business studies notes mr rajab

8/2/2019 Business Studies Notes Mr Rajab

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EDEXCEL

GCE ADVANCED SUBSIDIARY

Business Studies

UNIT 2: MANAGING THE BUSINESS

AUTHOR: MR RAJAB S.WANJALA

B.ED (UON), CPA(K)


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TABLE OF CONTENT

TOPICS

1.0Marketing Plan1.1The marketing objectives..1.2The marketing strategies; niche and mass marketing ..1.3The marketing mix the1.4Elements of marketing mix [4ps of marketing].1.5External factors affecting companies marketing decisions (Political, Economic, Social,

Technological, Legal And Environmental[PESTLE])1.6 The product life cycle1.7Product extension strategies1.8The Boston Matrix/product portfolio Matrix1.9Implication of product life cycle and Boston Matrix on product cash flow(card bury product

portfolio -case)1.10 Price elasticity of demand;1.11 calculations and interpretation of results1.12 What creates inelastic demand for products2.0Managing the Provision Process2.1product/service design2.2 standard and bespoke product/service designs with examples that meet identified market needs2.3Productivity and efficiency definitions2.4Inputs and in e.g finance, renewable resources, consumable resources, human resources, finished

products from other processes, skill and technology

2.5Outputs in production; e.g. finished products, services, combination of products, rejected productwaste products.2.6Types of production; job, batch, line (mass) and cell productions

2.7Capital and labour intensive production2.8Capacity utilization; how to improve productivity2.9Stock control; definitions, graphs2.10 How to improve stock control to reduce cash tied up in it2.11 Lean management; advantages and disadvantages of Just-In-Time(JIT)2.12 Quality management2.13 How culture of quality is created e.g. through management expectation of

continuous improvement (Kaizen), Quality assurance processes and self

checking2.14 why some firms still use quality inspections2.15 case studies on quality management techniques2.16 consumer protection and legislation; purpose of legislations


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3.0Budgeting3.1reasons for budgeting3.2historical and zero based budgeting;merit and demerits3.3difficulties of budgeting when there is no historical information3.4

types of budgets; sales, production, purchases, labour, capital expenditure, cash and profit and losbudgets

3.5comparisons of actual figures and budgeted figures to provide elementary variance analysis3.6sales forecasts, difficulties of estimating sales3.7cash flow fore casting; filling into cash flow blanks, interpretation of cash flow forests , importan

of cash flow forecasts3.8managing working capital, liquidity ratios; current ratio, quick ratio3.9importance of Working Capital and impact of working capital deficit on a

business, how to improve business cash flow, e.g. contingency finance planning egoverdraft/loan, managing debtors and creditors terms, stock controls3.10 difference between cash and profits3.11

working capital operating cycle (diagram)3.12 why businesses fail


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4.0Managing other people4.1organisation structures; organization charts ;types of organization structures; tall and flat

organisations4.2factors that affects the organisation structure4.3chain of command and span of control4.4centralized and decentralized organisations4.5how organization structure may affect communication between the employees and the

employers (use case studies to illustrate)4.6Recruitment; internal and external recruitment examples, advantages and disadvantages of

each.4.7Labour turnover; causes, implication and link to staff motivation4.8Motivation of staff; Motivation theories; Taylor, Herzberg, Maslow (briefs)4.9Criticism of motivation theories4.10 Financial incentives, piece work, bonus, profit share, performance related

pay4.15 How mangers can get the best from the staff (use a case study);4.16 technique of getting best from staff; delegation, consultation, empowerment,4.17 Reduction of labour costs4.18 Benefits and limitations of using flexible work force4.19 Natural wastage; definition and its effects to labour costs

4.20 Rights of staff on dismissal or redundancy.


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TOPIC 1: MARKETING PLANDefinitions:

A marketing plan is a statement that defines where the firm is in terms of its market(market audit)where it wants to get to (objectives) and how it plans to get

there(strategies).

The Process of Marketing Planning

Market planning involves a number of activities

1. market/situational auditThis is the process of analyzing the firms internal and external factors that may have

positive or negative implication to its operations.

Methods of market audit

Situational audits are carried out by use of two major analyses namely:(a)SWOT Analysis(b)PESTLE Analysis

SWOT Analysis

Definition:

SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and ThreatsThis is the analysis of a firms strengths, weaknesses and opportunities based on its

internal and external environments

S- Strengths

This relates to any advantage/positive aspect that the business enjoys over its competitors.

W- Weaknesses

These are the negative aspects that limit a business success.

O- Opportunities

These are the things that the business can profitably undertake in future because of itsstrengths or by eliminating their weaknesses.

T- Threats

These are the activities that threaten the future existence of the firm. This may be due toinability to utilise their strengths against their rivals.

The Key Distinction - Internal and External IssuesStrengths and weaknesses are internal factors. For example, strength could be yourspecialist marketing expertise. A weakness could be the lack of a new product.

Opportunities and threats are external factors. For example, an opportunity could be adeveloping distribution channel such as the Internet, or changing consumer lifestyles thatpotentially increase demand for a company's products. A threat could be a newcompetitor in an important existing market or a technological change that makes existingproducts potentially obsolete.

it is worth pointing out that SWOT analysis can be very subjective - two people rarelycome-up with the same version of a SWOT analysis even when given the same


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information about the same business and its environment. Accordingly, SWOT analysis isbest used as a guide and not a prescription. Adding and weighting criteria to each factorincreases the validity of the analysis.

Areas to Consider

Some of the key areas to consider when identifying and evaluating Strengths,Weaknesses, Opportunities and Threats are listed in the example SWOT analysis below:

PESTLE Analysis

Stands for the Political, Economic, Social, Technological, Legal and EnvironmentalPESTlE analysis is concerned with the environmental influences on a business. i.eThis is the analysis of all the external factors that may affect business survival.

P- Political,

E- Economic

S- Social,

T- Technological,

L- Legal and

E- Environmental,

Identifying PESTLE influences is a useful way of summarizing the external environmentin which a business operates. However, it must be followed up by consideration of how abusiness should respond to these influences.


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The table below lists some possible factors that could indicate important environmentalinfluences for a business under the PESTLE headings:

Political / Legal Economic Social Technological

- Environmental

regulation andprotection

- Economic growth

(overall; by industrysector)

- Income

distribution(change indistribution ofdisposable income;

- Government

spending onresearch

- Taxation (corporate;

consumer)- Monetary policy(interest rates)

- Demographics(age structure ofthe population;gender; family sizeand composition;changing nature ofoccupations)

- Governmentand industryfocus ontechnologicaleffort

- International traderegulation

- Governmentspending (overalllevel; specificspending priorities)

- Labour / socialmobility

- Newdiscoveries anddevelopment

- Consumer protection - Policy towardsunemployment(minimum wage,unemploymentbenefits, grants)

- Lifestyle changes(e.g. Homeworking, singlehouseholds)

- Speed oftechnologytransfer

- Employment law - Taxation (impact onconsumer disposable

income, incentives toinvest in capitalequipment,corporation tax rates)

- Attitudes to workand leisure

- Rates oftechnological

obsolescence

- Government

organisation / attitude

- Exchange rates(effects on demandby overseascustomers; effect oncost of importedcomponents)

- Education - Energy useand costs

- Competition

regulation

- Inflation (effect on

costs and sellingprices)

- Fashions and fads - Changes in

materialsciences

- Stage of thebusiness cycle (effecton short-termbusinessperformance)

- Health & welfare - Impact ofchanges inInformationtechnology


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A TV station may curve out a niche as a spots TV targeting only ports fans asits niche.

A radio station may only choose to play R&B music rather than playing a mixof all sorts of music.

Reasons for Niche Marketing

I) A niche market enjoys high initial profit marginsII) Niche markets have little or no competition since they are either un served or

underserved.III)This markets are less risky as chances of success are higherIV)Its is cheaper to serve niche markets than the mass market. For instance it is

cheaper to market in specific market segment than doing general marketingLimitations of niche marketing

I) It attracts new entrants; one the nicher firm has successfully exploited theniche market this may attract other rival into it.

II)Suffers market demand fluctuation: the market is made up of smaller numberof consumers whose spending may be erratic.

III)Lack of diversification:since the firm depends on one particular group anyfailure in demand for its products may affect their revenues.

Mass marketing/undifferentiated marketingThis is a form of marketing in which the markets its products to all possible groups.In this from of marketing the firm offers similar or nearly related products to allconsumers and promotes them in the same way without differentiating between thevarious groups of consumers. E.g. coca cola does mass marketing for its products.

Advantages of mass marketingI) More diversified risksII) Global marketing of products to different countries is possible.III)Products are sold to large number of customers thus the firm enjoys economies of

scaleIV)Stable demand for the productsLimitations of mass marketingI) It is often expensive to set up production facilities for mass marketed productsII) May face competition from successful market nichers and other efficient firms.


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The Marketing Mix

This is a set of elements of marketing that defines the marketing strategies of a firm.Marketing strategies are all defined in terms of the 4 elements of marketing.

Elements of marketing mix

There are 4 elements of marketing mixI) ProductII) PriceIII)PlaceIV)PromotionAll these are generally referred to as the 4 Ps of marketingProductA product is anything that the firm offers for sale.To achieve it objectives, affirm must design its product offers to suite the customers

needs. For this reasons the following product elements must be considered.

a. Product designsThis deals with how the product should be designed to meet customers requirements

This involves the issues such as; the colour of the product product shape product taste product size ingredients etc

b. product packagingThis deals with how the product should be wrapped to suite the customers preferences. This involves issue such like:

color of the package shape of the package

c. product benefitsThis should be stated on the product and well projected to attract buyers.

PRODUCT LIFE CYCLE

this refers to the various stages through which a new product goes through from the timeit is developed and introduced in the market upto the time it is removed.


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stages of product life cycle

i. Product developmentii. Introduction

iii. Growth.iv. Maturityv.

Saturationvi. Decline

Fig: The Product Life Cycle

Development Stage

This is the stage at which new product ideas are generated and tested before they arelaunched.

Introduction Stage

At this stage, level of sales is increasing at a very slow rate because of the followingreasons;

i. Consumers are not fully aware of the product or its benefits.ii. The development costs might have been high and therefore a high entry price hat

may be unattractive to buyers.iii. Lower market penetration as some firms are scared of launching the product in the

entire market thus they start with smaller sections of it.

Growth stage

At this stage the level of sales are increasing as the consumers awareness increases.

More so products were introduced at initially prices would have had the initial costrecovered thus the prices are falling.


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Maturity stage

At this stage the product has attained the maximum market share and the sales are atoptimum.

Saturation stage

At this stage new funds enter the market an d saturates it .Some businesses may considerpulling out of the product market. However other companies may choose to extend thelife of the product at this stage b use of product extension strategies.

Decline stage

For new products having attained the maximum market share with no room for expansionmay have the sales starting to decline.

PRODUCT EXTENSION STRATEGIES

These are strategies that extend the life of product beyond the saturation stage. Theyinclude;

Finding new uses of a product

This is a strategy where a company identifies new uses of the product in order to targetnew different groups in the marketIncrease product usage.This is achieved by encouraging consumers to increase the number of times they use theproduct e.g. many lotion companies may say apply twice per day for quick results.Find new market for a product.If the original market has been saturated the firm can increase sales by finding newmarket for their product e.g. expanding into international market.Changing the products ingredientsThe product life can b extended by adding new ingredients to suit the changing needs ofthe consumers e.g. herbal products were added to Dettol to form Dettol herbal.

Developing wider product rangeA company can extends the product life by developing various ranges of products to caterother changing tastes and preferences e.g. coca cola has developed various ranges ofproducts under the brand name coke that is light, lime and dark.

The effects of product extension strategies are as shown in the diagram below:


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Product Mix or Portfolio

This is a collection of all the products offered by a firm e.g. Coca Cola has the followingproduct portfolio; Coke, Sprite, Fanta, Dasani and novida.

Portfolio Analysis:

Portfolio Analysis analyses the overall balance of the strategic business units of abusiness. Most large businesses have operations in more than one market segment, andoften in different geographical markets. Larger, diversified groups often have severaldivisions (each containing many business units) operating in quite distinct industries.

An important objective of a strategic audit is to ensure that the business portfolio is strongand that business units requiring investment and management attention are highlighted.This is important - a business should always consider which markets are most attractiveand which business units have the potential to achieve advantage in the most attractivemarkets.

Traditionally, two analytical models have been widely used to undertake portfolioanalysis:

- TheBoston Consulting Group Portfolio Matrix (the "Boston Box");- TheMcKinsey/General Electric Growth Share Matrix

MANAGING A PRODUCT PORTFOLIO OR MIX

Product mix management is concerned with the timings f to launch a new product andpull out an old product from the market. This enables the firm to constantly launch newproducts at the appropriate time to ensure there is no vacuum created by the old productsthat have attained their maximum life. This is illustrated by the diagram below;

A sales of A products as started declining. B has just been launched ad the sales aregrowing. As Bs sales starts declining C has just been launched and sales are growing .Inthese case there exists no vacuum.

BOSTON MATRIX [PRODUCT PORTOLO MATRIX]

This is a technique that helps the firm to analyse the product mix recurring their variousstages in the product life cycle. A Boston matrix places the products into four categories;

1. Star product2. Problem children product3. Cash cows
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4. DogsThe Boston Consulting Group Box ("BCG Box")

1. Star product

These are products with a large market share in a high growth market.

2. Problem children product

These are products with a small market in a high growth market. The product might havefuture potential as they are in a high growth market segment but their sales particularly

bad. This could be products in their introduction stage.3. Cash cows

These are products that are capable of generating funds possibly to support other product.These are mature products with a stable market share.

4. DogsThese are products that may be in the decline stage. The dogs exist in a low growthmarket and have a low market share.

The Boston matrix is important as it enables the marketing managers to have anappropriate mix of all the four categories of the product. Products at different stages inthe life cycle may need other products especially if their level of sales is very low.

Exersice

Safaricom and Vodafone U.K offer a number of products to the Kenyan market;

i) money transfer services eg M- Pesa, Mkesho etc

ii) internet services

iii) SMS or MMS Services


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iv) Voice Services.

Based on your observation prepare a product mix portfolio a

And explain how products in different categories ma affect the cash flow of the company.

BRANDINGBrand is a name, symbol, sign or anything that identifies the product of a firm from thecompetitors priduct. Choosing a rand name is an important part of marketing strategy.

QUALITIES OF A BRAND

1. It should be simple, short and easy to remember.

2. It should project the intended image e.g. if the company intend to portray image ofproducts as environmental friendly they might use green colour to accompany the brandas part of identity.

3. Easy to differentiate from other competitors brands.

4. It should project the characteristics of the product.

brands - introduction

Introduction to brands

Take a look at the list below that shows the worlds top 10 brands in 2002 (as measuredby value):{Rank Brand Value ($ billions)}

1 Coca-Cola ($69.6)2 Microsoft ($64.1)3 IBM ($51.2)4 GE ($41.3)

5 Intel ($30.9)6 Nokia ($30.0)7 Disney ($29.3)8 McDonalds ($26.4)9 Marlboro ($24.2)10 Mercedes ($21.0)Source: Interbrand; JP Morgan Chase, 2002

Why do companies such as Coca-Cola, Microsoft, IBM and Disney seem to achieveglobal marketing success so easily? Why does it seem such an effort for others?

Why do we, as consumers, feel loyal to such brands that the mere sight of their logo has

us reaching into our pockets to buy their products?The meaning of brandsBrands are a means ofdifferentiatinga companys products and services from those ofits competitors.

There is plenty of evidence to prove that customers will pay a substantial price premiumfor a good brand and remain loyal to that brand. It is important, therefore, to understandwhat brands are and why they are important.

Macdonald sums this up nicely in the following quote emphasising the importance of


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brands:

it is not factories that make profits, but relationships with customers, and it is

company and brand names which secure those relationships

Businesses that invest in and sustain leading brands prosper whereas those that fail areleft to fight for the lower profits available in commodity markets.

What is a brand?One definition of a brand is as follows:

A name, term, sign, symbol or design, or a combination of these, that is intended to

identify the goods and services of one business or group of businesses and to differentiate

them from those of competitors.

Interbrand - a leading branding consultancy - define a brand in this way:

A mixture of tangible and intangible attributes symbolised in a trademark, which, if

properly managed, creates influence and generates value.

Three other important terms relating to brands should be defined at this stage:

Brand equityBrand equity refers to the value of a brand. Brand equity is based on the extent towhich the brand has high brand loyalty, name awareness, perceived quality and strongproduct associations. Brand equity also includes other intangible assets such as patents,trademarks and channel relationships.

Brand imageBrand image refers to the set ofbeliefs that customers hold about a particular brand.These are important to develop well since a negative brand image can be very difficult toshake off.


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Brand extensionBrand extension refers to the use of a successful brand name to launch a new or

modified product in a new market. Virgin is perhaps the best example of how brandextension can be applied into quite diverse and distinct markets.

Brands and products

Brands are rarely developed in isolation. They normally fall within a business productline or product group.

A product line is a group of brands that are closely related in terms of their functions andthe benefits they provide. A good example would be the range of desktop and laptopcomputers manufactured by Dell.

A product mix relates to the total set of brands marketed by a business. A product mixcould, therefore, contain several or many product lines. The width of the product mix canbe measured by the number of product lines that a business offers.

For a good example, visit the web site ofHewlett-Packard (HP). HP has a broadproduct mix that covers many segments of the personal and business computing market.How many separate product lines can you spot from their web site?

Managing brands is a key part of the product strategy of any business, particularly thoseoperating in highly competitive consumer markets.

METHODS OF BRANDING

Multiple branding

This

Price

In setting a price for a product the company will almost certainly want to cover its costs and m

profit as well. Firms have to decide whether to charge:

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

promotions.

A higher price can be charged if the product is seen as being better than the rivals.

There are a number of Pricing Techniques for new and existing products.

FOR NEW PRODUCTS
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1. SkimmingThis is the introduction of a new product at a high initial price. When a newproduct is released it may be possible to start off charging a quite high price.This can be because owning the product first has some prestige or novelty

attached to it. Many different prices can be charged as the product becomesless and less in demand.

e.g. N64, fashionable clothes.

2. Penetration PricingWhen a firm brings out a new product, it may feel it needs to make a lot of salesto establish itself in the marketplace. It can start off by offering the product at alow price. When they reach higher levels of sales they can raise prices.

FOR EXISTING PRODUCTS

1.

Price leader

The market leader will change its price and its competitors will follow suit.

e.g. when the price of petrol or interest rates change competitors normally follow suit

2. Price takerYou are a small seller in a large market selling an identical product, thereby you have no powchange the price, if you raise your price you will lose all of your customers as they will go to competitor.

e.g.

TACTICS

1 Cost plus pricingThe cost of a particular job is calculated then a particular percentage is added

on top. This is sometimes known as a mark-up.

e.g. the total cost of repairing a television is 100, if a business adds a 20%

mark-up it will charge a total of 120.

2 Hour based pricing


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Some businesses are able to calculate a standard charge per hour. e.g. gardening,photography.

3 Destroyer PricingYou sell your good at a very low price in order to destroy new or existingcompetitors. e.g. the Times newspaper reduced its price in the 1990s, other

newspapers followed suit and the result was the Today newspaper went out ofbusiness in 1995.

4 Competitor basedThis type of pricing is suitable when the market is competitive and pricecomparisons are easy.

e.g. goods in supermarkets.

5 Price discriminationA firm will charge different prices to different people for the same good or service.

e.g. some taxis charge different prices late at night, rail fares are higher during peakperiods.

6 Loss leaderSome products are sold below cost in the hope of selling other products.

e.g. retailers put a well known brand name in shop window at a loss in order toattract people into the shop.

7 Psychological pricingThis focuses on consumers perceptions of price.

e.g. charging high prices to convey quality, charging 2.99 rather than 3.00,because people regard it as over 2.00 rather than in the 3.00 band and stressingreductions in price (e.g. was 20 now only 10).

8 Contribution pricingWhen a firm sells a range of products, the price of each good will have to cover allof the direct costs, in addition to this it will also have to make a contribution to theindirect costs and profit.

e.g. Sony makes a large number of electrical goods, each of which helps to cover


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the costs of rent, lighting, heating etc.

Promotion - introduction to the promotional mix

It is not enough for a business to have good products sold at attractive prices. To generatesales and profits, the benefits of products have to be communicated to customers. Inmarketing, this is commonly known as "promotion".

Promotion is all about companies communicating with customers.

A business' total marketing communications programme is called the "promotional mix"and consists of a blend of advertising, personal selling, sales promotion and publicrelations tools. In this revision note, we describe the four key elements of the promotionalmix in more detail.

It is helpful to define the four main elements of the promotional mix before consideringtheir strengths and limitations.

(1) Advertising

Any paid form of non-personal communication of ideas or products in the "prime media":i.e. television, newspapers, magazines, billboard posters, radio, cinema etc. Advertising isintended to persuade and to inform. The two basic aspects of advertising are the message(what you want your communication to say) and the medium (how you get your messageacross)

(2) Personal Selling

Oral communication with potential buyers of a product with the intention of making asale. The personal selling may focus initially on developing a relationship with thepotential buyer, but will always ultimately end with an attempt to "close the sale".

(3) Sales Promotion

Providing incentives to customers or to the distribution channel to stimulate demand for aproduct.

(4) Publicity

The communication of a product, brand or business by placing information about it in themedia without paying for the time or media space directly. otherwise known as "publicrelations" or PR.

Advantages and Disadvantages of Each Element of the Promotional Mix


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Mix Element Advantages Disadvantages

Advertising Good for building awareness

Effective at reaching a wideaudience

Repetition of main brand andproduct positioning helps buildcustomer trust

Impersonal - cannot answer all acustomer's questions

Not good at getting customers tomake a final purchasing decision

Personal

SellingHighly interactive - lots ofcommunication between the buyerand seller

Excellent for communicatingcomplex / detailed product

information and features

Relationships can be built up -important if closing the sale maketake a long time

Costly - employing a sales forcehas many hidden costs in additionto wages

Not suitable if there arethousands of important buyers

Sales

PromotionCan stimulate quick increases insales by targeting promotionalincentives on particular products

Good short term tactical tool

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

Too much promotion maydamage the brand image

Public

RelationsOften seen as more "credible" -since the message seems to becoming from a third party (e.g.magazine, newspaper)

Cheap way of reaching manycustomers - if the publicity isachieved through the right media

Risk of losing control - cannotalways control what other peoplewrite or say about your product


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TOPIC 2: BUDGETINGA budget is a financial and quantitative statement prepared stating the plan of action to be undertakenin a given period.Budgets can be prepare as:

Historical based budgeting Zero based budgeting

Historical based budgetingThis is budgeting based on the existing historical data. e.g. sales budget can be prepared based on the

previous years salesAdvantages of historical budgeting

a) The information on which to base future estimates is readily availableb) It is easier and realistic as one can do the budget with precision.

Disadvantages of historical budgeting

a) New businesses may not have any historical data and may have to budget from scratch bymaking new forecast.

b) Markets are more dynamic and budgeting from the historical data may not reflect what the trueestimates for the future.

Zero based budgetingThis is the kind of budgeting that is not based on existing historical figures but done from scratch.

Advantages of Zero based budgetinga) This form of budgeting does not rely on historical data which may provide misleadingestimates for the future since the market conditions keep changing.

b) It is a flexible form of budgeting available to both new and existing businesses

Purposes of budgeting

1. PlanningA budget provides an insight into the future and enables the firm to put in place measures to dealwith anticipated problems.

2. ControlA budget provides a means of controlling all the business activities to ensure that they run toachieve the stated objectives.

3. MotivationBudgeting involves all levels of staff in establishing targets for and expected level of achievement.This makes the employees part of the process and thus committed to achieving the set goals.

4. Coordination of activitiesThe budgeting process enables the managers to coordinate various activities of all the departmentsin achieving the overall aims of the organization.

5. Yardstick of performanceA budget provides standards against which performance is measured. E.g. if one budgeted to sell5000 units in a month this provides a standard against which to measure whether one has over or

under performed.

Variance and Budgets

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


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Types of budgets

1. Sale budgetThis is prepared to provide an estimate of the expected sales. This can be done both in units and inpounds.

2. Production budgetThis is prepared to provide an estimate of the expected level of output. This can be both on unitsand pounds.

3. Cash budgetThis is a forecast of the expected cash inflow and outflow over a given period.

Sales forecasts

This is the process of estimating the amount of sales that is expected to be achieved over a

given period.

Example

Abc Ltd had the following sales forecast for the month of July to December each unit of sale at 18.

Month July August September October November December

Sales(units) 60 80 100 100 90 70

Prepare a sales budget in unit and revenues:

Solution :Sales budget in units

Month July August September October November December

Sales(units) 60 80 100 100 90 7018 18 18 18 18 18revenues 1,080 1,440 1,800 1,800 1,620 1,260

sales fore casting

This is the process of projecting how much sales can be generated from the future stated period. Allthis is done through research, primary or secondary. No budgets can be prepared before a salesforecast is done. This is because; production, labour, cash flow forecast etc shall be based on theprojected sales.

this can be done through

a) Time series analysisb) Subjective forecast:where forecasts are based on opinion of:

sales staff(giving estimates of their future expected sales estimates), customers may be asked to state their future buying intentions Use of set up panel experts to give projections of future sales

c) Qualitative forecastingWhere the sales are determined based on prediction on the changes in the social, political and


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economic environments and how this will affect demand.

Difficulties of Estimating Sales

a) All estimate are based on prevailing conditions whose future changes cannot precisely bepredicted

b) It involves market research and therefore very costly to sustainc) Bias: out of over ambition , Some managers may provide forecasts that are not realistic.d) Some workers may choose to set low level of sales to avoid pressure to perform.

Cash budget


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Managing working capitalWorking capital is the amount required for the day to day running of a business.It is the difference between the current assets and current liabilities.

Working capital (WC) = Current assets- current liabilities.Working capital items

Working capital comprises of current assets and current liabilities.Current assets

These are resources that are only available for use in the business for a short period of not more thanone year (12months). These are:

Stock of goods (inventory)what we offer for sale. Cash in hand Cash at bank Debtors (persons who owe us money for supplying them goods or services).

Current liabilities

These are debts that are payable within a year. I.e. they are short-term debts whose a payment fallswithin 12 months.These includes:

Creditors for supplies- (persons that we owe money for supplying goods or services). Bank overdrafts

Management of a business working capital

Working capital management deals with the whole process of ensuring that the business has adequatecash to meet its short term cash requirements as and when need arises.eg paying of bills salariessuppliers etc.

A business thatdoes not manage its cash flow may find itself bankrupt (insolvent) for being not able pay its short term obligations as and when they fall due.Each item of the working capital needs to be managed in a diligent manner to ensure a health andsolvent financial position for the firm.

management of Cash in hand and in bank

Many firms may not have a major problem with the cash at their disposal. However a budget shouldexist to ensure that cash is not misused.

Management of debtors

Debtors are persons who receive goods on credit and pay latter. A business may tie up too much cash

in this item if it doesnt have proper credit control policies. To ensure a sound working capital abusiness should adopt the following.a) Decrease the credit period within which credit customer should pay up their accounts. E.g. from

two months to one month. This is to ensure that customers pay on time to have the cash in thebusiness.

b) Offer discounts to customers to encourage prompt payment.c) Offer credit only to customers whose credit rating is high. I.e. those whose payment record is clead) Offer goods for sale only on cash basis


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Management of stocks

Stocks refer to what the business offers for sale.To maintain a sound cash flow a business should manage their stock well.1. Just in time stock requisition

High stock levels tie up funds besides increasing the storage and security costs. Therefore stockshould only be ordered as and when required to reduce tying up so much cash in stocks.

2. Fast moving goodsWhere possible buy goods that are fast moving to provide the required cash for the business.

Management of creditors

A business can ensure it has sufficient funds by negotiating for longer credit periods. This enables thefirm to retain as much cash in the business as possible.

Sources of cash flow problems

1. OvertradingThis occurs where a firm attempts to expand its activities without adequate cash. It is a case ofbiting more than you can chew, by wanting to produce and sell too much yet you have no enoughcash to support it.

2. Stock pillingThis occurs where the firm holds so much idle stocks of raw materials, finished and semi finishedgoods. This in the end ties up so much needed cash that could be utilized elsewhere to generatemore cash or to pay other bills.

3. Poor credit policiesA firm that allows too much credit or long credit periods to its credit customers may suffer cashflow problems.

4. Over borrowingA business that borrows more than it can afford to pay will be calling for cash flow problems.When a business borrows more than it can pay it cash resources shall be strained in a way that itwill not be able to meet its other obligations.

5. Investing too much in fixed assetsDuring the initial stages of a business funds are limited. Investing too much on fixed assets is asure way of putting the company into a cash flow crisis and into the path to insolvency.

Why businesses Fail

Statistics show that 2 out five startups go under within 2years this is due to the following reasonsi. Poor cash flow management

ii. Lack of a business plan to provide directioniii. Poor credit management eg giving too much credit with long repayment periods


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iv. Poor stock control overstocking that may lead to obsolete stocks and high storage costsv. Overtrading by trying to expand production without adequate capital

vi. Investing too much in fixed assetsvii. Lack of experienced human resource


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MANAGING OTHER PEOPLEOrganization structure

This is the layout of the different levels of responsibilities and authority in an organization.Span of control

This refers to the number of employees that are directly under the control and supervision of amanager.Types of organization structures

1. Tall organization structures (vertical structure)This is a structure in which there are many managers with smaller span of control. Ie is a structurewith many levels of management. A tall organization contrasts with a flat organization, since it hasan extended vertical structure with well-defined but long reporting lines. The number of differentlevels may cause communication problems and slow decision making. It is for this reason that manycompanies are converting to flatter structures more suited to the fast responses needed in a rapidly-

changing business environment.

Advantages of tall organization structures

a) Promotes closer supervision of the juniors by the managers to ensure the tasks areCarried out as expected.

b) Promotes good and closer relations between managers and the worker. A manager willbe in a position to cultivate a personal relation with the juniors that may production.

c) Communication is more effective here as the span of control is manageableDisadvantages of Tall organization structures

a) It may promote autocratic leadership as the leader may be full in charge of allthe decisions while workers take orders and this may be counterproductive.

b) The cost of supervision shall be unnecessarily high because of the larger numberof managers involved.

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

Advantages of a flat structure

a) This structure is generally possible only in smaller organizations or individual units withinlarger organizations.

b) The flat organization model promotes employee involvement througha decentralized decision-making process. By elevating the level of responsibility of baseline

employees and eliminating layers ofmiddle management,

c) Comments and feedbackreach all personnel involved in decisions more quickly. Expectedresponse to customer feedback becomes more rapid. Since the interaction between workers is

more frequent.

Disadvantages

This organizational structure generally depends upon a much more personal relationship between

workers and managers. Hence the structure can be more time-consuming to build than a

traditional hierarchical model

The flat structure: note that there are a few hierarchy of managemen

factors that determine the organisation structure and span of control

1) Skill and training of employeesmore experienced employees can be left on their own while untrained and unskilledones may require closer supervision and therefore a more taller structure with smaller

span of control.

2) Nature of the tasksome tasks may require quicker communication btn managers and employees

therefore a need for a taller structure with smaller spans of control while other tasks

may not require a quicker communication and thus a flat structure with lager spans of

control.
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the top management.

Disadvantages

i. Lack of strict control of the top management may lead to divergence of theorganizational objectives as the subordinates may make decision only in view of their

department/section without having the bigger picture of the entire organisation.ii. Communication will be slowed down considerably given the high level ofconsultation involved in decision making process.

RECRUITMENT AND TRAINING

This is the process of attracting a pool of applicants for the job.Methods of recruitment

1. Internal recruitment2. External recruitment

Internal recruitment

This where a firm recruits from the existing employees to fill up a job vacancy.Forms of internal recruitments

I. PromotionsThis is a form of recruitment in which junior employees are moved up the rank to fill up asenior position.

II. TransfersThis is where employees are moved from one section of the organization e.g. branch, ordepartment, to fill up the vacancy in the other.

Advantages of internal recruitmentsi. It gives existing employees a chance to advance in their careers

ii. There will be shorter induction training as the employee is already familiar with thecompany procedures and policies.

iii. The employer knows the internal employees more and there is a lower risk of hiring thewrong person for the job

iv. Internal recruitment is more cheaper and faster compared to external recruitments whichare lengthy and expensive.

v. It helps to reduce labour turnover. i.e the number of people who join and leave thecompany in a period of one year. Internal recruitment improves the desire for employees

to stay longer in the company since there is hope for future career advancements.

Disadvantages of internal recruitmentsi. Internal recruitments lack a variety of talents to choose from since it limits the employer

to the few existing employees.

ii. Sometimes internal recruitments may cause disputes between employees and themanagement especially where the recruitment is believed to have been unfair.

External recruitment

This is where the firm attracts employees from outside to apply for the job.


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Forms of external recruitment

1.Commercial employment agenciesThese are companies that hire on behalf of other companies for a fee.These companies recruit, interview and shortlist applicants and forward the list to theirclients for hiring.

2.Head huntingThis is a form of recruitment in which the employer or an executive agencies approachindividuals who have a reputation in a given field with job offers.

3.Career fairsA company can recruit fresh graduates through university placements and career fairs/visitsto the institutions of higher learning.

4.Media advertisementsFirms can also attract applicants for the job by placing job offers in the media such asnewspapers, TV etc.

5.Online recruitmentMany firms are increasingly using their websites to hire new employees. An applicationblank is posted on their website in which the prospective applicants make their job requestby filling them.Advantages of external recruitment

i.It enables affirm to get new and fresh ideas from the new recruitsii.This provides a variety of applicants for the company to pick from.

iii.Internal recruitments tend to cause little or no disputes after the selection process as theemployees are most likely to cooperate with new recruits than the colleague

Disadvantages of external recruitment.i. Some forms of external recruitment are too lengthy and time wasting

ii. The firm may get the wrong person for the job since they dont know them well.iii. It may cost the company more to train the new employees to understand the company

policies

iv. It may demoralize the existing employee as it denies them a chance to progress theircareers.

MOTIVATION OF STAFF

Motivation is the process of driving an individual or a group to act in a certain way.i.e. itrefers to the energy and commitment with which an individual or group Performs a task orrole.At the most basic level, motivated staff works harder. A motivator is what drives an individual to act

in a particular way.

Keeping staff motivated is good for business. Here are some examples why:

Motivated workers are more productive and higher productivity usually means higherprofits.

In a service industry, workers who are well motivated will provide a better level of customer


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service, keeping the customers happy.

Staff who are well motivated are more likely to stay with the company. They grow inexperience and become even more valuable to their employer.

If a business successfully keeps the staff, the cost of recruiting and training new staff isreduced.

Financial incentives

These are the monetary benefits given to employees to drive them to perform. Money, and the way itis paid, can affect motivation to work.

1. Time rate or 'wages' Paying by the number of hours worked.

2. Piece rate Paying by the number of items (pieces) produced.

3. Overtime Extra pay for work done over and above normal workinghours. It is usually paid at a higher hourly rate, e.g. doubletime means twice the normal hourly rate.

4. Shift payments Usually paid for working unsocial hours such as nightwork.

5. Bonus payments A special single payment for achieving a target.6. Profit sharing A percentage of the company's profit is shared amongst the

workers.

7. Employee share ownershipschemes (ESOP)

Employees are given a chance to buy the company shares tobe part of the company ownership.

8. Performance related pay(PRP)

Employees are paid based on how well they perform on thejob. Those who perform well earn more.eg salaryincrements may be based on ones performance.

extra pay for difficult jobs Paying extra money for jobs with difficult working

conditions will usually encourage people to apply for the

work.A loyalty bonus can be used to persuade workers to stay with their employer

for a long period of time. Employees may not want to work

longer than their contracted hours but they can often be

persuaded to do so by receiving a higher rate of pay.

perks Is a payment in kind. Instead of giving money the employer

might provide:

A company car health insurance free uniform discounted products first class travel

It is often cheaper for the employer to provide goods ratherthan the money to buy them with. A good perk will makean employee reluctant to leave the business


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Question for review

You are the Human Resources Manager of a large company. Feedback suggests many of theworkers are unhappy and are looking for new jobs. Recent figures show productivity has fallen. Youknow that the Managing Director has said there will be no wage increases this year. Whatimprovements could you suggest at the next management meeting which would improve motivation

and productivity?

The Answer

A good answer will suggest introducing some of the following things:

Providing a pleasant room for staff to use during breaks. Providing subsidised meals or improving the existing canteen. Giving permanent contracts of employment An occupational pension scheme Introducing team working and giving teams more say in how things are done Advertising job opportunities internally Introducing a newsletter or regular briefing for all staff Rewarding staff with perks like company cars, insurance schemes or discounted goods

Disadvantages/Limitations of financial incentives1. Some financial incentives such as piece rates may interfere with product quality as the

employees strive to produce more to earn more.

2. A system based on quantity produced may affect the level of earnings to the employees duringbreak downs.

3. Payments based on performance may not be adequate since there may be no acceptablestandard of performance.

Non financial benefitsThese are the non monetary incentives given to the staff to encourage them to perform well.Managers can get the best from their staff by use of these incentives. These are:1. Delegation/Empowerment

This is the assigning of the authority to carry out a task to the juniors by the senior managers.This motivates staff as they feel important, recognized and empowered to act for theorganization.

2. Job enrichment:This is the making work more interesting by improving the content and variety of tasksundertaken by an employee. Content of the job can be improved by giving more responsibilities

to the employees.3. Promotions

Employees can also be motivated by giving them a chance to progress in their careers throughpromotions.

4. RecognitionVerbal or written appreciation and recognition of any good work effort made by an employee


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tends to motivate the employee to work hard. E.g awarding good performance with certificates.5. Job rotation

Is where employees are not specialized on doing one task but are rather moved from one task orjob to the other. This is meant to reduce boredom besides make workers learn new skills.

Staff TurnoverThis is the number of employees leaving a business in a period of one.Causes of labour turn over1. Poor pay

Employees who feel they are underpaid by their current employer will quit to join one whomthey feel is paying well for their services.

2. Lack of job securityEmployees who feel threatened of losing their jobs quit in search for a secure job.

3. Lack of growthIf an employee is feels he/she has stagnated with no opportunity to advance in his career throughpromotions or training, may leave in search for an employer who can offer such opportunities.

4. Poor working conditionsCompanies that provide poor working facilities that make working difficult or dangerous tent tolose their workers to those that have good and secure work environments.

Effects of high labour turnover

1.High costs of recruitmentHigh labour turnover increases the cost of recruiting, hiring and training new workers for thejob.

2.Effect on productionWhen employees join and leave the organization this interferes with the production schedules ofthe company. Such loss of production may cause loss of sales orders.

3.Effects on reputationProspective employees may avoid companies with high labour turnover since they may feelmore insecure joining companies that too many people are already leaving because ofdissatisfaction.


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Motivation TheoriesTaylors Scientific Management Theory

Frederick Winslow Taylor (18561917) put forward the idea that workers are motivated mainly bypay.His Theory of Scientific Management is based on the assumptions that:

1. Workers naturally dislike work and need to be closely supervised and controlled.2. Therefore managers should break down production into a series of small tasks(division of

labour)

3. Workers should then be given appropriate training and tools so they can work as efficiently aspossible on one set task (specialisation).

4. Workers are then paid according to the number of items they produce in a set period of time(piece-rate pay).

5. Man is a rational economic animal concerned with maximising his economic gain;6. People can be treated in a standardised fashion, like machinesTaylor had a simple view about what motivated people at work - money. He felt that workers shouldget a fair day's pay for a fair day's work, and that pay should be linked to the amount produced (e.g.piece). Workers who did not deliver a fair day's work would be paid less (or nothing). Workers whodid more than a fair day's work (e.g. exceeded the target) would be paid more.

Taylors theory and management style

Taylors approach has close links with the concept of an autocratic management style (managerstake all the decisions and simply give orders to those below them)However workers soon came to dislike Taylors approach as they were only given boring, repetitivetasks to carry out and were being treated little better than human machines.

Firms could also afford to lay off workers as productivity levels increased. This led to an increase instrikes and other forms of industrial action by dissatisfied workers.

The implications of Taylor's theory for managing behavior at work were:

- The main form of motivation is high wages, linked to output- A manager's job is to tell employees what to do- A worker's job is to do what they are told and get paid accordingly

Weaknesses in Taylor's Approach1. The most obvious weakness in Taylor's approach is that it ignores the many differences

between people. There is no guarantee that a "best way" will suit everyone.2. Secondly, whilst money is an important motivation at work for many people, it isn't for

everyone. Taylor overlooked the fact that people work for reasons other than financialreward.

3. Workers dislike Taylors approach as they were only given boring, repetitive tasks to carryout

4. Worker were not empowered but were being treated little better than human machines. Thisis a great de-motivator.


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H e r z b e r g t w o f a c t o r t h e o r y

Introduction

Herzberg's Two Factor Theory is a "content theory" of motivation"(the other main one is Maslow's

Hierarchy of Needs).

Herzberg analysed the job attitudes of 200 accountants and engineers who were asked to recall when

they had felt positive or negative at work and the reasons why.

From this research, Herzberg suggested a two-step approach to understanding employee motivation

and satisfaction:

Hygiene Factors

Hygiene factors are based on the need for a business to avoid unpleasantness at work. If these

factors are considered inadequate by employees, then they can cause dissatisfaction with work.

Hygiene factors include:

Company policy and administration Wages, salaries and other financial remuneration Quality of supervision Quality of inter-personal relations Working conditions Feelings of job security
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Motivator Factors

Motivator factors are based on an individual's need for personal growth and they are intrinsic factors

i.e comes from within the job. When they exist, motivator factors actively create job satisfaction.

If they are effective, then they can motivate an individual to achieve above-average performance and

effort.

Motivator factors include:

Status Opportunity for advancement Gaining recognition Responsibility Challenging / stimulating work Sense of personal achievement & personal growth in a job

Similarities of Herzberg and Maslows Theories

There is some similarity between Herzberg's and Maslow's models. They both suggest that needshave to be satisfied for the employee to be motivated. However, Herzberg argues that only the

higher levels of the Maslow Hierarchy (e.g. self-actualisation, esteem needs) act as a motivator. The

remaining needs can only cause dissatisfaction if not addressed.

Applying Hertzberg's model to de-motivated workers

What might be the evidence of de-motivated employees in a business?

i. Low productivityii. Poor production or service quality

iii. Strikes / industrial disputes / breakdowns in employee communication and relationshipsiv. Complaints about pay and working conditions

According to Herzberg, management should focus on rearranging work so that motivator factors cantake effect. He suggested three ways in which this could be done:

i. Job enlargementii. Job rotation

iii. Job enrichment

M a s l o w s h i e r a r c h y o f n e e d s

Introduction

Maslow's Hierarchy of Needs is a "content theory" of motivation"(the other main one is Herzberg's

Two Factor Theory).

Maslow's theory consisted of two parts:

(1)The classification of human needs,(2) Consideration of how the classes are related to each other
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Classification of human needs

Maslow believed that these needs are similar to instincts and play a major role in motivating

behaviour.Physiological,security,social, and esteem needs are deficiency needs (also known

asD-needs), meaning that these needs arise due todeprivation. Satisfying these lower-level needs is

important in order to avoid unpleasant feelings or consequences.

Maslow termed the highest-level of the pyramid as growth need (also known as being needs orB-

needs). Growth needs do not stem from a lack of something, but rather from a desire to grow as a

person.

Five Levels of the Hierarchy of Needs

There are five different levels in Maslows hierarchy of needs:

1. Physiological NeedsThese include the most basic needs that are vital to survival, such as the need for water, air, food

and sleep. Maslow believed that these needs are the most basic and instinctive needs in the

hierarchy because all needs become secondary until these physiological needs are met.

2. Security NeedsThese include needs for safety and security. Security needs are important for survival, but they

are not as demanding as the physiological needs. Examples of security needs include a desire for

steady employment, health insurance, safe neighborhoods and shelter from the environment.

3. Social NeedsThese include needs for belonging, love and affection. Maslow considered these needs to be less

basic than physiological and security needs. Relationships such as friendships, romanticattachments and families help fulfill this need for companionship and acceptance, as does

involvement in social, community or religious groups.

4. Esteem NeedsAfter the first three needs have been satisfied, esteem needs becomes increasingly important.

These include the need for things that reflect on self-esteem, personal worth, social recognition

and accomplishment.

5. Self-actualizing NeedsThis is the highest level of Maslows hierarchy of needs.Self-actualizingpeople are self-aware,

concerned with personal growth, less concerned with the opinions of others and interested

fulfilling their full potential.
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How does the Hierarchy Work?

A person starts at the bottom of the hierarchy (pyramid) and will initially seek to satisfy basicneeds (e.g. food, shelter)

Once these physiological needs have been satisfied, they are no longer a motivator. Theindividual moves up to the next level

Safety needs at work could include physical safety (e.g. protective clothing) as well asprotection against unemployment-job security, loss of income through sickness etc)

Social needs recognise that most people want to belong to a group. These would include theneed for love and belonging (e.g. working with colleague who support you at work, teamwork,

communication, company treats )

Esteem needs are about being given recognition for a job well done. They reflect the fact thatmany people seek the esteem and respect of others. A promotion at work might achieve this

Self-actualisation is about how people think about themselves - this is often measured by theextent of success and/or challenge at work

Maslow's model has great potential appeal in the business world. The message is clear - if

management can find out which level each employee has reached, then they can decide on suitable

rewards.

Problems with the Maslow Model

There are several problems with the Maslow model when real-life working practice is considered:

i. Individual behaviour seems to respond to several needs - not just one


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ii. The same need (e.g. the need to interact socially at work) may cause quite different behaviour indifferent individuals

iii. There is a problem in deciding when a level has actually been "satisfied"iv. The model ignores the often-observed behaviour of individuals who tolerate low-pay for the

promise of future benefits.

v. There is little empirical evidence to support the model. Some critics suggest that Maslow's modelis only really relevant to understanding the behaviour of middle-class workers in the UK and the

USA (where Maslow undertook his research).

Review excercises: Managing other people


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

Batch production

This method of production involves the manufacture of an item being divided into a number of smalltasks. A collection (or 'batch') of items each have one of these tasks completed, and then the batchmoves onto the next manufacturing task.

In other words, several items have the same task performed on each of them and then they move ontothe next task together in a group.

This production method can result in the build-up of large amounts of stock and work-in-progress.This may be a problem if the business is in a fashion industry, where customers' tastes can changequickly and unpredictably, leaving the business with much stock that it is unable to sell.

Flow production

This method of production involves the tasks which were identified in 'batch' production becomingcontinuous for each unit, often with the use of a moving conveyor belt (e.g. a car assembly line). Eacunit is produced individually, instead of being produced in batches.

This type of production is usually undertaken by large businesses. This method of production was firestablished by Henry Ford in the 1920s, when he developed the world's first automated productionline. This involved each car passing the workers on a moving conveyor belt, rather than the workerscontinually moving to the car. This method should boost labour productivity and reduce average cost

of production even further.

It is often argued that flow production leads to high rates of alienation, demotivation and absenteeismamongst the employees - it is for these reasons that much machinery is today used on these productiolines to perform simple, repetitive tasks which humans may easily become bored in performing.

Cell production


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This method of manufacturing an item organises workers into 'cells' within the factory, with each celcomprising several workers who each possess different skills. Each cell is independent of the othercells and will usually produce a complete item, and each cell will usually have an output target toachieve for a given period of time.

It is often argued that if the group of workers in each cell can see the completion of the finishedproduct, then their work will have more meaning and therefore their levels of motivation and jobsatisfaction will be greatly enhanced.

Research and Development (R&D)

All businesses need to develop long-term strategies, and an important part of this strategy must be thecontinual development and launch of new products, or amendments made to existing products. This ithe purpose of research and development (R&D).

R&D can basically be defined as:

'carrying out extensive scientific research into the product and its design, and then developing a

range of prototypes, each to a slightly different specification.'

The prototype which best meets the needs of the customers and the business is then likely to becommercialised.

The development of products can take several years to complete and many businesses spend a hugeamount of money on this process (e.g. Unilever spent over 600 million on R&D in 1997). It canoften be a very risky process, since much money can be spent on ideas that will never be

commercialised.

It is within the 'sunrise' industries (i.e. industries which are fairly young and have rapid growthpotential, such as computers and aerospace) that extensive R&D spending today can result in a hugecompetitive advantage in the future.

The benefit of being the first company to launch a new, innovative product is immeasurable, since thcompany can charge a high price and build up a strong market share as it faces no competition.

It is estimated that only about one product in the pharmaceutical industry reaches thecommercialisation stage (i.e. launched onto the market) for every ten which are developed and test-

marketed. Therefore, the company will have massive R&D costs to recoup when it actually launches new product, and it will probably take several years before it will have broken-even and covered allthe R&D costs.

The businesses which are most likely to succeed in the future are those which develop more newproducts than their closest rivals, bring their new products to the market in less time than their rivals,compete in more product- and geographic-markets than their rivals, and provide very strong after-


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sales service to customers.


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Quality

Total Quality Management (T.Q.M)

This is the attempt by a business to stop errors and waste from occurring at all levels within theorganisation, and to try to encourage all employees to make 'quality' paramount within their dailyactivities (whether in production, marketing or personnel). There are a number of components ofT.Q.M:

1. Internal relationships between workers and their superiors and subordinates are seen to be asimportant as the external relationships that exist between the business and its customers andsuppliers.

2. TQM must be seen to be a policy that is followed by, and has the commitment of, all workersfrom senior management to shop floor employees.

3. The business must monitor all its activities and processes in order to identify any areas forimprovement and to ensure that quality is being achieved.

4. Team-working is important, since a group of people working together will develop a widerrange of skills, co-operation, and higher motivation than if workers were performing repetitivtasks on their own.

5. Regular market research must be undertaken to ensure that customers are happy with the leveof service that they receive (any complaints can be used to improve the existing systems).

Quality Circles

This is a group of workers that meets at regular intervals during the working week in order to identifyany problems with quality within production, to consider the alternative solutions to these problems,and to then recommend to management the solution that they believe will be the most successful.

The members of the quality circle are also involved in the implementation and monitoring of thesolution.

This should help to improve the level of motivation amongst the workers because it makes eachperson in the group feel valued and that they are making a significant contribution to theimprovements on the factory-floor.

Zero Defects

This is the ultimate objective for a business, to produce every product with no defects, thereforeeliminating waste and the time taken to correct mistakes.

Zero defects can lead to an improved business and customer reputation, as well as increasing levels oboth sales and profitability. In order for the objective of zero defects to be achieved, it requires theinvolvement of every employee in the business, making sure that they are all committed and suitablytrained.


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Continuous Improvement (Kaizen)

Kaizen is a Japanese word which means 'change for the better'.

A business will often be facing increasing demands from customers to add new features to their

products, as well as facing pressures from their competitors who are producing new and improvedproducts, or offering improved after-sales service.

The business will need to continually update and improve their products and marketing, in order tostay ahead of their competitors and boost revenue and profitability.

It is widely held that any aspect of the business can be improved, not just the production processesand, as with zero defects, it is vital that every employee in the business is involved in this philosophynot simply those in the production department, but also those in marketing, finance and personnel.

Kaizen aims to eliminate waste, and reduce both the time and the costs of production. It links in with

other concepts such as TQM, quality circles, productivity improvements and new productdevelopment.

Quality Standards

The British Standards Institution (BSI) is the body that is responsible for setting quality andperformance standards in UK industry.

The BSI 'kitemark' on a product implies to customers that it has been manufactured and produced toa high level of quality, and will be fit for the purpose for which it was advertised.

Quality assurance

refers to the attempt to achieve customer satisfaction, by ensuring that the business sets certain qualitstandards and publicises the fact that these standards are met throughout the business.

British Standard 5750 (BS 5750) was the most common quality certification in the UK. It is nowknown as ISO 9000, which is an international standard that tells customers that a business has reachea required level of quality in its products and processes.

Quality of output is vital for retaining customer loyalty and, therefore, it is necessary for quality to bean important consideration in the design, the production, the distribution, the sale and the after-sales

service of products.

Employee involvement and participation in quality programmes (e.g. quality circles and suggestion-schemes) will serve two purposes:

1. Improve the overall quality of the output and processes.2. Help motivate the workers by making them feel that their contributions and their suggestions


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are highly valued.

Quality control

is the process of checking the quality and the accuracy of raw materials and supplies as they arrive at

the business, and also of the finished products as they leave the business en route to retailers andcustomers.

This is usually carried out either by quality inspectors or by the employees themselves. Thephilosophies of zero defects and Kaizen require stringent quality control systems, in order to reducethe costs and time associated with both waste and the correction of low quality output.


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Stock ControlThis is the system used to ensure that the business always has sufficient stock available to meetcustomer requirements.

Re-Order Levels

This is the minimum amount of stock that a business will hold before it re-orders from itssuppliers. The re-order level will vary from business to business and from industry to industry.

For example, a supermarket is likely to have a higher re-order level than a car dealer, since in the timtaken to receive its supplies, a supermarket is likely to sell far more stock than a car dealer.

Re-Order Quantities

The re-order quantity is the amount of stock and raw materials that a business orders from itssuppliers each time it reaches its re-order level. This again will vary from business to business andfrom industry to industry.

For example, a business selling fast-moving consumer goods (e.g. chocolate bars or baked beans) islikely to order a far larger amount of stock from its suppliers than a manufacturer of goods with aslower stock turnover (e.g. televisions or washing machines).

There are several factors which will influence the amount of stock which a business orders,

including:

1. Lead times.2. The expected level of customer demand.3. The costs of stockholding.4. The type of stock, whether it is perishable or durable.

Buffer Stocks

This is the minimum stock level which will be held by a business to meet any unexpectedoccurrences.

For example, A sudden large order from a customer, deliveries of raw materials not arriving on time,

or computer re-ordering systems breaking down.

Lead Times

This is the amount of time that elapses between a business placing an order with a supplier for morestock or raw materials, and the delivery of the goods to the business.

The business will wish the lead-time to be as short as possible, so that it can meet its customer orders


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and minimise the time between paying for the stock and receiving the revenue from the customer.

However, this may not happen due to a number of factors, such as delays in the supplier receiving theorder, or the breakdown of the suppliers' lorries delivering the stock to the business.

An effective stock control system, combining the above four elements, can be seen below:

From this diagram, it can be seen that:

1. The re-order level (i.e. the amount of stock remaining when an order is placed) is 20,000 unit2. The re-order quantity (i.e. the amount of stock ordered from a supplier) is 20,000 units.3. The buffer stock (i.e. the minimum stock holding) is 10,000 units.4. The lead-time (i.e. the time delay between placing an order for stock and receiving it) is 8

days.

Stock Rotation

Many businesses use a stock rotation system. This is the process of ensuring that the older batches ofstock are used first rather than the newer batches, in order to avoid the possibility that the older stockwill become obsolete or go past their sell-by-date.

This is often referred to as a First In First Out (F.I.F.O) system, to encourage the older batches ofstock to be used first, therefore avoiding the possibility that the older stock will be left in a warehouspossibly becoming unusable.

Link to Information Technology (C.A.D/C.A.M)

The production process and stock control systems in a business can be assisted by the use ofInformation Technology (I.T).

Sophisticated software packages can enable a business to keep detailed and accurate records on itspurchases of stock and its sales to customers, using such systems as Electronic Point of Sale


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(E.P.O.S).

This records every transaction made by a business and can, therefore, enable it to monitor its stocklevels and sales of products to a 100% level of accuracy. This system can automatically re-order stocwhen numbers fall to a certain level in the warehouse, as well as monitoring the quantity of each

component that is used in the production process.

This enables a tight control to be kept on both costs and waste, as well as recording the amount ofrevenue received from customers and any outstanding customer debts.

Computer Aided Design (C.A.D) is the use of sophisticated computer software to design three-dimensional images of products quickly and relatively cheaply.

Computer Aided Manufacturing (CAM) is the use of computers and software for a wide variety ofproduction tasks, including automated production lines and stock control systems.


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Lean ManagementLean management/production is the term given to a range of measures traditionally used by

businesses in an attempt to improve efficiency by reducing waste and costs of production.

such measures includes:

(a)Just in time(JIT)(b)Cell production(CP)(c)Bench marking(BM)(d)Time based management

Just-In-Time

This is a method of manufacturing products which aims to minimise:

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

Raw materials and supplies arrive at the factory as they are required, and consequently there is verylittle stock sitting idle at any one time. Each stage of the production process finishes just before thenext stage is due to commence and therefore the lead-time is significantly reduced.

With a just-in-time production system, the level of production is related to the demand for the output(i.e. the number of orders) rather than simply producing finished goods and waiting for orders. Thismeans that raw materials and stock only needs to be ordered from suppliers as required - this reducesthe amount of money tied up in stocks, and leaves more money available for investment elsewhere.

The advantages of a just-in-time production system are:

1. Cashflow is improved, as less money is tied up in raw materials, work-in-progress and finishegoods.

2. Less need for storage space for raw materials and finished goods.3. The business builds up strong relationships with its suppliers.4. Communication and co-operation between the marketing and the production departments are

improved.

The disadvantages of a just-in-time production system are:

1. The business may struggle to meet orders if their suppliers fail to deliver the raw materials ontime.

2. The business is unlikely to 'bulk-buy' its raw materials and, therefore, it may lose the benefit oachieving economies of scale.

3. Buffer stocks are minimal and this may lead to the business having to reject customer ordersrequiring delivery immediately.


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Cell Production

This method of manufacturing an item organises workers into 'cells' within the factory, with each celcomprising several workers who each possess different skills.

Each cell is independent of the other cells and will usually produce a complete item, and each cellwill usually have an output target to achieve for a given period of time.

It is often argued that if the group of workers in each cell can see the completion of the finishedproduct, then their work will have more meaning and therefore their levels of motivation and jobsatisfaction will be greatly enhanced.

This method of production is often combined with the just-in-time approach.

The advantages of cell production are:

1. Improved job satisfaction and motivation.2. Improved quality as the group of workers take responsibility for the output.3. Multi-skilling of workers means that job rotation can occur.4. Stockholdings are reduced (leaving less money tied up in stocks).5. The factory space can be used more efficiently.6. Lead-times are reduced.

The disadvantages of cell production are:

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

Benchmarking

This refers to a business finding the best methods and processes that are used by other businesses, andthen trying to emulate these in order to become more efficient in its operations.

Benchmarking can be used in all areas and processes in a business, not just for production.

For example, it can be used to improve customer service, advertising campaigns, Human Resource

Management, and budgeting procedures.

Data for benchmarking is collected and used with the full co-operation of the other businesses, andoften the results will help both businesses to improve their systems and procedures.


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There are several stages involved in implementing a benchmarking system:

1. Researching the areas in a business which need improving.2. Deciding how an improvement in these areas can be measured.3. Identifying 'best practice' in other businesses.4.

Agreeing the exchange of information with other businesses.5. Comparing the 'best practice' with the existing processes, systems and procedures in thebusiness.

6. Altering the processes, systems and procedures in order to improve performance.7. Evaluating how successful the changes have been.

In order for benchmarking to be successful, the business must ensure that firstly every employee iscommitted and involved in the system, (from

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