Marketing Plan

Effective Marketing Objectives and Strategy

Introduction
- Effective marketing achieves the firms sales and profit targets by convincing customers to buy the firms
products again and again

Marketing objectives
- Steer the direction of the business
- Decision making will be more focused Increase the probability of success
- Achieving the marketing objective can help firm achieve its company-wide objectives
- Effective objectives should be quantifiable and measurable
o Increasing sales
If sales volume can be increased, the high fixed costs of operation will be spread across a
greater number of units of output, reducing fixed costs per unit. Lower operation costs will
widen its profit margin which gives the company the opportunity to increase its research and
development budgets, raising the likelihood of success for its new investments.
o To enhance, or reposition a brands image
Some brands become jaded due to changes in consumer tastes and lifestyles
Refreshing the brand image and can products relevant to the target market
Reposition: Occurs when a firm aims to change a brands image, so that the brand appeals to
a new target market.
Important to have a clear objective who is the new target market, how old are
they, which social class do they belong to, what is their lifestyle, etc.

Effective marketing strategy

- Marketing strategy is the medium to long term plan for how to achieve your marketing objectives.
o Profitable A proper balance between the firms need for profit and the customers need for value
o Offensive Get on the attack, leading the market, taking risks and force competitors to be followers
o Integrated The marketing approach must flow through the whole company
o Strategic Probing analysis of the market and your competitors leading to a winning strategy
o Effectively executed Strong and disciplined teamwork in carrying the strategy through efficiently
- Identifying the target market
- Market segmentation
- Market orientation
- Identifying the right brand image

What is effective marketing?

- Marketing is the business function that aims to identify, influence then satisfy consumer wants profitably
- In small businesses, owners are able to hear first-hand about the needs and wants of the target market
- In large businesses, formal research is undertaken to identify consumers wants and needs, designing of
products and services to match consumers preference and a launch of marketing mix must be decided.

Why is effective marketing important?

- In a competitive market, firms stand or fall according to their ability to satisfy the needs of consumers
o Firms that lack customer loyalty will lose market share and profit
o Firms with products and services that offer genuine consumer benefits will attract profit and
revenue
- Competitiveness depends on: the ability to respond and adapt quickly to change in consumers taste

The characteristics of effective marketing

- Identifying the target market
o Know and understand the customers within your target market
o Have a clear idea of the age, sex, personality and lifestyle of the target market
 Focus market research
Interview those who make up the target market more reliable findings
Clear definition of target market market research budget can be spent more
effectively
Quota sampling: interviewing those who meet the specific criteria saves money
and time
Focus advertising spending
Specific channels to specific target markets
E.g. Womens magazine if target market is young/ middle-aged women
- Segment markets
o Produce a range of products which are each targeted at specific market segments
- Market-orientated marketing: managers take into account the needs of consumers before making any
decisions
o Not product-orientated: managers focus on what the firm does best internal efficiency comes
before the customer preferences
The hard sell: employing a large salesforce to convince customers that they should buy the
product, motivating workers by setting individualised sales targets, low basic salaries and
high rates of commission high costs
Cutting costs and prices: if sales are decreasing and firms cut costs and prices, profit margin
may not be affected
A greater focus on the quality and reliability of the product would be more effective
- A coherent brand image
o Using the marketing mix all four elements must be coordinated, or mixed product messages will be
sent out to the target market thus creating confusion
o Create a coherent and attractive brand image that appeals to target market
o Think through the brand image that you want to create before making any decision on the marketing
mix of the product
- Marketing is everyones job
o Firms may not have a marketing department believe that every employee has a part to plan in
marketing their business
o Should not be the preserve of a specialised marketing department it is everyones responsibility
o Management has to create the right culture every member of staff must see their role as to serve
the better needs and wants of the consumer

Short-termism marketing = ineffective marketing

- Short termism marketing: the firm pursue strategies that may boost profits in the short run but damage the
firms long run profitability
o High prices designed to exploit customer loyalty or a dominant market position
In markets where competition is little, firms raise their prices to boost profits and revenues
which exploits the loyalty of their consumers
In the long term, consumers may rebel against the price increases and stop purchases
High profits may also attract new entrants to join the market and competition might
decrease prices and profits
- Short run sales-driven marketing
o Motivate employees by setting targets linked to bonuses and other performance-related payments
o Over-reliance on targets and performance-related pay can create a ruthless and dishonest culture
o Mis-selling inappropriate financial products to customers can improve a banks profitability in the
short run if the unethical marketing practices are exposed, the resulting wave of bad publicity may
hit demand for the firms product

Issues for analysis

- Good exam answers acknowledge that marketing is difficult because it is based on judgements about the
future future competition, consumer tastes, consumer attitudes, etc. not just the marketing mix (4Ps)
- Achieving success depends on devising a genuinely new type of product that meets an actual consumer need
or desire
- To judge the effectiveness of a marketing plan requires a full understanding of the market
o Study the evidence available data which tells you about the market for deeper understanding
Niche versus Mass Marketing

Introduction
- Mass marketing: Devising products with mass appeal and promoting them to all types of customers
- Niche marketing: Tailoring a product to a particular type of customer

Mass marketing
- Creation of products with universal appeal
- Aims the product at the whole market
- Creation of generis brands brands that are so well known that customers say the brand when they mean
the product (hoover = vacuum cleaner)

Niche marketing
- A small segment of a larger market niche market has to be big enough to support a profitable business
- Identifying the wants and needs of consumers that make up the smaller market identify a group of people
that share a taste for a product or service that is currently unsatisfied
- Creation of a specialised product to meet the distinctive needs of these consumers has to be superior to
the mass market equivalent that is already available
o Product differentiation: The extent to which consumers perceive a brand as being different from
others
- Sell in relatively low volumes at high prices (less supply) manage overhead costs with care if the business is
to operate its break-even point
- Distribution through specialist retailers or directly to the consumer via the internet
o Amount of profit generated must be high enough for the small firm but too trivial for the big firms
small niche operators lack the economies of scale (factors that cause costs per unit to fall when a
firm operates at a higher level of production) and have to compete on price with larger firms
o Survive on the basis that they occupy a relatively unimportant, low-profit market niche which pose
no threat to large firms
o Firms selling niche-market products can exploit the low price sensitivity created by product
differentiation by raising the price

Are niche markets safe havens for small businesses?

- To fill lots of small niches, large firms would have required lots of short production runs expensive as it
takes a long time to reset machinery so they will ignore small market gaps and smaller companies
- Advanced technology allows production lines to be reset almost instantly large firms are able to build the
sales volume they need by producing a large variety of low-volume niche-market producers
- Small firms are quicker to adapt so when large firms head towards their market, small firms might still be
able to win the competitive war

Issues for analysis

- Analyse niche-marketing in relation to price elasticity buyers of niche-market goods are likely to be less
price sensitive than consumers of market brands since the products are unique and meet their needs
(especially for the originators of the unique product)
- High-volume, low profit margin operations (mass markets) or low-volume, high-profit margin businesses
(niche markets)
o Dependent on the competitiveness of the market
o The mass market would be better if firms can succeed and make profits there

Designing an Effective Marketing Mix

Introduction
- The marketing mix is the balance between the four main elements of marketing needed to carry out the
marketing strategy product, price, promotion and place
Components of the marketing mix
- Product identify the right product
o To make it appealing and distinctive must understand fully both its customers and its competitors
- Price setting the right price
o Low prices or special discounts may not be the right strategies
- Promotion creating the right image for the product and present it to the right target audience
o Media advertising and other forms of promotion
o Specific markets can be reached at far lower cost by more careful/ specific targeting
- Place how to get your product to the place where consumers can be persuaded to buy
o The location of the product is important placement by the till is a prime position for purchases
bought on impulse

How is the marketing mix used?

- Develop ideas about how and where to market a product or service
- Decide marketing actions that need to be taken under each headings
- Set the marketing mix based on a balance between cost and effectiveness coordination
- Successful marketing mixes succeed in putting the strategy into practice
o For each market situation there will be a different mix
Vary according to the market in which the firm is operating different attitudes and tastes
of target market
Regular purchases product, promotion and price
Impulse purchases place and promotion (and attractiveness of packaging)
Emergency purchases product and place
o Within each market there may be many different segments
Differences in customers and buying habits each segment requires own marketing mix
o The ingredients are not equally important
Product is still the main element no amount of marketing will make a lousy product
succeed
Reliability and quality of product are far more important than brand image
However, a good product without good support will likewise not succeed
Balance will vary e.g. prices are important in a price sensitive market

Influences on the marketing mix

- Finance a budget is decided how to be divided between the 4Ps
o Tight budget right marketing mix is important
o Large budget can implement any marketing strategy you want
However, even companies with large budgets cannot do everything as strong advertising
costs a bomb
- Technology long term success in marketing requires that firms keep up with changes and invest in
technology
o With e-commerce (online purchasing), firms can make their products available worldwide even if
they only have a handful of retail outlets
- Market research
o Usually only small firms can get direct feedback from their customers
o Medium - large firms need primary research to keep the senior managers in touch with the
customers they rarely meet
Feedback will allow firms to improve their product which is the key element to success

Where does the marketing mix fit into marketing planning?

- Statistical analysis highlights trends, investigation reveals the reason for trends
- Market research provides:
o An understanding of the products place in the market, the market segments and target customers
o Customers views on the product
o Reasons for the success or failure of the product
o An understanding of competitive activity
- Marketing strategy with marketing mix:
 o Analysing the market -> Developing strategies -> Marketing activities focusing on product, price,
promotion and place -> Producing correctly targeted marketing

Issues for analysis

- How well the mix is matched to the new strategy depends on how coordinated and focused the 4Ps are
- Relative importance of the ingredients in the marketing mix every situation/ case places different
importance on the different variables
- How each of the mix ingredients can be used to achieve effective marketing mix elements must be suitable
for the situation/ case
o Best approach depends on the product, the competitive situation, objectives and marketing budget
- Mix should not only have 4Ps growing importance of customer service and good sales staff (even if product
is cheap, bad service will not encourage customers to return)
- Product is mainly the key element strategy depends on how well the product is matched to the segment of
the market being targeted

Product Life Cycle and Portfolio Analysis

Introduction
- The product life cycle is the theory that all products follow a similar pattern
over time, of development birth, growth, maturity and decline.

What is the product life cycle?

- Shows the sales of a product over time
o Introduction: When a product is first launched, sales will usually be
slow as the product is not yet known or proven in the market
Retailers may be reluctant to stock the product because it means giving up valuable shelf
space to products that may or may not sell which involves high risk
Consumers may also be hesitant and want to wait until someone else has tried it before they
purchase it themselves
o Growth: If the product succeeds, sales increase
o Maturity phase: At some point of time, sales will stabilise and sales growth slows down
Competitors may have introduced similar products or the market may have become
saturated (amount of product provided has been maximised in the current state of the
marketplace households may not need 2 of the same product, once all households have it,
it is not needed)
o Decline: Sales fall
New technology means the product has become outdated
Competitors may have launched a more successful model or the original creator has
improved its own product

What use is the product life cycle?

- Help managers plan their marketing activities
- Mangers adjust their marketing mix at different stages of the product life cycle
- Distinguish between the life cycle of a product category VS the life cycle of a particular brand of that product
Development Introduction Growth Maturity Decline
Sales No sales Low sales Increasing sales Growth of sales Sales decrease
slow down
sales stabilise
Cost per High costs of High fixed cost is Decreasing as Low as fixed Low as
unit investment and spread over low fixed costs spread costs is spread development
research and sales, high fixed over more of maximum costs have been
development costs per unit outputs output covered and
promotional
costs are reduced
 as no more need
to raise
awareness
Product Prototypes Basic May be modified May focus on Focus on more
after feedback core products profitable
and remove products
ones that are
not selling well
/OR/ may
diversify and
extend brand to
new items
Promotion Alert customers of Raise awareness Building loyalty of May focus on No promotion
its launch as of product to customer base highlighting the
development is customers product
finishing differentiation
Place/ Early discussions Limited stocks as Increases as more Focus on key Lower budgets to
Distribution with retailers will retailers want to distributors are outlets and keep costs down
help finalise see customers willing to stock it more profitable
product packaging reactions first channels
Price Not needed Depends on Depends on Decreases to Large promotions
pricing strategy demand and maintain and discounts to
(skimming low pricing strategy competitiveness maintain sales
competition or
penetration
high competition)

The product life cycle and capacity

- Link forecasted sales to plans for the firms capacity

Cash flow and the product life cycle

- Cash flow will only increase as it shifts from introduction to growth stage
- Cash flow will only be positive as it shifts into the maturity stage
- Careful budgeting required to avoid overspending

Extension strategies
- Marketing strategies used to prevent a decline in the products sales
o Targeting a new segment of market or a new geographic market
o Developing new uses for the product
o Increasing usage of a product set challenges which encourages increased consumption

Is a decline in sales inevitable?

- Developments in technology may make some products obsolete (out-of-date)
- Effective extension strategies creative marketing may be used to avoid the decline phase
- Determinism Managers may assume that a product will fail at some point and naturally decrease
marketing support, not making enough effort to save it by finding new ways of selling the product
- Top marketing managers try to influence the future by shaping the product life cycle, not just let it happen
which shapes their success life cycle graph only shows what has happened not the future

The product portfolio

- Product portfolio analysis: examines the existing position of a firms product
o Allows a firm to consider its existing position and plan what to do next/ where to direct marketing
efforts
- Boston Matrix: shows the market share of each of the firms product and the rate of growth of the market in
which they operate
o Cash cow: a product that has high share of a low-growth market
 Overall market is mature and slow growing
Generates high profits and cash for the company because sales and relatively high and
promotional costs are low as consumers are already aware of the brand
Cash from cash cow can be used to invest in newer products
o Problem child: a product that has a low share of a high-growth market
May provide high profits in the future product could provide high returns if it gets a
greater market share in the fast growing market
Future of product may be uncertain either grow and profit or not
Usually needs a relatively high level of investment to promote them, get them distributed
and keep them going (low share trying to increase share)
o Rising star: a product that has a high share of a high-growth market
Attractive products that are doing well and gaining high profits
Need protection from competitors products
Heavy promotion using profits from cash cow to ensure success
o Dog: a product that has a low share of a low-growth market
Little appeal for a firm unless they can be revived
Production will stop once sales falls below break-even point
- Purpose of product portfolio analysis
o Examine the existing position of the firms products so managers can plan what to do next
Building investment in promotion and distribution to boost sales, often used with problem
children
Holding marketing spending to maintain sales, often used with rising star products
Milking taking whatever profits you can without much more new investment, often used
with cash cows
Divesting selling off the product, often used with problem children or dogs

Issues for analysis

- Portfolio analysis examines the position of all the firms products and helps managers decide what to do with
each of them/ how to split marketing budget between each product shows the firms current position
within the market
o Managers must interpret their findings effectively and decide on the most effective course of action
- Managers must avoid letting these models become self-fulfilling attempt to influence the product life cycle
- Product life cycles are becoming shorter due to rapid developments in technology and the increasing levels
of competition
- Assumes high market share = high profits, may not be true
- High market share may mean rapid growth which might be due to markets instability
- Analysis of life cycle of a product VS analysis of life cycle of the products industry

Protecting Business Ideas

Introduction
- An idea cannot be protected, but patents and copyright are methods of preventing others from copying an
actual invention or piece of creative work

Intellectual property
- The general term for assets that have been created by human ingenuity or creativity

Patent
- Provide the inventor of a technical breakthrough with the ability to stop anyone copying the idea for up to
20 years
- 20 year period starts from the moment the patent is applied for
- Applications may take up to 2.5 -5 years to process
- Acts an incentive to investors dont have to worry about people copying ideas and stealing customers
- May charge premium prices as it has monopoly power the sole supplier -> increased demand -> higher
prices for consumers
 - Obtaining a patent can be expensive for small firms
o Actual costs 1000 to 4000 pounds
o Competitors breaking patents is not a criminal offence but a civil offence only can sue and fight in
court which requires high cost of court proceedings

Copyright: Makes it unlawful for people to copy an authors original written work
- Applies to original written work
- Occurs automatically no need to spend time and money applying for it
- Lasts for the lifetime of the author + 70 years
- Significant in publishing and music industries, computing and the internet

Trademark
- Any sign that can distinguish the goods and services of one trader from those of another
- Must be registered at the Intellectual Property Office (IPO) low costs
- Mostly applicable to large firms and less importance to small businesses

Issues for analysis

- Consumers ignore intellectual property (e.g. downloading music illegally)
o Businesses rely hugely on tightly regulated IP
o Consumers are not willing to pay higher prices in the short term for IP
o Everyone can see the potential benefits of IP (higher prices, more investment)
- Business success relies on building a distinctive market position and consumer image the more that
patents, copyright and trademarks can help a firm to achieve this, the more secure it will become compared
with its rivals
- In todays brand-conscious and fashion-conscious world, products and services are making greater appeal to
our senses as trademarks become more important

Pricing

Importance of decisions about price

- Price: The amount paid by the customer for a good or service
o One of the main links between the customer (demand) and the producer (supply)
o Gives messages about the product quality
o Fundamental to a firms revenues and profit margins
o Important to most consumer buying decisions
- Customer sensitivity to price
o Quality higher quality (may be real or perceived) products can carry a price premium
o Degree of demand customers will pay more for goods that they need or want
o Consumers income customers buy products within their income range
The higher the income, the less sensitive to price
The higher the interest rates, the higher the sensitivity to price
- The level of competitive activity
o The fiercer the competition in a market, the more important the price becomes
Customers have more choice and will take more care in buying the best-value item
o A firm with a strong monopoly position is able to charge higher prices
- The availability of the product
o The wider the availability of the product, the more price-conscious consumers are
o Scarcity removes some of the barriers to price the less common the product, the higher prices will
be charged.

Price revenue determines business revenue

- Revenue = Price x Quantity sold
- If the price is not right, the business could:
o Lose customers high prices may decrease demand, and if goods remain unsold, the costs of
production will not be recovered; dependent on the price elasticity of demand of product
 o Lose revenue low prices may increase demand, but the high sales may not compensate for the low
revenue per unit
- Requires a balance between being competitive and being profitable

How to businesses decide what price to charge

- Requires a good understanding of the market: consumers and competitors
- Requires a good understanding of costs
- Business must charge more than its variable cost in order to gain profits ensures that the revenue earned
from a product sold contributes towards the fixed costs of the business
- Fixed prices will depend on the company objectives
o Market research can provide consumer reactions to possible price changes
o Competitive research tells the company about other products and prices
o Analysis of sales patterns show how the market reacts to price and economic changes
o Sales staff can report on customer reactions to price
- Depends on the price elasticity of demand of product which measures the sensitivity of demand to price
changes

Pricing strategies
- A companys plan for setting its prices over the medium to long term
- Pricing tactics: a companys plan for setting its prices over the short term
o Skimming
Used when the product is innovative it is new and there is no competition -> able to charge
premium prices
High prices help establish the product as a must-have item
Early adopters (consumers with the wealth and personality to want to be the first to
get a new good) want exclusivity and are willing to pay high prices
Innovation can be expensive so high prices are reasonable to recover the investment
cost
If sales become stagnant the price can be lowered to attract customers who were unwilling
to pay the initial price
Prices may be lowered if competitors enter the market
Customers may be put off totally by rip-off pricing at the start of the products life
A cut in price may harm the products image
Buyers who bought at the higher prices may be annoyed that prices fell soon after
o Price penetration
Used when launching a product into a market where there are similar products (high level of
competition)
Prices are set lower to gain market share
o Low-priced new products may attract high sales volumes, which make it very
hard from a competitor to break into the market
o High sales volumes help to cut production costs per unit, as the producer
can buy in bulk and get purchasing costs down
o Achieving high sales volumes ensures that shops will provide high
distribution levels and good in-store displays
o Pricing low may affect the brand image, making the product look cheap
o Hard to gain distribution in more upmarket retail outlets due to mass-
market pricing
o Pricing on the basis of value for money can cause customers and
competitors to be very price sensitive
Once the product is established, price can be increased
o Pricing strategies for existing products
 To be clear about where the brand stands in
the market its market share
Price leader where the price is set
above the market level when the
company has strong brands or little
effective competition
Price taker where the price is set at
the market level or below the market
level in highly competitive markets
where one brand dominates
- Choosing a pricing strategy is dependent on how new the
product is and its competitive environment

Pricing tactics
- Loss leaders
o Prices are set deliberately low to encourage customers to buy other products or complementary
goods that generate profit
- Psychological pricing
o Prices are set at a level that seems lower to the customer
- Special offer pricing
o Discounts or offers made for a period of time to clear stocks

Issues for analysis

- The relationship between price and demand change in price will change demand
o Dependent on the price elasticity of demand and the sensitivity of demand to price change
- Role of pricing as one part of the overall marketing mix price should be matched by the image
- Influence of price on profitability reduce in price reduce profit margin but will increase in quantity
demanded offset loss and maintain profitability?
- Other factors influencing pricing e.g. cost, customer psychology and competitors
- Keep pricing in line with the overall marketing strategy
o Keep in mind the portrayed brand image and quality with relevance to pricing

Place and Location

Introduction to place
- Place is about availability how to get the product to the right place for customers to make their purchases
which includes the physical place, availability and visibility.
- For the retailer, there are opportunity costs to be considered shelf space is limited, stocking one good
would mean scrapping another, which good would be more profitable and which firm should the retailer
establish a better relationship with (potential products)?
- For the retailer, there are risks to be considered would the products high initial sales suddenly stop selling,
leaving the shopkeeper with boxes of slow-moving stock?

Choosing appropriate distributors

- Distribution channel how product passes from producers to consumer
- Control is often not in the hands of the producer, but the retailed they decide the location
- To the retailer, every foot of shop floor space has an actual cost (rental value) and an opportunity cost
- Obtaining distribution may be a barrier to entry

Distribution channels
- Traditional producers sell to wholesalers who then sell to small independent shops, where profit mark-ups
by wholesalers add to the final retail price
- Modern shops buy directly from producers and then organise their own distribution to their outlets, they
get huge buying power and are able to negotiate the highest discounts
 - Direct producer selling directly to consumers through mail order or website, where the producer gets to
keep 100% of profits which can finance more spending on advertising or on new product development

How does a small firm obtain good distribution?

- Distribute product samples
o Announce, display and hand out free samples at a trade exhibition
o Use direct mail to send advertising messages and product samples to trade buyers
- Advertise in the trade press
o Show the attractiveness of the packaging
o Emphasise the market gap, the generous trade profit margins, heavy consumer advertising support
and package of point-of-sale (POS) display materials
o Consumers will increase the level of impulse purchasing: buying in an unplanned way
- Identify and agree distribution and sales targets
o Identify and agree distribution and sales target for each area of the country and type of outlet
o Send sales representatives to visit each of the main wholesale and retail buyers agree on an
exclusive arrangement e.g. only stocking at Tesco will give it more competitiveness than other
supermarkets

What is promotion?
- Focuses on letting customers know about a product and persuading people to buy the product or service

Types of promotion for building long-term sales

- Branding creating a distinctive and lasting identity in the minds of consumers
o Reduces the amount spent on promotion
o Consumers are more likely to purchase the product again (repeat purchases)
o Easier to persuade retailers to put the product in their stores
o Other products can be promoted using the same brand name
- Persuasive advertising - to create a distinctive image
o Usage of slogans to create clear consumer images for firms
- Public relations affect consumers image of products without spending on media advertising
o Making contacts with journalists to get favourable mentions or articles
o Sponsor events which allows businesses to advertise and use its logo alongside the event logo

Types of promotion for boosting short-term sales

- Sales promotion offers such as BOGOF
o Customers may stock up at half price loss of sales for the following weeks
o Special offers may undermine the brand image association of low quality and assume that
discounts are offered because product is not good enough to gain enough sales
o Risks are only worthwhile if they manage to attract brand new customers who come for the offer
and stay loyal after it has ended
- Direct selling approaching consumers directly
o Door-to-door sales
o Expensive high labour costs
- Merchandising ensure that a brands display looks eye-catching and tidy
o Location to feature a newly launched product and charge high rent which will be offset by high sales
o Offer free product samples to encourage them to make their first trial samples

Promotional activity needs to fit in with marketing strategy

- Launching a new product
o Be informative
o Reach target customers
- Differentiating a product
o Identify special features of the product
o Persuade customers that it is different or better than rival products
- Extending the life of an existing product
o Reinforce the reasons for customers choosing it
o Highlight any new features
 o Attract new customers
- Increasing market share
o Attract new customers
o Reinforce buying in existing customers
- Building brand identity
o Increase awareness of the company/ product name
o Create customer recognition and loyalty

Issues for analysis

- Where is the ideal place that customers want to buy the product?
o Take into account convenience availability at the right place at the right time, requires appropriate
outlets
- Place difficult to obtain product distribution and firms will lose profit while wasting time looking for the
right distributor and location as every space has an opportunity cost to retailers
- Different promotional methods available dependent on the suitability and type of particular business
- Consider promotion in relation to the time-scale of the firms objectives short term profit maximisation VS
long term brand building
- If a product is good enough, customers will be attracted to it and spend the time finding it, not requiring a
good location

The Marketing Mix and Social Trends

Introduction
- A trend is a sustained movement in data
- Difficult to distinguish fads (temporary) and trends (sustained)

The marketing mix and social trends: clever or too clever?

- There has been rising social concern about environmental problems for more than 10 years, especially that
of global warming
- Widely accepted that increases in greenhouse gases are causing the planet to warm up year by year
o Oil giant British Petroleum (BP) responded by rebranding the business as Beyond Petroleum
change of logo to bright green and yellow sunburst which emphasised its new, greener thinking
o They were unable to live up to their promises promotion of environmentally friendly actions which
compromised the safety of the workers by cutting back on safety spending

Environmental trends and the marketing mix

- When sales of organic food were growing, producers assumed that sales upturned represented a permanent
choice away from processed, chemical foods
o It was actually more of a lifestyle choice a luxury that people dropped when recession came
- Recyclable packaging
o Burning waste materials directly increases greenhouse gas emission
o Burying waste materials destroys the environment and causes air pollution
o Recycling is to reuse as much as possible of the original materials promotion of this is a marketing
strategy due to rising social concern about environmental problems
- Food miles: a calculation of how much travelling is involved in making and delivering a product
o Criticising of shoppers who buy food thoughtlessly
o Impact of carbon dioxide emissions of all the food miles concerned transportation of the imports
o Clever marketers seize opportunities to build this into their marketing mix emphasising that their
supplies are locally produced
- Sourcing sustainable materials
o Sustainability: whether the supply source can be continued indefinitely into the future
Means that the purchase you make will not affect long-term supplies of the product because
it is automatically replenished
- Other environmental factors
o Carbon footprint created by products
 A measurement of all the carbon dioxide emitted by the materials used, delivery miles,
manufacturing and office costs (especially energy) involved in producing, packaging and
delivering a product
Raw materials
Manufacture
Packaging
Distribution
Disposal

Online retailing and the marketing mix

- Location is a key factor to retailers, but not to online retailers
o Outstanding price offer
o Good product
o Good service
o Small investment in advertising
- The saturation approach make sure that everyone thinks of you first, but may incur high costs
- Google search optimisation design website such that it comes very high on the list when people are
googling for something you want to sell, buy requires time and money
- Build a website people will talk about fun websites provide strong support to a brand image and get the
brand written about in the media, provides extra and free promotion

Retailer purchasing power

- Ensure that marketing and advertising messages emphasis the wish to help the customer
o May compromise the profitability of suppliers and quality of supplies negotiate lower costs from
suppliers who are forced to accept the terms due to monopolies having high purchasing power
o Customers do not really care about where the products come from and how they are produced as
long as they get the best value (lowest cost) for the product

Issues for analysis

- What the real intent of the company is true commitment to social purpose of motivation purely to cash in
on a trend
o Companies which say the right things may not be doing them, but just saying for marketing purposes
o Building of marketing mix on a positive and genuine social message - doing all it can to minimise any
environmental or health damage caused by its product
- Alignment of marketing mix (e.g. slogans) to the right social purpose may create an inseparable brand image
and company image
- The extent which firms can be relied on to act responsibly in marketing government imposes regulations
e.g. labelling nutrition facts
o If companies are left on their own, they may act responsibly to create good company image and
avoid bad publicity but may do only the absolute minimum (the minimum actions that show the
public that they are good companies)
- A well run business will see the opportunity to motivate staff and customers by taking a forward-looking
approach to social obligations encourage own staff and customers to care about the environment

Price Elasticity of Demand

Price elasticity of demand

- Price elasticity measures the responsiveness of demand to a change in price
- Price elasticity = % change in quantity demanded / % change in price
- Price elasticity = (price / quantity demanded) x (change in quantity demanded / change in price)
o Price elasticities are always negative
An increase in price leads to a decrease in demand
A decrease in price leads to an increase in demand
There will always be a negative change in demand or price
Determinants of price elasticity
- The degree of product differentiation
o Extent to which customers view the product as distinctive when compared to its rivals
o The higher the product differentiation, the lower the price elasticity.
- The availability of substitutes
o Consumers may just purchase from another brand offering the same product if prices are not ideal
o The wider the availability of substitutes, the higher the price elasticity.
- Branding and brand loyalty
o Strong brand names with strong brand images -> Strong brand loyalty where consumers make
purchases out of loyalty
o The stronger the branding, the lower the price elasticity.

The significance of price elasticity

- Firms are able to make better decisions if it knows the price elasticity of its products
o Sales forecasting
Firms considering price changes will be able to know how changes in price will affect
demand producing a sales forecast will make possible accurate production, personnel and
purchasing decisions
o Pricing strategy
The price the firm changes will determine its demand and profitability price elasticity can
be used with internal cost data to forecast the implications of a price change on revenue

Classifying price elasticity

- Price elastic product PED > (-)1, highly price sensitive
o The percentage change in demand is greater than the percentage change in price that created it
o The higher the price elasticity figure, the more elastic the product
Reducing costs will boost total revenue extra revenue gained from the increased sales
volume is more than the revenue lost from the price cut
Price cutting can damage brand image customers associate high prices with high
quality
Price cutting is difficult to reverse customers are resistant to price increases
Price cutting may start a price war when 2 or more companies battle for market
share by slashing prices and perhaps even selling at or below cost
- Price inelastic product PED < (-)1, low price sensitivity
o The percentage change in demand is less than the percentage change in price
o Price changes hardly have any effect on demand
o Products may be a necessity/ fashionable consumers feel they must have the product regardless of
its price
o Firms are tempted to push the prices up -> Relative small decrease in demand -> Boost revenue

Problems measuring price elasticity

- Fashionability/ trends how much consumers want it, changes with consumers tastes and preferences
- Number of direct competitors availability of similar/ substitute products
- Loyalty of existing customers
o All these may change over time may change over a products life cycle
Introduction: price elastic people are suspicious of it
Growth: price inelastic it may become trendy/ fashionable
Decline: price elastic people may only get it if the price is attractive

Strategies to reduce price elasticity

- Main issue: substitutes ways to reduce the number of substitutes available
o Increasing product differentiation the degree to which consumers perceive a product as different
from its competitors
May be differentiated by the image it gives to consumers
o Predatory pricing a deliberate attempt to force a competitor out of a market by charging a low loss
making price
 Driving competitors out of the market will reduce supply of substitutes available which
allows firms to increase their prices
o Takeover bids purchasing of a competitor firm in order to reduce competition
Reduce supply of substitutes available as goods are now all under one company, which also
allows a firm to increase their prices since they have control of supply

Issues for analysis

- Elasticity is a key factor in pricing pricing decisions must always start with careful considerations of price
elasticity
- Marketing may not always be about increasing sales, but may be about establish a brand image which
differentiates them from others reduces price elasticity, giving the company stronger control over its price
- Price elasticities change over time as factors change (fashionability/ trends, competitors, loyalty of
customers, etc.)
- Strong brands have constantly high sales low price elasticity gives them the power over market pricing that
ensures strong profitability year after year
Managing the Provision Process

Invention, Innovation and Design

Introduction
- These are processes by which interesting, new or unique products enter markets.

Invention
- Drawing up a new way of making a product or process
- May be by accident
- May be to fulfil a particular purpose
- Product invention devising a new type or category of product
- Process invention devising a new way of producing or manufacturing leading to greater competitive
advantages
o Patent the innovation provides a long period of 20 years in which the investor enjoys exclusive
rights to sell the new product or process with the ability to charge premium prices

Innovation
- Bringing a profitable new product or process to life
- Requires business skills and inventive talent
- Inventive idea must be honed into a marketable product
- Method of production must be developed and finances found
- Allows the firm to update its product portfolio by replacing products at the end of their life cycle
- Important in highly competitive markets increase competitiveness of firm
- Important in markets where product life cycles are low new products replaces old products
- Important in markets where rate of innovation is high keep up with the market and increase
competitiveness
- Small product innovations may have a major impact on market share in large and established markets

Design
- Used by firms to ensure that their products are attractive and practical
- Concerns the products function, quality, durability, appearance and shape take into account the cost of
design
- Design mix
o Aesthetics the appeal to the senses (the look, smell, feel, taste)
o Function is it relative to/ suitable for the consumers purpose/ usage
o Economic manufacture is the design simple enough to be made quickly and efficiently
- Important element is dependent on the purchasing motivations of existing and potential customers why
and how the customers want the product that is suitable for efficient usage
1. Market research on consumers needs and state of the market
2. Identify gap in the market
3. Original idea developed
4. Design brief prepared
5. Approach designers
6. Choose design from initial submissions
7. Models or prototypes made up
8. Working samples made up and tested
9. Consumer trials on target group
10. Tooling up for manufacture (preparation)
11. Organise supplies of raw materials
12. Full scale production

Invention and innovation in business

- Invention and innovation in marketing
o Able to charge premium prices
o Likely to get good distribution
 - Invention and innovation in finance
o Significant amounts of long-term investments
o High costs to highly paid researchers
o No guaranteed rewards
o Possibility of a successful market changing product which can alter the competitive conditions
- Invention and innovation in people
o Teamwork research teams share their breakthroughs and put ideas together
Taking specialists in various fields of operation from different departments within an
organisation
Enable the team to identify cost-effective, marketable new ideas without the need for the
idea to be passed around the different departments individual specialists will take into
account their concerns regarding relative aspects of the new product
- Invention and innovation in operations management
o New production processes can be invented or developed -> More efficient, cheaper or higher quality
products

Issues for analysis

- Invention =/= innovation
o Invention is the creation of new products
o Innovation is the improving of new products to make them suitable for marketing
- Major innovation can completely change a firms competitive environment change in market shares, etc.
- Good management means looking ahead
o Anticipation makes change manageable - far-sightedness ensures high product differentiation and
allows relatively high prices to be charged
- Innovation can happen in management procedures, attitudes and styles a progressive and adventurous
management -> empowered workforce -> generation of new ideas that may have lacked before it
- Innovation is a long term process
o Companies whose objective is short term profit maximisation will not spend heavily on invention,
innovation or design
o Companies who wish to profit in the long term will stick to their views and never give up on
invention, innovation and design may reap greater profits in the long term

People, Productivity and Performance

Introduction
- Productivity is a measurement of a firms efficiency by measuring its output in relation to inputs.
- Labour productivity: A measure of the amount a worker produces over a given time/ output per worker.
- Falling demand -> Rationalisation of organisation: Increase efficiency by cutting out unnecessary activities or
resources (e.g. labour)

Why does productivity matter?

- Increased output per worker -> decreased labour cost per unit -> lower cost of production per unit
- Increase productivity -> increase competitiveness a firm is able to sell its product at a lower price or
maintain it but enjoy a higher profit margin
- Ensure that quality does not suffer in the rush to produce more
o Set both productivity and quality targets

How to increase productivity

- Increase investment in modern equipment
o Advancement in technology -> improved machinery -> better production process -> require less
production workers
Firms may face financial constraints in buying machinery
Should be cautious about assuming that mechanisation guarantees high profits
o Improve efficiency with existing equipment running machines for longer time, spending more on
careful maintenance to prevent breakdowns, improving working practices
 Kaizen approach: continuous improvement important benefits can be achieved from what
seem to be relatively small changes to the way a firm operates rather than large scale
investments in technology
- Improve the ability level of those at work
o More training -> skilled and well-trained workforce -> produce more and make fewer mistakes +
need less supervision and advice -> complete the task more quickly
Solve their own work-related problems -> be in a better position to contribute ideas on how
to increase productivity
o Disadvantages
Employees may leave and work for another firm once they have gained more skills
High costs for training in the short run
Actual training period will disrupt the normal workflow
Risk of training providing insufficient gains to justify the initial spending on training
o Training may not be necessary for all workers if firms take great care in the selection process find
staff with the right skills and attitudes
Easier with a good reputation firms take great care over their relations with the local
community
- Improve employee motivation
o Professor Herzberg: Most peoples idea of a fair days work was less than half what they could give
if they wanted to.
o Create the circumstances in which people wanted to give all they could to the job
o Motivation -> Increased efficiency
- Role of management
o Managements style and ability may have a significant impact on motivation and how effectively
resources are used
o Good managers bring about substantial productivity gains through:
Well-organised work
The effective management of people
The coordination of resources
o Identification of increasing productivity as a permanent objective

Issues for analysis

- Productivity is important in determining the firms competitive ability impact on costs of production ->
impact on price for consumers
- High productivity may not guarantee high competitiveness dependent on cost, quality, design, marketing
and external factors (interest rate, exchange rate, etc.)
o A good quality product which has controlled costs and is marketed effectively = high success
- Productivity depends on training, capital equipment, production techniques, quality of management, etc.
- Productivity depends on the level of value added involved is boosting productivity a top priority for the
business concerned?
o High output but low marginal profits strategy or low output but high marginal profits strategy

Customer Service

Introduction
- Customer service describes the range of actions taken by a business when interacting with its customers
- Effective customer service will meet or surpass the expectations that customers have of the business

How is customer service delivered?

- Face to face
o Focuses on how shop staff interacts with customer the face of the employee is the face of the
company to the customer
- Telephone
o Through call centres which are cost efficient as they are located in low-cost areas
o Is the worker interacting and understanding the individual or just reading a script
 - Internet
o Through online booking systems elimination of direct human contact
o The attitudes within the business remain all-important staff must do their jobs on time
o Online services will fail if it cannot meet its promises delivering a good on time

Methods of meeting customer expectations

1. Identify customer expectations
2. Agree how to meet customer expectations
3. Train all staff to be able to provide the customer service level the firm is aiming to achieve
4. Monitor customer service and look for improvements
- Market research
o Qualitative research: Probe selected key customers to find what level of support and service they
expect enable the firm to gain a clear understanding of the range of expectations that different
customers may have
o Quantitative research: Used to assess how many customers expect certain features of customer
service
- Decision time
o Based on the results from market research, firms decide what level of service to aim to provide
o Low cost approach: outsourcing enquires and technical problems to reduce costs
o Dependent on objectives of firm maximise profit in short term or build brand loyalty for long term
- Training
o Varying levels of commitment to training for staff how long the staff are trained for
o The cost involved in improving the level of customer service must be set against the cost of not
doing so
- Quality
o Quality control spotting defective service
Recording of calls
Mystery shoppers
Planned or unannounced management checks
o Quality assurance introduction of systems to ensure that quality errors cannot occur
Thorough and ongoing staff training staff may start to see themselves as the focal point of
the business instead of the customers
Clear systems set out in writing about how to deal with different types of customer
complains
Customer service is an important feature of the company culture
- Quality standards
o Firms can apply for quality standards certification which shows the rest of the world that they are
serious about the quality of their work
ISO 9000 certification covers customer service in organisations
ISO 10002: a customer complaint handling standard
CCA Standard: a special quality standard for call centres
Charter Mark: a customer service standard by the government, for public and voluntary
sector organisations and firms that provide a public service

Monitoring and improving customer service

- Fight complacency monitor the effectiveness of customer service
o Ensure that the standards do not slip
o Ensure that quality systems being used for customer service continue to produce the required
results
- Firms may monitor their customer service standard in comparison to that of their rivals
- Innovations in customer service are copied quickly e.g. internet banking
o Major changes tend to become common features
- Benefits of good customer service
o Brand loyalty brings repeat customers
Hanging onto existing customers - customers who feel positive about the experience they
have had with the business will return to that firm for future purchases
Attracting new customers from rivals require expensive promotional tools
 o Word of mouth promotion
Happy customers tell their friends about the firm free promotion
People are more likely to believe your friends that a companys marketing department
o Increased efficiency
Better advice to customers -> firms are less likely to sell inappropriate products or services
that fail to meet customer needs -> fewer complaints -> reduced need for more customer
service backups e.g. customer complain lines, product returns, etc.

Issues for analysis

- Location of call centres may affect the perceptions of customers rather than the actual customer service
they receive
o Qualification of staffs in different countries affect customers perception
- Some firms believe that some types of people are better at customer service than others
o Students and school-leavers may be naturally less polite than older (retired, semi-retired) members
of staff
- Good customer service is provided by motivated staff vital determinant to a customers positive shopping
experience
o Firms need to be more concerned about the welfare of staff not just focus on managers but also
on staff lower down the organisations hierarchy
Front-line providers of customer service are usually the staff at the lowest level of the
hierarchy tend to be neglected

Capacity Utilisation

Introduction
- Capacity utilisation is the proportion of maximum possible output that is currently being used.

Operational targets
- Quality targets ensure quality is high so refunds are minimal
- Capacity utilisation targets ensure that the factory is working at 90% of its maximum possible capacity
- Unit costs ensure unit costs are as low as possible

How capacity utilisation is measured

- Current output / Maximum possible output x 100
- Demand may exceed capacity queues or waiting lists will be created
- A firm who wishes to stay cost-competitive will measure demand at different times of the day and ensure
that staffing level matches the capacity utilisation
o Employing part time/ temporary staff greater degree of flexibility of labour
o Can reduce wastage of having full-time staff (capacity utilisation of full time staff VS flexible staffing
may be altered to suit demand)

Fixed costs and capacity

- Fixed costs: do not change as output changes changes per unit of output
o When utilisation is high, fixed costs are spread thinly over many units, thus reducing the cost per
unit, boosting profit margins, whereby firms are then able to reduce prices to increase demand and
total revenue.
- Operating at maximum capacity involve risks:
o If demand rises further, you will have to turn it away, enabling competitors to benefit.
o Servicing of machinery and training of staff may be costly in the long term increases the chances of
production breakdowns in the short term.

How to get towards full capacity

- Increase demand
o Extra promotional spending
o Price cutting
 o Devising a new strategy to reposition the products into growth stage
o Launch new products requires long term planning and investment
- Cut capacity
o Cutting out shifts making workers redundant
o Moving to smaller premises avoid the disruption and inflexibility of cutting out shifts
Fixed costs are decreased
Firm may expand production in short term and require shifting again
- How to select the best option
o Analysis of underlying cause of the low utilisation
Temporary demand shortfall or economic recession (long term)

Why and how to change capacity

- Anticipate changes in demand ensure that capacity increases are managed
- Excess capacity (demand for product decreases) requires reduction of maximum capacity through
rationalisation (reorganisation in order to boost efficiency)
o Closing down and selling off a factory or part of a factory if the space will not be needed in the
foreseeable future, or leasing out factory space to other companies on a short term basis enables
firm to get the space back if demand increases again
o Machinery can be sold off renting of machinery instead of buying it in the first place enables the
firm to return the machinery in times when capacity needs to be reduced
o Redundancy of workers may be too expensive redeploying (find new jobs for staff whose current
work is no longer needed) of workers or cutting down the length of time worked by employees

Dealing with non-standard orders

- Firms with standard orders usage of automated production line which requires minimum labour and
minimal costs
- Firm with non-standard orders subcontracting (arranging with an external production factory to supply the
good)
o Check quality extra carefully
o Less profit from subcontracted production
o Better than running an under-utilised factory which may be prepared for extra orders but incurs high
costs

Capital and labour intensity

- Labour intensive production
o Labour costs form a high percentage of total costs
o Low financial barriers to entry (factors that make it hard for entrants to enter the market) cheap to
start-up production
o Focus on cost of labour
o Highly flexible
- Capital intensive production
o Large percentage of its total costs tied up in the fixed costs of purchasing and operating machinery
o High financial barriers to entry
o May produce in a high-cost country since labour costs are a low proportion
o Inflexible unable to switch from one product to another or to tailor a product to an individual
customer
- Capital intensity in the service sector
o Service sector jobs require people to provide the human face of customer service
o Desire to cut labour costs presses firms to pursue more capital-intensive approaches within the
service sector (e.g. internet banking)
o To choose labour intensive or capital intensive production depends on the business circumstances

Issues for analysis

- Time frame is spare capacity caused by a short term or long term fall in demand
o Cut capacity only if it is permanent trend
- High capacity utilisation -> Low fixed costs per unit -> Higher profit margins -> Higher profitability
 - Modern production systems: Just-in-time, flexible specialisation (productive systems based on batches of
good aimed at many market niches instead of massed production), lean production
- Firms operating close to full capacity may anticipate further expansion consider investing in new premises
or machinery which requires time and money VS subcontracting on a long term
- Cutting capacity by rationalisation redundancy causes issues in human resource management, motivation
and social responsibility
- Cause and effect of excess capacity or overcapacity determine if long term or short term

Stock Control

Introduction
- Stock control is the management process that makes sure stock is ordered, delivered and handled in the best
possible way.
- An efficient stock control system will balance the need to meet customer demand against the cost of holding
stock.

Purchasing
- Meet the needs of those running the internal operations of the business, ensuring that
o Sufficient quantity of stock is available at all times
o But not so many which represents a waste of resources
o Stocks are of right quality check through samples or by visiting the suppliers factory to inspect
methods and conditions, or by verifying the factory has achieved a ISO 9000 certification
o Stocks are available where they are needed
o The price paid for stocks is as competitive as possible negotiated to be as low as possible or for
longer credit periods, especially if purchasing in bulk or if buyer is a regular customer
o Good relationships are built up with suppliers
- Consider other questions before deciding which supplier to use
o Consistency of supplier ability to supply the quantity and quality needed on time every time
o Financial position of firm ability to safely guarantee its future survival
o Flexibility ability to change quickly to meet changing demands
o Expansion ability to expand if the buyers demand grows
- Consider the most strategic way to operate
o Should the firm place large orders occasionally or small orders frequently
o Accept lower-quality stocks at lower cost or pay higher prices for better-quality stock
o Rely on one supplier or use several

Types of stock
- Raw materials and components purchased from outside suppliers
- Work in progress incomplete products may be stored to ensure flexibility in meeting consumer demand
- Finished goods completed products may be stored if firm sells large batches or no buyer has come in yet or
stockpiling (producing for seasonal goods)
o More stock stored -> Higher costs for storage
o Opportunity cost of keeping too little stock VS opportunity cost of keeping too many stocks
- Control of stock to ensure it runs at peak efficiency

Stock management
- The way a firm controls the stock within the business handled and used correctly to ensure they are still in
peak condition when they are used in the production process
o Stock rotation administrative and physical processes to ensure that older stock is used first
Ensure that stocks do not deteriorate, go past their sell-by date or become obsolete
Stocks become obsolete if new specifications are used or if the product they were
part of is no longer manufactured
Minimise risks of stock going out of date
 First-in-first-out (FIFO) avoids a situation in which new stock is used first, leaving older
stock to become unusable at the back of a shelf or warehouse
o Stock wastage loss of stock in a production or service process which is a cost to firms
In a manufacturing process:
Materials being wasted may be minimised by careful planning
Reworking of items that were not done correctly first time good training and highly
motivated staff will increase efficiency and minimise mistakes
Defective products that cannot be put right sold off as seconds or damaged goods
Stock wastage in a service sector:
Damaged products due to improper handling or storage
Stealing from the shop
Products passing their sell-by dates
A sound management and administrative techniques could reduce or even eliminate the
problem of stock wastage
Cost effective strategies to maximise returns ensure that the cost of the processes
set up is not more than the money being saved by them

Stock control charts

- Used to analyse a firms stock situation line graphs which measures the level of stock in a firm over time
o Managers are able to see how stock levels have changed during period
o Able to note any unusual event e.g. late delivery where a firm may feedback to suppliers
- Stock levels: As stock is used up, level of stock falls but delivery of new stocks increases stock level vertically.
- Maximum stock level: The largest amount that a firm is willing or able to hold in stock.
o May show the physical size of the warehouse
o May show the maximum level set by the management
Belief that it is the most that can be used by the production process
Belief that it is the most that can be kept to ensure sell-by dates are not missed
Belief that it is sufficient, given the time between deliveries and the rate of usage
- Re-order level: Trigger quantity lets the firm knows that it is time to place a new order
o Supplier will need some lead time to process the order and make the delivery
- Minimum stock level: Buffer stock the firm keeps a minimum level of stock in case something goes wrong
o So that it will have something to fall back on if an order does not arrive on time
o It will have something to fall back on if stock is used up particularly quickly
- Graphs will not be neat and show a regular pattern
o Orders may arrive late
o May not always be of the correct quantity
o Rate of usage is unlikely to be constant

The costs of stock

- Stock holding costs overheads resulting from stock levels held by a firm
o Opportunity cost (cost of missing out on the next best alternative when making a decision)
prevents the firm from using its capital in other ways which may put it at a disadvantage as
compared to competitors
o Cash flow problem slow moving stock may cause insufficient cash to pay suppliers
o Increased storage costs more space needed and increased labour, electricity, insurance (against
fire and theft) or other costs within the warehouse
o Increased finance costs if capital needs to be borrowed, cost of interest rate will add to costs
o Increased stock wastage the more stock is held, the greater the risk of it going out of date or
deteriorating in condition
- Costs of storing low number of stocks
o Idle workers and machines as there is not enough materials or components to operate loss in
output and wages being paid for no output, long term disadvantage that extra overtime is needed to
make up for the production lost
o Lost orders customers needing a specific delivery date will turn to other firms
o Worsening relations with customers as orders not being fulfilled on time customers turn to more
reliable suppliers and firm pay have to pay financial compensation for missing delivery dates
o Loss of firms reputation and goodwill that had been built
 - As the level of stock grows, the holding costs increase but the costs of not holding stock decreases.
o Optimum level of stock to hold is where total costs of holding stock are the lowest
- How much stock to order at any one time
o Advantages of few large orders
Economies of scale by buying in bulk
Avoids chance of running out of stock
Prevents workers and machines from standing idle
o Advantages of many small orders
Less storage space needed
More flexible to changing needs
Less stock wastage

IT and stock control

- Efficiency of handling information about current and required stocks Information technology can handle
large quantities of data quickly, easily and more accurately
o Stock control systems exist that allow these databases to be updated instantaneously as stock leaves
the warehouse or goes through the checkout
Through barcode scanners which read the details of stock coming in or going out
RFID (radio frequency identification) systems which allow stocks to be traced to exactly
where it is being held in a warehouse
Data is accurate and up to date about how much stock is held at any given time
Need to re-order can be identified by the system and order will be sent
automatically from the warehouse IT system to the suppliers IT system
- Add to the ability of managers to analyse stock movements ability to make more accurate decisions on
what stock to hold and how much to hold

Just-in-time
- Just-in-time system is a system of stock control where the costs of holding stock should be unacceptable to a
firm, so level of stock held ought to be as small as possible in an attempt to operate with zero buffer stock.
- Requires the development of a close working relationship with suppliers
o Supplier will be required to make frequent deliveries
o Purchasers has to ensure that deliveries are made just-in-time for the goods to be used
- Advantages
o Improves the firms liquidity
o Costs of holding stock are reduced
o Storage space can be used more productively
o Stock wastage and stock rotation become lesser issues for management
o Response times to changing demands are sped up as new components can be ordered instantly
- Disadvantages
o Any break in supply causes immediate problems for the purchaser
o The costs of processing orders may be increased
o The purchasers reputation is placed in the hands of the external supplier
- Gradual decrease of maximum stock level and amount of buffer stock

Issues for analysis

- Poor stock control increased theft, rising costs, a threat to survival
- Different sized firms in different industries will have widely different stock control needs
- Use of IT as a way of stock control been restricted mainly to large firms needing to control masses of stock in
different locations firms need to apply and show why they need the IT system
- How will internet marketing affect retailers decisions about stock levels is there an increased effort to
ensure wider variety or more stock, etc.
- Consumers tastes and fashionable trends are always changing desire for a constant flow of new, fashion-
orientated stock means huge pressure to clear old stocks where JIT system would be ideal
- JIT approach requires close collaboration between purchasers and suppliers
o Discussion of product development together
o Gaining the suppliers commitment and increasing buyers trust in supplier if supplier does not
honour his word, buyer will suffer as reputation may be tarnished as goods are unavailable
Lean Management

Introduction
- Lean management is a philosophy that aims to produce more by using less, by eliminating all forms of waste
o Minimising the use of key business resources: materials, manpower, capital, floor space and time.
Just-in-time (JIT): producing with minimum buffer stock levels so every process must be
completed just in time for the process that follows
Kaizen: Continuous improvement encouraging staff to regularly come up with
ideas to improve efficiency and quality
o Maximise the input from staff
o Focus attention on the quality of supplies and production
o Minimise wasted resources in stock through just-in-time
Total quality management (TQM): a passion for quality that starts at the top and spreads
throughout the organisation
Time-based management

Benefits of lean production

- Creates higher levels of labour productivity -> uses less labour
- Requires less stock, less factory space and less capital equipment then a mass producer has substantial
cost advantages
- Substantial marketing advantages
o Results in far fewer defects, improving quality and reliability
o Requires half the engineering hours to develop a new product ability to develop a vast range of
products the mass producers cannot

Components of lean management

- Lean people management
o Lean producers believe in empowerment, team working and job enrichment
o Employees are trained in preventative maintenance to spot when a fault is developing and correct it
before the production line has to stop without the help of a supervisor
o Teams meet regularly to discuss ways in which their sections could be run more smoothly
- Lean approach to quality
o Self-checking at every production stage so that quality failures at the end become extremely rare
Total quality management attempts to achieve a culture of quality (ability to achieve
quality on the first round without needing to rework)
- Lean design
o Integrating the development functions where separate design and engineering stages are tackled at
the same time speeds up development times, cuts costs and reduces the risk of early obsolescence
o Principle of empowerment team members feel greater pressure to make the right decision
because it is more likely to hold
- Lean component supply
o Lean producers work in partnership with suppliers keep the supplier fully informed of new product
developments, encouraging ideas and technical advice
o By the time the assembly line starts running, errors have been ironed out there are few running
changes or failures
o Sharing of financial and sales information electronically encourages an atmosphere of trust and
common purpose and aids planning

Just-in-time
- Just-in-time production:
o Minimise the costs of holding unnecessary stocks of raw materials, components, work in progress
and finished product
o Production should be pulled through rather than pushed through production should be for specific
customer orders so production cycle starts only once a customer has placed an order with the
producer
No buffer stocks
Production is to order
 Stock is ordered only when needed
Zero defects
No spare workers employed
Staff are multi-skilled and capable of filling in for absent colleagues
Used by lean producers
- Mass production:
o Just-in-case system: reliance on stockpiles keeping buffer stocks of materials and components just
in case something goes wrong
Stocks of raw materials, components, work in progress and finished products are held by the
producer
Production is frequent stockpiled as manufactures seek economies of scale
Stock is ordered less frequently as average order size tend to be large
Incentive to achieve zero defects is less strong
- Capital and interest waste
o Holding stock creates actual costs costs of paying for somewhere to keep the stock
o Holding stock creates opportunity costs interest that could have been received had the capital tied
up in stock been available to invest elsewhere
- Defect waste
o By holding very little stock, firms no longer have a safety net
o Quality must improve to achieve zero defects
o Firms must tackle quality problems at source
o Firms must change production methods or suppliers where necessary
- Overproduction waste
o Mass producers set production levels based on sales forecasts
o Forecasts may be inaccurate which can lead to heavy price discounting in order to clear surplus stock

Time-based management
- Managing time in the same way most companies manage costs, quality or stock
- Try to shorten rather than lengthen production runs -> reduce costs and increase levels of customer
satisfaction
- Requires investment in flexible capital machines that can make more than one model
- Training of staff to be multi-skilled enables firm to produce a variety of models without a cost penalty
- Benefits
o By reducing lead and set up times, productivity improves, creating a cost advantage (cost per unit
decreases)
o Shortening lead times cuts customer response times, increases consumer satisfaction as they receive
their order sooner
o Short lead and set up times make firms more responsive to changes in the market and there will be
less need for long production runs and stockpiles, lowering stock holding costs. If demand does
suddenly increase, production can simply be quickly restarted
o Ability to offer consumers a more varied product range without losing cost-reducing economies of
scale segmented markets stand to gain

Issues for analysis

- Lean production eliminates waste -> higher efficiency -> reduced unit costs -> lower prices for consumers
(without sacrificing any profit margin) or higher product specifications/ quality for the same price =
increased competitiveness compared to rivals
- Innovative products must be launched quickly to avoid copying by competitors reducing design lead times
is important
- Lean production may be expensive flexible computer-aided manufacturing equipment costs a lot, but true
lean production depends on people (efficient workforce) which may not cost as much
- Lean production is the elimination of waste which could be over-manning (too many workers), hence a
leaner system would cause redundancies (sacking of workers) ruthless managers may use lean system as
an excuse to sack employees
Effective Quality Management

Introduction
- Quality management means providing what the customer wants at the right time, with the right level of
quality and consistency, therefore yielding high customer satisfaction.

What is quality?
- Largely dependent on customers perception of quality
- Customers will accept some trade-off (accepting less of one thing to achieve more of another) between price
and quality, but still requiring a minimum acceptable level of quality expect to get more as they pay more
o Related to level of competitiveness in the market when competition is fierce, the quality of the
product can tip the balance in the customers decision making
- Quality is all about satisfying customers expectations, taking into account the whole buying experience,
including customer service, after-sales service, where the product is sold, how it is sold, etc.
o Customers expectations of quality are constantly changing as quality improves, customer
demands also increase
- Quality is:
o Satisfying and exceeding customers expectations
o Applies to services as well as products
o Involves the whole business process
o Is an ever-rising target

Quality defined by customer specifications

- Firms lay down minimum standards for their suppliers
- Large businesses are able to insist on quality standards they have the buying power to force their suppliers
to conform
- Governments agencies insist that suppliers obtain their ISO 9000 certification for quality assurance ensures
that suppliers are operating within a quality framework

Why is quality management important?

- Quality is an important competitive issue where a customer has a wide range of choice, quality is vital in
determining his decision.
- Reputation for good quality brings about marketing advantages:
o Generate high level of repeat purchase -> longer product life cycle
o Allow brand building and cross-marketing
o Allow a price premium -> greater profits quality adds value
o Make products easier to place (higher distribution and retailers may give up their prime display
location)
- Implications of poor product or service quality
o Marketing costs
Loss of sales
Loss of reputation
May have to price discount (loss of profit)
May impact other products in range
Retailers may be unwilling to stock goods
o Business costs
Scrapping of unsuitable goods
Reworking of unsatisfactory goods costs of labour and materials
Lower prices for seconds (defected goods which cannot be changed/ improved)
Handling complaints/ warranty claims
Loss of consumer goodwill and repeat purchase

How can firms detect quality problems?

- Before they reach the customer
o Inspection of finished goods before sale
o Self-inspection of work by operatives quality needs to be everyones responsibility
 o Statistical analysis within the production process ensures that specifications stay within certain
limits (e.g. weight of chocolate in a packet)

How do business manage quality?

- Dependent on the size of the business
o A small business will be able to inspect every item and ensure that each customer is satisfied
o A large business will require a more systematic way of inspection quality control is the
responsibility of the production department in the factory, preventing faults from leaving the factory
o Now, customer service is also a part of quality
1. Prevention avoid problems from occurring
a. Build in quality in the initial product design
b. Care about not just price but also quality in purchasing raw materials and components
c. Designing the factory layout to minimise production errors
d. Ensure staff feel empowered to care about quality
2. Detection ensure quality problems are spotted before they reach the customer through the use of
electronic scanning which can detect faults
3. Correction correct faults and discover the reason behind the problem to ensure it does not recur
4. Improvement as customers expectations change, quality has to be improved
a. Staff need to be encouraged to put forward ways in which their jobs can be done better kaizen
(continuous improvement)

Programmes for managing quality

- Total quality management (TQM)
o Way of looking at quality issues
o Requires commitment from the whole organisation
o Business considers quality in every part of the business process
o Building in quality rather than inspecting and detecting faults
Advantages
Should become deeply rooted into the company culture
Once all staff think about quality, it should show through from design to
manufacture and after-sales service
Disadvantages
Staff may be sceptical of the management initiatives and treat TQM as hot air
(merely sayings without actions), especially in the beginning as it lacks concrete
programme of QC and QA.
May be expensive to get it into the culture as expensive training among all staff
would be required.
- Quality control (QC)
o Based on inspection check that output meets minimum acceptable standards
May inspect every product
May inspect a random numbered product e.g. the 200th product
If faulty, whole batch will be scrapped
Faulty products are able to slip through
Stops staff from producing the best quality only need to focus on good enough
to pass the checks
Advantages
Can be used to guarantee that no defective item will leave the factory
Requires little staff training which suits a business with unskilled or temporary staff
Disadvantages
Leaving quality for the inspectors to sort out may mean poor quality is built into the
product (instead of preventing it)
Can be trusted when 100% of output is inspected but not when it is based on
sampling
- Quality assurance (QA)
o Assures customers that detailed systems are in place to govern quality at every stage in production
o Starts with quality checking process for newly arrived raw materials components
 o Includes schemes where certification proves a quality assurance system e.g. ISO 9000
o Operates throughout the company involves suppliers and subcontractors
o Is a paper-based system encourages staff to tick the right boxes rather than care about quality
Advantages
Makes sure the company has a quality system for every stage in the production
process
Customers like the reassurance provided by a badge/ certificate and believe that
they will get higher quality service and be willing to pay more
Disadvantages
Does not promise a high-quality product, only a high-quality and reliable process
which may churn out average quality products reliably
May encourage complacency as it suggests quality has been sorted and can be
ignored while rising customer requirements mean quality should keep moving ahead

Other quality initiatives

- Kaizen: continuous improvement
o A system where the whole organisation is committed to making changes on a continual basis
- Six sigma
o A programme which aims to have fewer defective products than 1 per 300,000 by training staff to
become professional quality experts
- Quality circles
o A group of employees who meet together regularly to identify problems and recommending
adjustments to the working processes in order to improve the product or process
Used to address known quality issues such as defective products
Identification of better practices that may improve quality
Improve staff morale through employee involvement
Takes advantage of the knowledge of operators
- Zero defects
o Produce goods and services with no faults or problems by getting things right the first time no
mistake made -> high quality with no wastage of time or materials
- Benchmarking
o The process of comparing a business with other businesses and attempt to bring their performance
up to the level of the best by adopting their practices
- Impact of quality initiatives
o Increase in employee involvement Better working practices, improved employee motivation,
increased focus on tasks and the development of team working

Is quality expensive of free?

- High quality is costly Requires better materials, labour, training and checking systems = higher costs
- Quality is free Getting things right the first time and avoiding mistakes can save a huge amount of time and
money
o Time required to make it work quality initiatives take time and may cause disruptions e.g. sending
workers for training or quality circles
o Short term VS long term viewpoints shareholders may want instant returns and focus on short
term profit maximisation but quality initiatives require a long term view as benefits take time to
show
- Balance of cost against the advantages of quality control
o High costs -> high quality which is more important?

Issues for analysis

- Importance of quality - dependent on type of business, type of product or service and the market
- What is the right approach to quality management for a particular firm weigh benefits and costs of both
depending on its business, product/ service and market
- Quality issues are often related to the role of the employees, management styles, philosophies, etc.
- Customers satisfaction quality is about the whole experience of contact with the business
- Increased quality -> increased rewards improved motivation and efficiency, reduced wastes and costs
Consumer Protection Legislation

Consumer protection law

- Designed to ensure that consumers are treated fairly by the companies from which they buy
o Does the product do what it claims to do?
o Are products correctly labelled and measured out?
o Levels of safety required from products
o Rights of the consumers after purchase for refunds or exchanges of faulty goods
- Ensure that no firms can gain an unfair competitive advantage by taking short-cuts in how their products are
made
o All products must meet a minimum legal standard
o Ensures against unscrupulous companies using unsafe and cheaper materials to gain a competitive
edge

Costs of complying with the law

- Expensive
o Policies have to be written
o Staff have to be trained
o Quality of goods have to be checked
o Refunds may have to be given
o Administration costs will be higher
- Failure to comply even higher costs in the long term
o Damage to the firms reputation may be difficult to repair
o Legal costs may incur
o Loss of future sales requires more marketing costs
o Cost of rectifying faults
How Does a Company Budget Efficiently?

Budgets and Budgeting

Introduction
- Budget is a target for costs or revenue that a firm or department must aim to reach over a given period of
time
- Budgets tell individual managers how much they can spend to achieve their objectives
o Make a judgement of the likely sales revenue for the coming year
o Set a cost ceiling that allows for an acceptable level of profit
o Budget for whole companys cost is then broken down by division, department or by cost centre
o Budget for department is broken down further so that each manager has a budget a some spending
power
- Budgets should provide enough spending power to finance the vital needs

What is budgeting for?

- To ensure that no department or individual spends more than the company expects
- To provide a yardstick against which a mangers success or failure can be measured and rewarded
motivation for managers
- To enable spending power to be delegated (passing authority down the hierarchy) to local managers who
are in a better position to know how best to use the firms money improve and speed up the decision-
making process and help motivate local budget holders
- Motivate the staff in the department if budget figures are used as a clear basis for assessing their
performance, it is clear to staff what they must achieve to be successful and maybe get a bonus

Budgets as a mean of delegating spending power

- Budgets can be used to allow employees to decide what money to spend within the limits specified by the
budget
- Budgets for costs should help to avoid any unexpected financial surprises avoids overspending
o Directors discuss and agree on a master budget for the whole firm and divides it between ->
Regional managers who allocates a budget to each -> Branch manager who divides the branch
budget between -> Section managers who will try to get all their -> Shop floor workers to help meet
the budget targets

Budgets as a method of monitoring performance

- Budgeted figures are compared with what actually happens able to make a judgement on performance
and monitor business performance

Types of budget
- Income budget sets a minimum figure for the desired revenue level to be achieved over a period of time
- Expenditure budget sets a maximum figure on how much a manager can spend over a period of time to
control cost
- Profit budget sets a minimum target for profits to be achieved over time, dependent on income and
expenditure budget

Setting budgets
- Main determinant of budget setting: Previous years budget figures
- Minor adjustments will be made for inflation or other foreseeable changes
- For new firms, setting budgets will be tougher, which relies on
o A guesstimate of likely sales
o The entrepreneurs experience and expertise
o The entrepreneurs instinct based on market understanding
o A significant level of market research
- Zero budgeting: setting all future budgets at $0 to force managers to have to justify the spending levels they
claim they need in the future
o Departments have to justify every pound they ask for why the need, importance of it, etc.
 o Avoid the common problem of budgets increasing every year
o Time-consuming as managers may take a long time to find good reasons to justify the need for a
budget increase best to use every few years
Relate the budget directly to the business objective
Involve as many people as possible in the process people involved feel responsible and
more committed to achieving the targets set
- Simple budget statement
o Income, variable costs, fixed costs, total expenditure, profit stated per month
o Information is only of value if it is realistic proves possible for a manager to believe that the figures
are achievable -> more motivation for managers and workers to turn budget into reality

Problems in setting budgets

- Individual managers want as much spending power as possible (as high a budget as possible) may help
them to do their job more successfully and enjoyably
- But bosses will want to keep costs as low as possible (as low a budget as possible) justifications of
individual managers may be argued as no one knows the real cost of an action (e.g. advertising)
o A new firm or new manager may lack experience in knowing the real value/ cost of things
o A senior manager may be too arrogant to listen to his staff sets budget without discussion
o Type of business may make it hard to set budgets in a meaningful way
- Budgetary variances
o Variance: the amount by which the actual result differs from the budgeted figure
o Comparing the actual outcome with the budgeted one
o Favourable variance one that leads to higher than expected sales
o Adverse variance one that leads to losses
o Regular variances provide an early warning, leading to an early preparation of solution managers
can respond by altering marketing support and production

Issues for analysis

- Will designing and implementing a budgeting system cost more in terms of time and money than it can save
what are the opportunity costs involved
- Variances are the key to analysing budget why did the variance occur and is it a temporary or permanent
symptom/ trend -> how can firms solve adverse variances or maintain favourable variances
- Budgeting systems are dependent on the size of firms the bigger the firm the more complex the budgeting
system
- Budgets are a management tool can tell one a lot about a firms culture
o Bossy management tightly controlled budgetary system with closely watched variances
o Open culture budgeting will be an aid to discussion and empowerment
If a manager is to be held accountable for meeting a budget, he must have influence over
setting it and control over it.
- Analysis of actual against budgeted performance takes place only after the event has occurred might not
be as effective as financial monitoring is lagged behind since the event has passed
- Other measures may be far more reliable in predicting future performance e.g. market research indicating
growing levels of customer complaints

Measuring and Forecasting Trends

Introduction
- Sales forecasting a method of predicting future sales using statistical methods
- Managers need to think about what is likely to happen in their industry and prepare accordingly in all areas
of the business
- Managers can interpret sales data to understand the trend in product sales and compare it to trends in the
market as a whole
Moving averages
- Where strong seasonal influences on sale (seasonal variation: Change in the value of a variable that is
related to the seasons
- When sales are erratic for no obvious reasons
o Calculate a moving total
o Calculate centred average (moving total divided by number of months)

Forecasting sales using extrapolation

- Assume that pattern of sales will follow the previous trends (trend: the general path of a series of values
follows overtime, disregarding variations or random fluctuations)
- Unlikely that economy or demand will change dramatically overnight
- Extrapolation: predicting based on what has happened before
- Time-series analysis: values of data plotted over time may vary due to seasonal variations and genuinely
random factors which cannot be predicted (e.g. outbreak of SARS, revaluations of foreign currency)
o Analysis if trend is long term or short term (fad) what makes the most sense

Correlation
- Comparison of sales volume and advertising expenditure
- Strong correlation evidence that cause and effect may be present
- Weak correlation presence of other variables

Alternative methods of forecasting

- Test markets
o If there is no past data
o Testing product out in a small representative market
o Gather data from which a firm can estimate sales when they launch the product on a bigger scale
- Delphi technique
o Using experts who are asked for their opinions individually then summarised anonymously to
contributors who comment on the feedback goes on until a consensus is reached
- Scenario planning
o Analysis of particular scenarios in future
o Try to anticipate what market conditions will be and what will be happening to the market as a
whole

Other variables to consider when forecasting

- External changes
o New entrants
o Population changes
o Climate changes
o Legal changes
- Internal factors
o Changes in the salesforce
o Changes in expenditure on promotion
o Changes in how money is spent
o Launch of a new product

Issues for analysis

- Sales forecast forms the foundation of other business plans e.g. cash flow, workforce planning
- Based on past data but must take into account future seasonal factors or changes in internal/ external
factors that firms are aware of
- Estimated may not always be accurate but can provide important guidelines
Cash Flow Management and Forecasting

Introduction
- Cash flow: the flow of money into and out of a business in a given time period.
- Cash flow forecast: the estimation of future monthly cash flows to find out the net cash flow.

Importance of cash flow management

- 70% of businesses that collapse in their first year fail because of cash flow problems
- Able to review current and future cash position be prepared and understand future cash needs

Who needs to use a cash flow forecast

- Ensure that a new business has enough finance to keep afloat during the early months
- Allows existing businesses to be aware of their cash position seasonal factors may make cash hard to
manage
o Ensure that the business plans for future cash needs ability to cope in unexpected events occur
o Ensure that any growth in business is backed by sufficient funding

Preparing a cash flow forecast

- Cash in: injections into the business, revenue from sales, etc.
o The income for sales is shown when the cash is received not when the sale is made
- Cash outflow: finance of capital equipment, land, labour, etc.
- Cash flow
o Monthly balance
Cash inflow for the month - cash outflow for the month
Shows positive (inflow > outflow) or negative (outflow > inflow) movement of cash
Negative figures are indicated by brackets
o Opening and closing balance
Shows what cash the business has at the beginning of the band and what the cash position is
at the end of the month
Opening balance = balance from previous month + investments if any
Closing balance = opening balance + monthly balance

Benefits of cash flow forecasts

- Enables businesses to:
o Anticipate the timing and amounts of any cash shortages
o Arrange financial cover for any anticipated shortages of cash take measures to ensure cash will be
available
o Review the timings and amounts of receipts (money received) and payments
o Obtain loans for long-term problems and overdrafts for short-term problems
Banks request for cash flow forecasts of businesses to ensure that they:
Have enough cash to enable it to survive
Are able to pay the interest on the loan
Will be able to repay the loan
Are aware of the need for cash flow management
- Reliability of cash flow forecasts
o Figures are estimates businesses have to build in safety margins
What if sales are lower than expected
What if customers do not pay up on time
What if prices of materials are higher than expected
Use of spreadsheets
o Ability to adjust both timings and amounts enables a business the most
likely and the worst-case situation

Managing the day-to-day finances

- The cash cycle
 o After capital is injected into the business, the money enables firm to buy materials -> produce goods
-> sell to customers on credit -> customers (debtors to pay up) and repeats itself
- Problems caused by insufficient cash flow
o With suppliers inability to pay bills on time and may delay payment -> suppliers may refuse credit
for future orders
o With banks banks are quick to sense a cash flow crisis and reduce their own risk by calling in any
overdrafts and insisting repayment within short periods of time
o Opportunities may be missed inability to buy supplies in bulk and take advantage of economies of
scale, may even have to refuse a large order as it cannot finance the extra cash requirement
- In the longer term, shortage of cash -> insufficient funds for development -> business unable to grow as
rapidly as its rivals -> decreased competitiveness

Improving cash flow into the business

- Increasing efficiency of production and distribution -> getting goods to the market in the shortest possible
time the sooner goods reach the customer, the sooner payment is received
- Getting paid as quickly as possible get paid cash on delivery or encourage early payment by offering
incentives e.g. discounts for early payments
- Controlling debtors/ credit control ensure the debtor is creditworthy before granting credit by obtaining a
bank reference
- Factoring speed up payments by factoring money owed to the business by obtaining part-payment of the
amount owed from a factoring company who will then collect the debt and pass over the balance of the
payment

Reducing cash outflows from the business

- Managing outflow of cash
o Obtaining maximum possible credit for purchases delaying payment of bills but may tarnish credit
reputation
o Controlling costs keeping administrative and production costs to a minimum, increase efficiency by
upgrading machinery to replace labour
o Keeping stocks of raw materials to a minimum good stock management will decrease costs of
holding stock and controlling stock losses mean that less is spent on replacing lost or damaged
stocks
- Keeping cash in the business
o Lease rather than buy equipment increases expenses but conserves capital
o Renting rather than buying land increases expenses but conserves capital
o Postponing expenditure e.g. on unnecessary items such as company cars

Finding additional funding to cover cash shortages

- Using an overdraft: short-term borrowing of as much as a firm needs to cover its daily cash shortage from a
bank
o High interest rates
o Flexible ensures firm only borrows money on the days it really needs it
o Banks may withdraw the facility at any time and demand instant repayment
- Taking out a short term loan
o Lower interest rates
o More security
o May have fixed interest charges
- Sale and leaseback of assets: a contract that sells the freehold to a piece of property and buys back the
leasehold at the same time
o Releases capital and give an immediate inflow of cash
o Leasing will be a regular and ongoing cost that must be budgeted for

Issues for analysis

- Validity of forecasted figures reliability and biasedness
- Estimated forecasted figures take into account safety margins
o Spreadsheets to evaluate the best case and worst case possibilities reduce risks
- What the figures show a careful analysis of the cash position
 - Taking into account the circumstances of the business e.g. exports or imports cash flow may be affected by
time payment lags or exchange rates
- Differences between cash flow and profitability
- How a firm may improve its cash flow is dependent on the type of firm and its market situation e.g. large
firms cannot demand cash payments (too large a sum)
- Consider what is causing the problem and is it short term or long term poor payment or poor sales
- Identify the amount and timing of any cash flow problems in the future useful for evaluating new orders or
ventures
- Firms need to be continually aware of economic and market climate and its current cash position cash flow
forecasting and ensuring sufficient finance is not enough for succeeding

Managing Working Capital

Introduction
- Working capital is the finance available for the day-to-day running of the business
- Capital expenditure: expenditure on fixed assets

The working capital cycle

- How long it takes for a a complete cycle from cash out to cash back in from a customer payment
- When capital is injected into the business, the money is used to
o Buy materials
o Produce goods
o Sell to customers on credit
o Collect debts
o Repeat the cycle buy materials
- Ensuring the business has enough finance to meet all needs
- Keeping cash moving rapidly through the cycle, so there would e enough to meet future orders
- Every business have its own distinct cycle

Problems caused by insufficient working capital

- With suppliers delaying payments
o Suppliers may refuse credit or reduce the credit period for a future order
- With banks higher interest charges
o Banks concerned about the financial situation of the business may impose higher charges to be
assured that the company is managing its working capital efficiently
- Opportunities may be missed
o Firms may not be able to buy supplies in bulk and take advantage of economies of scale
o May have to refuse a large order due to inability to finance the extra working capital requirement
o No funds available for development and growth of business

How much working capital do businesses need?

- Dependent on
o The length of the business process/ working capital cycle e.g. a fruit seller who needs fresh fruit
everyday VS a builder who finishes a project in years
o The amount of stock the firm hold inefficient firms holding excess stock ties more money up in
working capital than needed
o The credit given to customers usually long credit periods of 60 days, the longer the credit period
the more working capital the business will need
o The credit given for purchases of materials or stock time period depends on
How established the firm is more established firms can get longer credit periods
Credit record better credit record, longer credit periods
Size of the order larger orders, longer credit periods
Regularity of order more regular customers, longer credit period
Credit period: length of time allowed for payment
 - Contingency finance: Planning how to copy if there are extra, unexpected financial requirements

Can a business have too much working capital?

- Pointless to have too much capital tied up in stock or giving too much credit to customers
- Definition of too much is subjective
- The more working capital in cash, the less risk for when uncertainty strikes

How should a business manage its working capital?

- Control cash used
o Minimising stock levels
o Keeping credit as low as possible without pushing customers away
o Trying to get as much credit from suppliers as possible
o Get goods to market in the shortest possible time sooner the goods, sooner the payment received
o Maximum efficiency of production and distribution
- Minimise spending on fixed assets
o Firms must balance its need for cash and its need for fixed assets
o E.g. lease equipment instead of buying, rent land instead of buying increases expenses but
conserves capital
- Plan ahead by estimating cash needed
o Anticipate and plan for cash shortage falls early solutions e.g. not buying a new company car now,
put off any investment plans
- Seek long-term solutions to short-term working capital issues

Issues for analysis

- The working capital cycle is crucial to a small firm: if the cash dries up, the firm dies very important and
essential for the growth of the firm
- Problems caused by too little or too much working capital ensure firm is able to fund short term actions,
pay its bills, maintain a good working capital position
- Effective management of the whole business reduces need for cash and ensure cash is available
o Efficient production keeps costs to a minimum and turns raw inputs into finished goods in the
shortest possible time
o Effective management of stock can ensure working capital is not tied up in excess stock
o Effective marketing ensures that goods are sold and demand is correctly estimated avoids wasted
production
o Accounting department helps control costs
o Effective credit control improves cash flow

Cash Flow versus Profit

Introduction
- Cash flow is the movement of cash into and out of a firms bank account.
- Profit is when revenue is greater than total costs.

Distinguishing revenue from cash inflow

- Revenue comes from just one source e.g. cash sales, credit sales, rent charged.
- Cash inflow comes from many sources e.g. cash sales, rent charged, capital raised from share sales, loans,
sale and leaseback.

Distinguishing costs from cash outflow

- Costs come from just one source e.g. cash payment, purchases on credit, paying of wages, bills
- Cash outflow comes from many sources e.g. paying the business costs, paying dividends (annual payments to
shareholders from the profits made by the company), repaying a bank loan, investment
- Seasonal factors which affect the cash flow of a company
o Short-term cash flow problems
o Mismanagement of cash spending all profits once gained
 o Pattern of demand for their good varies throughout the year
- Problems with credit periods
o If a firm gives credit periods to its customers, there is risk from a serious delay to a credit payment
the more the client delays the payment, the more serious the suppliers cash flow problems become,
the stronger the position of the client, throwing the supplier into a cash flow crisis that may threaten
its survival.

Cash-rich firms can be unprofitable

- Cash inflows arrive before the cash outflows e.g. insurance company
o Company might spend all the money rather than saving it for when they need it
o Owners might have paid out large sums to themselves and been unable to pay out to policy holders
o May be protected by limited liability owners enjoy pay-outs from profits (cash inflows) that
prove to be an illusion as they were not beneficial to clients

What does all this imply for managers?

- Good financial planning requires an estimate of the likely profitability of a course of action.
- Requires a careful forecast of the flows of cash in and out of the business.
- Profitability shows the long term value of a financial decision.
- Cash flow shows the short-term impact of that decision on the bank balance.

Issues for analysis

- Time key difference between cash flow and profit (how long it will take before cash flow is positive and
profit is earned)
o Cash flow measures todays money in and money out
o Profit is more of a long-term calculation
- Type of business new businesses especially manufacturers are most vulnerable to cash flow problems
o Spend long time and large amounts of cash to innovate and invest in research and development
before being able to sell the product and selling it to retailers, whereby they are probably only able
to get cash inflow 2 months after goods have been delivered
- Cash flow forecast predicts the impact on the bank balance shows the need for extra overdraft facilities to
be negotiated if necessary
- Cash rich businesses may lead to insolvency (inability to pay bills, forcing closure) high cash inflow at the
start which is not saved, resulting in problems when cash outflows start flooding in
Managing Other People

Organisational Structure

Introduction
- Organisational structure is the formal and systematic way the management of a business is organised.
- Objective: to maximise efficiency
o To break the organisation up into divisions with a common purpose different business functions
o Every individual would answer to their line manager
o No manager would be overloaded with too many subordinates, so the span of control is low
o Low span of control requires many management layers

The growing business

- Unnecessary to have organisational structures in small businesses with only 1 or 2 owners and workers
- Organisational chart
o Shows the link between people and departments within the firm the roles, responsibilities and
relationships of each member of the firm
o Shows communication flows between the layers of hierarchy

The roles and relationship

- Roles different tasks that the individual is responsible for
o Responsibility: carrying the burden of blame even if an error is made by a subordinate
o Authority: Having the power to make a decision or carry out a task important for manager too
consider carefully who to delegate tasks to
o Accountability: the extent to which an individual is held responsible for his decisions and actions
- Directors board of directors who handle the most senior appointments and set out the main aims and
objectives of the business
o Executive directors head up important divisions or departments
o Non-executive directors part-time directors from outside the business who takes an independent
view of the shareholders best interest
- Manager responsible for organising others to carry out tasks
o Line manager person immediately above someone in the organisational chart
- Team leader
o Matrix management structure: where the firm allocates its workers into project teams rather than
departments and a team leader will manage the workers involved in a particular project
Project teams will be made up by people with different skills able to make integrated
decisions for the project
Team leader is responsible for the management of the tasks and people involved

Organisational structure: Other key terms

- Levels of hierarchy number of different supervisory and management levels between bottom and top of
the chart
- Span of control the number of staff who are answerable directly to a manager
o Advantages of a narrow span of control
Allows close management supervision vital if staff are inexperienced, labour turnover is
high or if the task is critical
Communications may be excellent within the small, immediate team
Many layers of hierarchy means many rungs on the career ladder (more chances for
promotion)
o Disadvantages of a narrow span of control
Workers may feel over-supervised and not trusted may cause better staff to leave in
search of more personal responsibility
Communications may suffer within the business as a whole more layers of hierarchy makes
vertical communications harder
Leads to restricted scope for initiative and experiment constant supervision by boss will
alienate enterprising staff
 o Ideal span of control is dependent on nature of the task, skills and attitude of the workforce and
manager.
- Chain of command the reporting system from the top of the hierarchy to the bottom
o The route which information travels throughout the organisation
o The more the levels of hierarchy, the longer the chain of command and the larger the gap between
workers at the bottom of the organisation and managers at the top information travelling through
so many people may get distorted
- Centralisation and decentralisation extent to which decision making power and authority is delegated
within an organisation
o Centralised structure: A structure where decision making power and control remains in the hands of
the top management levels
o Decentralised structure: A structure where the decision making power and control is delegated to
workers lower down the organisation
Firms use a combination of both dependent on the nature of the decision involved

Recent changes in organisation structures

- Tall hierarchal structures
o Expensive many managers means high management salaries to be paid
o Communication issues longer chain of command
- Fewer layers of management (short hierarchal structures)
o Wider span control more responsibility for managers, more independence for workers
o Reduces overhead costs
o Greater efficiency better communication, saved costs and workers will have chance to be
enterprising
- Why is organisational structure so important?
o Growth of firm -> involvement of more staff and people need to ensure different tasks are fulfilled
important that every person is clear about what their role is, who they are answerable/ accountable
to and responsible for
Lack in coordination results in
Poor communication mistakes made
Duplication of tasks
Tasks being overlooked
Different departments failing to work together effectively
Creation of sub-standard service -> Reduced sales, revenue and profit
o Organisation structure must accommodate the growth of firms

Issues for analysis

- Structures are not static and should adapt to the environment in which they operate as a firm grows, roles
and responsibilities may change
- The link and match between structure and type of organisation loose structure (low levels of hierarchy)
promotes enterprising staff, tight structure (high levels of hierarchy) promotes efficiency

Recruitment and Training

Introduction
- Recruitment and selection is concerned with filling job vacancies that may arise within a business.
o Involves defining the job, attracting suitable candidates and selecting those best suited to fill it.
- Training is a provision of work-related education, where employees learn new skills or develop the skills they
already possess.

The need for effective recruitment

- Service businesses rely on their staff to present the face of the organisation to the customer
- Hiring the right people with the right skills is important in order to achieve company objectives
The recruitment process
- Establishment of human resource requirements
o Analyse the vacant job role is it redundant or necessary, if still needed can its responsibilities be
distributed among existing staff?
Additional workers may be recruited to support a firms expansion strategies
Employees with new skills may be required to help develop new products or new markets
- Consider the nature of work and workers required
o Draw up a job description & person specification used to assess the suitability of candidates
applications and to form the basis of any interview questions
Job description relates directly to the nature of the position itself
Title of post
Details of main duties and tasks involved
Person to whom the job holder reports and any employees the job holder is
responsible for
Person specification identification of the abilities, qualifications and qualities required of
the job holder
Any educational or professional qualification required
Necessary skills or experience
Suitable personality or characteristic

Internal recruitment
- Filling a vacancy internally employing from the existing workforce
o Redeployment
o Promotion of worker from elsewhere in the business
- Advantages
o Quicker and cheaper
o Greater variety and promotion opportunities may motivate employees
o Avoids the need and cost of induction training
o Firm will already be aware of employees skills and attitude to work
- Disadvantages
o Existing workers may not have the skills required, especially if firms want to develop new products
or new markets
o Relying on existing employees may lead to a stagnation of ideas and approaches within the business
o It may create a vacancy elsewhere, postponing external recruitment rather than avoiding it

Recruiting external candidates

- Methods of recruitment
o Media advertising job adverts in newspapers, specialist magazines, radio, TV or dedicated
employment websites
o Job centres government run organisations which offer free services to firm and tend to focus on
vacancies for skilled and semi-skilled manual and administrative jobs
o Commercial recruitment agencies carry a number of human resource functions, including
recruitment, on behalf of firms in return for a fee
o Executive search consultants poaching or headhunting: paid to directly approach individuals who
are usually in senior positions
o Firms own website career pages on website
- Factors influencing choice of method
o Cost
o Size of recruitment budget
o Location and characteristics of likely candidates
- Advantages
o Wider range of candidates available
o Candidates may already have skills required for job, reducing need and cost for training
- Disadvantages
o Time consuming and expensive
o Demotivates existing employees feel that they have missed out on a promotion
Selecting the best candidate who most closely matches the criteria set out in the person specification for the job
- Interviews
o Cheap
o Allows a wide variety of information to be obtained
o Susceptible to interviewer bias or prejudice unreliable indication
- Testing and profiling
o Aptitude tests measure the level of ability of a candidate
o Psychometric profiling examines the personality and attitudes of candidate
o Depends on the necessity/ desire for recruiting a personality type for a particular job wider range
of personalities in a workforce may lead to a more creative and interesting environment
- Assessment centres
o In-depth assessment of a candidates suitability by subjecting them to real life role plays and
simulations
o Expensive reserved for filling more senior management positions
- Effective recruitment and selection will reduce the risks involved calculate the cost and time involved,
percentage of candidates who accept job offers and the rate of retention of staff once employed

Training help employees to develop existing skills or gain new ones

- Induction training
o Make newly appointed workers fully productive as soon as possible by familiarising them with key
aspects of the business
Information on important policies and procedures, e.g. health and safety
A tour of the organisation and introduction to colleagues
Details of the employment, e.g. payment arrangements, holiday entitlements, basic duties
- On the job training
o Receives instruction while still carrying out their job receives training while remaining productive
Mentoring
Coaching
Job rotation
- Off the job training
o Leave their workplace in order to receive instructions using training facilities within the firm e.g.
seminar rooms or trainings provided by other organisations
o A temporary loss of production
o Allows trainee to fully concentrate on learning
o Allows access to more experienced instructors and those within workplace
- Benefits
o Increases level and range of skills available to the business improvements in productivity and
quality
o Increases the degree of flexibility within a business ability to respond quickly to changes in
technology or demand
o Creates opportunities for development and promotion motivates workforce
- Costs
o Expensive cost of training and cost of evaluating its effectiveness
o Production may be disrupted while training is taking place loss in output
o Newly-trained workers may be persuaded to leave and take up new jobs elsewhere (through
poaching) benefits of training are enjoyed by other businesses

Labour market failure

- Danger of poaching disincentive for firms to invest in training to improve their skills and knowledge
o Fear that short term costs and disruption of training may not be recouped if newly-trained
employees are enticed to work elsewhere
o Government may intervene to provide training overall fall in skills level will lead to a loss of
competitiveness in economy; government intervention ensures economy remains competitive

Training and the government

- Modern apprenticeships
o Structured programmes aimed at improving the level of technic
 o al skills within the workforce
o Apprentices receive a combination of on-the-job and off-the-job training over 12 months
- Investors in People
o Promotes training by setting out a set of criteria or standard for firms to work towards
o Achievers can display the Investors in People logo
Improved quality
Reduction in costs better reputation will garner better deals + increased productivity
Enhanced employee motivation

Issues for analysis

- Suitability of recruitment of selection methods dependent on situation
- Costs and benefits of internal VS external recruitment
- Costs and benefits of training
- Choosing a particular training programme depends on the suitability and ability to meet the needs of both
employer and employee
- Right person with right skills improve competitiveness
- Cut costs -> cut training budget/ poach
- New employees -> fresh ideas and approaches to work long term impact on quality and motivation of the
workforce VS short term impact on increased productivity and competitiveness

Motivation in Theory

F W Taylor and scientific management

- Believe that it is a managements task to decide exactly how every task should be completed, then to devise
the tools needed to enable the worker to achieve the task as efficiently as possible
o Task of management to devise a system that would maximise efficiency generate high profits to
enable workers to be paid a higher wage
o Theory: People/ the workers were motivated by the economic motive of self-interest
o Pay scheme of piece rate: paying workers per piece they produce
Devise a pay scheme to reward those who complete or beat tough output targets
Penalise those who cannot or will not achieve the productivity
o High division of labour, purpose built machinery and rigid management control
Division of labour: subdividing a task into a number of activities, enabling workers to
specialise and therefore become very efficient at completing what may be a small, repetitive
task
Limited, repetitive tasks for workers who are forced to work at the pace set by a manager or
consultant engineer
Conveyor belt: mens pace of work dictated by a mechanical conveyor belt, the
speed of which was set by management
Workers rebelled against the idea trade unions membership thrived: an organisation that
represents the interests of staff at the workplace

Elton Mayo and the human relations approach

- Prescription of work breaks which would increase motivation and efficiency than purely economic motives
- Workers would gain satisfaction from their freedom and control over the working environment
- Teamwork and coordination between individuals
- Group norms (expectations of one another) may be influenced more by informal (peers) rather than official
group leaders (managers)
- Communication between workers and managers influences morale and output
- Managerial involvement Hawthorne effect: Workers (motivation levels) are affected by the degree of
interest shown in them by their managers
o Requirement of organisational structure
Maslow and the hierarchy of needs
1. Physical needs e.g. food, shelter, warmth when unsatisfied, these are the primary motivations.
2. Safety needs e.g. stability and security after achievement of physical needs, motivated to achieve these
3. Social needs e.g. belonging, friendship, contact
4. Esteem needs e.g. strength, self-respect, confidence, status and recognition
5. Self-actualisation e.g. self-fulfilment reaching one s maximum potential
- Do all humans have the same set of needs purely money needs or other needs included
- Do different people have different degrees of needs some highly motivated by achievement of certain
needs than others
- Can anyones needs be fully satisfied human desire for achievement is limitless

Herzbergs two factor theory

- Factors affecting workers job satisfaction and dissatisfaction affects attitudes of workers
o Hygiene factors create job dissatisfaction and do not motivate
Company policy and administration (regulations, rules, paperwork)
Supervision (especially over supervision)
Pay
Interpersonal relations (with supervisors, peers, customers)
Working conditions
o Motivators create job satisfaction
Achievement
Recognition for achievement
Meaningful, interesting work
Responsibility
Advancement (psychological greater responsibility/ authority/ power, not just promotions)
- Movement and motivation
o Movement occurs when somebody does something
o Motivation occurs when somebody wants to do something
Bribes will motivate people to just do the minimum to achieve the bonus, but does not
motivate them to give their best may build up resentments for bosses as a reward once
given becomes a right
- Job enrichment giving people the opportunity to use their ability
o A complete unit of work working on a full challenging task instead of small repetitive tasks
o Direct feedback enable worker to judge immediately the quality of what he has done to give him
the satisfaction of knowing exactly how well he has performed, as everyone is responsible for their
own quality
o Direct communication avoid the delays of communicating via a supervisor which allows people to
feel committed, in control and be able to gain direct feedback
- Conclusion
o Unless the job itself is interesting, there is no way to make life satisfying

Issues for analysis

- The most appropriate theory (form of motivation) with respect to different managements of businesses
- Costs and benefits of every theory in different situations
- Success of any new policies will depend hugely on the history of trust successful change requires mutual
trust
- Crisis must be solved in the short term, but human motivation requires long term strategies motivation
must be developed right from the start so crisis can be solved efficiently
- Managers may underestimate the potential within their staff, unexpectedly causing and developing
resentments
- Ignorance leads managers to ignore motivation altogether or place less significance on it mentality that
control and organisation are most important as they fail to understand its subtle impacts
Motivation in Practice

Factors with influence the motivation of staff

- Financial reward systems
- Job design
- Empowering the employees
- Working in teams

Financial reward systems

- Piecework
o Working in return for a payment per unit produced
o Piece rate: payment received per piece
o No basic or shift pay
o Used in small-scale manufacturing e.g. jeans, jewellery
o Does not require supervision
o Operation of quality control system ensures finished product is worth its value
Disadvantages
Scrap levels may be high, if workers focused entirely on speed of output
An incentive to provide an acceptable quality instead of the best possible quality
Workers only work harder when they require higher earnings may not coincide
with seasonal patterns of customer demand
Problem of change focusing people on maximising their earnings by repeating a
task makes them reluctant to produce something different or in a different way
(inability to enterprise)
- Performance-related pay
o A financial reward to staff whose work is considered above average
o Used for employees whose work achievements cannot be assessed simply through numerical
measures e.g. units of output
o Encourages staff to work towards the organisations objective
Establish targets for each member of staff at appraisal interview
Discuss the individuals achievements against targets at end of year
Those with outstanding achievements are given pay rises or bonuses
o Lack of evidence for benefits of performance-related pay disadvantages:
Rewarding individuals does nothing to promote teamwork
Create unhealthy rivalry between managers vying for bonuses
Perceived fairness/ unfairness staff may be rewarded out of favouritism not ability which
damage working relations and team spirit
Whether they have a sound basis in human psychology evidence that it has not succeeded
in motivating staff o any significant degree
o Why firms continue with PRP
Easier for managers to manage/ control their staff with incentives
Reduce the influence of collective bargaining and therefore trade unions negotiations
between employees and employers
- Profit sharing
o Provide staff with a share of the firms annual profit puts staff in the same position as shareholders
Staff come to see profit positively wages + dividends
Financial reward not incentive encourage people to work harder or smarter but does not
stop them from working as a team
Free shares employees develop a strong sense of identity with the company and its
fortunes
o Pros
Encourages staff to think about the whole business, not just their own job
Encourages thinking about cost saving as well as revenue raising
Focus on profit may make it easier for staff to accept changes in working practices (less
resistance to change)
o Cons
 If employee share is only a small proportion of annual profit, payouts may be meaninglessly
small
Large payouts may either hit shareholder dividends or reduce investment capital for long
term investment
No single individual can have much impact on overall profits there may be no incentive
effect
- Fringe benefits
o Forms of reward other than income
Membership of clubs or leisure centres
Low interest rate loans or mortgages
Discounts on the companys products
o Encourages staff loyalty
o Improves human relations

Job design
- The thought process of deciding what tasks each employee must do, what equipment they will have, what
decision making power they will have and whether they are working alone or in a team.
o Job enrichment giving people the opportunity to use their ability
Job rotation: Giving people a range of responsibilities and activities
Adds more variety to the work which reduces repetition
Still provides employees with little challenge
Workers must have a complete unit of work
Responsibility for quality and self-checking
The opportunity to show their abilities/ reach their full potential
Expensive to rethink the whole production line
Team working could make job more satisfying
Less productive than high division of labour
o Division of labour: subdividing a job up into repetitive fragments of work
o Job enlargement anything that increases the scope of a job
Job rotation increasing a workers activities by switching between tasks of a similar level of
difficulty which reduces the boredom of a job
Job loading increasing workload as a result of redundancies which may mean increasing
repetition of a task with one or two extra activities that have to be taken on
Job enrichment extra responsibilities, challenges and activities/ workload

Empowerment
- Through delegation: The passing down of authority to workers at lower levels of hierarchy
o Authority to manage a task
o Some scope to decide what the task should be
- Having more power and control over working life
- Having the ability to make significant decisions about how to allocate time and how to move forward
- Greater risks taken especially if employee is ignorant and unknowledgeable
- Identification and exploitation of opportunities
- Aid motivation

Team working
- Maximise staff satisfaction and involvement by organising employees into relatively small teams
o Multi skilled everyone can do everyone elses job
o Working together to meet shared objectives e.g. production with zero defects
o Encouraged to think of the future as well as the present in a spirit of kaizen
- Satisfies workers social needs Maslows hierarchy of social needs
- Flexible as absenteeism will not affect job progression

Issues for analysis

- Select and apply relevant motivation theory to the relevant motivation method
 - Question publicly stated motives of organisations loose usage of words e.g. motivation/ empowerment
which may actually represent tougher targets and greater pressure
- Consider the time scale motivation requires long term strategies
- Human implications
o High commissions/ performance related pay -> overselling of products to customers -> Customers
may not be satisfied with the service
o Bullying to motivate staff into working harder -> culture of overwork -> stressful environment
- Successful motivation in the long term is a result of careful job design, employee training and development,
honesty and trust money may be a reward but cannot substitute motivation

Measuring the Effectiveness of the Workforce

Introduction
- Staff costs are usually 25-50% of a firms total cost firms must measure the performance of their people
objectively
- Staff productivity can be used to measure the success of initiatives do the new methods of working/
policies implemented motivate staff to increase productivity?

The need to measure performance

- How motivated is the workforce
- How productive is the workforce
- How effective are the personal policies in help the business to meet its goals
o Series of indicators used to measure the effectiveness of a personnel department
Labour productivity
Labour turnover

Labour productivity
- Calculating labour productivity
o Comparison of the number of workers with the output they are producing
o Output per period / number of employees per period = output per worker per period
o The higher the productivity of the workforce, the before it is performing.
o The importance of productivity: its impact on labour costs per unit
The higher the productivity, the lower the labour costs per unit
lower costs -> lower prices -> greater competitiveness

Labour turnover
- Measuring labour turnover
o Rate of change of a firms workforce
o Number of staff leaving the firm per period / average number of staff in the firm x 100
- Causes of labour turnover dissatisfaction of workers
o Internal causes
Poor recruitment and selection procedure appointment of wrong person to wrong post ->
workers leave to find a more suitable posts (suited to individuals interests or talents)
Ineffective motivation or leadership workers will feel no sense of loyalty or ownership ->
look for promotions of new career opportunities outside the firm
Wage levels are lower than that of competitor firms workers are dissatisfied by their
position -> look elsewhere to find a better reward for doing a similar job
o External causes
More local vacancies arising setting up of new businesses or expansion of existing
businesses
Better transport links new public transport systems make wider geographical areas
accessible to workers -> enable them to take employment that was previously out of their
reach
- Consequences of high labour turnover
o Negative effects
 Cost of recruitment of replacements
Cost of retraining replacements
Time wasted as new recruits need to settle into the business and adopt the firms culture
Loss of productivity while new workers adjust
o Positive effects
New workers bring new ideas and enthusiasm to the firm
Workers with specific skills can be employed rather than training workers from scratch
New ways of solving problems can be observed by workers with different perspectives, while
existing workers may just insist and keep trying techniques that have worked in the past
- Requires the right level of labour turnover balance between positive and negative effects

Voluntary labour turnover

- Workers choose to leave the company
o Retirement
o In search of new job
o Volunteering for redundancy

Evaluating the success of personnel management

- Analysis of figures to identify:
o Changes over time
o Performance compared to rivalry firms
o Performance against targets
- Indicate to the firm where it is performing well and where it may have a problem which requires
intervention

Downside of personnel management: Redundancy and dismissal

- Redundancy occurs when a job is no longer needed perhaps due to improved technology reducing the need
for physical labour
o Redundant workers may be deployed VS opportunity to leave retraining VS redundancy benefits
o Selecting young adults to leave will be the cheapest by far lowest redundancy pays
- Dismissal occurs when the firm decides that everyone will be better off without an individual
o The individual should never have been employed in the first place recruitment staff need to discuss
how or why this happened (what was wrong in the selection and recruitment process)
o May be unpleasant, but is essential one incompetent member of a team can spoil the atmosphere
and benefits to be gained by the others
o May be deemed fair or unfair
Fair if the employee had already been given warnings about poor performances but fails to
improve
Unfair if employee is dismissed due to insistency of personal rights
Joining a trade union
Becoming pregnant
Refusing to work on Sundays
- A good leader would ensure that staff take great care over recruitment ensure that there are no bad
employees which may influence the whole atmosphere of a team of good employees
o Personnel staff should work together to ensure that redundancies and dismissals are kept to the
absolute minimum

Using a flexible workforce

- Temporary workers able to get staff only when needed
- Annualised hours a system whereby the period of time which a full-time employee must work is defined
over the whole year
- Part time workers cover less sociable shifts e.g. midnight shifts, weekends
- Use of contractors cheaper than own labour

Issues for analysis

- Business success comes from being the best and staying the best every manager should be alert to early
warning signs if employees attitudes change, find out the reasons and tackle them straight away
- Short term thinking not caring about labour issues as long as job is accomplished and profits are high VS
long term thinking caring about quality and involvement of staff which influences the morale and
attendance of staff will help the firm grow in the long term
- Discovering underlying problems early and solving them instantly the reason behind high labour turnover
or low labour productivity and how to improve, is it due to overall poor performance or the short term effect
of a change in business strategy
- Figures are analysed at the end of a year looks at the past not the future, may not be a valuable indicator
of how things will change to be in the future