BUSINESS

ENVIRONMENT
A’LEVELS
The Purpose of Business Activity
What is a Business?
A business is an organisation that exist to provide goods and services on commercial basis to
customers.

Why Do Business Exist?

Businesses exist because they are formed by entrepreneurs (owners) and are subsequently
developed if they manage to get beyond the survival stage. Profits are the key motive for the
success of the org.

Businesses Play a Key Role in Wider Society: In particular They

1. Create and sustain employment and develop the skill of people.
2. Drive's innovation through research and development.
3. Contributes to the infrastructure of the country.
4. Pay taxes on profit earned.
5. Creates wealth.

The Economic Problem

➢ Needs are essential things for living.
➢ Wants are luxuries of life.
➢ When there are unlimited wants but limited resources scarcity arises.

Factors of Production
1. Land
All natural resources used to make goods or services.
2. Labour
Man power who are available to make goods and services.
3. Capital
Money invested into the business.
4. Entrepreneur
The skill and risk-taking ability of a person who brings other resources.
Opportunity Cost
Opportunity Cost is the next best alternative given up by choosing another item.

Division of Labour
When the production process is split up into different tasks and each specialised worker
performs one of these tasks.

Possible Gains of Specialisation

1. Higher output
2. Variety
3. Achieves economies of scale
4. Competition and lower prices

Division of Labour
The division of labour occurs where production is broken down into many separate tasks.
Division of labour raises output per person and people become proficient through constant
repetition of a task.

What are The Limitations of Division of Labour?

1. Unrewarding
2. Many people may choose to move to less boring jobs
3. Some workers relieve little training and may not be able to find alternative jobs
4. Mass produced standardized goods

Advantages of Specialisation
1. Higher productivity and efficiency
2. Lower Unit Cost
3. Encourage investment in specific capital economies of scale

Disadvantages of Specialisation
1. Risk of worker alienation
2. Risk of disruption to production process
3. Risk of structural unemployment
Advantages For a Country Specialising in Goods and Services
1. Allows a country to make full use of economic resources
2. Increases the scale of production
3. Surplus can be exported

Disadvantages For a Country Specialising in Goods to Trade

1. World prices for a product might fall
2. Risk of over specialising
3. Over extraction of natural resources

Added value
Added value is equivalent to the increase in value that a business creates by undertaking the
production process.

Businesses Can Add Value By

1. Building a brand
2. Delivering excellent service
3. Product features and benefits
4. Offering convenience

Benefits To a Business of Adding Value

1. Charging higher prices
2. Creating a point of difference from competition
3. Protecting from competitors
4. Focusing more closely on its target market segments

The Dynamic Business Environment

1. It is rarely static.
2. The nature of business and markets suggests volatility and turbulence.
3. Governmental influences change from time to time.
4. Economic and social movements affect demand and supply.
5. Technology is ever changing making new opportunities and threats.
6. Local, national and international competition develops Changes.
7. Business may be the part of the change dynamic as well as needing to react to change
initiated by others factors.
8. Financial factors often influential, currencies, exchange rates.
 The Role of Entrepreneurs and Intrapreneurs
Entrepreneurs Intrapreneurs
An entrepreneur is an individual who Intrapreneur is an employee tasked with
creates new business, bearing most of the developing an innovative idea or project
risks and enjoying most of the reward, the within a business. some one who behaves
process of setting up business is known as like an entrepreneur within a business but
entrepreneurship. does not face same risks or reap the same
rewards.

Qualities of Entrepreneurs Qualities of Intrapreneurs

1. Curiosity 1. Passionate and hardworking
2. Willingness to experiment 2. Thinks outside the box
3. Adaptability 3. Politically adapt
4. Decisiveness 4. Determination
5. Self awareness 5. Ability to convince others to accept ideas
6. Risk tolerance 6. Always seeking ways to refresh business activity
7. Comfort with failure

The Qualities Entrepreneurs and Intrapreneurs Need for Success

1. Entrepreneurs and intrapreneurs need to possess strong leadership skills to effectively
manage their teams and drive their businesses forward.
2. They must have a clear vision and the ability to communicate it effectively to stakeholders.
3. Both types of individuals need to be adaptable and able to pivot their strategies when
necessary.
4. They must be able to identify and capitalize on opportunities in the market.
5. Entrepreneurs and intrapreneurs need to be resilient and able to handle setbacks and
failures.
6. They must have a strong work ethic and be willing to put in long hours to achieve their
goals.
7. Both types of individuals need to be creative and innovative in their approach to problem-
solving.
8. They must have a deep understanding of their industry and the competitive landscape.
9. Entrepreneurs and intrapreneurs need to be financially savvy and able to manage budgets
effectively.
10. They must be able to build and maintain strong relationships with customers, suppliers,
and other stakeholders.
The Role of Business Enterprise in The Development of a Country
1. Business enterprises play a crucial role in the economic development of a country by
creating jobs and generating income for individuals and the government.
2. They contribute to the growth of the economy by investing in new technologies, research
and development, and infrastructure.
3. Business enterprises also help to increase the standard of living by providing goods and
services that meet the needs and wants of consumers.
4. They promote innovation and competition, which leads to better products and services,
and ultimately benefits the consumers.
5. Business enterprises also contribute to the development of the country's human capital
by providing training and employment opportunities.
6. They help to reduce poverty by creating jobs and providing income for individuals and
families.
7. Business enterprises also contribute to the development of the country's infrastructure by
investing in roads, bridges, and other public facilities.
8. They help to attract foreign investment and promote international trade, which can lead
to increased economic growth and development.
9. Business enterprises also play a role in promoting social and environmental responsibility
by adopting sustainable practices and supporting community development initiatives.
10. Overall, the role of business enterprise in the development of a country is critical, and it is
essential for governments to create an enabling environment that supports their growth
and development.

Level of Economic Activity

In order for the products to be made and sold to people, it must undergo three different
production processes. Each process is done by a different business sector and they are as
follows.

➢ Primary Sector
The extraction from natural resources (e.g.) farming, forestry and mining.
➢ Secondary Sector
Also known as manufacturing sector, where the raw material from primary sector is
converted into finished goods (e.g.) construction and car manufacturing.
➢ Tertiary Sector
Service sectors (e.g.) banks, hospitals, insurance companies and schools.

Industrialisation De-Industrialisation
Industrialisation refers to when a country is
When a company is moving from secondary
fully operating secondary sector and a
sector to tertiary sector.
producing goods at high potential.
Types of Economies
➢ Free Market Economy
All businesses are owned by private sector and there is no government intervention.

Advantages Disadvantages
1. Not all products will be available for
1. Consumers have a lot of choice.
everybody.
2. No govt intervention means
2. High motivation for workers. uncontrollable economic boom and
recessions.
3. Competition keeps prices low. 3. Monopoles could be set up.
4. Incentives for other businesses to set up
and make profits.

➢ Command / Planned Economy

All businesses are owned by public sector, and there is total government intervention.

Advantages Disadvantages
1. Eliminates any waste from competition
1. Little motivation for workers.
between businesses.
2. The government would produce things
2. Employment for everybody.
which people don’t want to buy.
3. All needs are met. 3. Low incentives for firms.

➢ Mixed Economy
Businesses belongs to both the private and public sector. Govt controls port of the
economy.

Industries Under Government Ownership

➢ Health
➢ Education
➢ Defence
➢ Public transport
Privatisation
Privatisation involves the government selling national businesses to the private sector to
increase output and efficiency.

Advantages Disadvantages
1. New incentive (profit) encourage the 1. Essential businesses making losses will be
business to be more efficient. closed.
2. Workers could be made redundant for
2. Competition lower prices.
the sake of profits.
3. Businesses could become monopolies,
3. Individuals have more capital to invest.
leading to higher prices.
4. Privatisation raises money for the govt.

Comparing The Size of Businesses

Businesses vary in size, and there are some ways to measure them. For some people, this
information could be very useful.
➢ Investors: How safe it is to invest
➢ Government: Tax
➢ Competitor: Compare their firm with others
➢ Workers: Job security
➢ Bank: Can they get a loan back

Ways of Measuring the Size of The Business

1. Number of employees
2. Value of output
3. Value of sales
4. By profits
5. By share price
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 sales.
For (e.g.) USA = 100 employees
EU = 50 employees
Australia = 19 employees
Importance of Small Business in The Economy
1. Create jobs
2. They can grow to become big
3. Small businesses are flexible
4. Cater local demands
5. In difficult times they are source of employment
6. Boost economic growth

Disadvantages Of Small Firms

1. Lack of capital
2. They sell inferior goods
3. Managed and run by employees
4. Risk of failure is high
5. Difficult for them to raise finance

Small Businesses Face Following Problems

1. Under capitalisation
2. Poor debt management
3. Lack of managerial skills
4. Cannot retain experienced employees
5. Recruitment is difficult

How Can Small Business Survive?

1. Segmenting the market by income
2. They respond to change quickly so they can survive
3. The internet also allows small firms direct access to consumers by passing
intermediaries
4. Small independent firms can form a buying group.

Why Do Some Businesses Stay Small?

➢ The type of industry in which they are operating
➢ Owners’ objective
➢ Market size

Why Do Some Businesses Fail?

1. Poor management
2. Failure to plan for change
3. Poor financial management
4. Over – Expansion
5. Risk of new business start-up
Business Growth
Why Do Owners Want Their Business to Grow
1. To maximise profits
2. More status and prestige
3. Economies of scale
4. Larger market
5. To reduce risk diversify

How Business
Grows

Internal Growth External Growth

➢ Internal Growth
Internal growth means where business expand its operations such as more outlet, more
industries, also known as organic growth.

➢ External Growth
Growth of the business usually by take over or merger, also known as inorganic growth.

Merger and Acquisition

A merger is where two or more businesses agree to Join together to become one large firm.
An acquisition is when one firm buys another firm.

Advantages of Mergers and Acquisitions

1. Economies of scale
2. Greater market share
3. Spread risk
4. Reduces competition
5. Other business can bring new skills and specialism
6. Easier to raise money

Disadvantages of Mergers and Acquisitions

1. Diseconomies of scales
2. Clashes of culture b/w businesses
3. May need to make some workers redundant
4. May be a conflict of objectives b/w businesses
Constraints on Growth
Though a business may wish to grow in size, there may be reasons why it cannot do this.
1. Financial incentives
2. Size of market
3. Government Control
4. Limited number of skill available

Types of Integration
Horizontal Integration
Where two businesses merge or takeover in the same sector and at same level of production.
“A bank take overs a bank.”
“A school take overs a school.”

Vertical Integration
Where two businesses merge in the same sector but at different level of production.

Forward Backward
Vertical Vertical
Integration Integration

➢ Forward vertical
1. Assured outlet for product
2. Profit made by retailer is absorbed by manufacturer
3. Prevent retailer to sell other products
4. Market research on customers transferred directly to manufacturer
➢ Backward vertical
1. Constant supply of raw material
2. Profit from primary sector business is absorbed by manufacturer
3. Prevent supplier from supplying other businesses
4. Controlled cost of raw material

Conglomerate Integration (Diversification)

When two businesses merge in the different sector and at different level of production.
1. Diversification reduces risk
2. Lack of experience
 Types of Business Organisation
Difference Between Private and Public Sector
➢ Private Sector
This sector comprises businesses owned and controlled by private individuals. Their main aim
is to make profit. Examples of business found in private sector includes:
1. Sole trader
2. Partnership
3. Private Limited companies
4. Public limited companies
5. Co-operatives

1. Sole Traders
Sole trader businesses are those which are owned and controlled by single individual.
Formation: No legal formation.
Ownership: Owned by one person.
Legal Status: The business has no legal personality, its an unincorporated business.
Liability: The owner of the business bears unlimited liability.
Continuity: The business comes to an end when the owner dies.
Tax Issues: It does not pay corporate tax but rather owner pays income tax.

Advantages
1. Easy to form
2. Owner has direct Control of the business
3. All profit to the owner
4. Enjoys major exemption from government

Disadvantages
1. Unlimited liability
2. Can raise little capital
3. Limited management expertise
4. Poor quality decision making
2. Partnership
Business owned by at least two or more individuals, where partners mutually run the business
on certain terms and conditions.
Formation: fewer legal formalities are required.
Ownership: Owned by at least two peoples.
Legal Status: The business is not recognised as a legal personality. It is referred as
unincorporated businesses.
Liability: Unlimited liability.
Continuity: The business comes to an end when key partner dies.

Advantages Disadvantages
1. Easy to form 1. Unlimited liability
2. Disagreements may lead to winding of the
2. More capital available
business
3. Diversity of skills and expertise 3. Lack of continuity
4. Profit and loss ratio is not necessarily
4. Quality decision are made
equal
5. Personal contact with employees 5. Owner may lose control
6. Risk reduce 6. Conflicts b/w partners
 Limited Companies
Limited companions are businesses where a number of owner (shareholders) poor in their
resources to do a common business.
In limited companies, the debt of company is separate from those of shareholders as a result
should the company experience financial distress b/c 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.

General Features of Limited Companies

1. Separate legal identity
2. Shareholders have limited liability
3. Owners are called shareholders (who buy shares)
4. Shareholders receive dividends as payments
5. The Board of director runs the company
6. Shareholder holds annual general meeting (AGM)
7. The company is governed by memorandum and article of association

➢ Memorandum of Association contains information about company and directors, the

official name and the address of the registered office, the objectives of the company and
the number of shares to be bought by each director.

➢ The Article of Association contains the rule under which the company will be managed,
the rights and duties of directors, rules concerning the election of directors and the
procedure to be followed for issuing of shares.

3. Private Limited Company

Refers to a small to medium sized business that is owned by shareholders who are often
members of the family, they cannot sell shares to general public and the right to transfer
shares is limited, lastly private limited companies annually make financial statements which
are also audited.
Formation: There are complex legal formalities, two documents should be drafted by the
owners of the company which includes, article and memorandum of association.
Ownership: Owned by at least two to maximum fifty shareholders.
Management & Control: It is managed and controlled by board of directors.
Legal status: The business is recognised as a legal personality.
Continuity: There is continuity.
Tax issues: Double tax system. (Corporate tax/Income tax)
Labiality: Limited liability.
 Advantages Disadvantages
1. Shareholders have limited liability. 1. Not easy to form.
2. More capital can be raised. 2. Has to comply legal formality.
3. Can not raise capital through stock
3. Greater status.
exchange.
4. Quite difficult for shareholder to sell
4. Easy to change to public LTD company.
shares.
5. Do not have to publish accounts.

4. Public Limited Company

A large business entity with the right to sell shares to general public, the company is listed
onto the stock exchange, there is no limit of shareholders, shares are transferable. The public
can be invited to subscribe to shares through a prospectus.
Formation: There are more legal formalities, three documents are important in forming a PLC
1. Article of association
2. Memorandum of association
3. Prospectus
Ownership: Shareholders own the company.
Management & Control: It is managed and controlled by board of directors.
Legal status: Separate legal personality, it is an incorporated business.
Liability: The shareholders enjoy limited liability.
Continuity: There is continuity.
Tax issues: Double tax system. (Corporate tax/Income tax)

Advantages Disadvantages
1. Easy to raise capital through issue of shares 1. Difficult to form
2. Can operate on a larger scale 2. Needs to be scrutinized
3. Continuity 3. Decision making delays
4. Higher Status 4. Conflict of interest
5. Limited liability 5. May lose control by issuing shares
Annual General Meeting AGM
An AGM is a legal requirement for all companies. Shareholders may attend and vote on who
they want to be on board of director for the coming year.

Features of AGM
1. Elections of directors
2. Appointment of auditors
3. Announcement of accounts
4. key strategic issues discussed

5. Co-Operative
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. Voluntary
2. Formed by people who want to work together
3. Members have equal contribution
4. Risk and benefits are shared equally
5. Are democratically controlled

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

Different Types of Co–Operatives

1. Housing co-operatives
2. Retailer’s co-operatives
3. Worker’s co-operatives
4. Consumer co-operatives
5. Agricultural co-operatives

Advantages Disadvantages
1. Easy to form (10 people can form it) 1. Unable to raise large amount of finance
2. Membership is open to everyone 2. It is managed by unskilled individuals
3. Conflict amongst members as they have
3. Members get goods and services at
different economic, social and academic
reasonable price
background
4. Absence of reward may bring
4. Surplus is shared amongst members
demotivation
5. Govt support
6. They are usually tax exempted
Joint Venture
A Joint venture is when two or more businesses agree to start a new project together, sharing
capital, risk and profits. Its a short-term business relation based on a certain project.

Advantages Disadvantages
1. Allows company to have access to new
1. Profits are shared
technology
2. Risk is shared 2. Disagreement
3. Access to greater resources 3. Different cultures
4. Companies gain new expertise
5. Cost sharing

Franchising
Franchising arises when a franchisor grants a license (franchise) to another business
(franchisee) to allow it trade using the brand / business format. The franchisor is the business
who sells the right to another business to operate a franchise.

Benefits To Franchisor

1. The franchisee has to pay to use the brand

2. Expansion is much faster
3. The franchisee manages outlet
4. All products sold must be bought from the franchisor.

Con’s To Franchisor

1. The franchisee keeps all the profit.

2. Failure of the franchise can lead to bad reputation.

Benefits To Franchisee

1. The chance of failure is much reduced

2. The franchisor pays for advertising
3. All supplies can be obtained from franchisor
4. Decisions made by franchisor
5. Training is provided by franchisor
6. Banks are willing to provide loan (lower risk)

Con's For Franchisee

1. Less Independence
2. May be unable to make decisions
3. License fee must be paid annually
4. Percentage of turnover needed to be paid each month.
Public Sector
Refers to all the businesses that are owned and controlled by the state and their main
objective is to provide service not making profits.

Advantages Disadvantages
1. Goods are available at a reasonable 1. They are inefficient b/c lack of profit
price. motive.
2. Provides employment 2. No competition that effects the quality
3. Implement government policies 3. Lack of motivation in employees
4. They are source of income for
4. To much political interference
government

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 Range and Aims of Social Enterprise

1. They operate for the well being of the society.
2. Making profit is not the main aim.
3. Main aim is to solve the problems faced by people.
4. Profit is kept to provide more services.
5. They normally provide education and health.
6. Generate the majority of their income through trade.

Triple Bottom Line

Social enterprises have three main objectives. These aims are often referred to as triple
bottom line. Triple bottom line is used to measure the performance of a business.

1. Economic → Profit
2. Social → People
3. Environment → Planet

Benefits of Social Enterprise

Social enterprises produce higher social returns on investment than others.

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 cost of public support 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,
chemical dependency and homelessness.

➢ Economic Opportunity:

It improves our pool of human capital and creates job in community in need of economic
renewal.

➢ Social Justice:

It gives a chance to those most in need.

Shareholders & Stakeholders

Shareholders
Shareholders are the owners of the business.

Stakeholders
Stakeholders are those who are directly or indirectly interested within the business.

Main Group of Stakeholders

1. Customers
2. Suppliers
3. Employees
4. Government
5. Banks
6. Pressure groups
7. Shareholders
8. Potential investors

Internal Stakeholders

Are those who are directly affected by business performance. They are also known as primary
stakeholders. They have strong influence on how the company is runned, for (e.g.) owners,
managers and employees.
External Stakeholders

Individuals or group that are not directly affected by the business performance, they are not
in direct decision making, for (e.g.) govt, general public, and customer.

How And Why a Business Needs to Be Accountable to Its Stakeholder

Benefits To the Business for Being Responsible to Customers

1. Customer loyalty
2. Good publicity by customer

Ways In Which Business Can Be Responsible to Customer

1. Business must offer quality products.

2. Business to offer well designed and durable goods.
3. To sell goods at reasonable price.
4. Not to take advantage of vulnerable customers (e.g.) high pressure selling tactics.

Benefits of Business for Being Responsible to Supplier

1. Supplier loyalty
2. Supplier may be willing to open credit limit
3. Suppliers will be prepared to meet deadlines and request special order.

Ways In Which a Business Can Be Responsible to Supplier

1. Prompt Payments
2. Buy stock regularly
3. Offering suppliers long-term contract
4. Giving suppliers clear guidance on what is required.

Benefits To the Business for Being Responsible to Employees

1. Employee loyalty
2. Low labour turnover
3. Business can attract qualified staff
4. Motivated staff

Ways In Which Business Can Become Responsible to Employee

1. Give fair wages

2. Provide training
3. Involve employee in decision making
4. Give employees fringe benefits.
Benefits To the Business for Being Responsible to The Government

1. Business may receive contract from govt

2. Govt subsidy
3. Easy licenses to setup new activities.

Ways In Which a Business Can Become Responsible to Government

1. Paying taxes
2. Obeying govt laws
3. Environmentally friendly

Stakeholders Conflict
Family Firms
Family business is a firm which has been closely identified with at least two generation of a
family and when this link and how this link had a mutual influence on company policy and on
the interest and objectives of family.

Characteristics
1. A group of people belonging to one or more families run one business enterprise.
2. Position in family is influenced by the relationship the family member enjoys among
themselves.
3. Family exercise control; over business in the form of ownership or in the form of
management of the firm where family members are employed at key positions.
4. Family exercise the influence on the firm’s policy direction in the mutual interest of family
and business.
5. The succession of family business goes to the next generation.
6. Family business is largely cast related.

Advantages of Family Firms

1. Stability
Family position typically determines who leads the business and as a result there is usually
longevity in leadership.

2. Commitment
Since the needs of the family are at stake, there is a greater sense of commitment and
accountability. This level of commitment is almost impossible to generate in non-family firms.

3. Flexibility
You won’t hear “sorry” that is not my job description in a family business, family members are
willing to wear different hats and to take on task outside of their formal jobs in order to ensure
the success of the company.

4. Long Term Outlook

Non family firms think about hitting goals this quarter, while family firms think year sometimes
decades a head. This patience and long-term perspective allow good strategy and decision
making.

5. Decreased cost
Family members working at family firms are willing to contribute their own finances to ensure
the long-term success of the organisation, this could be contributing capital or taking a pay
cut. This advantage comes in particularly handy during challenging times such as recessions.
Disadvantages
1. Family Conflicts
Conflict is bound to happen at any firm, but add in long history, family relationships and the
kind of contempt that comes with familiarity, deep seated, long lasting bitter fights can affect
every single person with in the firm and can draw divisive lines.

2. Unstructured Governance
Governance issues such as internal hierarchies and rules, as well as the ability to follow and
adhere to external corporate la, tend to be taken less seriously at family businesses, because
of the level of trust inherent at family firms.

3. Nepotism
Some family businesses are reluctant to let outsiders into the top tier, and the result is that
people are given jobs for which they lack skills, education and experience. This obviously has
a reaching effect on the success of the company. More family firms are recognizing this issue
and are taking care to strategically place outsider in certain position when necessary.

4. Succession Planning
Many family firms lack succession plans, either b/c the leader does not have the desire to
admit that he or she will one day need to step down or b/c there is too much trust in the
family to work this out when it becomes necessary. Infect because of close relationship and
long histories, it is of utmost importance in family firms that a succession plan is in place.
 Business and International Community
Multinational businesses are those with factories, production or service operations in more
than one country these are also known as transnational business.

Why Do Firms Become International?

1. To produce goods at a lower cost
2. Labour available
3. Exchange rate issues
4. Avoid barriers of trade
5. To expand into new markets
6. To remain competitive with rivals
7. Raw material availability
8. To reduce transportation cost

Advantages of Multinational Operating in a Country

1. Jobs are created
2. Economic growth
3. Tax revenue
4. More choices for consumers
5. More investment opportunity
6. Extra output is sold abroad

Advantages of Multinational Operating in a Country

1. Jobs created are often unskilled assembly line task.
2. Local firms may be forced out of the business.
3. Multinational often use scarce and non-renewable resources in host country.
4. Profits are often sent back to home country.
5. Lot of influence om govt and economy.
 Mission/Vision and Objectives
Mission/Vision

How Will Be Behave in Order to Achieve the Vision?

1. Core values
2. Core belief systems
3. Core culture

“Mission and vision should be clear”

“because”

Clarity is Power

Mission Statement
A mission statement is a brief outline of the general purpose of a business, a statement of
business objectives and values which provides direction for a business and its stakeholders
and to brand a business in the eyes of the external environment.

Aims of Mission Statement

1. Gives the central purpose of the business.
2. To motivate employees.
3. Stimulate interest by external interested parties.
4. A context for a corporate culture.
5. Provides guiding principles for business activity.
How Are Mission Statements Communicated with Stakeholders
1. Publish in published accounts.
2. Place it in business plan.
3. Publish in company website.
4. Use internal news letter and magazine.
5. Using advertising.

Importance of Mission Statements for Employees

1. It is considered important for employees as it provides the context of work activity.
2. The goals and philosophy in a mission statement may serve to direct and motivate a
workforce.
3. Mission statement may well reflect the beliefs and vision of senior management,
which is design to inspire employees and support distinctive organisational culture.
4. Public Ltd Co’s tend to be large and therefore need to make their overall aims and value
clear to employees.

Vision Statement
A vision statement focuses on tomorrow and what an organisation wants to ultimately
become.

“It is aspirational”
Vision Statement Questions Look Like
1. What are our hopes and dreams.
2. What problems we are solving for greater good.
3. Who and what are we aspiring to change.
The vision statement promotes growth, both internally and externally. A strong vision helps
team focus on what matters the most for the company, it also invites innovation. A purpose
driven company envisions success as a whole, because they know what success means for
their company.

Tesla
Vision Mission
To create the most compelling car company To accelerate the world transition to
of the 21st century by driving the world sustainable energy.
transition to electric vehicle.

Google
Vision Mission
To make search engines so powerful that To organise the world information and make
people would find and understand every it universally accessible and useful.
single thing in the world.
 Amazon
Vision Mission
To be earth most customer centric company, We strive to offer our customer, the lowest
where customer can find and discover possible prices, the best available selection
anything they might want to buy online. at utmost convenience.

Coca - Cola
Vision Mission
Maximize long term return to share owners, ➢ To refresh the world
while being mindful of overall responsibility. ➢ To inspire the moment of optimism and
➢ Be a highly effective lean fast-moving happiness
organisation

Why Mission Statements Are Important to Many Businesses?

1. Mission statements highlights and explain core values.
2. Provides a strategic back drop to operational objectives.
3. Often contains moral values and judgements that encourage distinctive ethical
behaviour.
4. Motivate employees with an organisational sense or purpose as they associate with
the core principles.
5. Inform and interest external stakeholders.
6. Act as a benchmark for measuring performance.
7. It is argued that mission statements have severe limitations such as allegations of
boldness generally, ambiguity, often considered to lead to meaningful public relation.
8. Often poorly communicated and treaded as cynical, faddish statement by employees.

A Business Mission Statement Is Only Important If It Directly Affects the

Strategy and Tactics of That Business:
1. Mission statements defines the core purpose and focus of an organisation and are
designed to motivate people.
2. Strategy is about long-term decisions.
3. Tactics are short to medium term decisions.
4. The view suggest that mission statements is sometime more than wish statement.
5. It must be a reference point for senior managers.
6. They must be acceptable at all levels as it effects the decisions.
7. It is more than a wish list or aspirational list.
 Business Objectives
Business Objectives
Business objectives are the stated, measurable targets of how to achieve business aims.

Aims
Aim is where the business wants to go in the future its goals. It is a statement of purpose.

The Main Objective A Business Might Have

➢ Survival
A short-term objective, probably for small business just starting out, or when a new firm enters
the market or at a time of crises.

➢ Profit Maximization
Try to make the profit possible, most likely to be the aim of the owners and shareholders.

➢ Growth
Businesses looks to need forward instead of remaining static, they might adopt different
technique in order to reduce the risk of elimination.

➢ Profit Satisficing
The objective will be to achieve enough profit to keep owner happy but not maximize profits.

➢ Increasing Market Share

market share refers to the proportion of Company sale to the total Sales in the market, thus
increasing market share indicates that the marketing mix is proving to be successful.

Alternative Objectives
1. Adding value
2. Charities
3. Providing services
4. Ethically or socially responsible
5. Health care

Importance of Business Objectives

1. To motivate people.
2. They clarify to everyone, what the business is working to achieve.
3. They enable checks on progress and corrective actions.
4. They provide means by which performance can be measured.
5. They facilitate the resolution of conflict b/w departments.
6. They provide shareholders with a clear idea of business in which they have invested.
Objectives Should Be Smart
S Specific
Objectives should be more precise, e.g. a hotel might have an objective of filling 60 % of its
bed, so issue of accommodation is specific.

M Measurable
Express in terms of quantities frequency, quality, cost deadlines, it refers to the extent to which
something can be evaluated against some standards.

A Achievable
It is pointless to have objectives that are impossible to achieve within the time period set, for
(e.g.) Can the person, do it? can the measurable objectives be achieved by the person.

R Realistic
The Objective should be challenging, but it should also be able to be achieved by the person
using available resources.

T Time Bounded
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.

Business Strategy
Business Strategy is mainly concerned with long-term goals and plans, business Strategy is
focused on:
1. The long-term business plan based on companies’ mission and vision.
2. What needs to be done to achieve corporate objectives.
3. what resources business needs and how they use them.
4. Business Strategy is more concerned with
1) Mission statement
2) Vision and core values
3) Culture of the org
4) Planning
5) Growth strategy
Business Tactics
Business tactics are short-term plans, responding to opportunities and threats, which are
often influenced by functional objectives.
In turns of business theory, the following are more relevant to the tactics employed by the
business.
1. Marketing mix
2. Financial and non-financial rewards
3. Location decisions
4. Day to day customer service decisions
5. Recruitment, selection and training processes

What Is Business Strategy?

strategy is the direction and scope of an organisation over the long run, which achieves
advantage for the organisation through its configuration of resources with a challenging
environment.

What Are Objectives?

Objectives are statements of specific outcomes that are to be achieved.

Where Do Objectives Fit In?

Mission = The overall purpose of the business.
Vision = The overall aspiration of the business.
Aims and goals = General Statement of what business intend to achieve.
Objectives = More precise and detailed statement.
Corporate Objective Market share of 12 %
Functional Objective Sales/Customer of $45
Individual Objective Shop sales of $500,000

Corporate Objectives
Corporate objectives are those that relate to the business as a whole.

OR
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 the 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 business
and can themselves be broken down into strategic departmental targets.
Departmental Objectives
Ford car company 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, marketing, HR and finance will have different roles to play to help ford
achieve its main aim.

Individual Objectives
These are 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.

Strategies and Tactics

Strategy is a plan setting out how a business as a whole well achieve its overall long-term
objectives, the strategies to achieve such an objective could be:
1. Increasing efficiency
2. Building a new factory
3. Designing a new model of car
For strategies to work well in the business, they need to be complimented with tactics, a tactic
is a short-term plan for day-to-day operations of a business with the aim of contributing
towards overall strategy.

Business Decision Making

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

Stages In Decision Making

1. Set objectives
2. Identify and analyse the problem
3. Collect relevant information
4. Analyse evaluates all options
5. Make a final decision
6. Implement
7. Review and evaluate
How and Why Objectives Might Change Overtime?
1. Change in owners’ priority
2. Change in market conditions
3. Change in the size of the business
4. Change in management
5. Change in legislation
6. Change in competitors’ behaviour
Strategy Vs Mission and Corporate Objectives
An org strategy reflects the ways and means it decides to move towards objectives and goals.
Strategies explain details, the actions to be done along with resources and skills necessary to
conduct them in most efficient manner. Like objectives strategies can be measured and
provide with clear deadlines to make sure objectives are reached on time. In order to better
understand the connection b/w strategy, mission and corporate objectives, it is important to
discuss the term permitting to connect concept.

Consideration
As seen in this course, mission, corporate objectives and Strategies are all parts of a big puzzle,
using them as isolated parts could be counter productive as they need to be interacting with
the whole structure in order to function at fullest. A strong mission statement is quite useless
without a corresponding strategy, and a strategy requires objectives to be conducted properly,
to be consistent, the whole need small and interactive components.
 ETHICS/CSR
Ethics:
➢ Moral principal which guides behavior.
➢ It is a contract between you and yourself.
➢ Nothing is right and nothing is wrong.
➢ A business cannot claim itself ethical if it ignores ethical practices.
➢ Use of child labour.
➢ Forced labour.
➢ Violation f basic rights of workers.
➢ Ignoring health and safety standards.

Common Areas Where Ethics Are Tested in Business

1. Personal selling
2. Supplies
3. Pricing
4. Contracts
5. Advertising

Advantages of Behaving Ethically

1. Higher revenues.
2. Improved brand and business awareness.
3. Better employee motivation.
4. Ethical recruit.
5. New sources of finance (ethical investors).
6. Build customer loyalty.
7. Enhances company reputation.
8. Retain good employees.
9. Positive work environment.
10. Avoid legal problems.

Disadvantages of Behaving Ethically

1. Higher costs (e.g.) (sourcing fair-trade suppliers).
2. Higher overheads (e.g.) training and communication.
3. A danger of building false expectations.
4. Freedom to maximize profit.
5. Time consuming to implement the practice.
Why Might a Business May Not Behave Ethically?
1. It may say the purpose of the business is to do business, to make profit, paying people.
Not acting ethically.
2. It is possible that a business might not be able to afford it.
3. Behaving ethically requires business to compromise and for the sake of survival,
growth the business couldn’t act.
4. Low priority by the owners.
5. The pressure to establish positive standards may be weak by the government or
society.
6. The business might be operating in an underdeveloped country.
Where there are few aspirations.

How Unethical Business Can Damage the Reputation of the Company?

1. Poor working conditions for employees or suppliers.
2. Dishonest sales techniques.
3. Environmentally unfriendly production methods.
4. Misleading financial reports.
5. Bribery to suppliers.
6. Loss of trust in the company by employees and customers.
7. Legal action may result to pay penalties.
8. Poor publicity effects market standings.
9. The brand is tarnished.
10. Investors and potential investors may respond negatively.
11. The value of the money deteriorates and leads to liquidation.

How Can Ethics Influences Businesses?

1. Business ethics are concerned with how businesses treat the environment.
2. Company adds value socially and economically.
3. Business ethics is part of the language of the business.
4. Customers are demanding more; businesses have to act ethically.
5. May mean new and different practices (e.g.) waste disposal.
6. Might mean additional cost.
7. May be seen as part of brand building and reputational protection. (U.S.P).
8. May be a source of additional investment so business adhere it.
9. Becoming a necessary rather than a distortionary approval to business.

How Sometimes Ethical Decisions Helps or Becomes Difficult for The Business?
Helps:
1. Reputation
2. High moral stance
3. Competitive advantage
4. Impact on internal culture and encouraging pride of the company.
Problems:
1. Cost
2. Reduces opportunity of outsourcing
3. More close control. of suppliers. But isn’t possible.

Benefits of Ethical Objectives

1. Philosophy of shareholders vs stakeholders.
2. Accounting information.
3. No insider trading.
4. Treatment of employees Sales and Marketing.
5. Not fixing high prices.
6. No disinformation.
7. Production pollution carbon emission.
8. Intellectual property - patent infringement
9. International > Child Labor > Working Conditions

How Ethical Issue Affects Manufacturing Business?

1. Environmental factors.
2. Treating employee wrongly.
3. Might be polluting environment healthy living issues e.g. soft drinks, fast foods,
tobacco and alcohol.
4. Reducing outsourcing.

How A Business Might Benefit from Acting Ethically?

1. Avoid negative publicity.
2. Retain customer loyalty.
3. Gain competitive advantage.
4. Attract staff, Retain staff.
5. Improve brand and business awareness.
6. Making reputational perception.

How Ethics May Influence Business Objective?

The objectives of the business is profit, survival, growth and providing services.
1. It prevents business from profit maximization through wrong means.
2. Prevents business-exploiting workers by giving low wages.
3. Prevents business-exploiting suppliers.
4. Prevent late or slow payments.
5. Prevent business to operate in low-cost location where there are fewer regulations.
6. Encourage recycling.
7. Encourage welfare.
8. Encourage sustainable production.
 Corporate Social Responsibility
CSR
It is a business approval that contribution to sustainable development by delivering
economical, social, and environmental benefits for all stakeholders.
Arguments for CSR
1. It is an ethical thing to do.
2. It improves business image and reputation.
3. It is necessary to avoid excessive regulations.
4. Socially responsible actions can be profitable.
5. It helps to correct the social problem caused by the business.
That is donations.
The Case Against CSR
1. The only social responsibility of a business is to create shareholders wealth.
2. C.S.R stifles innovation.
3. Extra cost is increased. Which must be passed on to customers.
4. Business cannot decide. What is? In society. Interest.
5. It’s a war between principal and economics.

C.S.R at Work
1. Fair treatment at work.
2. Work force diversity and equal opportunity.
3. Right to be kept informed.
4. Work life balance.
5. Altitude to disadvantaged groups.
6. Health and safety.

C.S.R and Environment

1. Effects of pollution.
2. Noise and wastage.
3. Avoiding excessive packaging.
4. Use of energy.
5. Water consumption.
6. Carbon emission.

Social Responsibility to Consumer

1. Value for money.
2. Product quality and safety.
3. After sale services.
4. Sustainable products.
5. Fair handling of complains.
6. Local sourcing.
Why Do Firms Engage In C.S.R?
1. Window dressing.
2. Altruism (well being of others).
3. Customer related motivation.
4. Improved access to ethical investors.
5. Contracting benefits.

Business Ethics And C.S.R

There is clearly an overlap between C.S.R and ethics. A socially responsible firm should be an
ethical firm. An ethical firm should be socially responsible, however there is a distinction, CSR
is about responsibility to all stakeholders not just shareholders, where as ethics is about
morally correct behaviour.

Why A Business Have C.S.R As an Objective?

1. Initial objective achieved (e.g.) survival.
2. Competitive environment changes.
3. New management and leadership.
4. New opportunity arises.
5. Becomes more ethical.
6. Economic recession.
7. Technology might change product design.

Advantages And Disadvantages of Setting C.S.R Objective

Advantages:
1. Companies exercise their moral duty to promote social justice.
2. It is a good business practice.
3. Such approvals can become powerful competitive advantage.
4. It encourages greater loyalty from customers.
5. It enhances the reputation of the business.
6. Contribute to environment sustainability.
7. Companies have a duty to correct any adverse social impact caused.

Disadvantages:
1. Cost may make business inefficient.
2. It is unfair to shareholders as profit, which belongs to them, is diverted to soul projects.
3. The purpose of the business is to do business.
4. Customers have to pay higher prices.
5. Leads to lack of business focus.
Why Shareholders of PLC Might Disagree Having C.S.R As Business Objective?
1. Lack of understanding by shareholders of long-term benefit of C.S.R.
2. Shareholders may be concerned with short-term profits.
3. Some shareholder may say that an awareness of the social consequences of business
activity is enough; there is no need to go as far as C.S.R.
4. Shareholder may believe that the objective of the business should be to make profit
not to do social good.
5. The distinction between ownership and contract can lead to conflicts between
shareholders and directors about the direction of the business.
6. Other then shareholders, stakeholders may prefer C.S.R as it could result in
environmental core, better work practice.
PEOPLE IN ORG
➢ MOTIVATION
➢ HUMAN RESOURCE MANAGEMENT
➢ MANAGEMENT
 Human Resource Management
The Strategic approach to the effective management of an organisation 's worker so that they
help the business to gain a competitive advantage.

The central purpose of H-R-M is to recruit, train and use the workers of an organisation in the
most productive manner to assist the organisation in achievement of objectives.

The Role of H-R-M

1. Workforce Planning
Planning for the future workforce team of the business
2. Recruitment & Selection Recruiting and selecting appropriate employee &
inducting them into the business.
3. Developing People Appraising straining & developing employees.
4. Employment Contract Preparing contracts of employment of employees &
deciding on how flexible these should be permanent, temporary, per time.
5. Employee Morale & Welfare Monitoring and improving employee morale and
welfare Including giving advice and guidance.
6. Incentive Scheme Developing appropriate pay systems for different categories of
employees.
7. Ensuring H.R.M Operators Across the Business Involving all managers in the
development of their employees, emphasising that this is not just an HR responsibility.
8. Monitoring Measuring and monitoring employee performance.

Recruitment & Selection

➢ Recruitment The process of identifying the needs of new employees, defining the
job to be filled and the type of the person needed to fill it & attracting suitable
candidate for the job.
➢ Selection Involves the series of steps by which the candidates are interviewed, tasted
and screened for choosing the most suitable person for the vacant job.

Recruitment Methods

Internal External

When a vacancy is filled by someone When a vacancy is filled by someone who is

who is an existing employee of the not an existing employee and will be new to
organisation the business
 Internal Recruitment
Advantages Disadvantages
1. Internal promotion leaves another job to
1. Manager knows the candidate
be filled
2. Motivates staff as this can encourage 2. It can cause resentment amongst
people employees
3. Candidate may not have external
3. Efficient process
response
4. Cost efficient 4. May not benefit the business
5. Knows the culture of the org.

External Recruitment
Advantages Disadvantages
1. Brings in fresh ideas 1. Manager do not know the applicant
2. Larger pool of applicants to choose from 2. Expensive
3. Employee may not know the culture of
3. They bring in experience from other org
the org
4. External recruits usually need longer
induction process

The Recruitment Process

1. Vacancy arises
2. Job analysis
3. Job description
4. Job specification / Person specification
5. Advertisement
6. C/V short listing
7. Interview
8. Vacancy filled

➢ Job Analysis
Deeper view about the position obtaining information, by determining, what duties,
task, activities of the job are H.R. manager uses job analysis for drawing up job
description and specification.
➢ Job description
The main purpose of job description is to collect job-related data that is useful to
advertise for (e.g.) job tithes, location, reporting duties and summary.
➢ Job Specification (Person Specification)
It outlines the qualification, experience, training & Skill of the employee. It outlines
the ideal profile of the person needed to match the Job description.
 ➢ Advertisement
1. Newspaper
2. Magazine
3. Internet
4. Specialist magazines

➢ Curriculum Vitae
A short summary about the candidate also known as resume.

➢ Interview
An interview is a face-to-face conversation between the interviewer and the
interviewee.

Employment Contract

A legal document that sets out the terms and condition governing a worker’s job.

A typical employment contract contains following features.

1. The main task to be undertaken

2. Permanent / Temporary
3. Working hours
4. Payment methods
5. Holiday entitlement
6. Policies on breach of contract from either party

Difference b/w Dismissal & Redundancy

Dismissal

Being dismissed from a job due to incompetence or breach of contract.

Redundancy

when a job is no longer required. The employee doing the job becomes unnecessary though
no fault of their own. This might be due to fall in demand, change in technology, redundancy
might be voluntary or compulsory.

Staff Morale and Welfare

1. Work life balance
2. Flexible working
3. Job sharing
4. Sabbatical period (an extended period of leave from work).
Analyse The Benefits to A Business of Focusing on Staff Morale and Welfare

1. Staff morale refers to the level of confidence and enthusiasm that employees feel
towards their place of work employers.
2. Welfare refers to the health and happiness of employees.
3. Business is likely to benefit from having a more highly motivated workforce.
4. When employees feel that their needs are important to their employers, they have
increased enthusiasm for work loyalty to the business and therefore a willingness to
work hard for the business.
5. Employees might be more willing to suggest improvements to the workplace if they
feel that their contribution is valued.
6. Less labour turnover and reduction in time and money involved in recruitment and
selection of new employees.
7. Less risk of damaged/poor reputation of the business.
8. An employee who receives help and advice when needed is likely to be a more
productive employee. A problem outside work can contribute to poor performance in
the workplace.
9. A business focusing on staff morale and welfare is likely to make sure that all health
and safety guidelines are followed therefore making employees feel safe in the
workplace.
10. Staff morale can also be affected by employers paying attention to equality and
diversity, all of which leads to employees having confidence that they will be treated
fairly, regardless of gender, race, religion etc. This can make business attractive to
potential employees.

Workforce Planning
Workforce planning is the activity of systematically identifying and analysing what a
business needs in terms of the size, type and quality of workforce to achieve this objective.

Why Workforce Planning Is Important?

1. It determines what mix of experience knowledge and skill is required and of steps
to get the right number of right people in the right place at right time.
2. Effective workforce planning ensures that decisions are made on staffing decisions
that are linked to set of defined workforce competencies.
3. Workforce planning effects most parts of the business.
4. Without effective workforce planning a business will not be equipped, to achieve
performance targets.
5. It is considered to be a necessary requirement for the business.
Training And Development

Training
Training is a planned and systematic modification of behaviour through learning events,
programmes, and instructions which enable individuals to achieve level of knowledge, skills
and competencies, to carry out the work effectively.

Development
It is the growth and the realisation of persons ability and potential through the provision of
learning and educational experience.

Methods of Training

Induction Training

It is the process where by a person is formally introduced and integrated into an organisation.

The Purpose is to

1. Help new recruits to find the bearings.

2. To begin to socialize new recruits into cultural norms.
3. To support new recruits in work.
4. To avoid initial problems of frustration, disappointment and disorientation.

On The Job Training

Where training is given to individuals. While remaining in the job context.
1. Observation
2. Coaching
3. Mentoring
4. Experimental learning
5. Advice by colleagues

Off The Job Training

Where training is been given while not remaining in the job context.
1. Seminars
2. Workshops
3. Visits and tours
4. Formal training Courses
5. Research assignments
Benefits of Training
1. Minimize the learning cost
2. Increased productivity
3. Fewer accidents
4. Less need of detailed supervision
5. Flexibility
6. Motivation
7. Change management
8. Strong culture

Benefits of Training to Employees

1. Enhancement in the portfolio
2. Psychological benefits
3. Social benefits
4. The job
 Motivation

Motivation is a driving force which stimulates an individual to initiate and sustain a behaviour.

Types of Motivation
1. Intrinsic Motivation

It is a type of motivation in which the motives originate from inside the human body. It refers
to the Internal driving state stimulating an individual to behave in a Specific way, (i.e.)

1. biological drives
2. Curiosity
3. Physiological Needs (Need for being accepted)
4. Internal desire (Desire to gain power or dominance)

2. Extrinsic Motivation

In this type of motivation, the motives originate from outside human body, that stimulate the
individual for certain actions, which includes:

1. Incentives
2. Bonuses
3. Allowances
4. Application
5. Prizes
6. Reward & punishment

Positive & Negative Motivation

Motivation by Positive Incentives

It is a type of motivation that is resulted from positive incentives. (e.g.)

1. Increase in pay
2. Promotion
3. Car bonus
4. House allotment

Motivation by Negative Incentive

It is a type of motivation that is resulted from negative incentives.
1. Demotion in job
2. Penalties
3. Fines on employees
Financial Rewards

1. Time Rate / hourly rate

2. Price Rate
3. Salary
4. Commission
5. Performance related pay (PRP)
6. Profit sharing
7. Share ownership
8. Bonus

Many of these different methods of pay are likely to be supplemented by "fringe benefits" or
(PERKS) such as:

1. Medical
2. Car
3. Accommodation
4. Subsidised meals
5. Children education
6. Cheap mortgage

Non-Financial Rewards

There is no universal rule for motivating employees and there are many methods used by
different managers to achieve the goal of a motivated & satisfied workforce.

1. Delegation
This occur when a manager passes a degree of authority down the hierarchy to
subordinates.
2. Empowerment
This involves a manager giving his subordinates a degree of power over their work.
3. Job Enlargement
This involves increasing the number of tasks which are involved in performing a
particular job, in order to motivate and multi skill the employees.
4. Job Enrichment
This is the method of motivating employees by giving them responsibilities and
opportunity to use their initiative.
5. Job Rotation
This involves employee performing a number of different tasks in turn, in order to
increase variety of the job therefore leads to higher level of motivation.
6. Quality Circles
Group of workers who meet on regular intervals in order to identify any problems with
quality, consider alternative solutions and advice management the solution for it.
 7. Team Working
Making workers work in teams so they feel socially facilitated.
8. Work Participation
Making workers engaged in decision making process and bring a sense of involvement
in them.
9. Work Council
This is a type of worker participation and it consists of regular discussions b/w
managers and worker representatives.

When a Poor Level of Motivation Exists Management Should

1. Develop a strong organisational culture & team Spirit

2. Ensure that pay levels are fair
3. Design more challenging jobs
4. Introduce decision making at lower levels in the organisation
5. Give praise & recognition to employees for their efforts
6. Encourage achievements
7. Ensure that communication flow is effective and that the relevant messages get to the
relevant personnel.
 Content School

Abraham Maslow

1. Needs lower down in the hierarchy must be satisfied before individual can attend to
needs higher up.
2. Maslow believed that people have an in born desire to be self actualized.
3. Maslow believed that these needs are similar to instincts and play major role in
motivating.
4. Maslow was more interested in learning about what makes people happy and what
they do to achieve that aim.

➢ Physiological Needs

These are biological requirements for human survival(e.g.) food, shelter, clothing and sleep.

➢ Safety Needs

At the second level the needs start to become more complex, at this level the need for safety
and security becomes primary, people want control and order in their lives. Some of the basic
safety needs include, financial security, health and wellness.
➢ Social Needs

Social needs include love acceptance and belonging. At this level the needs for emotional
relationship drives human behaviour (e.g.) friendship, attachments and social groups.

➢ Esteem Needs

The fourth level in the hierarchy is the need of appreciation and respect, once lower needs
are fulfilled then esteem becomes prominent. People have need to accomplish things and
their efforts should be recognized.

➢ Self Actualization Need

At the very peak people are self aware, concerned with personal growth, less concerned with
opinions of others and interested in fulfilling their potential. Self actualisation may be loosely
described as the full use and exploitation of talent and capabilities, such people seem to be
fulfilling themselves and to be doing the best.

Criticism of Maslow
 F. W. Taylor (Scientific Management)
Taylor was an American engineer who invented work-study and founded the scientific
approach to management. Taylors aim was to reduce inefficiency that existed in the industry.

1. How to improve productivity.

2. Select workers to perform task.
3. Observe them performing the task.
4. Record the time taken to do each task.
5. Identify the quickest method and time.
6. Train all workers in the quickest method.
7. Supervise workers to ensure that this best way is being carried out and time them to
check that the set time is not being exceeded.
8. Pay workers on the basis of results based on theory of economic man.

The Theory of Economic Man

Taylor supported the view that individuals are driven or motivated by only factor that
stimulates further effort was the chance of extra money.

Taylors main motivation suggestion was to pay workers according to the amount of output
they have produced, known as piece rate.

Results of Taylors Work

1. Extreme division of labour

2. Payment by piece rate
3. Strict management control

Elton Mayo (Human Relation Theorist)

Mayo's assumption was initially based that working conditions, lighting, heating, rest periods
and so on, had a significant effect on workers productivity.

➢ Crucially before changing working conditions mayo and his researchers discussed the
new changes with the work groups.
➢ The results from his experiment surprised all observers as the lighting and other
conditions were changed both improved or worsened so productivity rose in all groups
including the control group.
Mayo Drew Following Conclusion

1. Changes in working conditions and financial rewards have little or no impact on

productivity.
2. Job satisfaction increased as workers were given more freedom to determine the
conditions of their work environment and to set their own standards of output.
3. Intensified interaction and co-operation created a high level of group cohesion.
4. Job satisfaction and output depended more on cooperation and a feeling of worth than
on physical working condition.
5. Working in teams and developing a team spirit can improve productivity.
6. Workers had been unable to find satisfactory outlet for and expressing personal
problems and dissatisfaction in their work life. The problem as mayo perceived it, was
that managers thought the answer to industrial problem resided in technical efficiency,
when actually the answer was a human or social one.

Herzberg Two Factor Theory

The two-factor motivation theory otherwise known as Herzberg’s motivation hygiene theory
or dual factor theory, argues that there are separate sets of mutually exclusive factors in the
workplace that either cause job satisfaction or dis-satisfaction.

Motivators Hygiene Factors

(Satisfiers) (Dissatisfiers)
The presence of
which does not
motivate but the
1. Recognition
absence of which
creates great
satisfaction
2. Personal growth 2. Salary

3. The work itself 3. Relationships

4. Responsibility 4. Company policies

5. Job status 5. Working conditions

6. Advancement 6. Status
Consequences of Herzberg

1. Pay and working conditions can be improved as these will help to remove dis-
satisfaction about work, but they will not on their own provide conditions for
motivation.to exist.
2. The motivators need to be in place for workers to be prepared for work willingly and
to always give of their best.
3. Herzberg argued that motivators could be provided by adopting the principle of job
enrichment.
4. Arrangement of tasks.

McClelland’s Need Theory

McClelland is best known for describing three types of motivational needs.

The Need for Power

1. Want to control and influence others.

2. Likes to win arguments.
3. Enjoy competition.
4. Enjoy status and recognition.

The Need of Affiliation

1. Wants to belong to the group.

2. Favours collaboration over competition.
3. Doesn't like high risk or uncertainty.
4. Will often go along with whatever the rest of the group wants to do.

The Need of Achievement

1. Takes calculated risk to accomplish their goals.

2. Often likes to work alone.
3. Has a strong need to set and accomplish challenging goals.
4. Likes to receive regular feedbacks on their progress and achievements
 Process School
Victor Room Expectancy Approach

The expectancy states that employee’s motivation is an outcome of how much an individual
wants a reward, the assessment that the likelihood. that the efforts will lead to expected
performance and the belief that the performance will lead to reward.

➢ Valence

Valence is the significance associated by an individual about the expected outcome. It is an

expected not the actual satisfaction that an employee expects to receive after achieving the
goal.

➢ Expectancy

Is the faith that better efforts will result in better performance. Expectancy is influencing baby
factors such as possession of appropriate skills for performing the job, availability of right
resources, availability of crucial information, and getting the required support of completing
the job.

➢ Instrumentality

Is the faith that if you perform well, then a valid outcome will be there. Instrumentality is
affected by factors such as, believe in the people who decide who receives what outcomes.

V.room concluded that the force of motivation can but calculated using the formula.

Motivation = Valence X Instrumentality X Expectancy

Example:

Manager: I think David has the ability to take our next project he is doing a good job.

Manager To David: David, you did very well in the last project, I will give you one more project,
if you work well and complete the project you will be rewarded.

David To Himself: Yes, it is a good opportunity for me, I don't want to miss that if I work hard
anything is possible.

According To Room This Is Known as Expectancy: David thinks if he works hard his efforts will
lead to better performance.

David To Himself: I Like the reward, if I can accomplish this project, I will be rewarded, last
month boss gave me reward for good performance → This is known as instrumentality.
David To Himself: Oh No!! to much work but I can handle it, I will do this project, the reward
is valuable to me. If I come to office earlier, I can do the work, definitely I will get the raise, not
to mention. I will beat my colleague out of promotion, it is known as valence.

Valence = David is highly motivated by reward. The outcome is desirable, if he can achieve the
reward he will be satisfied.
 Mintzberg Role of Management
Mintzberg divides managerial work into three categories, interpersonal roles, informational
roles, and decisional roles. These roles require developing peer relationship, carrying out
negotiations, motivating sub-ordinates, resolving conflicts, establishing information network
decisions with little or ambiguous information and allocating resources. In this process
manager wear ten hats divided into three categories.

1. Interpersonal Roles
➢ Figure Head
Performs ceremonial duties, greeting visiting dignitaries, meeting important customer
and suppliers.
➢ Leader
Responsibility for the work of subordinates, motivating and encouraging employees
exercising formal authority.
➢ Laison
Making contacts outside the vertical chain of command including peers in other
companies or department and government trade org representatives.
2. Informational Roles
➢ Monitor
Scans the environment for the new information to be collected.
➢ Disseminator
Passing on privileged information to collect for colleagues and workers.
➢ Spokes Person
Sharing information with outside people of organisation.
3. Decisional Roles
➢ Entrepreneur
Seeks to improve the org by initiating or taking risks.
➢ Disturbance Handler
When there are road blocks, it is the manager who takes the charge.
➢ Negotiator
Manager may have to take part in direct negotiation with team and department.
➢ Resource Allocator
Managers need to determine where the org resources should be applied.
 Leadership & Management

What is Leadership?
Leadership is a process of influencing a group to achieve goals. It is the ability to influence a
group toward the achievement of goals.

➢ Leadership is about coping with change. A leader must challenge the status quo, create
vision of the future, align people by communicating this vision and then inspire them to
overcome hurdles and achieve the targets.

Who are Managers?

A manager is an expert in his or her field and is a support system for employees. A Manager
navigates his subordinates in order to achieve goals.

Differences B/W Being a Manager and a Leader

Leader Manager
1. Leaders create vision 1. Managers create goals
2. Leaders are change agents 2. Manager maintain status quo
3. Leaders are unique 3. Manager copy
4. Leaders takes risk 4. Manager control risk
5. Leader’s coach 5. Managers direct
6. Leaders create fans 6. Managers have employee
7. Leaders grow personally 7. Mangers rely on existing proven skills
8. Leaders build relationship 8. Managers build system
9. Leaders are in it for the long haul 9. Managers think short term
In a nutshell leaders and managers are not different.
A leader Cannot be successful until and unless he is a good manager and a manager
cannot be successful until and unless he is a good leader.

Traits of a Good Leader

1. Ambition & energy
2. Honesty and integrity
3. Intelligence
4. Self confidence
5. Vision
6. Courageous
7. Charismatic
8. Enthusiastic
9. Direction
10. Job relevant knowledge
Styles of Leadership
1. Autocratic style of leadership
2. Democratic style of leadership
3. Paternalistic style of leadership
4. Laissez – Faire Style of leadership

1. Autocratic Style of Leadership

Describe a leader who dictates work methods, makes unilateral decisions and limit employee
participation.

Advantages of Autocratic Leader Disadvantages of Autocratic Leader

1. Faster decision making. 1. Low employee morale.
2. Better communication. 2. Leads to resentment.
3. Boost productivity. 3. Develop a system of dependence.
4. Effective in handling crisis.
5. Ideal to counter inexperience.
6. Reduce employee stress.

2. Democratic Leadership Style

Democratic style describes a leader who involves employees in decision making, delegates
authority and uses feedback as an opportunity for coaching employees.

Advantages of Democratic Leader Disadvantages of Democratic Leader

1. Encourage participation. 1. It may never reach true consensus.
2. It does not always offer a positive
2. Brings more views on table.
outcome.
3. It can cause disharmony if it is
3. Efficient problem solving.
misapplied.
4. It can cause leaders to start fence
4. Builds team relationship.
setting.
5. Increases morale and team relationship.
6. A strong and clear vision is built.
3. Paternalistic Style of Leadership

A paternalistic leader fosters a friendly work atmosphere, where employees see co-workers
as family. The leader lay huge importance on the needs of employees and organisation.

Advantages of Paternalistic Leader Disadvantages of Paternalistic Leader

1. High loyalty b/c employees feel
1. Employees become increasingly reliant
acknowledged and their needs are
on the employer.
taken care of.
2. Good behaviour and work are always 2. Staff motivation can suffer if loyalty to
rewarded. management is not strong.
3. Employee legislation and rights can
3. Reduce absenteeism and quitting.
cause or worsen problems.
4. Managers like parents will occasionally
4. Decision is made with the employee’s
show an expression of disapproval to
best interests in minds.
employees.

4. Laissez – Faire Style of Leadership

Where a leader lets the group to make decisions and complete work in whatever way it
considers fit.

Advantages of Laissez-Faire Leader Disadvantages of Laissez-Faire Leader

1. Brings creativity 1. Lack of role awareness
2. Freedom to make decision 2. Low accountability
3. Networking 3. Passivity
4. Motivation 4. Poor decisions
5. Better decisions if employees are
experienced.

Researchers Discovered Two Dimensions of Leadership Behaviour

1. Employee oriented

Leader emphasizes on interpersonal relations. They took personal interest in the need of their
employees and accepted individual differences among numbers. Employee oriented leaders
are associated with higher group productivity and higher satisfaction.

2. Production oriented

Leaders tend to emphasize on the technical or task aspect of the job, group members are a
means to that end. They tend to be associated with low group productivity and lower job
satisfaction.
Charismatic Leadership

According to this theory, followers make attribution of heroic or extra ordinary leadership
abilities, when they observe certain behaviours. The five best documented characteristics of
such leaders are:

1. They have a vision.

2. They are willing to take risk.
3. They are sensitive to both environmental constraints and follower needs.
4. They exhibit behaviours that are out of the ordinary.

Charismatic Leaders Actually Influence Followers Through a Four Step Process:

1. The leader first articulates an appealing vision.

2. The leader then communicates high performance expectations and expresses confidence
that follower can attain.
3. The leader conveys through words and actions.
4. The charismatic leaders make self sacrifices and engages in unconventional behaviour to
demonstrate courage and convictions about the vision.

Which style of leadership is Best?

Non of the style of leadership is best, the best style of leadership is one which best suits the
situation.

“One style of leadership is bit like a stopped clock, its twice a day correct but the remaining
time its incorrect!”
 Groups/Teams
Groups

A group is any number of people who interacts with one another, are psychologically aware
of one another and perceive themselves to be a group.

"Groups have certain attributes which crowd doesn't possesses."

Sense of Identity

There are acknowledged boundaries to the group, which defines "who is in" and "Who is out”,
"who is us" and "who is them".

A Sense of Inclusion and Belonging

Loyalty to the group and acceptance within the groups, this expression as cohesion or
solidarity and as conformity or the acceptance of shared norms or behaviour and attitude with
in the group.

Group Processes

Are aimed at collaborative activity in pursuit of shared purpose.

Teams

A team is a small number of people with complementary skills, who are committed to a
common purpose, performance, goal and approach, for which they hold themselves mutually
accountable.

Different Types of Teams

➢ Multi-Disciplinary Teams

It brings together individuals with different sets of skills and specialism so that their skills,
experience and knowledge can be pooled or exchanged.

➢ Multi-Skilled Teams

A multi-skilled team brings together a number of individuals who can perform any of the group
task.

➢ Self-Managed Teams

They are the most highly developed form of team-working, they are permanent structure in
which team members collaboration decide all major issues affecting their work.
Why Sometimes Team Working Is Not Beneficial

1. Everyone is not a team player.

2. Some like to work alone.
3. It can lead to conflict b/w team members with different views.
4. Individuals may take advantage of team and contribute little efforts.
5. Conflict b/w team members.
6. It may delay decision making.
7. Effective team working may require development and training support.

Discipline
Discipline Can be considered as a condition in an enterprise in which there is orderliness, in
which the members of the enterprise behave sensibly and conduct themselves according to
the standards of acceptable behaviours as related to the goals of the organisation.

Types of Disciplinary Situations

1. Sleeping while on duty

2. Disobedience
3. Negative altitude
4. Poor performance
5. Convicting criminal offense
6. Intoxication
7. Embezzlement
8. Threatening co-workers

Relationship Management in Disciplinary Situations

1. Immediacy
2. Impersonality
3. Advance warning
4. Privacy
5. Consistency
6. Fairness

Disciplinary Action

1. Informal talks
2. Oral warnings
3. Written official warning
4. Lay-off or suspension
5. Dismissal
Disciplinary Procedures

Disciplinary procedures are written step by step processes, which a business commits to follow
in every case, where an employee needs to be warned or dismissed, by an employer to review
and correct serious performance issues (e.g.) habitual absenteeism sexual harassment.

Why Are Disciplinary Procedure Important

1. Guarantees fairness for all employees and protect reputation of the business.
2. May reveal the need for more employee training.
3. An important and valuable management tool, and a safeguard for employees.
4. It protects management from allegations of discriminatory practice, leading to actions of
unfair dismissals.
5. Give employees a clear statement of disciplinary rules and measures in place to review
activity.
6. Provides information to employers what is acceptable or what is unacceptable.

Equality and Diversity

Equality
Equality can be defined as breaking down barriers, eliminating discrimination ensuring equal
opportunity and access for all groups in business. It aims to outlaw discrimination on grounds
of gender, marital status, sexual orientation, race, colour, religion, age, disability and political
belief.

Discrimination
Discrimination is treatment or consideration of or making a distinction towards a person based
on a group, class or category.

➢ Direct Discrimination

It is where employer treats you differently and worse than someone else b/c of who you are.

➢ Indirect Discrimination

It is when the raise practice, policy or rule which applies to everyone in the same way, but it
has worse effect on same people then others.

Diversity
Celebrating the differences and valuing everyone, each person with visible or invisible
differences, are valued and respected.
Importance For Businesses to Have Policies on Diversity and Equality

1. There are increasing legal requirements relating to equality and diversity, it may vary from
region to region or countries.
2. Diversity and equality are regarded as essential for workplace effectiveness and efficiency.
3. Policies developed to reflect the distinctive values of the business.
4. Once diversity and equality are embedded it develops a culture.
5. Equality and diversity play an important role to counter the negative effects of
discrimination, and to produce and richer and more tolerant environment.
6. It ensures that everyone has access to the same opportunities and same fair treatment.

Work Life Balance

It is about creating and maintaining supportive & healthy environment that enable employees
to have balance between work and other aspects of life, family, friends, community and
personal growth.

Importance of Work Life Balance

1. It effects the bottom line.

2. WLB programmes are seen as an investment by some businesses.
3. It can become a USP in terms of recruitment and retention of staff.
4. Duty of care for employees/family society and value to the employee.
5. Active programme of support in many organisations. HRM plays an important role, flexible
working, increased pay leaves, advice on health and counselling.
6. Strengthen employee loyalty and productivity.
7. Reduce negative effects of work life conflicts, such as health risks, smoking, drinking
depression on employees·
8. Reduce employee stress b/w work and family.
9. A focus on WLB could lesson the danger of overworked employees.
 Employee Participation
Employee participation is the process where by employees are involved in decision making
rather then simply acting on orders. It is the part of empowerment in the work place,
empowerment involves decentralising powers within the org to individuals further down the
line. Team working is the key part of empowerment process, where the members are
encouraged to make decisions for themselves in line with guidelines and framework of
managing teams.

Advantages

1. Motivates other person

2. Costs less and manage time
3. Makes you more creative
4. Boost productivity levels
5. Boost influence and capacity
6. Meeting psychological needs of employees
7. Sense of pride
8. Worth sense of ownership
9. Greater acceptability to change
10. Increase the level of trust and faith

Disadvantages

1. Risk of security
2. Objectives may come from union
3. Employees idea may not be realistic
4. Employees may lack Confidence
5. It can increase bargaining power
6. Employees may become inflexible
7. May slowdown decision be making
BUSINESS AS LEVEL NOTES
MARKETING
Marketing
Marketing is a management process in which a business identifies and anticipates consumer
wants and fulfills them in a profitable manner.
Marketing Objectives
The goals bet for the marketing department to help the business achieve its overall
objectives.
Marketing Strategy
Long term plans established for achieving marketing objectives.
Marketing Objectives Include an Increase In:
1. Market share
2. Total sales
3. Average number of items purchased per customer visit
4. Frequency that a loyal customer shop
5. Brand identity
6. Customer satisfaction.
To Be Effective, Marketing Objective Should
1. Fit in with overall aims and missions of the business
2. Be determined by the senior management
3. Be realistic, motivating, achievable, measurable and clearly communicated to all
departments
Why Are Marketing Objectives So Important?
1. They provide a sense of direction
2. Progress can be monitored against these targets
3. They can be broken down into regional and product sales targets
4. They form the basis for marketing strategy
 Market Orientation and Product Orientation
Market Orientation
Market orientation is a business approach where in the process of product development
andcreation are found on satisfying the needs of consumers. It is a type of marketing
orientation that designs products with qualities that consumers want, which is
completely different from conventional marketing approach. In the conventional
approach, the business prioritizes the promotion of existing products by establishing
features that can be key selling points.
Advantages of Market Orientation
1. Greater customer satisfaction.
2. Trends can be identified.
3. Consumer demands seem impractical but sometimes their knowledge can be
vital forlong range.
4. Data collected for product development can be used post launch to improve
customerservice.
Disadvantages of Market Orientation
1. An excessive focus on addressing the needs and desires of consumer reduces the
scopefor innovation in an organization.
2. Consumer desires are not fixed and can change rapidly.
3. A stand-alone market orientated strategy cannot guarantee a huge market share.
4. Market orientation is based on reacting to market trends rather than creating them.
Product Orientation
Product orientation is a marketing philosophy by promoting quality products to generate
sales.The company assumes Product quality as a determinant of demand in the market
they pay lessattention to customer needs and wants. They are of the view that consumers
will buy if they produce products with superior quality, performance and features,
regardless of whether it suits their taste or not. In Product orientation they say "supply
creates its own demand".
Advantages of Product Orientation
1. Fewer Resources
2. Cheaper cost
3. Unique product
4. First mover advantage
Disadvantages of Product Orientation
1. Limited Innovation
2. Wastage of resources
3. Wrong market tapped
4. Lack of human capital who brings innovation
Societal Marketing
The purpose of the societal marketing concept is also to satisfy the needs and requirements
of customers before making any profit. But the emphasis of this concept is to make the
company fulfill social responsibilities for a Sustainable future in long term. The idea of the
societal marketing concept is that the businesses should satisfy the needs and wants of
customers, but this target should be aligned with the long-term Interest of society. The
world we live in today isfacing many challenges like global warming, increasing sea levels,
pollution, etc. However, the areas society marketing influences are as follows:
1. Human welfare
2. Consumer needs
3. Profits
Societal Marketing Objectives

1. Changing attitudes and beliefs of people, so that people should care about the
environment.
2. Companies should adopt such strategies that would make people change their
behaviour.
3. Societal marketers should change the traditional marketing mix and use their own
campaign, which would increase the impact.
4. Marketing of the company’s product should also spread awareness about the
environment in which companies are operating.
5. Societal marketing campaign messages should be so effective that people and
businesses start taking responsibility about the environment.
Market Size
Is the measurement of all the sales of the businesses that are supplying to the market.
Thereare two methods that can be used to determine market size.
1. Value of goods sold = the total amount spent by customers buying products from all
sellers.
2. Volume of sales = refers to the total physical quantity of products which were
sold by all firms.

Market Growth
It refers to the rate at which total sales in the market are rising each year or falling (if
growth isnegative). It is also defined as the 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

1. Economic growth.
2. Income of consumers.
3. Changes in consumer taste and preferences.
4. Technological advancement.

Market Share
It is the proportion or percentage of sakes of one firm as compared to the whole market
size. Itis the percentage of the total market held by a business or product.

Market share = __Business Sale__ x 100

Total Market Sale

Market share measures the relative success of one business marketing strategy against that
of its competitors. A product with highest market share is known as a brand header and a
businesswith highest market share is known as market leader.
 Mass and Niche Marketing
Niche Marketing
Involves identifying and exploiting one segment of a larger market. This segment can be
onethat 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.) Watches, market for
professional diversand high-status products.
Benefits of Niche Marketing

1. Enhanced customer relationship

2. Reduced competition
3. Increased visibility
4. Word of mouth growth.
5. Accidentally capture markets
6. Direct marketing is possible

Disadvantages of Niche Marketing

1. Limited Growth
2. High competition.
3. High Return on investment not guaranteed.
4. lesser opportunities

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
everyonebecomes a customer, no matter what their age, job, home, wealth or gender.
Benefits of Mass Marketing

1. Enables a firm to operate in a large scale and enjoy economies of scale.

2. It is less risky than niche marketing.
3. A strong brand image and customer loyalty is reinforced and these act as
barriers toentry making difficult for competitors.

Disadvantages of Mass Marketing

1. Business might lose customers who will be looking for specialized products.
2. Direct marketing is not possible.
3. Lot of competition.
Market Segmentation
Refers to the process of dividing the whole market into different subgroups according to
their respective similar or homogeneous characteristics. It is the process of Identifying
particular groups that have similar needs and wants in market. Market segmentation is also
known as differentiated marketing. A market segment consists of consumers who have
similar characteristics, segmenting a market means that marketing activities cure focused
on people who are more likely to buy.
Identification of Consumer Groups
The business should be able to determine the different consumer groups in the market, the
business must come up with a consumer profile. Consumer profile refers to a quantified
pictureof consumers for a firm’s product. Thus, the consumers can be grouped according to
age, income levels, gender, social class, religion and region.

Methods of Market Segmentation

Geographical Differences:
Refers to crew 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. Marketscan be divided into districts, town, provinces rural etc. For example, woolen
and thick garmentsare not demanded in hot cities while the demand is very high in polar
region.
Demographic Differences
Segmentation can be based on the vital characteristic of population, e.g. gender, age,
incomedistribution, religion, education etc. Social class is usually determined by the level
of Income earned by an individual. Basically, there are three categories of social classes

➢ Upper class
➢ Middle class
➢ Lower class

Psychographic Factors
Refers to market segmentation according to mental status of people. It includes
culture,personality attributes, motives, lifestyle of the consumer.

Behavioral Segmentation
Market segmentation according to the utilization of the product. Thus, consumers are
groupedaccording to volume of usage, purchase occasions, brand loyalty, price sensitivity
etc.
Benefits of Market segmentation

1. Increased sales since products are produced for a specific group of consumers.
2. Enable the business to identify consumer needs and wants which are not currently
satisfied.
3. Enables Small firms to avoid competition from big firms by targeting a
specific group of customers.
4. Enables the business to implement price discrimination to increase revenues and
profits.
5. Money and time are not wasted in trying to sell products to whole market.

Disadvantages of Market Segmentation

1. Firms may appeal to segments that are too small to be profitable.

2. Costly and extensive market research is needed.
3. Firms may misinterpret consumer similarities and differences.
4. Promotional cost might be high as different advertise and promotions might be
needed fordifferent segments.
5. Firms may not be able to use certain media due to small size of segment.

Product Portfolio Analysis

Refers to analyzing products of a business to help allocate resources effectively between
them.Considers the range of product a business offer, using market sales, market share,
position of product life cycle and segmentation in order to plan the most appropriate mix
to meet objectives. It focuses on how to achieve the optimum product mix, that means
getting a range of product that are going to achieve long lasting sales.
Benefits of Product Portfolio

1. Allows businesses to ensure that it always has a product ready to replace products
thatmight be losing market share and sales.
2. It enables a business to have a range of products so that if one fails the others
canprovide revenue to cover.
3. It allows planning to take place over time so that the business will always be
in aposition to maintain revenues.
 Market Research
It is defined as the collection, collation analysis and interpretation of decision, related
information which is generally related to the demand, marketing and consumption of
goodsand services in a particular market.
Need For Market Research
Businesses should use snorkeling research on a regular basis b/c of the dynamic nature
of themarket - Marketing research is needed for the following reasons:

1. To reduce the risk of failure

2. To predict future changes
3. To improve public relations as it provides a link to market trends
4. To explain the patterns of sales of existing product
5. To help in decision
6. To assets the most popular design

Types of Research
➢ Primary research → Field research
➢ Secondary research → Desk research

➢ Secondary Research
Accordingly, research is the use and analysis of secondary data lays the information
which already exists in some form. This information was originally collected by another
person or organization for a different purpose. This data is also known as secondhand
data. It is the secondary research that should be initially done as it has lower costs, saves
time and helps ingiving direction for the primary research.
Internal Source of Data

➢ Internal company records

➢ Sale Trends
➢ Supplier and customer records

External Source of Data

➢ Newspapers
➢ Magazines
➢ Libraries
➢ Economic Surveys
➢ Internet
➢ Information from competition
➢ Government publications
Advantages of Secondary data
1. Secondary researches materials are usually cheaper to obtain as cost of research do
not have to be borne.
2. They could be obtained quickly.
3. Nature of the market can be identified and essential details about market size
and growth isobtained.
4. Basic information like population structure and others can be obtained that provide
foundation for primary research and may make it easy.
5. Data from several different sources can be compared and important
competitor details obtained.
Disadvantages of Secondary data
1. Data could be outdated.
2. The data obtained may not suit the objectives of the company.
3. The way different organizations have conducted their research for secondary
information is not known.
4. If it’s a new startup then data will not be available.

➢ Primary Research
Primary or field research involves counting and analyzing primary data e.g. the
information which does not already exists and has to be collected by researcher. Field
research can eitherbe carried out by a firm itself or by marketing research agency.
Methods of Primary Research
There are two types of primary methods:
1. Quantitative Research:
Finding out the number of customers who might buy product and in what quantities.
2. Qualitative research:
It prefers to why consumers will or will not buy a particular product. It discovers the
motivational factor behind consumer buying habit. This can be done through personal
interviews and in-depth discussion among groups e.g. focused groups and consumer
panels.
Focused Group
It is a selected group 15 - 20 people who are shown a product and asked about what they
feel of its taste, or design and color depending on what the product is once they are
interviewed, they won't be asked again. In four group people related to a one segment of
market areselected.
Consumer Panel
It is a great extent like the focus group. The difference is that after one interview, the focus
group is dismissed and the next time another group is selected. However, in consumer panel
the same group is asked for opinions after intervals about the product and any changes that
areintroduced. It is more accurate as asking the same people give a better idea of how
consumer thoughts and feelings are charged.
Quantitative Research Technique
1. Observation
2. Survey method
3. Experimental Method / Test-marketing
1. Observation Method
It can give you the answer of what is happening but not why as you just observe and
see through cameras, stock-movements e.g. seeing how much time they spend at the
shelf and looking at wide product.
2. Survey Method
Telephonic surveys, mall - Intercepts, Internet surveys and mail survey, questionnaire and
door to door survey.
3. Experimental Method
➢ Laboratory method
➢ Field experiment

Issues Regarding Surveys

➢ Who to ask
➢ How accurate one result will be
➢ What to ask
➢ How to ask
➢ Who To Ask

➢ Population includes current and/or potential customer.

➢ Sample size is the number of people selected from the population on which the
market research is conducted.
Sampling Methods:
1. Random sampling
2. Stratified Sampling
3. Quota Sampling
4. Cluster sampling
5. Snowballing Sampling
Limitations of Market Research
Sampling Biased
➢ Probably chosen a wrong method of sampling
➢ Chosen a proper sample but by chance is not a true representation of the true
population that is unintentional.
Questionnaire Based
➢ Leading questions might misguide the respondents.
➢ Changing human behaviour - unintentional people liking a product today may not
like after some time.
Other Biased
If the respondents intentionally do not give true answers like taking it lightly or didn't
understand the question.

Sampling Methods
Sampling methods are the techniques of market research that enables an organization to
select the consumer groups which have to be Interviewed or researched upon for their
choices and opinions.
1. Random Sampling:
The major objective as well as advantage of this method is that the entire survey population
has an equal chance of becoming a part of the sample. It would not be practical to include
the entire population of the country or countries. Therefore, a survey population is decided
which consists of all of the present customers as well as potential customers of the firm's
product. From all this population people are randomly selected (e.g.) if survey population
includes all the people in a telephone directory, then random names are selected for
research. The disadvantage is that by chance any selected people may have similar
preferences and so may not be a true representation.
2. Stratified Sampling:
In this method, the population is divided into sub - group’s samples that would be selected.
The subgroups consist of only those people that are interested in the product. Therefore,
the samples would be truer representation (e.g.), if a new magazine is to be printed that
would have articles related to teens, then the sub group would be teenagers or people
belonging to age group of (12 - 19) year.
Therefore, any examples selected would also be from this subgroup.
3. Quota Sampling:
When samples are selected by quotas, then selection is according to a set proportion of
people from particular areas based on consumer consumption. E.g. if research was to be
concluded in Pakistan, and a sample of 200 people was to be selected than 10% might be
selected from Baluchistan, 15% NWFP 50% from Punjab and 25% from Sindh.
4. Cluster Sampling:
When a full Sampling frame list is not available or when the product is mainly likely to
appeal to specified groups or consumers, e.g. town or regional newspapers, then cluster
sampling will take a sample from just this group not the whole population. Random
methods can then be used to select the sample from this group.
5. Snowballing Sampling:
It is a very specialized form of sampling. In this firstly a group of people is selected at the
first sample, then they are asked for one contact or reference that is then added into the
sample and so the size increases.
6. Systematic Sampling:
Asking every Nth number of individuals.
Presentation of Data
➢ Tables
➢ Line graphs
➢ Bar charts
➢ Histogram
➢ Pie charts
➢ Pictograms
 4P’s of Marketing
Product
Types of Products
1. Consumer goods: These are goods which are consumed by people, which do not
lastlong.
2. Consumer services: These are services that are produced for people e.g.
education,insurance.
3. Producer goods: These are goods produced for other businesses to use.
4. Producer services: These are services that are produced to help other businesses
e.g.accounting, advertising agency.
What Makes a Product Successful?
1. Satisfying existing needs and wants of customer
2. Design
3. Quality
4. Distinction from competitor’s product
5. Brand image
6. Consumer satisfaction
Product Development
1. Generate Ideas
2. Do market research
3. Decide will the company be able to sell
4. Develop a prototype
5. Test market
6. Full launch
The Cost and Benefits of Developing New Products
Benefits
1. Diversification for the business
2. Allow business to expand into new markets
3. USP
4. It may allow business to expand into existing markets
Costs
1. Cost of carrying out the research.
2. Lack of sales if target market is wrong
3. Loss of company image
4. Cost of producing trials
5. Chances of failure
Unique Selling Point (USP)
A unique Selling point is a factor that differentiates a product from its competitor, such as
lowcost, high quality or first ever product of its kind. A USP could be thought of as "what
you havethat competitors don't”
Examples:
1. Domino's Pizza deliveries "it arrives in 30 minutes or it’s free” promise.
2. FedEx “when it absolutely, positively has to be there over night”
3. Southwest’s claim to be the lowest priced airline
Benefits of Unique Selling Point (USP)
1. The business is able to charge high prices
2. Increased market share
3. Brand loyalty
4. Can create differentiation
Branding
The term brand means a name, term, sign, symbol or design or a combination of them
intended to identify the goods and services of one seller or group of sellers and to
differentiate them from those of other sellers.
Why have brands = the objectives that a good brand will achieve include:
1. Deliver the message clearly
2. Confirms your credibility
3. Connects you target prospects emotionally
4. Motivates your buyers
5. Concretes your loyalty
Brand Name
Unique name of a product that distinguishes it from others
Brand Loyalty
Is when consumers keep buying the same brand again and again
Brand Image
Identity given to a product which gives a personality of its own and distinguishes it from
competitors
The Product Life Cycle
A product life cycle shows the different stages through which a product travels over its
usefullife.

➢ Induction
1. Product launched in the market.
2. Sales grow slowly.
3. Informative advertising is done.
4. Firm might not earn projects.
5. Price skimming may be used if a product is new invention.
➢ Maturity
1. Sales increase slowly.
2. Competition is at maximum level as many “me-too” products are in the market.
3. Promotional pricing is a good option.
4. Repetitive advertising is done.
➢ Growth
1. Sales grow rapidly.
2. Persuasive advertising may be used.
3. Prices may be reduced.
4. Firm’s product is getting vulnerability.
➢ Saturation
1. Sales are stagnant.
2. Maximum competition.
3. Advertising efforts at its highest points.
4. Promotional and competitive pricing used.
➢ Decline Stage
1. Sales starts to decline.
2. Profits start to come down.
3. Market research is done to find out whether this decline is temporary or permanent.
4. Advertising is reduced.
➢ Extension Strategies
1. Introduce new variations of product.
2. Try to sell the product in different markets.
3. Make small changes in colour, design or packaging.
4. Start new advertising campaign.
5. Add more Retail to boost sales.

Varieties of PLC

The Classic The Gimmick A False Start

Life Cycle with Extension Continuous Growth The Flop

 Pricing
Price:
The amount of money expected, required, or given in payment for something.
Factors Influencing Consumer Demand:
1. Price of the product.
2. Factors other than price:
a) Seasonal changes
b) Inflation
c) Change in consumer disposal income
d) Interest rates
e) Price of substitute product
f) Promotion
g) Population size
h) Price of complementary product

Factors Influencing Pricing Decisions:

1. Business and marketing objectives e.g. Objective are profiting maximization so
prices would be increased.
2. The other marketing mix elements e.g. Innovation, placing
3. Cost of production.
4. Demand in the market.
5. Supply in the market.
6. Degree of competition.
7. Market condition e.g. 1- Monopoly 2- Perfect competition
8. Stage of product life cycle.
9. Resources or capital available.
10. Scale of operation.
11. Niche or mass market.
12. Product positioning.
13. Elasticity.
14. Economic condition.
a) Interest Rate
b) Inflation Rate
c) Taxation
d) Unemployment Rate
e) Boom or Recession

Pricing Strategies
1. Cost Plus Pricing
Cost plus pricing strategy is one in which businesses charges fixed markup on cost in order
todetermine the price.
2. Price Skimming
Price skimming involves setting high prices when a product first enters the market to skim
profits from those willing to pay more before gradually lowering the price to reach the
remaining markets.
3. Dynamic Pricing
Dynamic pricing also known as burse pricing; it is a practice of varying the price for a product
toreflect changing market conditions e.g.
➢ Time based
➢ Supply and demand
➢ Customer profile
➢ External factors in the market
The main idea behind dynamic pricing is that it is flexible and based on real time data,
it istypically used by e-commerce platform.
4. Price Discrimination
Price discrimination exists within a market when the sales of identical goods or services are
soldat different prices by the same provider. The goal of price discrimination is for the seller
to make the most profit possible. Although the cost of producing the product is same, the
seller has the ability to increase the price based on location, consumer financial status,
product demand, etc.
Price Discrimination Criteria:
There are certain criteria that must be met in order for price discrimination to occur.
1. The firm must have market power.
2. The firm must be able to recognize differences in demand.
3. The firm must have the ability to prevent arbitration, or resale of the product.

Types of Price Discrimination

➢ First Degree Price Discrimination

1. First degree price discrimination is where a firm charges the customer their
maximum willingness to pay.
2. This is highly effective within firms with high fixed cost.
3. First degree price discrimination does not occur in real world, some close examples
Include airline tickets, utilities and business to business services.
 ➢ Second Degree Price Discrimination
Price of a good or service varies according to the quantity demanded. Larger quantities are
available at a lower price (higher discounts are given to consumers who buy it in bulk).
Example:
1. Reward cords.
2. Coupons.
3. Telecommunication companies.
➢ Third Degree Price Discrimination
The price varies according to consumer attributes such as age, sex, location and
economic status. Example:
1. Occupational discounts.
2. Age discount.
3. Frequent buyer discounts.
4. Gender discounts.
5. Psychological Pricing
Psychological pricing is a business practice of setting prices lower than a whole number.
The idea behind psychological pricing it that consumer will read the slightly lowered price
and treatit lower than the price actually is. For example, $999, $4.999.
6. Loss Leader
A loss leader pricing strategy refers to an aggressive pricing strategy in which store prices its
goods below cost to stimulate sales of other, profitable goods, with such a pricing strategy, a
business is selling its goods at a loss to lure customer traffic away from competitors. Loss
leaderpricing is aimed towards stimulating other lakes of profitable products.
7. Predatory Pricing
Predatory pricing is a method in which a seller sets a price so low that other suppliers cannot
compete and are forced to exit the market, a company that does this will initially see losses,
buteventually it benefits by driving competitors out of the market and raising the prices
again.
8. Premium Pricing
A strategy where businesses price a product higher than the market average to strengthen
perceived quality and establish a luxury brand image.
There are two scenarios in which prestige pricing works well.
➢ Either your brand has a premium feel to it.
➢ You’re entering a market where there is a demand for your product.
9. Bundle Pricing
Bundle pricing is a strategy that retailers use to sell lots of items at higher margins while
providing consumers a discount at the same time. With bundle pricing retailers offer several
different products as a package deal, and then offer that package to consumers at a lower
pricethan it would cost to purchase those items separately.
10.Customer Value Pricing
Customer value pricing is Strategy businesses use to charge products or services at a rate they
believe customers are willing to pay.
Examples:
➢ Fashion
➢ Cosmetics
➢ Technology
11.Promotional Pricing
Much lower prices are charged but for a shorter period of time.
12.Competitive Pricing
Prices are charged same as the competitor or lower than the competitor to capture a
greatermarket share.
13.Penetration Pricing
Where lower prices are charged just to enter into a new market or to capture a greater
marketshare.
 Place
Channel of Distribution
This refers to the chain of intermediaries a product passes through from producer to final
consumer.
Channel 1 = Producer – Consumer
Channel 2 = Producer – Retailer – Consumer
Channel 3 = Producer – Wholesaler – Retailer – Consumer
Channel 4 = Producer – Agent – Wholesaler – Retailer – Consumer
Why The Distribution Channel Choice Is Important
➢ Consumers may need easy access to firm’s products to allow them to try them and see
them before they buy, to make purchasing easy and to allow, if necessary for return of goods.
➢ Manufacturers need outlets for their products that give as wide market
coverage aspossible.
➢ Retailers will sell producers goods but will demand a markup to cover their costs
and make a profit, so, if price is very important using few or no intermediaries
would be anadvantage.
Factors Influencing Choice of Distribution
1. Industrial products tend to be sold directly.
2. Geographical dispersion of the target market.
3. Level of service expected by consumers.
4. Technical complexity of the product.
5. Unit value of the product.
6. Number of potential customers.
 Promotion
It is the attempt to draw attention to a product or organization in order to gain new
customers or to retail the existing ones. Effective promotion does not only Increases
awareness of the product but can create Image and product personality that consumers
can identify with.

Objectives of Promotion
1. Increase Consumer awareness
2. To reach target audience this might be geographically dispersed
3. To remind consumers about the product
4. To show superiority of a product over its competitor
5. To develop or improve the brand Image
6. To create product Identity
7. To give Information about the product
8. To Increase sales
Above The Line Promotion
Above the line marketing refers to marketing expenditure on advertising in the media such
as the press, radio, television billboard, cinema and internet. However, ATL promotions are
difficultto measure in terms of actual sales generated. The most important decision facing
those responsible for advertising is which “medium" to use. The decision will be influenced
byconsiderations such as:
1. The target audience
2. The size of the market
3. The relative cost of the media
4. The time frame of the advert
5. The nature of the product
Below The Line Promotion
Below the line promotion techniques, the firm can keep control over its promotional efforts
anddo not have to pay Intermediaries and external agencies. As a result, BTL promotion is
relativelycheap compared to ATL promotion. Below the line promotion target individuals
based on their needs or preferences and can head directly to sales.
Examples of BTL:
1. Sales promotion
2. Public Relation
3. Sponsorship
4. Direct mail
5. Telemarketing
6. Trade fairs
7. Branding and merchandising
8. Personal selling
Types of Advertising
➢ Informative Advertising:
It gives Information about the product.
➢ Persuasive Advertising:
It attempts to convince a consumer to purchase a product or service by appealing to
theirneeds and desires.
➢ Reassuring Advertising:
Its status that whatever purchases you have made are absolutely correct.
Advertising Decisions: (Which to Choose)
1. Cost
2. Size of the audience
3. The profile of the target audience
4. Message to be communicated
5. Legal and other constraints
6. The impact
Method of Promotions
1. Buy one get one free
2. Point on sale demonstration
3. Discounts
4. Loyalty schemes
5. Gifts
6. Free samples
7. Money off coupons
Which Method of Promotion Is Best?
1. The nature of the product
2. The stage at which the product lies on the life cycle
3. Cost of promotion
4. Cultural values
5. The nature of the market
Branding
Branding is the perpetual process of identifying, creating and managing the cumulative
assetsand actions that shape the perception of a brand in stakeholder’s minds.
Why Is Branding Important?
Branding is absolutely critical to a business because of the overall impact it makes on your
company. Branding can change how people perceive your brand, it can drive new business,
andincrease Value - but it can also do the opposite if done wrong.
1. Branding Increases business value
2. Branding generates new customers
3. Improves employee pride and satisfaction
4. Creates trust within the marketplace
5. Branding acts as a way of communicating with customer
6. Builds credibility
7. Branding connects a product with customer
8. Builds trust
Brand Image
The general impression of a product held by real or potential customer.
Brand Loyalty
How much frequently consumer buys the particular product.
Brand
A unique name given to a product.
An Effective Brand Identity Will Have Following Benefits
1. Increase the chance if brand recall by consumers
2. Clearly differentiate the product from others
3. Allow for the establishment of a family of closely associated product with the same brand
name
4. Reduce the price elasticity of demand
5. Increases consumer loyalty
 4Cs of Marketing
4Ps of Marketing 4Cs of Marketing
1. Product 1. Customer solution
2. Price 2. Cost to customer
3. Place 3. Communication with customer
4. promotion 4. Convenience to customer
4P 's are considered as the pillars of marketing strategy e.g. product, price, promotion and
place are ingrained in our memory in our marketing world, however these four categories
alignwith four other, more realistic pillars of marketing: The 4C's
What are 4Cs?
The 4C's of marketing, which consist of consumer wants and needs, cost, convenience and
communication are arguably much more valuable to the marketing mix than the 4P's. They
focus not only on marketing and selling of product but also on communication with the
targetaudience from one beginning of the process to the very end.
The 4Ps focus on a seller-oriented strategy, which can be extremely effective for sales.
However,the 4C's offer a more consumer-based perspective on marketing strategy.
1. Consumer Wants and Needs
The first C is this mix is customer want and needs. Instead of focusing on the product itself
the first C focuses on filling a void in the customer’s life. This marketing strategy is important
for businesses that are interested in seeking an understanding for their customer, it
becomes mucheasier to create product that will be of benefit to them. The customer makes
the purchase decision and is, therefore, the most valuable resume in any marketing strategy.
2. Cost
Don’t confuse the cost of your product with its price. Price is only a small segment of the
overallcost of buying a product to a customer. It is Important to determine of overall cost,
not price of your product to customer. Cost not only includes price of the item; but also,
may include things such as the time it takes for the customer to get to your location in order
to buy the product, orthe cost of gas that it takes to get them there. Cost can also include
the product’s benefits, or lack thereof to the customer.
3. Convenience
Convenience is similar to “place”, however, these two are different, place simply refers to
where the product will be sold. Convenience is a much more customer-oriented approach
to this strategy. Once you have analyzed your customer’s habits, you should be able to
know whether they shop online or in stores as well as what they are willing to do to buy
your product. The overall cost of the product will determine in part its convenience to your
target audience. The goal is to make the product cost affective and simple enough for the
customer toattain the product without having to jump through hoops.
 4. Communication
Communication is always key to business marketing: without it, the 4c's would not be
effective.Communication is similar to the fourth P, promotion; however, it is very different.
Promotion of a product is used to sway customers in order to get them buy a product.
Promotion can be often manipulative and ineffective. However, communication is (again) a
customer-oriented approach communication requires interaction b/w buyer and seller, can
be easily implemented through social media. Marketing a product on your social media
sites, or even including links to your social media profiles can be very beneficial to your
customers. This allows to interact with your brand on a personal level and will eventually
lead to greater brand loyalty.
Applying The 4Cs
This strategy forces the marketers to really understand their audience before they even
begin to develop a product. This strategy requires communication throughout the entire
process, from start to finish. When vitalizing the 4c's, just remember to always think of
your customer first, and communicate with them along the way, consequently your
audience will feel like youare speaking directly to them and their needs.
 Internet Marketing
Internet marketing also called online marketing; it is the process of promoting the
brand, product or service over the internet. It is broad scope includes email marketing,
electronic customer relationship management and any promotional activity that are
done via wirelessmedia.

6 “I” of Internet Marketing:

1. Interactivity
2. Intelligence
3. Individualism
4. Integration
5. Independence of location
6. Industry Restructuring
1. Interactivity
Allows visitors to engage with the website and brand on a higher level. Contributing to
theirmarketing efforts and social proof. It allows audience to make product suggestions.
2. Intelligence
Refers to the data gained through market research and how a company may use
informationsuch as customer demographics to their advantage.
3. Individualization
Refers to how dynamic the content of a website is to suit an individual needs, which allow
theuser to filter by prize, size, color etc.
4. Integration
Refers to the combining of different media channels to provide a more wholesome marketing
approach. This allows for greater Interactivity and Intelligence as users should easily be able
tomove from one channel to another via the Integration.
 5. Independence of location
It refers to consumer having the ability to access the website no matter where they are located
or what device they are using as long as they have internet connection. “You are nowhere but
you are everywhere”
6. Industry Restructuring
Refers to how marketing methods are continuously evolving to suit the times and this causes
waves inane Industry as more marketing tasks are automated through new technology.
Advantages of Internet Marketing
1. Fast availability of Information
2. Presence on internet helps the expansion of the company from local markets to
National or International
3. On internet everything can be measured thus it is easier for companies to know
if their campaign is working or not
4. Extremely low risk
5. Faster response to end consumer
6. Increased exposure of product
7. Boundless Universal accessibility
8. Reduction in cost through automation
Disadvantages of Internet Marketing
1. Physical evidence
2. Slow Internet Connection causes difficulty
3. Lack of trust of the user
4. Security and privacy issues
5. Continues maintenance cost
6. Worldwide competition
7. Total dependability on technology
OPERATION MANAGEMENT
A’LEVELS
Operations Management
Operations management has been defined as the discipline of managing resources to achieve
efficient on-going production of goods and services, it is the conversion of strategic goals into
operational activity.

How Can Operations Management Contribute to The Success of The Business?

Operations managements concerned with combining all resources to produce final good or
service and as such is constantly seeking to make the transformation process of inputs into
outputs more efficient.
1. Reducing cost
2. Reducing wastage
3. Improving quality
4. Efficient inventory management
5. Improving design

Added Value
Added value can be defined as the difference in the production process b/w the cost of raw
material and the price of finished goods. It is a key business objective.

Why Is Added Value Important for Businesses?

1. It allows the business to market their products successfully
2. Business can charge higher prices
3. Achieve a USP
4. Obtain competitive advantage
5. Higher added value products are less price elastic
6. It is harder for competitors to imitate

Ways In Which Businesses Can Achieve High Added Value

1. Building a brand
2. Offering convivence
3. Product features and benefits
4. Delivering excellent service

Location of Firm
Location is the general area selected for a particular business. Its choice is likely to involve a
detailed process of analysing through different financial methods & other cost benefit
analysis.
 Factor Influencing
The Location of
Business

Quantitative Factors Qualitative Factors

➢ Tax Availability of labor

➢ Cost & Cultural issues

1. Population and demand

2. Location of competitor
3. Cost of labour
4. Availability of labour
5. Degree of govt competition
6. Rent & cost of land
7. Physical features (weather)
8. Personal preference
9. Transportation & communication
10. Financial incentives
11. Availability of natural resources

Issues Regarding International Location

Multinationals has to make a key decision about location as they are scaling with a wide range
of local & International markets. Following issues are considered while making the decision.
1. Trade barriers
2. Financial incentives
3. Embargo
4. Language & Cultural barriers
5. Exchange rates
6. To build a strong image worldwide
7. Red Tapism
8. Ethical Consideration
Multinationals are growing rapidly & represent significant source of industrial development in
countries throughout the world.
Benefits of MNC to Host Countries
1. Increased employment
2. Improve quality
3. Economic growth
4. Technology transfers
5. Controls prices
6. Foreign Investment
7. Better trained labour
8. Standard of living
9. Revenue to the govt
10. GDP Increase

Efficiency
Efficiency refers to the ability to produce maximum output from the given input with least
waste of time, effort, money, energy and raw materials. It can be measured quantitatively by
designing and attaining the input-output ratios of the company's resources like funds, energy,
material, Labor etc.

Effectiveness
Effectiveness refers to the extent to which something has been done, to achieve the targeted
outcome. It means the degree of closeness of the achieved objective with the predetermined
goal to examine the potency of the whole entity.

Key Differences Between Efficiency and Effectiveness

1. The ability to produce maximum output with limited resources is known as efficiency.
The level of the hearness of the actual result with planned result is effectiveness.
2. Efficiency is "to do the things perfect while effectiveness is to do perfect things.
3. Efficiency has a short run perspective. Conversely, the long run is the point of view of
effectiveness.
4. Efficiency is measured in operations of the organisation, but effectiveness of strategies
is measured which are made by the organisation.
5. Efficiency is yield oriented unlike effectiveness, which is result oriented.

Conclusion
Efficiency and effectiveness both have a prominent place in the business environment which
must be maintained by the organisation b/c success lies on them. Efficiency measures the
performance of operations, processes, workers, cost, time etc. It has clear focus on reducing
the expenditure or wasting or eliminating unnecessary costs to achieve the output. In case of
effectiveness, it highlights the relationship of the business with the rest of the world to attain
competitive position.
Why Efficiency Is Important for Businesses
1. Efficiency is producing highest ratio of output to input.
2. Efficiency leads to higher productivity, growth better market share and profitability.
3. To be successful a business needs to be efficient in deployment of resources.
4. Inefficiency can result in high cost leading to competitiveness and leading to loss of
share.
5. The transformational process needs to add value inefficiency will reduce value.

Production
How inputs are been converted into outputs, it is also known as process transformation.

Productivity
It is the means of the ratio of output to any of the firm’s input. Productivity is an efficiency
measure. If a firm becomes more productive, it becomes more efficient.

How to Increase Productivity Levels

1. Improve training of staff
2. Bring in technology
3. Improve employee motivation
4. Change the layout of work
5. Improve working conditions
6. More efficient management
NOTE Raising productivity is not always guarantee for success. It doesn’t create demand
among the customer so it is the quality of the management which determines the success of
the business.

Labour Productivity
1. Labour productivity = output
# of staff

2. Productivity = output
Input

Capital Intensive
Involving a high quantity of capital equipment compared to labour Input. Capital intensive
methods of production might be used in industries that supply mass produced goods due to
the nature of production process.
 Advantages Disadvantages
1. Break down in machines can be a
1. Increase labour productivity
challenge
2. Consistency in quality 2. High setup cost
3. Lesser defects 3. Training cost
4. Easier to recruit employee 4. Employees usually get bored
5. Enable business to enjoy economies of
5. Continuous upgradation of machines
scale
6. Skill levels may be lower so cost is less

Labour Intensive
Labour intensive involves high level of labour input compared with capital equipment.

Advantages Disadvantages
1. Can produce one off unique product 1. Economies of scale may be limited
2. Well suited to deliver personal service 2. Labour intensive may be uncompetitive
3. Lower set up cost 3. Training cost
4. Cost of employees during industrial
4. More flexible
actions
5. Labour cost initially low may become too
5. Useful where we can’t use machines
high

Ways To Improve Organisational Effectiveness

1. Better communication
2. Adaptability
3. Interaction
4. Positive environment
5. Leadership
6. Direction

Efficiency Oriented Company

These company focus on elimination on certain factors:
1. Equipment failure
2. Reduced speed
3. Stable production
4. Setup & adjustments
5. Idling & minor stoppages
6. Process defects
Economics of Scale
Economies of scale refer to where there is a reduction in an average cost/unit.
Example
How can IKEA profitably sell furniture at lower price, which seems impossible.
The answer is: Economies of scale.
Economies of scale are the cost advantage that a business can exploit by expanding their scale
of production. There are many different types of economics of scale a business can achieve
depending on the particular characteristic of an industry.

Economies of Scale
Internal Economies of Scale External Economies of Scale
Internal economies of scale arise from the External economies incur within an
growth of the business itself. industry.
1. Training courses in local education
1. Technical economies of scale
institution
2. Marketing economies of scale 2. Government support
3. Financial economies of scale 3. Co-operation amongst firm
4. Emergence of skilled labour (e.g.) supply
4. Managerial economies of scale of labour is high low wage rates less need
to train
5. Purchasing economies of scale 5. Efficient & productive labour
6. Spending by local authorities on
improving the transport network.

1. Technical Economies
Large scale businesses can afford to invest in expensive & specialist capital machinery,
for (e.g.) supermarkets and automobile industries.
2. Marketing Economics
A large firm can spread its advertising and marketing budget over a large output and
it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient
negotiation power in market.
3. Purchasing Economies
Businesses buy goods in bulk and they try to reduce their average cost/unit.
4. Managerial Economies
This is a form of division of labour. Large scale manufacturers employ specialist to
supervise production systems, manage marketing systems and oversee human
resource.
5. Financial Economics
Larger firms are usually rated by financial markets to be more "credit worthy” and have
access to credit facility and achieve favourable rate of borrowing, in contrast small
organisations often face higher rate of interest.
Dis-Economies of Scale
Dis-economies of scale refers to where there is a rise in an average cost/unit.

Internal Dis-Economies of Scale

1. Communication problems
2. Control problems
3. Lower morale
4. managerial diseconomies
5. Conflicts amongst management

External Diseconomies of Scale

1. Pollution increase
2. Skilled labour shortage due to high competition
3. Over crowding in industrial problem
4. Price of factors may rise in production

How To Reduce Diseconomies of Scale

1. Decentralization
2. Diversification
3. Training to workers

Methods of Production
1. Job production
2. Batch production
3. Flow production
4. Mass customization

1. Job Production
It involves the production of a single product at a line. It is generally used when orders for
products are small and different from each other. Production is organized in such a way that
one job is completed at a time.

Advantages Disadvantages
1. Unique items can be produced 1. It is time consuming
2. Benefits of bulk buying cannot be
2. Motivated workforce
achieved
3. Better satisfaction of workforce 3. It is generally labour intensive
4. Tailored product 4. Highly skilled labour is required
2. Batch Production
Batch production is a production process where several identical products are made
simultaneously, as one part of the process is completed on each product before the next
process is started.

Advantages Disadvantages
1. Each batch can be changed to meet
1. Careful co-ordination is needed.
customer requirement.
2. Reduced need of expensive skilled
2. Difficult to manage
employees.
3. Possible to use standardized machinery. 3. More complex machinery is required.
4. More interesting work for employees
4. If batches are small unit cost is high.
then flow production.

3. Flow Production
Where there is continuous flow of production of goods without any halts & stoppages.
Main Features of Flow Production
1. Large quantities are produced
2. Simplified & standardized products
3. Large stock of new-materials and components may be kept.
4. A semi-skilled workforce specializing in one operation only is generally employed.

Advantages Disadvantages
1. Unit cost is reduced 1. High initial setup cost
2. Higher automated process which reduces
2. Work in boring
the need for labour
3. The need to stock pile is reduced 3. Inability to meet customers need
4. quality is consistent 4. Wide product range isn’t available
5. Easy to check the process at different
5. Technicalized production lines.
stages

4. Mass Customization
Mass Customization is a production process where there is a flow of production of products
with many standardized components but with flexible equipment’s, often computer
controlled that allow variation in the product, the production process is supported by flexible
and semi-skilled workforce.

Benefits of Mass Customization

1. Lower unit cost due to flow production
2. Flexibility to meet individual requirement
3. Products can be made quickly just by bringing small changes in the process
4. The technology in mass customization gives business the advantage of high volumes
5. Higher added values are achieved
Dis-Advantages of Mass Customization
1. Difficulty in holding stock
2. Challenges regarding how to handle returns
3. Cost involved in manufacturing each product individually
4. Forecasting trends/spike in sales more difficult due to wide range of options

Lean Production
Lean production is an approach to management that focuses on cutting out waste and ensuring quality,
making goods available for sale.
The lean approach of managing operation is about:

1. Doing simple things

2. Doing things better
3. Involving employees for continuous improvement
4. Avoiding waste

Lean Production
➢ Kaizen
➢ JIT (just in time)
➢ Cell production

➢ Kaizen
Kaizen or (continuous improvement) is an approach of constantly introducing small
incremental changes in the business in order to improve the quality or efficiency. This
approach assumes that employees are the best source to identify room for improvement,
since they see the processes in action all the time, a firm that uses this approach therefore
has to have a culture that encourage and reward employees for their contribution to the
process.

The Key Features of Kaizen

1. Improvements are based on many small changes rather than the radical changes that
might arise from research and development.
2. As this idea comes from this worker themselves, they are less likely to be radically different
and therefore easier to implement.
3. Small improvements are less likely to require major capital investments and major process
change.
4. All employees should continually be seeking ways to improve their own performance.
5. It helps encourage workers to take ownership of their work and can help reinforce team
working there by improving worker motivation.
6. For Kaizen to be effective there has to be a culture of trust b/w staff and managers
supported by a democratic structure and a theory y view of employees.
➢ JIT (Just in Time)
Just in time is a pull system of production, that means a business produces only what is
required, in the correct quantity at the correct time, so that inventory is kept at minimum.

Advantages of JIT
1. Funds not tide up in inventory, can be used elsewhere.
2. Storage areas can be used for more productive processes.
3. Potential quicker response to customer demand and greater output.
4. Defect rate reduced.
5. Greater customer satisfaction.
6. Reduced planning complexity.

Disadvantages of JIT
1. Expensive to introduce JIT into the business.
2. Opens the business to a number of risks especially those associated with supply chain.
3. A minor disruption from a supplier can force to stop production.
4. There are no spare finished goods available to meet unexpected orders.

➢ Cell Production
Cell production has the flow production line, split into a number of self-contained units, each
item or cell is responsible for significant part of finished article and rather than each person
only carrying out only one very specific task, team members are skilled at a number of roles,
so it provides a mean of job rotation.

Advantages
1. Closeness of cell members should improve communication, avoiding confusion arising
from misunderstood or non-received messages.
2. Workers become multi-skilled and more adoptable to future needs of business.
3. Greater worker motivation, arising from variety of work, team working and more
responsibility.
4. Quality improvement, as each cell has ownership for quality on its area.

Disadvantages
1. The company culture has to encourage trust and participation, which is difficult.
2. The company may have to invest in new material handling and ordering systems
suitable for cell production.
3. Training will be given to employees.
4. Allocation of work to cell has to be efficient.
5. Small scale production lines may not yield enough savings to make a switch cell
production worthwhile.

Inventory Management
Inventory management refers to ensuring an appropriate level of inventory (stock) held by the
business, so that there is no disruption in the operations.
Why Do Businesses Hold Inventory?
1. To enable production to take place
2. To satisfy customer demands
3. To enable efficient production
4. To meet unforeseen demands
5. To provide buffer b/w different parts of the process
6. To allow business to meet seasonal changes in demand

Cost of Holding High Level of Stock

1. Opportunity cost as capital is tiep up in stock
2. Storage cost
3. Spoilage cost
4. Administrative and financial cost
5. Risk of theft
6. Risk of wastage in case of lower demands in the market

Cost of Holding Insufficient Level of Stock

1. Lost sales
2. Idle production resources
3. Special and sudden orders could be expensive as the firm is less able to cope with
unexpected changes
4. Fire holding very low level of stock may have to place a greater number of orders. This
will raise ordering cost.

Minimum Stock Levels

Also known as buffer stock. This is the minimum number of stocks that should be held to
ensure that production could still continue in case of delay in delivery of raw materials.

Re-Order Level
This the level of stock at which a new order is placed with the supplier.

Re-Order Quantity
Re-order quantity is the magnitude or the number of units to be ordered in a new purchase
order for the fresh supply or particular inventory item.

Lead Time
It is the time when the stock is been ordered and goods are been delivered.

How To Control Stock Using JIT

1. Excellent relation with supplier
2. Employee flexibility
3. Flexibility of machinery
4. Accurate forecast demand
5. Employee Commitment
6. Extensive use of IT
7. Strict quality control and zero defect
 Quality
Quality Control
It means inspecting and checking the work to ensure that the products and services come up
to an agreed standard of quality.

Quality Control Technique

1. Inspection and testing
2. Random sampling
3. Involving the workforce in making decision
4. Quality Control Charts and statistical measures to control quality.

Quality Assurance
The process that ensures production quality meets the requirements of customers. This is an
approach that aims to achieve quality by organising every process to get the product right
first-time and prevent mistakes ever happening. This is also known as “zero defect approach".

Total Quality Management

Total quality management describes a management approach to long term success through
customer satisfaction. In TQM, all members participate in improving processes, products,
services and the culture in which they work.

Principles of TQM
1. Customer focused
2. Total employee involvement
3. Process centred
4. Strategic & systematic approach
5. Continual improvement
6. Communication

Why Is It Important for Businesses to Establish Quality Assurance?

1. To involve all staff, and this can promote team work.
2. To reduce total quality cost.
3. To gain accreditation for quality awards.
4. To set quality standards for all stages of production.

Operational Planning
Preparing the input resources to supply products to meet expected demands.
Operation Decisions
Decisions taken by operations managers that have a significant impact on the success of the
business.
The role of operation decision is to achieve a desired value. In terms of product efficiency, in
reducing the unit cost and in terms of financial value.

The Decisions Are Influenced By

1. Marketing factors
2. Planning future production levels
3. Availability of resources
4. Technology (e.g.) CAD, CAM

CAD = Computer Aided Designs

The use of computer programs to create two/three-dimensional graphical representation of
physical objects.

Advantages
1. Increase productivity
2. Lower product cost
3. Good visualization of products
4. Quality product
5. Faster time to market
6. Greater accuracy
7. Easy use of design data for other product applications

Disadvantages
1. Complex programs
2. Employee training
3. High setup cost

CAM: Computer Aided Manufacturing

The use of computer software to control machines tool and related machinery in
manufacturing of components.

Advantages
1. Niche products can be produced.
2. Integrated with CAD & CAM allow more design variants of products to be produced.
3. The increased customisation increases the competitiveness.
4. Precise manufacturing and reduced quality Problems.
5. Technical economies of scale.
6. Increased labour productivity.
Disadvantages
1. Setup cost
2. Time to time upgradation
3. Repair & maintenance cost
4. Recruitment of specialist employees
5. Training
6. Complexity of program
7. Hardware failure

Flexibility & Innovation

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

Flexibility Can Be Achieved in A Number of Ways

1. Increased capacity by doing extensions.
2. Hold high stock levels.
3. Flexible labour force.
4. Flexible production lines (mass Customisation)

Process Innovation
Process Innovation: The use of a new much improved production method / service delivery
method such as Robots, ERP, etc.

Scale of Operations
Scale of operations means that a business is able to handle a growing amount of work or sales
in a capable, cost effective manner.

Factors That Influence the Size of Business

1. Owner objective
2. Capital available
3. Number of competitors
4. Scope for scale of economies
5. Size of market the firm operation in
Importance of Flexibility & Innovation to Businesses
Operational flexibility is the ability of a business to very the level of production and range of
products in response to consumer demands.
1. Flexibility might be achieved by having a flexible and adaptable workforce.
2. Flexible flow line production equipment, increase capacity by purchasing more
equipment, logistics and supply chains.
3. Innovation might be achieved by CAD, cams, training and restricting of workforce.
4. Maintain good relation with supplier.
5. Innovative designs might boring in compativeness.
6. Bringing innovation in deliveries.
7. Brining in sustainable processes.

Why Cost Information Is Important for Businesses?

1. Important decisions are made in business such as, what supplies to use, what price to
set how much to invest, when to expand, such decisions can't be made without
accurate cost information.
2. Cost information Informs the decision-making process.
3. It facilitates in control, monitoring and doing comparisons.
4. Important in setting budgets.
5. Comparing cost with competitors.
6. Knows when breakeven points is achieved.
7. Cost information is the heart of all important business decisions.
 FINANCE
A’LEVELS

$
 Sources of Finance
Internal Sources External Sources

Internal sources refer to External sources of

where finances are been finance implies the
generated while arrangement of capital
remaining within the and finance from
organisation. sources outside the
organisation.

Methods of Internal Sources

1. Selling of assets
2. Retained profits
3. Owner’s savings
4. Selling of inventory
5. Sale and lease back.

Methods of External Sources

Short-term Medium-term Long-term
1. Trade credit 1. Loans 1. Issue of shares
2. Bank overdraft 2. Leasing 2. Debentures
3. Debt-factoring 3. Hire purchase 3. Venture capitalist
4. Grants and subsidy

Advantages of Internal Financing

1. There is no time limit in which payment has to be done.
2. No collateral required.
3. No interest rate.
4. Own money is used.
5. Flexible.

Disadvantages of Internal Financing

1. Small amount is raised.
2. Chances that the company might be in liquidity problems.
3. Till when company can sell their assets to generate finance.
➢ Trade Credit
Buying goods on credit and promising to pay within a set term.

Advantages Disadvantages
1. Helps start-up businesses get up and
1. Penalties and interest.
running.
2. No cash required up front. 2. Hard to obtain for start-ups.
3. Easy to manage. 3. Negative impact on credit rating.

➢ Debt-Factoring
With debt factoring a business can raise finance by selling their outstanding receivables to a
third party (to a debt factoring company) with some consideration.

Advantages Disadvantages
1. Receivables are turned into cash quickly. 1. Quite high cost.
2. Business can focus on core activities, 2. Customers may feel their relationships
rather than collecting cash. has changed.
3. Shareholders may feel concerned if
3. There is no security required.
company usually go for debt factoring.

➢ Bank Overdraft
A bank overdraft is a borrowing facility attach to your bank account, set at an agreed limit. It
can be drawn at any time and is most useful to meet day to day expenses.

Advantages Disadvantages
1. The interest rate applied is nearly always
1. An overdraft facility flexible. variable so difficult to calculate the
borrowing cost.
2. If you extend your overdraft you need to
2. Cheaper than bank loan.
pay an arrangement fee.
3. The facility can be just as quickly closed
3. Shor-term finances can be managed
down by the bank if you breach the terms
easily.
and condition.
➢ Leasing
Leasing is becoming a preferred solution to resolved fixed asset requirement vs purchasing
the asset. A lease can be defined as an arrangement between lessor (owner of the asset) and
lessee (user of the asset), where by the lessor purchases an asset for lessee and allow him to
use it in exchange for periodical payment called lease rental or minimum lease payment.

Advantages Disadvantages
1. Balanced cash outflow. 1. No ownership.
2. Better usage of capital. 2. Lease expense.
3. Low capital expenditure. 3. Limited access of other loans.
4. Tax benefits.

➢ Hire Purchase
Under the higher purchase system, goods are delivered to the person, who agree to pay the
owner equal periodical installments, such installments to be treated as hire of those goods,
until a certain fixed amount has been paid, when these goods become the property of the
hirer.

Advantages Disadvantages
1. Payments can be done in instalments. 1. Overall high cost.
2. Access to high spec assets. 2. Asset depreciation.
3. Own the asset once the instalments are
3. Committing long-term payment plan.
been done.

➢ Loans
A loan is an amount of money borrowed for a set period with an agreed repayment schedule.
The repayment amount will depend on the size and duration of the loan and the rate of
interest.

Advantages Disadvantages
1. Loans can come up with harsh repayment
1. It is available for long-term.
criteria.
2. Loan can be tied up to the lifetime of the 2. There may be charge if you want to repay
assets. the loan before end of the term.
3. While we are paying interest on loan, so
3. Loans are not very flexible.
no need to give lender % of profit.
➢ Issue of Shares
Public limited companies issue shares in order to generate finance, its a process in which
companies allot new shares to individual or corporate.

Advantages Disadvantages
1. Company issue shares, company can use
the finance and shareholders get the 1. Dilutes company ownership.
return, its a win-win situation.
2. Shares are not debt to the company. 2. Risk of being bought out.
3. Lowers the risk of the company 3. Issuing more shares negatively effect
becoming bankrupt. existing shares.

➢ Venture Capitalist
Venture capitalist is a mechanism where investors support entrepreneurial talent by providing
finance and business skills in order to obtain long-term capital gains by exploiting marketing
opportunities.

Advantages Disadvantages
1. Opportunity for the expansion of the
1. Dilution of ownership of the company.
company.
2. Guidance and expertise. 2. May release fun time to time.
3. Helpful in building networks. 3. May require high return.
4. No obligation for repayment. 4. Easy redemption by venture capitalist.

➢ Grants and Subsidy

Grants are sum that usually do not have to be repaid, but are to be used for defined purposes,
subsidies on the other hand refer direct contribution, tax breaks and other special assistance.

Advantages Disadvantages
1. Free money 1. Difficult to raise
2. Although grants are free money but they
2. Waterfall effect
still come with some restrictions.
3. Gains credibility 3. Uncertain renewals.
➢ Debentures
Debenture is a long-term source of finance; it is a form of bond which is issued by a company.
It typically carries a fix rate of interest over the course of loan.

Advantages Disadvantages
1. Restrictions imposed by securing the
debenture with an asset, takes away the
1. Control is not reduced
freedom, to control and use the asset at
will.
2. It usually provides a fix rate of interest
2. Can be hard for company to make
for the lender, and this has to be paid
payments in time of difficulty.
before interest.
3. Not a good investment choice in low
3. It can encourage long-term funding.
inflationary period.

Sources of Finance for Unincorporated Business

Crowd Funding Micro-Financing
The practice of funding a project or venture Providing financial services for poor and
by raising money from a large number of low-income customers who do not have
people who each contribute small amount access to commercial banks and other
typically via – internet. financial institution.
1. Donations
2. An equity stake in the business
3. The initial capital back plus interest

Advantages of Crowd Funding Disadvantages of Crowd Funding

1. Fast way to raise finance no up-front fee 1. Not an easier process
2. Pitching the project through online 2. Need to do lot of work to build interest
platform can be valuable form of marketing of owners
3. Failed projects are damage to the
3. Expert guidance
reputation
4. Test public reaction 4. Ideas can be duplicated
5. Getting rewards and return wrong means
5. Can track progress
giving too much of business
6.Investor become loyal customers
 Advantages of Micro-Financing Disadvantages of Micro-Financing
1. It gives people access to credit 1. Small amount of loan
2. Opportunity for under privileged for 2. High interest rate
better living
3. Its a sustainable process 3. Harsh repayment criteria
4. It serves to those who are often over 4. It takes advantage of those who are in
looked by the society tough situation

Factors Influencing Sources of Finance

1. The use of finance
2. Existing borrowing amount
3. Amount required
4. Cost of debt
5. Time period for which finance is required
 Budgets
Budgets are financial plans for the forth coming year that is drawn up to help the business
achieve its objectives. Budgets are often used to exert a degree of control over the cost of
the business in an attempt to gain efficiency.

Common Mistakes in Making Budgets

1. Repeating last year figures
2. Each department ignoring over all objectives of the business and concentrating on
their own goals.
3. Setting unrealistic and unachievable budgets
4. Sticking rigidly to budgets and forgetting that things change over a period of time

Management Uses Budget To

1. Establish priorities
2. Set targets
3. Turn objective into practical reality
4. Provide direction and co-ordination
5. Assign responsibilities
6. Control income and expenditures
7. Delegate without loss and controls
8. Forecast outcomes
9. Communicate targets
10. Allocation of resources

How To Make Budgets

1. An environmental analysis revolving around organisational objectives is conducted and
then we set new organisational objectives.
2. Finding out key factors that influence budgets (output & sales).
3. Departmental and functional budgets are made (cash budget, marketing budget, R&D
budgets) each department makes it own.
4. Co-ordination amongst department through meetings.
5. Preparation of master budget.

Type of Budgets
1. Incremental Budgets

Incremental budgeting takes last year figures, add or subtract a percentage to obtain current
year budget. Incremental budget is appropriate to use if primary cost drivers do not change
year by year.
2. Activity Based Budget

Activity based budgeting is a top-down budgeting technique that determines the amount of
input required to support the targets or output set by the company.

3. Zero Based Budgeting

Zero based budgeting starts with an assumption that all department budgets are zero and
must be re-build from the scratch, managers must be able to justify every single expense, zero
based budgeting is best when there is an urgent need of rationalization. It is used when
company is going through financial restructuring or economic crises.

4. Flexible Budgeting

Flexible budget is one which adjust itself with the changes in volume or activity. It is more
useful and sophisticated then static budget.

Advantages Disadvantages
1. It coordinates activity across 1. It is based on estimation and prediction
departments
2. It translates plans into action 2. Time consuming
3. Budget provides an excellent record of 3. Budgets are restricting in nature
organisational activity
4. Budget improves communication with 4. Sometimes demotivating for workers
employees
5. Budgets provide a tool of corrective 5. Budgets can cause a perception of
action unfairness
6. Lack of participation
7. A major problem arises when budgets
are applied mechanically and rigidly

Variance Analysis
Analysis of the difference b/w the budgeted and the actual value. It is conducted on each
single factor to see the direction it takes towards profit.
Variance = Budgeted - Actual

Financial And Management Accounting

Financial Accounting Management Accounting
Financial accounting is the collection or Management accounting involves the
calculation, analysis and publication of internal financial information available to
figures relating to business performance managers (as apposed to that which must
and profitability. be published by law) This information is
used for forward planning reviewing and
analysing the performance of a business
lost, revenue and budgets.
 Differences Between Financial and Management Accounting
Financial Accounting Management Accounting
1. Financial accounting reports are 1. Managerial accounting is for internal
consumed by law purpose
2. Focuses on offering information to 2. Heavily focused on providing
those outside the organisation information to persons in the
organisation
3. Financial accounting information is 3. Information is used with the
historical in nature organisation
4. Financial accounting principle follows 4. It is not required by law
accounting standards
5. Legally required by law 5. managerial accounting reports could be
provided to cover any specific period
6. Reports are used internally and 6. It usually concerns itself with creating
externally operational based reports and
distributed to the management inside
the org
7. Financial accounting reports are derived
after a set period of time such as fiscal
year or quarter
 Working Capital
Working Capital = Current Asset – Current Liabilities
Working capital provides a strong indication of a business “ability to pay its debts”
Every business needs to be able to maintain day to day cashflows. It needs enough to pay staff
wages and supplier, maintaining adequate working capital is important for both short-term
and long-term. The challenge is to maintain sufficient liquidity to ensure business to survive
in long run.
The current liability shows the amount that needs to be paid in the next twelve months.
Current assets show cash and other assets that are available to settle those liabilities.
Of course, the balance sheet is just a snapshot of the working capital position, at a point in
time. In reality business is constantly setting liabilities, taking money from customer, buying
inventory and so on. This is known as working capital cycle.
Factors Effecting the Level of Working Capital
1. Businesses with lot of cash sales and fewer credit sales, should have minimal trade
receivable, supermarkets are good example.
2. Businesses that exist to trade in completed goods will only have finished goods in stock
compared to manufacturer who will also have to maintain stock of raw material and
work in progress.
3. Some finished goods notably food stuff, have to be sold with in a limited period of time
b/c of its perishable nature.
4. Some businesses will receive their money at a certain time of a year, although they
may incur expenses throughout the year at a fairly consistent level, this is known as
seasonality of cashflow.
The Amount of Working Capital Held by a Business Depends on Variety of Factors
➢ Need To Hold Inventory
Some businesses need to hold substantial inventories to meet customer needs.
➢ Production Leadtime
A product that is made and sold with in a short time, require much less inventory than
one where the production process take place a long time.
➢ Lean Production
Businesses that successfully implement lean production technique, they require less
inventory.
➢ Expected Credit Period by Customer
In some industries it is expected that a long credit period can be taken before debtors
need to settle their invoices, which means higher working capital is required.
➢ Credit Period Offered by Supplier
The longer the credit period offered by supplier the better for cashflow and working
capital.
Explain The Effect on The Business of High Working Capital

1. The ability to offer credit to customers

2. Ability to offer more prompt payment to supplier
3. Less reliance on over/draft
4. Results in opportunity cost decisions
5. Money could be used to make more money for the business

Main Causes of working Capital Problems

1. Poor control of inventories

2. Poor control of receivables
3. Ineffective use of payables
4. Poor cashflow forecasting
5. Unexpected events

Capital Expenditure Revenue Expenditure

The expenditure that are incurred by an Revenue expenditure is referred to as the
organisation for long turn benefits are expenditure incurred by an organisation to
known as capital expenditure, these manage the day-to-day functions of a
expenditures serve the purpose of business. These are the expenditures that
increasing the capacity or capabilities of the neither help in creation of an asset nor in
long term either enhancing or adding new reducing the liabilities of a business. It is
asset to the organisation. recurring in nature and very essential to
maintain daily operations.

Parameters Capital Expenditure Revenue Expenditure

Money spent on management
Definition Money spent on fixed asset
operations
Duration of return More then one year Less then one year
Gains Long term gains Short term gains
Accounting tools As a fixed asset Income statement
Recurrence No recurrent Recurrent
Resale value Have resale value Little of no resale value
impacts earning potential of the Impacts profitability of the
Motive
company business
Depreciation Depreciation is charged No depreciation
 Cash Flow Planning
What Is Meant by Cash Flow?

The amount of money flowing in and out of the business over a period of time.

Cashflow Cycle

A cash flow cycle explains the stages that are involved in the process of cash out and cash in
into the business. This what happens.

2. materials,
wages, rent
etc.

1. cash
3. goods
needed to
produced
pay for

5. cash
payment
4. goods sold
received for
goods sold

The longer it takes for cash to get back to the business, the more they will need working capital
to pay off their short-term debts. This what happens when the company is short of cash.
1. Not enough to pay for materials.
2. The business will insist customers on paying in cash but they might lose them to
competitors who give them credit.
3. There could be liquidity crisis.
 Net Cash flows = Inflows – Outflows

Cash Inflows Cash Outflows

Payments of wages and

salaries
Cash sales Payment of supplies (e.g. raw
Receipts from trade materials, stocks)
Customers Buying equipment
Sales of spare assets Interest on bank loan or
Investment of share capital overdraft
Personal funds invested Payment of dividends
Receipt of bank loan Repayment of loans
Government grants Payment of leasing or hire
Receipts from factoring Purchase rental
Income tax, VAT &
Corporation tax

Cash inflows: movement of Cash outflow: movement of

cash into the business. cash outside the business.

Cash Flow Forecast

Cashflow forecast estimates the future inflows and outflows of the business.
Uses of Cash Flow Forecast

1. Starting up a business.
2. Managing cashflows.
3. Keeping bank manager informed.
4. Running an existing business.

How Can Cash Flow Problems Be Solved?

1. Cost minimization.
2. Inventory control.
3. Delay payments to suppliers.
4. Delay expansion plans.
5. Reduce credit period to customers.
6. Inject small loans in order to make business survive.
Why Is It Important to Manage Cash Levels in Business?
1. That business have enough cash to pay wagers buy suppliers.
2. Importance of cashflow forecasting, cash in and out.
3. Companies only looking at earnings and not looking at cash may not survive.
4. So cashflow management and cash flow forecasting are critical to the financial health
and survival of the business, the simple goal is that you have enough cash in hand
when you need it.
 Cost Information
The Need for Accurate Cost Data

1. Accurate profit/Losses will allow a business to take effective and profitable decisions.
2. Cost data are useful to other departments for (e.g.) marketing manager will use cost
data to help inform their pricing decision.
3. It allows comparison to be made with past period of time and efficiency of
department.
4. They can help set budgets.
5. Calculating the cost of different options can assist managers in their decision-making
and help improve business performance.

How Can Cost Information Can Be Used to Monitor and Improve Business Performance?

Classification and interpretation of cost allows a business to analyse the current cost situation
and trend.

Such analysis can relate to key performance issues and indicators such as:

1. Product pricing
2. Payment for resources
3. valuation of stock
4. Absorption of overheads
5. Break even of products
6. Profitability of product lines

Why Cost Information Is Important for Businesses?

1. Accurate cost data is at the heart of current and future operation and decision of
business.
2. If costs are not accurate, then managers have incomplete or misleading information to
make decisions.
3. Setting price require accurate cost information.
4. Calculation of gross profit will be misleading.
5. The balance sheet will not be accurate unless inventory costs are correct.
6. Breakeven estimates rely on accurate costing.
7. Cashflow forecast need to be accurate if they are to be useful.
8. Help in good decision making.
9. With accurate cost data a business Can run more effectively (e.g.) selling price can be
set to a more competitive margin.
Explain Why Cost Information Is Important for Business Decision Making

1. When to expand
2. Vital for setting budgets and targets
3. Compare cost with competitor’s cost
4. Know when the breakeven point is achieved
5. What price to set
6. How much to invest
7. It facilitates, monitor and benchmark

Different Types of Cost

➢ Fixed Cost

Cost which remains constant at all levels of activity, it is also known as indirect cost· E.g. rent,
salary, insurance.

➢ Variable Cost

cost which varies with the level of output, it is also known as direct cost. E.g. raw material and
wages.

➢ Semi-Variable Cost

Cost which remains fixed to a certain extent but then it becomes variable.

➢ Marginal Cost

The extra cost of producing one more unit of output.

➢ Total Cost

Total cost = Total fixed cost + Total variable cost

➢ Average Cost

Average cost = Total cost

# of units
 Breakeven analysis
Break even point is where the firm is neither in loss nor in profits.

Breakeven Point = ___Fixed Cost___

Contribution/Unit

Contribution/Unit = Selling Price-Variable Cost

Advantages Disadvantages
1. Unrealistic assumption, products are
1. Measures profit and losses at different
sold at different prices over a period of
level of production.
time.
2. Predicts the effects of changes in selling 2. Variable cost does not always remain
price. same
3. Analyse the relationship b/w fixed and 3. Breakeven should be seen as planning
variable cost. tool not a decision-making tool.
4. Predict the effect of cost and efficiency
4. Sales are unlikely to be same as output.
changes on profitability.
5. Helps the entrepreneur to understand 5. It can be applied to single products not
the level of risk involved in the start up. multiple products.
6. Helps to understand the viability of the
6. It may be time consuming to prepare.
business.
7. Calculation is quick and easy.
8. Focuses entrepreneur on how long it
will take before a start-up reaches
profitability.
Marginal and Absorption Costing
Advantages and Disadvantages of Marginal Costing