Business Studies Notes Mr Rajab

EDEXCEL GCE ADVANCED SUBSIDIARY

Business Studies

UNIT 2: MANAGING THE BUSINESS

AUTHOR: MR RAJAB S.WANJALA B.ED (UON), CPA(K)

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TABLE OF CONTENT TOPICS 1.0 Marketing Plan 1.1 The marketing objectives……………………………………….. 1.2 The marketing strategies; niche and mass marketing …………………………….. 1.3 The marketing mix the 1.4 Elements of marketing mix [4ps of marketing]. 1.5 External factors affecting companies’ marketing decisions (Political, Economic, Social, Technological, Legal And Environmental[PESTLE]) 1.6 The product life cycle 1.7 Product extension strategies 1.8 The Boston Matrix/product portfolio Matrix 1.9 Implication of product life cycle and Boston Matrix on product cash flow(card bury product portfolio -case) 1.10 Price elasticity of demand; 1.11 calculations and interpretation of results 1.12 What creates inelastic demand for products 2.0 Managing the Provision Process 2.1 product/service design 2.2 standard and bespoke product/service designs with examples that meet identified market needs 2.3 Productivity and efficiency definitions 2.4 Inputs and in e.g finance, renewable resources, consumable resources, human resources, finished products from other processes, skill and technology 2.5 Outputs in production; e.g. finished products, services, combination of products, rejected products, waste products. 2.6 Types of production; job, batch, line (mass) and cell productions 2.7 Capital and labour intensive production 2.8 Capacity utilization; how to improve productivity 2.9 Stock control; definitions, graphs 2.10 How to improve stock control to reduce cash tied up in it 2.11 Lean management; advantages and disadvantages of Just-In-Time(JIT) 2.12 Quality management 2.13 How culture of quality is created e.g. through management expectation of continuous improvement (Kaizen), Quality assurance processes and self checking 2.14 why some firms still use quality inspections 2.15 case studies on quality management techniques 2.16 consumer protection and legislation; purpose of legislations

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3.0 Budgeting 3.1 reasons for budgeting 3.2 historical and zero based budgeting; merit and demerits 3.3 difficulties of budgeting when there is no historical information 3.4 types of budgets; sales, production, purchases, labour, capital expenditure, cash and profit and loss budgets 3.5 comparisons of actual figures and budgeted figures to provide elementary variance analysis 3.6 sales forecasts, difficulties of estimating sales 3.7 cash flow fore casting; filling into cash flow blanks, interpretation of cash flow forests , importance of cash flow forecasts 3.8 managing working capital, liquidity ratios; current ratio, quick ratio 3.9 importance of Working Capital and impact of working capital deficit on a business, how to improve business cash flow, e.g. contingency finance planning eg overdraft/loan, managing debtors and creditors terms, stock controls 3.10 difference between cash and profits 3.11 working capital operating cycle (diagram) 3.12 why businesses fail

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4.0 Managing other people 4.1 organisation structures; organization charts ;types of organization structures; tall and flat organisations 4.2 factors that affects the organisation structure 4.3 chain of command and span of control 4.4 centralized and decentralized organisations 4.5 how organization structure may affect communication between the employees and the employers (use case studies to illustrate) 4.6 Recruitment; internal and external recruitment examples, advantages and disadvantages of each. 4.7 Labour turnover; causes, implication and link to staff motivation 4.8 Motivation of staff; Motivation theories; Taylor, Herzberg, Maslow (briefs) 4.9 Criticism of motivation theories 4.10 Financial incentives, piece work, bonus, profit share, performance related pay 4.15 How mangers can get the best from the staff (use a case study); 4.16 technique of getting best from staff ; delegation, consultation, empowerment, 4.17 Reduction of labour costs 4.18 Benefits and limitations of using flexible work force 4.19 Natural wastage; definition and its effects to labour costs 4.20 Rights of staff on dismissal or redundancy.

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TOPIC 1: MARKETING PLAN Definitions: A marketing plan is a statement that defines where the firm is in terms of its market (market audit)where it wants to get to (objectives) and how it plans to get there(strategies). The Process of Marketing Planning Market planning involves a number of activities 1. market/situational audit This is the process of analyzing the firm’s internal and external factors that may have positive or negative implication to its operations. Methods of market audit Situational audits are carried out by use of two major analyses namely: (a) SWOT Analysis (b) PESTLE Analysis

SWOT Analysis Definition: SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats This is the analysis of a firm’s strengths, weaknesses and opportunities based on its internal and external environments S- Strengths This relates to any advantage/positive aspect that the business enjoys over its competitors. W- Weaknesses These are the negative aspects that limit a business success. O- Opportunities These are the things that the business can profitably undertake in future because of its strengths or by eliminating their weaknesses. T- Threats These are the activities that threaten the future existence of the firm. This may be due to inability to utilise their strengths against their rivals. The Key Distinction - Internal and External Issues Strengths and weaknesses are internal factors. For example, strength could be your specialist marketing expertise. A weakness could be the lack of a new product. Opportunities and threats are external factors. For example, an opportunity could be a developing distribution channel such as the Internet, or changing consumer lifestyles that potentially increase demand for a company's products. A threat could be a new competitor in an important existing market or a technological change that makes existing products potentially obsolete. it is worth pointing out that SWOT analysis can be very subjective - two people rarely come-up with the same version of a SWOT analysis even when given the same

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information about the same business and its environment. Accordingly, SWOT analysis is best used as a guide and not a prescription. Adding and weighting criteria to each factor increases the validity of the analysis. Areas to Consider Some of the key areas to consider when identifying and evaluating Strengths, Weaknesses, Opportunities and Threats are listed in the example SWOT analysis below:

PESTLE Analysis Stands for the Political, Economic, Social, Technological, Legal and Environmental PESTlE analysis is concerned with the environmental influences on a business. i.e This is the analysis of all the external factors that may affect business survival. P- Political, E- Economic S- Social, T- Technological, L- Legal and E- Environmental, Identifying PESTLE influences is a useful way of summarizing the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences.

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The table below lists some possible factors that could indicate important environmental influences for a business under the PESTLE headings: Political / Legal - Environmental regulation and protection

Economic - Economic growth (overall; by industry sector)

- Taxation (corporate; consumer)

- Monetary policy (interest rates)

- International trade regulation

- Government spending (overall level; specific spending priorities) - Policy towards unemployment (minimum wage, unemployment benefits, grants) - Taxation (impact on consumer disposable income, incentives to invest in capital equipment, corporation tax rates) - Exchange rates (effects on demand by overseas customers; effect on cost of imported components) - Inflation (effect on costs and selling prices) - Stage of the business cycle (effect on short-term business performance)

- Consumer protection

- Employment law

- Government organisation / attitude

- Competition regulation

Social - Income distribution (change in distribution of disposable income; - Demographics (age structure of the population; gender; family size and composition; changing nature of occupations) - Labour / social mobility

Technological - Government spending on research

- Lifestyle changes (e.g. Home working, single households)

- Speed of technology transfer

- Attitudes to work and leisure

- Rates of technological obsolescence

- Education

- Energy use and costs

- Fashions and fads

- Changes in material sciences - Impact of changes in Information technology

- Health & welfare

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- Government and industry focus on technological effort

- New discoveries and development

- Economic "mood" consumer confidence

- Living conditions (housing, amenities, pollution)

- Internet!

2. Setting Marketing Objectives This are the goals that the firm would like to achieve through its marketing activities. i.e marketing objectives defines where the firm wants to be in a given period regarding its markets. A firm can pursue a number of objectives namely: 1) Market share objective This is an objective set to increase the percentage of the market controlled by the firm or its products 2) Market growth objectives These are objectives aimed at expanding the size of he firm. E.g. through mergers /acquisitions. 3) Revenue/profit Maximisation A firm may set a marketing objective aimed at increasing its level of revenue within a give time frame. 4) Business/ product image Some firm’s marketing activities are aimed at boosting their image/reputation. Sports sponsorship campaigns. 5) Product innovations The marketing objectives of affirm may be to introduce new product innovations in the market within the stated time frames. 3. Setting Marketing Strategies These are the way in which a business plans to achieve its objectives. Business strategies define how the firm will get to where it wants to be in a given period. Marketing strategies have to be defined for every stated marketing objective. Often marketing strategies are defined in terms of the 4P’s of marketing. To increase the market share the firm most ensure it has the right price, with an effective promotion and distribution policy. Types of marketing strategies There is a number of marketing strategies can that can be adopted by a firm. Amongst them includes: I) Niche marketing strategy II) Mass marketing strategy Niche marketing A market niche is a tiny segment of the larger market that is un served or under served by the exiting businesses. Niche marketing is a strategy in which the firm aims its products to tiny and particular segment of the market. Niche marketing is the opposite of mass marketing. Examples

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 

A TV station may curve out a niche as a spots TV targeting only ports fans as its niche. A radio station may only choose to play R&B music rather than playing a mix of all sorts of music.

Reasons for Niche Marketing I) A niche market enjoys high initial profit margins II) Niche markets have little or no competition since they are either un served or underserved. III) This markets are less risky as chances of success are higher IV) Its is cheaper to serve niche markets than the mass market. For instance it is cheaper to market in specific market segment than doing general marketing Limitations of niche marketing I) It attracts new entrants; one the nicher firm has successfully exploited the niche market this may attract other rival into it. II) Suffers market demand fluctuation: the market is made up of smaller number of consumers whose spending may be erratic. III) Lack of diversification: since the firm depends on one particular group any failure in demand for its products may affect their revenues. Mass marketing/undifferentiated marketing This is a form of marketing in which the markets its products to all possible groups. In this from of marketing the firm offers similar or nearly related products to all consumers and promotes them in the same way without differentiating between the various groups of consumers. E.g. coca cola does mass marketing for its products. Advantages of mass marketing I) More diversified risks II) Global marketing of products to different countries is possible. III) Products are sold to large number of customers thus the firm enjoys economies of scale IV) Stable demand for the products Limitations of mass marketing I) It is often expensive to set up production facilities for mass marketed products II) May face competition from successful market nichers and other efficient firms.

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The Marketing Mix This is a set of elements of marketing that defines the marketing strategies of a firm. Marketing strategies are all defined in terms of the 4 elements of marketing. Elements of marketing mix There are 4 elements of marketing mix I) Product II) Price III) Place IV) Promotion All these are generally referred to as the 4 P’s of marketing

Product A product is anything that the firm offers for sale. To achieve it objectives, affirm must design its product offers to suite the customers’ needs. For this reasons the following product elements must be considered. a. Product designs This deals with how the product should be designed to meet customers’ requirements This involves the issues such as;  the colour of the product  product shape  product taste  product size  ingredients etc b. product packaging This deals with how the product should be wrapped to suite the customers’ preferences. This involves issue such like:  color of the package  shape of the package c. product benefits This should be stated on the product and well projected to attract buyers. PRODUCT LIFE CYCLE this refers to the various stages through which a new product goes through from the time it is developed and introduced in the market upto the time it is removed.

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stages of product life cycle i. ii. iii. iv. v. vi.

Product development Introduction Growth. Maturity Saturation Decline Fig: The Product Life Cycle

Development Stage This is the stage at which new product ideas are generated and tested before they are launched. Introduction Stage At this stage, level of sales is increasing at a very slow rate because of the following reasons; i. Consumers are not fully aware of the product or its benefits. ii. The development costs might have been high and therefore a high entry price hat may be unattractive to buyers. iii. Lower market penetration as some firms are scared of launching the product in the entire market thus they start with smaller sections of it. Growth stage At this stage the level of sales are increasing as the consumer’s awareness increases. More so products were introduced at initially prices would have had the initial cost recovered thus the prices are falling.

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Maturity stage At this stage the product has attained the maximum market share and the sales are at optimum. Saturation stage At this stage new funds enter the market an d saturates it .Some businesses may consider pulling out of the product market. However other companies may choose to extend the life of the product at this stage b use of product extension strategies. Decline stage For new products having attained the maximum market share with no room for expansion may have the sales starting to decline. PRODUCT EXTENSION STRATEGIES These are strategies that extend the life of product beyond the saturation stage. They include; Finding new uses of a product This is a strategy where a company identifies new uses of the product in order to target new different groups in the market Increase product usage. This is achieved by encouraging consumers to increase the number of times they use the product e.g. many lotion companies may say apply twice per day for quick results. Find new market for a product. If the original market has been saturated the firm can increase sales by finding new market for their product e.g. expanding into international market. Changing the products ingredients The product life can b extended by adding new ingredients to suit the changing needs of the consumers e.g. herbal products were added to Dettol to form Dettol herbal. Developing wider product range A company can extends the product life by developing various ranges of products to cater other changing tastes and preferences e.g. coca cola has developed various ranges of products under the brand name coke that is light, lime and dark. The effects of product extension strategies are as shown in the diagram below:

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Product Mix or Portfolio This is a collection of all the products offered by a firm e.g. Coca Cola has the following product portfolio; Coke, Sprite, Fanta, Dasani and novida. Portfolio Analysis: Portfolio Analysis analyses the overall balance of the strategic business units of a business. Most large businesses have operations in more than one market segment, and often in different geographical markets. Larger, diversified groups often have several divisions (each containing many business units) operating in quite distinct industries. An important objective of a strategic audit is to ensure that the business portfolio is strong and that business units requiring investment and management attention are highlighted. This is important - a business should always consider which markets are most attractive and which business units have the potential to achieve advantage in the most attractive markets. Traditionally, two analytical models have been widely used to undertake portfolio analysis: - The Boston Consulting Group Portfolio Matrix (the "Boston Box"); - The McKinsey/General Electric Growth Share Matrix

MANAGING A PRODUCT PORTFOLIO OR MIX Product mix management is concerned with the timings f to launch a new product and pull out an old product from the market. This enables the firm to constantly launch new products at the appropriate time to ensure there is no vacuum created by the old products that have attained their maximum life. This is illustrated by the diagram below;

A sales of A products as started declining. B has just been launched ad the sales are growing. As B’s sales starts declining C has just been launched and sales are growing .In these case there exists “no vacuum”.

BOSTON MATRIX [PRODUCT PORTOLO MATRIX] This is a technique that helps the firm to analyse the product mix recurring their various stages in the product life cycle. A Boston matrix places the products into four categories; 1. Star product 2. Problem children product 3. Cash cows

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4. Dogs The Boston Consulting Group Box ("BCG Box")

1. Star product These are products with a large market share in a high growth market. 2. Problem children product These are products with a small market in a high growth market. The product might have future potential as they are in a high growth market segment but their sales particularly bad. This could be products in their introduction stage. 3. Cash cows These are products that are capable of generating funds possibly to support other product. These are mature products with a stable market share. 4. Dogs These are products that may be in the decline stage. The dogs exist in a low growth market and have a low market share. The Boston matrix is important as it enables the marketing managers to have an appropriate mix of all the four categories of the product. Products at different stages in the life cycle may need other products especially if their level of sales is very low.

Exersice Safaricom and Vodafone U.K offer a number of products to the Kenyan market; i) money transfer services eg M- Pesa, Mkesho etc ii) internet services iii) SMS or MMS Services

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iv) Voice Services. Based on your observation prepare a product mix portfolio a And explain how products in different categories ma affect the cash flow of the company.

BRANDING Brand is a name, symbol, sign or anything that identifies the product of a firm from the competitors priduct. Choosing a rand name is an important part of marketing strategy. QUALITIES OF A BRAND 1. It should be simple, short and easy to remember. 2. It should project the intended image e.g. if the company intend to portray image of products as environmental friendly they might use green colour to accompany the brand as part of identity. 3. Easy to differentiate from other competitors brands. 4. It should project the characteristics of the product. brands - introduction Introduction to brands Take a look at the list below that shows the world’s top 10 brands in 2002 (as measured by value): {Rank Brand Value ($ billions)} 1 Coca-Cola ($69.6) 2 Microsoft ($64.1) 3 IBM ($51.2) 4 GE ($41.3) 5 Intel ($30.9) 6 Nokia ($30.0) 7 Disney ($29.3) 8 McDonalds ($26.4) 9 Marlboro ($24.2) 10 Mercedes ($21.0) Source: Interbrand; JP Morgan Chase, 2002 Why do companies such as Coca-Cola, Microsoft, IBM and Disney seem to achieve global marketing success so easily? Why does it seem such an effort for others? Why do we, as consumers, feel loyal to such brands that the mere sight of their logo has us reaching into our pockets to buy their products? The meaning of brands Brands are a means of differentiating a company’s products and services from those of its competitors. There is plenty of evidence to prove that customers will pay a substantial price premium for a good brand and remain loyal to that brand. It is important, therefore, to understand what brands are and why they are important. Macdonald sums this up nicely in the following quote emphasising the importance of Page 15 of 57

brands: “…it is not factories that make profits, but relationships with customers, and it is company and brand names which secure those relationships” Businesses that invest in and sustain leading brands prosper whereas those that fail are left to fight for the lower profits available in commodity markets.

What is a brand? One definition of a brand is as follows: “A name, term, sign, symbol or design, or a combination of these, that is intended to identify the goods and services of one business or group of businesses and to differentiate them from those of competitors”. Interbrand - a leading branding consultancy - define a brand in this way: “A mixture of tangible and intangible attributes symbolised in a trademark, which, if properly managed, creates influence and generates value”. Three other important terms relating to brands should be defined at this stage: Brand equity “Brand equity” refers to the value of a brand. Brand equity is based on the extent to which the brand has high brand loyalty, name awareness, perceived quality and strong product associations. Brand equity also includes other “intangible” assets such as patents, trademarks and channel relationships. Brand image “Brand image” refers to the set of beliefs that customers hold about a particular brand. These are important to develop well since a negative brand image can be very difficult to shake off.

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Brand extension “Brand extension” refers to the use of a successful brand name to launch a new or modified product in a new market. Virgin is perhaps the best example of how brand extension can be applied into quite diverse and distinct markets. Brands and products Brands are rarely developed in isolation. They normally fall within a business’ product line or product group. A product line is a group of brands that are closely related in terms of their functions and the benefits they provide. A good example would be the range of desktop and laptop computers manufactured by Dell. A product mix relates to the total set of brands marketed by a business. A product mix could, therefore, contain several or many product lines. The width of the product mix can be measured by the number of product lines that a business offers. For a good example, visit the web site of Hewlett-Packard (“HP”). HP has a broad product mix that covers many segments of the personal and business computing market. How many separate product lines can you spot from their web site? Managing brands is a key part of the product strategy of any business, particularly those operating in highly competitive consumer markets. METHODS OF BRANDING Multiple branding This

Price In setting a price for a product the company will almost certainly want to cover its costs and make a profit as well. Firms have to decide whether to charge:  

A low price in order to attract sales An average price, this means you have to compete with rivals by other means. e.g. quality, promotions.

A higher price can be charged if the product is seen as being better than the rivals. There are a number of Pricing Techniques for new and existing products. FOR NEW PRODUCTS

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1. Skimming This is the introduction of a new product at a high initial price. When a new product is released it may be possible to start off charging a quite high price. This can be because owning the product first has some prestige or novelty attached to it. Many different prices can be charged as the product becomes less and less in demand. e.g. N64, fashionable clothes. 2. Penetration Pricing When a firm brings out a new product, it may feel it needs to make a lot of sales to establish itself in the marketplace. It can start off by offering the product at a low price. When they reach higher levels of sales they can raise prices. FOR EXISTING PRODUCTS 1. Price leader The market leader will change its price and its competitors will follow suit. e.g. when the price of petrol or interest rates change competitors normally follow suit 2.

Price taker You are a small seller in a large market selling an identical product, thereby you have no power to change the price, if you raise your price you will lose all of your customers as they will go to a competitor. e.g.

TACTICS 1. Cost plus pricing The cost of a particular job is calculated then a particular percentage is added on top. This is sometimes known as a mark-up. e.g. the total cost of repairing a television is £100, if a business adds a 20% mark-up it will charge a total of £120. 2. Hour based pricing

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Some businesses are able to calculate a standard charge per hour. e.g. gardening, photography. 3. Destroyer Pricing You sell your good at a very low price in order to destroy new or existing competitors. e.g. the Times newspaper reduced its price in the 1990’s, other newspapers followed suit and the result was the Today newspaper went out of business in 1995. 4. Competitor based This type of pricing is suitable when the market is competitive and price comparisons are easy. e.g. goods in supermarkets. 5. Price discrimination A firm will charge different prices to different people for the same good or service. e.g. some taxis charge different prices late at night, rail fares are higher during peak periods. 6. Loss leader Some products are sold below cost in the hope of selling other products. e.g. retailers put a well known brand name in shop window at a loss in order to attract people into the shop. 7. Psychological pricing This focuses on consumers’ perceptions of price. e.g. charging high prices to convey quality, charging £2.99 rather than £3.00, because people regard it as over £2.00 rather than in the £3.00 band and stressing reductions in price (e.g. was £20 now only £10). 8. Contribution pricing When a firm sells a range of products, the price of each good will have to cover all of the direct costs, in addition to this it will also have to make a contribution to the indirect costs and profit. e.g. Sony makes a large number of electrical goods, each of which helps to cover

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the costs of rent, lighting, heating etc.

Promotion - introduction to the promotional mix It is not enough for a business to have good products sold at attractive prices. To generate sales and profits, the benefits of products have to be communicated to customers. In marketing, this is commonly known as "promotion". Promotion is all about companies communicating with customers. A business' total marketing communications programme is called the "promotional mix" and consists of a blend of advertising, personal selling, sales promotion and public relations tools. In this revision note, we describe the four key elements of the promotional mix in more detail. It is helpful to define the four main elements of the promotional mix before considering their strengths and limitations. (1) Advertising Any paid form of non-personal communication of ideas or products in the "prime media": i.e. television, newspapers, magazines, billboard posters, radio, cinema etc. Advertising is intended to persuade and to inform. The two basic aspects of advertising are the message (what you want your communication to say) and the medium (how you get your message across) (2) Personal Selling Oral communication with potential buyers of a product with the intention of making a sale. The personal selling may focus initially on developing a relationship with the potential buyer, but will always ultimately end with an attempt to "close the sale". (3) Sales Promotion Providing incentives to customers or to the distribution channel to stimulate demand for a product. (4) Publicity The communication of a product, brand or business by placing information about it in the media without paying for the time or media space directly. otherwise known as "public relations" or PR. Advantages and Disadvantages of Each Element of the Promotional Mix

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Mix Element

Advantages

Disadvantages

Advertising

Good for building awareness

Impersonal - cannot answer all a customer's questions

Effective at reaching a wide audience

Not good at getting customers to make a final purchasing decision

Repetition of main brand and product positioning helps build customer trust Personal Selling

Highly interactive - lots of communication between the buyer and seller

Costly - employing a sales force has many hidden costs in addition to wages

Excellent for communicating complex / detailed product information and features

Not suitable if there are thousands of important buyers

Relationships can be built up important if closing the sale make take a long time Sales Promotion

Public Relations

Can stimulate quick increases in sales by targeting promotional incentives on particular products

If used over the long-term, customers may get used to the effect

Good short term tactical tool

Too much promotion may damage the brand image

Often seen as more "credible" since the message seems to be coming from a third party (e.g. magazine, newspaper)

Risk of losing control - cannot always control what other people write or say about your product

Cheap way of reaching many customers - if the publicity is achieved through the right media

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Price Elasticity of Demand

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TOPIC 2: BUDGETING A budget is a financial and quantitative statement prepared stating the plan of action to be undertaken in a given period. Budgets can be prepare as:  Historical based budgeting  Zero based budgeting Historical based budgeting This is budgeting based on the existing historical data. e.g. sales budget can be prepared based on the previous year’s sales Advantages of historical budgeting a) The information on which to base future estimates is readily available b) It is easier and realistic as one can do the budget with precision. Disadvantages of historical budgeting a) New businesses may not have any historical data and may have to budget from scratch by making new forecast. b) Markets are more dynamic and budgeting from the historical data may not reflect what the true estimates for the future. Zero based budgeting This is the kind of budgeting that is not based on existing historical figures but done from scratch. Advantages of Zero based budgeting a) This form of budgeting does not rely on historical data which may provide misleading estimates for the future since the market conditions keep changing. b) It is a flexible form of budgeting available to both new and existing businesses

Purposes of budgeting 1. Planning A budget provides an insight into the future and enables the firm to put in place measures to deal with anticipated problems. 2. Control A budget provides a means of controlling all the business activities to ensure that they run to achieve the stated objectives. 3. Motivation Budgeting involves all levels of staff in establishing targets for and expected level of achievement. This makes the employees part of the process and thus committed to achieving the set goals. 4. Coordination of activities The budgeting process enables the managers to coordinate various activities of all the departments in achieving the overall aims of the organization. 5. Yardstick of performance A budget provides standards against which performance is measured. E.g. if one budgeted to sell 5000 units in a month this provides a standard against which to measure whether one has over or under performed.

Variance and Budgets variance is the difference between the budgeted and the actual performance.

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Types of budgets 1. Sale budget This is prepared to provide an estimate of the expected sales. This can be done both in units and in pounds. 2. Production budget This is prepared to provide an estimate of the expected level of output. This can be both on units and pounds. 3. Cash budget This is a forecast of the expected cash inflow and outflow over a given period. Sales forecasts This is the process of estimating the amount of sales that is expected to be achieved over a given period. Example Abc Ltd had the following sales forecast for the month of July to December each unit of sale at £ 18. Month July August Sales(units) 60 80

September 100

October November 100 90

December 70

Prepare a sales budget in unit and revenues: Solution : Month July August Sales(units) 60 80 ×18 ×18 revenues 1,080 1,440

Sales budget in units September October November 100 100 90 ×18 ×18 ×18 1,800 1,800 1,620

December 70 ×18 1,260

sales fore casting This is the process of projecting how much sales can be generated from the future stated period. All this is done through research, primary or secondary. No budgets can be prepared before a sales forecast is done. This is because; production, labour, cash flow forecast etc shall be based on the projected sales. this can be done through a) Time series analysis b) Subjective forecast: where forecasts are based on opinion of:  sales staff(giving estimates of their future expected sales estimates),  customers may be asked to state their future buying intentions  Use of set up panel experts to give projections of future sales c) Qualitative forecasting Where the sales are determined based on prediction on the changes in the social, political and

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economic environments and how this will affect demand.

a) b) c) d)

Difficulties of Estimating Sales All estimate are based on prevailing conditions whose future changes cannot precisely be predicted It involves market research and therefore very costly to sustain Bias: out of over ambition , Some managers may provide forecasts that are not realistic. Some workers may choose to set low level of sales to avoid pressure to perform. Cash budget

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Managing working capital Working capital is the amount required for the day to day running of a business. It is the difference between the current assets and current liabilities. Working capital (WC) = Current assets- current liabilities. Working capital items Working capital comprises of current assets and current liabilities. Current assets These are resources that are only available for use in the business for a short period of not more than one year (12months). These are:  Stock of goods (inventory) – what we offer for sale.  Cash in hand  Cash at bank  Debtors (persons who owe us money for supplying them goods or services). Current liabilities These are debts that are payable within a year. I.e. they are short-term debts whose a payment falls within 12 months. These includes:  Creditors for supplies- (persons that we owe money for supplying goods or services).  Bank overdrafts Management of a business’ working capital Working capital management deals with the whole process of ensuring that the business has adequate cash to meet its short term cash requirements as and when need arises.eg paying of bills salaries suppliers etc. A business that does not manage its cash flow may find itself bankrupt (insolvent) for being not able to pay its short term obligations as and when they fall due. Each item of the working capital needs to be managed in a diligent manner to ensure a health and solvent financial position for the firm. management of Cash in hand and in bank Many firms may not have a major problem with the cash at their disposal. However a budget should exist to ensure that cash is not misused. Management of debtors Debtors are persons who receive goods on credit and pay latter. A business may tie up too much cash in this item if it doesn’t have proper credit control policies. To ensure a sound working capital a business should adopt the following. a) Decrease the credit period within which credit customer should pay up their accounts. E.g. from two months to one month. This is to ensure that customers pay on time to have the cash in the business. b) Offer discounts to customers to encourage prompt payment. c) Offer credit only to customers whose credit rating is high. I.e. those whose payment record is clean. d) Offer goods for sale only on cash basis

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Management of stocks Stocks refer to what the business offers for sale. To maintain a sound cash flow a business should manage their stock well. 1. Just in time stock requisition High stock levels tie up funds besides increasing the storage and security costs. Therefore stock should only be ordered as and when required to reduce tying up so much cash in stocks. 2. Fast moving goods Where possible buy goods that are fast moving to provide the required cash for the business. Management of creditors A business can ensure it has sufficient funds by negotiating for longer credit periods. This enables the firm to retain as much cash in the business as possible. Sources of cash flow problems 1. Overtrading This occurs where a firm attempts to expand its activities without adequate cash. It is a case of biting more than you can chew, by wanting to produce and sell too much yet you have no enough cash to support it. 2. Stock pilling This occurs where the firm holds so much idle stocks of raw materials, finished and semi finished goods. This in the end ties up so much needed cash that could be utilized elsewhere to generate more cash or to pay other bills. 3. Poor credit policies A firm that allows too much credit or long credit periods to its credit customers may suffer cash flow problems. 4. Over borrowing A business that borrows more than it can afford to pay will be calling for cash flow problems. When a business borrows more than it can pay it cash resources shall be strained in a way that it will not be able to meet its other obligations. 5. Investing too much in fixed assets During the initial stages of a business funds are limited. Investing too much on fixed assets is a sure way of putting the company into a cash flow crisis and into the path to insolvency. Why businesses Fail Statistics show that 2 out five startups go under within 2years this is due to the following reasons i. Poor cash flow management ii. Lack of a business plan to provide direction iii. Poor credit management eg giving too much credit with long repayment periods Page 27 of 57

iv. v. vi. vii.

Poor stock control overstocking that may lead to obsolete stocks and high storage costs Overtrading by trying to expand production without adequate capital Investing too much in fixed assets Lack of experienced human resource

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MANAGING OTHER PEOPLE Organization structure This is the layout of the different levels of responsibilities and authority in an organization. Span of control This refers to the number of employees that are directly under the control and supervision of a manager. Types of organization structures 1. Tall organization structures (vertical structure) This is a structure in which there are many managers with smaller span of control. Ie is a structure with many levels of management. A tall organization contrasts with a flat organization, since it has an extended vertical structure with well-defined but long reporting lines. The number of different levels may cause communication problems and slow decision making. It is for this reason that many companies are converting to flatter structures more suited to the fast responses needed in a rapidly-

changing business environment. Advantages of tall organization structures a) Promotes closer supervision of the juniors by the managers to ensure the tasks are Carried out as expected. b) Promotes good and closer relations between managers and the worker. A manager will be in a position to cultivate a personal relation with the juniors that may production. c) Communication is more effective here as the span of control is manageable Disadvantages of Tall organization structures a) It may promote autocratic leadership as the leader may be full in charge of all the decisions while workers take orders and this may be counterproductive. b) The cost of supervision shall be unnecessarily high because of the larger number of managers involved. 2.

Flat structures(also known as horizontal organization) These are structures with fewer managers with large spans of control. The idea is that well-trained workers will be more productive when they are more directly involved in the decision making process, rather than closely supervised by many layers of Page 29 of 57

management. Advantages of a flat structure a) This structure is generally possible only in smaller organizations or individual units within larger organizations. b) The flat organization model promotes employee involvement through a decentralized decision-making process. By elevating the level of responsibility of baseline employees and eliminating layers of middle management, c) Comments and feedback reach all personnel involved in decisions more quickly. Expected response to customer feedback becomes more rapid. Since the interaction between workers is more frequent. Disadvantages This organizational structure generally depends upon a much more personal relationship between workers and managers. Hence the structure can be more time-consuming to build than a traditional hierarchical model

The flat structure: note that there are a few hierarchy of managemen factors that determine the organisation structure and span of control 1) Skill and training of employees more experienced employees can be left on their own while untrained and unskilled ones may require closer supervision and therefore a more taller structure with smaller span of control. 2) Nature of the task some tasks may require quicker communication btn managers and employees therefore a need for a taller structure with smaller spans of control while other tasks may not require a quicker communication and thus a flat structure with lager spans of control. Page 30 of 57

3)

Degree of similarity of tasks to avoid duplication one manager can be put under the command of those workers doing related tasks thus a larger span of control and flat structures. However where the tasks are not related there may be many managers to command different sections thus smaller spans with a taller structure. 4) Personality of the top leadership a more autocratic leader may opt for heavy supervision of the worker and therefore few workers will be put under the charge of a manager a need for taller structure with a smaller span of control. centralized and decentralized organizations centralized organizations are those in which the decision making is vested in the top management. The lower cadre staff has no input in the decision making but rather to implement the decisions of the top management. Advantages 1) It encourages responsibility in top management. since the decision making is vested in the top management it is upon them to ensure that the work is carried out as expected. 2) Decision making is quicker as the managers do not consult their juniors before making a decision. 3) disadvantages i. Too much work and responsibility on the top management may render them ineffective managers ii. Subordinates will not feel part of the decision making process as they are not consulted. Therefore they will tend to be less motivated to implement the management decisions. iii. It creates a rigid environment where the top managers may be resistant to change due to their inability to listen to new ideas iv. The top managers may lack the technical skills to make some key decision without consulting the lower level staff who may be the experts in their own areas of operation Decentralization Decentralization is the process where most of the decision making is delegated to the lower level management. Ie the top managers involve the lower level staff in decision making.

i. ii. iii.

Advantages It gives the subordinates the power to make decision at their level of operations and therefore it makes them feel wanted, appreciated and therefore, motivated. By delegating the decision making to the various levels of operations, the top managers can have more time to deal with more pressing issues. It creates flexibility in the organisation as each function or level of operations can adjust itself to meet the changing circumstances of which they understand better that

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the top management.

i.

ii.

Disadvantages Lack of strict control of the top management may lead to divergence of the organizational objectives as the subordinates may make decision only in view of their department/section without having the bigger picture of the entire organisation. Communication will be slowed down considerably given the high level of consultation involved in decision making process.

RECRUITMENT AND TRAINING This is the process of attracting a pool of applicants for the job. Methods of recruitment 1. Internal recruitment 2. External recruitment Internal recruitment This where a firm recruits from the existing employees to fill up a job vacancy. Forms of internal recruitments I. Promotions This is a form of recruitment in which junior employees are moved up the rank to fill up a senior position. II. Transfers This is where employees are moved from one section of the organization e.g. branch, or department, to fill up the vacancy in the other. Advantages of internal recruitments i. It gives existing employees a chance to advance in their careers ii. There will be shorter induction training as the employee is already familiar with the company procedures and policies. iii. The employer knows the internal employees more and there is a lower risk of hiring the wrong person for the job iv. Internal recruitment is more cheaper and faster compared to external recruitments which are lengthy and expensive. v. It helps to reduce labour turnover. i.e the number of people who join and leave the company in a period of one year. Internal recruitment improves the desire for employees to stay longer in the company since there is hope for future career advancements. Disadvantages of internal recruitments i. Internal recruitments lack a variety of talents to choose from since it limits the employer to the few existing employees. ii. Sometimes internal recruitments may cause disputes between employees and the management especially where the recruitment is believed to have been unfair. External recruitment This is where the firm attracts employees from outside to apply for the job. Page 32 of 57

Forms of external recruitment 1. Commercial employment agencies These are companies that hire on behalf of other companies for a fee. These companies recruit, interview and shortlist applicants and forward the list to their clients for hiring. 2. Head hunting This is a form of recruitment in which the employer or an executive agencies approach individuals who have a reputation in a given field with job offers. 3. Career fairs A company can recruit fresh graduates through university placements and career fairs/visits to the institutions of higher learning. 4. Media advertisements Firms can also attract applicants for the job by placing job offers in the media such as newspapers, TV etc. 5. Online recruitment Many firms are increasingly using their websites to hire new employees. An application blank is posted on their website in which the prospective applicants make their job request by filling them. Advantages of external recruitment i. It enables affirm to get new and fresh ideas from the new recruits ii. This provides a variety of applicants for the company to pick from. iii. Internal recruitments tend to cause little or no disputes after the selection process as the employees are most likely to cooperate with new recruits than the colleague Disadvantages of external recruitment. i. Some forms of external recruitment are too lengthy and time wasting ii. The firm may get the wrong person for the job since they don’t know them well. iii. It may cost the company more to train the new employees to understand the company policies iv. It may demoralize the existing employee as it denies them a chance to progress their careers.

MOTIVATION OF STAFF Motivation is the process of driving an individual or a group to act in a certain way. i.e. it refers to the energy and commitment with which an individual or group Performs a task or role. At the most basic level, motivated staff works harder. A motivator is what drives an individual to act in a particular way. Keeping staff motivated is good for business. Here are some examples why:  

Motivated workers are more productive and higher productivity usually means higher profits. In a service industry, workers who are well motivated will provide a better level of customer

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service, keeping the customers happy.  Staff who are well motivated are more likely to stay with the company. They grow in experience and become even more valuable to their employer.  If a business successfully keeps the staff, the cost of recruiting and training new staff is reduced. Financial incentives These are the monetary benefits given to employees to drive them to perform. Money, and the way it is paid, can affect motivation to work. 1. Time rate or 'wages' Paying by the number of hours worked. Paying by the number of items (pieces) produced. 2. Piece rate Extra pay for work done over and above normal working 3. Overtime hours. It is usually paid at a higher hourly rate, e.g. double time means twice the normal hourly rate. Usually paid for working unsocial hours such as night 4. Shift payments work. A special single payment for achieving a target. Bonus payments 5. A percentage of the company's profit is shared amongst the 6. Profit sharing workers. 7. Employee share ownership Employees are given a chance to buy the company shares to be part of the company ownership. schemes (ESOP) Employees are paid based on how well they perform on the 8. Performance related pay job. Those who perform well earn more.eg salary (PRP) increments may be based on one’s performance. Paying extra money for jobs with difficult working extra pay for difficult jobs conditions will usually encourage people to apply for the work. A loyalty bonus can be used to persuade workers to stay with their employer for a long period of time. Employees may not want to work longer than their contracted hours but they can often be persuaded to do so by receiving a higher rate of pay. Is a payment in kind. Instead of giving money the employer perks might provide:  A company car  health insurance  free uniform  discounted products  first class travel It is often cheaper for the employer to provide goods rather than the money to buy them with. A good perk will make an employee reluctant to leave the business

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Question for review You are the Human Resources Manager of a large company. Feedback suggests many of the workers are unhappy and are looking for new jobs. Recent figures show productivity has fallen. You know that the Managing Director has said there will be no wage increases this year. What improvements could you suggest at the next management meeting which would improve motivation and productivity? The Answer A good answer will suggest introducing some of the following things: 

Providing a pleasant room for staff to use during breaks.  Providing subsidised meals or improving the existing canteen.  Giving permanent contracts of employment  An occupational pension scheme  Introducing team working and giving teams more say in how things are done  Advertising job opportunities internally  Introducing a newsletter or regular briefing for all staff  Rewarding staff with perks like company cars, insurance schemes or discounted goods Disadvantages/Limitations of financial incentives 1. Some financial incentives such as piece rates may interfere with product quality as the employees strive to produce more to earn more. 2. A system based on quantity produced may affect the level of earnings to the employees during break downs. 3. Payments based on performance may not be adequate since there may be no acceptable standard of performance. Non financial benefits These are the non monetary incentives given to the staff to encourage them to perform well. Managers can get the best from their staff by use of these incentives. These are: 1. Delegation/ Empowerment This is the assigning of the authority to carry out a task to the juniors by the senior managers. This motivates staff as they feel important, recognized and empowered to act for the organization. 2. Job enrichment: This is the making work more interesting by improving the content and variety of tasks undertaken by an employee. Content of the job can be improved by giving more responsibilities to the employees. 3. Promotions Employees can also be motivated by giving them a chance to progress in their careers through promotions.

4. Recognition Verbal or written appreciation and recognition of any good work effort made by an employee Page 35 of 57

tends to motivate the employee to work hard. E.g awarding good performance with certificates. 5. Job rotation Is where employees are not specialized on doing one task but are rather moved from one task or job to the other. This is meant to reduce boredom besides make workers learn new skills. Staff Turnover This is the number of employees leaving a business in a period of one. Causes of labour turn over 1. Poor pay Employees who feel they are underpaid by their current employer will quit to join one whom they feel is paying well for their services. 2. Lack of job security Employees who feel threatened of losing their jobs quit in search for a secure job. 3. Lack of growth If an employee is feels he/she has stagnated with no opportunity to advance in his career through promotions or training, may leave in search for an employer who can offer such opportunities. 4. Poor working conditions Companies that provide poor working facilities that make working difficult or dangerous tent to lose their workers to those that have good and secure work environments. Effects of high labour turnover 1. High costs of recruitment High labour turnover increases the cost of recruiting, hiring and training new workers for the job. 2. Effect on production When employees join and leave the organization this interferes with the production schedules of the company. Such loss of production may cause loss of sales orders. 3. Effects on reputation Prospective employees may avoid companies with high labour turnover since they may feel more insecure joining companies that too many people are already leaving because of dissatisfaction.

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Motivation Theories Taylor’s – Scientific Management Theory Frederick Winslow Taylor (1856 – 1917) put forward the idea that workers are motivated mainly by pay. His Theory of Scientific Management is based on the assumptions that: 1. Workers naturally dislike work and need to be closely supervised and controlled. 2. Therefore managers should break down production into a series of small tasks(division of labour) 3. Workers should then be given appropriate training and tools so they can work as efficiently as possible on one set task (specialisation). 4. Workers are then paid according to the number of items they produce in a set period of time (piece-rate pay). 5. Man is a rational economic animal concerned with maximising his economic gain; 6. People can be treated in a standardised fashion, like machines Taylor had a simple view about what motivated people at work - money. He felt that workers should get a fair day's pay for a fair day's work, and that pay should be linked to the amount produced (e.g. piece). Workers who did not deliver a fair day's work would be paid less (or nothing). Workers who did more than a fair day's work (e.g. exceeded the target) would be paid more. Taylor’s theory and management style Taylor’s approach has close links with the concept of an autocratic management style (managers take all the decisions and simply give orders to those below them) However workers soon came to dislike Taylor’s approach as they were only given boring, repetitive tasks to carry out and were being treated little better than human machines. Firms could also afford to lay off workers as productivity levels increased. This led to an increase in strikes and other forms of industrial action by dissatisfied workers. The implications of Taylor's theory for managing behavior at work were: - The main form of motivation is high wages, linked to output - A manager's job is to tell employees what to do - A worker's job is to do what they are told and get paid accordingly

1. 2.

3. 4.

Weaknesses in Taylor's Approach The most obvious weakness in Taylor's approach is that it ignores the many differences between people. There is no guarantee that a "best way" will suit everyone. Secondly, whilst money is an important motivation at work for many people, it isn't for everyone. Taylor overlooked the fact that people work for reasons other than financial reward. Workers dislike Taylor’s approach as they were only given boring, repetitive tasks to carry out Worker were not empowered but were being treated little better than human machines. This is a great de-motivator.

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Herzberg two factor theory Introduction Herzberg's Two Factor Theory is a "content theory" of motivation" (the other main one is Maslow's Hierarchy of Needs). Herzberg analysed the job attitudes of 200 accountants and engineers who were asked to recall when they had felt positive or negative at work and the reasons why. From this research, Herzberg suggested a two-step approach to understanding employee motivation and satisfaction:

Hygiene Factors Hygiene factors are based on the need for a business to avoid unpleasantness at work. If these factors are considered inadequate by employees, then they can cause dissatisfaction with work. Hygiene factors include:  Company policy and administration  Wages, salaries and other financial remuneration  Quality of supervision  Quality of inter-personal relations  Working conditions  Feelings of job security

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Motivator Factors Motivator factors are based on an individual's need for personal growth and they are intrinsic factors i.e comes from within the job. When they exist, motivator factors actively create job satisfaction. If they are effective, then they can motivate an individual to achieve above-average performance and effort. Motivator factors include:  Status  Opportunity for advancement  Gaining recognition  Responsibility  Challenging / stimulating work  Sense of personal achievement & personal growth in a job Similarities of Herzberg and Maslow’s Theories There is some similarity between Herzberg's and Maslow's models. They both suggest that needs have to be satisfied for the employee to be motivated. However, Herzberg argues that only the higher levels of the Maslow Hierarchy (e.g. self-actualisation, esteem needs) act as a motivator. The remaining needs can only cause dissatisfaction if not addressed. Applying Hertzberg's model to de-motivated workers What might be the evidence of de-motivated employees in a business? i. Low productivity ii. Poor production or service quality iii. Strikes / industrial disputes / breakdowns in employee communication and relationships iv. Complaints about pay and working conditions According to Herzberg, management should focus on rearranging work so that motivator factors can take effect. He suggested three ways in which this could be done: i. Job enlargement ii. Job rotation iii. Job enrichment

Maslow’s hierarchy of needs Introduction Maslow's Hierarchy of Needs is a "content theory" of motivation" (the other main one is Herzberg's Two Factor Theory). Maslow's theory consisted of two parts: (1) The classification of human needs, (2) Consideration of how the classes are related to each other Page 39 of 57

Classification of human needs Maslow believed that these needs are similar to instincts and play a major role in motivating behaviour. Physiological, security, social, and esteem needs are deficiency needs (also known as D-needs), meaning that these needs arise due to deprivation. Satisfying these lower-level needs is important in order to avoid unpleasant feelings or consequences. Maslow termed the highest-level of the pyramid as growth need (also known as being needs or Bneeds). Growth needs do not stem from a lack of something, but rather from a desire to grow as a person. Five Levels of the Hierarchy of Needs There are five different levels in Maslow’s hierarchy of needs: 1. Physiological Needs These include the most basic needs that are vital to survival, such as the need for water, air, food and sleep. Maslow believed that these needs are the most basic and instinctive needs in the hierarchy because all needs become secondary until these physiological needs are met. 2.

Security Needs These include needs for safety and security. Security needs are important for survival, but they are not as demanding as the physiological needs. Examples of security needs include a desire for steady employment, health insurance, safe neighborhoods and shelter from the environment.

3.

Social Needs These include needs for belonging, love and affection. Maslow considered these needs to be less basic than physiological and security needs. Relationships such as friendships, romantic attachments and families help fulfill this need for companionship and acceptance, as does involvement in social, community or religious groups.

4.

Esteem Needs After the first three needs have been satisfied, esteem needs becomes increasingly important. These include the need for things that reflect on self-esteem, personal worth, social recognition and accomplishment.

5.

Self-actualizing Needs This is the highest level of Maslow’s hierarchy of needs. Self-actualizing people are self-aware, concerned with personal growth, less concerned with the opinions of others and interested fulfilling their full potential.

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How does the Hierarchy Work?  A person starts at the bottom of the hierarchy (pyramid) and will initially seek to satisfy basic needs (e.g. food, shelter)  Once these physiological needs have been satisfied, they are no longer a motivator. The individual moves up to the next level  Safety needs at work could include physical safety (e.g. protective clothing) as well as protection against unemployment-job security, loss of income through sickness etc)  Social needs recognise that most people want to belong to a group. These would include the need for love and belonging (e.g. working with colleague who support you at work, teamwork, communication, company treats )  Esteem needs are about being given recognition for a job well done. They reflect the fact that many people seek the esteem and respect of others. A promotion at work might achieve this  Self-actualisation is about how people think about themselves - this is often measured by the extent of success and/or challenge at work Maslow's model has great potential appeal in the business world. The message is clear - if management can find out which level each employee has reached, then they can decide on suitable rewards. Problems with the Maslow Model There are several problems with the Maslow model when real-life working practice is considered: i. Individual behaviour seems to respond to several needs - not just one

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ii. The same need (e.g. the need to interact socially at work) may cause quite different behaviour in different individuals iii. There is a problem in deciding when a level has actually been "satisfied" iv. The model ignores the often-observed behaviour of individuals who tolerate low-pay for the promise of future benefits. v. There is little empirical evidence to support the model. Some critics suggest that Maslow's model is only really relevant to understanding the behaviour of middle-class workers in the UK and the USA (where Maslow undertook his research).

Review excercises: Managing other people

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MANAGING THE PROVISION PROCESS(OPERATIONS MANAGEMENT) Operations management is the creating the product or service and delivering it to the customer. Eg operation management at Ford means designing the cars and machinery for making them, ordering the supplies, manufacturing the products, delivering them to the show rooms and handling customer service issues such as warranties. Marketing creates demand; operations management creates supply to meet the demand. Techniques of production 1. Job production 2. Batch production 3. Mass/flow production

Production Methods There are four ways for manufacturing businesses to organise their production - job production, batch production, flow production and cell production.

Job production This method of production involves an item being manufactured entirely by one worker or by a group of workers.

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These items are often made to customer requirements, rather than being mass produced. This type of production is usually undertaken by small businesses and craft industries (e.g. carpenters), although larger businesses which specialise in 'one-off' products (e.g. bridges) may also use this production method.

Batch production This method of production involves the manufacture of an item being divided into a number of small tasks. A collection (or 'batch') of items each have one of these tasks completed, and then the batch moves onto the next manufacturing task. In other words, several items have the same task performed on each of them and then they move onto the next task together in a group. This production method can result in the build-up of large amounts of stock and work-in-progress. This may be a problem if the business is in a fashion industry, where customers' tastes can change quickly and unpredictably, leaving the business with much stock that it is unable to sell.

Flow production This method of production involves the tasks which were identified in 'batch' production becoming continuous for each unit, often with the use of a moving conveyor belt (e.g. a car assembly line). Each unit is produced individually, instead of being produced in batches. This type of production is usually undertaken by large businesses. This method of production was first established by Henry Ford in the 1920s, when he developed the world's first automated production line. This involved each car passing the workers on a moving conveyor belt, rather than the workers continually moving to the car. This method should boost labour productivity and reduce average cost of production even further. It is often argued that flow production leads to high rates of alienation, demotivation and absenteeism amongst the employees - it is for these reasons that much machinery is today used on these production lines to perform simple, repetitive tasks which humans may easily become bored in performing.

Cell production

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This method of manufacturing an item organises workers into 'cells' within the factory, with each cell comprising several workers who each possess different skills. Each cell is independent of the other cells and will usually produce a complete item, and each cell will usually have an output target to achieve for a given period of time. It is often argued that if the group of workers in each cell can see the completion of the finished product, then their work will have more meaning and therefore their levels of motivation and job satisfaction will be greatly enhanced.

Research and Development (R&D) All businesses need to develop long-term strategies, and an important part of this strategy must be the continual development and launch of new products, or amendments made to existing products. This is the purpose of research and development (R&D). R&D can basically be defined as: 'carrying out extensive scientific research into the product and its design, and then developing a range of prototypes, each to a slightly different specification.' The prototype which best meets the needs of the customers and the business is then likely to be commercialised. The development of products can take several years to complete and many businesses spend a huge amount of money on this process (e.g. Unilever spent over £600 million on R&D in 1997). It can often be a very risky process, since much money can be spent on ideas that will never be commercialised. It is within the 'sunrise' industries (i.e. industries which are fairly young and have rapid growth potential, such as computers and aerospace) that extensive R&D spending today can result in a huge competitive advantage in the future. The benefit of being the first company to launch a new, innovative product is immeasurable, since the company can charge a high price and build up a strong market share as it faces no competition. It is estimated that only about one product in the pharmaceutical industry reaches the commercialisation stage (i.e. launched onto the market) for every ten which are developed and testmarketed. Therefore, the company will have massive R&D costs to recoup when it actually launches a new product, and it will probably take several years before it will have broken-even and covered all the R&D costs. The businesses which are most likely to succeed in the future are those which develop more new products than their closest rivals, bring their new products to the market in less time than their rivals, compete in more product- and geographic-markets than their rivals, and provide very strong after-

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sales service to customers.

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Quality Total Quality Management (T.Q.M) This is the attempt by a business to stop errors and waste from occurring at all levels within the organisation, and to try to encourage all employees to make 'quality' paramount within their daily activities (whether in production, marketing or personnel). There are a number of components of T.Q.M: 1. Internal relationships between workers and their superiors and subordinates are seen to be as important as the external relationships that exist between the business and its customers and suppliers. 2. TQM must be seen to be a policy that is followed by, and has the commitment of, all workers, from senior management to shop floor employees. 3. The business must monitor all its activities and processes in order to identify any areas for improvement and to ensure that quality is being achieved. 4. Team-working is important, since a group of people working together will develop a wider range of skills, co-operation, and higher motivation than if workers were performing repetitive tasks on their own. 5. Regular market research must be undertaken to ensure that customers are happy with the level of service that they receive (any complaints can be used to improve the existing systems).

Quality Circles This is a group of workers that meets at regular intervals during the working week in order to identify any problems with quality within production, to consider the alternative solutions to these problems, and to then recommend to management the solution that they believe will be the most successful. The members of the quality circle are also involved in the implementation and monitoring of the solution. This should help to improve the level of motivation amongst the workers because it makes each person in the group feel valued and that they are making a significant contribution to the improvements on the factory-floor.

Zero Defects This is the ultimate objective for a business, to produce every product with no defects, therefore eliminating waste and the time taken to correct mistakes. Zero defects can lead to an improved business and customer reputation, as well as increasing levels of both sales and profitability. In order for the objective of zero defects to be achieved, it requires the involvement of every employee in the business, making sure that they are all committed and suitably trained.

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Continuous Improvement (Kaizen) Kaizen is a Japanese word which means 'change for the better'. A business will often be facing increasing demands from customers to add new features to their products, as well as facing pressures from their competitors who are producing new and improved products, or offering improved after-sales service. The business will need to continually update and improve their products and marketing, in order to stay ahead of their competitors and boost revenue and profitability. It is widely held that any aspect of the business can be improved, not just the production processes and, as with zero defects, it is vital that every employee in the business is involved in this philosophy, not simply those in the production department, but also those in marketing, finance and personnel. Kaizen aims to eliminate waste, and reduce both the time and the costs of production. It links in with other concepts such as TQM, quality circles, productivity improvements and new product development.

Quality Standards The British Standards Institution (BSI) is the body that is responsible for setting quality and performance standards in UK industry. The BSI 'kitemark' on a product implies to customers that it has been manufactured and produced to a high level of quality, and will be fit for the purpose for which it was advertised. Quality assurance refers to the attempt to achieve customer satisfaction, by ensuring that the business sets certain quality standards and publicises the fact that these standards are met throughout the business. British Standard 5750 (BS 5750) was the most common quality certification in the UK. It is now known as ISO 9000, which is an international standard that tells customers that a business has reached a required level of quality in its products and processes. Quality of output is vital for retaining customer loyalty and, therefore, it is necessary for quality to be an important consideration in the design, the production, the distribution, the sale and the after-sales service of products. Employee involvement and participation in quality programmes (e.g. quality circles and suggestionschemes) will serve two purposes: 1. Improve the overall quality of the output and processes. 2. Help motivate the workers by making them feel that their contributions and their suggestions

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are highly valued. Quality control is the process of checking the quality and the accuracy of raw materials and supplies as they arrive at the business, and also of the finished products as they leave the business en route to retailers and customers. This is usually carried out either by quality inspectors or by the employees themselves. The philosophies of zero defects and Kaizen require stringent quality control systems, in order to reduce the costs and time associated with both waste and the correction of low quality output.

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Stock Control This is the system used to ensure that the business always has sufficient stock available to meet customer requirements.

Re-Order Levels This is the minimum amount of stock that a business will hold before it re-orders from its suppliers. The re-order level will vary from business to business and from industry to industry. For example, a supermarket is likely to have a higher re-order level than a car dealer, since in the time taken to receive its supplies, a supermarket is likely to sell far more stock than a car dealer.

Re-Order Quantities The re-order quantity is the amount of stock and raw materials that a business orders from its suppliers each time it reaches its re-order level. This again will vary from business to business and from industry to industry. For example, a business selling fast-moving consumer goods (e.g. chocolate bars or baked beans) is likely to order a far larger amount of stock from its suppliers than a manufacturer of goods with a slower stock turnover (e.g. televisions or washing machines). There are several factors which will influence the amount of stock which a business orders, including: 1. 2. 3. 4.

Lead times. The expected level of customer demand. The costs of stockholding. The type of stock, whether it is perishable or durable.

Buffer Stocks This is the minimum stock level which will be held by a business to meet any unexpected occurrences. For example, A sudden large order from a customer, deliveries of raw materials not arriving on time, or computer re-ordering systems breaking down.

Lead Times This is the amount of time that elapses between a business placing an order with a supplier for more stock or raw materials, and the delivery of the goods to the business. The business will wish the lead-time to be as short as possible, so that it can meet its customer orders Page 51 of 57

and minimise the time between paying for the stock and receiving the revenue from the customer. However, this may not happen due to a number of factors, such as delays in the supplier receiving the order, or the breakdown of the suppliers' lorries delivering the stock to the business. An effective stock control system, combining the above four elements, can be seen below:

From this diagram, it can be seen that: 1. 2. 3. 4.

The re-order level (i.e. the amount of stock remaining when an order is placed) is 20,000 units. The re-order quantity (i.e. the amount of stock ordered from a supplier) is 20,000 units. The buffer stock (i.e. the minimum stock holding) is 10,000 units. The lead-time (i.e. the time delay between placing an order for stock and receiving it) is 8 days.

Stock Rotation Many businesses use a stock rotation system. This is the process of ensuring that the older batches of stock are used first rather than the newer batches, in order to avoid the possibility that the older stocks will become obsolete or go past their sell-by-date. This is often referred to as a First In First Out (F.I.F.O) system, to encourage the older batches of stock to be used first, therefore avoiding the possibility that the older stock will be left in a warehouse, possibly becoming unusable.

Link to Information Technology (C.A.D/C.A.M) The production process and stock control systems in a business can be assisted by the use of Information Technology (I.T). Sophisticated software packages can enable a business to keep detailed and accurate records on its purchases of stock and its sales to customers, using such systems as Electronic Point of Sale

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(E.P.O.S). This records every transaction made by a business and can, therefore, enable it to monitor its stock levels and sales of products to a 100% level of accuracy. This system can automatically re-order stock when numbers fall to a certain level in the warehouse, as well as monitoring the quantity of each component that is used in the production process. This enables a tight control to be kept on both costs and waste, as well as recording the amount of revenue received from customers and any outstanding customer debts. Computer Aided Design (C.A.D) is the use of sophisticated computer software to design threedimensional images of products quickly and relatively cheaply. Computer Aided Manufacturing (CAM) is the use of computers and software for a wide variety of production tasks, including automated production lines and stock control systems.

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Lean Management Lean management/production is the term given to a range of measures traditionally used by businesses in an attempt to improve efficiency by reducing waste and costs of production. such measures includes: (a) Just in time(JIT) (b) Cell production(CP) (c) Bench marking(BM) (d) Time based management

Just-In-Time This is a method of manufacturing products which aims to minimise:   

the production time the production costs the amount of stock held in the factory.

Raw materials and supplies arrive at the factory as they are required, and consequently there is very little stock sitting idle at any one time. Each stage of the production process finishes just before the next stage is due to commence and therefore the lead-time is significantly reduced. With a just-in-time production system, the level of production is related to the demand for the output (i.e. the number of orders) rather than simply producing finished goods and waiting for orders. This means that raw materials and stock only needs to be ordered from suppliers as required - this reduces the amount of money tied up in stocks, and leaves more money available for investment elsewhere. The advantages of a just-in-time production system are: 1. Cashflow is improved, as less money is tied up in raw materials, work-in-progress and finished goods. 2. Less need for storage space for raw materials and finished goods. 3. The business builds up strong relationships with its suppliers. 4. Communication and co-operation between the marketing and the production departments are improved. The disadvantages of a just-in-time production system are: 1. The business may struggle to meet orders if their suppliers fail to deliver the raw materials on time. 2. The business is unlikely to 'bulk-buy' its raw materials and, therefore, it may lose the benefit of achieving economies of scale. 3. Buffer stocks are minimal and this may lead to the business having to reject customer orders requiring delivery immediately.

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Cell Production This method of manufacturing an item organises workers into 'cells' within the factory, with each cell comprising several workers who each possess different skills. Each cell is independent of the other cells and will usually produce a complete item, and each cell will usually have an output target to achieve for a given period of time. It is often argued that if the group of workers in each cell can see the completion of the finished product, then their work will have more meaning and therefore their levels of motivation and job satisfaction will be greatly enhanced. This method of production is often combined with the just-in-time approach. The advantages of cell production are: 1. 2. 3. 4. 5. 6.

Improved job satisfaction and motivation. Improved quality as the group of workers take responsibility for the output. Multi-skilling of workers means that job rotation can occur. Stockholdings are reduced (leaving less money tied up in stocks). The factory space can be used more efficiently. Lead-times are reduced.

The disadvantages of cell production are: 1. Output may not be as high as a 'flow' production system. 2. Different 'cells' may work at different speeds (leading to conflict and tension). 3. The business may need to invest heavily in new machinery and equipment, as each cell will require the same capital items.

Benchmarking This refers to a business finding the best methods and processes that are used by other businesses, and then trying to emulate these in order to become more efficient in its operations. Benchmarking can be used in all areas and processes in a business, not just for production. For example, it can be used to improve customer service, advertising campaigns, Human Resource Management, and budgeting procedures. Data for benchmarking is collected and used with the full co-operation of the other businesses, and often the results will help both businesses to improve their systems and procedures.

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There are several stages involved in implementing a benchmarking system: 1. 2. 3. 4. 5.

Researching the areas in a business which need improving. Deciding how an improvement in these areas can be measured. Identifying 'best practice' in other businesses. Agreeing the exchange of information with other businesses. Comparing the 'best practice' with the existing processes, systems and procedures in the business. 6. Altering the processes, systems and procedures in order to improve performance. 7. Evaluating how successful the changes have been. In order for benchmarking to be successful, the business must ensure that firstly every employee is committed and involved in the system, (from senior management to shop-floor employees), and secondly that sufficient time and finance is available for the gathering of data and the implementation of new procedures. Benchmarking will fail to deliver improvements to the business if there is a lack of willingness by other businesses to disclose information, or if the systems and procedures used by the 'best practice' businesses are not appropriate for the business in question. In summary, benchmarking can help a business identify those areas in its operations which need improvement, as well as considering alternative processes and procedures for achieving its objectives. 'Best practice' can be emulated and the competitiveness of the business should improve as it strives to improve and become more efficient.

Time-based Management Time is a very valuable resource and time-based management is concerned with reducing both the length of time taken to produce the product and also, therefore, reducing the lead-time (the time lag between the customer placing an order and the business delivering the finished product). In order for a business to successfully operate a time-based management system, it is important that machinery is flexible and production runs can be shortened or lengthened at short notice, in order to produce more of an existing product or to start the production of an alternative product. It is also essential that staff are multi-skilled and can rotate between different tasks, as they may be required to perform a number of different jobs in a short space of time. Time-based management makes it easier for a business to implement other lean production techniques (such as just-in-time and cell production), and since these techniques require less time and fewer stocks of raw materials than more traditional mass production techniques, then the business will save money. However, it is often argued that the move away from mass production and lengthy production-lines will reduce the chance of the business benefiting from economies of scale in its manufacturing

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techniques. It is also likely that a business will be able to implement the time-based management philosophy to its R&D processes, as well as to the production-line. A business which can develop and launch more products in a shorter time than its competitors will benefit from a number of advantages: 1. If the business is the first to launch a product on the market, then it can charge a premium price to reflect the innovative nature of the product. 2. Premium prices help to quickly recoup R&D costs, as well as earning the business a significant profit-margin per unit sold. 3. Brand loyalty is likely to develop - enabling the business to use this strong customer base as a 'launch pad' for new products in the future. 4. The diversity of products that are on sale will increase the product portfolio of the business, as well as reduce the risk of business failure should one or two of the products prove unsuccessful.

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