
demand as compared to commodities which are in fashion. In the same way, change in
taste of people affects the demand of a commodity.
viii) Changes in Income Tax: An increase in income tax will see a fall in demand as
people will have less money left in their pockets to spend whereas a decrease in
income tax will result in increase of demand for products and services because people
now have more disposable income.
What is Supply?
Supply refers to the amount of goods and services firms or producers are willing and able to sell in the
market at a possible price. The law of supply states that when the price of a commodity rises, the supply
for it also increases. The higher the price for the good or service the more it will be supplied in the
market. The reason behind it is that more and more suppliers will be interested in supplying those good or
service whose prices are rising.

Supply Curve

Represents the relationship between the quantity supplied and the price if the product in form of a graph.
A supply schedule represents this relationship in form of a table. Supply curve plots the quantity of a
product supplied against its price.
Shifts in Supply Curve

When factors other than price affect the supply it results in the shift of supply curve. The supply curve
may move inward or outward.
A shift of supply curve outwards to the right will mean an increase in supply at the same price level.
When the supply curve moves inwards to the left it means that less is being supplied at the same price
level.

Factors affecting Supply

Price of the commodity: A rise in price will result in more of the commodity being supplied to the
market and vice versa. A change in the price of the product will lead to a movement along the same
supply curve.

Other factors leading to shifts

Prices of other commodities: For example if it is more profitable to produce LCD TVs then producers
will produce more LCD TVs as compared to PLASMA TVs. Thus the supply curve for PLASMA TVs
will shift inwards (leftward shift) i.e. a fall in supply.

Change in cost of production: Increase in the cost of any factor of production may result in the decrease
in supply as reduced profits might see producers less willing to produce that commodity. (Leftward
shift)

Technological advancement: Improvement in technology results in lowering of cost of production and

more profits for the producer and thus more supply of that commodity.(rightward shift)

Climate: Climate and weather conditions affect the supply of commodities especially agricultural goods.
Favourable weather will lead to an increase in supply (rightward shift). Unfavourable weather will lead
to a decrease in supply( leftward shift)

Number of firms: when the number of firms increases, the industry’s supply curve will shift to the right
(increase in supply). Conversely when the number of firms decreases the supply curve will shift to the
left( decrease in supply)

Government policy : Taxation can be regarded as an increase in the cost of production and hence shifts
the supply curve to the left. On the other hand, subsidies are seen as a reduction of the cost of production
thereby they shift the supply curve to the right.

Market Price-Equilibrium Price

Equilibrium refers to a situation of balance where, at least under the present circumstances, there is no
tendency for change to occur. Demand will be equal to the supply. Thus the plans of consumers ( as
represented by the demand curve) match the plans of suppliers (as represented by market supply curve).
Consumers are willing and able to buy more when price decreases and the producers are willing and able
to supply more for sale when price increases. Thus the consumers’ wishes and Sellers’s wishes are
combined and that interaction of demand and supply will force them to settle on a compromise price at a
point where demand is equal to the supply. Equilibrium price can be defined as the price at which the
quantity demanded is equal to the quantity supplied. Equilibrium price can be defined as the price which
the demand is equal to the supply. Prices are determined by supply and demand forces. Equilibrium
quantity is defined as the level of output where demand is equal to supply
In the graph below the point at which the demand curve meets the supply curve is the equilibrium.
Disequilibrium: refers to a situation where demand and supply are not equal. Supply may be
greater than demand or the demand may be exceeding the supply. Shortage : This refers to a situation
where the demand is greater than the available supply. There will be an upward pressure on prices. Price
will continue to increase until demand is equal to supply. This condition is also known as excess demand.
Surplus: It occurs when the demand is less than supply. There will be a down ward pressure in prices.
The sellers will find themselves with unsold stock. To avoid an unnecessary loss they reduce the price to
clear stock. This condition is also referred to as excess supply

Shifts and changes in the equilibrium

Equilibrium can only change if the conditions of either demand or supply change as shown in the
diagrams below.
Progress Check: Using supply and demand curve diagrams, show how the price and quantity demanded
of soap made by ABC limited will change in the following circumstances. Make sure you identify
whether it is supply or demand that is changing:

i)The government carries out an extensive campaign to get people to wash their hands more often
ii)A new process is invented which reduces the cost of production of soap.
iii)XYZ limited, the main competitor reduces its price
iv)The government puts a new tax on soap

TYPES OF MARKETS

a)Consumer Market: a market whose customers are final users of the product such as members of the
public. They are ultimate/ final consumers who consume either by themselves or for family use. They do
not buy a product to make another product for resale.

b)Industrial Market: a market for which customers are other businesses and they buy products as inputs
to their own processes. It is also known as a business market. It consists of individuals or groups who
purchase a specific kind of product for any of the following purposes:

 Resale
 Direct use in producing other products
 General use in daily operation e.g lighting in schools, stationery for organisations’ offices etc

Product and Customer Orientation

Product Orientation: The business will supply products it thinks will be attractive to customes.
The business will be making unique products without keeping customer needs in mind. It is also referred to as
inward-looking approach where businesses just invent and develop products in the hope that they will find
customers who will buy their products. Much emphasis is placed on the production of quality goods. They think
that customers are always looking for high quality goods. It is ideal when there is no or little competition. A
good example is the iPhone, which was designed by Apple and then sold worldwide on the strength of its
design and technical features.

Benefits of Product Orientation

  The approach saves market research costs
 The business is also using its strength
Limitations of Product

 More risk than customer orientation

 Resources will be wasted when customers are not buying the product
Customer Orientation: An approach used by businesses that researches what consumers
want and designs and supplies these to the market. It is also referred to as market orientation or outward-
looking approach. The business pays more attention to customers and their satisfaction needs. The business
will produce goods that are wanted by customers. This approach requires the business to carryout market
research and market analysis to indicate present and future customer needs. It is ideal where there is stiff
competition in the market.

Advantages of customer orientation

 The firm will be more confident of a successful launch of a new product as effective market research
has been undertaken to determine customer requirements
 Appropriate products that meet customer needs are likely to survive longer and give higher profits that
those built with a product-led approach.
 Firms can respond quickly to changes in the market information as constant feedback from customers
is given
 Due to continuous market research, firms will be better able to anticipate changes and will be in a strong
position to meet the challenge of new competitors entering the market.
Recent Trends in Marketing

a)Asset-Led Marketing:- an approach to marketing that bases strategy on the firm’s existing strengths and
assets instead of concentrating on what the customers want. If a company try to satisfy the needs of all
customers in the market, the costs may increase leading to losses.

b)Societal / Green Marketing:- The concept was put forward by Kotler in 1972. This approach considers not
only the demands of customers but also the effects on all members of the public (society) involved in some
way when firms meet these demands. It’s a marketing approach that focuses on the business and all its
stakeholders. The business must therefore satisfy customers profitably and at the same time minimise damage
and costs to the society.

Features of the Market

a).Location: Firms should know who their customers are and where they are located. A firm may
operate locally, Nationally, regionally or internationally. Customers in all these geographical areas may have
different needs and wants depending on cultural, economic or historical factors.

i).Local Markets: The firm will sell its products to customers in the area where the business is located e.g
hairdressers, motor-repair garages, restaurants. Local media is used to advertise the products.
ii).National Markets: Firms will sell its products to consumers in the area where the business is located and
also outside its geographical location. National markets are larger and will require more research. The business
must be able to get what they offer known to potential buyers across a country so mass media is often used
for advertising. A firm may service national markets to increase sales. Examples include Banking sector firms,
large retail shops.

iii).Regional Markets: regional markets are larger again. A firm that sell its products to customers located in
different countries but in the same geographical region. They may cover a wider economic grouping like the
European Union, Southern African Development Commission (SADC). Each region will have its own
identifiable characteristic and customer needs.

iv).International Markets: A firm that sell its products to customers located in different countries in different
continents. It is done to increase sales and also profitability. Companies that operate in different countries are
known as Multinational Companies (MNCs). International markets are increasingly important as globilisation
continues. Globalisation refers to the growing integration and interdependence of economies and cultures
involving increased trade, movement of capital and people.

b) Market Size: is the measurement of all the sales of businesses that are supplying to the market.
Size of market can be estimated or calculated by the local market sales of all businesses in the market. There
are two methods that can be used to determine market size

 Value of goods sold:- the toal amount spend by customers buying products for all sellers in the market
(total revenue/ total sales)
 Volume of sales: refers to the total physical quantity of products which were sold by all frims in the
market i.e total number of units sold by all firms
Importance of Market size:-

 Firms can be able to calculate its own market share

 The firm can easily see if the market is growing or declining
 Marketing manager can assess whether a market is worth entering or not
c).Market Growth: It refers to the rate at which total sales in the market are rising each year or
falling (if growth is negative) It is also defined as th percentage increase in the size of the whole market.
Marketing managers will be more willing to venture into markets which are growing rapidly.

Factors affecting market growth

 Economic growth: The rate at which GDP of a country is growing will also affect the rate of market
growth.
 Incomes of consumers: increases in income increases the consumers’ willingness abd ability to pay for
the product.
 Changes in consumer tastes and preferences: Consumer tastes can change in favour or against the
product.
 Technological Advancement: inventions and innovations like on-line buying and selling can lead to
growth in the market
Benefits of calculating Market Growth

 It enables the business to plan ahead by looking at the market growth trend
 Growing market indicates opportunities
d).Market Share: it is the proportion or percentage of sales of one firm as compared to the whole
market size. It is the percentage of the total market held by a business or [Link] variables are used and
these include firm’s sales and total market sales. Market share can be by value or by volume. It is calculated
using the following formulas.

Market Share by value = Firm’s sales x 100

Total sales of all firms

Market Share by Volume = Units sold by the firm x 100

Total units sold by all firms

Market share measures the relative success of one business’s marketing strategy against that of its
competitors. A product with the highest market share is known as a brand leader and a business with the
highest markets share is known as a market leader.

Benefits of high market share

 Higher market share usually translate into high profits

 Small scale shops will be willing to buy from the business since it will be offering best-selling brands
 Customers are more willing to buy from a market leader ( a business with a higher market share)
Limitations of market share

 Different results can be obtained if two methods are used which makes it difficult to interpret the
results
 Markets can change rapidly especially in services or technology-based industries, making it difficult
to track changes over time
 Data on sales or profits can be hard to obtain
Numerical Example

There are four firms in the market and below are the sales figures for each firm. Use the data to answer the
questions that follow.

1990 1991
Firm W $10 000 $50 000
Firm X $40 000 $80 000
Firm Y $30 000 $50 000
Firm Z $20 000 $20 000

Questions:
a)Calculate market size for the two years
b)Calculate market growth for the two-year period
c)Calculate Firm Y’s market share in 1990 and in 1991
d)Comment on the results obtained on ‘c’ above
e).Competitors: are businesses that sell similar or identical goods or services in the market. There
are two main types of competition and these include price competition and non-price competition. Price
competition involves charging price different from the competitor’s price. Non-price competition include offering
quality goods, after-sale services, hire purchase facilities etc. Competition can be direct or indirect.

 Direct competition: refers to competition from the business that provide the same or very similar goods
and services. Goods may be slightly differentiated. Goods can be differentiated by size, colour,
packaging etc
 Indirect Competition: competition is from businesses that are in a different market of sector i.e a bus
operator can experience indirect competition from rail transport operators.
Niche and Mass Marketing
a).Niche Marketing: involves identifying and exploiting one segment of a larger market. This segment
can be one that has not been identified and filled by competitors. It is a very small section of the market and
that section has got specific requirements e.g the market for professional divers’ watches or high status
products. It is suitable for small firms and the goods are produced in small quantities. This segment is also
known as the target market. Target market refers to a specific group of customers to which a business has decided
to sell its products or services. A target market can be defined according to age, gender, income, taste, location
etc. Allows businesses to develop products/services to meet the needs of this specific group.

Benefits of Niche Marketing

 Enables small firms to avoid competition from larger firms

 By targeting niche markets, firms can focus on the needs of customers in these markets
 Direct marketing is possible
 There is little competition on those markets
Limitations of Niche Marketing

 Niche markets are small and can therefore only support a small business
 It is not suitable for a business selling many products
 It is more risk than mass marketing
b).Mass Marketing: involves selling the same products to the whole market with no attempt to target
separate groups. Mass marketing produces a product that appeals to the whole market, so that everyone
becomes a customer, no matter what their age, job, income, wealth or gender. Mass markets consists of a
large number of customers for a standardised product such as markets for food and grocery. Goods are
produced in large quantities.

Benefits of Mass Marketing

 Enables a firm to operate in a large scale and enjoy economies of scale (economies of scale refers to
a decrease in the average costs experienced when a firm operate on a large scale.)
 It is less risk than niche marketing since the business will be selling to a lot of consumers
 A strong brand image and customer loyalty is reinforced and these act as barriers to entry making if
difficult for competitors.
Limitations of Mass marketing
  The business can lose customers who will be looking for specialised products
 Direct marketing is not possible. Thus mass marketing is likely to require very high advertising,
promotion and distribution costs and failure to succeed will be very expensive.
 There is a lot of competition as the needs and wants of the large market can be seen by many
businesses.
Market Segmentation
Refers to the process of dividing the whole market into different sub-groups according to their respective similar
or homogeneous characteristics. It is the process of identifying particular groups that have similar needs and
wants in the market. Market segmentation is also known as differentiated marketing. A sub-group of the whole
market is referred to as a market segment. A market segment consists of consumers who have similar
characteristics. Segmenting a market means that marketing activities are focused on people who are more
likely to buy, meaning they are more cost effective and less likely to be a waste of time.

Identification of Consumer Groups

The business should be able to determine the different consumer groups in the market. To have a clear picture
of the type of consumers in a given market, the business must come up with a consumer profile. Consumer
profile refers to a quantified picture of consumers for a firm’s products. Thus the consumers can be grouped
according to age, income levels, gender, social class, religion and region.

Methods of Market Segmentation

a)Geographical Differences: refers to area wise market segmentation. Consumers in different

locations demand different types of goods and services. Thus it will be ideal to offer different goods in these
areas. Markets can be divided into districts, towns, provinces, rural etc. For example Woollen and thick
garments are not demanded in hot cities while the demand is very high in Polar regions.

b)Demographic Differences: segmentation can be based on the vital characteristic of population.

E.g gender, age, income distribution, religion, education etc.

Social class is usually determined by the levels of income earned by an individual. Basically there are three
categories of social classes and these are:

 Upper Class: skilled and experienced professional e.g [Link] Directors, Managers, Lawyers, Doctors
etc. They buy expensive goods for prestigious reasons
 Middle Class: Lower managerial workers e.g Teachers, Nurses etc. They want quality goods at
affordable prices
 Lower Class: unemployed, pensioners, part-time workers etc. The want inferior goods at low prices
Age: Some products are purchased by particular age groups eg. Walking frames, coke zero

c).Psychographic Factors: refers to market segmentation according to mental status of the people.
It includes culture, personality attributes, motives, life style of the consumer. Life style refer to the way in which
one lives. Attitude refers to a settled way of thinking or feeling or a position of the body indicating a particular
mental state. Personality refers to the combination of characteristic or qualities that form an individual’s
distinctive character. Brands are generally segmented according to the psychograph. Segmentation is decided
according to the advertisements and content shown. A celebrity can be used for a BMW X5 car to make the
advert more appealing to the middle and upper classes.

d).Behavioural Segmentation: market segmentation according to the utilisation of the product.

Thus consumers are grouped according to the volume of usage, purchase occasions, brand loyalty, price
sensitivity etc

Benefits of Market Segmentation

 Increased sales since products are produced for a specific group of consumers
 Enables the business to identify consumer needs and wants which are not currently satisfied
 Enables small firms to avoid competition from big firms by targeting a specific group of customers
 Enables the business to implement price discrimination to increase revenue and profits
 Money and time is not wasted in trying to sell products to the whole market
Disadvantages of Market Segmentation

 Firms may appeal to segments that are too small to be profitable

 Firms may not be able to use certain media die to small size of the segment
 Costly and extensive market research is needed
 Firms may misinterpret consumer similarities and differences
 Promotional costs might be high as different advertisements and promotions might be needed for
different segments

Market Research
Refers to the collection, collation and analysis of data relating to the marketing and consumption of goods. It is
the process of gathering information about markets, customers, competitors and the effectiveness of marketing
methods. It is every day information about developments in the marketing environment that mangers use to
prepare and adjust marketing plans. The information is used to identify and define marketing opportunities and
problems, generate and evaluate marketing actions, monitor marketing performances and improve
understanding of marketing as a process.

Qualitative and Quantitate Information

Quantitative Information: information will be in the form of numerical data. Data can be obtained by carrying
observations and some experiments e.g test marketing or field experiments. The results can be distorted if the
person is aware that he/she is being observed.

Qualitative Information: information is non-numerical e.g attitudes, opinions, ideas etc The researcher may
want to find the reasons why consumers will or will not buy a particular product. The data can obtained through
personal interviews and in-depth discussions amoung groups e.g focused groups and consumer panels

Reasons for conducting Market Research

a).To eliminate the risk associated with new products: the company needs to obtain information about
potential demand before launching a new product.
b).To predict future changes in demand: information should be gathered which will enable the firm to predict
all the likely changes in future demand.

c).To help in decision making: market research provides vital information which is needed for decision
making purposes

d).To gain a competitive edge: to assess the most popular designs, styles, brands, promotions and packages

e).To explain patterns in sales of existing products and market trends: market research is required for
both new and existing products. If the sales figures for an existing product are declining then marketing
managers must implement new measures to reverse the negative trend.

Types of Market Research

Primary Research: it is also known as field research. It is the gathering of information for the first time directly
from sources in the market. Information which is collected by the researcher and the information gathered is
new. An example of primary research is asking people what is their favourite chocolate.

Characteristics of Primary Research

 The data collected has never been published in any form

 The data will be directly related to a firm’s specific needs. Thus a consumer survey will be designed to
discover specific aspects of consumer needs relevant to the firm.
 Primary research is typically expensive to collect. This is because it requires significant labour input
and expertise of the results are to be trusted.
Primary Research Methods
a).Observation: market researcher can observe how people behave. Observations can take the form
of audit (stock checks) or using recording devices like security cameras and Televisions. It can give you the
answer of what is happening but not why as you just observe and see through cameras. It involves seeing how
much time they spend at a shelf and the type of products they were looking at. Thus the results can be distorted
if the customer knows that he/she is being observed.

b)Experimental Methods/ Test marketing: basically there are two types which
includes:-

i).Laboratory Method:- occurs when people are invited to a particular artificial setting and ask them to taste a
product or try it at their own place.

ii).Field Experimentation:- the marketing manager will select a particular geographic area and launch a
product in that location to see the reaction of the people. This is cheaper as the loss is less if the product is not
successful.

c).Survey Method: It includes the telephone surveys, mall-intercepts, internet surveys, simple
questionnaire surveys and door-to-door surveys. Mall-intercepts occurs when people are stopped in malls and
are then asked about a product. Questionnaire surveys are most common when people are given out forms
with questions that could be either open-ended or closed-ended. Quantitative research include the use of
closed questions e.g a yes or no question and or a multiple choice question. Qualitative research include the
use of open-ended questions where the responded is allowed to give his or her point of view (space is provided
for respondent to give his/her point of view)

Questions to ask when using surveys

i).Who to ask: it involves population, sample size and sampling method. Population includes current or
potential customers.

ii)What to ask: the types of questions and the required information

iii).How to ask: the layout of the questionnaire, questionnaire techniques (i.e complex or simple)

iv)How accurate the result is: likely limitations of market research. Accuracy depends on the intelligence and
cleverness with which questions are being asked.

Example of a questionnaire: Shopping for shoes

1. Do you ever buy shoes yourself? Yes…….. No……
2. If yes, where do you buy them? A) High street
B) Shopping mall
C) Departmental store
D) Internet site
E) Other
3. How do you often buy shoes? A) One week
B) Once a month
C) Once every three months
D) Once a year
4. How much do you usually spend on a pair of shoes? A) less than $10
B) $11-$20
C) $21-$40
D) Over $40
5. What is the most important thing you look for when buying a pair of shoes?..................................................
……………………………………………………………………………………………………………………………
6. How important to you is the place you buy shoes in?....................................................................................
………………………………………………………………………………………………………………………….
7. How much do you consider fashion when buying a pair of shoes? ………………………………………….
…………………………………………………………………………………………………………………………….

d).Sampling Method
What is a sample: is that part of the whole population whose characteristics are studied to give insights into
the characteristics of the population as a whole. Statistical theory can be used to calculate the minimum size
of the sample necessary to give the required degree of accuracy. Sample size refers to the number of people
selected from the population in which marketing research is conducted. Generally speaking, the larger the
sample size the more accurate can be the results. The sample must be more representative of the population,
it should be balanced in terms of age, sex, type of occupation, social class etc. A carefully chosen sample
should produce similar results to those that would be achieved by asking everyone in the population.
However one needs to take into consideration time and cost factors. Bias will also exist especially if the samples
are poorly selected or too small, or if questionnaires have complex interview questions.

Two types of Sampling Methods

 Probability Samples: a sample is selected randomly and the probability of each member’s inclusion
in the sample can be calculated and reliable conclusions about the whole population can also be made.
Probability sampling methods are more complex, costly and also time consuming.
 Non-Probability Samples: it excludes estimating the probability of any particular item being included.
Reliable conclusions from these samples for the whole population are not possible. However it saves
time and money. It is also very easy.
Probability Sampling Methods
i)Random Sampling: every member of the population has an equal chance of being selected. Names and
addresses for respondents may be chosen at random from the electoral register and then visited for an
interview.

ii)Systematic Random Sampling: every nth member in the target population is selected. For example,
selecting every 10th name in the telephone directory until the required sample size had been reached.

iii).Stratified Random Sampling: it divides the population into groups (strata) by age, sex, occupation, social
class etc. It provides a more representative cross-section of the whole population. Each selected sub-group is
then randomly sampled i.e people in each stratum should be randomly chosen.

iv).Quota Sampling: when the population has been stratified and then the interviewer selects an appropriate
number of respondents from each stratum. It is commonly used for street interviews e.g a quota may be used
to interview 25 males and 25 females for each selected age group.

v).Cluster Sampling: cluster refers to a group of similar things positioned or occurring closely together. A
random group is selected from a particular area or region where they are concentrated e.g choosing the CBD
in a town. It is used to reduce costs of interviewing and travelling.

Non-Probability Sampling Methods

i).Convenience Sampling: involves the gathering of information from whoever is available when the survey
takes place, regardless of their age, sex, background etc. It also involves stopping by-passers, asking shoppers
in just one location. It is less costly. However the results are less reliable

ii).Snowball Sampling: it is a very specialised form of sampling in that, a first group of people is selected as
the first sample. The selected people are then asked for one more contact (friend) who is then added into the
sample. Sample size continue to increase hence snow ball effect. Businesses in secretive markets use this
and also those firms that produces highly specialised and expensive products for a very limited range of
customers. It is less costly. However sampling in this way is not representative. Thus the results may be biased
since a person’s friend is likely to have a similar lifestyle.
iii).Judgemental Sampling: the researcher chooses the respondents based on what they think is appropriate
for their study. This could be used by an experienced researcher who may be short of time as they have been
asked to produce a report quickly.

e).Focus Groups
It is a selected group of 15-20 people who are shown a product or allowed to taste it and then asked about
what they feel or think about it. These people must comment on its taste, design and colour depending on what
the product is. Once they are interviewed they won’t be asked again. It is used to obtain feedback especially
for new brands. During the interview, members are allowed to discuss with each other. Information to be
obtained is more reliable.

Limitations

 It can be time consuming

 The data collected can be difficult to analyse and present to senior managers
 The presence of the researcher may influence the discussions
f).Consumer Panels
It is to a great extent similar to focus group. The difference is that, after an interview, the focus group is
dismissed and another group is selected. In a consumer panel, the same group is asked for opinions at a
certain point in time after some changes have been introduced. It is more accurate as asking the same people
give a better idea of how consumer thoughts and feelings are changed.

Advantages of Primary Research

 Targeted issues are addressed: thus the investigator collects data specific to the problem under study
 Data is up-to-date: the data is current and as such it is specific to the place and situation the researcher
is targeting.
 The researcher enjoys privacy: collector of information is the owner of that information and he need not
share it with other companies and competitors. This gives an edge over competitors relying on
secondary data
 Data interpretation is better: the collected data can be examined and interpreted by the marketers
depending on their needs rather than relying on the interpretation made by collectors of secondary
data.
 The researcher may get more information: if required, it may be possible to obtain additional information
during study.
Disadvantages of primary research

 High costs: collecting data using primary research is a costly proposition as the more people are
required to carry out surveys and collect data
 Time consuming: the time required to do the research accurately is very long as compared to secondary
data, which can be collected in much lesser time duration
 In accurate feedback: in case the research involves getting feedback from the targeted audience, there
are high chances that feedback given is not accurate. Feedback by its basic nature is usually biased
and given just for the sake of it.
SECONDARY RESEARCH
It is also known as desk research. It involves the collection, analysis and evaluation of second-hand information.
Second-hand information refers to data that already exists. This information was originally collected by another
person or organisation for a different purpose. It is the secondary research that should be initially done as it
has lower costs, saves time and helps in giving directions for primary research.

Sources of data for Secondary Research

Internal Sources

 Internal company records or annual reports

 Sales trends
 Stock movements
 Supplier and customer records
External Sources

 Newspapers e.g the business section

 Magazines
 Government publications (population census)
 Libraries (number of households in an area)
 Economic surveys (economic trends)
 Information from competitors
 Internet (feedback from customers)
 Prepared research report by other firms
Advantages of Secondary Research
 Secondary research materials are usually cheaper to obtain as costs of conducting the research do not
have to be borne by the organisation
 Data is obtained quickly since the data is already there. There are no hassles of data collection
 Data from several different sources can be compared and important competitor details obtained
 Basic information like population structures can be obtained which then provide a foundation for primary
research. Thus secondary research makes primary research easier.
Disadvantages of Secondary Research
 The data is often out-of-date:- in fast-moving consumer markets, data quickly become out-dated as
the external environment change.
 The data was collected for a different purpose:- Thus the data obtained may not suit the objectives
of the company as it may have been conducted for a different purpose.
 If a company is starting to develop or has developed a new product then secondary research data
may not be available at all.
 Obtaining additional data or some additional clarification about something may not be possible
 Lack of control over data quality. One can only hope that the data is of good quality.
Factors affecting choice of the research method
[Link] available: if the researcher has more money available for market research to be conducted then
primary research can be necessary. The organisation can afford expensive primary research methods such
stratified random sampling, quota sampling etc. If the organisation is experiencing cash problems the secondary
research can be the best option.

2. Accuracy required: primary research provides more accurate results than secondary research . Secondary
research provides misleading results since the research was done for a different purpose and is often out-dated.

[Link] quickly the information is required: secondary information is ideal when the marketing data is required
quickly since the data is readily available. Primary research method can be employed when the data is not
required quickly.

[Link] to the old sample: if the researcher doesn’t have access to the sampled population then primary
research won’t be possible. The researcher will then depend on the data provided by other organisations.

Cost effectiveness of market research

The business should not just spend large sums of money on market research for the sake of it. The marketing
managers should ask themselves questions such as: Is it worth it? Is it cost effective? These questions implies that
money should not be wasted. A well designed and focused market research pays for itself in form of higher sales
and increased profits. If very little amounts are spent on market research then the validity and reliability o the
results will be compromised. By spending more on market research the more the data can be obtained leading
to better results. Nowadays the internet and mobile phones have made it easy to contact a wide range of
potential customers within a short period of time as compared to home surveys. The key way to maximise the
likelihood of cost-effectiveness is to plan thoroughly. According to the Marketing Association: an existing
business must set a marketing budget not exceeding 1% of its gross sales and 10% for a new product or business.

Factors to consider when deciding how much to spend on market research

a)likely returns :The marketing manager should consider the potential increase in sales or profits

b)Method to be used :More money is required if they are planning to use a primary research method.

c)Budget available: resources available can be a constraint to the amount of money a business can spend on
market research.

d)Emergence with which the data is required: If the data is required quickly then more is required so that more
data collectors can be hired.

Reliability of data collection

-different factors should be considered before concluding on whether the data is reliable or not.

Market research data may be unreliable due to the following reasons:

 Questionnaires used may have had misleading or leading questions
  Interviews or focus group leaders may guide responders or may not fully under stood the question they
are asking.
 Interviewers or focus group leaders may complete the forms themselves
 Respondents to questionnaires, interviews and discussions may deliberately not give their real views in
order to get the process finished quickly or just for fun.
 People in focus groups may say what they think other people in the group would like to hear
 The sample size may be too small and so not represent the whole population
 Different statistical methods of treating data will often result in different conclusions

Analysis and Interpretation of the results of market research

Most market research reports will be presented in writing, though there may be meetings where the findings are
orally presented. The writing may be supported by graphs, charts, tables and diagrams. The information must be
presented clearly and in an organised way. There may be recommendations, though these may be left to those
who the report was produced for.

Methods of presenting market research results

a)Tables: a table shows the rows and columns which show any connection between the two variables. It is
important to choose appropriate headings for the rows and columns. It is an effective way of organising large
quantities of data.

Product Sales revenue for the four product in a supermarket over time
1990 1991 1992
Biscuits $100 $110 $123
Bread $90 $88 $84
Cooking oil $55 $55 $56
Buckets $60 $65 $70

Problems

 Not attractive in most cases

 The reader may take more time to interpret the data

Pie Chart
They are visually attractive and present the data in an easy-to-see way. The data is broken down into categories.
The area of each circle/sector occupied by each category is in proportion to the percentage that category is of the
total.
Problem: A pie chart is used to show only one variable

Bar Graph
Show data in the form of vertical or horizontal bars. A bar graph displays data in separate columns. They may
show absolute values or percentages. They are also visually attractive. Use the data in the table below to draw a
bar graph

Month Jan Feb Mar April May Jun July

Pairs of shoe sold 30 35 20 0 25 20 30
Pictograph
A pictograph uses icons or pictures to present the information. It is visually appealing and it is easy to see
variables. A key is required for the reader to easily understand value of an icon. Use the following data to draw a
pictograph.

Month Jan Feb Mar April May Jun July

Pairs of shoe sold 30 35 20 0 25 20 30

Draw a pictograph on the space provided

Line Graph
A line graph is used for showing the way a variable changes over time. A line graph plots data as points and joints
the points with a line. It is simple and clear and more than one line can be shown on the same axis to enable a
comparison. Use the data below to draw a line graph.

Month Jan Feb Mar April May Jun July

Pairs of shoe sold 30 35 20 0 25 20 30
Measures of the middle or the average
Use the data in the table below to calculate the mean; median and the mode. The table shows the number of
hours the respondents listened to a certain radio station

Year Number of hours

2010 7;3;2;0;10;3;2;4;8;6;7;5;7;10;7;11
2011 6;12;3;9;11;6;9;10;5;9;9;4;10;4

First step: Arrange the data in ascending order

Year Number of hours

2010 0;2;2;3;3;4;5;6;7;7;7;7;8;10;10;11
2011 2;3;4;4;5;6;6;9;9;9;9;9;10;10;11;12

Mean = add all the values and divide by the total number of values

Mean (2010) = 92/16 = 5.8

Mean (2011) = 118/16= 7.4

Comment : the data show an improvement since people are listening to the radio programs for longer periods.

Mode: refers to the number which appears most

Mode (2010) is 7 (appears 4 times)

Mode (2011) is 9 ( appears 5 times)

Median refers to the middle term in the range of ordered data. The median divides the data into 2 equal
parts

Median when there are odd number of values :- = (Number of values +1) th value
2

Median when there are even number of values = add the two middle numbers and divide by 2

Median (2010) = (6+7)/2 = 6,5

Median (2011) = (9+9)/2 = 9

Advantages of using a mean

 It includes all of the data in its calculation
 It is widely used and easily understood

Disadvantages of using the mean

 It is affected by one or two extreme results
 It is commonly not a whole number.

Advantages of using the mode

 It is easily observed and no calculation is necessary
 The result is easily understood since it is a whole number

Disadvantages of using a mode

 The mode does not consider all of the data
 There can be more than one modal result which could cause confusion

Advantages of using the median

 It is less influenced by extreme results than the mean

Disadvantages of using the median

 It cannot be used for further statistical analysis
 When there is an even number of items in the results, its value is approximated
MARKETING MIX
Marketing Mix is defined as a combination of elements that influence a customer’s decision whether or not to
buy a product. It is also defined as the combination of product, price, promotion and place that is used to make
sure that the customer’s requirements are met. It is a marketing tool that combines a number of
components in order to strengthen and solidify a product’s brand and to help sell the
product or service. The marketing mix is often simplified and is commonly described as the 4 P’s. This
approach identifies four elements in the mix (all beginning with the letter P)

P - Product : Include the many different aspects of a product such as design, quality, reliability as well as
its features and functions. A product is an item that is built or produced to satisfy the needs of a
certain group of people. The product can be intangible or tangible as it can be in the form
of services or goods.

P – Price: Refers to how much the customers are charged for the product and other terms of payment
involved. This is what a business is asking consumers to pay for a product or service. The price can be related to
the cost of production or sometimes related to the prices charged by competitors

P – Promotion: This is the way a firm communicates information about the product to the customer. It
may use advertising or a sales force to highlight its strength. The promotion of a product will affect the image
that customer have of it and their awareness and understanding of the benefits of the product. Promotion
includes advertising, special offers, sponsorship and public relations activities

P – Place: Refers to the way the product is distributed. Is the product sold directly to the customer or
through retail outlets? Can you buy online or do you have to travel some distance to get to a shop where it is
sold. Place refers to the points of sale such as store or websites as well as Lorries that distribute products.
Packaging is also part of promotion. Packaging refers to the technology of enclosing or protecting product for
distribution, storage, sale and use.

The role of the consumer (The 4 C’s’)

Another way of analysing the marketing mix is to consider it from the perspective of the consumer. The
4Cs (Customer/consumer value, Cost, Convenience, and Communication) enables you to
think in terms of your customers’ interests more than your own. From being business-
oriented, you’ll become customer-centric. This is known as the 4 C’s approach
 4 C’s Explanations
Customer solution  What benefits does it offer? How does the product meet a customer
need to solve a customer’s problem? A company should only
sell a product that addresses consumer demand. So,
marketers and business researchers should carefully study
the consumer wants and needs.
Convenience to customers  How easy it is to buy the product. The product should be readily
available to the consumers. Marketers should
strategically place the products in several visible
distribution points.
Communication with the  What do we know about the product. Marketers should aim to
customers create an open dialogue with potential clients based on
their needs and wants
Cost to the customer  How much does the product cost to the customer

Relationship between 4 C’s and 4 P’s

The 4 P’s take the point of view of the seller and not the one of the buyer. From the buyer’s point of view, the 4
P’s are transformed into the 4 C’s

Relationship between 4 P’s and 4 C’s

4 P’s Product Price Place Promotion
Customer solution Cost to the Convenience of the Communication
4 C’s customer customer with customers

Customer Solution and Product

 Buyers don’t see a product as a selling item but rather as a solution for their problem
 The business must find out what people want and then ‘build it’ for them, their way
 Study customer needs and wants and then attract them one by one

Cost to the customer

 Price indicates a return to the sellers and on the other hand, price is a cost to the customers
 Buyers see how much they would have spent to benefit from the product

Convenience to the customer

 Sellers try to choose the right place for their products in order to make them convenient for buyers
 You have to know how each sub-set of the market prefers to buy e.g on the internet, from a catalogue,
on the phone, using credit cards etc
Communication with the customers
 Communication requires a give and take between the buyer and seller
 As a marketing manager, you must listen to your customers whenever they give you feedback

Product Differentiation: refers to the degree to which customers perceive a product or brand to be
different. The main focus for most of the businesses is to make customers see that the brand or product
is the only one that meets their wants. The differentiation may be through an actual advantage in design,
performance, or price, or an imaginary but real process in which the customer is convinced that the
product or brand has something over and above its physical characteristics.

Ways to achieve product differentiation:

 Advertising and marketing campaigns to make the product stand out e.g Nike
 Branding and packaging e.g Coca Cola
 After sale services and guarantees
 New designs

Unique Selling Point / Unique Selling Proposition

A unique selling proposition (USP, also seen as unique selling point) is a factor that differentiates a product from
its competitors, such as the lowest cost, the highest quality or the first-ever product of its kind. A USP could be
thought of as “what you have that competitors don’t.” A successful USP promises a clearly articulated benefit to
consumers, offers them something that competitive products can’t or don’t offer, and is compelling enough to
attract new customers. The USP may be something unique to the product, the distribution arrangements or the
marketing methods.

Here are a few famous examples of USPs:

 Domino’s Pizza deliveries“ it arrives in 30 minutes or it’s free” promise.
 FedEx’s “When it absolutely, positively has to be there overnight.”
Southwest’s claim to be the lowest-priced airline

Benefits of Unique Selling Point (USP)

 The business is able to charge high prices

 Positive publicity from customers
 Increase in market share
 Leads to Brand loyalty. Brand refers to an identifying symbol, name or trade mark that
distinguishes a product from its competittors

What is the product life cycle?

The product life cycle is an important concept in marketing. It describes the stages a
product goes through from when it was first thought of until it finally is removed from the
market. Not all products reach this final stage. Some continue to grow and others rise and
fall. This can be illustrated by looking at the sales during the time period of the product
 What are the main stages of the product life cycle?

Development stage - objectives

At this stage, you should not worry about sales or introducing the product. Your focus should be on
working with a team of designers, manufacturers or product development experts on:

-producing prototypes
-testing prototyped product
-sourcing and pricing materials
-intellectual property issues

To further develop your product, you should:

 consult team members on development plans
 speak to suppliers and other business associates
 communicate with customers about your plans
 consider the environmental impacts of your product
 ask a group of potential customers to test your product and give feedback - you can use this to develop the product
 When developing your product or service you need to establish the level of quality you are aiming for,
and how many different versions you want to develop to generate interest at launch. You should also
take steps to protect all your intellectual property rights - eg patents and trademarks - before you launch
the product or service. Doing this protects you from other competitors copying the idea and hurrying
through an alternative. See how to protect your intellectual property.

Introduction stage of a product life cycle

The introduction stage of a product's life cycle is when you can build an awareness of your product or service in
certain markets.

Introduction stage - objectives

You should concentrate on building a base for your product at this stage, and focus on the following marketing
factors: - pricing
-distribution
-promotion

Price your product or service

You should initially start pricing at the highest point you believe it is possible to achieve. You can also consider a
skimming price strategy: charging a relatively high price for a short time when a new, innovative, or much-
improved product is launched onto a market. The aim with skimming is to skim off customers who are willing to
pay more to be one of the first to have a new product. You can lower the prices later when demand from the early
adopters falls.

A penetration pricing strategy may work best for businesses entering a new market or building on a relatively small
market share. It involves the setting of lower, rather than higher prices to achieve a large, if not dominant market
share. See how to price your product or service.
Distribution
Your distribution should be selective and limited to a specific type of consumer, until your product is accepted.
Also, you should consider different distribution models during different periods of the product life cycle, eg new
products for different seasons in a clothes shop.

Promotion
You should try to build brand awareness at an early stage. It is worth working with a brand design or
communications agency as you develop a product to establish a strong brand.
 You can use samples or trial incentives to capture early adopters of the product or service. Introductory promotions
can also help convince potential resellers to carry your lines. See more on branding: the basics.

Profitability during the introduction stage of product life cycle

It is likely that, at the introduction stage, your sales will be low until customers become aware of your product or
your service's benefits. Due to the high cost of advertising and low initial sales, it is possible that you won't make
immediate profits or you may even find that the product is producing negative profits. However, you should make
up for this with increasing revenue generated at the growth and maturity stage of a product life cycle

Growth and maturity stage of a product life cycle

At this point in your product's life cycle, you should be putting your efforts into:

-increasing your product's market share

-creating a brand preference for your customers
Product growth stage
This should be a period of rapid growth in both sales and profits for your product or service. Your profits should
rise through an increase in output and more competitive pricing.

You should also consider:

-maintaining product quality and adding features or support services for the product
-maintaining pricing to increase demand for the product
-increasing distribution channels to cope with demand
-aiming promotion at a wider audience
If your profits are still low, consider reducing the price of the product or service to increase the volume of sales.

Product maturity stage

If your product or service makes it to the maturity stage, this should be the longest part of its product life cycle.
Sales are near their highest, but the rate of growth is slowing down, e.g. new competitors in market or
saturation

At this stage, you will probably notice that:

 you may need to enhance product features to make it more appealing than competitors'
 you may need to lower your pricing due to increased competition
 distribution is becoming more intensive and you may need to offer incentives
 you may need to focus your promotion on the difference between existing products
At this point, the market has often reached saturation as a result of competitors releasing their own version of your
product. Your product or service may experience a decreasing rate of sales, which should eventually stabilise.

During this stage, you should aim to differentiate your product or service from others that your competitors offer.
You can do this by focusing and highlighting any branding, trademarks, or customer testimonials that may give
you an advantage. Read about designing a successful brand.

Decline Stage
The last of the product life cycle stages is the Decline stage, which as you might expect is often the
beginning of the end for a product. When you look at the classic product life cycle curve, the Decline
stage is very clearly demonstrated by the fall in both sales and profits. Despite the obvious challenges of
this decline, there may still be opportunities for manufacturers to continue making a profit from their
product. The product/service either comes to its natural end or is re-developed

Extending the Product Life Cycle

What can businesses do to extend the product life cycle?

 Extension strategies extend the life of the product before it goes into decline. Again
businesses use marketing techniques to improve sales. Examples of the techniques are:
 Advertising – try to gain a new audience or remind the current audience
 Price reduction – more attractive to customers
 Adding value – add new features to the current product, e.g. improving the
specifications on a smartphone
 Explore new markets – selling the product into new geographical areas or creating a
version targeted at different segments

Challenges of the Decline Stage

 Market in Decline: During this final phase of the product life cycle, the market for a product will start to
decline. Consumers will typically stop buying this product in favour of something newer and better,
and there’s generally not much a manufacturer will be able to do to prevent this.
 Falling Sales and Profits: As a result of the declining market, sales will start to fall, and the overall
profit that is available to the manufacturers in the market will start to decrease. One way for
companies to slow this fall in sales and profits is to try and increase their market share which, while
challenging enough during the Maturity stage of the cycle, can be even harder when a market is in
decline.
 Product Withdrawal: Ultimately, for a lot of manufacturers it could get to a point where they are no
longer making a profit from their product. As there may be no way to reverse this decline, the only
option many business will have is to withdraw their product before it starts to lose them money.

Summary : Stages of the PLC and the marketing Mix

Introduction growth MATURITY Decline
Product -first model -modified model -new models -drop poor selling
-wide range -modify existing models
models to extent
their life cycle
Price -Could be high -could be lower to -Could be lowered -heavily
(skimming pricing) attract customers further to attract discounted
Could be low - could be higher if customers -reduce price to
(penetration the brand is - competitors are clear stock
pricing) successful. also entering the
market
Promotion -Significant -more advertising -persuasive -could be much
advertising ( and promotion to adverting to stress lower to save
informative create brand on the positive costs
advertising) and loyalty difference with - advertising is
promotion to raise competitors’ only used to
awareness. products inform the public
about lower prices
Place -Could be focused -increased levels -the highest -eliminate
on the key areas ( for wider coverage number of outlets unprofitable
restricted outlets) outlets
Uses of the PCL
 The position of a product in the PLC gives some indications to a business about how the
elements of the marketing mix might be used
 It is also used to check progress against the marketing objectives of the business
 It is used to identify how cash flow might depend on the cycle
 To decide on whether to withdraw or to re-launch a product

Limitations of the PLC

 It is based on past or current data as such it cannot be used to predict the future
 Some products can come back after the decline stage
 Sales of some products continue to grow.
New Product Development
An ability to develop new products [or services] can help to breathe new life into a
business. The primary advantage of product development is that it can help a brand
and business stay relevant with its consumer base. By continually striving to solve new
problems that consumers face, an organization is continually creating the chance to
create revenues.

New Product Development: the creation of products with mew or different

characteristics that offer new or additional benefits to the customer. Product
development may involve modification of an existing product or its presentation, or
formation of an entirely new product that satisfies a newly defined customer want or
niche market.

Benefits of new product development

 Increase in market share

 The business is able to respond to changing needs of customers
 The business can benefit from positive word-of-mouth marketing, which can lead
to higher revenues.

Limitations

1. It can be easy to set unrealistic expectations for a product.

Without quality benchmarks in place, the product development process can create
unrealistic future expectations for a brand and business. Just because a prototype
works as intended does not mean that it can provide an expected value. There must be
a consistent performance in meeting consumer value expectations and accurate
benchmarks must be set to make this happen.

2. Products can fail unexpectedly.

Even with thousands of hours of testing, it is possible for a product to fail
unexpectedly. The Samsung Galaxy Note 7 battery issues and subsequent recall are
example of this. If a product doesn’t perform as expected in the general market, then
the anticipated profits can become large unanticipated expenses in a very short period
of time.

3. External sources can change procedures, which can alter your product
development.
There are a number of external sources which are involved in the product development
process, but fall outside of the direct sphere of influence for a brand and business.
Shipping vendors may change delivery dates. Off-shore manufacturers might change
procedures. Manufacturing materials may decline in quality. These all can affect the
final product under development.

4. Product testing can result in a failed idea.

A brand and business can put a lot of time and effort into the product development
process, only to see an idea fail when tested within a market. There will always be a
risk with product development because the costs of a failed idea must be absorbed. If
the hopes for new revenues rely on one product in development, then this puts the
organization at risk for failure instead of experiencing a product failure.

5. The primary disadvantage of product development is that changing consumer

preferences can cause a valuable product to actually be seen as worthless.

NB: The pros and cons of product development show that this process can be risky,
but it also provides a brand and business with the opportunity to experience greater
success. When approached in a methodical way, the innovative outcomes are often
worth the risk of future failure.
Product Portfolio Analysis

Refers to analysing products of a business to help allocate resources effectively

between them. Considers the range of product a business offers, using market sales,
market share, position of the product life cycle and segmentation in order to plan the
most appropriate product mix to meet objectives. It focuses on how to achieve the
optimum (best) product mix, that means getting a range of products that are going to
achieve long-lasting sales. It helps the business to pinpoint exactly what marketing
activities need to be employed for each product in the mix

Benefits of product portfolio analysis

 Allows businesses to ensure that it always has a product ready to replace

products that might be losing market share or sales
 It enables a business to have a range of products so that if one fails the others
can provide revenue to cover
 It allows planning to take place over time so that the business will always be in a
position to maintain revenue.

Marketing Mix – Promotion (Promotional

Strategy)
Promotion is the marketing activity that communicates to customers in order to
change their attitudes or buying behaviour. It is an attempt to draw attention of the
customer to the product. Promotion is the part of marketing where you advertise
and market your product, also known as a promotional strategy. Through it, you let
potential customers know what you are selling.

 In order to convince them to buy your product, you need to explain what it is, how
to use it, and why they should buy. The trick in promoting is letting consumers feel
that their needs can be satisfied by what you are selling.
 An effective promotional effort contains a clear message that is targeted to a
certain audience and is done through appropriate channels. The target customers
are people who will use, as well as influence or decide the purchase of the product.
Identifying these people is an important part of your market research. The marketing
image that you’re trying to project must match the advertisement’s message. It
should catch your target customers’ attention and either convince them to buy or at
least state their opinion about the product. The promotional method you choose in
 order to convey your message to the target customers may probably involve more
than one marketing channels

Objectives of Promotion

 To increase customer awareness

 To reach targeted clients which might be geographically dispersed
 To remind customers about the existing product and its quality
 To show the superiority of a product over its competitors
 To increase sales
 To give information about the product and the company
Types of Promotion
a)Above the line promotion: it occurs through an independent media such as
advertising using television, magazine, newspaper, radio, internet. Thus it
involves using mass media space that is paid for, often through an advertising
agency. The main aim is to inform, raise awareness and build brand positioning.
Communication is targeted to the whole market not to specific individuals
b) Below the line promotion: marketing methods that communicate with the
customer without paying for the media. These are promotional activities that
pushes customers into buying e,g buy one get one free (BOGOF). These are
promotional activities where the business has direct control over the target or
intended audience. It is designed and produced by a business in-house. It is
more of one-on-one approach. It is designed to achieve short term sales
increases and repeat purchases.
Elements of Below the lime promotion include:
-Sales promotion
-Personal selling
-Public relations
-Exhibitions and Trade fairs
Promotional Mix
Refers to all the elements of promotion that a business can pursue which include
advertising, public relations and sales promotions. In other words, it is defined
as the combination of promotional techniques that a firm uses to sell a product.
Elements of Promotional Mix
 a)Advertising: it is a controlled impersonal conveyance of a message regarding
a need-satisfactory product or service by a business to a specific audience with
the objective of informing, reminding or persuading them to take a specific
action.
Four Types of Advertising
i)Informative Advertising: it is done to inform the public about the existence of a
product. Provides precise details of goods to the public on new products, prices,
where to buy and how to buy the product.
ii)Persuasive Advertising: it is undertaken by an individual company to promote
its own products using brand names at the expense of other manufacturers.
iii)Competitive Advertising: advertising only gives the good points about the
product and they use attractive devices or techniques
iv)Collective or Generic Advertising (Collaborative):producers in the same
industry will jointly advertise a product in general. They don’t use brand names
e,g ‘Take a lot of milk for good health’.
Types advertising Media
a)Print Media: newspapers; magazines; pamphlets
b).Electronic Media: Radio; internet; television
c)Outdoor Media: Billboards; posters

Factors influencing choice of Media

i)Size of targeted audience: national coverage requires Television; national
newspapers. Local level requires posters and Billboards
ii)Cost involved: television is more expensive nut more expensive
iii)Urgency of message: if speed is required to spread the information then
radio and television is the best
iv)Expected profit or revenue: revenue to be collected should be able to
cover all the advertising expenses

Benefits of advertising
 Enables consumers to make informed decisions
 Increase in sales and profitability
 Fights competition
 Improves image of the business
 Informs customers about promotions and sales taking place
 Problems of advertising
 Leads to higher prices
 Encourages impulse buying
 Adverts interrupt TV and radio programmes
Elements of Below-the-line promotion

 Sales promotion
 Personal selling
 Public relations
 Exhibitions and trade fairs

Sales Promotions
This promotional strategy is done through special offers with a plan to attract people to buy
the product. Sales promotions can include coupons, free samples, incentives, contests,
prizes, loyalty programs, and rebates. You might also want to educate potential and
current customers by holding trainings and seminars, or reach them via trade shows. Some
of the target audience may be more receptive to a certain promotional method than
another. You can also do sales promotions by setting up product displays during a public
event or through social networking at business and civic gatherings.

Sales promotion is divided into two:-

Trade Promotions: These are aimed at distributors like wholesalers and retailers. It includes
special discounts and bonuses such as free extra product per case.
Consumer promotions: is used to create interest and tempt potential customers to make a
purchase. It includes free gifts, coupons, special offers, free samples, competitions, buy-
one-get-one (BOGOF).

Public Relations or PR
Public relations is usually focused on building a favorable image of your business. You can
do this by doing something good for the neighborhood and the community like holding an
open house or being involved in community activities. It also involves sponsorship.
Sponsorship refers to a financial contribution to an event in return for publicity. You can
engage the local media and hold press conferences as part of your promotional strategy.
In this case the business is not going to pay for the message to be run on the media. Thus
PR is the cheapest method of promotion

Personal Selling
You can employ salespersons to promote and sell your products as part of the business
communication plans. These salespersons play an important part in building customer
relationships through tailored communication. Personal selling can be a bit costly, though,
because you will need to hire professional sales people to do the promotion for you. But
done right, the profit gained could. It is an action oriented approach and it is often used by
insurance companies.
Exhibitions and Trade fairs

Some businesses attend trade fares and exhibitions to promote their products. The business
setup a stall and promote their products face-to-face.

Factors to consider when choosing a method of promotion

a)Cost: many businesses are forced to use cheaper promotions because advertising is too
expensive

b)Stage in the product life cycle: promotional methods change as a product gets older e.g
PR is used during the introduction stages aggressive advertising on maturity and decline
stage.

c)Competitors’ promotion: it is common for business to copy the method of promotion used
by a rival firm. Once one business come up with a successful promotional method, others
will quickly take advantage of it and modify a little bit.

d)Legal factors: in the E.U, tobacco product cannot be advertised on T.V.

Promotional Elasticity of Demand

The responsiveness of quantity demanded due to a change in promotional expenditure
,ceteris paribus.

Promotional Elasticity of demand = % change in quantity demanded

%change in promotional expenditure

Illustration: From the data below find the promotional elasticity of demand when the
promotional budget was increased from $2000 to $3000.

Year Quantity demanded in units Promotional budget ($)

2010 100 000 200

2011 200 000 300

Marketing Mix – Price (Pricing Strategy)
Price is the amount of money that your customers have to pay in exchange for your
product or service. Determining the right price for your product can be a bit tricky.

A common strategy for beginning small businesses is creating a bargain pricing impression
by pricing their product lower than their competitors. Although this may boost initial sales,
low price usually equates to low quality and this may not be what customers to see in your
product.

Pricing Objectives
-They include the following:
1. Profitability -prices should increase overall profitability of the firm
2. Rate of return –a specified return on capital employed (ROCE)
3. Growth –the price should provide a steady profit over a period of years to enable the firm to survive
and grow.
4. Competition –should be competitive and attractive to customers
5. Market share –a price must be set which enables a firm to at least maintain its market share.
6. Utilization of capacity –it should cover fixed costs and enable the firm to fully utilize capacity, thus
spreading unit costs over a larger output.

Pricing Policies/Strategies
1. Price Skimming –It uses high prices to obtain high profit margins and a quick recovery of
development costs. It is useful for products with a short life cycle and fashion items e.g.
computers, videos, toys, CDs etc It is ideal for technological goods and where there is less competition

Advantages
 High prices give appearance of quality and a must have ‘factor’
 Some customers pay high prices for a new unique product
 High prices covers development and marketing costs
 More profits to the business
Disadvantages
 High prices may discourage buyers
 Early buyers at high prices may be discouraged when price falls and they will not buy again
 Buyers may wait as they know price will fall
 Attract new competitors

2. Penetration Pricing –The main objective is to capture a large share of the market as quickly
as possible. It depends on the expected product life. It is mainly used for products with a longer life. Low
prices are set in the initial stages of the product and gradually increased as it gains market share.
Consumer products are often introduced this way. It is suitable where there is stiff competition.
Advantages
 High sales volumes and low prices stop entry of competitors
 High sales volume reduces average costs ( economies of scale)
 Increase in brand awareness
 High market share
Disadvantages
  Consumer resistance when prices are increased in the future
 May result in brand seen as low quality
 Low profit margins

3. Differentiated/Discrimination Pricing –It involves the use of different prices for the
same product when it is sold in different locations or market segments e.g. wholesalers may receive trade
discounts while small buyers in remote areas may be charged a higher price due to additional distribution
costs.
Can be used where:
 Supply of the product is controlled only by one firm
 Markets are geographically separated
 Reselling of the product is not possible e,g when the business is selling a service

4. Promotional Pricing –Involves the use of a lower and normal price either to launch a new
product or to periodically boost sales of existing products.

5. Negotiable Pricing –It is common in industrial markets and building trade. The price is
individually calculated to take account of costs, demand and any specific customer requirements.

6. Market Pricing –Prices are quoted ‘at market’. They are determined by forces of supply and
demand. Common for commodity markets e.g. gold, silver, stock exchange
etc
7. Premium Pricing –Involves charging a higher price than competitors to strengthen the image
perceived by consumers of a certain brand.

8. Cost-based pricing: firms will assess the cost of producing each unit of the product and add a
certain amount on top of the calculated cost. It also includes mark-up pricing which involves adding a
fixed mark-up for profit to the unit price of a product. It takes into account all the relevant costs. But the
problem is that it can lead to higher prices.

9. Predatory Pricing: charging a low price to drive competitors out of the market. When the rival
firms had closed down the business will then increase price.

10. Psychological Pricing: setting a price at just below a whole number e.g $99,99, making
customers feel they are paying much less than $2.00, so they more likely to buy than if the price were
$2.00

11. Bait and hook pricing: selling a product at a low price but charging a high price for
associated products, for example selling a printer cheaply but the cartridges are expensive. It can only
work if the products are complementary goods.

12. Loss leader pricing: products are sold below cost at a loss to attract customers who might
then buy other products. When customers enter into a shop, full price products will also be bought.
Customers have a tendency of buying more than what they planned for. The loss on the loss leader will
be more than made up for by extra spending on the full-price items. It is used in most cases by
supermarkets.

[Link] based pricing: involves researching the price competitors charge and then
setting a price based on this. The price can be similar, slightly higher or lower than that which is charged
by competitors. It is suitable where there is large number of competitors. If the firm is selling a
differentiated product, they can charge a higher price. Differentiated product is that where customers see
as being different from any other similar products. If they are selling the same type of product, they can
charge the same price and then offer after sale services to attract more customers.

Factors to consider when setting prices

 cost : fixed and variable costs

 price charged by the competitors
 stage of the product in the product life cycle
 Objectives of the business
 Customer perceptions
 Government policy
 Price elasticity of demand

Price elasticity of demand (PED)

Refers to the responsiveness of quantity demanded for a product due to a change in its price. It
measures the extent to which units demanded respond to a decrease or increase in price

% change in quantity demanded

Price Elasticity of demand (PED)=
% Change in price

If the answer is between 0 and 1 (ignore negative sign)

PED is inelastic: increase the price to maximise profits. A given increase in price will lead to a less
than proportionate decrease in quantity demanded. The product has very few substitutes

If the answer is equal to 1(ignore negative sign)

PED is said to be unitary elastic: maintain the price

If the answer is greater than 1(ignore negative sign)

PED is said to be elastic: reduce the price to maximise sales. A given decrease in price will lead to a
more than proportionate increase in quantity demanded. The product will be having a lot of
substitutes.

Illustration: Use the data in the table below to answer questions that follow
 Current units demanded and proposed increase in price and its
the corresponding price effect on quantity demanded

Quantity demanded 100 units 200 units

Price $10 $8

a)Calculate the Price elasticity of demand (PED) [3]

b)Use your answer in ‘a’ above to decide on whether it is elastic or inelastic [1]

c).What will be the best strategy for the business to maximise sale in this case [3]

Factors that affect Price elasticity of demand:

 The number of substitutes: goods that have a lot of substitutes have elastic
demand e.g margarine. Those with very few substitute have inelastic demand e.g
pills to a patient
 The period of time : in the short run the demand for goods is generally inelastic
while it becomes elastic in the long run
 The proportion of income spent on the commodity: products which take up a
small proportion of an individual’s income have inelastic demand e.g sweets. On
the other hand products which take up a larger fraction of a person’s income have
elastic demand e.g wardrobes
 The necessity of the product: products that are basic necessities have inelastic
demand while luxury products have elastic demand.

DISTRIBUTION
-It is concerned with getting the product from the producer to the customer at the right quantity, to the
right place, at the right time and in the right condition.

Channel of distribution
Refers to the chain of intermediaries a product passes through from producers to the final consumer. It
involves the links between the manufacturer and the consumer. A Channel of Distribution for a product is
the route taken by the product as it moves from the producer to ultimate consumer
The 3 types intermediaries are :
1. Agents
-An agent works on behalf of another firm to perform certain specified services. They are usually used in
importing and exporting and also in domestic trade.
2. Wholesalers
-A wholesaler buys goods for resale to someone other than the eventual customer. They usually supply
goods to retailers who in turn sell to the public or to the manufacturers who use the goods in the
production process.
Functions of Wholesalers
a) they break down bulk purchases and repack them into smaller lots to retailers
b) they offer warehousing for products for the manufacturer
c) they provide financial service to manufacturer (pay cash) and extend credit to the retailer
d) they handle publicity and promotion on behalf of the manufacturer

3. Retailers
-Retailing refers to all activities that are related directly to the sale of goods/services to the ultimate
consumer.

Types of Distribution Channels

[Link] –level Channel/ Direct selling
The product is passed directly from manufacturer to the final consumer e.g dentist.

Advantages of zero-level channel / direct selling

 Quicker than other channels
 Producer has complete control over the marketing mix i.e how the product is sold
 Direct contact with customers offers the business with useful information
 Products will be cheaper to consumers

Disadvantages of direct selling

 All storage costs are paid for by the producer
 It may not be convenient for consumers
 It can be expensive to deliver each item to the consumer
 Consumers may not be able to see and try the product before they buy

One-level Channel
There is only one intermediary. The retailers buy the product from the manufacturer and sell it to the final
consumers

Advantages of One-level channel

 Producers can focus on production and selling is done by retailers
 Retailers are often in locations that are near to customers
  When goods are bought by retailers, the risk is reduced on the part of the manufacturer
 Storage costs are reduced

Disadvantages of One-level channel

 Profit mark-up imposed by retailers could make the product more expensive
 Producers lose some control over the marketing mix
 Retailers may sell products from other competitors too i.e there is no exclusive outlet

Other channels of distribution

Factors Affecting Choice of Distribution Channel

 The desired degree of control wanted by the manufacturer: More is gained on a zero-channel
of distribution
 The number of potential customers: If they are too many then a 2-level or 3-level channel can
be used
 Type of products: some goods are perishable hence they require a zero-level channel of
distribution.
 Storage costs: if storage costs are very high then the goods must be quickly sold to wholesalers or
retailers
 Availability of intermediaries like the agent; wholesalers or retailers. If they are not there , the
manufacturer will have to sell the goods directly
The role of Branding in Promotion
Branding:-Brand is a name/term/design or symbol or a combination of these which is intended to
identify the goods/services of one business from others, usually offering similar products.
 Brand Image is a perception a person has of a particular brand.
 Brand Extension is a strategy by which an established brand name is applied to new products
from the same manufacturer.
 Brand Loyalty is a consumer’s decision to consistently repurchase a brand continually
because he/she perceives that the brand has the right product features or quality at the right price.
-With brand loyalty, consumers can reduce purchasing time, thought and risk therefore developing brand
loyalty as the long-term objective of all marketing organizations and the major reason for their continued
study of consumer behaviour.

Types of Brands
1. Family Brands
-the brand name is used to cover all the products of a business, even if they are widely different and in
different markets e.g. Willard, Heinz, Kellogg, and Unilever

2. Retail Brands
-the retailer, not the manufacturer is the one guaranteeing quality and consistency e.g. Barbour’s,
Greatermans, Truworths

3. Corporate Brands
-the name of the business is incorporated into the brand name of the product e.g. Jewel Bank-CBZ

4. Individual Brand
-each product is given its own brand name

Factors to consider when selecting a brand

1. easy to spell, say or recall
2. should allude to the product uses, benefits or special characteristics
3. should be distinctive and recognizable
4. should be sufficiently versatile to be applicable to new products
5. should be capable of being registered and legally protected under The Trade Marks Act
6. should be adaptable to packaging and labelling requirements

Benefits of Branding
-protects quantity
-it aids in shelf selection (case of identity)
-it differentiates similar goods
-for prestige
-it facilitates product diversification
-it hampers price comparisons
-it facilitates promotional effort

Reasons for Not Branding

-to avoid the high initial costs of promoting a brand
-the physical nature of some goods may prevent branding e.g. vegetables
-to maintain a consistent quality of output
-it may be difficult to differentiate products of one firm from another e.g. safety pins,
coal, wheat etc
The role of packaging in promotion
Packaging is what the consumers see as they consider buying a product. Packaging act as protection and
security, enables grouping of several items, convenience and is used for transmitting information and
marketing communications
-Packaging is used to develop brand image by making it distinct and easily recognizable.
-It is termed the ‘silent salesman’ in marketing.
-It is often an integral part of a product designed to add to its appeal through the use of colour, shape,
size, logos etc, all of which can have a significant effect on sales.
-Packaging is useful in successful advertising and promotion as it can encourage impulse buying.

*A package should have:

1. brand (product) name
2. quantity
3. expiry date
4. ingredients/nutritional information
5. guarantee
6. directions for use
7. address and contact number of manufacturer
8. health information e.g. ‘do not litter’
Internet Marketing (Online Marketing)
Refers to the advertising and marketing activities that use the internet, email and mobile communication
to encourage direct sales via electronic commerce

E-commerce: refers to the buying and selling of goods and services by business to consumers through
electronic medium. It involves the trading of products or services using computer networks, particularly
the internet and mobile phones.

Benefits of Internet Marketing

 It is relatively cheap
 World coverage
 Accurate data can be kept about the number of visitors
 Convenient for consumers since they can shop in the comfort of their homes

Problems of internet marketing

 Internet connectivity problems

 Consumers can not touch, smell, fell or try the goods before buying it
 It is more [Link] dealing with someone whom you doesn’t know
 Problem of hackers especially for telegraphic funds transfer.

Viral Marketing
Refers to the use of social media sites or text messages to increase brand awareness or sell products. It is
type of marketing in which users of social networks act as advertisers for products by spreading
knowledge of them to other users of the network. It describes any strategy that encourages individuals to
pass on a marketing message to others, creating the potential for exponential growth in the number of
people getting the message. A viral message must be created and then passed to the influences. The
influences will then pass on the message about the products they like and the people who are going to
receive that message will also spread the message to their friends.

Short Answer questions

[Link] is meant by the term marketing mix? [2]
2.a)What is meant by the term price elasticity of demand [2]
b)Explain the meaning a value of price elasticity of demand of -3 [3]
3.a)Explain any two stages of the product life cycle [2]
b)Explain one way in which the marketing mix might change at different stages of the product life cycle
[3]
4.a)What is meant by an extension strategy [2]
b)Explain one extension strategy with an example [3]
5.a)What is meant by the term ‘price skimming’ [2]
b)Explain one condition necessary for price skimming to be effective [3]
6.a) What is meant by the term ‘price description’ [2]
b)Explain one benefit of price discrimination to the business [3]
7.a)What is meant by the term ‘primary market research’ [2]
b)Explain one advantage of primary market research [3]
[Link] is meant by the term ‘secondary market research’ [2]
b)Explain one disadvantage of secondary market research [3]
9.a)What is meant by the term ‘market research’ [2]
b).Explain one reason why spending more on market research may not lead to higher sales [3]
10a) What is the difference between a random sample and a quota sample [2]
b).Explain one limitation of sampling [3]
11.a)Define the term ‘qualitative research’ [2]
b).Briefly explain the term ‘consumer profile’ [3]
12.a)Explain why sample size influences the reliability of research results [3]
b).Explain why it is important to consider the type of market that a new product is aimed at before
starting primary research [3]
13.a)List two factors that could lead to an overall decline in the size of a market [2]
b).Explain two benefits to a business of using mass marketing [3]
14a).Outline two possible examples of marketing objectives that a retail business might set [2]
b)Outline three ways a manufacturer of jeans could use to try to increase market share [3]

15. Use the data in the table below to answer questions that follow
2013 2014
Value Volume Value Volume
($) (Units) ($) (Units)
Company A 200 150 600 300
Company B 300 200 400 200
Company C 500 450 800 500

a).Define the term ‘market share’ [2]

b)Calculate market share (by volume) for company B in 2013 [3]
c) Find market growth by value for the two year period [3]
16.a)Explain the term ‘Unique selling point’ [2]
b).Explain the term ‘product portfolio’ [2]
17 (a) Define ‘product differentiation’. [2]
(b) Briefly explain two marketing benefits of product differentiation. [3]

(b) Briefly explain two advantages of using ‘focus groups’ as a method of market research. [3]

18 (a) Defi ne the term ‘cost-based pricing’. [2]

(b) Briefl y explain when a business might use penetration pricing. [3]

Essays
719(a) Analyse how a business might use price elasticity of demand for pricing decisions. [8]
(b) Discuss the best ways a car manufacturer could use the marketing mix to increase its share
of the market. [12]

20 (a) Analyse, using examples, why packaging could be important in the marketing mix. [8]
(b) Discuss factors that could determine the success of a business that has decided to set up an
online shop to sell beauty products. [12]

21 (a) Explain the differences between niche marketing and mass marketing. [8]
(b) Discuss the view that marketing is only about the advertising and selling of products and services.
[12]
22(a) Explain, with examples, the difference between ‘above the line’ and ‘below the line’ methods
of promotion. [8]
(b) Discuss the importance of branding for effective product promotion. [12]
23 (a) Explain the importance of primary market research to a new business. [8]
(b) Discuss how a business could make sure that its market research expenditure is cost effective.[12]

Marketing Advanced Level

MARKET PLANNING
Is the systematic approach to developing marketing objectives and setting out specific activities that will
implement the marketing strategy designed to achieve the objectives. It will result in a marketing plan
setting out these activities. Marketing plan sets out the marketing objectives, strategy, budget and the
activities necessary to achieve the objectives. Marketing plan provides a detailed, fully researched written
report on marketing objectives and the marketing strategy to be used to achieve them

Important questions when making a marketing plan

 Where are we now? Carry out an Audit. An audit is an investigation to determine exactly what
position in the marketplace a business is. Market audit can be achieved through PEST and SWOT
analysis
 Where do we want to go? It involves setting marketing objectives
 How are we going to get there? It involves deciding on the appropriate marketing mix
 How do we make sure we get there? Monitoring using performance standards and benchmarks

Elements of a Marketing Plan

 Purpose and Mission: it must provide important information about the business to potential
investors. The plan must highlight on the purpose of the marketing plan and mission of the
business. The marketing plan should provide background information about the business.
 Situational Analysis: It must clearly indicate the position where the business is currently at. Carry
out things like PEST or SWOT analysis. The plan will look at current product analysis. The plan
will also look at competitor analysis to identify the main competitors. Target market analysis is
also done to identify the important features of consumers in the market
 Marketing objectives: the plan must clearly spell out where the business is aiming to get to.
Marketing objectives should be SMART. An example of objectives for a car manufacture could
be: ‘To take advantage of the expanding customer demand for fuel-efficient cars and to obtain 5%
of small-car market by 2018’
 Marketing Mix: it must describe how the business is planning to get there. Marketing plan can
now focus on the 4 Ps.(product, place, price and promotion)
 Budget : a budget must be prepared to ensure the success of these marketing objectives. Most
businesses are affected by the problem of limited resources. The budget will look at how much is
required to put the marketing strategy and tactics into effect. The budget must also consider the
 expected sales performance of the plan, to allow a comparison between marketing expenditure
and expected sales
 Executive Summary: refers to a short summary of the plan and the time scale over which it will
be introduced. The plan will also look at how the business is going to ensure they get there.
Monitoring using performance standards and benchmarks should be highlighted.

Benefits of a marketing Plan

 Ensure that the marketing activities are aimed at achieving corporate objectives
 Encourage a rational integrated approach to marketing
 Improve efficiency of the business in relation to using its resources by providing a frame work for
marketing activities
 Better prepare the business for change as there is ongoing monitoring and evaluation
 It is an essential part of the overall business plan. It is used to convince potential investors that
their business proposal is both sound and potentially profitable

Limitations of marketing plan

 It is costly and many small business doesn’t have the money to finance the production of a
professional marketing plan
 It is time consuming
 Since the market is ever changing, it means the marketing plan can become out of date before it is
published

Demand
-this is the total amount of a particular product which consumers wish to buy at a given price or period of
time. -generally, demand increases if price falls and vice-versa -a change in price has an income effect
(low price, real income increase) and substitution effect (high price, consumer switch on to substitute
goods or other cheaper products from competitors)
The Demand Curve

Factors Influencing Changes in Demand

Change in people’s income: More the people earn the more they will spend and thus the demand will
rise. A fall in income will see a fall in demand.

Changes in population: An increase in population will result in a rise in demand and vice versa.

Change in fashion and taste: Commodities or which the fashion is out are less in demand as compared
to commodities which are in fashion. In the same way, change in taste of people affects the demand of a
commodity.

Changes in Income Tax: An increase in income tax will see a fall in demand as people will have less
money left in their pockets to spend whereas a decrease in income tax will result in increase of demand
for products and services because people now have more disposable income.

Change in prices of Substitute goods: Substitute goods or services are those which can replace the want
of another good or service. For example margarine is a substitute for butter. Thus a rise in butter prices
will see a rise in demand for margarine and vice versa.

Change in price of Complementary goods: Complementary goods or services are demanded along with
other goods and services or jointly demanded with other goods or services. Demand for cars is affected
by the change in price of petrol. Same way, demand for DVD players will rise if the prices of DVDs’ fall.
Advertising: A successful advertising campaign may affect the demand for a product or service. The
demand will increase since advertise creates new customers and remind old customers to buy the product.

Climate: Changes in climate affects the demand for certain goods and services. In winter the demand for
warm clothing increases and in summer demand will decrease.

Interest rates: A fall in Interest rate will see a rise in demand for goods and services. People can save
when interest rate is low, they rather use the money to buy goods for current consumption.

Elasticity of Demand
Elasticity is the degree of responsiveness of demand to changes in demand conditions (price, income).

1. Price Elasticity of Demand (PED) -it measures the responsiveness of demand to changes in price of
the product.
PED = % change in quantity demanded
% change in price

-If PED > 1, a small change in price causes a large change in quantity demanded therefore it is elastic. A
reduction in price causes revenue to increase.
-If PED < 1, a small change in price causes a relatively small change in quantity demanded, therefore it
is inelastic. A reduction in price causes total revenue to fall and vice-versa.
-Unitary Elasticity is when total revenue stays the same at all prices.

Factors determining the degree of Elasticity

[Link] of Substitutes e.g. glass has no perfect replacement therefore it is very inelastic
2. The proportion of income spent on a product –e.g. matches, salt are very inelastic – they cost a tiny
proportion of a person’s income.
3. Necessities –e.g. bread, mealie-meal, clothing are inelastic. Luxuries e.g. computers, holidays,
satellite, television are elastic.
4. Habit forming goods –e.g. tobacco and alcohol have a relatively inelastic demand because they make
substitution more difficult for consumers to accept.

Importance of PED
Elastic demand: firms must reduce price of goods to maximise revenue. Revenue refers to the total amount
of money that the seller will get which is found by multiplying price with the number of units sold.

Inelastic demand: firms must increase the price in order to maximise revenue. The product has no substitutes
so the customers cannot easily switch to other products.
[Link] Elasticity of Demand (YED) -it measure the responsiveness of demand to change in levels of
income

-If income increases, the demand for necessities will probably not change but the demand for luxuries is
likely to increase.
-If income produces a fall in demand, YED is negative because people switch from ‘inferior’ to ‘better’
products.

3. Cross Elasticity of Demand (XED) -it measures the responsiveness of demand to changes in price of
other products.

-Substitute goods have a positive XED e.g. coffee, beer, butter and margarine. -Complementary goods
have negative XED e.g. cars and petrol, VCR and video tapes.

Promotional Elasticity of Demand

Show the sensitivity of demand due to a change in promotional expenditure or the responsiveness of
quantity demanded due to a change in promotional budget.
PRED = % change in quantity demanded
% change in the promotional expenditure

When Positive
It shows that when the business spend more on promotion, quantity demanded will increase

When Negative
It shows that when promotional expenditure is increased, quantity demanded will decrease

NB: PROMOTION -The basic sum of promotion is to communicate information to customers and
potential users about the product/services on offer and to eventually persuade them to buy.
-It focuses on the distinctive features of a product called the ‘Unique Selling Points’ (USPs).
-Promotion comprises advertising, public relations (PR) and sales promotion

-The objectives of promotion are;

1. to increase awareness of the
2. to target particular segments
3. to position the product in relation to its main competitors
4. to build an image for the organization

-The promotional mix depends on;

1. the nature of the product
2. the nature of the market and its customers
3. the product life cycle
4. the relative costs and the availability of funds

New Product development

Refers to the creation of products with new or different characteristics that offer new or additional
benefits to the customers. Product development may involve modification of an existing product or its
presentation, or formulation of an entirely new product. It is important for businesses to consider
developing new products all the times as existing products reach the decline phase of their life cycle, as
new technologies appear, as market gaps are identified, as a way of expanding into different markets and
as a way to maintain their competitive advantage over rivals

Reasons for Product Development

1. it stimulates sales enabling existing markets to be developed
2. to enter new markets or market segments
3. to counter competition more effectively
4. to increase market share and profitability
5. to spread risks
6. to maintain market positions as innovator
Stages in the Product development process
Developing a new product is a process. It require planning, it does not just happen. Developing a new
product starts with an idea and moves on through stages in the planning process as described below.

Generating ideas: it involves assessing current range, threats and opportunities in relation to objectives.
Business may be doing this as part of review and market research. Ideas for new product can come from a
variety of sources which include: company’s own research and development (R&D), from the adaptation
of competitor’s idea, market research such as focus groups, employees, sales people and brainstorming in
groups.

Idea Screening: it involves eliminating those ideas that seem to be unprofitable. It can be very expensive
to develop and market new products that have very few chances of success. Those doing the screening
process should ask themselves questions such as: How will the customers in our target markets benefits
from this product?, is it technically feasible to manufacture this product?, will the product be profitable
enough at the price we are likely to be able to charge the customers for it?
Developing new product
The people involved should consider things like the features that should be included, method of
production which is cost-effective and possibly how consumers are likely to react. The firm will the then
produce prototypes and should carry out initial market research.

Product Testing: this is concerned with the technical performance of the product and whether it is likely
to meet consumer’s expectations. Product testing include testing the product in typical use conditions e.g
a car will be tested in hot and cold industries to test performance under different conditions, using focus
groups to gather opinions about the product and adapting the product as required after testing considering
focus group feedback.

Test Marketing: refers to the launch of the product on a small market to test consumer’s reactions to it.
Test marketing has certain benefits over a full-scale launch to the entire market.
These benefits include:
 Getting and recording actual consumer behaviour
 Feedback from customers can be used to improve the product before the full-scale launch
 Risks associated with a product failing after a full-scale launch are reduced.
 Any weakness in the product are identified and addresses in the final version of the product

Limitations of test marketing

 It can be very expensive
 Competitors have access to the firm’s intentions and possibly come up with an exact copy of the
product before the full-scale launch of the product

Full-Scale Launch:
It corresponds to the introduction stage of the product life cycle. Consumer reaction monitored through
product life cycle and marketing mix altered in response. It is also referred to as commercialisation.
Research and Development (R&D)
Refers to the scientific research and technical development of new products and processes. It is a function
within a business set up to investigate new ideas/ products/ services and then to develop the best of these
into marketable products / services.

Benefits of R&B programmes

 Generate new product possibilities
 Increase in profitability
 Reduces risk of failure
 Business will gain competitive advantage in rapidly changing environment
 Quality goods are produced
 Good name for the business

Factors influencing the level of R&D expenditure in a business

 The nature of the business. i.e rapidly changing industries requires substantial amounts
 The R&D spending plans of competitors
 Business expectations
 The risk profile and culture of the business: attitude of the management to risk and whether
shareholders are prepared to invest for the future.
 Government policy: tax exemptions for business that invest in R&D programmes can promote
research and development.
Reasons why new products fail
Product failure is attributed either to failure in the marketing process or to an
unanticipated change in the external environment.
-inadequate market research
-misleading market research findings
-defects in the product
-activities of competitors
-insufficient or inappropriate marketing efforts
-distribution problems
-unexpectedly high costs
-inadequate sales force

Sales Forecasting
Is defined as the predicting of future sales levels and sales trends. Marketing data is a valuable tool for a
business.

Importance of sales forecasting

 The production department would know how many units to produce and how many materials to
order
 The marketing department would be aware of how many products to distribute
 The human resource department will know how many employees to add
 Finance department could plan cash flows with much greater accuracy
Methods of forecasting sales

a).Trend Analysis/ Time series Analysis

Trend refers to an average change (increase/decrease) for each time period. It shows the overall pattern of
movement in the data. Trend analysis takes data over a period of time and assumes that whatever patterns
or trends had occurred in the past will continue into the future. For instance, if sales have been increasing
by 5% per year, trend analysis assumes the future see sales continue to rise by 5% per year. To forecast
sales in the near future, extrapolation is used.

The dotted line shows projected sales for the next year (2009).

b) Moving Average Forecasting

Refers to a method of forecasting into the future that takes account of regular variations. E.g seasonal
changes in sales. It involves averaging sales figure over a set time period and doing this successively,
moving the average through time. Moving average method enables the data to be smoothened out to give
a trend line that removes the effect of regular changes

Calculating moving average for a four quarter moving average

It is used to forecast sales where they are varying in regular quarterly way
Data

Year 1st quarter 2nd quarter 3rd quarter 4th quarter

Sales ($) Sales ($) Sales ($) Sales ($)
2005 100 130 140 120
2006 130 160 190 150
2007 140 190 240 180
2008 170 240 280 190

Calculation

Column 1 column 2 column 3 column 4 column 5 column 6 column 7 column 8

Year Quarter Sales four Eight Eight Seasonal Average
quarter quarter quarter variation= seasonal
sales sales total/ 8 (Col3-Col6) variation
per quarter
2005 1 100
2 130
3 140 126.25 13.75 31.25
4 120 490 133.75 -13.75 -16.1
2006 1 130 520 1010 143.75 -13.75 -30
2 160 550 1070 153.75 6.25 11.25
3 190 600 1150 158.75 31.25 31.25
4 150 630 1230 163.75 -13.25 -16.1
2007 1 140 640 1270 173.75 -33.75 -30
2 190 670 1310 183.75 6.25 11.25
3 240 720 1390 191.25 48.75 31.25
4 180 750 1470 201.25 -21.25 -16.1
2008 1 170 780 1530 212.50 -42.25 -30
2 240 830 1610 218.75 21.25 11.25
3 280 870 1700
4 190 880 1750

NB: Quarterly moving average (trend) is found on column 6. The data for the quarterly moving average is used to
forecast sales.
Evaluation

 Give forecasts which takes account of seasonal variation hence the estimates are more accurate
 It identifies the average seasonal variation for each time period and this can assist in planning for each
quarter in future
 More realistic than projecting forward a trend line without considering seasonal variation
Limitations

 Future growth in sales may not follow past trend due to changes in the future external environment
 Change in customer’s tastes and entry of new competitors may not be reflected in the trend analysis
 It is more complicated to use.
Co-ordinated marketing Mix
A successful marketing mix is one that achieves specific objectives. These objectives must be clearly set out and
relate to achieving the overall objectives of the organisation. Product, price , place and promotion must all be
integrated together to give the same message to consumers and support and reinforce each other.

 A high quality, high –specification product is likely to be sold to a small target market at a high price
where technical expertise and personal selling is available to the consumer. Promotions of such a product
are likely to be in appropriate media publications and will focus on the performance and characteristic of
the product, or the level of service available to a buyer.
 A low-quality and low-price product aimed at a mass market is likely to be promoted in mass media with
a focus on the price and be available in a wide range of outlets. Contrast the marketing of a luxury cruise
liner with that of discount clothing. If one of the mix elements does not match and support the others,
the consumers are less likely to be interested
A co-ordinated marketing mix must take account of the position of the product in its life cycle, the economic
environment, market conditions and the actions of competitors

Globalisation and international marketing

Globalisation: refers to the growing trend towards worldwide markets in products, capital and labour,
unrestricted by barriers. Globalisation is now being accelerated by the rapid growth of Multinational
Companies and the expansion of free international trade with fewer tariffs and quotas on imports Tariff is
a tax charged on imported goods. It is also known as a customs duty. Quota refer to a physical limit on
the quantities of imports from other countries. In other words, Globalisation means moving towards a
borderless world.

Characteristics of Globalisation:

 A rapid expansion of international trade in products and services

 A large increase in finance moving between countries, both money and foreign direct
investments and inward direct investments by multinational companies
 Increased international travel and instant global communications
 Increasing similarity between cultures and societies
 Free movement of workers.
 Signing of trade agreements. Globalisation involves the signing of the World Trade Organisation
and its free trade agreements. It also involves the growth of regional free trade areas that allow
no trade barriers between member states, such as the Northern American Free Trade
Area(NAFTA) and the European Union (EU).
 Increase in the Global brands for example, Apple, Toyota, Coca Cola are found in most
countries
Effects of increasing Economic collaboration/ or forming trading Blocs

 member countries will maximise the gains from trade

 removal of the barriers to trade leads to variety of goods
 member state are able to sell their products and services more easily in other markets
 countries can easily achieve a faster economic growth and a rising income. Standards of living will
improve when GDP is increasing
 competition between local and foreign firms leads to quality goods
NB: Trading Bloc: refers to an agreement between states, regions or countries, to increase trade between the
participating regions by removing barriers to trade. It is a grouping of countries with formal agreements on trade.
They make it easier for member countries to access the market and very difficult or expensive for non-members
to sells their goods on the market.

Examples of trading blocs:

 ASEAN:- Association of South East Asian Nations

 APEC:- Asia Pacific Economic Co-operation
 NAFTA:- North American Free Trade Agreement
 EU:-European Union
BRICS Countries

It’s an acronym for Brazil, Russia, India, China and South Africa. These are major economic power that are not yet
fully developed but are developing at a faster rate. Their income (GDP) is growing rapidly. They account for over
40% of the world population, 25% of the world income and production, and have large trade surpluses and
foreign reserves. As their economies continue to grow and attract greater trade, their markets will become
increasingly important for the world economy and as key market opportunities for foreign businesses

Benefits of Globalisation to the businesses

 Greater opportunity for selling goods in other countries

 Increased competition gives firms the incentives to become more internationally competitive
 There is a wider choice of locations
 Greater freedom to arrange mergers and takeovers with firms from other nations as restrictions on
foreign acquisition are reduced
 Global brand can be created and this saves on the cost of ‘different markets –different products’ This is
also known as Pan Global marketing. Thus adopting a standardised product across the globe as if the
entire world were a single market. It involves selling the same goods in the same way.
Limitations of Globalisation to the businesses

 Businesses from other countries have freer access to the domestic market, so the will be increased
competition
 Inefficient domestic firms will shutdown
 Businesses are now at risk of foreign takeovers e.g Land Rover and Jaguar by Tata.
 Anti-globalisation pressure groups may comment negatively about a multinational company. E.g Coca
Cola is under pressure to limit production in some Indian state due to shortage of water.
 Decrease in profitability for domestic firms when more imports flood local markets

International Marketing

Refers to the selling of products in markets other than the original domestic markets. The rapid development of
major developing countries is leading to huge marketing opportunities for businesses that are prepared to sell
their products and services in these international markets. The decision to expand into an international market is
a key one for any business. It is potentially very costly, firstly in terms of the market research needed, then to set
up the distribution systems and marketing plans. This kind of expansion must match the objectives of the
business and there must be resources of money and the right people available.

Why sell products in other countries : These are also the factors influencing the decision to enter an
international market

 To maximise profits
 When the home market is saturated
 To reduce risk of failure
 Poor trading conditions in the home market
 Legal differences creating opportunities abroad. Fewer restrictions abroad can create opportunities for
local firms to export goods to those countries
  To escape competition in the home market
 To meet management goals of growth
Identifying, Selecting and Entering an International market
Identifying an International Market

Market research should be done. SWOT analysis is carried out to get a clear picture of the market

SWOT ANALYSIS

Strengths Weaknesses (controllable)

 Strong ethical position  Inefficiency due to large size market and the
 Excellent research facilities lack of control
 Expansion in new markets  High advertising budget
 Brand loyalty  Inexperienced workers
Opportunities Threats (uncontrollable)
 Increasing incomes and population  Risk of economic downturn
 Growth of the market  Emergence of competitors
 Buying other companies  Increase in inflation and interest rates
 Foreign government support  Restrictive laws from governments

Selecting an international market

Factors influencing the Selection of an International Market

a) Product Factors: the business must consider its product in relation to possible markets

b) Organisational Factors: the business must consider its objectives, risk and resources.

C) Market Factors: market factors are key in selecting the final choice and these include:

 Size of the market

 Potential growth prospects of the market
 Nature of competition
 Existing and possible distribution channels
 Costs of setting up distribution channels
 Political and cultural factors affecting the market
 Economic factors e.g currency used and its stability, tariffs, government incentives etc

Entering an International Market

Once the business has selected a market to sell to, it must decide how it will do it. The choice will be determined
by the strategy of the business. This in turn is determined by the objectives and resources of the business.
Methods of entering an international market:
Direct Foreign investments: the business may set-up subsidiaries in foreign countries. Direct
investments refers to constriction of production facilities or offices in other countries. Toyota opened subsidiaries
in South Africa. The subsidiaries will have centralised control from the Head Office in the Home or parent
country. The firm will be able to produce and distribute in the host country. Thus the product must the have a
marketing plan designed to achieve objectives.

Benefits of this method

 The business will be able to avoid trade barriers

 The business may be able to get government support especially if they have invested in critical areas or if
they are socially responsible.
 There is no agent or joint venture partner to consult with or take joint decisions with. Thus all profits
after tax belong to the organisation
 Lower costs e.g the decrease in transport and labour costs.
Limitations

 Set-up costs are very high

 The firm is required to have country specific understanding of the way businesses operates which may
increase costs
 It is more time consuming than taking over an existing firm
 Foreign operations may be subject to changes in government policy. Foreign firms may be asked to
comply with certain government policies like nationalisation, indenisation etc
NB: Foreign Investments is suitable for large businesses where there are tax advantages, government aid, trade
barriers and a long-term commitment.

Exporting: refers to the marketing and selling of goods and services to other countries. Production is done
in the domestic economy and goods are sold in other countries. The business will need to find an importer and a
transport provider and deal with the government. An agent may be used to arrange the practical details of
selling. Agents often organises sales through existing channels in return for a commission or agency fee.
Exporting can be done directly or indirectly. Direct exporting occurs when the business sell goods directly to
foreign customers. Indirectly through intermediaries in international trade like agents or trading companies.

Benefits exporting Directly

 The company has complete control over the distribution of goods

 Agents may be having other deals with other companies and as a result may not be fully committed
 Saves on costs since no commission is given to the intermediaries.
 Customer feedback is obtained directly by the business.
Benefits of exporting indirectly

 The agents have full knowledge about the local market hence make more sales per given period
 Transport and administrative procedures become the responsibility of the agent
 Less costly as fewer staff is involved in selling goods abroad.
Problems of exporting directly

 The business lacks important knowledge about the local market

 More hustles of arranging transport and storage facilities
 The business must employ sales personnel to deals with foreign buyers
Problems of exporting indirectly

 Commission should be paid to the agents

 The agents may be having products from other firms to sell as well and they may not be fully committed.
 Lack of personal touch with the foreign customers.

Franchising: a franchise business (franchisor) charges a fee to other businesses (franchisee). In return
for this money the franchisee obtains the right to use trademarks, logos, recipes, promotional material and the
use of the brand. This means that the franchising business has few start-up costs apart from marketing. Examples
include. McDonalds, Wimpy, Connaught Plaza restaurants etc

Benefits of opening a franchised business

 Few start-up costs

 Fewer chances of new business failing as an established brand product are being used
 Advice and training offered by the franchisor
 Supplies obtained from established and quality-checked suppliers
 Franchisors agrees not to open another branch in the area
Problems of opening a franchised business

 Share of profits or revenue has to be paid to franchisor each year

 Initial franchise fee can be expensive
 Local promotions may still have to be paid by the franchisee
 The franchisee is forced to get raw materials from certain suppliers only
 Strict rules over pricing and layout of the outlet reduces the owner’s control over their own business.
NB: It is suitable for businesses selling services

Joint Ventures: refers to an alliance where two or more businesses agrees to contribute products,
services and or capital to a common commercial enterprise. It is a business agreement in which organisations
agree to develop a new corporate identity separate from their own, for a specific period of time.

Benefits of a joint venture

 Risk is shared between the business and venture partners

 Sharing of skills, knowledge and resources
 Trade barriers are not relevant
Problems of a joint venture

 There may be conflicts between the venture partners

 There is loss of control
 One business may not have the incentive to be efficient
Licensing: it involves a contractual agreement to distribute the product or services in return for a fee.
Benefits of licensing

 This means there is a low initial costs

 much of the risk is borne by the licensee
 trade barriers are avoided
 licensee may have full knowledge of the local market
Problems of licensing

 the business lose control of the marketing process

 the business must pay a fee to the licensee
 The contract can be terminated at any time.
NB: It is suitable when there are strong legal property rights.

Acquiring existing foreign business: the business can merge or take over a foreign
company. Many Chinese companies are entering global markets through this route. Lenovo obtained the IBM PC
business in 2004. Using this method, the business directly acquires brand names, distribution networks,
experienced employees and customer relationships

Benefit of acquiring foreign firms

 risk of failure is reduced

 customer relationships are maintained
 a faster way to penetrate foreign markets
 skilled and experienced staff can be retained
Problems of acquiring foreign firms

 lot of paper work is involved when merging two firms

 more capital is required when buying a business which is already performing well.
Challenges faced when trying to enter foreign markets
Political differences: changes in the governments can cause instability in the country. Wars can increase the risk
of doing business in foreign lands. Acts of terrorism or threats of civil violence, which might lead to the
destruction of a company’s assets, will all add to the problems of marketing abroad.

Economic differences: in some economies the GDP will be falling making it difficult for firms to survive. Inflation
rates may also be rising and business operations will be crippled.

Social differences: the structure of the population may differ greatly between the mother country and the host
country. The role of women and the importance of marriages in societies vary substantially and other social
factors may have an impact on the types of products to be sold in those markets

Legal difference: products allowed in one country may be illegal in other countries. For example, guns can be sold
in USA, but are illegal in other countries. It is also illegal to advertise directly to children below the age of 12 on
Swedish TV. Product safety and product labelling controls are much stricter in the EU than in some African states.
Cultural Difference: cultural differences are not written down as laws are, yet they can powerfully impact on
people’s behaviour. Cultural differences are often related to religious beliefs and moral values. Failure to
recognise cultural difference can have disastrous effects on a firm’s marketing strategies. Firms must also take
note of the language differences. Some words have unfortunate meanings when translated into another
language. Colours can have different significance too e.g black is associated with mourning in the Far East.

Strategies in global marketing

Pan Global Marketing: involves marketing products and services to global markets in many
different markets using a single strategy. It refers to the selling of the same goods in the same way in different
countries. The business must build a consistent brand image, use the same logos, colours and advert styles that
give customers the same message which ever country they are in. Examples of Pan Global businesses include
Coca Cola, Nike, Toyota and Nestle.

Benefits of Pan Global Marketing

 saves on costs since the same product can be produced for all markets
 a common identity for the product can be established.
Problems of Pan Global Marketing

 legal restrictions can vary across nations. It is illegal to use promotions involving gambling in certain
countries
 brand names do not always translate effectively into other languages. They might even cause offence or
unplanned embarrassment for the company
 setting of the same price in different countries may not lead to profit maximisation
 firms must develop different products to suit cultural or religious variations.

Global localisation: occurs where the products are marketed in a way which allows for local
differences. Sales are maximised when the marketing strategies take account of local cultural differences. Many
businesses are now using segmentation in their global markets to target particular countries or groups of
customers in order to achieve their objectives.

Benefits of Global Localisation

 profit and sales maximisation

 local needs, tastes and cultures are reflected in the marketing mix of the business
 products are made in such a way that they meet certain minimum quality standards in each country
Problems of Global localisation

 there will be additional costs of adapting the products to suit cultural variations
 the business can no longer benefit from the economies of scale
Questions

Desjardins offers finance and accountancy services to construction businesses. The business is considering
expanding into neighbouring countries. Advise the business on which method of entry it should adopt [10]
2. Explain the Pan Global Marketing [4]

[Link] the benefits of entering into a joint venture when expanding into international markets [8]

4. Explain the main factor that a business must consider when identifying and selecting a country to start
exploiting [10]

5. Assess the negative and positive effects of globalisation on marketing plans of a business [12]

6. How might growth in BRICS influence globalisation [6]

7. Explain the main features of globalisation [4]

8. Explain the reasons why McDonalds decided to enter international markets [8]

9. Assess the importance of marketing planning to a new product of your choice [10]

Essays

10. Recommend to a marketing director of one of your country’s largest manufacturers of consumer goods the
best way to sell its products in another country’s market that it has not yet entered.
[20]

11. ‘Pan Global marketing is the only way forward –we must establish a global identity and sell in all markets
using the same mix.’ Discuss whether this approach is likely to be successful for a manufacturing of quality ice
cream.[20]
CHAPTER 2 People in Organisations (AS & A)
1.6 MANGEMENT AND LEADERSHIP

Management is the process of getting things done through people. Management is undertaken by managers
who co-ordinate the activities of other employees to achieve the results not obtainable by one person. There
is no management without people. The management plans, controls, leads and organise resources in the
business. They rely on their position to obtain co-operation from employees. Management focuses on tasks
and ensures that performance targets are made. Managers are appointed and goods managers usually the
skills, experience and the knowledge to run the business

THE 4 MANAGEMENT FUNCTIONS

a)PLANNING: refers to a systematic development of action programs aimed at reaching agreed business
objectives. Thus planning involves setting goals. Good mangers think ahead and they ensure that necessary
resources are made available before it’s too late. Plans can be short term, medium term and long term. It is
believed that ‘failing to plan, is planning to fail’

b)ORGANISING: includes the assigning of the tasks identified or developed during planning to various
individuals within the organisation in order to achieve set targets. It also includes giving instructions to
individuals. i.e delegation of tasks. Each department or unit is given a clearly defined list of duties and the
name of a person to whom the report to.

c)LEADING: is the process of influencing other people to attain organisational goals. It involves directing
and motivating people. When employees are motivated, their productivity will improve. Leading also
encompasses the establishment of effective communication channels

d)CONTROLLING: the manger must ensure that the tasks are carried out as planned. It involves comparing
actual results with the planned results. Corrective measure are taken if there is big anomaly between actual
results and the aimed result.

Management Skills

Conceptual Skills: are the skills for the top management which enables them to deal with complex ideas
and abstract relationships. It is the mental capacity and ability to view the organisation as a whole and to
see how the parts of the organisation relate to and depend on one another.

Human Skills or Interpersonal Skills: refers to the ability of managers to work with people or to interact
with other people successfully. Such skills builds co-operation within teams being led and they are for middle
management.

Technical Skills: refers to specialised knowledge or expertise and ability in using processes, practices,
technique or tools of a speciality responsibility area e.g accountants, engineers, computer programmers etc.
Mintzberg’s roles of management
Henry Mintzberg identified ten management roles which are then grouped into three main categories
namely interpersonal roles, information roles and decision roles

Interpersonal Roles Information roles Decision Roles

 Figurehead  Monitor  Entrepreneur
 Leader  Disseminator  Disturbance handler
 liaison  Spokesperson  Resource allocator
 Negotiator

Interpersonal Roles : involves dealing with and motivating staff at all levels of an organisation

i) Figurehead: these are duties that are symbolic or ceremonial in nature e.g guest of honour at
a function like a Prize Giving Day
ii) Leader: involves directing and co-ordinating the activities of all employees in the business. Thus
the manager will provide direction for the team or business by making clear what is required of
everyone in the business. It also involves staffing and monitoring staff.
iii) Liaison: It involves the mangers’ interpersonal relationships outside of their area of command.
Thus the manager should be able to make contacts both inside and outside the organisation.
The main aim is to establish good relationships e.g participating in meetings with other
businesses.
Information Roles

i) Monitor: involves examining the environment to gather information, changes, opportunities and
problems that may affect the business. It also involves the processing of information related to
those internal or external changes which might the business.
ii) Disseminator: involves providing important or privileged information to the subordinates.
Information needs to be passed to the appropriate people as and when required. This must be
at a suitable time and must use an appropriate medium
iii) Spokesperson: the mangers represents the business to other people outside the business. As
a spokesperson, the manager will have to pass information to interested parties e.g informing
the Local authorities about planned changes and also communicating with trade unions for any
proposed changes to the conditions of work.
Decision Roles

i) Entrepreneur: it involves the process of continually looking for new ideas or new methods to
improve the organisation’s performance. For example, an effective marketing manager
continually seeks to develop new products.
ii) Disturbance handler: it involves the manager making decisions to take corrective in response
to situations out of control. The main aim will be to bring about peace and harmony. E.g the
responding to emergences like strikes, disasters etc.
iii) Resource allocator: effectively allocating resources whether they are funds, equipment or
people in the business organisation. The manger must bear in mind that the resources are
always scarce. The manager will make decisions on who will get what resources.
 iv) Negotiator: involves negotiating agreements between employees or between departments.
Negotiating agreements with other businesses e.g suppliers or customers. Negotiating with
trade unions to obtain advantages for his business etc.
Managerial Effectiveness and Efficiency

The manger is judged by his performance. The criteria used is effectiveness and efficiency as shown
in the table below

Ineffective Effective
Efficient not reaching goals and not reaching goals and not wasting
wasting resources resources
inefficient not reaching goals and wasting reaching goals and wasting
resources resources

Managerial Effectiveness: it defines as ‘’doing the right thing’. It is defined in terms of resource utilisation
in relation to organisational goal attainment. A manger has the responsibility of selecting the right goal
and appropriate means of achieving that goal. If organisations are using their resources to attain their
goals, the managers are effective

Managerial Efficiency: it is defined as ‘doing the thing right’. It measures the cost of attaining a given
goal. The higher the proportion of organisational resources that contribute to productivity, the more
efficient is the manager. If minimum cost is spend to obtain the desired goal, the manager is being
efficient.

Leadership
Refers to the process of influencing other people to work harder for the business to achieve its
objectives. The leader must inspire other employees to put more effort in whatever task they have to
perform. Thus a leader is someone who can inspire and drive a group of people towards a target or
goal.

Differences between leaders and mangers

Managers leaders
 Someone who controls and directs within  Someone who can inspire or drive a
a business group of people towards a business goal
 Rely on their position to obtain co-  They motivate or encourage a team to
operation of employees achieve goals using their personality
(qualities)
 Focused on tasks  Focused on people
 Responsible for ensuring that  Responsible for setting new targets
performance targets are met  Concentrate on long term goals
 Concentrate on short term goals  Leaders are elected
 Managers are appointed
Leadership Qualities

i) Self-confidence: leaders have self-trust and they believe that they have the ability to make
sound decisions and to identify achievable long term objectives of the business
ii) Creative: are able to come up with new or original ideas. Leaders need to be able to come up
with ideas that others might not think of.
iii) Dependable: able to be trusted to do or to provide what is needed.
iv) Energetic: they work extra hard to achieve the goals of the business
v) Multitalented: possess several skills so that they can understand a wide range of issues
affecting their business.
vi) Charisma: a leader must have a personality that makes other people believe in him and be
prepared to follow you and your ideas.
vii) Persistent: continuing to do something even though it is difficult

Leadership roles in business

a) Directors : are elected into office by shareholders of a private or public limited company. They
are senior managers elected to represent shareholders. They set corporate or departmental
objectives. They also ensure that departmental goals are met.
b) Managers: refers to any individual responsible for people, resources or decision making. They
have some control over the staff below them in the hierarchy. They ensures that the rules are
being followed by employees
c) Supervisors: refers to an employee overseeing the work of others. They are appointed by
management to watch over the work of others. They are just team leaders and are not involved
in decision making. Their mandate is to help staff achieve corporate objectives
d) Workers’ Representatives: are employees who represent other employees on negotiations
with the management. They are elected by workers to present the views of the workforce to
senior management. These employee representatives must have excellent communication
skills
leadership styles:
It is accepted that different leadership styles are appropriate for different circumstances and that a manger or
leader might actually choose to use more than one leadership style depending on the situation at that time. For
example, a democratic leader might adopt characteristics of an autocratic leader if a situation required immediate
action such as an emergency. There are three main leadership style and these include autocratic, democratic
and laissez-faire

i) Autocratic /Boss Centred: the leader is an authoritarian and assumes responsibility for all aspects
of the business. Communication is one way with little or no feedback i.e top-down communication. It is a
form of leadership used in hierarchical business in which all decisions are taken by those at the top of the
organisation. Such leaders do not trust their employees to make decisions about their own work. The
leader makes the decisions by telling employees what he/she wants done and how he/she wants it done.
 Benefits
 Quick solutions to emergence cases
 Enables new policies to be implemented
 Close supervision for employees who are lazy or irresponsible.
 Appropriate on new employees who are unsure about company policies
Problems

 Not concerned about the opinions of employees

 Brilliant ideas can be lost from experienced employees
 Low staff morale since workers are not trusted and also not consulted (morale refers to the feeling
of enthusiasm and loyalty that a person of group has about a job)
 High labour turnover

Democratic Style of leadership

Refers to a leadership style that involves all employees in the decision making process. It is also known as
participative leadership style. The majority view is often accepted although the senior managers will make the
final decision. The leaders believes in consulting employees and allowing them to share in decision making. There
is two-way communication and the employees are usually given more information about the business and the
direction it is taking

Advantages

 Improvement in the quality of decisions. Employees might have very useful ideas to contribute that would
be lost without two-way communication
 Increases employee morale. Employees are likely to be more motivated due to being allowed to
participate in decision-making
 Causes greater commitment since the leader considers employee feelings and opinions
 Promotes personal development as employees can now come up with new ideas which the leader might
consider
Disadvantages

 There is not always time to allow for consultation with employees. Sometimes a quick decision is
essential. Thus meeting can be time consuming
 The leaders will lose management control on employees
 Some issues are too sensitive to be discussed with the whole workforce e.g proposed redundancies
Application

 It is suitable when the co-operation is required between a leader and a team

 Suitable when decisions need to be looked at from several perspective e.g organisational conflicts
Free reign/ Laissez Faire Style of Leadership

Employees are given a lot of control over their own work while management will have a reduced input into
decisions that have a direct effect on the way in which work is done. It is usually used with for highly skilled and
self-motivated employees. It is also referred to as a non-authoritarian leadership style. The leader only set goals
for subordinates and clear parameters within which they work but gives them the freedom and responsibility to
achieve their objectives. It is also argued that, a very lazy manager might adopt a laissez faire because they are
too lazy to manage activities of their department themselves.

Advantages

 This gives employees freedom and flexibility about how they organise their work
 It shows that the employees are trusted, and can therefore be motivating
 Encourages creativity since the subordinates are encouraged to find their own solutions to problems
 It can help employees to develop self-discipline
Disadvantages

 It can be used by lazy managers to avoid making decisions about work matters
 Provides employees with little direction and its difficult for employees to complete tasks on time
 It can lead to too much control being in the hands of the employees
 Managers might lose touch with the way in which work is being done
 Its success depends on the competence and integrity of employees
Application

 Suitable when employees are highly skilled and experienced. When employees know more about a task
than the leader
 Suitable when the leader wants to empower employees
Choice of Leadership Style
It is believed that managers have certain attitude or perceptions towards their workers. Thus they type of
leadership style a manager is going to use depends on whether the manager considers his/her workers to
like or dislike work. There are two theories that have been identified which usually influence the manager’s
approach to their workforce. These theories include Douglas McGregor and Daniel Goleman

McGregor’s Theory X and Y

McGregor’s Theory X and Y (1960) suggested that many managers adopt a particular style due to their
beliefs concerning human nature. A manager’s perception of their employees is also likely to influence them
in terms of which style of leadership they feel is the most appropriate to adopt. Thus Theory X and Y is about
managers’ perceptions of their employees and not about the employees themselves.

McGregor identified two management approaches that can be used to explain the managers’ choice of
leadership style namely Theory X and Theory Y.

Theory X: managers assume that employees dislike work and will avoid it if they can. They need to be told
what to do and to be closely supervised. People must be coerced, controlled, directed and threatened in
order to get them to work. They do not want responsibility and will avoid and perhaps even resist this.
Managers have a negative view of their workforce

Management approach to Theory X type of workers

  Close supervision
 No delegation
 Implement control measures (Setting targets)
 Autocratic leadership style
Theory Y: managers assumes that the employees enjoy work and can derive job satisfaction from their
work. Work is as natural as play. Employees are creative and they can exercise self-direction. They enjoy
responsibility and might even seek it if they are recognised and rewarded appropriately. Managers have a
positive view of their workforce and they believe that employees can make a positive contribution to business
activity.

Management approaches to Theory Y type of workers

 Delegation of authority can be done

 They require little supervision
 Allow employees to make their own decisions
 Democratic leadership style
Daniel Goleman’s Emotional Intelligence/ Quotient (EI/EQ)

Goleman views the management of employees by using an analysis of emotional intelligence ie Emotional
Quotient (EQ). His theory is based on the need for managers to be aware of and understand their own
emotions and feelings as well as those of their employees. Emotional intelligence refers to the ability to
monitor one’s own and other people’s emotions, to discriminate between different emotions and label them
appropriately and to use emotional information to guide thinking and behaviour. Thus it involves knowing
and understanding your own feelings and those of others. An intelligent person can only become a good
leader when he/she has a high emotional intelligence. Thus the businesses must employ people with high
levels of emotional intelligence to improve the business’s performance.

Differences between Emotional Intelligence (EQ) and Intelligence Quotient (IQ)

Emotional Intelligence Intelligence Quotient
 More important for personal success than IQ  Not necessarily important for personal success
 Can be improved  Cannot be improved

Emotional Intelligence Cycle

Goleman’s Four Emotional Intelligence Competences

Self-awareness Social awareness

Self-management Social skills/ relationship management

Self-awareness: includes knowing and understanding your emotions. Understand how you feel and
accurately assess your emotions. Understand your own strengths and weaknesses. Have self-
confidence

Self- management: Control your emotions so that they won’t control you. Build on the understanding
that you gained with self-awareness. Have self-control to maintain your equilibrium in the face of any
problem or provocation you may face. Motivate yourself to achieve goods results. Ie be optimistic. Be
exemplary.

Social awareness: involves expanding your awareness to include the emotions of those people around
you. It includes being able to empathize with others and being aware of how the organisation that you
are working in affects them. An emotionally intelligent manager is sensitive to the needs of others and
is prepared to give support and feedback. They also need to recognise that different people have
different needs hence different style of management are required. Manager who become aware of
different needs of employees is likely to meet the specific needs of those individual employees.

Social Skills/ Relationship skills: being able to manage the emotions of other people and to be able
to build strong relationships with them. It also includes the identification, analysis and management of
relationships with people with people inside and outside your team as well as their development through
feedback and coaching. Employees might be angry at some point and it is at this time when an
emotionally intelligent manager will recognise and appreciate the cause of such emotion and will then
actively seek to calm and resolve the situation. The manager must also have the ability to communicate,
persuade, and lead others, whilst being direct and honest without alienating people.

Managers with Low Emotional Intelligence

 Lack self-confidence
  React negatively when provoked
 Don’t have trust in others
 They are self-centred
 Always force things to happen
 Lack communication skills
PROGESS CHECK ?
Short answer questions
[Link] characteristics of a successful leader [2]
[Link] three main functions of management [5]
[Link] why there is no such thing as ‘a theory X employee’ [3]
[Link] the difference between a leader and a manager [5]
[Link] the importance of controlling and monitoring in a manufacturing business [5]
[Link] the differences between democratic and laissez faire leadership styles [4]
[Link] is the difference between a formal and informal leader [3]

Essays
8a)Explain the possible disadvantages to the employees in a business with an autocratic leader [8]
b)Discuss the qualities that are likely to be essential in order for a business leader to be effective [12]
9..‘Effective business leaders need to be more emotionally intelligent than brilliant’. Discuss this statement?

[20]

MOTIVATION
It is defined as a management process of influencing people’s behaviour to achieve stated goals. It also
refers to all forces and influences that employees want to behave in a certain way. i.e include incentives to
exert effort. When employees are motivated, it means that the they are satisfied and they enjoy the job they
are doing. Motivation is a tool used by leaders and managers to encourage their employees to work willingly
as hard as they can. Thus motivation refers to the desire to do something or the drive to reach a goal.

What motivates workers?

 Pay
 Promotion
 Working conditions e.g annual leave, uniforms, working hours, working environment
 Fringe benefits e.g company house, sponsored vacation, school fees for children, company vehicle,
free health care
 Colleagues
 Management style
 Work related achievements
Benefits of motivated staff
Higher levels of productivity: workers will perform their tasks quickly. They work harder and be more
productive
Lower labour turnover: employees won’t be willing to look for other jobs elsewhere. They are satisfied
with their current job.
Lower absenteeism rate: employees won’t absent themselves from work for no apparent reason.
Employees who are not motivated are likely to take time off when it is not absolutely necessary
Creativity: employees are more likely to come up with new ideas and they will be willing to take on
responsibilities
Employees loyalty: employees when they feel trusted or valued, they tend to give their best to the business.
Improved customer service: a motivated employees will recognise that a happy customer is likely to be a
repeat customer and also that the reputation of the business rests not only on the goods produced but on
the quality of aftercare that their customers receive.
Better quality products: more attention will be paid to the way in which work is carried out, whether that is
the production of goods or the provision of services.
Increased likelihood of achieving business goals: when employees are work as hard as they can the
business will have the best chance of achieving any stated objectives. Employees will even be willing to
work for unpaid overtime.

Indications of poorly motivated staff

 Absenteeism: workers can just decide to be absent from work without any justification
 Reporting late for duty: the workforce will arrive late and may be leave their jobs very early before
the normal knock-off time.
 Poor performance: poor quality work and a greater waste of raw materials
 High labour turnover: employees just ‘come and go’. They won’t take time at the business and this
will cost the business more in training and recruiting new staff
 Conflicts: there will be a lot of disagreements within the workforce. Employees have a negative
attitude towards work.
 Poor response rate: workers do not respond very well to orders and any response is often slow.
 Low worker morale: employees feel as if they are not needed and this decreases their productivity

MOTIVATIONAL THEORIES
Motivational theories are divided into two namely content theories and
process theories

Content Theories: motivation theorists whose work focuses on the nature of the work itself and or the terms
and conditions of employment. These theories are also based on the idea that individuals are motivated by
their desire to fulfil their human needs (inner needs). Thus their human needs energises them to work harder.
Content theories also focuses on how the managers can create favourable conditions that allow workers to
satisfy their human needs.

Content Theories include: -Taylor

-Mayo
-Maslow
-Herzberg

Process Theories: are motivation theories whose work focuses on the psychological drivers that can
encourage employees to work harder. Basically they focus on how and why individuals choose certain
behaviours in order to meet their personal goals. Process theories study what people are thinking about
when they decide whether or not to put effort into a particular activity.

Process Theories include : -Vroom

-McCLelland
a)Frederick Winslow Taylor (Economic Man)
Taylor put forward the idea that workers are motivated mainly by pay. Taylor believed that people are were
motivated by money and that they should be paid according to the output that they produce. His idea was
that employees should be observed in order to identify the most efficient way of working. Once the best
method had been decided, all employees should carry out the required task in the same way. Taylor wanted
to advise management on the best ways to increase worker performance or productivity. He also argued
that workers do not naturally enjoy work and so need close supervision and control.

Managers were required to breakdown production into series of small tasks. Workers should then be given
appropriate training and tools so that they can work as efficient as possible on one set task. Performance is
then recorded and working conditions will be altered. This approach of detailed recording and analysis of
results is known as scientific management. Workers are then paid according to the number of items they
produce in a set period of time. i.e piece rate pay. Piece rate refers to a payment made per unit produced.
Piece rates encourages workers to work harder and maximise productivity. An employee is referred to as
an economic man i.e he/she is driven by the desire to earn more money. An economic man will work harder
to be able to receive the highest pay possible. The chance of earning extra money stimulate further effort.

How to improve output per worker according to Taylor’s scientific

approach

 Select workers to perform a tsk

 Observe them performing the task
 Record the time taken to do each part of the task
 Identify the quickest method and do not allow them to make any changes to it
 Train workers in the quickest method
 Supervise workers to ensure that the best way is being carried out
 Pay workers on the basis of results i.e piece rate (based on theory of economic man)
Application of Taylor’s work

Henry Ford used Taylor’s methods to design the first ever production line, making ford cars. This was the
start of the era of mass production.

Limitations of Taylor’s Theory

 Piece rate payment is not suitable in a service industry where the product itself is invisible
 The theory encourages autocratic style of management which can motivate staff
 Money is not the need at work. Employees have a wide range of needs. Taylor’s theory does not
address the problem of how to motivate employees once their desire for money has been satisfied.
i.e workers may have the desire for status symbols etc
 Mass production can lead to repetitive or boring tasks which the demotivate employees
 Mass production involves the use of machines and a lot of workers will be replaced by machines
b) Abraham Maslow (1908-1970)
Maslow based his theory on a series of human needs which he believed could be placed in order of
importance. Human needs are the wants or desires of people that they hope will be met at their work or in
their activities outside the work environment. Maslow put forward that there are five levels of human needs
which employees need to have fulfilled at work. All of the needs are structured into a hierarchy and only
once a level of needs has been fully met, would a worker be motivated by the opportunity of having the next
need up in the hierarchy satisfied. For example, a person who is dying of hunger will be motivated to achieve
a basic wage in order to buy food before worrying about having a secure job contract or the respect of
others. Maslow view. Once a need is satisfied, it no longer motivates the worker.

Maslow’s Hierarchy of needs

Key terms

Cell-production: refers to groups or teams of employees performing the various tasks required to complete
a process or product. It is deemed motivational because the group get the satisfaction of completing a
product. It is an element of social needs

Self-esteem : refers to the desire of an individual to be respected by others and to gain their approval

Application of Maslow in the business environment

Basic needs: paying a fair wage which enable employees to buy essentials for life

Safety: provide a contract of employment; follow the health and safety guidelines for a safety work
environment

Social needs: encourage team work; encourage social activities and communication between all levels of
employees. E.g social soccer, hosting Christmas party etc
Esteem needs: give recognition for good work; show appreciation e.g employee of the month; motivating
job titles (e.g a security guard-security enforcement director; garbage Collector- environment sanitation
Technician); promote people to give them additional responsibilities

Self-actualisation: meet the need for feeling of achievement perhaps through assigning more difficult and
challenging tasks. Allow for further training and progression within the business.

Critics of the theory

 Not everyone has the same needs as assumed by the hierarchy. It is possible for a person not to
desire the approval of others and therefore, once their ‘safety needs’ have been met, self-
actualisation might be their next goal
 In the real world, it is very difficult to identify the degree to which each need has been met and which
level a worker is on. Thus it is very difficult for the manager to know for sure which level on the
hierarchy each employee is on
 Money is necessary to satisfy basic needs, yet it might also play a role in satisfying the other levels
of needs such as status and esteem
 Self-actualisation is never permanently achieved as the hierarchy has suggested. In the real world,
life jobs must continually offer challenges and opportunities for fulfilment.

ELTON MAYO (Hawthorne Effect)

Elton Mayo (1880-1994) thought that the work rate (productivity) of employees is affected by the physical
conditions in which they were placed. Mayo introduced the Human Relations Schools of thought which
focused on managers taking more of an interest in the workers, treating them as people who have worthwhile
opinions and realising that workers enjoy interacting together. Mayo conducted a series of experiments at
the Hawthorne Factory of the Western Electric Company in Chicago. He isolated two groups of women
workers and changed factors such as lighting, financial incentives and working conditions. He expected to
see productivity levels declining as lighting and other conditions become progressively worse. What he
actually discovered surprised him. Whatever the change in lighting or working conditions, the productivity
levels of workers improved or remained the same.

These results forced Mayo to conclude that working conditions in themselves were not that important in
determining productivity levels. Other motivational factors should be investigated first before conclusions
could be drawn.

Mayo’s Conclusion on motivation

 Changes in working conditions and financial rewards have little or no effect on productivity
 Workers are motivated by better communication between managers and workers (i.e Hawthorne
workers were consulted over the experiments and also had the opportunity to give feedback).
 Workers are motivated by working in teams of groups
 Workers are also motivated by a greater manager involvement in employees working lives.
Hawthorne workers responded very well to increased level of attention they were receiving.
  Mayo concluded that workers are not just concerned with money but could be better motivated by
having their social needs met whilst at work. (similarities with Taylor and Maslow).

Frederick Herzberg’s Two Factor Theory

Frederick Herzberg (1923) believed in a two factor theory of motivation. He argued that there are certain
factors that a business could introduce that would directly motivate employees to work harder (motivators).
However there are also factors that would demotivate employees if not present but would not in themselves
actually motivate employees to work harder (Hygiene factors). Thus Herzberg analysed motivational factors
by grouping them into two broad categories namely hygiene factors and motivators

Motivators

Motivators drive people to achieve more in their work as these are what lead to employees gaining job
satisfaction. Employees are sometimes concerned about the job itself for instance, how interesting the work
is and how much opportunity it gives for extra responsibility

Examples of Motivators

 Recognition of work done

 Promotion
 Being given responsibility
 Nature of work
How business can satisfy motivators

 Give positive feedback to employees

 Involve employees in decision making
 Allow delegation of tasks
 Ensure that the work is stimulating and rewarding good performance
 Implement things like job rotation, job enlargement and job enrichment etc
Hygiene Factors

Refers to the aspects of work that do not motivate but, if not present, cause dissatisfaction. These are factors
which surrounds the job rather than the job itself. E.g a comfortable working temperature. It is believed that
a worker will only turn up to work if a business has provided a reasonable level of pay and safe working
conditions but these factors will not make him work harder at this job once hi/she is there.

Examples of Hygiene Factors

 Pay (wages and salaries)

 Fringe benefits
 Relationship with co-workers
 Status and security
  Company policy
How business can satisfy hygiene factors

 Pay a fair wage / salaries

 Make sure that the working conditions are as good as possible e.g suitable temperature
 Company rules should be reasonable and not too rigid
 Encourage two-way communication and team work
 Limited supervision
NB: Herzberg argued that people do not work harder if the hygiene factors are present at work, but their
output can decline if conditions deteriorate. Motivators on the other hand are intrinsic in nature, and produce
job satisfaction and higher output.

Ways to improve the nature and content of the actual Job

a) Job enlargement: workers being given a variety of tasks to perform which would make the work
more interesting. The tasks are not necessarily challenging. Additional tasks are given to broaden
the employee’s skills and experience.
b) Job Enrichment: involves workers being given a wider range of more complex, interesting and
challenging tasks surrounding a complete unit of work. This would give a greater sense of
achievement
c) Job Rotation: This involves changing a worker’s tasks more regularly to overcome potential
boredom
d) Empowerment: delegating more power to employees to make their own decisions over areas of
their working life.
Process Theories: a)McClelland

b)Vroom

Motivational Need Theory by McClelland (1917-1998)

McClelland argued that the effort exerted by individuals or the way they behave depends on three
motivational needs. Both managers and employees are driven by these three motivational forces.

i) Achievement Motivation (N-ach): these are result oriented individuals. Their main aim is to
achieve goals especially the challenging ones. Such individuals are further motivated if they can
produce results that are better the expected or required.
ii) Authority/Power Motivation (N-pow): such people are power or authority seekers. They
always want to lead and control others. They feel very mush comfortable when they gain control
over others. Their fulfilment would also come from self-esteem and respect that would be
acquired if there was a successful outcome as a result of their influence.
iii) Affiliation Motivation (n-affil): some people just need to be liked by others. This need is likely
to drive a person to want to work as part of a team where they feel respected and also supported.
How can business meet these needs:
Need for achievement:
 Set challenging but realistic targets
 Recognition of achievements by managers
Need Power:
  Involve employees in decision making
 Encourage team work
 Encourage two-way communication
 Give employees small areas of responsibility
Need Affiliation:
 Promote team work

Victor Vroom’s Expectancy Theory

Vroom believed that employees behave in different ways depending on what they think will lead to desired
outcome. Thus effort exerted by individuals depends on the expectancy of where that particular course of
action will lead to. Vroom thought that employees are prepared to work harder if they feel that their efforts
will be suitably rewarded.

The three beliefs of Expectancy Theory

a. Valence: refers to the depth of the want of an employee in relation to desire or need for the reward.
The reward can be intrinsic i.e job satisfaction or extrinsic i.e money
b. Expectancy: the degree to which people believe that putting effort into work will lead to a given level
of performance or result. Employees need to believe that increased effort on their part can actually
lead to a better performance.
c. Instrumentality: employees need to fill confident that if they deliver an increased level of performance
they will receive their expected reward. The employees must have confidence in whatever they have
been promised by the manager.
Vroom’s Conclusions

 Individuals will only act when they have a reasonable expectation that their behaviour will lead to
the desired outcome.
 There is positive correlation between effort and the results
 The rewards plays an important role in satisfying the needs of employees
 The employee’s behaviour is a result from conscious choice among alternatives. The purpose of the
choice is to maximise pleasure and to minimise pain

FINANCIAL MOTIVATION
There are various payment systems that can be used to motivate staff. They fall under the general headings
of financial rewards and non-financial rewards

Financial Rewards
Time Rates: under this system, earnings are calculated by multiplying the hourly time rate by the
number of hours at work. It is a payment based on the number of hours worked. Unsocial hours or overtime
raise the pay rate
 Conditions for use
 Where employees have no control over the speed of work
 Where output cannot be measured or attributed to individuals e.g service industries
 Where output is of a non-standard type
Advantages

 Less harmful to quality

 Less harmful to health of employees
 Simple and easy to understand
 Appropriate in most circumstances
Disadvantages

 Pay is not related to effort or output but merely to the time spend at work
 Can encourage time wasting
 Does not provide incentive for increased effort
 Tasks not completed on time
 Close monitoring is required
Piece Rate

The earnings of an individual worker or group of workers are related to the quantity of items produced. The
pay is based on the number of units produced. The focus will be on the quantity rather than quality

Conditions for use

 Appropriate where output is standardised

 Appropriate output is measurable
 Where there is a link between effort and output
 Appropriate where output can be attributed to an individual work and he/she receives a reward
commensurate with effort
Advantages

 Stimulates effort
 Encourages workers to devise improved methods
 No need for supervision i.e cut on costs
 Targets are surpassed
 There is no time wasting
Disadvantages

 Encourages more output at the expense of quality

 Method is in appropriate in service industries where output is immeasurable
 Production breakdowns can affect employees at a next stage of production
 More harmful on employees’ health i.e employees overwork themselves
Salary: Refers to an agreed amount paid monthly in return for work undertaken. It is paid to those in the
white collar sector i.e professionals like Doctors, teachers, lawyers etc. Salary doesn’t depend on the number
of hours worked or units produced. Each organisation uses different salary bands or grades

Example of Salary Grades

Grade A: $700 -$1000: Most skilled and educated employees

Grade B $400-$699: Semi skilled staff

Grade C Less than $400: Unskilled and without any experience

Advantages

 The employee will be certain about what he/she is going to get at the end of the month
 Enables the management and the employee to plan in advance
 Is suitable where output is not measurable
 It is suitable for management positions where staff are expected to put extra time to complete task
Disadvantages

 Can encourage time wasting

 It can only work when individuals are closely monitored
 Does not provide incentive for increased effort.
NB: Wages are given are to manual staff and are given weekly or fortnightly while salaries are for
management.

Commission
An individual is paid according to the sales he/she has made in a given period. Business usually give a basic
salary plus a commission based payment on top. It is appropriate for salespersons. The basic salary will
improve job security. This method will inspire employees to achieve the highest possible level of sales.

Example

Each salesperson is paid a basic salary of $400 a month and earns a commission of 2% of the value of
sales made. The table below show the sales made by each salesperson in the month of February 2016

Salesperson A Salesperson B
value of sales 24 000 9 000

Question: Calculate the total payment received by salesperson A for February 2016. [3]

Total payment = basic salary + commission

= $400+ (2/100x24 000)
=$400+ $480
=$880
Advantages

 The method is cost effective i.e no need for a supervisor

 Employees are motivated to exert more effort in order to get a higher commission
 Employees are time conscious
Disadvantages

 No job security especially if there is no basic salary

 Team work is discouraged since individual salespersons will be keen to maximise their personal
sales

BONUS: refers to a payment made to employees in addition to their contractual wage or salary. It is
given to employees when they have reached and surpassed the targets set. It is a thank you given to
employees so that the can maintain the status quo.

Performance Related Pay: a bonus scheme to reward staff for above –average work
performance. It is used for many groups of managerial, administrative and professional workers. If
performance standards are not visible in terms of quality produced, a system of staff appraisal is established
for PRP to be introduced. Workers are paid a bonus according to the degree to which the targets have been
exceeded.

Advantages
 Staff are motivated to improve performance if they are seeking for an increase in financial rewards
 Target setting can help to give purpose and direction to work of an individual
 Annual appraisal offers the opportunity for feedback on the performance of an individual
Disadvantages
 Some employees are not driven by the need to earn additional financial rewards
 Team spirit can be damaged by the rivalry/ competition between employees
 Favouritism can harm manager-employee relationships

Profit Sharing Scheme: a bonus for staff based on the profits made by the business. It is
usually paid as a proportion of basic salary. It is paid to encourage employees to identify with the company.
Thus the employees and owners will be working towards the same goal. PSS also provide an incentive for
increased effort and staff turnover is greatly reduced.

Advantages

 Potential conflict between owners and workers is reduced

 The business can attract highly qualified and experienced workers from rival firms
 it is not a burden to the firm since it is paid out of the profits made.
 Workers will be motivated to work harder
 Employees will be profit and cost conscious
Disadvantages

 The scheme can be costly to set up especially in large organisations with a lot of employees
 When the business made a loss or small profits, workers won’t be motivated
  Can lead to lower dividends to the owners of the business
 The reward is not closely related to individual effort hence it may not effectively increase motivation.

Fringe Benefits: refers to benefits or perks given to an employee which have a financial benefit to
them. These are non-cash forms of rewards. They include:

 Company house
 Company car
 Education for children
 Discounts on company products
 Pension schemes
 Low interest on company loans
Advantages

 The business is able to recruit and retain skilled and experienced staff
 Leads to higher productivity and profitability of the business
 Can help to reduce the employees’ financial burden e.g free transport and accommodation
 It can motivate staff to work harder
Disadvantages

 Some employees are motivated by cash and cash alone

 Fringe benefits add on to the costs of the business

Non-Financial Motivators/ Rewards

Include things such as:
 Job enlargement
 Job enrichment
 Job rotation
 Induction
 Training
 Job redesigning
 Worker participation
 Team working
 Empowerment
 Promotion
 Delegation
 Non-financial fringe benefits

Job Enlargement: involves adding tasks of a similar level to a worker’s job. It simply gives more
variety to employees’ work which makes it more enjoyable. Job enlargement can lead to job satisfaction in
the short-term. It also used to reduce absenteeism. Additional tasks are given to broaden the employee’s
skills and experience.
Job Enrichment: adding tasks of a higher level to a worker’s job. Workers may need training, but
they will be taking a step closer to their potential. Workers become more committed to their job which gives
them more satisfaction. Involves workers being given a wider range of more complex, interesting and
challenging tasks surrounding a complete unit of work. This would give a greater sense of achievement. Job
enrichment allows for two-way communication and workers must be given complete units or work so that
individual contribution can be identified.

Job Rotation: Workers in a production line can now change jobs with each other and making their
jobs not so boring. It can help train employees in different aspects of their jobs so that they can cover for
other employees of they do not show up in future. Worker’s tasks are changed more regularly to overcome
potential boredom.

Job redesigning: Involves the restructuring of a job. It can be inform of adding and sometimes
removing certain tasks and functions on a worker’s job description. It encompasses job enlargement,
enrichment and rotation. Employees should be part and parcel of the job redesigning exercise. The job can
be made more challenging and interesting. A bored employee is more likely to lose concentration and can
easily make costly mistakes.

Training: The business can encourage the development and improvement of employee’s skills. The
business can achieve this by offering educational leaves or educational loans at favourable interest rates.
Sometimes trainers can be invited to the business to reduce transport costs to the employees. Training can
increase the status of employees and gives them a better chance of promotion to better paid jobs. It can
also lead to employee loyalty. Training leads to long-term job satisfaction. There are two types of training i.e
on-the-job and off-the-job training.

Worker participation: workers are actively encouraged to be part of the decision making
process. Employee participation recognises that employees are likely to have some worthwhile ideas to
contribute to the business and that, in some instances, they might have a better solution to a problem than
their managers. Managers can allow the employees to elect their own worker representative. The worker
representative will represent employees at council meetings. The business can be using an open-door
policy. Worker participation will lead to quality decisions. It can lead to greater commitment since
management considers employee feelings and opinions
How to achieve employee participation:
 Appointing employees to the board of directors
 Staff meetings where employees are free to ask and to receive information
 Electing a representative
 Training

Benefits of worker participation:

 Improves motivation and commitment
 The business can utilise the knowledge and experience of workers
 Improvement in terms of information flow leading to quality decisions
 Leads to job satisfaction

Limitations of worker participation:

 Time consuming
 Conflict of interest may arise
 Workers lack management skills

Team Working: Employees are organised into groups and each group is given a certain task to
perform. A team is a group of people who work together to achieve a common goal. E.g management
team,financial team, production team, quality circles etc. Business will not be able to achieve its objective if
employees fail to work together in teams. Team working involves cell production. Cell production occurs
when employees are given the responsibility to produce a certain product or to complete a certain process.
Cell production is deemed to be motivating because the group gets the satisfaction of completing a product
or a substantial part of one.
TEAM stands for T= together; E= everybody; A= achieves; M= more

Benefits of Team working

 The team as a whole, delivers greater results than the sum of each team member’s individual effort.
 Teams generate more creative solutions than individuals because they build on one another’s ideas
 Employees have an opportunity to be involved in decision making
 Teams are usually capable of completing tasks quicker than individuals.
 Team members help to keep each other motivated

Problems of team working

 Team conflicts may arise. Conflicts leads people’s focus away from the job.
 Team members can learn bad cultures from difficult employees.
 Some employees work more effectively when they are not in teams. Thus they are not team players.
 Can be time consuming when workers need to consult one another.

Empowerment: delegating more power to employees to make their own decisions over areas of
their working life. Workers are allowed some degree of control over how the task should be undertaken.

Delegation: refers to the passing of authority down the organisational hierarchy. Subordinates are
given the responsibility and authority to do a given task. It is done to enable top managers to concentrate
on major issues especially as the organisation grows in size. The subordinates will feel valued and more
trusted.

Benefits of delegation

 Work becomes more interesting and rewarding

 Employees feel important and trusted
 Helps train workers, giving them better career opportunities
Problems of delegation

 Inexperienced employees may fail and this may tarnish the manager’s good name
 Managers may lose management control
 When subordinates perform better than managers, the managers may feel insecure.

Promotion Opportunities: achievement can also be rewarded by giving a promotion to those who meet,
and perhaps exceed, expectations in their performance. Sometimes only a small promotion is needed to
give an employee the feeling that their efforts have been recognised and appreciated. The belief that
promotion is a possibility for those who perform well can be a strong motivator for some employees.

Questions
Short answer questions

[Link] the financial rewards that might be given to employees [2]

2. Identify two non-financial rewards that might be given to employees [2]

[Link] one situation in which financial rewards might not be appropriate [3]

4. Give two benefit of team working [3]

[Link] the difference between Herzberg’s motivators and hygiene factor [5]

[Link] outline what is meant by ‘valance’, ‘expectancy’ and ‘instrumentality’ in Vroom’s expectancy theory

[5]

[Link] do you understand by the term ‘motivation’ [3]

[Link] the differences between content and process motivational theories [4]

[Link] performance related pay be introduced for the teacher in your school. [5]

[Link] two different level of Maslow’s hierarchy. Explain how these could be satisfied at work. [4]

12.a)Define the term ‘Piece rate’ [2]

b)Explain any two problems of a piece rate [3]

13.a)Define the term ‘time –based wage’ [2]

b)Explain any two benefits of a time-based wage. [3]

ESSAYS

[Link] how the owner of a retail clothes business might motivate their employees. Your answer should
refer to motivational theories that you have studied. [20]

[Link] the importance of motivation in a manufacturing business. You should relate your answer to the
work of motivational theories that you have studied. [20]
HUMAN RESOURCES

The purpose of human resource management (HRM) is to make sure that the business has the appropriate
workforce to enable it to meet its stated objectives. The workforce must be committed and physically capable
of doing the work required. Aims to ensure that the right workers are available in the right numbers, in the
right place and at the right time. The human resources (HR) function is also responsible for planning for a
business’s future need for labour

Functions

 The HR department is responsible for succession planning. Succession planning is the process of
identifying employees who can be trained for future leadership positions
 Recruiting, selecting and appointing employees
 Salary administration and determination
 Skills development
 Appraising and managing workforce performance
 Establishing and maintaining employee wellness
 Responsible for promotions, transfer, demotions and expulsions
 Prepare employment contracts
 Responsible for workforce planning
 Keeping staff records
 Ensure that labour legislations are followed
Recruitment

Refers to all HR activities that are aimed at finding and attracting job candidates who have the necessary
knowledge, experience, qualifications and skills to fill a job. It involves identifying the need for an employee,
devising a job description and finding a person suitable to fulfill the needs of the job.

Reasons why businesses need to recruit people

 To replace those who were dismissed

 To replace employees who resigns or who have passed away
 New employees for expansion
 Employees who are promoted
 Employees who retire
Two types of recruitment
a)Internal Recruitment: occurs when in-house employees are promoted.

Advantages of internal recruitment

 Saves time and money

 The candidate’s reliability, ability and potential are already known.
 The candidate already know the expectations and rules of the company
 Motivate other employees to work harder to get promoted too
Disadvantages of internal recruitment
  No new ideas or experience come into the business
 May create jealousy and rivalry between existing employees
 Can cause line management problems for the promoted person if they now supervise former
colleagues
External Recruitment

Finding and attracting job candidates from outside the organisation. Most vacancies are filled with external
recruitment, which always involve advertising the vacancy. Some of the suitable media of advertising
include:

 Local news paper

 National news paper
 Recruitment agencies
 Government job centres
 Internet
External recruitment also involves headhunting. Headhunting takes place when people who are already
employed by one employer are asked to apply for a job at another employer

Advantages of external recruitment

 New ideas and skills are brought into the business

 Can prevent conflicts among existing employees
 Chances of attracting the best candidate are high
Disadvantages of external recruitment

 It is time consuming
 It is very expensive e.g advertising costs and interview expenses
 Demotivate existing staff. Internal applicants might be unhappy that a stranger has got the job.
Recruitment Agencies

Most agencies keep record of candidates’ CVs and they are able to make a recommendation quickly.
Recruitment agencies usually know a business’s needs. Time is saved as the agency works through
applicant’s CVs

Problems

 Usually, recruitment agencies are paid a percentage of the new employee’s remuneration package.
Thus it increases the cost of labour.
 The business doesn’t know what CVs have not been recommended
Recruitment Procedure
Step no.1: Determine the exact labour needs of the enterprise

The business must carry out job analysis. Job analysis involves determining the exact labour needs of an
enterprise before candidates can be attracted. Job analysis involves coming up with the job description and
job specification.
Job Description

Refers to a written description of the job and its requirements. Provide details as to what task will the person
be expected to undertake.

It includes details such as:

 Job tittle
 Main purpose of the job
 Duties and responsibilities
 Department in which the job is performed
 Pay scale
ADVANTAGES OF PRODUCING A JOB DESCRIPTION
• Provides a clear idea of what a job involves so they can select the best candidate
• Saves time / money / makes selection easier and the business won’t get applications from
people who cannot do the job
• As a basis for drawing up a contract and the business can be sure that all duties will be
carried out on-board
• Helps decide basis for pay
• Help create person specification
• Helps create appropriate job advert
• Helps resolve disputes between managers and subordinates

Jon specification

Refers to a written description of the characteristic and qualification required of the person that will fill the
job. It is a person profile which will help in the selection process by eliminating applicants who do not match
up to the necessary requirements.

It includes details such as:

 Qualifications required
 Training required
 Minimum experience required
 Physical requirements
Step no.2: Choose the recruitment Source

Decide on whether to use external or internal recruitment method

Step no.3: Prepare a job advertisement

This is what a business needs to decide on when drawing up an job advert

 What should be included i.e job description and job specification

 Where the advert will be placed i.e newspapers, internet, notice boards etc
 Costs associated with the advertising media.
Headings to be included in a job Advert
  Job tittle
 Job location
 Essential skills, qualifications and personal qualities
 Brief outline of the job responsibilities
 Pay scale
 How to apply (Curriculum Vitae (CVs), telephone call or online etc)
 Who to apply to (to the business itself or it might be through an agency)
 Deadline for the submission of applications
NB: Draw up a job advert for a new maths teacher at your school.

Step no.4 Selection

It is known as shortlisting. It refers to the process of determining which applicants will best suit which specific
jobs. Selecting them basing on certain assessment criteria (screen responses). The CVs of unsuccessful
candidates can be kept for future references. Draw up a short list of candidates. Come up with a short list of
potential candidates, usually a list of 5 candidates

Step no.5: provide feedback to candidates

Inform all applicants about the outcome of their applications so that unsuccessful candidates can look for
other employment options. Invite suitable candidates for interviews.

Step no.6: Employment Interviews

An interview is a conversation between a job candidate and the relevant managers of a business enterprise.
It is used for selecting the best candidate from the short list. Interviews aim to determine if candidates are
suitable for a job by comparing the candidate’s skills, experience, qualifications with the job requirements.

Roles of Interviewer and Interviewee

Interviewer

 Put the candidate at ease

 Explain the purpose of the interview
 Allow the candidate time to think about each question
 To answer questions asked by the interviewee
 Explain to the candidate how he/she can benefit from working for the business
 Analyse the candidate by also looking at his/her non-verbal communication
 Prepare interview questions
Interviewer

 Prepare for the interview

 Research the business by visiting its website
 Avoid simple yes or no answers
 Giving a clear picture about oneself
 Not avoiding difficult questions
Aptitude Tests and Psychometric Tests
Aptitude Test- tests the candidate’s skills or the ability of a candidate to perform a certain task. The tests
can include practical tests requiring the applicant to perform some part of the work that they are applying
for.

Psychometric Test- written examination or role plays on situations that are designed to test the character,
attitude and personality. For example, a role play might reveal whether or not the applicant works well as
part of a team.

NB interviews, aptitude tests and psychometric tests are methods of selection

Contract of Employment

Once a candidate is appointed, the individual receives a letter of appointment followed by a contract of
employment. The letter of employment is an offer to the chosen candidate to work for a particular employer.
The contract of employment is a written agreement between the employer and the employee which
describes the duties, rights and responsibilities of both parties.

Contents of an Employment Contract

 Details of the employer

 Details of the employee
 Working hours (ordinary days and hours of work)
 Remuneration
 Job tittle and job specification
 Date of commencement
 Duration of contract i.e part-time, temporary or full time
 Termination of contract
 Leave (number of leave days, types of leave days)
Benefits of having an employment contact

 Both parties are clear about the terms and conditions that have been agreed
 The employer and the employee both know what a person has been employed to do because this
would be clearly stated in the contract that would be signed by both parties
 Any dispute about the terms and conditions of employment could be resolved by referring to the
employment contract.
 Avoiding heavy fines or penalties
What employees expect from employers

 Fair treatment by managers

 Fair wages
 Reasonable working hours and good working environment
 Holidays with pay
 Appropriate training
 Opportunities for promotion
What employers expect from employees

 Punctuality
 Co-operation from employees
 Obedience to instruction
 Appropriate handling of facilities and equipment
 Loyalty and trustworthiness
How can an employment contract be terminated?

 The employee can resign in order to take up employment elsewhere

 The employee might reach retirement age
 The employee might be in breach of contract and therefore the employer might be able to dismiss
him
 The employee might have broken the terms of the contract causing the employee to wish to leave
his/ her employment
 The term of the contract might have come to an end
 The employee might be promoted, in which case the roles and responsibilities would probably
change.
Performance Appraisal
It is the process of assessing an individual’s performances at work. It is an analysis of an individual’s
performance against pre-set and agreed targets.

It is important for :

 Identifying training needs

 Motivating staff by discussing and recognising their achievements
 Remuneration
 Identifying people worth of promotion
 Checking the efficiency of the organisation in recruitment, selection and training.
Two types of performance appraisal
a)Formal appraisal: involves the use of standardised forms which are completed by employees and
managers combined with regular interviews. Employees can also draw up personal action plan.

b) Informal Appraisal: takes place when managers check on the work of the employees and discuss how
it can be improved. It is an on-going process.

Problems of performance Appraisal

 Employees dislike appraisal because they fear criticism and their weaknesses being exposed
 Badly designed forms or poorly conducted interviews may result in subjective appraisal
Causes of poor performance

 Lack of job knowledge

 Lack of skills
  Stress
 Health problems
 Poor management
 Poor working condition
Solutions

 Offer counselling services

 Provide staff development programmes
 Organise review meetings
 Set realistic targets

Dismissal and Redundancy

Dismissal: to end the services of an employee due to an act of misconduct. It is the termination of an
employment contract because the employee has not fulfilled the conditions of the contract in some way. An
employee can be sacked from a job due to incompetence. Incompetence refers to the lack of ability to do
something well. Dismissal will deprive a worker of his or her immediate means of financial support and the
worker is likely to lose pension benefits. There should be enough evidence that the HR department has
done all it can to help the employee before dismissing him/her. It is unfair to terminate the contract of
employment for the first offenders

Reasons for dismissal

 Gross misconduct e.g stealing

 Incompetence even after sufficient training has been given
 Continuous negative attitude
 Intentional destruction of an employer’s property
 Bulling of other employees
 Failure to disclose relevant details when being offered employment.
Unfair Dismissal

Terminating an employee’s employment contract for a reason that the law regard as being unfair. The
affected employee can report to the civil court so that the court can deal with such unscrupulous employers.
When dismissal is judged to be unfair, the employee will get damages from the firm.

Dismissal is unfair under the following circumstances:

1) Pregnancy
2) A discriminatory reason e.g based on race, gender, religion, political affiliation etc
3) Employee being a member of a certain trade union
4) For minor cases without giving first or second warning.
Redundancy

It occurs when an employee loses his/her job when the business no longer requires that work to be done. It
is important to note that, it is the job that is no longer needed, not the person doing the job. When the good
or service is no longer required, the employee doing that job becomes unnecessary through no fault from
his/her side. It occurs due to a permanent decrease in demand for a particular product. It also occurs in the
mining sector due to the depletion of mineral resources. It is fair for the employer to give the redundant
worker severance package. The severance pay can be used by the redundant worker to start income
generating project.

Labour Turnover
Measures the rate at which employees are leaving an organisation. It is measured using the following
formula

Labour turnover = number of employees leaving x 100

Average number of people employed

Example: ABC limited employees 500 employees on average in 2014. 50 workers left the business during
2014.

Labour turnover = 50 workers x 100

500 workers

Interpretation: labour turnover is increasing or is too high then it will be a signal that:

 Employees are not happy i.e low morale

 The business failing to recruit the right people
 Bad leadership or management
 Availability of better paid jobs elsewhere
Potential benefits of high labour turnover

 Low-skilled and less productive staff might be leaving and creating space for highly skilled workers
 New ideas and practices are brought into the business by new workers
 Can benefit the business with the plans of reducing staff size i.e staff that will be leaving won’t be
replaced
Problems of high labour turnover

 High costs of recruiting, selecting and training new staff

 Difficult to establish team spirit as team members are constantly changing
 Low output level when a new worker is introduced and, or when the business is in the process of
finding a suitable replacement.
 Lose of customers
Workforce Planning
It is also known as manpower planning. It involves the analysis and forecasting the number of workers and
skills of those workers that will be required by the organisation to achieve its objectives. Thus, it involves
forecasting the future demand for labour in the organisation and planning to meet it. It is accomplished
through analysis of internal factors such as current and expected skills needs, vacancies and departmental
expansions and reductions as well as external factors such as the labour market conditions. Workforce
planning also involves a skills audit (Workforce audit). Workforce audit involves an assessment of staff
capabilities and matching them against future needs. This is just a check on the skills and qualifications of
all existing workers and managers. The HR manager will be checking on social, intellectual, technical,
managerial and administration skills.

Benefits of Workforce planning

 Planning for the future i.e to calculate the future staffing needs of the business
 To prevent the problems of too few or too many staff at the business
 To avoid many staff with wrong skills
 To achieve the objectives of the business in the future
Factors influencing the number employees required in the future

 Future demand for the firm’s product

 Productivity of existing staff
 The objectives of the business i.e growth objective will imply that more staff will be required.
 Labour legislations i.e minimum wage laws from government encourages firms to workers with
machines
 Labour turnover i.e the higher the rate at which staff leave the business, then the greater will be the
firm’s need to recruit replacement staff.
 Skills of existing staff i.e HR managers have insatiable appetite for better-qualified employees.
Employee morale and Welfare
Morale and welfare are important to people at work. They affect people’s attitudes and willingness to work.
Thus they influence how much effort workers will exert to their job.

Employee Morale: refers to the feeling of enthusiasm and loyalty that a person has about a task or job.
Employees must feel that what they are doing is worthwhile. If they feel that their work is valued by
management, they are also likely to feel that they are valued both as employees and as individuals. Their
morale will be high and employees tend to have a greater commitment and loyalty to their work.

Employee Welfare: refers to the state of being happy, healthy or successful. Employees are often
concerned about their health and safety at work. A business organisation which cuts corners on welfare is
unlikely to get the best from its employees.

Ways to maintain or improve staff morale and welfare

 Ensure that health and safety guidelines/ legislation is met. The physical welfare of employees can
partly be assured by following health and safety measure.
 Offering help and guidance to employees who might be experiencing problems in their life outside
work. E.g when a worker is worrying about her child’s deteriorating health condition.
 Provide medical facilities within the business in order for the employees to get treatment for any
injuries.
 Dealing with issues that are demotivating employees
 Treating employees fairly.
Work-life Balance

Refers to a situation in which employees are able to give the right amount of time and effort to work and to
their personal life outside work. Employees must have enough time to attend to their private life. Thus
employees must get time to spend with their loved ones. Working long hours and also denying employees
breaks can lead to stress and poor health. The management must assist employees to achieve a better
work-life balance. The aim is to maintain a sensible balance that allows career and ambition needs to met
as well as family and friendship needs and commitments.

Methods that can be used to achieve a better work-life balance

 Flexible working i.e allowing some employees to come at busy periods of the day but not during
slower periods
 Teleworking i.e working from home for some of the working week
 Job sharing i.e allowing two people to fill one full-time job, although each worker will only receive a
proportion of the full-time pay
 Sabbatical periods i.e an extended period of leave from work. Some business do not pay employees
during this period.
Policies of Diversity and Equality
Equality Policy

Refers to practices and processes aimed at achieving a fair organisation where everyone is treated in the
same way. People have the right to be treated with equality, respect and dignity. All employees must have
equal opportunities. Equality policy is violated when some employees are discriminated against e.g denying
some employees an opportunity to receive skills training.

Benefits of promoting Equality

 Can improve employee morale

 Greater commitment and effort from employees
 The business can easily attract skilled and experienced personnel from other organisations
Diversity Policy

Diversity refers to variety or mixture. Diversity policy refers to practices and processes aimed at creating a
mixed workforce and placing positive value on diversity in the workplace. Diversity promotes inclusivity

Diversified workforce include employees:

 Who come from different backgrounds and cultures

 Who speak different languages
 With different levels of education
 Who differ in terms of age and gender
Advantages of Diversity in business

 Creativity increases when diverse team members work together

  When a diverse team pulls together by focusing on their strengths, increased levels of productivity
will be achieved
 Colleagues learn to value and respect one another even if they do not hold similar values and beliefs
 A diverse workforce brings different skills to the workforce, for example language skills
 Can lead to an increase in the customer base since some customers are attracted by a diversified
sales force.
The costs may include:

 higher recruitment costs

 longer recruitment process
 greater training needs
 communication barriers.

Training
Refers to work-related education to increase workforce skills and efficiency. Training is required for new as
well as existing employees. Training will help prepare new employees for change and to improve the
efficiency of the organisation. The emphasis on quality, competitiveness and the rapid pace of technological
change have increased the need for training.

Reasons for training

 To facilitate the introduction of new technology

 To prepare existing employees for succession purposes
 To develop workers in order to enable them progress
 To provide employees with the skills, knowledge and aptitude
 To improve worker morale
Types of training
a)Induction Training: involves the introduction of new staff to the firm as they are told about its
business and the way of operation. The HR manager should explain to the new worker the internal
organisational structure, health and safety issues, and also company policy. The employee on the other
hand has got the chance to ask questions.

BENEFITS OF INDUCTION TRAINING

• Helps employees to settle into their job quickly/familiarise workers with the business/provide
information about the business so that he/she can easily cope with flow production
• Aware of health and safety/legal issues in the factory
• the new employee will know who to ask if there is a problem and this helps to prevent wastage of
expensive raw materials
• Help keep productivity/efficiency high so that the business will remain competitive

b)On-the-job training: training is done at the work station where an employee works. It can
take the form of job training combined with related classroom instruction and apprenticeship. The trainee
will be under the guidance of a highly skilled co-worker. Employees are trained by watching professionals
do a job. It is only suitable for unskilled and semi-skilled employees.
Advantages

 It can cut travel costs.

 The trainee may do some work while on training. They can actually be contributing to production
while they are learning.
 Can be a motivator the trainers
 No special premises to hired or built
 It is cheaper since it uses existing skilled and experienced employees
Disadvantages

 The trainer’s productivity is decreased because he/she must attend to the trainee’s problems
 If mentoring is not paid, the trainer may not be fully committed
 Some skilled and experienced employees are not good teachers.
 Mistakes made by the trainee may affect the business’s reputation
Off-the-job Training: It takes place outside the work place. Workers go to another place for
training e.g schools or private training colleges. It involves the use of specialised instructors.

Advantages

 Employees can learn many skills.

 Employees can work during the day and attend training sessions in the evening.
 Any mistake that the trainee is going to makes are unlikely to affect the reputation of the business
 Training can lead to a recognised qualification
Disadvantages

 outside trainers are very expensive

 output of the trainee is lost
 Trainee can also copy bad behaviours from the trainer.
Benefits of training
To the employer

 Improves motivation of staff

 Reduction of waste and scrap
 Quality services to customers
 May reduce labour turnover
 Helps to develop a positive culture in the organisation
 Increases productivity
To the employee

 Employees may feel valued by the organisation

 Training improves promotional prospects
 May improve job satisfaction
 Employees are better able to cope with change.
Staff Development

Employee development is more future oriented i.e it deals with preparing employees for future positions that
will require higher level skills, knowledge or abilities. Staff development differs with training because training
focuses on the skills needed to do one’s current job. Staff development can help provide long-term
motivation to employees. The business could benefit in the long term if its employees are better educated
and therefore more able to understand some of the more complex aspects of business activity.

What do you know?

[Link] any three functions of the human resources management department? [8]
[Link] the differences between internal and external recruitment [4]
[Link] possible reasons why external recruitment might be more beneficial to a business than internal
recruitment [4]
[Link] two methods of selection that might be used to select a new sales manager for a car retail business
[6]
[Link] two advantages of using interviews as a method of selecting a new employees [4]
[Link] explain three ways in which an HR department can improve staff morale and welfare [6]
[Link] two advantages of i) on-the-job training
ii)of-the-job training [4]
[Link] between redundancy and dismissal [4]
[Link] between a job description and a person specification. [4]
[Link] is meant by the term staff appraisal [3]
[Link] is meant by term ‘work-life balance’ [3]
[Link] why it is important to both the business and the employee to have a contract of employment
between them [6]
Essays
[Link] the reasons why staff training and development is believed to be essential in modern
business[20]
[Link] the potential problems that a business might experience if it did not use appropriate methods of
selection when recruiting new members of staff
[20]
15.a)Explain the purpose and roles of human resource management [8]
b)Discuss whether improving staff morale and welfare is the most important role of human resource
department in a large manufacturing business [12]

ALEVEL
Approaches to HRM
a)Hard HRM
- involves a business viewing its employees as a resource to be used to achieve its objectives just lie
the machinery, vehicles and premises. Employees will be recruited, trained, redeployed or dismissed
according to the needs of the business. Employees are likely to be closely monitored for the business
to be able to achieve its objectives. Training is not for the direct benefit of the employee but rather to
improve the business outcomes. It is an approach to managing staff that focuses on cutting cost e.g
offering temporary and part-time employment contracts

b)Soft HRM
-involves the treatment of employees as individuals usually with an awareness of the individual
development and considering the needs of each employee. It takes a more humanistic approach to the
management of employees. Training is offered for the benefit of both the business and the employee.
Workers are motivated to work harder and to stay in the business for a long time.
HRM and Flexible
The business requires different numbers of employees at different times. Thus the business needs as
much flexibility as possible regarding the size of workforce. There is therefore need for temporary or
part-time employees.

Type of Contracts
a) Permanent Contract- a contract of employment that does not specify a time period or
have a termination date
b) Zero hours contract- a contract of employment where the employee does not have any
guaranteed hours of work. The employee will only be paid for the hours they are
actually required to work, which might be zero in any given time period. In restaurants
employees are required to be available but if there are no customers, they are not
required to wait on tables or to cook and as a result they won’t be paid.
c) Part-time employees- a contract of employment for a specified number of hours that is
less than the number of hours worked by the full time employees
d) Flexi-tine contracts-employment contract that allows staff to be called in at times most
convenient to employers and employees e.g at busy times of the day

Benefits of Part time workers

Less overhead cost: In many organizations, part time employees are not eligible for benefits such as
health insurance, paid time off (PTO), paid vacation days, and sick leave.
Ability to attract desirable workforce: There might be many people who are good at their
work but do not want to work full time. For example, many new mothers want to go back to
work, but they don't want to go back full time or have to pay too much for a nanny or day-care
service. Part-time work may also attract retirees who have a wealth of knowledge and would
be great mentors to younger staff members.
Flexible workforce: It’s a great way to develop your business as a flexible workforce allows you to
respond to changes in demand, whether that is through hours, services or reputation.

No redundancy pay-the business does not pay any extra costs to the employee if the work they are
employed to do is no longer available

Limitations of Part time workers

Inconsistent productivity: Part-time workers, especially those that work more temporarily or
seasonally, usually have less knowledge and familiarity with the company because they work less.
Part-time workers won't be on site as often as your full-time staff, it might take them longer to get used to
your company's culture or become familiar with the programs used regularly. This may increase their training
time or reduce productivity while they're getting up to speed.
Lack of loyalty: Part-time workers usually have less commitment because they spend less time at the
company and find it easier to leave because of the lack of full-time income and benefits. Thus, losing part-
timers to other jobs is more common.
Because there are both pros and cons to hiring part-time employees, a business should carefully evaluate
its needs before hiring part-time workers. Part-time workers may help offset your health insurance costs,
but they may also not be able to offer the loyalty and time commitment to the business
More employees- there will be more employees to manage than if they were all full-time. It will be a
burden to the firm

FULL-TIME EMPLOYMENT CONTRACTS

ADVANTAGES OF FULL-TIME EMPLOYMENT CONTRACTS

 employees are likely to be better trained than part-time workers

 employees are more committed to the business
 less supervision is required
 fewer errors since they are more experienced than part-time employees
DISADVANTAGES FULL-TIME EMPLOYMENT CONTRACTS

 no new ideas are brought into the business

 employees are not able to combine jobs with different firms hence lack of variety in their working lives
 the contract is not ideal for certain types of workers e.g parents with young children, elderly etc
 employees will be at work even at less busy times
 full-time employees are very expensive since they are specialists
Measurement of employee performance
Staff Appraisal- a process of measuring the performance of an employee against predetermined
targets or desired outcomes. Staff appraisal can be in form of interviews with employees discussing
the extent to which they have reached their objectives, through observations and through the
determination of the worker’s productivity rate. The is need for communication as to what form the
appraisal will take and how frequent it will take place.

Benefits of staff appraisal

 During appraisal interviews or observation, training need can often be identified
 New ideas can come out from the discussion for the benefit of the business
 It can allow pay levels to be adjusted
 It can confirm the extent to which employees are meeting targets which can then be used as the
basis for bonus payments

Causes of poor employee performance

 Poor employee motivation
 Lack of effective leadership
 Lack of skills/ experience
 Absenteeism

Labour legislation
All governments have passed laws to control working conditions and the relationship between employer and
employee. These are collectively called Labour laws or Labour Legislations. These offers protection to
employees and can prevent their exploitation by unscrupulous employers. The role of HR managers is to
ensure that such legislation is followed and deals with any instances where the laws may have been broken.

Legislation offers protection on the following areas

 Hours of work
 Minimum wage and other remuneration issues
 Discrimination issues
 Holiday entitlement
  Minimum age for work
 Health and safety
 Termination of employment contracts
 Employment relations

Number of Working Hours

In the UK, people are not expected to exceed 48 hours per week. If extra hour are needed then special
arrangements between the employee and employer can be made as long as the employee is over 18 years of
age.
Employees under the age of 18 can work up to a maximum of 40 hour per week.

Remuneration
Refers to the payment received by employees in return for providing their labour and expertise
Employers must ensure that all its employees gets a remuneration above the minimum wage for them to be
able to sustain themselves
Overtime rate is usually 1.5 times the normal rate
The employment contract must also state how and when payments are made

Holiday Entitlement
Government can dictate the minimum number of days that should be given as holiday to each employee. For
example, after two years of continuous service an employee may be given 1 week holiday for their loyaly.

Minimum Age for work

Some governments have specified that young people should not be expected to work below a certain age.
Minors below the age of 15 are not allowed to work. 15 to 18 years may be allowed to work provided they are
given light jobs. This ages varies from one country to another.

Employment Contract and their termination

Labour legislation stipulate that all employees should be given an employment contract. The legislation will also
dictate the circumstances under which that contract can be terminated. It is in the best interest if employers and
employees to have such a contract as the terms of employment will be clearly defined and therefore each party
knows exactly what they are committed to do.

CONTRACT OF EMPLOYMENT

-it is a written agreement between the employee and the employer which binds both the employer and the
employee, and describes the duties, rights and responsibilities of both parties

CONTENTS OF ANY EMPLOYMENT CONTRACT

 details of the employer

 details of the employee
 working hours
 remuneration
 job description and job specification
 date of commencement
 duration of the contract
 termination of the contract
 leave
IMPORNANCE OF EMPLOYMENT CONTRACTS

• It’s a legal requirement - failure to use them could lead to fines / legal action
• Avoids misunderstanding -if there is a dispute business can check what workers are expected to
do
• removes uncertainty -Employers and employees know the terms and conditions of the
employment

Employee Relations
Employees in certain occupations can be allowed to join Trade Unions. Trade Union refers to an organisation
that works on behalf of a group of employees by seeking to improve their pay and conditions of service as well
as acting on the behalf of member who are in dispute with their employer. Employee relations legislation can
outline the rights of employees to belong to a trade union or any rights they may have to withdraw their labour
(Strike)

Healthy and safety legislation ( done already)

Discrimination issues (done already)
Minimum wage laws (done already)

Questions
[Link] two benefits to a manufacturing business of following health and safety legislation [4]
[Link] two ways in which labour legislation protects workers in food processing business [3]
[Link] the importance of labour legislation using examples from your country [8]
[Link] and explain two advantages to FDD of employing part- time workers. [4]
[Link] and explain two reasons why employment contracts are used by T&J. [4]

Co-operation between the management and the workforce

-it is very important now to involve workers’ suggestions and those of their union leaders for the
benefit of both employees and employer. Co-operation can be achieved by the increased use of
employee participation. Management should recognise and accept that employees at all levels in a
business are capable of making a valuable contribution if each individual feels informed and involved
Benefits of co-operation between workers and management
 less confrontation and fewer strikes
 promotes team work. It can help to remove the feeling of ‘ them and us’
 it can lead to the development of mutual respect and valuable exchange of ideas
 it can lead to managers and employees beginning to appreciate each other’s point of view

Workforce planning
Refers to the analysis and forecasting of the number of workers and the skills of those workers that
will be required by the organisation to achieve its objectives. Businesses need to ensure that they have
the right number of employees with the right skills employed in the business at the time that they are
needed. Workforce planning means thinking ahead and establishing the number and skills of the
workforce required by the business in the future to meet its planned objectives. Workforce planning
involves workforce audit which is a check on the skills and qualifications of all existing workers/
managers.

Factors influencing the number of workers required:

 forecast demand for the firm’s product
 the productivity levels of staff
 the objectives of the business
 changes in the law regarding workers’ rights e.g maximum working week or minimum wage
 the labour turnover and absenteeism rate

TRADE UNION
An organisation of working people with the objective of improving the pay and working conditions of
their members and providing them with support and legal services. Alternatively it can be defined as a
group of workers who join together to protect their interests and work for better wages and working
conditions. It is a type of pressure group.

Relationship between Trade Union and HRM

A Trade Union works on behalf of its members to ensure that the rights of employees are satisfied while in
employment. Trade union representatives will meet with representatives of any business to discuss issues
related to trade union members employed by the business. This relationship can be beneficial to both
parties

Why do workers join trade unions?

Workers might join a trade union because

 They believe that there is strength in number and they will be listened to when they are in a group.
 To negotiate a better pay, more holidays and less hours of work.
 To pressurise the employer to provide them with a healthier and safer working environment.
 Improved benefits for retrenched workers
 To get the benefits of advice, financial support and welfare activities carried out by Trade Unions.
 Many workers may also join a trade union because there is a closed shop policy.

Benefits of Trade unions to employer

 Trade unions usually intervenes to ensure that its members respect the employment laws
 Employers will discuss issues with a representative from a trade union rather than discussing the
same issues with numerous employees
 A trade union can be asked to explain to the employees that their actions are not lawful and that
they must return to work
 Trade union can encourage its members to further their education and the business will benefit from
increased productivity
Benefits of Trade union to employees

 Employees have someone who can negotiate with employers on their behalf. These representatives
are more experienced in negotiating than the average individual employee
 Employees will be protected from illegal dismissal
 Members will get up-to-date information about employment legislation that applies in the country
 Improvement in wages and working conditions
 Financial support at favourable rates
 Protection from unfair discrimination
Collective Bargaining
The process of negotiating the terms of employment between an employer and a group of workers who are
usually represented by a trade union official. It means that the needs and demands of a group of employees
will be discussed, by the management and the representatives of a trade union, for the workforce as a whole
rather than on an individual basis
Closed Shop
It is where all employees must be a member of the same trade union.
Single Union agreement
It is an agreement between the management and workers, where the management deals with only one trade
union and no other.
No-Strike Agreement
Unions agree to sign a no strike agreement with employers in exchange for greater involvement in decisions
that affect the workforce.
Productivity agreement
It is an agreement between the management and workers whereby the management agrees to increase the
benefits for workers in return for an increase in productivity.

Types of Industrial Actions

Industrial action refers to the measures taken by the workforce or trade union to put pressure
on management to settle an industrial dispute in favour of employees

 Strike: when employees refuse to work

 Picketing: When employees stand outside the workplace and prevent the smooth functioning of the
firm. E.g. they may stop the movement of Lorries in and out of factory.
 Work to Rule: employees refuse to do any work outside the precise terms of the employment contract.
 Go slow: It is when the employees work at a very slow pace.
 Non-cooperation: It involves workers refusing to follow a new procedure or rule.
 Overtime ban: It is when the employees refuse to work overtime or for additional hours of work apart
from their normal working hours.
 Lock out: occurs when striking workers prevents non striking workers from entering the business
premises
 Sit-in/ Sit down strike: employees report for duty but they just sit in their offices

Methods used by employers to influence the outcome of industrial dispute

 Threats of redundancies
 Changes of the employment contract
 Closure of the business
 Using public media to gain public support

Factors determining the strength of a Trade Union

 Most workers belong to one union
 All workers agree to take industrial action
 Industrial action costing the employer large sums of money
 Rate of inflation increasing
 Labour cost are a low proportion of total costs
 Demand for the product labour helps to produce is inelastic
 When productivity increases

Factor determining the strength of the employer

 Unemployment is high
 Profits are low
 Threats of relocation to low cost countries0
 Demand for the product is elastic
 When the rate of inflation fairly stable
 Productivity of workers didn’t change
Questions
[Link] is meant by the term ‘collective bargaining’? [3]
[Link] two advantages to employees of their employer recognising a trade union. [4]
ORGANISATIONAL STRUCTURE F6
EVNTUALLY when the business grows larger and employs many people, they will have to create an
organisational chart to work out a clear structure for their company.

ORGANISATIONAL CHART

-The internal, formal framework of a business that shows the way in which management is organised and
linked together and how authority is passed through the organisation. It’s a framework indicating the chain
of authority and lines of communication. Organisational structure is represented primarily by means of a
graphic illustration called an organisational chart or organogram. Organisational chart is a diagram or chart
which records the format structures and relationships within an organisation. The relative positioning of
individuals within boxes on the chart indicates broad working relationships while lines between boxes
designate formal lines of communication between the individuals.

IMPORTANCE OF AN ORGANISATIONAL STUCTURE

It shows:-
1) Who reports to whom – the chain of command. It shows employees in one level of the
organisation who they would report to who they should receive instructions from.
2) How many subordinates work for each manager _ the span of control.
3) Channels of official communication through the solid lines that connect each job (box). If an
employee wants to discuss an issue, the organisational chart will show them the person who they
are answerable to and therefore the person who should be the first one that any issues should be
discussed with.
4) How the company is structured – by function, customer, product etc.
5) The work being done in each job – the label on the boxes. It allows employees to know where
their post fits in the business structure.
6) The hierarchy of decision making. It shows who are the decision makers in an organisation and
who has the most authority.
7) Types of authority relationships – solid lines illustrate line authority and dotted lines show
staff and functional authority. Authority refers to the power or right to control or command the
action of others
An Organizational Chart

TYPES OF ORGANISATIONAL STRUCTURE

HIERARCHICAL STRUCTURE BUREAUCRATIC STRUCTURE)
Refers to a structure that is designed to represent the various levels of authority and to outline the chain
of command and channels of communication

 It is also known as pyramid structure

 Hierarchy refers to the order of the levels of management in a firm from the highest to the
lowest ranks
 This is a structure where there are different layers of managers with fewer and fewer
workers on each higher level

ADVANTAGES DISADVANTAGES

 The role of each employee is clear  Promotes one-way

and well defined communication
 Clearly defined chain of command  Lack of co-ordination can occur
 Employees are given because of fewer horizontal links
responsibilities, proper roles to  Managers are generally accused
perform and procedures to follow of having tunnel vision (narrow
 Specialisation and economies of vision)
scale can be achieved
 It is a proper departmental
structure
 Span of Control
-It is the number of people directly accountable to and reporting to a manager. A span of 4-8
is acceptable at upper levels of management and up to 15 at lower levels.
-basically there are two types :-
a)Narrow span of control( Tall organisation)
b)Wide span of control( short/Flat organisation)

NARROW SPAN OF CONTROL / TALL STRUCTURE

-it is known as a tall organisational structure. The maximum could be three subordinates
reporting to a superior or manager. This is likely to lead to close control of subordinates. It is
linked to more bureaucratic organisations ,such as the army and many government departments

Characteristics : Tall
1. Centralized authority
2. Many authority levels
3. Narrow span of control
4. Long lines of communication

FEATURES OF THE DIAGRAM ABOVE

 Span of control- 3 subordinates for the manager
 Authority levels- 3 authority levels (or 3 hierarchical levels)
 Chain of command- long chain of command
 Advantages of a Narrow Span/Tall structure Disadvantages of narrow span/ tall structures

1. –close supervision of subordinates 1. –superiors are too closely involved in

2. –tight control subordinates’ work
3. –faster communication (vertical 2. –high costs e.g. staffing costs
communication) 3. –stretches the communication line between
4-decision making responsibilities are managers and subordinates
distributed between several levels which 4-too many decision makers can lead to
reduces the burden of decision making on business objectives being difficult to achieve
senior management 5-decisions and instructions pass through
many levels and this can be extremely time
consuming and can delay the receiving of
information

WIDE SPAN OF CONTROL/FLAT STRUCTURE

-there are six employees that reports to the manager. It is likely to encourage delegation. Usually
results in a short chain of command. A flat structure is often found in young business, where
smaller number of employees are usually involved, or in organisations that have undergone a
process of delayering. Delayering involves removing some levels of management from an
organisation therefore producing a flatter structure

Characteristics : Short structure

 Decentralised authority
 Fewer authority levels
 Wide span of control
 Easier communications
 Easier co-ordination

FEATURES OF THE DIAGRAM ABOVE

 Span of control- 6 subordinates for the manager
 Authority levels- 2 authority levels (or 2 hierarchical levels)
 Chain of command- short chain of command

ADVANTAGES
 Greater motivation as more trust is placed on employees
 Less supervision of employees
 Lower costs involved in supervision
 Information and decisions pass through fewer levels hence less time consuming
DISADVANTAGES
 Manager is responsible for large number of subordinates. The absence of some layers of
management can place a greater burden for decision making in the remaining levels
 Greater delegation necessary as it is difficult to keep control over all subordinates
 Communication problems as decisions need to be conveyed to many persons
 Quality maintenance is difficulty

Factors affecting the Span of Control

1. –the nature of the task
2. –the ability of experience of the people concerned
3. –the effectiveness of communication
4. –the cohesiveness of the team
5. –the degree of delegation exercised

FUNCTIONAL STRUCTURE

-It is organised in terms of functional areas or departments of the business. Each the departments might
have their own hierarchical structure outlining who should report to whom within each department

-there are eight functional areas in a normal business set up namely:

 General management
 Human resources
 Public relations
 Administration
 Finance
 Marketing
 Production
 Purchasing
Illustration

ADVANTAGES DISADVANRAGES

 Efficient performance and specialisation  Horizontal communication problem

 Clear chain of command and span of  Slow to respond to the change ie co-
control ordination problems
 Simple lines of control  Decisions are concentrated at the top
 Employees will clear about where they fit which in turn damages the motivation level
into the overall business structure  Departments might compete for resources,
which can prove more costly for the
business as a whole

The Matrix Structure

-an organisational structure that creates project teams that cut across traditional functional
departments. It is only made for a certain project. It crosses departmental boundaries bring
together all of the skills and expertise required to carry out a particular project. It combines
functional managers with an overlay of project managers. An employee will end up reporting to
two or more superiors. These are 2 chains of command. It is applicable in high-technology,
project-based industries such as Aerospace, Government contracting R & D etc.
 Advantages Disadvantages

[Link] allows the best employees to be brought 1. –power struggle can occur. Each project
together to complete a task or project leader will usually claim that the work for
2. leads to co-coordinated effort since it focuses their project must take priority
on functional expertise on a project 2. –costly to implement
3. it encourages co-operation and 3. –creates problems of control as the
communication between departments within employees are answerable to more than one
an organisation boss
4. Highly skilled employees can be used to the
maximum as they can be moved from one
project to another as required

Organisations Structured by Product

It is applicable to business that produces a wide variety of products and each of those products are made on a large
scale. Thus it will be cost effective to divide itself into sections and each section dealing with only one product. Each
product has its own needs and it has to produce its own profit
Advantages

 People working in each division will be specialised in that specific product

 Costs and revenues can be clearly allocated to that particular product
Disadvantages

There can be some duplication of effort. For example, each product might have a marketing
department and a finance department
CONSEQUENCES OF POOR ORGANISATIONAL STRUCTURE

 Low motivation and morale

 Ineffective decision making
 Lack of co-ordination and control
 Poor communication
 Poor implementation of organisational objectives
 Inability to respond to changing conditions
 Duplication of activities
Causes of Changes in organisational structure

 Change in the demand for a product

 Change in the style of management
 Growth in the market
 Diversification
Questions

1. Explain the advantages of using a narrow (tall) organisation structure

2. Explain two possible disadvantages of using a flat organisation structure
3. Explain why business might wish to change its structure from narrow (tall) structure to a flatter
4. Explain two disadvantages of using a structure based on geographic region
5. Explain two advantages of using matrix structure
6. Give two advantages of organising business by function
7. Explain what business functions should be shown on an organisational chart
8. Explain the term span of control
 9. Why might it be difficult to manage a flat organisational structure
10. Outline two functions of an organisational structure
Formal versus Informal Organisational Structure

Formal Structure

The levels of authority and channels of communication are defined by the organisational structure. Refers to a
deliberately planned structure of roles within an organization. It is represented on the organizational
structure. Formal structure indicate the chain of command, which is the route through which all
communications should pass. The levels of responsibility and authority are also indicated. i.e The
person with the ultimate responsibility for how the business performs is at the top of the structure.
formal structure also shows how delegation can take place

Informal Structure

A network for communication and authority other than that outlined by the organisational structure. The
informal structure is a network of personal and social relationships or cliques which arise at work. It is
not planned or official. The power of the group leader is personal and behaviour of the group is guided
by norms rather than by rules laid down. Control is not by means of financial rewards or penalties but
by threats of expulsion.
Advantages of Informal groups
1. –a lighter workload for management
2. –work group satisfaction
3. –improved communication
4. –forces management to plan
5. –greater co-operation

Disadvantages
1. –resistance to change
2. –interpersonal and intergroup conflicts

CHAIN OF COMMAND

-it is the route which authority is passed down in an organisation.

- instructions needs to be passed from the Top managers to the employees at the bottom of the
hierarchy

-some information is also passed from the bottom to the top

-long chain of command slows down communication

-there two types i) Long chain of command with several levels. Suitable in Tall structure

ii)Short chain of command with few levels. Suitable in Flat structure

AUTHORITY

-is the legitimate exercise of power which in turn is the ability to exercise influence over people or
situations
 TYPES OF AUTHORITY

a)Line Authority/ Line management: -is a direct authority as it involves a right to give orders and have
decisions implemented. The mangers have direct authority over and responsibility for the employees on
the level immediately below them

b)Staff Authority/ Staff management: -it does not provide a right to command. It is for the advisory and
supportive purposes e.g legal department of a business. Employees who might offer specialist advice to
any department without having any authority or responsibility for anyone in the department that they are
advising

c)Functional Authority: -it is a right to give orders in a department other than your own. E.g on specific
projects some specialists can be hired. For instance, calling a finance person to supervise a project

DELEGATION

-passing of authority down the organisational hierarchy. It is the act of assigning duties to subordinates.
Authority to perform a task is passed to an employee in a lower level of authority. It is done to enable
top managers to concentrate on major issues especially as the organization grows in size and
complexity. Delegation of decision making should be done through giving subordinates sufficient
authority to carry out the tasks.

-Delegation can be achieved if:

1. The subordinate possesses sufficient skills and experience
2. The objective is defined and understood
3. The subordinate is given sufficient authority and responsibility
4. The procedure is clearly understood
5. There is a clear schedule for completion of task

ADVANTAGES DISADVANTAGES

 Gives senior managers more time to  Inexperienced employees may fail and
focus on important issues this may tarnish the good name of the
 Show trust in subordinates and this manager
can motivate them  Managers will lose control of staff
 Develops and trains staff for more  When subordinates performs better
senior positions than the manager, the manager may
 Helps staff to achieve fulfilment feel insecure
through their work (self-actualisation)  In most cases managers delegate
 It can allow the mangers to see which boring tasks which demotivates
employees are perhaps ready for and employees
capable of being promoted to a more  It may cause tension among a group of
responsible post. employees if one of them is given the
authority to oversee the completion of
a group task
 Delegation and Accountability

At each level in the organisation tasks are delegated from chief executive officer at the top of the
organisation down to the employees on the very bottom level, but if anything happens that causes the
organisation to perform less well it is the chief executive who will ultimately have to answer to the
shareholders.

DIFFERENCE BETWEEN AUTHORITY AND RESPONSIBILITY

Authority can be passed down and responsibility cannot. Thus the authority to perform a tsk can be
passed to a lower level employee but the final responsibility for the successful execution of the work
remains with the manager who delegate work. It is the manger’s responsibility to ensure that the
employee has the required skills and experience

CONFLICTS BETWEEN CONTROL AND TRUST THAT MIGHT ARISE WHEN DELEGATING
Delegation requires an element of trust. Trust on the part of the manager that their employee will carry out the
work as required. Trust on the part of the employee that the manager will not interfere once the work has been
delegated. When a manager performs a particular task themselves they have complete control about how and
when it is done and the standard to which it is done. They must accept that they lose some control over the
work if it is delegated to one of the employees in the hierarchy. If the manager check constantly how the work
is done, the employee may sense lack of trust and may no longer be willing to undertake the task. However if
the manger does not keep checking, how do they know that the work is being done and is being completed to
the required standard. This a dilemma faced by people who delegate some of their work to others.

Decentralisation.

-Refers to a business delegating important decisions to lower divisions in the business

-decision making powers are passed down the organisation to empower subordinates and regional
managers

Decentralisation means:

 Less central control

 More delegation
 Decisions are taken ‘lower down’ in the organisation
 Authority is given to departments/ regions

Advantages Disadvantages

 Decisions are made by managers who are  Loss of control

‘closer to the action’  Development of narrow departmental view
 Managers feel more trusted and get more
job satisfaction due to delegation
 Decisions can be made much more quickly
 The business can adapt to change more
quickly
FORMS OF DECENTRALISATION

a)Functional decentralisation: Specialist departments are given the authority to make decisions

The most common are:- -human resources

-marketing
-finance
-production
b)Federal Decentralisation: authority is divided between different product lines eg separate truck/car/ bus
divisions

c)Regional Decentralisation: in multinationals, each base in each country has authority to make its own
decisions

d) Decentralisation by project: for a certain project, decision making authority is given to a team chosen from
all functional departments

CENTRALISATION

A centralized organization is one in which most decisions are taken at the centre or upper levels of the
organization. There will be minimum delegation to managers in the various departments
The degree of centralization depends on:
1. Cost
2. Desire for uniform policy
3. Size of the organization
4. Management philosophy
5. The quality of middle and junior management
6. Availability of control techniques
7. Geographical dispersion of the organization

Advantages Disadvantages

1. Greater control of the business over the 1. no new ideas are brought in the management
employees and the use of business resources system.
2. decisions made will be consistent across all 2. Rigidity i.e the business may not quickly
departments or divisions adjust to an unexpected change
3. business image can be maintained due to the [Link] in decision making
consistency of decision 4. prevents personal development for managers
4. Easier communications due to the limited lower down the hierarchy
involvement of employees
[Link] working towards a common goal

Typical exam questions

Callow is a large retail business based in country X. ‘Our employees are an important stakeholder’,
said the Managing Director. ‘To make sure we stay profitable we need to motivate them.’ Callow
trains all of its shop employees by using off the job training.
 Fig. 1: Callow Organisation Structure

a) Identify two stakeholder groups, other than employees. [2]

(b) Identify two functions of management that each shop manager will have to perform. [2]
(c) Identify and explain two features of Callow’s organisational structure. [4]
(d) Identify and explain two possible methods that Callow could use to improve the motivation of
its employees [6]
(e) Do you think it is a good idea for Callow to use off the job training for all its shop employees?
Justify your answer. [6]
(f) Identify two advantages and two disadvantages of using a wide span of control to this particular
business [4]
(g) What is meant by the term ‘Span of control’ [2]
(h) Explain the term Delegation [2]
(i) What is the Span of control for each supervisor [2]
(j) Identify and explain two benefits to Callow of having an organisational chart. [4]

(k)distinguish between authority and responsibility [3]

(l)Briefly explain one advantage and one disadvantage of delegation [4]
(m)Explain two advantages of centralisation in a business context [3]
[Total 44]

Communication
Communication is the transfer of information from the sender to the receiver with the information being
understood by both the sender and the receiver. Refers to the passing of information between two or more
parties. Effective communication refers to the successful exchange of information between people, including
some kind of feedback
Methods of communication
One-way versus Two-way communication:
 One-way communication occurs when information only moves in one direction, which is usually
from top to bottom of the organisation. Feedback is not required. It is usually for the giving of
information, orders or directions
 Two-way communication: refers to the successful exchange of information between people,
including some kind of feedback. Thus information can travel vertically both upwards and downwards
and in both directions between people on the same level of the hierarchy. Two-way communication
can improve the co-ordination and co-operation between departments or divisions within a business
Vertical versus Horizontal communication
 Horizontal communication: communication between two employees at the same level of a
hierarchy
 Vertical communication: refers to communication between different levels of a hierarchy. Manager
and subordinate .
Channels of Communication
Refers to the route within an organisation structure taken by an information flow.

Role of Communication
Communication is needed

 To establish and disseminate goals of an organisation

 To develop plans for their achievement
 To organise human and other resources in the most effective and efficient way
 To select, develop and appraise members of the organisation
 To lead, direct and motivate people
 To control performance.

The communication process

Sender of the message: Communication begins with the sender who has a thought or and idea which is
then encoded in a way that can be understood by both the sender and the receiver.
Transmission of message: The information is transmitted over a channel that links the sender with the
receiver. The message may be oral, written or visual.
Receiver of the message: The receiver has to be ready for the message so that it can be decoded.
Accurate communication can only occur when both the sender and the receiver attach the same meaning
to the message.
Noise and Feedback: We can never be sure whether or not a message has been effectively encoded,
transmitted, decoded and understood until it is confirmed by feedback.
Methods of communication

Types of Communication
Written Communication
It includes letters, memos, reports, notices, faxes and e-mails.

Letters: -they are used when applying for a job, requesting for something, informing employees of
any impending redundancies etc
Advantages

 Provides records and references. The receiver can re-read

 Message can be carefully drafted and directed to large audience through mass mailing
 It promotes uniformity in policy and procedures.

Disadvantages

 It may create mountains of papers.

 May be poorly expressed by ineffective writers.
 It may long time to receive and properly understood.
 Information can be misinterpreted
Reports: -formal means of communication, they are used in schools colleges to give information
about the progress of the student. Some are issued by companies i.e annual reports. Some are used when
a managers wants a stubborn employee to narrate his or her case

Advantages

 Reports can be very detailed and can include diagrams to illustrate some information
 Provides a permanent record of information
 Information is provided in a logical way
Disadvantages

 Some information might not be read if the report is too long

 Information can be misinterpreted
Notice boards: It can be used for a planned social event or meeting. It also includes posters

Advantages

 The information is available to many people at the same time

  It is cheaper to use
Disadvantages

 There is no guarantee that the intended recipients will see the information
 The reactions of people to the information will be unknown
 The information cannot be targeted at a specific group of people
Emails: -it’s a quick means of communicating both internally and externally

Advantages

 A fast way of communicating regardless of where in the world the sender and recipient
 Supporting documents can be attached so that a lot of information can be transmitted quickly
Disadvantage

 May provide no immediate feedback. Some open their emails after a long time
 Information overload where too many emails are send.
 It may long time to receive and properly understood.
 Can lead to cyber related crimes
 The illiterate cannot use the internet
Websites: -many businesses convey information about their activities on a business website. The
business can display mission, products offered, jobs, prices on the website.

Advantages

 A lot of information can be made available on a website

 If the website is very professional and sophisticated the business can project a good image
 A website is a relatively low-cost form of communication for businesses once the site has been
established
 It allows businesses to make contact with people who they are not yet in formal contact with
Disadvantages

 The information made available on a website is accessible to everyone who visits the site. Thus
competitors can have information which can be used to their advantage
 There is the potential for malicious individuals to gain access to the website and to add harmful
information or comments
Social media: -social media include face-book, twitter. Many people invite people to follow
them on social media so that up-to-date information can be given out about business activity

Advantages

 Faster communication with people outside the business

 Immediate reaction from people can be obtained through responses posted on social media
 Such interaction between the business and its customers might allow the business to be more
responsive to the needs of its customers
Disadvantages
  There is a danger that information might be released through social media that was not intended for
public knowledge
 The target market of the business might not be in the section of the population that habitually uses
social media
 Someone within the business will have to allocate time to manage the face-book or twitter
communications

Oral Communication
Oral communication includes one to one conversations, interviews, appraisal sessions, group meetings or
team briefings.

Meetings
Advantages

 It allows two way communication and feedback.

 It encourages motivation.
 It is fast and feedback can be received instantly.
 The message can be reinforced with the proper use of body language.

Disadvantages

 Body language of both the sender and receiver may have a negative impact.
 It may be unsuitable for information which is technical in nature.
 Meetings can be time consuming

Telephone/ Mobile phones

Advantages

 It allows two way communication and feedback.

 It is fast and feedback can be received instantly.
 Employees can be in contact 24 hours a day , 7 days a week.
 Messages can be send/ received and they will act as a record

Disadvantages

 There is no record of what was said

 The body language of the people involved cannot be seen
 There is no guarantee that the person on the other end of the phone is actually listening and paying
attention to what is being said

Visual Communication
Visual communication usually includes diagrams, pictures, charts and pictorial representation of the
message.
Advantages

 Easy to understand and retain the information.

 May be more interesting than simple written communication.

Disadvantages

 It is not always clear and the may be misinterpreted by the receiver.

Electronic Communication
Video Conferencing: a video-conference can be held between two or more people in a variety of locations

Advantages

 Saves time because do not need to travel to meetings

 The costs involved in travelling to meetings are saved
 People working in different parts of the world can hold regular meetings in this way.
 The cost of equipment is small compared to the costs saved
 It allows for some eye contact to be made and for body language and tone of voice to be observed
Disadvantages

 It is difficult to judge the body language of those participating

 Any time lag can disrupt the fluency of the discussion
 High Installation costs
 It can be difficult to assess who wants to have an input if the group is large
 Physical sampling of products of new products such as new chocolate bar or a new blend of tea is
not possible

Flow of communication
In an organization, communication flows in various directions:
 Downward communication: Downward communication flows from people at higher level to those
at lower levels in the organization hierarchy. This kind of communication exists especially in
organizations with an authoritarian leadership style. Examples of written downwards communication
are memo, letters, handbooks, policy statements and procedures.
 Upward communication: This communication travels from subordinates to superiors and continues
up the organizational hierarchy. This type of communication is found in participative and democratic
organizational environments. Typical means of upward communication are suggestion systems,
appeal and grievance procedures, complaint systems, counselling sessions, grapevine, group
meetings, morale questionnaires and the exit interview.
 Crosswise communication: It includes the horizontal flow of information between people on the
same or similar organisational levels and diagonal flow between persons at different levels who have
no direct reporting relationships. This kind of communication is used to speed information flow, to
improve understanding and to coordinate efforts for the achievement of organisational objectives. It
 may include oral communication ranging from informal meetings , or more formal conferences and
board meetings. Written forms include company newspapers or magazine and bulletin boards.

Barriers to Effective
Communication
Barriers to effective communication mean the reasons for a breakdown in communication. It refers to
anything that prevents the receiving and understanding of information. These breakdowns may be for arising
due to:

Problem with the sender

 The sender may use to technical language or may use ‘jargons’ which are difficult to understand.
 The sender may speak too quickly which makes it difficult to interpret what he is saying.
 The sender initiates a wrong message.
 The message send by the sender may be too long and due to this the main point to be emphasized may
get lost.
 The sender may have a wrong opinion or perception of the receiver and may not put effort to put across
the message in an effective way.

Problem with the medium

 The message may be lost while transmitting.
 Using an inappropriate medium may result in the less effective communication.
 A longer channel of communication will result in distortion of the message and it may lose its original
meaning.
 There is lots of physical disturbances in channel of communication used.

Problem with the receiver

 The receiver might not be paying attention and thus the message may lose its impact.
 In many cases, the sender might not be trusted by the receiver and may not act in the intended way.
 The receiver may not have the necessary skills to understand the message.

Problem with the feedback

 The feedback may be missing or distorted.

Steps to overcoming barriers to

communication Sender
 Message should be as brief as possible and to the point.
 Main points of the message should be highlighted.
 Language used should be understood by the receiver.
 Avoid using technical jargons.
 Use of appropriate facial expression while delivering verbal messages.

Medium
 Select appropriate channel for communication.
 Medium used should be free from distortions such as telephone failure etc.
 Use the shortest possible channel in order to avoid distortion.

Receiver
 Feedback should be asked from the receiver.
 Trust between the sender and receiver is an important requirement.
 Receiver should pay attention to the message received.

How to select the appropriate

media?
There is no ‘best communication method’. The method of communication may be chosen after
considering the following factors:

How much does it costs?

 Electronic media cost a lot and may not be afforded by an organization whereas face to face
discussion does not involve any cost.

How fast should be the communication?

 Oral communication is always faster than written communication. Moreover, with the advent
of electronic media large message can be transmitted over large geographical areas in the
minimum of time.

How much information is to be transmitted?

 Written communication may be more suitable when dealing with loads of information.

What is the importance of feedback?

 In organizations where employees’ feedback is an integral part of decision making, Oral
communication may be the most important form of communication.

Do you want a permanent record of information?

 Written communication is most suitable form of communication when a permanent record of
the message has to be kept. For example, an employee contract records the terms of
employment.

Communication networks
a)Wheel Network: one person is controlling information and contact between the different
participants. i.e the chief executive office communicating with different branch managers. Two-
way communication between the chief executive and one branch manager can occur.
Communication is dominated by one person. There is low creativity
b)Circle Network: information is not freely exchanged between the members of the circle. Each
person within the circle maintains contact with two others. There is greater motivation and high
morale , there is two-way communication. Slow decision making due to lack of co-ordination

c)Y-network: combines the wheel and chain network. There one person who control information
d)Chain Network: the chain network follows the hierarchical structure within an organisation. The
communication can be one-way or two-way depending on the culture in the organisation. The leader is
full control of the information which is passed down the hierarchy.

e) Integrated / Connected Network: it is referred to as an all-chain network. Information is allowed

to pass freely between all those involved. There is no set pattern or channels for communication. It
provide best solutions to complex problems. Morale is very high due to participative approach in
decision making. One problem is that it may be difficult for all the people to agree on one thing.
INFORMAL COMMUNICATION
Information is passed or exchanged outside the formal communication channels. It is the
communication among the people of an organisation not on the basis of formal relationship in the
organisational structure but on the basis of informal relations and understanding. It is also referred to
as grapevine which indicates informal means of circulating information or gossip. Occurs when person
A tells B, person B tells C, person C tells D etc. Informal discussions can occur during lunch time or
after work

Advantages
 Enable employees to understand instructions from the top management especially when they
are explained by other workers informally.
 Informal system covers the gap or shortcomings of formal communication system
 Improved relationships. Any problem between the workers and the management can be solved
by informal system. Thus it makes good relationships among employees and management.
 Increases efficiency. Under informal system, the employees discuss their problems openly and
they can solve it. Thus work is done properly
 Problems can be easily and quickly identified. New ideas, suggestions, opinions may come out
through such communication as people can express their feelings without fear,
 Flow of information is fast and is suitable for emergencies

Disadvantages
 Maintaining secrecy is impossible
 It is very much difficult to control the information
 The original information may be transformed to wrong information (i.e spread rumour)
 Has no documentary evidence. No one can be held responsible as it is not possible to find out
the supplier of wring information in the case of an enquiry
 Can be time wasting
 Can create conflicts between employees
Formal Communication
Refers to communication which follows established systems, rules, regulations, procedures or any
prescribed ways and means.

Advantages
 Smooth communication system. Everyone is aware of where and how to send the information
to.
 There is permanent record. The supplier of information can be identified
 Less errors and mistakes. Managers must pass instructions to employees regarding how the
task is performed
 Co-ordination of work. There is order since orders usually come from the top to the bottom
 Reliable. Formal communication is more credible for sending important information
Disadvantages
 Wastage of time
 Inflexibility. When somebody is absent it is not possible to make some changes
 Lack of initiative. Everybody does his/her duty by following specific predetermined systems

Exam Questions
1. Briefly explain two possible barriers to communication [3]
2. Give two benefits of written communication [2]
3. Identify two spoken (verbal) forms of business communication [2]
4. Briefly explain two reasons why effective communication is essential to a business [4]
5. Explain the difference between a wheel network and a circle network giving examples when
each may be used
[4]
6. Which type of network might an autocratic manager may use. [1]
7. Distinguish between formal and informal communication [4]
8. Discuss the potential implications for businesses of not having an effective system of
communication [14]
Essays
[Link] Ltd is a confectionery and soft drinks manufacturer. It has doubled the number of
employees in recent years by opening two factories in other countries to supply local markets there.
Discuss how Brunson might ensure the effective internal communication in the firm is achieved
[20]

[Link] the two-way link between communication methods and employee motivation, drawing on
examples of both poor and appropriate communication methods [20]