Business Studies Topic 1: Nature of Business 1. Role of business ● The nature of business Finished products are products that are ready for customers to buy and use. Business enterprises undertake many activities before they provide the product that has been demanded by consumers. Production refers to the activities undertaken by the business that combine resources to create products that satisfy customers’ needs and wants. Creation of extra or added value as raw materials are transformed into intermediate or finished products through various stages of production. Can be influenced by branding, resources used, profit margins etc. ● - Other functions Profit ○ Profit is what remains after all business expenses have been deducted from sales revenue. ○ Profit is the reward that business owners receive for assuming the considerable risks of ownership. - Employment ○ Business organisations attract employment by offering good pay and work conditions, career paths and promotions ○ Businesses provide 80% of all private sector jobs - Income Businesses generate income for: ○ employees (wages and salaries) ○ business owners (profits) ○ shareholders (dividends) The amount of income a business can generate as wages, salaries, profits or dividends depends largely on how successful it is in selling its products. - Choice ○ In our society, consumers have freedom of choice and the opportunity to purchase a variety of products at competitive prices - Innovation - ○ Research and development (R&D) leads to the creation of new products (inventions) and the improvement of existing ones (innovations). ○ ○ Innovation: Cars that can automatically park themselves Invention: Computers Entrepreneurship and risk ○ A person who transforms their ideas into a new business is called an “entrepreneur” - ○ An “entrepreneur” is someone who starts, operates and assumes the risk of a business venture in the hope of making a profit. ○ Entrepreneurs have to take risks because usually they explore untapped markets with no track record of proven consumer demand or guaranteed returns. ○ For example, an entrepreneur can be a local business. You may be familiar with “Pho An” Wealth and quality of life ○ ○ Business is a major creator of wealth within the Australian economy. ○ Quality of life refers to the wellbeing of an individual, and is a combination of material and non-material benefits Businesses produce a vast range of products that enable us to satisfy many and varied wants, which results in a higher standard of living. 2. Types of businesses ● Classification by size Characteristics Small Medium Large No. of employees Less than 20 employees 20−199 employees 200 or more employees Type of ownership Independently owned and operated by one or two people i.e. local hairdresser Owned and operated by a few people and/ or private shareholders i.e. motel Owned usually by thousands of public shareholders Market share — the proportion of total market sales the business has compared to competitors Small – usually local area. Not dominant in the industry Medium, due to dominance within a geographic region Large, especially for multinational corporations that dominate the markets Legal structure Sole trader (1 Person) Partnership (2-20) Partnership Private company Public company Sources of finance Owner (savings or a loan) – difficulty accessing loans Owner’s/partner’s own savings or a loan and/or private shareholders – easier to access loans Many sources – retained profit, sale of shares, loans from domestic and overseas institutions Decision making Owner responsible for majority of decisions. Simple and quick decision making Owner responsible for majority of decisions. Slower process due to influence of directors Complex – due to division of responsibilities between mgt levels; slow decision making because of many layers Examples Fruit shop, Hairdresser, Local Newsagent Hotels/motels, service clubs Coles, Apple, JBHIFI SMEs are defined by the Australian Bureau of Statistics as firms with fewer than 200 full-time equivalent employees and/or less than $10 million turnover. SMEs play an especially important role within the Australian economy. As consumers, we rely on a large number of SMEs to satisfy our needs and wants. These businesses also provide employment for about 7 million people. ● Classification by geographical spread Geographical spread is the presence of a business and the range of products across a suburb, city, state or country or the globe. Local business - Serve the surrounding area, very restricted geographical spread, small to medium in size. (Eg.Jenny’s fruit market, Tom’s mechanic’s,) National business - Operates within just one country, increased range of products, larger business (Eg. Coles, David Jones, Sportsgirl) Global business- Transnational/multinational corporation (TNC), large business with a home base in one country that operates subsidiaries in other countries. (Eg. Apple, Coca Cola, Westfield, Tiffany and Co) The FOUR main reasons businesses expand include: increase in sales; desire to increase profits; increase in market share; global consumers. ● Classification by industry sector INDUSTRY DEFINE Examples PRIMARY All businesses in which is directly associated with natural resources Mining, farming SECONDARY all businesses that take the output from the primary sector (raw materials) and process it into a finished or semi-finished product. production of cars, food and clothes QUATERNARY includes services that involve the transfer and processing of information and knowledge Teaching, journalism, banking QUINARY includes all services that were traditionally performed in the home Carpet cleaning, child care, restaurants TERTIARY all businesses that provide a service for other people Supermarkets, hairdressing, travel agents, dentists ● Classification by legal structure Sole trader - an unincorporated business entity — is a business that is owned and operated by one person and has unlimited liability. Unlimited liability occurs when the business owner is personally responsible for all the business’s debt. Partnership - an unincorporated business entity — is a business that is owned and operated by between two and 20 people and has unlimited liability. • The partnership can be made verbally or in writing or by implication. ● Types of companies Incorporation is the process that companies go through to become incorporated, i.e. to become a registered company and a separate legal entity Limited liability is a feature of corporate ownership that limits each owner’s financial liability to the amount of money he or she has paid for the business’s shares. Proprietary (private) company - has fewer than 50 shareholders and must have the words ‘proprietary limited’ (Pty Ltd) after its name. Government enterprises - government-owned and operated and provide essential community services. ● - Factors influencing choice of legal structure size of the business ownership Finances 3. Influences in the business environment ● Business environment - External environment: ○ Factors over which the business has little control such as government policy, technology, economic conditions and social attitudes - Internal environment: ○ Factors over which the business has some degree of control, such as products, location, resources, management and business culture ● External influences Economic influences : These changes are characterised by boom and recessionary periods in the economic cycle. Geographical factors: Australia’s geographic location within the Asia, Pacific region, changing demographic factors, the process of globalisation. Social influences: changes to fashion and culture, have the capacity to affect business sales and profits. - Three social issues that have had a significant impact on business practices include the growing awareness of the environment, the growing desire for businesses to provide family-friendly workplaces and the growing belief that businesses must cater for workplace diversity. Legal influences: the regulation (legal framework) within which a business must operate. Political influences: derived from state and federal government policies and include free trade policies and the process of deregulation. Institutions: influence business include government, regulatory bodies and other groups such as trade unions and employer associations. Technological influences can increase business productivity and communication. Each business is influenced by their competitors and should aim to achieve a sustainable competitive advantage. Factors influencing a business’s competitiveness include the ease of entry into a market for a new business, local and foreign competition, the marketing strategies employed by competitors and the number of competitors. Other external influences include changes in financial, labour and consumer markets ● Internal influences Product influences affect a range of internal structures and operations within the business. Location will have a direct impact on the sales and profits of some businesses. Factors to consider when choosing a location are: – visibility – cost – proximity to suppliers – proximity to customers – proximity to support services. Resources that influence a business are human, information, physical and financial. Management: Businesses can adopt a traditional hierarchical structure or a flat organisational structure. Business culture can be seen in the unwritten or informal rules that guide how people in the organisation behave. There are four essential elements of a business culture: values, symbols, rituals and heroes. ● - Stakeholders Shareholders have a direct influence on a business because they have voting rights on major business decisions. - Companies need to ensure that they maximise returns on their shareholders’ investments. Managers will influence organisational policies and procedures as well as employees’ productivity. Employees will influence the quality of an organisation’s products. To ensure its future viability, a business should consider the needs of their customers. Members of the community increasingly expect organisations to show concern for the environment and to be socially responsible. There is growing pressure for businesses to adopt ecologically sustainable operating practices. 4. Business Growth and decline - Business life cycle Feature Establishment Growth Maturity Post-Maturity Alternate Names Start-up, birth, beginning, commencement Take-off, growth spurt Market saturation, market hardening Regeneration, revival Goals Survival, and setting a firm foundation for future growth To constantly increase the average level of sales; to continue growing through mergers and takeovers; to diversify business activities To maintain profits at pre-existing levels To increase sales, cash flow and profits. Seek out and exploit previously unmet demand in new markets. Undertake further diversification and integration. Sell off any unprofitable non– correlated activities or assets. Sales Normally begin slowly and are somewhat erratic Rapid increase, especially in the early stages of the growth phase. New products introduced and some slow-selling products deleted Rate of growth slows and eventually flattens out; plateauing. Increase over time, especially as newer products are brought onto the market and new markets exploited Marketing Highlight product advantages by accentuating the product’s strengths. Undertake inexpensive promotion strategies Development of new products to satisfy market niches. Price discounts due to lower production costs. Extensive promotional activities and a widening distribution network. Desire to increase market share by using Maintain customer and brand loyalty through extensive advertising. Due to increased competition, relative market share may decline. Need to improve quality of products Conduct market research analysis to determine customers’ wants and identify any changes. Advertise in new market areas. Identify new market niches. mass-marketing techniques Profit Usually slow to begin with, occasionally a loss. Sometimes all the profits are put back into the business to ensure its survival. Should increase due to rising sales and falling production costs. As well, profits of other businesses acquired through acquisition (takeover) or merger are available for use. Rate of growth slows, eventually flattening out. Reflects what is happening to the level of sales Will improve over the long term, reaching higher levels than previously achieved Financial management Greatest source of start-up capital is from the owner’s personal savings. This can be supplemented with a loan from a financial institution, although such finance is often difficult to obtain because of the high risks involved. Use of sophisticated, computerised accounting procedures and systems. Raising finance tends to be easier. Main sources of finances are from financial institutions, the selling of shares or taking on more partners. All the correct procedures are in place, but their efficiency needs to be improved to protect the profit margin. Finances should be devoted to advertising and development of new products. May need to issue new shares to raise finance to assist with research and development Cash Flow Sometimes erratic, with a period of constant cash outflow in the early stages Difficulties can be experienced if the growth is too rapid. Adequate cash flow must be maintained to continue expansion. A credit policy needs to be organised. Forecasting of sales and expenditures becomes more crucial. If costs are not able to be controlled, then the cash flow position starts to deteriorate May decline in the short term as money is spent on research and development of new products and markets Costs Very high fixed costs. Major cost items include premises, equipment, raw materials and insurance Production costs tend to decrease due to economies of scale — that is, cheaper unit costs due to larger production runs. Business becomes more efficient in areas of administration, finance and production Keeping costs under control is now essential. Need to improve efficiency to keep costs down, otherwise profits will start to fall even further Research and development, marketing, integration and restructuring costs will be high in the short term. Customers Establishing a customer base large enough to sustain future viability is important. Need to develop a positive Production costs tend to decrease due to economies of scale — that is, cheaper unit costs due to larger production runs. Due to the size of the New markets exploited; business customers explore possibility of may sense a degree exporting of impersonality. Business is in danger of losing the relationship with customers. Attempt to accurately forecast customers’ needs. Business becomes more efficient in areas of administration, finance and production personalised service that gave the business success in previous stages. Management Informal, with all decisions being made by just one or two people. Decisions are often made ‘on the run’. Delegation of some responsibilities. Development of a formalised organisational structure. Introduction of line managers (supervisors). Clear lines of communication become essential. Specialist departments are established. Some functions may be outsourced. Leadership is crucial. Need to redefine the business’s objectives and vision. The organisation’s hierarchy becomes too entrenched and unable to quickly adapt to new conditions. Many new regulations and ‘red tape’ that will strangle any initiative Implement an organisational development program to realign the objectives, vision statement and organisational structure so it fits in with the new environment. Employees Normally only a few. Owner establishing work routines and building up relationships Increased specialisation of workforce requiring formal and informal training. Human resource strategies need to be implemented, especially in compiling job analyses and descriptions. .Introduce a work team approach, devolving responsibility to employees to avoid complacency. Introduce quality programs such as total quality management or quality circles. Open and honest Communication is essential. Employees need to be fully aware of where the business is headed, how the new goals are to be achieved and how individual jobs may be affected. Need to overcome possible resistance to change Failure rate Very high, up to 33% within the first year of trading Lessened, especially after successful mergers or takeovers, which result in increased diversification and reduced competition Will increase the longer the business takes to react and reverse plateauing sales Has been lessened compared to the maintaining or steady state phase Main Problems Lack of money with possible cash flow shortages Expanding too rapidly and therefore losing control of the business’s direction. Moving away from the core business activities — that is, what the business originally produced. Business may not have enough experience in the new areas. The need for finance to continue with the growth Rate of increase in sales begins to falter, sometimes flattening out. Loss of initial enthusiasm. Air of complacency starts to dominate. Anticipated sales may not eventuate due to inaccurate forecasts, poor timing or inappropriate marketing strategies. Initial costs are high, with cash flow shortfalls in the short term. Employees may become disenchanted with the restructuring and having to adapt to constant change. Risk level Extremely high, especially within the first few months. High degree of uncertainty Reduced, due to diversification and less competition. However, if borrowings increased too rapidly the business may leave itself exposed — that is, with liabilities far greater than its assets. If costs are not controlled and management becomes slow to respond to market demand, then cash flow falls and the level of risk increases Business Entity Usually sole trader or partnership Usually some form of incorporated entity; private or public company Normally, no change in the beginning although, if the Situation deteriorates, parts of the business may be sold off. Program of downsizing and selling off non-core business activities - Factors that can contribute to business decline - Voluntary and involuntary cessation Undertaking any new strategy involves some degree of risk. Risk minimisation techniques can help reduce the exposure to risk. Topic 2: Business Management 5. Nature of Management Manager: Someone who coordinates the business’s limited resources in order to achieve specific goals Traditional definition: The Process of coordinating a business’s resources to achieve its goals Contemporary definition: views management as the process of working with and through other people to achieve business goals in a changing environment - The features of effective management An effective manager needs to be good at: - Planning - Organising - Leading - Controlling - Skills of management These skills include: Interpersonal (people): skills needed to work and communicate with other people and to understand their needs Communication: exchange of information between people; the sending and receiving of messages strategic thinking: allows a manager to see the business as a whole and to take the broad, long-term view Vision: The clear, shared sense of direction that allows people to attain a common goal problem solving: broad set of activities involved in searching for, identifying and then implementing a course of action to correct an unworkable situation Decision making is the process of identifying the options available and then choosing a specific course of action to solve a specific problem Flexibility and adaptability to change skills Reconciling conflicting interests of stakeholders 6. Achieving business goals - Business goals Profits: Profit maximisation occurs when there is a maximum difference between the total revenue coming into the business and total costs being paid out Market share Market share refers to the business’s share of the total industry sales for a particular product Growth Businesses can achieve growth internally (organically) or externally - Internal growth could involve employing more people, Increasing sales, introducing innovative products, purchasing new equipment or establishing more outlets - External growth is achieved by merging with or acquiring other businesses. For example, when Coca-Cola Amatil purchased Neverfail Springwater and Mount Franklin bottled water suppliers Share price For companies that wish to be successful, they need to maximise the returns of their shareholders. This is achieved by keeping the share price rising and paying back healthy dividends Social goals Among the main social goals are: - Community service- many businesses financially support educational, cultural, sporting and welfare activities - Provision of employment- most large businesses do not regard employment of people as a main goal. However, many small businesses employ family members who otherwise might be unemployed - Social justice- the business adopts a set of policies to ensure employees and/or other community members are treated equally and fairly. Environmental goals Enlightened businesses are adopting practices of ‘recycle, renew and regenerate’, as well as adopting a ‘green’ attitude, and developing products and creating ideas that are environmentally friendly - Achieving a mix of business goals Businesses do not generally have only one specific goal; they have a range of goals because they have different stakeholders who each have different needs Managers therefore have a mix of goals that they try to achieve simultaneously Sometimes it can be difficult for a business to achieve all of its goals simultaneously because the links between the goals make some of them incompatible; that is, they conflict with each other Such a situation will force a business owner into deciding to adopt a compromised position; a trade off between conflicting - Staff involvement Staff involvement will only be fully successful if a business provides employees with the necessary expertise as well as recognising the importance of: - Innovation Ways to encourage innovation within the business include: - rewards given to employees with innovative ideas that become profitable a trustful management that does not excessively control (micromanage) people sufficient financial, management, human and time resources to achieve goals not fearing the consequences of making a mistake - Mentoring Mentoring is the process of developing another individual by offering tutoring and coaching, and modelling acceptable behaviour A formalised mentoring program is beneficial because: - it ensures access to mentors for all employees, regardless of levels of experience, backgrounds, gender or ethnicity - the participants in the mentoring relationship know what is expected of them. - it assists with the training and development of all employees and passes on the skills and abilities of the more experienced staff members - it provides career and psychological support for inexperienced employees - Motivation: Motivation refers to the individual, internal process that directs, energises and sustains a person’s behaviour - Training New employees also need some training, depending on their level of experience Multiskilled employees are better able to: - adapt to a rapidly changing technological environment - provide better customer service - participate effectively in work teams - gain promotion 7. Management approaches - Classical The classical approach to management stresses how best to manage and organise workers so as to improve productivity (output) - Scientific management is an approach that studies a job in great detail to discover the best way to perform it - Bureaucracy is the most efficient form of organisation and should have: - a strict hierarchical organisational structure - clear lines of communication and responsibility - jobs broken down into simple tasks; specialisation - clearly defined job roles - rules and procedures - impersonal evaluation of employee performance A manager using an autocratic leadership style tends to make all the decisions, dictates work methods, limits worker knowledge about what needs to be done to the next step to be performed, frequently checks employee performance and sometimes gives feedback that is punitive. - Behavioural The behavioural approach to management stresses that people (employees) should be the main focus of the way in which the business is organised A participative or democratic leadership style is one in which the manager consults with employees to ask their suggestions and then seriously considers those suggestions when making decisions - Contingency Contemporary management approaches represent major innovations in ways of thinking about management and appropriate management practices. It stresses the need for flexibility and the adaptation of management practices and ideas to suit changing circumstances 8. Management process - Different ways of coordinating key business functions for a SME Though a business can separate the key business functions into departments that perform their distinct roles, the functions are interdependent — each relies on the others to perform effectively. This means that the various business functions work best when they work together The coordination of key business functions depends on the broad goals of the business as well as its size. In large businesses, the key business functions are often separated into different divisions or departments headed by separate managers. - Operations Operations refers to the business processes that involve transformation or, more generally, ‘production’. It is a term that applies both to the manufacturing and the services sector Operations management consists of all the activities in which managers engage to produce a good or service - Production process There are three key elements of the production process in any business: - Inputs: the resources used in the transformation (production) process - Transformation processes: the conversion of inputs - (resources) into outputs (goods or services) - Transformed resources are those inputs that are changed or converted in the operations process. They include materials, information and customers. - Transforming resources are those inputs that carry out the transformation process. They enable the change and value adding to occur. They include human resources and facilities - Outputs: refer to the end result of a business’s efforts - the service or product that is delivered or provided to the consumer - Quality management: Refers to the strategy which a business uses to make sure its products meet customer expectations. 1. Quality control involves the use of inspections at various points in the production process to check for problems and defects 2. Quality assurance involves the use of a system so that a business achieves set standards in production 3. Quality improvement focuses on two aspects: total quality management and continuous improvement - Marketing Marketing is a total system of interacting activities designed to plan, price, promote and distribute products to present and potential customers - Traditional marketing attempted to pull customers to a product, whatever the cost - Contemporary marketing refers to those strategies that stress the importance of customer orientation. Everything the business does is directed towards putting the customer at the centre of its thinking - Identifying target market A target market is a group of customers with similar characteristics who presently, or who may in the future, purchase the product 1. Mass marketing approach - In a mass market, the seller mass-produces, mass-distributes and mass-promotes one product to all buyers 2. Market segmentation approach - Market segmentation occurs when the total market is subdivided into groups of people who share one or more characteristics based on four elements or dimensions: demographic, geographic, psychographic and behavioural 3. Niche markets An extension of the market segmentation approach is that of the niche market, which is a narrowly selected target market segment - Marketing mix Marketing mix refers to the combination of the four elements of marketing, the four Ps — product, price, promotion and place — that make up the marketing strategy - Finance Finance refers to how a business funds its activities - for instance, where it gets the money to trade, why it chooses to use certain lenders - as well as the costs, risks and benefits of different types of borrowings - Accounting is a managerial and administrative tool for recording financial transactions, so that a summary of what has happened to business money can be traced - Financial statements 1. A cash flow statement is a financial statement that indicates the movement of cash receipts and cash payments resulting from transactions over a period of time 2. The income statement, or statement of financial performance, is a summary of the income earned and the expenses incurred over a period of trading - Gross profit Revenue - COGS = GP - COGS Opening stock + Purchases - Closing stock = COGS - Net profit GP - Expenses = NP 3. Balance sheet represents a business’s assets and liabilities at a particular point in time, expressed in money terms, and represents the net worth of the business - Assets Assets are items of value owned by the business that can be given a monetary value. - Liabilities Liabilities are items of debt owed to outside parties and/or other organisations (like suppliers or the banks) and include loans, accounts due to be paid by the business, mortgages, credit card debt and accumulated expenses. - Owner’s equity The owners give a business money for it to acquire resources and begin operating. This money is called owner’s equity (capital). Assets = Liabilities + Owner’s equity - Human Resources Human resource management (HRM) is defined as the effective management of the formal relationship between the employer and the employees - Stage 1: Acquisition/Recruitment Acquisition is the process of attracting and recruiting the right staff for roles in a business - Stage 2: Development/Training Development refers to activities that prepare staff to take greater responsibility in the future Training generally refers to the process of teaching staff how to perform their job more efficiently and effectively by boosting their knowledge and skills Stage 3: Maintenance & Employment Contracts Maintenance involves the strategies used to motivate employees to remain within the business, including monetary and non-monetary benefits An employment contract is a legally binding, formal agreement between an employer and an employee - Awards: legally binding agreement that sets out the minimum wages and conditions for a group of employees - - Enterprise agreements: collective agreements made at a workplace level between an employer and a union, acting on behalf of its employees, or between the employer and a group of employees, about terms and conditions of employment Individual law contracts: Individual contracts exist when an employer and an individual employee negotiate a contract covering pay and conditions Stage 4: Separation of human resources Separation is the ending of the employment relationship - Voluntary separation Voluntary separation occurs when an employee chooses to leave the business of their own free will There are three different forms of voluntary separation: - Retirement - Resignation - Redundancy - Involuntary separation Involuntary separation occurs when an employee is asked to leave the business against his or her will The main types of involuntary separation are: - Involuntary redundancy - Retrenchment - Dismissal - Ethical behaviour Ethics are standards that define what is acceptable and unacceptable behaviour. Business ethics is the application of moral standards to business behaviour. - Ethical issues Within the business world, the following ethical issues regularly occur: - Fairness and honesty - Respect for people - Conflict of interest - Financial management - Truthful communication 9. Management and Change - What is organisational change Change is any alteration in the internal or external environments; for example, change in consumer tastes, change in production methods etc. - Proactive v. Reactive approaches To be proactive is to initiate change rather than simply to react to events To be reactive is to wait for a change to occur and then respond to it - Responding to internal and external influences Businesses must keep responding to the never-ending pressure for change Whether the influences driving change come from external or internal sources, changes to the business will occur Such changes should be viewed as opportunities to be taken advantage of as opposed to challenges to overcome - Internal Influences 1. Management 2. Employees - External influences 1. Competition 2. Legislation 3. Technology 4. Social - Managing change effectively Businesses often fail to manage change well Strategies to achieve successful change rely on communication, employee involvement in the change process, training, support and negotiation Poorly managed changes normally result in employee resistance, tension, anxiety, lost productivity, and unmet objectives Managing change - Identifying the need for change An effective manager should always be scanning the environment, attempting to understand factors that will have an impact on the business (proactive) - Setting achievable goals A vision statement states the purpose of the business. It indicates what the firm does and states its key goals - Resistance to change Resistance to change is strong because for most people personal change is: - achieved only with considerable effort - often emotionally stressful - Management consultants: Specialise in a diverse range of business-related areas, including risk management, brand protection, business set-up, executive recruitment and sustainability Year 12 Course TOPIC 1: Operations 1. Role of Operations Operations management is an essential key business function that overlaps with the other business functions such as marketing, finance and human resources management. - Operations - the business processes that involve transformation or, more generally, ‘production’ ● Strategic Role of Operations Management - strategic - refers to long-term, broad aims affecting all key business areas; that is, the strategic role of each key business function involves the managers of each function contributing to the strategic direction or strategic plan of the business profit centres - those aspects of a business that directly derive revenue and profits cost centres - particular areas, departments or sections of a business to which costs can be directly attributed - Cost Leadership There are several different sources of operations costs in business. There are input costs, processing or transformation costs and the costs of getting products to markets. - Cost leadership - involves aiming to have the lowest costs or to be the most price-competitive in the market. Good/Service Differentiation Good/service differentiation means distinguishing goods or services in some way from competitors. - Standardisation involves producing homogeneous goods and services and is usually a high-volume, low-cost approach ● - Goods and Services in different industries Goods and services are produced differently. Goods in different Industries - Goods may be standardised (mass produced or an assembly line) or customised (varied according to the needs of customers). - Goods may be perishable or non-perishable. - The character of the goods will shape the nature of the operations processes. - Intermediate goods have gone through one set of operational processes then become inputs into further processing. Services in different Industries - Services vary according to whether they are highly specialised or more customised. - Services can be standardised and in doing so a cost leadership strategy is being applied. ● Interdependence with other key business functions The range of typical business functions is operations, marketing, finance and human resources. - Interdependence refers to the mutual dependence that each of the key functions have on one another. This means that the various business functions work best when they work together. In most businesses, closely related tasks are grouped together — for example, sales and marketing, finance and administration, and operations and research and development. - - Operations refers to the business processes that involve transformation or, more generally, ‘production’. Marketing is about meeting the needs and wants of consumers through provision of products (both goods and services) at prices that the market is prepared to pay. Reports such as income statements, which determine the amount of money the business has earned after its expenses have been paid, are very useful to managers and other stakeholders. The function of human resources is to deal with the people the business employs and the issues arising from their employment. 2. Influences on Operations management ● Globalisation and Technology Globalisation - Globalisation is a reference to the removal of barriers of trade between nations. - - Globalisation is characterised by an increasing integration between national economies and a high degree of transfer of capital (facilities and machinery), labour, intellectual capital and ideas, financial resources and technology. Globalisation has significantly affected the operations function of large and global businesses. Globalisation affects consumers who seek global brands and this, in turn, shapes the operations function. Technology Technology plays a very important role in operations — from administration, through to all operations processes. ● Quality Expectations and cost-based competition Management of quality expectations in both the manufacture of products and the delivery of services is a goal of operations management. Quality Expectations - Quality expectations differ between goods and services. - Whether quality expectations relate to goods or services, in both cases they lead to consumers having a perception about the standard of products, and accordingly consumers will be prepared to pay a higher price for higher quality. Cost-Based Competition Another factor affecting and shaping operations is cost-based competition. Here a business can apply cost leadership to reduce both fixed and variable costs - cost-based competition derived from determining breakeven point (the level at which the firm’s total revenue is exactly equal to its total costs) and applying strategies to create cost advantages over competitors - fixed costs - costs that are not dependent on the level of operating activity in a business. Fixed costs do not change when the level of activity changes — they must be paid regardless of what happens in the business. - variable costs - costs that vary in direct relationship to the levels of operating activity or production in a business. Such costs include labour costs and costs of energy ● Government Policies and Legal Regulation Government Policies - Government policy is a source of change for business. - Government policies affect operations decisions. - Policies from the government are reflected in laws and regulations. Legal Regulations - Managers who do not comply with government regulations in respect to human resources, the environment and public health risk fines and, in some cases, jail. - While some government policies restrict business practices, other policies encourage business and provide opportunities. - compliance costs - the expenses associated with meeting the requirements of legal regulations, i.e. abiding by all laws ● Environmental Sustainability and Corporate Social Responsibility Environmental Sustainability - Business operations are required to adopt environmentally sustainable practises to reduce their carbon footprint. - environmental sustainability (ecological sustainability) to shape business operations around practices that consume resources today without compromising access to those resources for future generations - precautionary principle requires that, where environmental impacts are uncertain, a business undertakes actions that are most likely to cause the least environmental impact Corporate Social Responsibility (CSR) - Corporate social responsibility (CSR) is an important influence on business and it integrates financial, social and environmental goals. - triple bottom line refers to the financial profitability, social impact and the environmental impact of a business The difference between legal compliance and ethical responsibility - Legal compliance refers to businesses abiding by the word of the law, whereas ethical responsibility encompasses a much broader integration of social, community and environmental concerns. Compliance costs are those associated with the cost of meeting the needs imposed by regulations. Compliance applies to a wide range of business activities. Compliance typically falls into a number of areas for business. These areas include, but are not limited to: - Labour law compliance - Environmental and public health compliance - Business licensing rules - Taxation - Trade practises and fair marketing dealings - Migration and rules around the use of offshore skilled labour - Intellectual property - Financial and accounting regulations and corporations law - Corporate governance - Human Rights - Fiduciary- a person in a position of financial trust with respect to others’ money Ethical Responsibility - Ethical business enterprises recognise that variation in laws can undermine social and ethical responsibility. Therefore, they may seek independent sources, such as the ILO and lobby groups, to create ways of applying ethical standards across the operations function. - outsourcing (or contracting out business functions) involves the use of third-party specialist businesses; for example, recruitment firms. It aims to take advantage of the specialist skills provided by them and to achieve a reduction in labour costs. - onshore outsourcing involves the use of domestic businesses as the outsourcing provider - offshore outsourcing involves taking the activities to a provider in another country Environmental Sustainability and Social responsibility. - Environmental sustainability and social responsibility are features of an ethical approach to operations management. - Economic development must be accomplished sustainably. Environmental sustainability refers to the economic, social and environmental performance of a business. - Social responsibility refers to a business’s management of the social, environmental, political and human consequences of its actions. 3. Operations Processes The operations process refers to the input–transformation–output process. ● Inputs Inputs are the resources used in the transformation process and can be classified as either transformed resources or transforming resources. Input Classification Transformed Resources Transformed resources are those inputs that are changed or converted in the operations process and include: - Materials — the basic elements used in the production process, consisting of raw materials and intermediate goods - Information — the knowledge gained from research, investigation and instruction, which results in an increase in understanding - Customers — their desires and preferences are the starting point to production processes. Transforming Resources Transforming resources are those inputs that carry out the transformation process and include: - human resources — they coordinate and combine other resources to produce goods and services - facilities — the plant (office or factory) and machinery used in the operations process. - Key performance indicators (KPIs) - specific criteria used to measure the efficiency and effectiveness of the business’s performance - customer relationship management (CRM) the systems that businesses use to maintain customer contact ● - Transformation Processes: volume, variety, variation in demand and visibility Transformation is the conversion of inputs (resources) into outputs (goods or services). Transformation differs between manufacturing businesses and service businesses. - A manufacturer transforms inputs into tangible products. - A service organisation transforms inputs into intangible products. Transformation processes are influenced by: - volume — how much of a product is made This responsiveness to the required changes in volume is essential to effectively managing lead times. Lead time is the time it takes for an order to be fulfilled from the moment it is made - variety — the range of products made Mix flexibility - the mix of products made, or services delivered, through the information process - variation in demand — the amount of a product desired by consumers - visibility — the nature and amount of customer contact (feedback). ● Transformation Processes: Sequencing and Scheduling Sequencing and scheduling are essential activities in operations processes. - Sequencing refers to the order in which activities in the operations process occur. - Scheduling refers to the length of time activities take within the operations process. Two tools that assist with sequencing and scheduling are: - Gantt charts — a type of bar chart that shows both the scheduled and completed work over a period of time - critical path analysis — a scheduling method that shows what tasks need to be done, how long they will take and what order is necessary to complete the tasks. ● Transformation Processes: Technology, task design and process layout Technology Technology is the application of science or knowledge that enables people to do new things or perform established tasks in new and better ways. - Business technology involves the use of machinery and systems that enable managers to undertake the transformation process more effectively and efficiently. Office or administrative technologies include a range of computers, communications devices and software applications. Manufacturing technologies include: - robotics — a programmable machine capable of doing several different tasks - computer-aided design (CAD) — a computerised design tool that creates products from a series of input parameters - computer-aided manufacturing (CAM) — software that controls manufacturing processes - 3D printing — allows a digital design to make an actual product through the use of polymers and other materials. Task Design - Task design — classifying job activities so that employees can successfully perform and complete the task — is an essential aspect of transformation processes. - Task design involves job analysis and can be done after a skills audit has been completed. Process Layout There are three different forms of layout for manufacturing plants: - Process layout — machines and equipment are grouped together by the function (process) they perform - Product layout — machines and equipment relate to the sequence of tasks performed in manufacturing a product; for example, assembly line arrangement - Fixed position layout — employees and equipment come to the product. Modern office layout uses a workstation arrangement and in many cases an open office format. ● Transformation Processes: Monitoring, Control and Improvement Monitoring All operations should be monitored against KPIs for their effectiveness. Control - Control occurs when corrective action is taken if there is a discrepancy between performance and goals. Improvements Improvements lead to reduction in inefficiencies such as bottlenecks. - bottleneck - an aspect of the transformation process that slows down the overall processing speed or creates an impediment, leading to a backlog of incompletely processed products Continuous improvement involves ongoing commitment to achieving perfection ● Outputs The outputs of transformations processes include: - the goods made or services provided - customer service - warranties. Customer Service - Customer service refers to how well a business meets or exceeds the expectations of consumers. Exceeding customers’ expectations is likely to be the key in developing long-term customer relationships. Warranties - Warranties are an agreement to fix defects in products. An assessment of warranty claims can help a business to adjust transformation processes so that they become more effective. Warranties apply to services and enable customers to cancel contracts or seek a refund for the unused portion or be compensated for the reduced value should a major failure occur. 4. Operation Strategies Operations strategies are based around the need to achieve performance objectives. ● Performance Objectives Performance objectives are goals that relate to particular aspects of the transformation function and can be allocated to particular key performance indicators (KPIs) in the following areas. Quality, including: - Design: how well a good is made or a service is delivered - Conformance: how well the good or service meets a prescribed design with a certain specification Service: how reliable, suitable and timely the service delivery is Speed: the time it takes for the production and the operations processes to respond to changes in market demand Dependability: how consistent and reliable a business’s goods or services are Flexibility: how quickly operations processes can adjust to changes in the market Customisation: the creation of individualised goods or services to meet the specific needs of the customers Cost: the minimisation of expenses so that operations processes are conducted as cheaply as possible Each of the performance objectives will be allocated targets or goals. ● New Product or Service Design and Development A business needs to design and develop new products and services. New Product design and development Two different approaches determine product design and development: - consumer preferences - changes and innovations in technology. Important factors in new product design and development include quality, supply chain management, output capacity and cost. New Service Design and development Service design and development differs from the design and development of products as services are intangible and ‘consumed’ as they are produced. A service can be: - explicit — the application of time, expertise, skill and effort Explicit service the tangible aspect of the service being provided, such as the application of time, expertise, skill and effort - implicit — the feeling of being looked after. Implicit service is based on a feeling and is therefore intangible. The implicit aspects of a service are the psychological wellbeing — the feeling of being looked after — that comes with the provision of the service ● - Supply Chain Management Supply chain management (SCM) involves the management and flow of supplies throughout all inputs, transformation processes and outputs. There are three key aspects to SCM: logistics, e-commerce (including e-procurement) and sourcing (including global sourcing). Logistics - Logistics refers to the physical distribution and transportation of products. The use of warehouses and distribution centres is crucial to the successful management and movement of inventories. E-Commerce E-commerce enables businesses to source through online links to suppliers through business-to-business (B2B) processes and also enables customers direct access to products through business-to-consumer (B2C) processes. - e-procurement - the use of online systems to manage supply, which allows suppliers direct access to the business’s level of supplies Sourcing - Sourcing, in the context of SCM, involves the purchasing of inputs for transformation processes. - Global sourcing involves the use of global markets for the purchasing of any supplies; however, in the context of SCM, global sourcing refers to where and how supplies are sourced within the limitation of geography. ● - Outsourcing Outsourcing involves taking to market those internal business processes and activities that can be done better and at lower cost when given to external vendors. The term ‘outsourcing’ is often called business process outsourcing (BPO) and captures a range of outsourced business processes including: - finance and accounting outsourcing (FAO) - knowledge process outsourcing (KPO) - legal process outsourcing (LPO). Outsourcing Decision The outsourcing decision should consider several factors and can involve the use of different options. Advantages of outsourcing Numerous advantages are associated with outsourcing: - simplification - efficiency and cost savings - increased process capability - increased accountability - access to skill/resources lacking within the business - provides a capacity to focus on core competencies, thus improving in-house performance and several strategic benefits. Disadvantages of outsourcing The disadvantages associated with outsourcing include: - the cost and uncertainty associated with payback - issues with communication and language - loss of control of standards and information security - loss of corporate memory and costs associated with IT, organisational change, redesign and management of hierarchies. ● Technology: Leading edge, established The thoughtful application of technology helps a business create a competitive advantage. Leading Edge Technology Leading edge technology — the most advanced or innovative at any point in time — can help businesses to: - create more products quickly and to higher standards - reduce waste - operate more effectively. Established technology: Established technology — that is widely accepted and used — helps to establish basic standards for productivity and speed. Both forms of technology give businesses efficiencies, productivity gains and a capacity to improve operations processes. ● Inventory Management Inventory or stock refers to the amount of raw materials, work-in-progress and finished goods that a business has on hand at any particular point in time. Inventory management is a key operations strategy. Advantages of holding stock: There are advantages associated with holding stock, including being able to respond quickly to changes in demand and allowing development of new markets that can supply stock quickly. Disadvantages of holding stock: There are also disadvantages that come with carrying stock, including the costs and tying up of money that could be applied elsewhere. - At the end of an accounting period, it is important that the value of sold and unsold stock is determined, to allow for the calculation of gross profit. LIFO, FIFO: There are alternative inventory valuation methods, including LIFO (last-in-first-out) and FIFO (first-in-first-out). - Businesses are seeking to become ‘lean’, meaning they emphasise low cost. - Lean businesses apply a just-in-time (JIT) approach to inventory management, which means to make to order. ● Quality management Quality management refers to those processes that a business undertakes to ensure consistency, reliability, safety and fitness of product purpose. The most common quality management approaches are: - quality controls — inspection, measurement and intervention - quality assurance — application of international quality standards such as the ISO 9001 series - quality improvements — continuous improvement and total quality management. Quality Improvement: A focus on continuous improvement is an ongoing commitment to improving a business’s goods or services. - Innovation, employee involvement and quality are closely aligned and indicate quality working processes. ● Overcoming resistance to change Generally, sources of change are external and the business is responding to the threat that change can pose. Resistance to change can be a major obstacle to the realisation of operations goals. Overcoming the resistance to change is a necessary aspect of change management. There are two principal sources of resistance to change: financial and psychological (inertia). - The financial costs of change include purchasing new equipment and technology, redundancies, retraining employees and structural reorganisation. - Inertia can be due to a feeling of uncertainty or fear of the unknown. Financial Costs: One major cause of a resistance to change from managers and business owners is that of financial costs, including costs associated with: - purchasing new equipment - redundancies - retraining employees - structural reorganisation of the business, including changes to plant and equipment layouts (plant layout). ● Global Factors Several global factors present opportunities when assessing the operations strategies in managing a business. These opportunities may be classified as: - global sourcing - economies of scale - scanning and learning - research and development (R&D). Global sourcing: Global sourcing is a broad reference to sourcing business supplies or services without being constrained by location and it therefore includes all outsourcing. Economies of Scales: Economies of scale can lead to significant cost saving in various aspects of the business enterprise. Scanning and learning: Scanning and listening can be a very valuable operations management tool as it can help managers adapt best practice to the business operations. Research and Development: R&D can make a very big difference to the level of innovation, quality and competitive advantage of a business CASE STUDY: KATHMANDU Kathmandu is an outdoor clothing and equipment company. Its first store opened in Melbourne in 1987. Kathmandu’s founders Jan Cameron and John Pawson saw a market opportunity to satisfy the demand of these types of travellers and set about producing fleece and thermal apparel that were lighter and quicker drying than others available and which were far more suited to this growing form of travel. Kathmandu also established one of the world’s first loyalty programs, the Summit Club, in 1994. ● Role of operations management The strategic five-year plan, Best for the World, is built around three pillars — people, planet and practice. - Best for people -- Most notable is the aspirational goal to empower the community to positively change 100 000 lives through education, personal development and wellbeing. - Best for the planet -- Designing out waste and pollution, keeping products and materials in use and regenerating natural systems. - Best in practice -- Governance through meeting the highest standards of positive social and environmental impact. Management will undergo training and development in providing clear performance accountability for all of the business’s sustainability and community impact strategies. Kathmandu demonstrates cost leadership, as management strives to continue improving efficiency through investment in information technology (IT) infrastructure, automation and emphasising more cost-effective social media during promotional periods. Additional cost advantages are achieved through optimising the use of retail labour in respect to its stores. Goods are designed in-house and this decision enables Kathmandu to make full use of the experience of its staff to offer contemporary fashion. Management also makes use of customer feedback to create well-made original products. Quality and performance are central to Kathmandu’s apparel and equipment; therefore, resources, including the product team, are devoted to design, technical efficiency, quality and strong relationships with suppliers that ensures a range of apparel and equipment that meets the needs of its extensive customer base. Its products can be broadly differentiated into apparel and equipment. - Interdependence of operations with other areas of business The business continues to focus on distinctive, sustainable, quality products and opening new stores. These qualities are also a key feature of the marketing strategies used by the business to grow sales. Maintaining gross margins and delivering operating efficiency, particularly through effective cost leadership, are essential to the development of Kathmandu apparel and equipment. Human resources involves an ongoing commitment to ensuring that employees develop skills and have opportunities for career development across all areas of the business. This helps ensure they have the capacity to adapt to a changing retail environment and thus move the company forward. ● Influences on Operations Cost-based competition in the form of efficiency in the management of its supply chain operations, ongoing automation and digital platforms are also prominent influences on operations. Sustainability is a core business goal and centres on management’s desire to minimise both its waste and its environmental footprint. The company’s commitment is reflected in: - award recognition in ‘larger business sustainability leadership’ - elimination of harmful chemicals - recycling of plastic bottles into finished products - increased use of sustainable cotton - increased recycling rate. ● Operations processes - Inputs Inputs, in the form of transformed resources, include the materials that are required to produce Kathmandu’s apparel. For example, fabrics are chosen to minimise environmental impacts and are driven by customer feedback. The priority of preferred materials at Kathmandu is: 1. responsible down 2. recycled polyester 3. sustainable cotton 4. approved fabrics and trims (minimal chemicals) 5. responsible wool 6. materials that minimise water use 7. preferred man-made cellulosics 8. materials that seek to reduce ocean plastics. The Better Cotton Initiative (BCI) involves engaging with suppliers that use pre-consumer waste from the factory floor and blending the fabric back to a yarn and, in doing so, removing all heavy impacts from the growing and dyeing phases of cotton production. Key supplier facts include: - 99 suppliers (76% in China) - 8.5 years is the average tenure working with suppliers - 12 audits (including 2 unannounced). Due to COVID-19 this number was less than usual. • 62 corrective action suppliers for suppliers - 5 % turnover of suppliers. - Transformation Processes The role of the four Vs — volume (large-scale production), variety (both technical, functional and fashion conscious), variation in demand (although predominantly a winter brand, an emphasis on a summer range is also marketed extensively) and visibility (increased e-commerce and in-store customer experience through more effective visual merchandising in store and product presentation) — is significant to the success of the business. The increased role of information technology in further developing online sales growth (especially globally) and the use of an experienced, customer-driven in-house design process allows for technical and original products — it is the basis of its competitive advantage and one that Kathmandu anticipates will provide the platform for further success. ● Operations strategies Kathmandu’s range of products reflect their performance objectives of high quality, quick to market and mass customisation at a low cost. \. - Supply Chain management Kathmandu has a robust factory assessment and monitoring program. Those that supply the business must ensure that workers receive the minimum legal wage. working collaboratively with other global brands and with the Fair Labour Association to ensure an ethical fashion industry. - Supply Chain Outsourcing is the main focus of Kathmandu’s product manufacturing process across the globe with an emphasis in China, where 76 per cent of its products are made. The main advantages of such a process are a low-cost, high-quality product. It does, however, have some disadvantages such as the need for a policy of responsible purchasing that ensures it does not put undue pressure on suppliers to provide goods in unreasonable timeframes and the use of workplace audits to ensure compliance. - Inventory Management Recent financial data indicate that stock levels fell by an average of 7.6 per cent per store, and the focus of high turnover remains a priority. This was made possible through investments in planning software that enabled more accurate buying and to reflect store differences. The seasonal nature of stock ensures effective stock holding processes. - Quality Management The Supplier Quality Excellence program is designed to identify quality control problems before the item reaches the customer. By reducing the number of unacceptable products that arrive in the company’s warehouses, there will be fewer returns due to poor workmanship. - Global Factors: Global Sourcing Kathmandu seeks to protect human rights and improve working conditions for its contract workers. This involves greater transparency and working in partnership with suppliers. Kathmandu segments its supply chain according to the problems it observes and its willingness to work in harmony with factory owners. Kathmandu also has a responsible purchasing policy that recognises the importance of not putting undue pressure on factories through product development delays that may result in less time to produce apparel and equipment and in turn increase overtime and subcontracting.
