HSC Business Studies Syllabus Revision Guide

10.4 HSC TOPIC HUMAN RESOURCES

HSC Business Studies Syllabus Revision Guide CONTENTS: 10.1 OPERATIONS ……………………………………………..… 2 1. 2. 3. 4. 5. 6.

Role of operations management Influences Operations processes Operations strategies Operations ‘super summary’ Operations acronyms

3 5 8 14 23 25

10.2 MARKETING ………………………………………………. 26 1. 2. 3. 4. 5. 6.

Role of marketing Influences on marketing Marketing process Marketing strategies Marketing ‘super summary’ Marketing acronyms

27 30 33 38 47 49

10.3 FINANCE ……………………….…..….….….….…….…… 50 1. 2. 3. 4. 5. 6.

Role of financial management Influences on financial management Processes of financial management Financial management strategies Finance ‘super summary’ Finance acronyms

51 53 56 64 70 73

10.4 HUMAN RESOURCES ….….…..….....…...……..….....….. 74 1. 2. 3. 4. 5. 6. 7.

Role of human resource management Key influences Processes of human resource management Strategies in human resource management Effectiveness of human resource management Human resources ‘super summary’ Human resources acronyms

75 77 83 86 90 92 95

THE BUSINESS REPORT ….……..…..…...…….….….………. 96

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10.1 HSC Topic: Operations Outcomes: The student: H1 critically analyses the role of business in Australia and globally H2 evaluates management strategies in response to changes in internal and external influences H3 discusses the social and ethical responsibilities of management H4 analyses business functions and processes in large and global businesses H5 explains management strategies and their impact on businesses H6 evaluates the effectiveness of management in the performance of businesses H7 plans and conducts investigations into contemporary business issues H8 organises and evaluates information for actual and hypothetical business situations H9 communicates business information, issues and concepts in appropriate formats

The focus of this topic is the strategies for effective operations management in large businesses.

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1. Role of operations management All goods and services are the result of deliberate decisions to design, conduct and continually improve systems of production, i.e. operations management. Operations management involves planning, organising, co-ordinating and controlling the transformation or inputs to outputs to meet the requirements of customers. It is about providing products reliably with consistent quality.

Strategic role of operations management – cost leadership, good/service differentiation As consumers can easily purchase goods from competitors, a competitive advantage must be developed. To gain a competitive advantage, the following must be addressed: Cost leadership – involves providing consumers with the best value for a relatively low price. Market share is gained by appealing to price-sensitive customers (those who consider price important) by offering either the lowest price or the lowest price compared to the value the customer receives. Cost leadership can also be gained by achieving low operating costs from offering no-frills products using fewer components and with a limited variety, e.g. Tiger Airways. Product differentiation – involves making a product that has different or unique features which enables a company to charge a premium and achieve above average returns. The differentiation feature (specialty) can be associated with design, technology, brand image or after-sales customer service. The resulting brand loyalty is likely to lower the customer’s sensitivity to price, i.e. a higher price can be charged. Brand loyalty can block out competition, who will have to come up with their own unique differentiating feature. Sometimes a product is differentiated by the owner, e.g. Steve Jobs with Apple. Basically, higher profitability can be achieved by either: -

Successful differentiation – high margins selling lower volumes. Successful cost leadership – low margins selling high volumes.

Focus or strategy scope – determines whether a business uses cost leadership or product differentiation, e.g. Woolworths uses cost leadership. A focus strategy involves targeting market segments where competition is weakest so above-average returns can be made.

Goods and/or services in different industries Different industries provide very different goods and services. For example, in the school education system, operations is about what happens between teachers and students. In manufacturing, the operations deal with the production and assembly tasks carried out by workers in the factory. Operations management – relates to producing goods and services. In big business this can have a much larger scope, being on a global scale. Operations may be complex, requiring management of production for many different businesses at the same time and for multiple goods and services.

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Interdependence with other key business functions Operations has a flow through affect influencing all aspects of business, e.g. in car manufacturing, staff levels, training and work schedules need to be determined so quality products are able to be produced without bottlenecks being created. This means that the size and organisation of a facility is linked to production levels, which is determined by the target market size. This, in turn, determines the qualifications and equipment needed to ensure efficiency. Target market → size of facility → production levels → qualifications and equipment needed Operations management becomes the core to which all other business functions contribute, i.e. it actually makes the product. Suppliers and customers are closely linked to operations management. Finance has to be managed to provide the funds needed by the suppliers and the employees to help produce the goods. Finance is also essential for marketing to sell the goods and services.

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2. Influences Globalisation, technology, quality expectations, cost-based competition, government policies, legal regulation, environmental sustainability Operations management occurs in a dynamic environment, i.e. constant change. Business that doesn’t adapt to change → decrease in customers (market share) → decrease in profits, e.g. Coles in the early 2000’s compared to Woolworths. A business must constantly change and respond to the influences of the environment. These influences include: 1.

Globalisation: Globalisation is a process that is leading to the development of a single world market. Globalisation is the result of the decrease in communication and transportation costs. Distances are no longer a barrier for business as governments have deregulated their systems to open their economies, resources are now global and finance can be easily borrowed from countries like Japan, China and USA. Australian businesses can now borrow from overseas and have a global labour force, e.g. over 5,000 Telstra employees work overseas. Globalisation has resulted in the development of factories in low wage countries such as Bangladesh, Thailand and Vietnam. This has enabled businesses to outsource tasks that are low skilled and repetitive. Outsourcing is where and outside business manufactures a component part or assembles a product for the operations function, e.g. Jetstar is now employing flight and maintenance crews from Singapore. Due to globalisation, both the production of goods and the market place where they are sold are global.

2.

Technology: Technology is the knowledge of how things are done concerning both the hardware and software components. Not keeping up with technology changes, particularly in relation to equipment and operations methods, will lead to business failure. While new technology won’t necessarily lead to a competitive edge, it will prevent loss of competitiveness, e.g. car manufacturers introducing robotics, Qantas purchasing the A380 as it is more fuel efficient and carries more passengers.

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Quality Expectations: Quality is meeting, or exceeding, a customer’s expectations. In the 1980’s and 90’s, quality was the main focus for operation managers. The Japanese called it lean production, i.e. decrease costs, ensure that products meet their design specifications and improve every aspect of the operations process (TQM – Total Quality Management). We now expect products to be of high quality so now the emphasis is on customisation.

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4.

Cost-based Competition: Cost-based competition is concerned with driving down the costs of warehousing and transportation while spreading overhead costs. Business gains cost advantage → lowers prices → attract customers from competitors, e.g. Woolworths did this with its warehousing and transportation logistics and gain market share over Coles. Overhead costs are the ongoing costs of a business, e.g. rent, electricity, wages. When a business is open 24 hours, (e.g. Kmart) overhead costs are spread over a higher inventory turnover. Cost-based competition does not try to cut costs through low value or low quality, but rather provides customers with the best value for money. The customers’ perception of value and quality is very important.

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Government Policies: Government policies include regulations, subsidies, grants, taxes and tariffs that encourage or discourage aspects of the operations function. Different political parties have different views on important matters, e.g. Gillard’s Labor government introduced the Carbon Tax. It has been government policy to encourage car manufacturers in Australia to develop and manufacture products towards a ‘greener future’ ($6.2 billion was given as assistance – withdrawn from budget in 2011). Sometimes when a government sees a product as undesirable, they implement policies against it, e.g. tobacco packaging regulations and tax increase on pre-mix alcoholic drinks (alco-pops).

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Legal Regulations: Legal regulations are the laws that regulate the way things can be done. They are important because of the potentially dangerous aspects of using equipment. The Occupational Health and Safety (OH & S) Act of 2000 was put in place to provide a safe working environment. Most responsible operations functions go further than OH & S by developing a culture of safety.

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Environmental Sustainability: Environmental sustainability is concerned with air, waste, water and environmentally sustainable products and operations practises. Many operations functions impact on these, therefore strategies must be developed to reduce their impact. Customers are now very aware of the need for environmental sustainability and it often sways them to select one product over another, e.g. Walmart and Orica have already developed strategies to reduce emissions and are working towards carbon-neutral goals.

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Corporate social responsibility: - the difference between legal compliance and ethical responsibility - environmental sustainability and social responsibility Corporate social responsibility: Corporate social responsibility refers to the relationship between business and the broad society and the way this relationship is perceived and managed. The focus of corporate social responsibility is to make sure business activities have a positive impact on society and, more specifically, the stakeholders of the business. This does bear a cost to the business and creates a problem, i.e. profit vs corporate responsibility, e.g. Bluescope Steel would experience additional costs with a Carbon Tax, but it is argued that a Carbon Tax is needed by the broader community. Also, ANZ’s Indigenous mentoring and employment program in towns such as Moree benefits the community.

The difference between legal compliance and ethical responsibility: Legal compliance is concerned with obeying the letter of the law, i.e. law abiding. Ethical responsibility is concerned with doing the ‘right thing’ and having a positive impact on the society in which the business operates. Doing the wrong thing can have economic advantage, but rarely in the long run, e.g. The Australian Wheat Board (AWB) paying kickbacks to Saddam Hussein was profitable short term until it was made public and then their share price plummeted.

Environmental sustainability and social responsibility: Environmental sustainability is the ability to maintain the qualities that are valued in the physical environment, mainly concerned with energy efficiency, climate change and water and waste management. There is an increased concern regarding this, both in the wider community and in the impacting business. The main focus of energy efficiency and climate change is to decrease the business’ carbon footprint through things like the Carbon Tax. Water can have a huge impact on a range of businesses, e.g. cattle farming and cotton growing. The focus is now on water recycling. One of the problems with water is that it is an externality (something that the community bears the cost of rather than the business, e.g. community pays for roads rather than road transport companies. Waste management refers to the collection, transportation, processing and recycling of waste materials. The focus is on businesses to decrease waste, mainly by recycling, e.g. BMW use a lot of recycled materials and around 80% of a BMW car can be recycled. Levi Stauss & Co has three objectives concerning environmental sustainability. They are aiming to achieve carbon neutrality and 100% renewable energy (energy efficiency and climate change), reduce water usage (water) and become a zero-waste company (waste management)

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3. Operations processes Operations processes are the activities involved in the transformation of inputs into outputs. This may also be referred to as the production system or operations system. Inputs such as skilled labour, machinery, raw materials and/or component parts are used to transform customers (e.g. haircut), transform information (e.g. newspaper) or transform materials (e.g. mobile phone). Each activity adds value so that the output has a greater value than the cost of inputs. When assessing the performance of the operations functions, the manager determines how effectively the business: - makes and assembles raw materials and components into finished goods and services - distributes to wholesalers, retailers and customers - provides after-sales customer service Some approaches are: - “Top down” approach – the operations business function interprets and aims to play its role in achieving the business objectives. - Systems management approach – focuses on integrating operations with the other key functions to create sustainable competitive advantage.

Inputs: - transformed resources (materials, information, customers) - transforming resources (human resources, facilities) Inputs – the inputs in an operation system are the: - physical raw materials - skills/knowledge - machinery - component parts Intangible inputs – time and money Inputs can be classified as: - Materials, e.g. raw materials, component parts - People, e.g. labour, managers - Physical, e.g. factory and office buildings, land Customers can also be transformed physiologically, (e.g. hospitals, dentists, surgeons, fitness instructors etc.) or psychologically, (e.g. theatres, cinemas, theme parks etc.) Transportation changes customers’ location.

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transformed resources (materials, information, customers)

Transformed resources are the inputs that are changed or converted into something else as component or a finished good or service. Businesses use a combination of transformed resources (materials, information and customer), e.g. Qantas uses fuel, equipment and information. Customers are transformed by changing their location. The types of transformed resources are: Materials – the raw materials, component parts and supplies used during the operations process. Information – stored in files, in computer programs and in databases. This information is used to make plans, execute operations and keep controls over material inputs. Information comes from the analysis of the

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performance of the operations system. In Australia, there is a big move away from manufacturing to quaternary and quinary industries. Customers – can be changed in different ways, e.g. customers feel value has been added to their lives after going on a cruise, watching a film or visiting a theme park.

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transforming resources (human resources, facilities)

These are the resources that remain in the business and are applied to the inputs to change them to add value. Human resources – different to the rest of the inputs in a business, i.e. the human resources do the transforming. They apply the skill, knowledge and capabilities to materials to transform them into goods and services. The human resources function provides the business with suitably qualified, skilled and experienced employees. Facilities – these are the buildings, machinery, land, equipment and technology the business use in operations, e.g. Coca-Cola’s Northmead Factory utilises an automated assembly line.

Transformation processes: - the influence of volume, variety, variation in demand and visibility (customer contact) - sequencing and scheduling – Gantt charts, critical path analysis - technology, task design and process layout - monitoring, control and improvement Transformation processes – the activities that determine how value will be added. These processes can add value in four ways: - physical altering of the inputs or the changes involving customers - transportation of goods or services, e.g. having them shipped to a different location - protection and safety from the environment - inspection by giving customers a better understanding of the good or service

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the influence of volume, variety, variation in demand and visibility (customer contact)

Most operations processes are similar; however, the differences come from the 4Vs, (volume, variety, visibility, variation). The influence that is most important depends on the type of production that is being used. The production methods are: - Job – suits those products and service that require customer requests. It is a highly flexible system but with low output, e.g. designer homes and cars – costs per unit are high. - Batch – products are made in batches or groups, e.g. bakery – suits businesses that have variations. - Flow – involves a continuous flow of inputs and outputs. It is often associated with assembly lines. Products have little variation, e.g. Fuel refineries – costs per unit are low. Volume: The most effective way to decrease costs is to produce large amounts of the same thing. A business producing high volumes will have a high degree of process repetition. A business with customization and low production will have many stoppages and adjustments. When volume is the most important factor, there will usually be a high level of equipment and technology and less labour, e.g. assembly lines using convey belts will be utilised. e.g. of high volume – Domino’s Pizza e.g. of low volume – Matt Moran’s restaurant ARIA

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Variety: Sometimes customers want variety or flexibility rather than the lowest price, e.g. wedding reception venues. Variety refers to the number of different models and variations offered in the products or services. A business producing a high volume product with low variety will be capital intensive. e.g. of high variety – financial advice at Yellow Brick Road e.g. of low variety – Apple’s iPhone (same for each customer)

Variation: Variation is associated with the changes that can occur due to the time of day, season, holidays and time of year. When there are steady levels with no variation, there will be high volume and capital costs. e.g. of high variation – Thredbo Ski Resort e.g. of low variation – Dairy Farmers Milk

Visibility: Visibility is concerned with customer contact. Operations will be influenced by the degree to which customers can see the operations in action. Service-based businesses have a high level of visibility. Speed of operations can be important as customers usually have a low tolerance for waiting. e.g. of high visibility – Subway e.g. of low visibility – chicken growing/production at Steggles Chicken

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sequencing and scheduling – Gantt charts, critical path analysis

Scheduling and sequencing: Sequencing is the planning of activity that decides on the order in which the work is to be performed. In most cases it is done on the basis of due date. Scheduling is a term used to indicate a detailed timetable of what work is to be done, when it is to be done and where it is to be done (e.g. your school time table). In bigger businesses, it involves matching things like employee skills, machine capacity and completion times. Sequencing and scheduling tools are used to identify all steps in the operations process and organise them into the most efficient order to complete. There are two approaches to scheduling: - forwards scheduling – the work is started as soon as it is received - backwards scheduling – the work is started just in time to meet the delivery time or deadline Task analysis – is the breakdown of exactly how the activities to manufacture a good, or to provide a service, are to be accomplished.

Gantt charts: The most common form of scheduling is where activities are represented as a Gantt chart. It represents activities as a bar chart. They show the start, finish and progress of an activity. They record the number of tasks involved in each particular project and the estimated time needed for each task, but will not show the relationship between each of the tasks. Dates can be set for the completion of tasks. Gantt charts allow the business to compare the actual progress to the original expected progress and to effectively communicate the progress of activities to employees.

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Critical path analysis: Large projects involve a network (i.e. a group or system of interconnected people or things). A critical path analysis (CPA) is an appropriate scheduling tool for use in an operation that involves a series of repeated tasks. It is a flow diagram that shows the interrelationship of tasks. The critical path time period is the longest sequence of activities through a project network. A delay in activities means the whole project is delayed. In this example, each number indicates how many weeks it takes to complete each stage or task. To calculate the critical time period from task A to task F, the longest sequence must be calculated (i.e. 4+4+4+4 = 16 weeks).

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technology, task design and process layout

Technology: The most significant change in the last couple of decades is the way technology is used in the transformation process. The machines and equipment used to transform inputs into outputs are called process technology. Process technology’s largest effect is computerisation, e.g. Robotics used at Coca-Cola’s Northmead Factory, the Airbus A380 which is on auto pilot 94% of a flight. Product technology is the innovation in the products themselves. Technology can give the business more flexibility as it: - Allows the business to respond to changes in the market more easily, e.g. changing volumes and variations. - Allows the business to apply software modelling programs, the internet and wireless communication to the process. Flexible manufacturing systems → integrated approach to using technology

Task design: Task design is the way the overall transformation process is broken down into manageable activities (e.g. Apple’s iPad). It is concerned with working out the most efficient and effective transformation process. It must be ensured that the employees have the appropriate skills, knowledge, capabilities and equipment to do the

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job. Task design allows ongoing analysis and adjustments in each activity to ensure continuous improvement in productivity. Task design and product design must be done together to ensure maximum efficiency and effectiveness in the transformation process.

Process layout: Process layout refers to the physical location of the transforming resources. It determines the way the transformed resources (materials, information and customers) flow through the operation. Tasks must be allocated to transform the resources the most efficient and effective way. A process layout is where all the machinery is arranged by what they do. The product/service moves from department to department depending on what transformation is needed, e.g. a machinery shop has the drills in the one section, the grinders in one section etc. and the product moves from department to department. A process layout is more flexible than a product layout. Product layout arranges activities in a line according to the sequence of operations for a particular product or service, e.g. car assembly line at Ford. Product layouts are used for assembly line manufacturing of large volumes of goods with few variations.

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monitoring, control and improvement

Monitoring for a business refers to knowing how well its operations are working. It involves collecting information about the performance of operations process. These include: - quality - speed - dependability - flexibility - customisation - costs Data needs to be collected about: - Operation costs - Waste from operations - Defects - Speed of manufacturing A business’ plans must be monitored to check whether the planned activities actually occur. The output can be compared to the planned output. The purpose of monitoring and control is to ensure the operations process runs efficiently and effectively, producing the goods and services it was designed to do. Control is the process of comparing actual output with what was the planned output for that centre. Adjustments can be made if things go wrong. Sometimes these adjustments are radical, e.g. Pacific Brands relocating to China. Improvement is the function that suggests that adjustments and readjustment may need to be made to dayto-day activities in the short term, and even the entire operations process in the long term. Continuous improvement is the most common and involves the continuous search for small incremental steps that improves the operations function. TQM (total quality management) puts improvement (particularly improving quality) at the core of every activity of the business (e.g. Toyota factory). Just-in-time (JIT) or lean improvement is designed to meet the customers’ requirements immediately with a quality product and no waste (e.g. Coca-Cola’s Northmead factory). Improving operations is a key strategic goal. There can be improvements in the following areas: - Quality – by getting it right the first time and having defect-free products and error-free services. - Speed – by increasing speed of production and delivery of services - Dependability – by being on time with a reliable operations system, and employees

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Flexibility – through having processes that are able to change Cost improvements – by being efficient and productive to offer more value

Outputs: - customer service - warranties Transformation process → outputs (either products [tangible] or services [intangible]) Outputs are the final products or services that a business offers to customers. They may be the final services or educated people (from the input of education). Outputs in banking are home loans and investments. Outputs in education are socially responsible young adults.

Customer service: Customer service often determines whether a customer will chose a business’ product over a competitors’. It refers to the interaction between customers and the provider of the product/service. It is a service provided to customers before, during and after a purchase. Customer service is an intangible output that requires extensive contact with customers. Good customer service will increase consumer satisfaction. Customer service features include handling customer returns, answering questions and following up customer enquiries.

Warranties: A warranty is an assurance that a business stands by the quality claims of the products they make and provide to the market. It is a contractual agreement between the manufacturer of the product and the customer. Under Australian law, all goods must have a level of quality, be suitable for the job, match the promotion and be free from defects. This is an implied warranty. Potential customers often find that a number of products meet their needs (e.g. cars, whitegoods etc.) and therefore, it is post-sales factors that become important. Businesses must comply with the Fair Trading Act 1987 (NSW) and Competition and Consumer Act 2010 (Cth).

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4. Operations strategies Operations strategies include: - The activities involved in the production of a goods and supply of services. - Specific decisions about what and how the business produces goods and supplies services. - The influences on operations strategies must be considered by operations managers.

Performance objectives – quality, speed, dependability, flexibility, customisation, cost Performance objectives are the key areas of focus for operations and are therefore part of a business’s competitive strategy. Stakeholders judge the operations function and the aspects of operations performance they are judging are the performance objectives. Quality, speed, dependability, flexibility, customisation and cost are the main performance objectives. Quality – having the highest quality goods and services. Good quality prevents costs caused by product recalls and repairs. Dimensions to quality are: - Performance- does it do what’s claimed - Durability- does it last? - Aesthetics- does it look good? - Serviceability- is it convenient to repair Speed – producing goods faster and delivering services faster. This relates to productivity. Productivity is output divided by input and is sometimes measured in output per unit of time. CAD (computer aided design) and CAM (computer aided manufacture) can increase the speed without compromising quality. A risk of increasing the speed of operations is that quality may suffer. Dependability – consistently good in both quality and performance. It involves being reliable in providing what outputs are needed and when they are required. There is also dependability in delivery or supply – how well can the business always fill orders and distribute to markets. Flexibility – being more flexible than competitors and being able to make changes to operations. Businesses need to match the increase in demand and avoid a stock-out where the business runs out of inventory. Customisation – modifying a standard product to meet the individual needs of the customer. Custom designers can usually command a premium price. Cost – producing cheaper, more efficient and with better productivity than competitors. A key measure of costs is using efficiency ratios and average costs. An important objective for costs involves the break-even point. Used to determine the point at which business starts to make a profit. Costs can be categorised as: - Fixed – do not change as output changes - Semi fixed – parts are fixed and parts are variable - Direct – are directly related to production - Variable – do change as output changes - Indirect – sometimes called overheads, e.g. salaries of administration staff.

New product or service design and development New products must be developed for a business to maintain competitive advantage. New product design is a lengthy and expensive process. Only a few products make it to final production from the large number that may be initially developed. Many businesses do not have the financial resources, knowledge or time to develop new products. This is why a business might supply their own version of a competitor’s new product and avoid the expense and risk of

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product development, e.g. HTC entering the smartphone market after the proven successes of Apple, Samsung etc. The new product development process is as below: 1. Concept development – many ideas are discussed and assessed. 2. Cost benefit analysis – economic analysis to determine if the product is worth pursing 3. Production design – engineers design the product, work through technical difficulties and create features 4. Product testing – feedback from testing and market research

Supply chain management – logistics, e-commerce, global sourcing Supply chain management: Supply chain management refers to those activities that procure materials and services, transform them into products and services and then deliver them to a customer. e.g. the supply chain of pumpkins: Pumpkin grower → transported to wholesaler → transported to Woolworths store → customer

Logistics: Logistics management is concerned with all the business activities that acquire the materials, moving and storing them. This is important as most things come from outside the business. The logistics function is often outsourced to specialist businesses, e.g. DHL, Fox, FedEx. These specialist businesses have the expertise in things like tracking shipments.

Alternative distribution systems available: Transportation Type Road (trucking)

Railroad Shipping (containerisation) Air Freight

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Advantages Flexibility (just-in-time) Low cost Reliable Low cost Able to move large volumes Enormous quantities Very low cost Speed

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Disadvantages Lacking capacity Increased pressure on road infrastructure Lacking flexibility

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Lacking speed

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Costly

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Logistics is crucial because it can gain a competitive advantage. It isn’t cheap but the advantages are incredible, e.g. Woolworths spent billions.

E-commerce: E-commerce refers to the use of the internet for all aspects of commercial transactions. In recent years an electronic marketplace has emerged that has facilitated business-to-business commercial activity for both buyers and sellers (online shopping).

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When businesses use e-commerce with their supply chain it is called e-procurement. E-procurement refers to electronic methods, primarily through the internet, used in the purchasing process. E-procurement: - makes it easy to find suppliers on the internet which increases competition and keeps prices lower - lowers administration costs because documents can be easily exchanged over e-mail - saves time - develops more effective partnership with suppliers

Global sourcing: Global sourcing is where products are acquired outside the home country. Businesses are increasingly sourcing raw material and component parts wherever they are cheapest, particularly from low-wage countries like Bangladesh, Vietnam, Thailand and India. Global sourcing is done to decrease costs. It has been made possible by the developments in transportation (particularly containerisation).

Outsourcing – advantages and disadvantages Outsourcing is when goods and services that would normally be a part of the business are obtained outside the business. In relation to supply chain management, it can provide significant value to the business, e.g. Apple purchased screens from LG and microprocessors from Samsung for the iPad 2. When businesses start, they conduct their business internally, except for accounting reports. If the business excels and grows, it is due to its strengths (core competencies). Therefore, managers concentrate on the core competencies and outsource the activities that other businesses do better and at a lower cost. There are some risks associated with outsourcing, particularly to overseas, e.g. Jetstar is experiences industrial relations problems after outsourcing to Singapore, Pacific Brands (Bonds, Hard Yakka) outsourced but have discovered transport costs are higher and quality is an issue. Advantages and disadvantages of outsourcing:

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Advantages Provide greater flexibility – increase or decrease the quantity of products it wants manufactured. Access to the best technology – specialist businesses have the best technology.

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Disadvantages Danger of future competition – the supplier may gain expertise by manufacturing and design a competing product. Human resource problems – outsourcing means that jobs are lost. Language problems – language differences can make communications difficult.

Technology – leading edge, established Technology is knowledge of how things are done, both hardware and software components. Leading edge technology is the foremost position, the very latest way of doing something. It is most evident in the area of computer chips and microprocessors, which have enabled products such as mobile phones, computers and robotic equipment to offer more benefits to the customer, e.g. Walmart’s new radio-frequency identification (RFID) technology which sends a notification to the suppliers every time a product is purchased, ordering a replacement. This greatly lowers storage costs.

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Established technology is the way something has been done for some time, e.g. the technology used for milking machines has been used for hundreds of years (however, the new “robotic milkmaid” is an example of leading edge technology).

Inventory management – advantages and disadvantages of holding stock, LIFO (last-infirst-out), FIFO (first-in-first-out), JIT (just-in-time) Inventory management is often called stock and refers to the store of transformed resources waiting to be processed. In manufacturing operations the inventory may consist of the raw materials and component parts received from suppliers or the partly finished products in the transformation process, called work-in-progress. Sufficient raw materials are needed to maintain the operations process, i.e. no ‘downtime’, e.g. if the Coca Cola factory in Northmead has too few empty cans, then the process stops. On the same note, if there are too many cans, there are additional costs of storage and the higher cost reduces profits. Having no downtime is crucial as inventory of finished goods is needed to supply customers whenever the customer wants the product. Inventory management is crucial for customer service as it represents a huge cost for most businesses. Inventory is often between 30% and 90% of a business’ resources (called assets), e.g. for Kmart to be successful, thousands of items of inventory are needed as customers are rarely prepared to wait. Advantages and disadvantages of holding stock:

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Advantages Lower cost – large batches (bulk) of particular raw materials or component parts might result in lower cost through quantity discounts. Handling and transportation costs will also be lower. Allows a buffer – holding stock allows a safety aspect for when customers demand or inventory from suppliers is uncertain.

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Disadvantages Cost of storage Danger of obsolescence – out of date with latest trends, e.g. mobile phones are usually superseded within 6 months. Packaging/stock damage – after being kept for a long time Perishability – going off Shrinkage – stock that is not accounted for between when its received and sale (1% - 3% of inventory) Finance tied up in stock – could be used for something else, e.g. training

Inventory takes a lot of a business’ short-term resources or current assets. Therefore inventory has to be valued. This is important as it affects profit and the amount of tax a business pays. LIFO (Last-in-first-out) – a method of recording the value of inventory. Using this method, the inventory is valued on the last price paid for inventory. This means that stock purchased earlier and cheaper is valued at the same price as the latest stock, which is usually more expensive (inflation). This decreases the tax a business pays and is illegal in Australia. FIFO (First-in-first-out) – is a method where stock that is left over at the end of the year is valued based on its replacement value (i.e. current cost of the materials from suppliers). The COGS (cost of goods sold) includes all costs involved in getting the goods to the shop (invoice costs, transport costs and insurance costs). For this reason COGS is calculated on the invoice cost of the stock, i.e. the different prices which were paid earlier in the accounting period.

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JIT (Just-in-time) – eliminates any activity in the entire supply chain that does not add value to the final product. It can also be called lean operations. The aim of JIT is to eliminate all types of waste such as overproduction (where more is produced than is need for the next activity), storage costs and downtime (waiting time on resources, e.g. if labour or equipment is idle due to a machine braking down or an order of raw materials hasn’t arrived). The goal of JIT is to create a business culture in which all employees are encouraged to come up with ideas that could lead to continuous improvement. Russel and Taylor (2005) set out the following principals for continuous improvement: 1. Create a mind set for improvement – do not accept that the present way of doing things is necessarily the best. 2. Try and try again – don’t seek immediate perfection but move to your goal by small improvements, checking for mistakes as you progress. 3. Think – get to the real cause of the problem. Ask why – five times. 4. Work in teams – use the ideas from a number of people to brainstorm new ways. 5. Recognise that improvement knows no limits – get in the habit of always looking for better ways of doing things. The danger of JIT is that if one activity in the supply chain fails, the whole operations function comes to a grinding halt.

Quality management - control - assurance - improvement Quality management is as important as new product development. In business, quality is consistent performance to customers’ expectations. The operations function is concerned with meeting customer expectations. Therefore it is important to close the gap between customer expectation and customer perception (how they see a product), e.g. a certain level of customer service is expected at Kmart. An important principle is that quality is the responsibility of every employee in the business, which leads to continuous improvement.

Customer expectations

Customer perception

Expectation > perception

Customer expectations

Customer perception

Expectation = perception

Poor quality

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Customer perception

Expectation < perception

Good quality

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Control: Quality control is the most common way of ensuring consistent quality in a business. It is the sampling technique that checks the quality of an item in the transformation process, e.g. quality checks of the temperatures of the cool room at McDonalds. Quality control → quality improvement Quality control minimizes the variations to defined limits and then builds systems and procedures to ensure these limits aren’t exceeded, e.g. Coca Cola allows only a 2ml variation either side of a 375ml can.

Assurance: Quality assurance involves putting into place systems and procedures that make sure an error or fault will not happen, e.g. storing fresh meat below 4°C will prevent salmonella. While checking that the meat is stored bellow 4°C is quality control, the system that establishes what sort of checking and when it takes place is quality assurance. Quality management must be proactive, rather than reactive. Therefore employees must be trained to assess the quality of their work, i.e. self-inspection. Both managers and customers must be confident that the product has consistent quality. An important part of quality assurance is certification. Certification is where an independent organisation like Standards Australia inspects and certifies quality products.

Improvement: Quality improvement involves all employees improving in a business. Operations managers understand that: Increased customer satisfaction → increased sales → increased profits → grows the value of the business. One of the most common approaches to improvement is TQM (Total quality management). TQM was developed by the Toyota factories in Japan and is based on continuous improvement. It is based on: 1. Customer defines quality and then the product designers and operations managers ensure that customers are always considered. 2. Quality is the responsibility of all employees. They therefore must inspect their own work with customers in mind and continually think of ways to improve what they do. 3. Develop a business culture that sees a need for quality and seeks to continuously improve in quality performance.

Overcoming resistance to change – financial costs, purchasing new equipment, redundancy payments, retraining, reorganising plant layout, inertia Like businesses, products have a life cycle, i.e. they are born, they live, they die, e.g. the Sony Walkman revolutionised portable music, but made way for CD players and MP3 players, i.e. a change in technology produced products better suited to customer needs. If managers don’t adjust and cling to products that are dying, there is a gradual loss of customers as they change to products that better meet their needs. Change is inevitable, yet some managers resist change, e.g. Coles resisted while Woolworths embraced change and gained market share.

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Managers are often too busy looking at day-to-day activities and problems that they don’t have time to change. Managers must develop strategies to overcome the resistance to change:

1.

Financial Costs: A business might not want to change as the current system may be working and financial resources may be tight. However, if other businesses change while you don’t a loss of market share will be incurred and cost will become even greater. When managers are trying to convince shareholders that they require finance, debt financing is not a good option. Instead mangers could explain to shareholders that a greater portion of profits have to be retained to spend on the business, rather than be distributed as dividends, e.g. Microsoft.

2.

Purchasing New Equipment: The cost of purchasing new equipment can be very expensive, but it is worth it because if a business doesn’t keep up with technology, future profits can be lost, e.g. Ansett Airlines resisted upgrading their fleet and as such, the older, less fuel-efficient and less cost-competitive planes couldn’t compete with Virgin’s newer planes. Strategies to overcome the resistant to change caused by the cost of new equipment include: - Outsource the components that would be manufactured by the new equipment to businesses that have invested in the latest technology, e.g. Apple. - Lease rather than purchase the new equipment. A big advantage is that no deposit is needed, you just pay each month. Leasing is where the equipment is owned by a financier and the business has the right to use it in return for monthly payments, e.g. Qantas leases its A380 Airbuses.

3.

Redundancy Payments: Restructuring a business to cut costs and increase productivity requires a decrease in the size of the workforce. This means that a number of jobs are no longer need (redundant), but people losing their jobs are entitled to compensation, called redundancy packages. If managers consider the redundancy costs too high, they often resist restructuring the business, e.g. Patrick’s is one of Australia’s largest stevedoring (loads and unloads container ships) business. For years the business was grossly overstaffed and inefficient. The redundancy payments would have exceeded $400 million so the Australian government assisted with a levy on all containers coming into the country. Strategies to overcome the resistance to change caused by redundancy costs include: - Equity finance from shareholders where the business increases share allocation, often called ‘options’. Existing shareholders get the option to purchase additional shares for a slightly reduced price. - Effectively plan for redundancies so the necessary finance can be raised over a longer period.

4.

Retraining: The cost of retraining is considerable because employees have to not only learn new skills, but often managers will also try and implement a new business culture, e.g. Kmart recently retrained every employee in improved customer service. Australian businesses are able to compete with businesses in low wage countries like Vietnam and Bangladesh due to flexibility. Australian business can vary a production run from 500 to 50,000 units. This is because the employees are multi-skilled due to continuous training.

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Strategies to overcome the resistance to change caused by a lack of training include: - Change the culture of the business by getting all employees to embrace change. Business culture refers to the attitudes and values held by all the human resources in the business. Continuous training → employees embrace change → improvement in everything the business does. - Businesses must budget for training methods and reward employees who change their behaviour (Guy Rosso, CEO of Kmart did this).

5.

Reorganising Plant Layout: In manufacturing businesses, the production line represents a large financial outlay. However, technological developments, particularly in robotics and computerisation, could significantly reduce costs if the layout was reorganised. Managers often won’t replace machinery that is still working with new technology. These businesses are called legacy businesses because they have a legacy of equipment and employees with the skills to use the older equipment.

6.

Inertia: Inertia is the lack of resolve or energy to do something about a problem. Sometimes managers feel they do not have the leadership skills to make the necessary changes, but often it is because they are concentrated on short-term goals, e.g. increase profits for now but the business suffers in the long run. Managers often do this because their bonuses are connected to profit. Long-term goals are sacrificial. Strategies to overcome the resistance to change caused by inertia include: - Often need to change the management team so that they are in line with the CEO’s vision for the business. Vision is how the business will look in three to five years if the CEO makes the proposed changes. It is almost inevitable that a new CEO (appointed by the Board of Directors) will bring in a new management team who share his vision, e.g. what Wesfarmers did when they bought Coles.

Global factors – global sourcing, economies of scale, scanning and learning, research and development Global strategies → improve the competitive position in the global environment It is not easy, but Apple Inc. has shown that it can design, market and price a mobile phone better than its competitors. One of the reasons they could do this by incorporating global factors, including: 1.

Global Sourcing: Global sourcing → supply chain management → continuous improvement at a lower cost Global sourcing is where the products or components are acquired outside the home country, usually because they are cheaper, e.g. Boeing’s new 787-9 Dreamliner is made up of parts that are globally sourced such as engines from UK, landing gear from France, fuselage from Italy etc. Basically, global sourcing + supply chain management → increased improvement, decreased costs and increased market share.

2.

Economies of Scale: Managers must decide on capacity volume when designing a new factory. Capacity volume is the maximum amount of that product that can be produced in a given period of time.

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Economies of scale are the cost savings that result from spreading fixed costs over increased output. Therefore, average cost decreases as the business gets bigger. This works on equipment used and also by purchasing large amounts of raw materials. Transportation costs are also important depending on the size of the operation and the location of the factory. Only works to an optimum level then diseconomies of scale are set in and occurs when the average costs of producing a product starts to rise.

3.

Scanning and Learning: The global business environment is constantly changing. Technology is changing at a rapid rate. Therefore, businesses must be aware of the changes, i.e. scanning and must change the way the business responds and the way they achieve these new goals, i.e. learning. Scanning is often called data acquisition. It is done by using BIS (business information systems) which involves scanning real changes and identifying anticipated changes. Businesses must decide what changes need to be monitored. A vital part of scanning is interpretation, i.e. deciphering what the data means. Learning involves taking action to adapt the way things are done in the business to regain a competitive position, e.g. Samsung has to come up with a product to compete with Apple’s iPad. Everyone in the business needs to learn and embrace continuous change. The scanning and learning process: 1. Find out what the market place wants in a particular type of product. 2. Work out how well our business’ operations function performs compared to our competitors. 3. Work out what our operations function needs to do better. 4. Work out how this can be done.

4.

Research and Development (R&D): Research and development is the business function concerned with developing new ideas and ways of doing things, i.e. the basis for new products. New idea → process design → new product All aspects of business in electronics is done to gain a competitive advantage, e.g. Quanta Computers R&D funds top universities in the USA ($200m)to develop the next generation of computing platforms. Research and development takes advantage of things like new materials and new knowledge of ways things can be done to develop a product. The businesses doing things first gain a competitive advantage, e.g. Apple was the first to effectively utilise touchscreen technology (iPod, iPhone, iPad).

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5. Operations ‘Super Summary’ Operations: the process of converting raw materials into finished goods. Operations management: the planning, organising, co-ordinating and controlling of the transformation of inputs to outputs.

Strategic role: involves l-t management issues (3-5 years) Influences: -

Globalisation – single world market. Result of decrease in communication and transport costs. Technology – the knowledge of how things are done concerning both the hardware and software components. Quality Expectations – meeting, or exceeding, a customer’s expectations Cost-based Competition – driving down the costs of warehousing and transportation while spreading overhead costs. Government Policies – regulations, subsidies, grants, taxes and tariffs that encourage or discourage aspects of the operations function. Legal Regulations – laws that regulate the way things can be done, e.g. OH&S. Environmental Sustainability – concerned with air, waste, water and environmentally sustainable products and operations practises.

Strategies: Quality

Addressing performance objectives

Speed Dependability Flexibility Customisation Cost Logistics

Address supply chain management

Outsourcing

E-commerce Global sourcing Outsourcing Quality control

Quality management

Quality assurance Quality improvement Financial costs

Overcoming the resistance to change

Purchasing new equipment

Having the highest quality goods and services. Good quality prevents costs caused by product recalls and repairs. Producing goods faster and delivering services faster. This relates to productivity. Consistently good in both quality and performance. It involves being reliable Being more flexible than competitors and being able to make changes to operations. Modifying a standard product to meet the individual needs of the customer. Producing cheaper, more efficient and with better productivity than competitors. Concerned with all the business activities that acquire the materials, moving and storing them, e.g. change transportation type (trucking, railroad, shipping, air freight). Refers to the use of the internet for all aspects of commercial transactions, i.e. an electronic marketplace (online shopping). Where products are acquired outside the home country. When goods, services or activities (but not the core competencies) that would normally be a part of the business are obtained outside the business. The sampling technique that checks the quality of an item in the transformation process. Putting into place systems and procedures that make sure an error or fault will not happen. All employees improving in a business, e.g. TQM (continuous improvement). Financial resources may be tight. Strategies to overcome this include: - Explain to shareholders that a greater portion of profits have to be retained to spend on the business, rather than be distributed as dividends, e.g. Microsoft. Can be expensive, but if it doesn’t happen, future profits can be lost. Strategies to overcome this include: - Outsource the components that would be manufactured by the new equipment to businesses that has invested in the latest technology. - Lease rather than purchase the new equipment.

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Redundancy payments

Overcoming the resistance to change

Retraining

Reorganising plant layout Inertia

Global factors

Global sourcing Economies of scale Scanning and learning Research and development

Restructuring a business to cut costs and increase productivity requires a decrease in the size of the workforce. Strategies to overcome this include: - Equity finance from shareholders where the business increases share allocation, often called ‘options’. Existing shareholders get the option to purchase additional shares for a slightly reduced price. - Effectively plan for redundancies so the necessary finance can be raised over a longer period. High cost as they have to learn skills and business culture. Strategies to overcome this include: - Change the culture of the business by getting all employees to embrace change. - Budget for training methods and reward employees who change their behaviour Costs could be reduced if the layout was reorganised. Strategies to overcome this include: - Implement new business culture to alter standing as a legacy business. The lack of resolve or energy to do something about a problem. Strategies to overcome this include: - Often need to change the management team so that they are in line with the CEO’s vision for the business Where products are acquired outside the home country. The cost savings that result from spreading fixed costs over increased output. Businesses must be aware of the changes, i.e. scanning and must change the way the business responds and the way they achieve these new goals, i.e. learning. The business function concerned with developing new ideas and ways of doing things.

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6. Operations Acronyms Influences: “GTG LE CoQ” – pronounced “Got-to-go (GTG) le cock” G – Globalisation T – Technology G – Government policies L – Legal regulation E – Environmental sustainability Co – Cost-based competition Q – Quality expectations

Processes: “4Vs” Volume Variety Variation Visibility

Strategies: “POGO SQuINT” P – Performance objectives O – Outsourcing G – Global factors O – Overcoming the resistance to change S – Supply chain management Qu – Quality management I – Inventory management N – New product/service design and development T – Technology

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10.2 HSC Topic: Marketing Outcomes: The student: H1 critically analyses the role of business in Australia and globally H2 evaluates management strategies in response to changes in internal and external influences H3 discusses the social and ethical responsibilities of management H4 analyses business functions and processes in large and global businesses H5 explains management strategies and their impact on businesses H6 evaluates the effectiveness of management in the performance of businesses H7 plans and conducts investigations into contemporary business issues H8 organises and evaluates information for actual and hypothetical business situations H9 communicates business information, issues and concepts in appropriate formats H10 applies mathematical concepts appropriately in business situations

The focus of this topic is the main elements involved in the development and implementation of successful marketing strategies.

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1. Role of marketing Consumers decide which businesses succeed and fail as they choose to purchase from businesses who best meet their needs. Marketing involves understanding customer needs and meeting their needs more effectively than competitors. Management must consider other stakeholders such as owners/investors (sufficient profit) and employees (adequate benefits). Marketing has to satisfy customer needs, i.e. Identify the group of customers who are the focus (target market) Research their needs Develop a product to meet those needs After this the business must price the product so customers see value in buying it, communicate the information to the customer and make the product accessible to the customer.

strategic role of marketing goods and services Identifying and meeting customer needs is difficult as their needs are always changing, e.g. mobile phones are always evolving. Sometimes changes are gradual and predictable, e.g. change towards a healthy lifestyle has made it difficult for tobacco sellers. At other times the changes are rapid and turbulent, e.g. those associated with the Global Financial Crisis. Businesses must monitor changes in the environment and look out for potential customers. They must determine what motivates them and detect their unmet needs. Businesses must look for possible new competitors and new technology. This is called external analysis and is concerned with monitoring the unmet needs of customers, identifying strengths and weaknesses in competitors, trends in the market place and the technological, consumer and economic environment. Businesses must also conduct and internal analysis, which is concerned with things like profitability, customer satisfaction and product quality. An effective internal analysis enables the marketing function to build on its strengths and strengthen its competitive advantage. Strategic role of marketing → identify changing environment → adapt the business and its products

interdependence with other key business functions Operations, marketing, finance and human resources are all interdependent, i.e. the individual functions are unable to operate without the others. Marketing is the start of a process as it is concerned with finding out not only what the customer wants, but also with designing a product that meets the customer wants more effectively than competitors. After the product is designed (marketing function) it has to be manufactured (operations function) and staff need to be trained (human resources function). Money is needed (finance function) to do the market research, design the product, train employees and purchase new equipment.

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production, selling, marketing approaches The marketing approach for a business is to satisfy the needs of its customers more effectively than its competitors. Approaches have changed over time and include: Production approach: From 1820 – 1920 and was all about production. The business had only a broad understanding of customer needs and manufactured a product that they considered met those needs. The production approach concentrated on low-cost manufacture achieved through large-scale production, e.g. Henry Ford’s T-model Ford which was only available in black.

Selling approach: From 1920 – 1960 and was all about selling. This was a major change as managers thought they could deal with increasing competition with good sales teams. They were very aggressive and tried to convince customers that their product was much better than competitors. Radio advertising was utilised along with door-to-door salesmen.

Marketing approach: A philosophy that believes success comes from a total focus on customer satisfaction, i.e. a satisfied customer will return for more (relationship marketing). It is much cheaper to retain an existing customer than to try to get new customers. Retain customers → achieve goals → increase profitability and growth Customer satisfaction is the core of a successful business. Businesses must provide a quality product. Most do this through TQM (Total Quality Management) which works towards continually improving every aspect of the production and distribution process. Businesses use outsides bodies like Standards Australia to certify that the business has procedures and systems that result in a quality product all the time. Keeping customers satisfied leads to repeat purchases (relationship marketing). Loyalty reward schemes are often used, e.g. Fly Buys.

types of markets – resource, industrial, intermediate, consumer, mass, niche Businesses must know the different types of market as a business that develops products that better meet the needs of customers in a specific market will have a competitive advantage. Markets are where the buyers of products are linked to the business selling the products. They can be physical places where buyers and sellers meet or intangible networks where buying and selling is conducted over great distance through computers. Different markets include: 1.

Resource Markets – refers to business buyers who purchase the factors of production (land, labour, capital and enterprise) in order to make products or deliver services to customers. The factors of production are: Land – things such as agricultural land, mineral deposits, forests etc. Labour – people who provide the range of skills businesses need. Capital – such things as equipment and factories. These are tools used by businesses to produce, manufacture and distribute the product (don’t confuse with $ capital) Enterprise – the risk taking by entrepreneurs. Entrepreneurs provide the management skills that combine the other factors.

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2.

Industrial Markets – refers to businesses that provide products needed to manufacture other products. Many buyers buy goods only because they are needed to make the product that they manufacture, e.g. Coca Cola buys aluminium cans from Alcoa.

3.

Intermediate Markets – refers to the purchase of goods for resale, e.g. Woolworths purchases products to sell to retail customers.

4.

Consumer Markets – consists of buyers who purchase goods and services for personal use, e.g. buyers who purchase clothes, food, electronics etc.

5.

Mass Markets – refers to the large number of customers who want to buy a standard product such as electricity or petrol. From the 1930’s to the 1960’s, many products (e.g. washing machines) were massproduced, i.e. the consumers were treated as the same.

6.

Niche Markets – consists of buyers with specialised needs, i.e. a narrowly defined group of potential customers, e.g. the proposed Virgin space flight. The advantage of establishing a niche market is that large competitors are not interested in the market and there is no real competition, i.e. small businesses often target niche markets.

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2. Influences on marketing factors influencing customer choice – psychological, sociocultural, economic, government The factors influencing customer choice involves what motivates a customer to choose one product over a competing one, i.e. what lies behind the purchase decisions. Thousands of reasons are grouped into the categories: 1.

Psychological Factors: Psychological factors influencing customer choice refers to the way we think, feel and reason when we decide to select a particular product and includes things like the way we perceive the product, our personality, lifestyle and attitudes and beliefs. Businesses must understand what the customer is feeling and reasoning because product features can be added that help the customer gain a more favourable feeling to the product. Customers buy from a particular brand mainly because it provides them with the psychological benefits of confidence, esteem and total satisfaction. A brand is a design, logo and name that distinguish a business’ products from competing products.

2.

Sociocultural Factors: Sociocultural factors are those influences from the society and culture that the customer is a part of. It includes things like social class, family, household type, roles and status. The influence of family and peers has a huge impact on consumer choices. Therefore, changes in society and social structures need to be monitored. The trend towards a healthy lifestyle is one of the most significant sociocultural influences. There is strong social reaction to the aggressive advertising of products with too much fat to children (e.g. McDonalds advertising targeting children) and there are opportunities to develop products that cater to these changes.

3.

Economic Factors: Economic factors refer to changes in spending and income in the wider economy, i.e. anything to do with money). Businesses use economic indicators (e.g. new car registrations, new building approvals and retail sales) to gauge how the economy is going. Fiscal policy is budget policy. Economy growing → confidence high → consumers more likely to make large purchases, e.g. cars, furniture, whitegoods etc. When there is a loss of confidence, consumers refrain from purchasing large items and save. This makes it difficult for retails, e.g. during the GFC David Jones was relying on “sales” to attract customers.

4.

Government Factors: Government factors refer to the capacity of the government to tax, make grants and implement laws and regulations that impact on the type of product a business markets and the price, e.g. the regulations on tobacco where the federal government implemented the plain packaging of cigarettes to make the product less attractive to young people.

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consumer laws - deceptive and misleading advertising - price discrimination - implied conditions - warranties The purpose of consumer law is to protect consumers from business exploitation. State governments have many laws to protect consumers, but it is the Commonwealth government that develops laws to control business behavior. The Trade Practices Act (TPA), 1974 (Cth) sets out the rules for fair and reasonable behavior by business. The Australian Competition and Consumer Commission (ACCC) enforce these laws. TPA sets out laws → ACCC administers these laws. Important aspects of consumer law include: Deceptive and misleading advertising – illegal under the TPA. Examples include deceptive and misleading advertising information on the features of a product and using “bait advertising” where they promote a heavily discounted product when there are very few of the products for sale. Price discrimination – where a good is sold at different prices to different customers. The aim of the legislation is to try to stop the discrimination against small retailers, who are most likely forced to pay higher prices for products where larger businesses get the same product at a lower price. This practice is very hard to stop because the legislation allows for so many exceptions, i.e. ineffective. Implied conditions – both State and Territory Fair Trading Acts and TPA 1974 provide consumers with basic protection in relation to the goods and services they buy, i.e. they require that any goods sold will comply with the way they were described to the customer, will be of suitable quality and fit for their intended purpose. Warranties – a warranty is an important aspect in marketing as it provides customers with an assurance that the product will perform satisfactorily and that any defects will be corrected during the warranty period. They are particularly important in the marketing of new products. An extended warranty occurs when, for a price, a customer extends the standard warranty.

ethical – truth, accuracy and good taste in advertising, products that may damage health, engaging in fair competition, sugging It is vital that businesses are perceived to be ethical. Ethical behaviour is concerned with the way moral, rather than legal, principles apply to a business. Truth, accuracy and good taste in advertising: Consumers have the right to expect truthful marketing of products and services. Consumer laws try to ensure this. Some examples of inaccurate and/or untruthful forms of advertising are: Hidden fees and surcharges that are not disclosed in the advertised price, e.g. insurance costs add significantly to vehicle hire rates, surcharges such as fuel and departure taxes are on airfares and there may be hidden activation fees on mobile phone services. Closing down or liquidation sales where prices appear to be marked down for clearance while there is little evidence of what the pre-sale price actually was. Undefined terms such as “organic”, “free range”, “biodegradable” or “light” enable advertisements to mislead or confuse consumers who are seeking environmentally-friendly or healthier options. The ACCC (Australian Competition and Consumer Commission) has the power to charge businesses that use misleading advertising, e.g. Dodo was fined $26,400 for claiming that their broadband service was $39.90 per

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month even though consumers could only purchase the plan if they were also signed up for a $29.90 home phone plan. Good taste in advertising is much more subjective. Ethnic minorities, animal welfare, bodily functions, children’s issues, the needs of the aged, medical research and fundraising appeals are some of the areas that demand sensitivity in advertising.

Products that may damage health: It is estimated that the average Australian is exposed to over 2000 advertisements a day and some of these are for products that could be considered unhealthy, e.g. tobacco, alcohol, high-fat and high-cholesterol foods and over the counter pharmaceuticals. In 2011 there was a heated debate over plain packaged cigarettes with many studies showing young people will find them less appealing and of lower quality.

Engaging in unfair competition: Unfair competition can take a number of forms: Price fixing – where two or more businesses agree to control or fix prices for goods or services they produce. Misrepresentation in advertising – false or misleading claims. Bid rigging – when the tendering process is manipulated by the business involved. Predatory pricing – a business uses its dominant position in the market place to lower prices to drive competition out of the market. Resale price maintenance – suppliers attempt to influence retailers to charge a fixed price to maintain profit margins.

Sugging: Sugging is an unethical practice that involves selling under the guise of research. It is illegal in Australia but very difficult to detect. Market research with the real purpose of selling products or services to the consumer can be subtle, e.g. surveying a household about primary school students may focus on selling programs to improve NAPLAN testing.

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3. Marketing process The marketing function is the most important in the business, as if the business gets it wrong, it fails to understand the needs of customers and/or develop a product concept that is competitive in the marketplace, and then the business will likely fail. A carefully considered marketing process is needed. A business must start with a situation analysis to understand the business environment. Situation analysis → market research, establish market objectives and identify customers. Objectives are achieved through strategies – must check to see if these strategies are working.

situational analysis – SWOT, product life cycle Situation analysis sets out the present state of the business, providing answers to questions asked in the planning process, describes the market and a business’ position in that market. It also describes the environment in which the business is operating, both internal (factors inside the business) and external (outside), e.g. Qantas’ internal factors include the types of planes they use and the training of staff while the threat of a terrorist attack is from the external environment. Qantas used hedging of aviation fuel prices to gain some control over an external influence. The two key elements of a situation analysis are: SWOT analysis and product lifestyle. SWOT analysis is one of the most effective tools to evaluate a business in terms of its competitors. From the internal environment: Strengths – anything the business does better than its competitors Weaknesses – the things that competitors do better. From the external environment: Opportunities – changes in the external environment that can be exploited to achieve objectives. Threats – changes in the external environment that make it difficult to achieve objectives. e.g. Qantas SWOT analysis: Strengths Strong global brand Strong financial resources Loyal, highly skilled workforce Highly profitable Jetstar brand Opportunities Can take advantage of Tiger Air recent groundings to gain market share Substitute Qantas international routes with cheaper Jetstar Collapse of Air Australia in Feb 2012

Weaknesses Legacy of industrial agreements (higher costs) Cost structure has made international operations less competitive Losses on international routes Inability to settle industrial disputes Threats Higher costs from aviation fuel and aircrew Industrial action as pilots react to the fear of cheaper Asian replacements Disputes led to grounding of Qantas planes which damaged the Qantas brand name

Product life cycle – a business must keep a very close watch on their products and the position of their products on the product lifestyle, i.e. the stages a product goes through. A business with too many products in the maturity stage of their lifecycle faces a dangerous situation. A business must have new products in the introductory stage or growth stage to take the place of those in the post maturity or decline stage. The stages are: introduction, growth, maturity and decline.

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Introduction – characteristics include: Until people get to know the product, sales will grow slowly. Heavy promotion and the costs of development often mean negative profits. Higher prices can be charged until competitors enter the market. Growth – characteristics include: The heavy promotion pays off and sales grow rapidly. It is very profitable because prices are high. The profits attract competitors. Maturity – characteristics include: Sales level off. Only occasional advertising is needed to promote product, e.g. Weet-Bix.

SALES

Decline – characteristics include: Sales are falling and there is little purpose in fighting the trend. Getting rid of stock requires heavy discounting.

Differentiation: Product design High costs Focus on quality Improve distribution Standardisation: Competitive cost important Long production runs Introduce small improvements Cost minimisation

market research A business must undertake market research to find out customer needs. Market research is the way information needed for market decision-making is collected and analysed. This information will guide the decision making on such things as the needs of customers, what competitors are doing, new product development and so on.

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There are three typical steps in the market research process: 1. Determine information needs – working out what information is needed to make the decision. 2. Collecting the data from primary and secondary sources. 3. Data analysis and interpretation. Determining the information needs: Info is used to solve problems, e.g. if a new product is being developed and problems emerge, they must find out what benefits customers most value and find out more about the location and income of the target market. Managers then must decide on how to collect the information needed to solve the problems.

Data collection (primary and secondary): Primary data – involves original research to solve the problem. The most common methods are: 1. Use of focus groups – involves collecting a small group of people who match the characteristics of the target market. 2. Surveys – refers to the questioning of a group of people as to their opinions on issues of importance to the marketing team. They are popular because they can be conducted relatively cheaply over the phone or prices can be offered. Secondary data – refers to the facts and figures that have already been collected for other purposes, e.g. the ABS (Australian Bureau of Statistics) publishes facts and figures on things like geographic location, income and education levels. Therefore it is much cheaper than primary data. It comes from sources like government departments, media, company reports etc. Secondary data helps pick up trends in things like fashion, lifestyle, buying patterns and demographics. The marketing department can pick up anticipated changes in the external environment and respond to them.

Data analysis and interpretation: Data and information are different. Data refers to the raw figures and facts which is then analysed to provide information that is useful in solving marketing problems. This info is then interpreted to solve the marketing plan. Interpretation is concerned with looking for relationships that explain the meaning of the data. Determine information data

Original material collected to solve the problem Primary – focus groups or surveys used

Need to work out what information is needed to solve the problem

General material collected

Secondary – excellent for picking up trends

establishing market objectives Marketing objectives set out what the business wants to achieve with its marketing effort, i.e. objectives drive the marketing effort. Marketing objectives must relate to things like profit, quality and staffing. Good marketing objectives: must be specific should be capable of being measured must be realistic

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Another objective model is the SMART model: S – specific, e.g. increase market share by 5% over last year M – measurable (get figures on), e.g. $100,000 increase A – achievable R – realistic T – time (needs to have a time frame), e.g. 1 year The most common type of market objective relates to market share which describes a business’ performance in the market place compared to its competitors. Other marketing objectives include: developing new products to take the place of products in the maturity of the product lifestyle entering new markets, e.g. a NSW business opening new stores in Victoria

identifying target markets The total market is usually too large for a single product to meet the needs of customers in that market. Therefore most business’ target a particular group of customers with common characteristics at which to direct their marketing activities. The target market refers to the group of actual or potential buyers of the product. It is the group at which the marketing effort is directed. When a business really understands its target market, it can often develop new products to meet their needs, e.g. there is no doubt that The Wiggles understand their target market of preschool children.

developing marketing strategies Marketing strategies allow a business to achieve objectives. For the objective: increase market share by 5%, the strategy: heavily promote the product and/or reduce the price, could be used. The marketing mix (4 p’s – product, price, promotion and place) plays an important role in marketing strategies.

implementation, monitoring and controlling – developing a financial forecast; comparing actual and planned results, revising the marketing strategy Implementation – a process whereby the marketing plans are put into operation. It must be effective (achieve its goals) and efficient (uses a minimum of resources). Monitoring – essential to ensure the plan is effective and involves watching what happens when the product is placed in the market. Monitoring is done by: Sales analysis – the breakdown of sales figures by product, customer or market for a given period of time, e.g. watching things like warehouse sales to retail shops and sales reports from the sales representatives. Market share analysis – refers to the products’ share of the total market and profitability refers to the money that is left over after all expenses have been paid. Controlling – process of comparing actual results with planned results. It is done by developing a financial forecast and comparing actual results against the planned results. Financial forecasting – involves working out the expected costs and revenues of implementing the plan, i.e. makes an estimate of costs such as the cost of manufacturing the product (including development costs),

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promotion costs and distribution costs. It also estimates revenue from sales. However it is not easily done, even though it will be based on careful research of customers and their needs. Revising the marketing strategy – essential if the forecast proves to be inaccurate as it enables the business to get the plan “back on track” as quickly as possible. The marketing mix is usually the starting point of any revision, e.g. if sales are below the forecast the business can: Lower the price and use discounts (price) Increase spending on promotion (promotion) Increase the distribution intensity (place) Improve the benefits from the product through things like better warranty and better after sales service (product)

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4. Marketing strategies Marketing strategies refers to the ways the marketing function goes about achieving the marketing objectives. A business must know its market and the needs of their customers. This is done by breaking it up into smaller parts where customers have common characteristics, i.e. market segmentation. Then a business identifies which segments match the business’ resources. A business could develop products that fit a number of segments, i.e. product/service differentiation. The business then decides what image (in terms of price and quality) it wants to but forward, before developing products that will most competitively meet the needs of customers, price, promote and distribute them. Marketing strategies → achieve marketing goals → consistent with overall business goals

market segmentation, product/service differentiation and positioning Market segmentation: Market segmentation occurs when businesses focus their efforts on a particular group of customers who have similar needs. This is because customers’ needs in the total market are so varied, e.g. Supre targets young women. Segmentation allows a business to develop a more competitive product/approach. Segmentation → focus on needs of that group → provide better products for that group (therefore more competitive) Markets can be segmented on many variables including: Gender – is crucial in providing different products/styles for women and men. Not only clothes but also housing, furniture, entertainment and cars, e.g. the Nissan Micra is aimed at females while the Toyota Hilux is aimed at men. Age – crucial in determining the needs, e.g. Huggies target families with babies. Income – very important in products we purchase, e.g. cars, clothing, furniture and housing all contain segments directed at the rich. Lifestyle – interests vary greatly from person to person, e.g. health magazines and gyms meet certain lifestyle needs.

Product/service differentiation: Product/service differentiation occurs when businesses decide to compete across a number of segments by changing their products to meet the specific needs of the customers in each segment, e.g. the smartphone market. Product/service differentiation is better able to satisfy customer needs in a particular segment but it is a more expensive strategy than having a standardised product designed to generally meet the needs of all customers in all segments. Standardised products can take advantage of economies of scale (lower costs). Economies of scale are the cost savings, such as bulk-buying, associated with large-scale production. However, customers are increasingly heterogeneous (have individual needs). The increase in market share for HTC and the consistent market share of Apple’s iPhone 4 supports this.

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Positioning: Positioning provides the ‘fit’ between customers in a particular market segment and the business resources and skills required to develop a product that will successfully meet the needs of customers in that segment. Positioning is a perception or image that potential buyers have of a product compared with its competitors, e.g. a restaurant with a top chef will be positioned at the top of the market while McDonalds will be positioned lower, promoting value for money. This shows the relationship between market segmentation, product/service differentiation and positioning.

products – goods and/or services - branding - packaging There are two aspects to a product: - The core product refers to the benefits the product offers to customers, e.g. a can of drink quenches thirst, a car gets you from point A to point B etc. - The actual product includes not only benefits but also added features, positioning, brand and packaging. It also includes intangible features such as a guarantee, possibly delivery and installation and after-sales service. The actual product is also called the augmented product. Product strategies refer to the ways a product itself can be used as a strategy to improve competitiveness, e.g. a car could be made more competitive by extending the warranty. Typically, the core product is augmented with features like:

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-

Quality Styling Warranty After-sales service A brand name that can be trusted Provision of credit, including interest free periods Packaging

Branding: A brand is the heart of marketing and therefore a business. Marketing is all about making the business’ products different from its competitors’. If a customer doesn’t see a difference, they will buy the cheapest or the most convenient. A brand is a logo, name, symbol or design (often a combination) that distinguishes a business’ products from other products in the market place. Over time a customer identifies the product with the characteristics of the brand, (e.g. style, reliability, price etc.). Satisfied customers develop brand loyalty. Brand supports positioning, e.g. Sony does not have to convince customers of quality every time they release a new product. Brands like Sony develop brands over a long time and it costs a lot of money to achieve this dominance in the market place. Brand dominance → high profit margins

Packaging: Packaging has both a functional and marketing role. It protects goods in transit and it contains information such as identification of the brand, weight and possibly the instructions of the product (functional role). It also is important in getting potential customers attention (marketing role). Packaging is all about making the product more competitive. It can give info about possible uses and dangers associated with incorrect use. It can add to the aesthetics of the product. Packaging is essential to calculate the maximum space in things like standard containers. Packaging impacts significantly on the cost of distribution. It needs to support the positioning of the brand, i.e. an expensive, highly positioned product wouldn’t be placed in cheap packages.

price including pricing methods – cost, market, competition-based - pricing strategies – skimming, penetration, loss leaders, price points - price and quality interaction There are three methods of pricing a product: 1.

Costs – businesses can work out how to price their products on the cost to develop, manufacture and distribute. They then add a margin to this (profit) and this becomes the price. It is called cost-based pricing.

2.

Market – used by businesses producing commodity products (e.g. wheat, wool, coal, iron ore). They tend to be price takers and are literally forced to accept the market price. This price fluctuates on the world market.

3.

Competition based – businesses look very closely at competitors’ prices because if a business is charging more, a customer is likely to go to a competitor. Charging too much less than competitors

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can lead to a price war. Lower prices should only be used in the long run if a business has cut costs, e.g. like Woolworths did to Coles.

Pricing strategies – prices are can vary and different pricing strategies can be used to gain a competitive advantage. The key strategies are: 1.

Skimming strategies – where the business sets a relatively high price at first and then lowers the price over time. This helps the business recover its development costs before competition forces a lower market price. The price is set at what the market will bear, e.g. Microsoft’s Xbox 360.

2.

Penetrating strategies – where a business sets a lower price (below competitors) in order to increase market share. If successful it will increase sales and market share and usually lower per unit costs through economies of scale. Usually only done for a short period of time as it will impact profit, unless economies of scale are achieved and profit is maintained.

3.

Loss leaders – are prices set at a very low level to encourage consideration of a product newly introduced to the market or to encourage customers to consider other products, e.g. Woolworths use this with specials, hoping customers do the rest of their shopping there. Businesses must be careful they are not using ‘bait advertising’, which is illegal.

4.

Price points – is psychological and refers to cut-offs in the minds of customers, e.g. $9.99 is less than $10 even though it is rounded up to $10 at the checkout. In the minds of customers, under $10 is ok, but $10 or over is the price point that becomes too high.

Price and quality interaction: Customers are individuals, varying greatly, with some being price sensitive, i.e. price is the dominant criteria when a customer makes their choice between competing products and services. Other customers consider quality, service and image as the dominant criteria when choosing between competing products and services. Therefore, a business must understand its customers’ sensitivity to the different factors, e.g. some Qantas customers are price sensitive where a 5% increase in prices would see them choose another airline while some customers insist on the full service (meals, drinks, entertainment). The solution to the price and quality interaction is multi-branding, i.e. the development of several products, positioned in terms of quality and price, and supported by a logo, name or symbol the customer associates with the value or quality of the product, e.g. Qantas underwent multi-branding with their Jetstar brand.

Promotion - elements of the promotion mix – advertising, personal selling and relationship marketing, sales promotions, publicity and public relations - the communication process – opinion leaders, word of mouth Promotion is about effective communication with customers. If a customer doesn’t know about a product, they won’t buy it, regardless if it’s the best product. A business can use many techniques to communicate. This mix of techniques is called the promotion mix.

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Elements of the promotion mix: The promotional mix refers to the way techniques (such as advertising, personal selling and relationship marketing, sales promotions, publicity and public relations) are combined so that they effectively meet the communication requirements of a particular business at a particular time. 1.

Advertising – paid communication with the target market and it is usually designed to be persuasive. It can be very effective and expensive. Advertising uses various types of media such as television, newspapers, magazines, radio, social media (e.g. Facebook, Google) and viral advertising. Viral advertising involves promoting products in such a way (usually humorous) that customers want to send it to friends (usually via email). A lot of advertising supports the brand and positioning, e.g. the milk aspect of Cadbury’s advertising suggests quality and high market positioning.

2.

Personal selling and relationship marketing – personal selling is what teams of sales representatives employed by manufacturers do when they sell products to retail outlets. It is one of the most important promotional tools and is becoming a partnership between the supplier and the retailer, e.g. Dulux Paint sales reps at Bunnings will replace stock, clean the shelves, ensure the display is attractive, often serve customers and do point of sale advertising by setting up promotional material. Relationship marketing is concerned with building a long-lasting relationship, not only between manufacturer and retailer customer but also between the retailer and their customers, e.g. Myer gets 60% of its business from customers who own a Myer card. There is an ethical dimension to relationship marketing as social media is increasingly used as a tool to build relationships, some of which are dubious, e.g. Paddle Pop and Smarties aimed at young children.

3.

Sales promotion – are non-media communication, e.g. promotional activities such as vouchers, loyalty card offers and competitions. They are very cost effective and often include special displays in retail stores.

4.

Publicity and public relations – increasingly used to communicate with a target market. Public relations is a planned effort to present a business and its products in a positive light, i.e. ensure strong public image. It involves activities that are not paid for directly. Big businesses have specialist PR departments to deal with any media aspect that has the potential to affect the image of a business. PR is about ensuring that every aspect of the business gives a positive message customers feel good about. Publicity is concerned with creating newsworthy stories about the business and its products. Celebrities are often used to wear the products or the talk about them, e.g. Ricky Ponting with Swisse Vitamins, Derrick Rose $260 million Adidas deal over 14 years. Celebrities are used because people (young people in particular) listen to their message. Using celebrities is not always ethical as they sometimes do not use the product. It is also unethical to endorse products like alcohol and tobacco. Publicity is about creating and reinforcing an image of the business in the eyes of customers. An effective way of creating a positive image is through sponsorship of special events and sporting teams.

The communication process: Marketing is all about communicating with potential customers or buyers in a way that will influence their behavior. Two important aspects are: Understanding what influences buyer behavior Understanding who influences buyer behavior What – key influences include personal and psychological factors as well as social and cultural environments in which people live. Who – buyer behavior is influenced by other people who do things like suggest buying a product or service and influence whether they buy it or not and where they buy it from.

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The people who influence buying decisions in this way are called opinion leaders. Opinion leaders are people you respect and tend to agree with their views on a whole range of things, including fashion and taste. The internet and social media have increased the influence of opinion leaders greatly. National sporting figures and celebrities tend to be very effective opinion leaders, e.g. Nicole Kidman, Michael Clarke. Word of mouth communication relies on local opinion leaders. It refers to personal endorsement.

place/distribution - distribution channels - channel choice – intensive, selective, exclusive - physical distribution issues – transport, warehousing, inventory The distribution process is about allowing the customers access to the product when they want it. The distribution channel links the point of manufacturing to the final customer. Traditional distribution channel: Manufacturers produce the product → wholesaler → retailer → customer Although all parties work together, they are all trying to achieve their own goals (maximise profits), often at the expense of those before or after them.

Modern distribution channel – involves vertical distribution where the one business designs, manufactures, sells, and delivers the product to the final customer, e.g. Walmart, and Woolworths with their ‘Select’ brand.

Channel choice: The intensity of the distribution refers to the number of outlets selling the product. The choice of distribution channel is crucial to success, e.g. Poppy King manufactured lipsticks and delivered them through an exclusive distribution channel. Her business failed, but if she had of chosen a selective channel she may have been successful. The main channels are: 1.

Intensive distribution – chosen when the manufacturer wants to uses as many outlets as possible, e.g. Coca-Cola uses supermarkets, service stations, vending machines etc.

2.

Selective distribution – is used when the manufacturer wants the product widely distributed but not quite to the degree of intensive distribution, e.g. groceries, clothing, furniture

3.

Exclusive distribution – is often used for products positioned at the top of the market that are high quality and with prices that indicate exclusivity, e.g. Rolls-Royce cars.

Physical distribution issues: Physical distribution is about efficiency, i.e. using as few resources as possible to achieve the goals. It is important as it is a cost component of the final product. If done efficiently (by managing transport, warehousing and inventory more effectively) it allows a business to gain a competitive advantage over its competitors. 1.

Transport – cost-reduction advances in transport have been very significant. The most important being standardization of packaging to ensure the pantechnicons (warehouse) and containers are fully loaded and that a business is minimizing its unit cost of transport. Another advancement is the

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adoption of pallets and the fitting of automatic “roll-on-roll-off” conveyor belt technology to trucks that means the driver can load and unload without assistance. 2.

Warehousing – technological advancements have led to cost reductions, e.g. Woolworths stopped using the old warehouse sheds and went to totally sealed warehouses with no lights or windows. They are totally automated and run by computers. Very few staff are needed and they warehouse and distribute incredibly large amounts of products. Coles then followed.

3.

Inventory – stock must be available when the customer wants it, but businesses must take into account the cost of storage.

people, processes and physical evidence The classical marketing mix (4 p’s) has typically related to traditional manufacturing but now in Australia there has been a big move from businesses manufacturing goods to provide services. This is due to a great deal of manufacturing being outsourced to low-wage countries. The people, processes and physical evidence are crucial parts of the marketing mix in a service business. People: People are central to a business, e.g. Kmart focuses greatly on customer service, putting employees through training on how to deliver it. Therefore recruitment and selection of employees is critical. Employees selected with desired basic skills → training to enhance/develop interpersonal skills → happy customers → repeat purchases

Processes: Processes are very important, e.g. McDonalds, as a fast-food restaurant, must be fast. They spend a lot of time and money on this, especially on the drive through.

Physical evidence: Physical evidence in the market place can give a business a competitive advantage. It is the part of the marketing mix where the customer makes judgments about the business. Quite often the physical evidence is the most important factor in the customer’s evaluation of the product, e.g. flying first class on a plane has very high expectations. If the physical evidence of that expectation isn’t there, then you won’t repeat purchase and you will be negative in your word of mouth comments.

e-marketing E-marketing is concerned with using the internet to research customer needs, develop a brand to meet that need and then use the internet to sell that product, e.g. the success of www.bookdepository.co.uk probably led to the failure of Angus & Robertson and Borders. E-marketing has an enormous potential, mainly across two areas: 1.

Access to customers – the internet can target an enormous market and because it is so large, there is a great deal of potential to develop a product that satisfies a small niche in that market, e.g. the Apple App Store. Of course building a global brand is entirely different and very difficult.

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2.

The area of costs – businesses such as www.bookdepository.co.uk are able to set up factory-type processes using relatively unskilled labour and consequently they have low costs. Competing businesses are often very high cost, with highly skilled employees and very expensive retail premises.

E-marketing is growing rapidly and so is the range of products including: - Consumer products - Whole range of business services (these include call centres to telephone businesses and banks, graphic artists, computer programming and accounting services) Increasingly, functions in a business are outsourced in the e-marketing environment.

global marketing - global branding - standardization - customization - global pricing - competitive positioning Businesses are often tempted to enter the global market as the potential market is enormous. Before doing so, it is important for a business to consider the following marketing concepts: 1.

Global branding: Customers generally buy things because they have confidence in the brand. If brand was irrelevant, the customer would buy the cheapest. There has been a move from local brands to become global brands, i.e. recognized in most countries. The main reasons for developing a global brand are: - Growing internationalism of tastes and buying patterns, e.g. smartphones, computers. - Economies of scale, e.g. Apple have been able to achieve high quality, low cost products. The advantages of developing a global brand are: - Potential cost savings, i.e. standardize design, packaging, logo and name across production. - Customers are increasingly mobile and tend to purchase familiar brands when they travel - Strong brands attract good prices and significant market share.

2.

Standardisation: Localised and national markets are changing because of travel, communication and transport. This is contributing to customer needs and tastes becoming increasingly alike. It therefore makes sense to market a standardized product, e.g. Apple iPhone. A standardised product is a product designed to meet the needs of every market segment in a particular market. They can achieve economies of scales resulting in high quality at low prices. The advantages of a standardised product are: - High degree of similarity in putting together effective marketing campaigns in different countries. - Cost savings with things like packaging and staff training.

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3.

Customisation: Very few products can be marketed in the same way, i.e. without some degree of customisation. Customisation is concerned with ensuring there is a better fit between the needs of customers in a global market and the product, e.g. a standardised Barbie Doll can be customized by adding clothes etc. The degree of standardisation varies with the product and market. National values are important in food products, but not in electronic products. Cultural values are important to the elderly and those on low income, but not to the young and wealthy.

4.

Global pricing: Global pricing is a difficult concept as every product sold in a particular country is sold in that country’s currency. Currencies change their value in relation to other currencies all the time. Pricing is important as it is the link between marketing and the business’ profitability. The purpose of the business is to deliver value to the customer and pricing is the technique that enables this. A well perceived brand can charge higher prices, e.g. Apple. They can do this by convincing customers of value, particularly to do with design, the applications and intuitive operations.

5.

Competitive positioning: Competitive positioning is concerned with creating an image in the minds of customers of the value the business’ products can give the customer in a global market where competitors are trying to create an image that their product offers the customer better value. It is all about value. The purpose of positioning and branding is to make the value clear to the customer. The following can influence competitive positioning: - The number of competing businesses in that market. - The relationship a business develops with its customers, e.g. Apple with their stores and their social media channels that they use to keep the customers informed and to launch new products. - Product and technology development, HTC is building an image of developing new products that better meet the needs of customers, i.e. product differentiation. A great deal of very expensive advertising is needed to support the competitive position of a global business.

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5. Marketing ‘Super Summary’ Marketing: understanding and meeting customer needs. Marketing management: consider other stakeholders, e.g. owners/investors (sufficient profit) and employees (adequate benefits).

Strategic role: -

Maximise sales Maximise profits Increase market share Maximise customer satisfaction

Approaches: -

-

-

Production approach – (1820 – 1920). The business had only a broad understanding of customer needs and manufactured a product that they considered met those needs. Concentrated on low-cost manufacture achieved through large-scale production. Selling approach – (1920 – 1960). Managers thought they could deal with increasing competition with good sales teams. They tried to convince customers that their product was much better than competitors using radio advertising and door-to-door salesmen. Marketing approach – A philosophy that believes success comes from a total focus on customer satisfaction, i.e. a satisfied customer will return for more (relationship marketing). It is much cheaper to retain an existing customer than to try to get new customers.

Types of market: -

Resource Markets – the factors of production (land, labour, capital and enterprise). Industrial Markets – products needed to manufacture other products. Intermediate Markets – resale, e.g. Woolworths buys from intermediate market. Consumer Markets – goods and services for personal use. Mass Markets – standard product, e.g. electricity or petrol. Niche Markets – consists of buyers with specialised needs.

Influences: -

Psychological factors – the way we think, feel and reason when we decide to select a particular product. Sociocultural factors – influences from the society and culture that the customer is a part of, e.g. it includes things like social class, family, household type, roles and status. Economic factors – changes in spending and income in the wider economy. Government factors – capacity of the government to tax, make grants and implement laws and regulations that impact on the type of product a business markets and the price.

Consumer law: -

Deceptive and misleading advertising – they promote a heavily discounted product when there are very few of the products for sale, i.e. “bait advertising”. Price discrimination – where a good is sold at different process to different customers. Implied conditions – State and Territory Fair Trading Acts and TPA 1974 specify products will be of suitable quality and fit for their intended purpose. Warranties – an assurance that the product will perform satisfactorily and that any defects will be corrected during the warranty period.

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Strategies: Market segmentation Segmentation and differentiation

Product

Product/service differentiation Branding Packaging Skimming strategies

Price

Penetrating strategies Loss leaders Price points Advertising Personal selling Relationship marketing

Promotion Sales promotion Public relations Publicity Intensive distribution Place (distribution channel choice)

Selective distribution

Exclusive distribution

Global marketing

Develop a global brand Create a standardised product Create a customizable product Develop competitive positioning

When businesses focus their efforts on a particular group of customers who have similar needs. When businesses decide to compete across a number of segments by changing their products to meet the specific needs of the customers in each segment. Developing a recognisable and trusted brand that consumers associate with. Having packaging that supports the positioning of the brand. Both marketing and functional role (i.e. also protects product and used for ease of storage.) Sets a relatively high price (what the market can bear) at first and then lowers the price over time. Sets a lower price (below competitors) in order to increase market share. Set at a very low level to encourage consideration of a new product or other products, e.g. Woolworths’ specials. Is psychological and refers to cut-offs in the minds of customers, e.g. $9.99 is less than $10. Paid communication with the target market. What teams of sales representatives do when they sell products to retail outlets, e.g. Coca Cola. Building long-lasting relationships between manufacturer and retailer and retailer and customers. Non-media communication, e.g. promotional activities such as vouchers, loyalty card offers and competitions. A planned effort to present a business and its products in a positive light. Creating newsworthy stories about the business and its products. Chosen when the manufacturer wants to uses as many outlets as possible, e.g. Coca-Cola uses supermarkets, service stations, vending machines etc. Is used when the manufacturer wants the product widely distributed but not quite to the degree of intensive distribution, e.g. groceries, clothing, furniture. Is often used for products positioned at the top of the market that are high quality and with prices that indicate exclusivity, e.g. Rolls-Royce cars. More recognisable as customers are increasingly mobile. A product designed to meet the needs of every market segment in a particular market. They can achieve economies of scales resulting in high quality at low prices. Ensure there is a better fit between the needs of customers and the product in a global market. Create an image in the minds of customers of the value the business’ products can give the customer in a global market.

Marketing objectives set out what the business wants to achieve with its marketing effort. They must relate to things like profit, quality and staffing. An objective model is the SMART model: S – specific, e.g. increase market share by 5% over last year M – measurable (get figures on), e.g. $100,000 increase A – achievable R – realistic T – time (needs to have a time frame), e.g. 1 year The most common type of market objective relates to market share which describes a business’ performance in the market place compared to its competitors. Other marketing objectives include: developing new products to take the place of products in the maturity of the product lifestyle entering new markets, e.g. a NSW business opening new stores in Victoria

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6. Marketing Acronyms Factors influencing customer choice: “PEGS” P – Psychological factors E – Economic factors G – Government factors S – Sociocultural factors

Consumer laws influences: “WIPD” – pronounced “whipped” W – Warranties I – Implied conditions P – Price discrimination D – Deceptive and misleading advertising

Ethical influences: “TAPES” T – Truth A – Accuracy and good taste in advertising P – Products that may damage heath E – Engaging in unfair competition S – Sugging

Strategies: “4Ps + PEG” 4Ps – Product, Place, Price, Promotion P – People, processes and physical evidence E – E-marketing

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G – Global marketing

10.3 HSC topic: Finance Outcomes: The student: H2 evaluates management strategies in response to changes in internal and external influences H3 discusses the social and ethical responsibilities of management H4 analyses business functions and processes in large and global businesses H5 explains management strategies and their impact on businesses H6 evaluates the effectiveness of management in the performance of businesses H7 plans and conducts investigations into contemporary business issues H8 organises and evaluates information for actual and hypothetical business situations H9 communicates business information, issues and concepts in appropriate formats H10 applies mathematical concepts appropriately in business situations

The focus of this topic is the role of interpreting financial information in the planning and management of a business.

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1. Role of financial management Role of financial management – to provide the link between what a business wants and the resources that will be needed to achieve its objectives.

strategic role of financial management Strategic role of financial management – the process of ensuring that the resources needed to achieve business goals are available when they are needed. In large business, it is done by a senior management team, led by the Chief Financial Officer (CFO). Senior management team → set direction of business → turn goals into achievable objectives This is not an easy task due to the dynamic external environment, which is often turbulent and affects the financial markets, e.g. GFC in 2008, Euro crisis in 2012.

objectives of financial management - profitability, growth, efficiency, liquidity, solvency - short-term and long-term Objectives of financial management – concerned with levels of profitability and growth that will satisfy investors in the business and make it possible to attract funds to finance the growth. Efficiency is important as it impacts on costs and profitability. Liquidity and solvency are important as investors need to be confident the business can repay any monies due in the short or long term. Liquidity – short term Solvency – long term 1.

Profitability – revenue from sales (minus) the costs of manufacturing the product or delivering the service. Profit is important as it is a major factor when people decide to invest.

2.

Growth – the increase in the value of the business over time and is usually measured by changes in the share price, e.g. Google shares went from $83 to $300 in 18 months.

3.

Efficiency – achieving lower costs by increasing output from inputs such as labour or machinery, e.g. the Airbus A380 is more efficient than the 747, employees at Virgin are more efficient than those at Ansett as they are multi-skilled (cabin staff clean plane).

4.

Liquidity – ability to pay short term debts, e.g. Qantas’ fuel bill must be paid in 7 days. To do this, s-t assets such as customer debt and inventory may need to be turned into cash.

5.

Solvency – ability to pay long term debts, often called gearing or leverage. Businesses often use debt to expand their operations, e.g. Centro used debt to build shopping centres in regional Australia.

Short term – relates to the accounting period, i.e. financial year (July 1 → June 30) Long term – period greater than the accounting period, e.g. a 10 year mortgage Liquidity objectives – ensuring there is sufficient money to repay s-t debts as they fall due. Solvency objectives – ensuring there is an ongoing cash flow to meet debt repayments in l-t.

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interdependence with other key business functions

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2. Influences on financial management internal sources of finance – retained profits Retained profits – money that has been earned by the business and not distributed to its shareholders as dividends. This increases the share price, e.g. Microsoft did not pay dividends and the share price went from $2 to over $200. Even though shareholders pay capital gains tax when they sell the shares, it is often less than income tax on dividends. Retained profits are used to grow the value of the business, i.e. for the development of a new product, research and development, equipment purchase, training of employees etc.

external sources of finance - debt – short-term borrowing (overdraft, commercial bills, factoring), long-term borrowing (mortgage, debentures, unsecured notes, leasing) - equity – ordinary shares (new issues, rights issues, placements, share purchase plans), private equity External sources of finance typically involve money that people with a surplus of cash want to invest so they get a return on it. They can lend the cash as debt or become owners in the business through equity finance. Banks often facilitate this by bringing together lots of small surpluses, but it is also done by individuals on the stock exchange (ASX – Australian Securities Exchange). Debt: Overdrafts Short-term borrowings (shorter than the accounting period i.e.