MANAGEMENT OF
BUSINESS
FOR CAPE® EXAMINATIONS
JEROME PITTERSON
CAPE is a registered trade mark of the
Caribbean Examinations Council (CXC®).
MANAGEMENT OF BUSINESS for CAPE®
EXAMINATIONS is an independent
publication and has not been authorised,
sponsored, or otherwise approved by CXC.
Macmillan Education
4 Crinan Street, London, N1 9XW
A division of Macmillan Publishers Limited
Companies and representatives throughout the world.
www.macmillan-caribbean.com
ISBN 978-0-230-40043-6
ISBN 978-0-230-48319-4 AER
Text © Jerome Pitterson, 2014
Design and illustration © Macmillan Publishers Limited, 2014
The author has asserted his right to be identified as the author of this
work in accordance with the Copyright, Designs and Patents Act 1988.
First published 2014
All rights reserved; no part of this publication may be reproduced,
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The author and publishers would like to thank Judy Sewsaran
for her assistance in preparing this book.
Author’s acknowledgement: I want to thank God for the knowledge
and strength he has bestowed on me to complete this text successfully.
Sincere gratitude is also extended to my family, for their support
and inspiration throughout this process, and to the students I have
taught for their encouraging words and who are waiting to see
this publication. Thanks to everyone who had a part to play in the
completion of this book.
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The author and publishers are grateful for permission to reprint the
following copyright material:
Extract from Functions of the bank by Caribbean Development Bank
© Caribbean Development Bank. Reprinted by permission of the Bank.
Extract from ‘Costing’ by T. Lucey © 2000, Cengage Learning EMEA
Ltd. Reproduced by permission of Cengage Learning EMEA Ltd.
Extract from http://www.entrepreneur.com/encyclopedia/business-plan
with permission of Entrepreneur Media, Inc. © 2014 by Entrepreneur
Media, Inc. All rights reserved.
Extract from ‘Innovation and Entrepreneurship’ by Peter F. Drucker
© Peter F. Drucker. First published in 2007 by Taylor & Francis Ltd.
Extract from ‘Organizational Behaviour’ by Stephen P. Robbins and
Timothy A. Judge, 15th Edition, © 2013. Reprinted by permission of
Pearson Education, Inc., Upper Saddle River, NJ.
Extract from info@sbaj.org.jm © Small Business Association of Jamaica.
Reprinted by permission of the organization.
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3
Contents
List of figures and tables
Introduction
7
10
UNIT 1 MANAGEMENT PRINCIPLES AND
PROCESSES
11
MODULE 1 BUSINESS AND ITS ENVIRONMENT 12
1 Economic and Legal Structures
Types of economic activity
Economic sectors and legal structures
The private sector
The public sector
Privatisation
Multiple Choice Questions
Extended Essay Questions
12
12
14
15
23
26
27
28
2 Business Objectives
Nature, role and importance of objectives
Business ethics and social responsibility
Obligations of the firm to stakeholders
Good corporate governance
Importance of business ethics and integrity
Code of ethics
Government’s response to social irresponsibility
Multiple Choice Questions
Extended Essay Questions
29
29
32
34
34
34
34
35
35
36
3 Decision Making
Essential features of information
Significance of qualitative versus quantitative
decision making
The stages of decision making
Factors affecting decision making
Multiple Choice Questions
Extended Essay Questions
37
37
4 Caribbean Business Environment
and Globalisation
The nature and structure of Caribbean
business organisations
Caribbean business culture
The growth of multinational corporations
in the Caribbean
The impact of trade liberalisation and globalisation
37
38
39
45
46
47
47
48
49
50
Protectionism
Other barriers to trade
Multiple Choice Questions
Extended Essay Questions
54
55
56
57
MODULE 2 THE MANAGEMENT OF PEOPLE
58
5 The Functions and Theories of Management
The need for and nature of organisations
The major management theories
The functions of management
The roles of management
Multiple Choice Questions
Extended Essay Questions
58
58
58
64
65
67
67
6 The Organisation and its Structure
Classification of organisations
Factors influencing the classification of organisations
Characteristics of the formal organisational structure
Centralisation and decentralisation
Multiple Choice Questions
Extended Essay Questions
68
68
72
73
75
76
76
7 The Theory and Application of Motivation
Factors that stimulate and influence motivation
Theories of motivation
Financial and non-financial motivational strategies
Implications for managers
Multiple Choice Questions
Extended Essay Questions
77
77
78
80
85
87
87
8 Leadership
Leadership theories
Theory X and Theory Y
The Trait Theory
Leadership skills
Leadership styles
Factors influencing the choice of leadership style
Leadership roles
Informal leadership
Multiple Choice Questions
Extended Essay Questions
88
88
88
89
90
92
94
95
95
96
97
9 Team Management and Conflict
The nature of teams
98
98
4 CONTENTS
Stages of team development
Types of formal group
Characteristics of effective teams
Team or group cohesiveness
Evaluation of team work
Benefits of team management to the organisation
Conflict management
Multiple Choice Questions
Extended Essay Questions
99
99
99
100
101
101
101
106
106
10 Management of Change
Factors that may cause change in the organisation
Differences between leading and managing change
Resistance to change
Strategies for managing change
The importance of communication in the
management process
Multiple Choice Questions
Extended Essay Questions
107
107
108
108
110
11 Communication in Business
Types of communication
The communication process
Channels of communication
Factors influencing the choice of channel used
Lines of communication
Barriers to effective communication
Reducing barriers to communication
Multiple Choice Questions
Extended Essay Questions
113
113
113
114
116
117
119
120
122
123
12 Human Resource Management
The role and importance of human
resource management
The functions of human resource management
Labour–management relations
Laws affecting health and safety in the workplace
Multiple Choice Questions
Extended Essay Questions
124
MODULE 3 BUSINESS FINANCE AND
ACCOUNTING
13 The Need for Capital and Sources of Finance
The need for capital
Sources of finance
Criteria for seeking finance
How to choose from these sources of funds?
Money and capital markets and international
financial institutions
The money and capital markets
Multiple Choice Questions
Extended Essay Questions
111
112
112
124
124
131
134
135
136
137
137
137
140
140
143
143
145
147
147
14 Accounting Information and
Financial Statements
Why do we need accounting records?
Internal users of accounting information
External users of accounting information
Getting started with accounting
Components of financial statements
Multiple Choice Questions
148
148
148
149
149
152
158
15 Financial Statements Analysis
Financial analysis
Importance of financial analysis
Ratio analysis
Types of ratio
Multiple Choice Questions
Extended Essay Questions
159
159
159
159
160
166
166
16 Budgetary Accounting
Projections
The budgeting process
Categorisations of budgets
Operational budgets
Types of budget
Budgetary control
Multiple Choice Questions
167
167
167
168
168
168
170
172
17 Investment Appraisal
Investment
Investment appraisal
Analytical methods of appraisal
Limitations of investment appraisal
Comparison of methods of appraisal
Multiple Choice Questions
173
173
173
173
178
178
179
END OF UNIT ASSESSMENT
180
UNIT 2 APPLICATIONS IN MANAGEMENT
184
MODULE 1 PRODUCTION AND OPERATIONS
MANAGEMENT
185
18 The Nature of Production
The production process
Factors of production
What to produce?
Production methods
Factors that influence the method of production used
When to produce?
Location of production
Multiple Choice Questions
Extended Essay Questions
185
185
185
186
186
190
191
191
195
195
19 Forecasting Techniques
Forecasting techniques
196
196
CONTENTS
Qualitative forecasting techniques
Quantitative forecasting techniques
Multiple Choice Questions
Extended Essay Question
196
199
202
203
20 Production Design Strategies and
Capacity Planning
Product design planning
Product design strategies
Capacity planning
Capacity utilisation
Options available to increase capacity
Economies and diseconomies of scale
Diseconomies of scale
Business layout
Multiple Choice Questions
Extended Essay Questions
204
204
204
206
207
208
208
210
210
215
215
21 Costing
Direct costs
Indirect costs
Fixed costs
Variable costs
Fixed costs per unit
Semi-variable cost
Approaches to costing
Including stock
Application of marginal costing
’Make or buy’ decisions
Multiple Choice Questions
Extended Essay Question
216
216
216
216
216
217
217
217
219
220
221
223
223
22 Inventory Management
Importance of inventory
Importance of inventory control
Inventory control management
Multiple Choice Questions
Extended Essay Question
224
224
224
225
228
229
23 Lean Production and Quality Management
Importance of quality
Dimensions of quality
Techniques for improving quality
Multiple Choice Questions
Extended Essay Questions
230
230
230
231
239
240
24 Productivity
Factors that affect productivity
Methods of measuring productivity
Methods of improving productivity
Multiple Choice Questions
Extended Essay Questions
241
241
243
243
246
246
25 Project Management
Critical Path Analysis (CPA)
Decision trees
Multiple Choice Questions
247
247
250
253
MODULE 2 FUNDAMENTALS OF MARKETING 254
26 The Concept of Marketing
The core marketing concepts
Multiple Choice Questions
Extended Essay Question
254
254
260
260
27 The Marketing Environment
The micro-environment
The macro-environment
Multiple Choice Questions
Extended Essay Questions
261
261
262
265
265
28 Marketing Research
Importance of conducting marketing research
Importance of developing a research plan
Stages of marketing research
Limitations of market research
Multiple Choice Questions
Extended Essay Questions
266
266
266
266
272
274
275
29 Principles of Segmentation
Market segmentation
Criteria for effective segmentation
Bases of segmentation
Consumer buying behaviour
The consumer decision-making process
(the buying process)
Factors influencing buying behaviour
Multiple Choice Questions
Extended Essay Questions
276
276
278
278
281
30 Product Management
The concept of product
Dimensions of the product mix
Product line and extension
The Boston Matrix
New product development process
The product lifecycle
Branding and packaging
Characteristics of services
Multiple Choice Questions
Extended Essay Questions
285
285
286
286
286
289
290
292
293
296
297
31 Pricing Decision
Introduction to pricing
Factors influencing pricing decisions
Pricing strategies
298
298
299
302
281
283
284
284
5
6 CONTENTS
Multiple Choice Questions
Extended Essay Questions
305
306
32 Distribution Management
The role of distribution in the organisation
Factors influencing distribution decisions
Types of distribution channel
Introduction to logistics strategy
Types of distribution strategy
Multiple Choice Questions
Extended Essay Questions
307
307
307
308
309
310
311
311
33 Promotion Strategy
The concept and objectives of promotion
Tools of promotion
Multiple Choice Questions
Extended Essay Questions
312
312
312
318
319
34 Internet Marketing
Development of internet marketing
Opportunities created by internet marketing
Challenges associated with internet marketing
The importance of e-commerce to
business organisations
Challenges created by e-commerce
Multiple Choice Questions
Extended Essay Question
320
320
321
322
322
323
325
325
MODULE 3 SMALL BUSINESS MANAGEMENT 326
35 The Nature and Characteristics
of Entrepreneurship
Corporate entrepreneurship (‘intrapreneurship’)
Social entrepreneurship
Characteristics of successful entrepreneurs
Benefits of entrepreneurship
Drawbacks of entrepreneurship
Multiple Choice Questions
Extended Essay Question
326
326
326
327
328
329
330
330
36 Economic Systems and Business Growth
The economy problem
Types of economic system
Criteria for measuring size and growth of businesses
A comparison of small firms and large firms
Strategies for growth
Multiple Choice Questions
Extended Essay Questions
331
331
331
334
335
338
343
343
37 Major Challenges and Opportunities Faced
by Small Businesses
Identifying successful business opportunities
Sourcing capital (finance)
344
344
344
Selection of business types
Determining a location
Globalisation and trade liberalisation
E-commerce
Intellectual property
Multiple Choice Questions
Extended Essay Question
345
345
345
345
346
347
348
38 Types and Nature of Assistance Available
to Small Firms
Government agencies
Non-government agencies
Financial institutions
Types of assistance offered to small businesses
Extended Essay Question
349
349
350
350
351
352
39 Preparation of a Business Plan for
a Small Business
Feasibility study
The business plan
Elements of a business plan
Multiple Choice Questions
Extended Essay Question
353
353
353
354
359
359
END OF UNIT ASSESSMENT
360
40 Internal Assessment
Choosing an appropriate topic or title for
your research
Introduction
Literature review
Writing your methodology
Presentation of data
Analysis of data
Interpretation of results
Conclusion and recommendation
References and citations
Appendices
Note to teachers
364
Glossary
372
Answers to Multiple Choice Questions
384
Index
386
364
365
366
367
368
369
370
370
370
370
370
7
List of figures and tables
Figures
Figure 17.1 NPV graph
178
Figure 1.1 An example of industry in the
primary sector
Figure 1.2 An example of industry in the
secondary sector
Figure 1.3 An example of industry in the
tertiary sector
Figure 1.4 Private-sector organisations
Figure 1.5 A sole-trader business
Figure 1.6 A public limited company
Figure 1.7 A cooperative business
Figure 1.8 A franchise
Figure 1.9 Public-sector organisations
14
15
16
19
20
21
24
Figure 19.1 Examples of common trends
Figure 19.2 A scatter diagram
Figure 20.1
Figure 20.2
Figure 20.3
Figure 20.4
Figure 20.5
Diseconomies of scale
Process layout
Product layout
Fixed-position layout
Cellular layout
210
211
212
213
214
Figure 2.1 The hierarchy of objectives
Figure 2.2 Scotiabank
31
33
Figure 3.1 The stages of decision making
38
Figure 4.1 Business culture factors
Figure 4.2 Digicel headquarters, Kingston
48
51
Figure 21.1
Figure 21.2
Figure 21.3
Figure 21.4
Figure 21.5
Fixed costs
Variable costs
Fixed costs per unit
Semi-variable costs
A breakeven chart
217
217
217
217
221
Figure 5.1 A basic system
Figure 5.2 The three levels of management
62
64
Figure 6.1
Figure 6.2
Figure 6.3
Figure 6.4
Figure 6.5
Figure 6.6
Figure 6.7
Figure 6.8
Figure 6.9
Functional organisational structure
Product organisational structure
Geographical organisational structure
Matrix organisational structure
Team organisational structure
Network organisational structure
Virtual organisational structure
Narrow span of control
Wide span of control
12
13
68
69
69
70
71
71
71
73
74
Figure 18.1
Figure 18.2
Figure 18.3
Figure 18.4
The production process
An example of job production
An example of batch production
An example of flow production
185
186
187
189
199
201
Figure 22.1 Stock control levels
Figure 22.2 Simpson Lumber Yard stock control
graph
Figure 22.3 A typical economic order quantity graph
Figure 22.4 Economic order quantity graph
for Questions 6–8
225
247
247
248
248
249
249
249
250
251
252
253
226
227
228
Figure 10.1 Managing change
110
Figure 11.1 The communication process
Figure 11.2 The flow of communication
113
118
Figure 25.1
Figure 25.2
Figure 25.3
Figure 25.4
Figure 25.5
Figure 25.6
Figure 25.7
Figure 25.8
Figure 25.9
Figure 25.10
Figure 25.11
Figure 12.1 The recruitment plan
125
Figure 26.1 Core marketing concepts
254
Figure 14.1 The double entry system
150
Figure 28.1 Stages in developing a research plan
267
Figure 16.1 The budgetary process
168
Figure 29.1 Market coverage strategies
Figure 29.2 The consumer decision-making process
277
282
Figure 7.1 Maslow’s Hierarchy of Needs
78
The sections of a node
Lines representing activity
Network diagram
New network diagram
Three possible situations in CPA
New diagram, using dummy activity
Network diagram
A decision tree
The revised decision tree
A more complex decision tree
Network diagram for Questions 1–3
8 LIST OF FIGURES AND TABLES
Figure 30.1 The Four Ps
Figure 30.2 Attributes of the product
Figure 30.3 Dimensions of the product mix
Figure 30.4 The Boston Matrix
Figure 30.5 New product development process
Figure 30.6 The four-stage product lifecycle
Figure 30.7 The five-stage product lifecycle
Figure 30.8 Extending the product lifecycle
Figure 30.9 Secondary packaging
285
285
286
287
289
290
291
291
293
Figure 31.1 Price ceiling
Figure 31.2 Price flooring
Figure 31.3 Penetration pricing and price
skimming compared
301
301
Figure 32.1 Types of distribution channel
Figure 32.2 One-channel intermediary
Figure 32.3 Two-channel intermediary
308
309
309
Figure 36.1 Market share illustrated in a pie chart
Figure 36.2 Diseconomies of scale
Figure 36.3 An example of conglomerate integration
335
337
339
Figure 40.1 Examples of statistical tools
369
304
Tables
Table 1.1 Benefits and problems associated
with a change in legal structure
23
Table 2.1 The firm’s social responsibilities
to stakeholders
34
Table 3.1 The decision-making process
Table 3.2 Possible impact of factors on a firm’s
decision making
Table 5.1 Contributions of classical theories to
modern organisations
Table 5.2 Contributions of modern theories
to modern organisations
Table 5.3 Mintzberg’s ten roles for top management
Table 8.1 An evaluation of different leadership styles
Table 9.1 An evaluation of conflict
management strategies
39
44
61
63
65
93
104
Table 11.1 An evaluation of communication methods 117
Table 11.2 Methods of overcoming barriers
to communication
121
Table 13.1 Advantages and disadvantages of
sources of capital
141
Table 14.1 Transactions illustrating the double
entry system
Table 14.2 Cash inflows and outflows
151
156
Table 15.1 Net profit figures for analysis
Table 15.2 Data for calculating investment
or shareholders’ ratios
Table 15.3 Data for calculating efficiency and
activity ratios
Table 17.1 KEP Industry initial capital outlays
and annual cash inflows
Table 17.2 initial capital outlays and annual
cash inflows for three projects
Table 17.3 Initial capital outlays and annual
cash inflows for two projects
Table 17.4 Forecasted data for Projects A and B
Table 17.5 An extract of discount factors for $1
Table 17.6 Investment information for
DGF Company Ltd
Table 17.7 Information for NPV/DCF analysis
Table 17.8 Comparison of methods of appraisal
159
162
163
174
174
175
175
176
177
177
178
LIST OF FIGURES AND TABLES
Table 19.1 Data for calculating simple
moving averages
Table 19.2 Data for Future Sales Ltd sales forecasts
Table 19.3 Data for least squares
regression calculation
Table 19.4 Data for Questions 5 and 6
Table 21.1 Calculating operating profit under
marginal costing
Table 21.2 Calculating operating profit under
absorption costing
Table 21.3 Production costs for Great Juices Ltd
Table 25.1
Table 25.2
Table 25.3
Table 25.4
Table 25.5
Table 25.6
Table 25.7
Getting ready for school
Getting ready for school (revised timings)
Information for critical path exercise
Information for critical path example
Activities by A Fisher Ltd
Expected values
Data from James Duncan’s
market research
200
200
201
203
218
218
222
248
248
249
249
250
251
252
Table 26.1 Overview of business concepts
259
Table 28.1 An evaluation of marketing
research techniques
272
Table 30.1 Possible responses from marketers
to characteristics of services
295
Table 31.1 Information for calculating price
elasticity of demand
Table 31.2 Degrees of elasticity
299
300
Table 33.1 Overview of types of advertising media
314
Table 36.1 The impact of economic systems
on business decision making
333
Table 40.1 Module content related to SBA topics
365
9
10
Introduction
This textbook is geared towards students studying CAPE®
Management of Business Units 1 and 2, including private
candidates. The text is divided into two units and gives
comprehensive coverage of the CAPE® Management of
Business syllabus, providing students with a wide knowledge
base of business concepts. Students will be furnished with
the information needed to do well in their CAPE®
examinations and the book forms a basis for higher studies.
The text also incorporates some ‘hard to find and explain’
concepts and so it is also an excellent resource for teachers.
The text breaks down accounting information so that
students without accounting knowledge from CSEC® level
will be able to understand the concepts of Module 3, Unit 1.
However, it also offers challenging exercises for those with a
strong accounting background.
The book gives a number of definitions, examples from
different territories and practice exercises to assess students’
understanding of the concepts. Each chapter is summarised
at the end and also incorporates multiple choice questions,
case studies which help students to think critically, and
extended essay-type questions.
The text also contains photographs, artwork and diagrams
to cater for visual learners, as well as worked examples of
accounting questions and tables to break down information
for ease of understanding, studying and remembering.
11
Unit 1
MANAGEMENT PRINCIPLES
AND PROCESSES
12
1
Module 1 Business and its Environment
Economic and Legal Structures
LEARNING OBJECTIVES:
At the end of this chapter students should be able to:
Identify the different types of business activity
Distinguish among the different types of business
activity
Distinguish between the private and public sectors
Describe the different private- and public-sector
businesses
Outline how each of the businesses is formed
Discuss the benefits and drawbacks of each type of
business
Identify examples of each type of business
Types of economic activity
T
he Caribbean business environment can be divided
into three types of economic or business activity.
These are discussed below.
Figure 1.1: An example of industry in the primary sector
Primary sector
The primary sector incorporates all the extractive industries,
including mining (for example, bauxite), fishing, forestry
and farming. In most cases, the products of the primary
sector are the raw materials that are used for secondary
production. For example, bauxite is used for manufacturing
aluminium and lumber is used in the building of furniture
and houses. The primary sector also includes the fishing and
agricultural industries.
Some Caribbean countries are heavily dependent on the
primary level of activity in order to earn foreign exchange.
Currently, some countries export large amounts of our raw
materials in their natural state instead of exploring the
products that could be produced by using those same
resources. This means that the secondary level of activity is
perhaps not explored as much as it could be. Dependence on
the primary sector presents the country with the following
advantages and disadvantages: