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Contents
Ui 1: Busiss orizio d
Ui 4: mrki
viro
4.1
The
4.2
Marketing
1.1
Introduction
of
to
business
management
organizations
1
1.2
Types
1.3
Organizational
1.4
Stakeholders
55
1.5
External
61
37
environment
of
marketing
planning
introduction
18
objectives
role
4.3
Sales
4.4
Market
4.5
The
Growth
and
evolution
1.7
Organizational
the
forecasting
(including
four
(HL
Ps)
263
only)
274
research
four
Ps
promotion,
1.6
to
247
281
(product,
price,
place)
293
65
4.6
planning
tools
(HL
only)
The
extended
(HL
only)
marketing
mix
of
seven
Ps
80
320
4.7
International
4.8
E-commerce
marketing
(HL
only)
Ui 2: Hu rsourc 
2.1
Functions
human
and
evolution
resource
326
of
management
94
Ui 5: Oprios 
2.2
Organizational
2.3
Leadership
2.4
Motivation
2.5
structure
and
117
management
5.1
The
5.2
Production
5.3
Lean
(corporate)
5.4
Location
only)
Employer
(HL
5.5
Production
5.6
Research
5.7
Crisis
operations
management
339
methods
production
and
346
quality
management
culture
(HL
2.6
of
135
Organizational
(HL
role
127
only)
353
147
and
employee
365
relations
only)
155
planning
and
(HL
only)
development
management
and
(HL
374
only)
384
contingency
Ui 3: Fic d ccous
planning
3.1
Sources
of
3.2
Costs
3.3
Break-even
3.4
Final
3.5
Protability
3.6
Efciency
3.7
Cash
3.8
Investment
3.9
Budgets
and
nance
External
HL
only)
397
liquidity
analysis
ratio
(HL
Assessment
406
191
Index
ratio
Assessment
179
Internal
and
392
174
analysis
(some
only)
161
revenues
accounts
(HL
analysis
only)
ow
413
207
216
224
appraisal
(HL
only)
(some
HL
only)
233
240
v
Introduction
This
book
is
a
companion
Management
Diploma
is
a
in
to
caring
and
of
“develop
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more
an
IB
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studies
and
o r g a n i z at i o n
1
e n v i r o n m e n t
tnemnorivne
a n d
1.1 An introduction to business management
By the end of this chapter, you should be able to:
➔
Explain the role of businesses in combining human, physical and
nancial resources to create goods and ser vices
➔
Understand the main business functions and their roles (human
resources, nance and accounts, marketing, and operations)
➔
Dene primary, secondary, ter tiary and quaternary sectors
➔
Outline the nature of business activity in each sector and the impact
of sectoral change on business activity
➔
Explain the role of entrepreneurship (and entrepreneur) and
intrapreneurship (and intrapreneur) in overall business activity
➔
Identify reasons for star ting up a business or an enterprise
➔
Outline common steps in the process of star ting up a business or an
enterprise
➔
Examine problems that a new business or enterprise may face
➔
Outline the elements of a business plan
th l f b
A
business
aims
organizations
●
producing
●
creating
●
providing
Some
that
its
activities
distinct.
(sometimes
doing
wanted
Many
“a
so
or
focus
desired
referred
either
or
one
and
wants
following
raw
of
individuals
or
activities:
materials
activity.
Other
may
a
convert
even
output.
to
by
as
a
from
this
“added
organizations
olives
will
the
value”)
earth
for
to
the
most
under
that
olives
are
oil
for
generally
adds
and
satisfying
is
is
them
to
value
rewarded
what
is
needed.
would
business
sale
related
processes
what
or
activities.
several
inputs
people
many
olive
business
for
satisfying
grow
multiple
into
and
the
(sales)
may
in
cluster
activities
fashion,
that
operate
engage
resources
revenue
recognition
nonetheless
the
in
inputs
In
gaining
business
business
engage
business
A
businesses
Sometimes
gaining
activities
business”
on
olives
label.
sometimes
by
the
extracting
transistors.
grows
the
needs
of
service.
Regardless,
generate
for
a
own
or
or
the
any
product
businesses
farm
under
meet
crops
a
manufacture
A
to
through
not
consider
principles.
All
1
dna noitazinagro ssenisuB 1
B u s i n e s s
1
B u s i n e s s
many
tnemnorivne
dna noitasinagro ssenisuB 1
organizations
sense
must
religious
charities,
a
basics
and
provide
food
for
other
and
our
organizations,
need
Business
Figure
have
human,
organizations
business.
–
people
o r g a n i z at i o n
types
Needs
or
want
activity
can
wants
Other
be
in
are
and
etc.
that
all
nancial
such
shelter
–
as
they
in
the
clubs
and
live
are
we
many
for
our
services
are
resources.
synagogues,
to
provide
provide
sense
summarized
and
mosques,
different:
businesses
clubs,
and
physical,
(churches,
clothing
charities,
e n v i r o n m e n t
organizations
and
water,
needs.
of
a n d
in
all
a
certain
need
the
businesses
wants.
or
Thus,
etc.),
Religious
products
that
businesses.
ow
chart
shown
in
1.1.1.
human
goods
physical
production
nancial
services
enterprise
Resource inputs
Processes to add value
Product outputs
Figure 1.1.1. Summary of business activity
The
●
resource
Human
the
inputs
–
the
product
automated
Others
●
and
land
Internet
●
●
or
–
the
business.
become
a
It
the
–
is
the
the
least
to
types
of
and,
as
of
laundry
often
and
the
with
of
input
or
of
social
including
services,
and
the
a
cash
to
Even
computer.
and
see
other
important
the
business.
which
cutting-edge
Enterprise,
everyday
brick
and
person.
sets.
machinery,
service.
crucially
will
thriving
media.
or
one
skill
materials,
make
highly
only
different
“entrepreneurship”,
high-tech
if
to
forms
of
service.
but
the
required
even
even
space
quantity
ideally,
–
product
ofce
and
people
businesses,
input
product
idea
of
quantity
some
tangible
telephones,
business,
and
make
the
follows:
All
human
quality
make
business
referred
institutional
2
right
to
to
require
connotation
computers,
all
the
service.
quality
required
as
quantity
individuals,
functioning
sometimes
has
right
the
and
require
many
required
Enterprise
categorized
quality
still
businesses
–
be
provide
ones,
space
Financial
money
right
require
Physical
can
other
for
elements
Enterprise
today
is
often
businesses:
though,
exists
(lawn-mowing
manufacturing,
etc.)
in
services,
●
processes
Capital
intensive
machinery
land
rich
the
of
●
or
in
a
resource
and
operation
other
inputs,
intensive
also
or
(an
Goods
home.
such
–
these
They
as
be
are
might
or
Services
–
them
these
examination,
are
a
service:
products
for
and
the
a
or
with
land
or
Sometimes
qualities
unique
deal
the
(land
features),
due
to
the
or
scale
example).
proportion
land
or
of
labour
machinery.
low-skilled
as
that
other
an
we
and
for
provides
the
or
relative
Labour-
workers
but
primary
extracted
a
can
in
take
sector,
from
the
the
secondary
not
physically
car.
buyer
delivery
physically
the
made
example,
the
can
in
items
items
iPad
international
to
to
special
for
of
labour.
great
produced
include
include,
consumers
M A N A G E M E N T
follows:
products
such
retailers
a
large
fairly
as
items
intangible
the
B U S I N E S S
employees.
might
They
cost
factory,
use
products
are
home.
or
equipment
involve
include
sector,
proportion
especially
relation
categorized
they
(manufacturing)
in
tangible
agricultural
environment,
take
processes
skilled
large
simply
automobile
may
a
proprietary
specialized
especially
can
use
have
T O
forms:
inputs,
machinery
highly
outputs
many
other
may
operations
involve
Product
●
to
Labour-intensive
to
●
the
take
processes
relative
machinery
land
the
can
I N T R O D U C T I O N
tnemnorivne
Production
A N
does
a
of
service
karate
a
of
class,
package.
having
a
medical
Retail
an
sales
array
of
purchase.
B fc
All
businesses,
from
the
same
lines,
●
human
●
marketing
●
nance
●
operations
by
small
resources
and
start-ups
function
–
what
to
is
huge
to
be
conglomerates,
done.
There
are
are
four
organized
key
on
functions:
(HR)
accounts
HR
management
or
production
HR
Finance
Business
Marketing
and
organization
accounts
Finance
Business
and
Marketing
organization
accounts
Operations
Operations
A small business
A large business
Figure 1.1.2. Business functions in a small business and a large business
3
dna noitazinagro ssenisuB 1
1 . 1
1
B u s i n e s s
or
tnemnorivne
dna noitasinagro ssenisuB 1
The
only
o r g a n i z at i o n
difference
owners
of
themselves
managers
a
and
to
between
smaller
do
a
larger
the
the
business
jobs
two
can
e n v i r o n m e n t
types
have
business
same
a n d
to
of
deal
afford
organized
in
business
with
to
is
these
hire
that
the
owner
functions
specialized
separate
departments.
The role of business depar tments
In
larger
doing
are
so
set
businesses
help
out
the
these
managers
business
achieve
will
its
focus
overall
on
their
function
objectives.
Some
and
in
examples
below.
Table 1.1.1. Business functions
Function
Role
HR
Ensuring
to
make
people
that
the
are
suitably
accomplish
must
these
recruit
dismiss
appropriate
product
goals,
and
people
ser vice
rewarded
people,
them,
or
the
train
for
HR
them,
determine
are
and
employed
that
doing
the
so.
To
depar tment
at
times
appropriate
compensation.
Finance and accounts
Ensuring that appropriate funds are made
available to make the product or service. To
accomplish this goal, the nance and accounts
depar tment must forecast requirements, keep
accurate records, procure nancial resources
from various providers, and ensure proper
payment for goods and services acquired to
operate the business.
Marketing
Ensuring that the business oers a product or
ser vice that is desired by a sucient number of
people or businesses for protable operations.
To accomplish this goal, the marketing
depar tment must use appropriate strategies
to promote, price, package, and distribute the
product or ser vice.
Operations management or
Ensuring
production
in
order
that
the
quality.
that
to
in
ways
or
ser vice
is
this
quantity
appropriate
the
of
the
used
and
desired
the
f low
methods
good
are
ser vice
operations
depar tment
and
competitive
produce
or
goal,
production
the
t o d a y ’s
to
or
processes
product
accomplish
control
determine
and,
the
product
To
management
must
appropriate
make
of
world,
or
of
stock ,
production,
look
ser vice
for
more
efficiently.
All
these
functions
department
as
4
a
result
are
interdependent.
determines
of
changes
in
that
a
product
consumer
For
example,
needs
taste,
the
to
be
if
the
made
operations
marketing
differently
management
production
degree.
That
department
and
type
must
of
with
character
businesses
and
that
the
may
(produce
other
each
of
the
then
growth
HR
goods
on
a
or
even
processes,
at
least
resources,
may
business,
can
survival,
to
the
would
B U S I N E S S
M A N A G E M E N T
some
which
inuence
which
is
a
which
control
of
the
If
in
the
may
places
a
over
the
nance
number
have
market
might
to
and
all
to
be
geared
to
very
become
its
diversify
requirements
is
the
Initially,
accounts,
marketplace,
plan
new
business
modications
time.
nance
production
business
departments.
signicant
or
HR,
established
example,
services),
change
with
management
business
For
business
and
redesign
the
interdependence
Once
require
in
its
nancial
T O
function.
focus
change.
four
could
The
operations
end.
priorities
which
the
redesign
require
working
typically
marketing,
toward
of
must
may
procure.
people
coordinated
The
function
redesign
I N T R O D U C T I O N
tnemnorivne
or
A N
on
successful,
a
different
priority,
business
departments.
The
strength
aligned
or
the
service
good
and
or
a
for
the
service,
particular
functions
market
and
are
non-nancially)?
they
can
hand,
more
must
can
of
four
respond
large
name
it
Small
to
the
at?
upon
business
Are
in
have
the
right
often
the
even
a
successfully
a
people
appropriately
have
an
they
good
On
the
wider
dominating
become
the
(nancially
advantage
resources,
business
when
desired
producing
marketplace.
greater
businesses,
how
producing
rewarded
businesses
changes
However,
Large
depends
people
generally
recognition.
vigilant.
Is
aims
those
quickly
businesses
remain
business
are.
in
that
other
reach,
a
and
market
complacent,
fail.
yduts esaC
Kk
For most of the 20th century, Kodak dominated
the US photographic lm market. However,
because of the introduction of digital
photography (the technology for which Kodak
itself actually developed), the business began
to see sales of its photographic lm decline.
By the late 1990s, the company was star ting
to struggle nancially. The last year in which
the company made a prot was 2007 and in
2012 Kodak led for bankruptcy. Since then,
the company has made several attempts to
revitalize the business through redirection
of operations and sale of assets. Although
the business emerged from bankruptcy in
September 2013, its health prospects for the
future are uncer tain.
Kodak’s early camaras made home photography possible for
many people. The company continues to dominate the market
throughout much of the 20th century.
5
dna noitazinagro ssenisuB 1
1 . 1
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
Business
tnemnorivne
dna noitasinagro ssenisuB 1
sc f b cy
local
activity
takes
community,
Traditionally,
sectors,
as
in
a
place
economists
set
out
in
in
a
country,
have
Table
number
or
even
of
different
within
grouped
the
business
areas:
global
activity
in
the
community.
into
different
1.1.2.
Table 1.1.2. Sectors of business activity
All raw materials are acquired in the primary sector. This can be by extraction, mining,
farming, shing, hunting, or even trapping. Today, because of the scarce nature of many
Primary
resources in the primary sector or because of the potential to damage fragile environments,
governments closely monitor activities in the primary sector.
In the secondary sector raw materials are processed, usually by manufacturing. Goods
Goods
from the secondary sector can take many forms, such as consumer durables, non-durable
consumer goods, and capital goods. For most of the 19th and 20th centuries, much
Secondary
secondary sector production occurred in what are referred to today as “developed countries”.
Since the 1970s, however, manufacturers in developed countries have been facing increasing
competition from manufacturing rms located in “developing nations” and “emerging
markets”.
All services are provided in the ter tiary sector, sometimes using manufactured products.
These services can be nancial, leisure, healthcare, education, transpor t, security, and many
others. As manufacturing (the secondary sector) has shifted to developing countries, the
Ter tiary
ter tiary sector has grown in impor tance in developed countries. Services such as banking,
insurance, transpor tation, retail and wholesale, and consultancy have become especially
impor tant.
Services
This sector, a subgroup of the ter tiary sector, provides ser vices that are especially focused
on knowledge. Generally speaking, various types of e-ser vices and those involving IT,
Quaternary
the media, and web-based ser vices are considered quaternary. This sector is typical of
“post-industrial” economies and, thus, many businesses in the developed world engage in
quaternary activities.
These
sectors
production
is
the
raw
steps
types
glass,
materials
and
of
The
online
6
this
type
of
information.
is
turn
sector).
also
and
This
type
of
and
on
by
is
to
also
the
For
to
parts
turn
plastic
into
the
(secondary
assembly
line
(tertiary
after-sale
in
the
read
service
to
sector)
service
tertiary
but
(oil
sector.
magazine
or
Sometimes
in
other
companies
quaternary
make
(tertiary
records.
for-prot
the
to
example,
make
government,
by
in
made
consumers
they
and
the
production
manufacturers
shipped
cars,
produced
business
an
provide
repairs),
features
be
as
of
processed
parts
cars
typically
provided
is
must
materials
are
the
purchase
to
chain
automobile
used
cars
sell
A
marketed.
sector)
into
then
major
automobile
free
is
rubber,
The
which
information
referred
automobile
are
consumers
about
information
cases
sell
before
reports
that
even
is
that
that
(primary
parts
dealers
and
sectors
good
manufacturers
dealerships,
what
(metals,
sector)
(secondary
in
production.
different
material
automobile
tune-ups,
Sometimes,
of
consumer
extracted
Automobile
changes,
this
are
linked
chain
the
(secondary
automobile
sector).
or
a
raw
etc.)
automobiles
to
into
automobile
sector).
typically
through
materials
many
and
are
chain
sector.
that
A N
I N T R O D U C T I O N
T O
B U S I N E S S
M A N A G E M E N T
tnemnorivne
Student workpoint 1.1
Be a thinker
Think
of
some
production
everyday
chain.
●
a
cherry
●
a
skateboard
●
a
cellphone.
What
pie
primary,
involved
in
products
you
you
use
and
imagine
their
purchase
secondary,
the
that
Consider:
tertiary,
production,
and
quaternary
distribution,
and
business
marketing
of
are
these
products?
As
businesses
this
is
merging
for
the
when
(the
other
times,
in
have
or
operations
activity
the
as
in
business
a
lumber
company
this
process
is
purchases
called
another
forward
organic
the
crops
organic
Horizontal
market
and
Lowering
Ensuring
●
explicit
●
and
supply
in
market
–
has
various
activity,
grocery
occurs,
the
new
involved
internal
to
in
in
or
a
businesses
by
If
chain,
harvest
a
or
growth.
the
business,
store
the
other
production
earlier
its
own
When
the
a
trees,
business
process
farm
the
such
is
producing
restaurant
that
sells
farm.
to
increase
economies
transactions
costs.
–
if
These
the
market
of
scale.
terms
of
regulation
–
if
share
and
Vertical
–
integration
treat
such
the
strategies
as
is
exibility
price
to
backward
and
controls,
(or
stage
as
price.
taxes,
or
integration.
successful
in
is
“downstream”
availability,
through
integration
businesses
eliminated.
quantity,
stages
greater
pricing
can
between
are
vertical
stage
various
power
business
use
of
of
were
acquiring
of
example,
intended
of
or
integration.
retail
on
chain
or
same
reasons:
upstream
customer
a
advantage
costs
government
the
can
usually
transaction
the
open
is
another
produced
varied
regulation
Increasing
costs),
for
reliable
preferred
Avoiding
is
take
transaction
have
“upstream”),
a
might
by
reserves
For
the
share.
through
forest
less
one
Sometimes
acquiring
integration
chain
vertical
or
merged
entered
enters
business
more
market
the
businesses.
a
when
that
integration.
meats
to
or
or
stage
or
purchasing
meats
occurs
earlier
business
and
two
in
backwards
integration
typically
●
and
power
an
in
“vertically”
stages
acquired
vertical
food
integration
●
called
grow
later
to
horizontal
the
increased
businesses
earlier
merge
When
of
other
refers
engaged
airlines
another.
will
acquire
which
business
two
beginning
of
often
combination
acquisition)
involved
they
growth,
another
purchases
business
At
with
example,
stores
grow,
“horizontal”
setting
increase
its
its
(that
is,
prices
market
if
to
it
lowers
others
power.
1
●
Eliminating
or
weakening
the
market
power
of
other
businesses.
1
Carlton, Dennis W., and Perlo, Jerey M. 2005, Modern Industrial Organization, 4th ed.
Addison-Wesley, Boston, MA
7
dna noitazinagro ssenisuB 1
1 . 1
1
B u s i n e s s
Not
tnemnorivne
dna noitasinagro ssenisuB 1
Common
to
always
prots,
than
as
these
does
it
can
savings.
sometimes
and
all
o r g a n i z at i o n
a
purposes
vertical
(or
introduce
Also,
the
business
downstream
is
a n d
the
stages
at
aim
horizontal)
of
of
integrate
another
becoming
integration
proportionally
protability
will
e n v i r o n m e n t
greater
to
protable.
greater
complexity
integration
vertically
more
lead
can
only
to
(costs)
change
divest
over
time:
upstream
time.
backwards
vertical
primary
horizontal
horizontal
integration
secondary
tertiary
forwards
vertical
quaternary
Figure 1.1.3. Business sectors and types of integration
Sectoral change
The
size
of
each
sector
of
the
economy
may
change
because,
just
as
TOK discussion
individuals
or
Economists
businesses
usually
grow
measure
and
the
develop,
size
of
so
each
too
sector
will
in
countries.
terms
of
the
Are business sectors “timeless”?
number
of
people
employed
by
the
industries
in
that
sector.
The
Have they always existed, or
traditional
pattern
is
set
out
in
Figure
1.1.4.
are they specic to cer tain
Closely
related
termed
“social
complex
whereas
skilled
sector
are
raw
ability
tandem:
as
(for
and
typists.
8
of
see
are
–
not,
however,
while
are
workers
to
with
the
thrive.
the
and
that
Thus,
historic periods?
more
Thus,
few
quaternary
managers
want
more
economies
technologies
have
relatively
(producers
and
is,
workers,
businesses
information.
social
sector
businesses
possible
and
a
scholars
and
of
have
developed
advance
improve;
as
in
social
develop.
linear.
word
about
some
often
for
technologies
computerized
some
low-skilled
people
develops,
and
what
advanced
often
of
advanced
knowledgeable
Thus,
is
economies
technologies
(which
contexts
skilled
social
economy
example
other
emerge
use
are
more
numbers
highly
improve,
The
extraction
consumers
make
the
(individuals
make
on
and
Developments
economies
social
large
typically
technologies
area
and
both
to
economies
needed
material
workers
relies
changing
technologies”.
the
information)
the
to
Technological
processors)
operating
occupations
occupations
perceived
as
and
word
its
related
processors)
obsolete,
become
“high
innovation
skill”).
such
as
in
one
workers
can
typewriters
obsolete,
new
ones
Businesses
that
can
anticipate
or
adapt
A N
to
I N T R O D U C T I O N
the
changing
T O
B U S I N E S S
environment
M A N A G E M E N T
can
Less developed
well,
even
in
industries
that
are
perceived
as
“in
decline”.
In
general,
(low income) economies
developed
both
done
in
economies
Canada
and
remarkably
Australia.
economies
German
have
well:
Another
of
the
have
is
has
a
strong
and
a
two
in
primary
Canada
as
sector
and
one
of
quaternary
of
strong
the
primary
Germany:
retained
engineering
from
two
farming
example
it
away
however,
organic
world,
businesses
high-quality
moved
Australia,
its
wine
the
In
sector.
have
primary
production
most
secondary
developed
ter tiary
However,
long-standing
secondary
sector.
industries
quaterary
strengths:
sector.
Developing
The
process
of
shifting
from
one
proportional
weighting
of
sectors
in
an
(middle income) economies
economy
primary
can
to
a
produce
sector
to
an
require
fewer
occur
and
may
other
as
require
of
will
mostly
physical
well.
As
be
(as
skills
economy
the
as
economy
may
one
tertiary
will
not
be
to
the
short
secondary
damage
are
the
primary
secondary
supply.
ter tiary
another.
needed
goods).
on
example)
Secondary
in
to
for
quaternary
tangible
environmental
be
sector
or
based
sector,
resources.
that
from
for
shifts
an
secondary
human
these
services
against
as
diverted
in
from
the
specialist
resources
an
on
such
based
intangible
protections
(shifting
based
resources,
too,
economy
production
weighting
economy
on
resources,
Finally,
can
an
strains
businesses
Financial
the
different
sector
quaterary
sectors
as
much
Other
sector,
often
will
in
strains
legislation
weak,
Developed
(high income) economies
and
primary
manufacturing
rms
in
developing
countries
often
do
more
damage
to
the
secondary
environment
than
manufacturing
in
developed
economies.
ter tiary
quaterary
Entrepreneurship and intrapreneurship
Both
as
entrepreneurs
they
provide
opportunities.
to
the
for
the
by
impetus
of
a
large
their
intrapreneurs,
as
well).
business
start-up,
risk
of
ventures.
either
for
for
failure
They
a
typically
which
and
employers
Both
are
work).
both
and
likelihood
types
or
new
usually
entrepreneurs
product
of
for
a
to
products
develop
the
vital
business
and
self-employed
they
(which
against
new
are
innovative
are
organizations
of
the
for
business
benet
balance
intrapreneurs
Entrepreneurs
start-up
employed
the
and
new
(or
activity
business
were
Intrepreneurs
products
benet
or
people
whole
success
who
new
for
want
central
are
services
them,
intrapreneurs
of
Figure 1.1.4. Size of sectors
the
must
new
to
create
a
business.
Key terms
Innovation
is
central
to
what
entrepreneurs
and
intrapreneurs
do.
This
Entrepreneur
2
typically
comes
in
one
of
three
forms
:
an individual who demonstrates
●
market
reading:
observing
customers
and
competitors
and
then
enterprise and initiative in order
making
small
changes
to
existing
products
to make a prot.
●
need
to
seeking:
determine
communicating
their
with
current
and
potential
customers
Intrapreneur
needs
an individual employed by
●
technology
driving:
investing
in
research
and
development
and
a large organization who
following
opportunities
offered
by
technological
capabilities.
demonstrates entrepreneurial
Sometimes
people
imagine
that
“innovation”
always
involves
new
thinking in the development of
technologies
(computers,
telephones,
electronics,
etc.),
but
need-seeking
new products or services
innovation
often
need
for
exists
occurs
simply
otherwise
because
ordinary
someone
products
or
understands
services.
For
that
a
example,
in
2
Rober t M. Price, “Infusing Innovation into Corporate Culture,” Organizational Dynamics
(2007),
vol. 36, issue 3, pages 320-328.
9
tnemnorivne
do
dna noitazinagro ssenisuB 1
1 . 1
1
B u s i n e s s
in
tnemnorivne
dna noitasinagro ssenisuB 1
the
United
the
last
services.
and
the
States
30
Although
in
the
entrepreneurs
Other
social
are
in
the
business
home
some
all
of
have
workforce
or
workers
most
of
in
have
homeowning
for
lawn
occurred
demand
providing
social
has
these
in
and
the
been
equipment
met
services.
changes
patterns
garden
by
an
Some
successfully
built
industry.
prompted
increased
in
demand
the
these
this
e n v i r o n m e n t
changes
the
mostly
understood
emerged:
and
innovations
businesses
changes
a n d
increased
involved,
who
protable
changes
have
number
large,
new
social
years
processes
increase
women
o r g a n i z at i o n
other
in
the
the
dog-walking
the
day,
the
industries.
United
States,
business.
family
pet
As
Now
often
the
for
example,
that
has
percentage
fewer
nine
or
of
one
women
ten
hours
Professional dog-walkers have
alone
in
the
house.
Some
businesses
go
to
the
homes
in
which
both
partners
made the most of changes to
work
and,
for
a
fee,
take
the
family
pet
on
a
30-minute
walk
in
the
middle
families’ working habits
of
the
day.
Dog-walking
services
are
now
common
in
many
US
cities.
r f  p  b
People
start
business
for
many
reasons,
as
summarized
in
Table
1.1.3.
Table 1.1.3. Reasons to star t up a business
Working for someone else means that you do not get to keep all the rewards yourself. Although some
criticize this aspect of capitalism, one central element is that those who put their capital at risk (the
Rewards
business owners) get the rewards, whereas those who do not put their capital at risk (employees)
receive wages or salaries that are typically less than the return on capital is to the owners. Many
millionaires own “boring” small businesses.
Working for yourself means that you are your own boss and not following someone else’s rules.
Individuals with an entrepreneurial spirit sometimes feel constrained by bosses, policies, and
Independence
procedures in large organizations. Star ting your own business means that you can set and change the
policies and procedures as you see t.
Sometimes businesses are star ted by individuals whose positions were made redundant or who could
Necessity
not nd work . The necessity of having an income led them to star ting a small business.
Some people just want to see whether they can “make it” themselves. Star ting a small business typically
requires one person to perform all functions of the business (HR, marketing, accounts and nance, and
Challenge
operations management or production). Over time, if the business is a success, the business owner then
has to learn new skills as his or her role changes to accommodate a larger and more complex operation.
Many interesting businesses are set up by people with a passion for something who want to just keep
doing what they enjoy doing. The business producing Hawaiian Tropic suntan lotion was begun by a
Interest
high-school chemistry teacher who liked spending time at the beach. Many specialty shops – guitar
stores, lamp stores, ballet clothing stores, rare books stores, and many others – allow their owners to
work in an area for which they have a passion.
Businesses may see or nd an untapped opportunity in order to achieve “rst mover advantage”.
Sometimes businesses, large or small, stumble into opportunities for which they were not looking. The idea
Finding a gap
of Post-its®, one of the most successful products of the 3-M Corporation and which revolutionized interoce
communications, was stumbled across by accident by Dr Spender Silver, a scientist working at 3-M.
If you really believe in something, you may want to sell the idea to others. Yoga studios, for example,
Sharing an
are typically owned by people who themselves do yoga and want to spread the idea that yoga
idea
enhances quality of life. Marketing the idea helps their business, but often the original motivation to
open a yoga studio is to spread the idea.
10
A N
I N T R O D U C T I O N
T O
B U S I N E S S
M A N A G E M E N T
th pc f  p  b
15
time
it
takes
minutes
common
in
to
all
●
the
●
planning.
The
business
more
it
is
idea
refers
sophisticated,
–
service-driven,
or
business
Then
the
or
the
for
that
or
market-
to
must
to
4
might
weeks
in
vary,
for
example,
Argentina.
Two
from
features
are
start-ups:
the
basic,
fundamental
such
as
means
convince
of
others
the
should
associated
with
by
that
activity
sense
plan
up
a
business
business
the
or
must
the
the
service,
the
business
entrepreneur
starting
of
product
new
carefully
The
needs
some
the
the
that
house-cleaning
the
in
that
whether
product-driven,
a
manufacturing.
determined
which
Regardless
risks
business
up
example
is,
entrepreneur
many
a
to
idea
something
market-driven
purchasing.
register
successful
business
whether
to
Singapore
tnemnorivne
The
will
do,
something
idea
market
or
can
be
product
–
entrepreneur
service
is
or
basic
have
a
business
is
worth
or
sophisticated,
basic
in
business
order
to
idea.
reduce
business.
4 Establishing
1 Organizing
2 Researching
3 Planning
5 Raising the
6 Testing the
nance
market
legal
the basics
the market
the business
requirements
Figure 1.1.5. Steps for star t-ups
1.
Organizing
must
be
based?
be
its
a
2.
the
address
How
legal
basics .
several
will
business
suppliers,
potential
Rening
the
the
to
concept
determine
the
market.
case,
are
United
a
to
idea
feasible,
the
is
very
they
for
be
business
a
gap
its
in
or
failure
as
elude
she
the
business
in
50
Is
to
will
there
feasible
research.
outline,
–
itself
easy.
and
research
from
Were
others
that
However,
precise
are
Once
the
market
so
surveys,
between
going
What
structure?
obvious.
be
business
services?
do
While
new
business
distinguish
would
a
business
business?
broad
should
rates.
many
are
the
market
in
market
detection
example,
the
government
will
the
is
operational
make
that,
business
high
name
through
he
starting
Where
to
and
determined
determine,
that
States,
will
customers,
successful
have
difcult
short-lived
how
Rarely
starting
businesses
What
infrastructure
has
is
entrepreneur
questions:
entrepreneur
business
entrepreneur
business
the
structure?
sufcient
The
basic
rates
small
failure
80
per
new
of
and
failure
so
rates
cent
in
the
in
in
the
the
3
rst
In
four
years
Europe,
Thus,
then
will
once
do
will
target
the
operation;
and
he
or
market?
business
research
the
she
Can
25
developed
basic
market
target,
How
of
another
to
per
idea
is
conduct
new
in
the
failure
the
must
market
fail
precise
answer
research?
business
test
its
rst
rates
determined,
determine
entrepreneur
the
cent
economy,
the
year
are
Who
high.
business
market
some
alone.
also
basic
will
concept?
must
segment
be
it
questions:
the
What
will
3
http://www.statisticbrain.com/star tup-failure-by-industry/
11
dna noitazinagro ssenisuB 1
1 . 1
1
B u s i n e s s
its
“unique
selling
a n d
proposition
e n v i r o n m e n t
(USP)”?
How
will
the
business
Student workpoint
communicate
with
the
market?
1.2
tnemnorivne
dna noitasinagro ssenisuB 1
be
o r g a n i z at i o n
Let’s
the
of
consider
grocery
the
the
example
business.
basic
The
necessities
of
of
the
idea
is
entrepreneur
very
human
who
attractive.
wants
After
all,
to
enter
food
is
one
existence.
However,
market
may
too
competitors,
Be a thinker
research
Choose
may
be
very
revealing.
A
market
have
many
one
following
a
segment
of
the
grocery
market
(high
volume,
low
cost,
for
be
saturated.
Market
research
might
reveal
that
a
the
businesses:
example)
●
may
of
or
small
local
delicatessen
and
niche
café
market
there
(such
is
a
gap
as
for
in
the
organic
products
market.
Thus,
or
specialized
researching
the
meats)
is
market
where
has
rened
●
the
it
basic
to
a
business
idea
signicantly
(a
more
grocery
precise
store)
idea:
a
and
narrowed
speciality
and
grocery
rened
store
new
either
organic
products
and/or
specialized
Planning
the
business.
Once
the
concept
has
been
narrowed,
should
write
a
business
plan,
a
travelling
hairdresser
which
is
a
beautician
the
●
entrepreneur
of
drink
meats.
and
3.
energy
that
●
offers
manufacturer
document
after-school
sports
that
club
addresses
begin.
all
The
business
owners
of
plan
to
business
will
some
the
well
as
must
entity
business
–
can
the
be
tax
only
be
in
paid,
taxes,
such
as
unemployment
5.
Raising
the
rened,
a
business
started
from
protable
than
the
the
for
the
can
in
–
often
take
investor
or
its
business
legal
–
to
can
(even
include
taxes
that
insurance.
has
get
the
sustain
the
requirements
must
of
who,
the
not
must
government,
idea
if
In
pass
requirements
been
requirements
it
of
must
investigate
would
payroll
types
that
and/or
must
as
businesses
country.
the
lender
and
host
licences
These
in
legally
Other
medical
years
procedures
a
from
until
cash
or
the
business
has
practices,
all
not
even
legal
plan
have
the
business
operations
business
may
be
is
greater
condence
business.
external
met,
to
Who
the
in
will
business,
groups
plan
business.
between
write
the
organization
entities
taxes
of
money
business
auditing
the
and
nance
of
These
sorts
basic
is
business
pensions
the
legal
specic
the
business
operate
legal
business).
are
the
how
in
business
steps
them.
countries,
laws
benets,
the
of
a
new
the
business
operational
operate.
country.
beginning,
Any
the
various
written,
the
–
the
(which
the
have
can
its
most
trader
of
that
address
Work
lending
starting
the
The
potential
of
elements
businesses
and
In
(banks,
nanciers,
All
below.
especially
people
indicates
Finally,
Once
raise
and
accounts
the
or
to
operations
composition
inuence
with
they
also
plan
which
prots).
and
example
sickness
then
from
sole
employees’
support
accounting
prepare
12
to
prots,
of
nance.
must
it
can
must
detailed
specic
trying
operator
costly.
but
and
business
and
a
for
before
and
requirements
income
if
accordance
inspections
as
obligations.
the
The
the
practices,
businesses
extensive
of
investors
is
are
before
institutions
entrepreneur
that
even
from
countries
certain
tax
corporations,
established
many
plan
requirements.
laws
planned
stakeholders,
capital.
most
and
labour
registered,
separate
be
its
determine
be
issues
have
business,
For
be
nancial
condence,
legal
that
and
the
to
business
multiple
through
operate.
Establishing
of
the
need
provide
requires
potential
countries
of
serve
may
think
provide
that
business
that
business
foreseen
will
the
business
can
issues
elements
plan
companies)
4.
the
bullet
down
at
points
to
for
create
your
Divide
you
least
for
the
and
ve
each
step
verify
start-up
other
that
investors
capital,
Most
it
the
investment
the
they
may
means
of
–
are
Some
may
required.
who
selling
all
person
business,
business.
accurate?
or
be
that
entrepreneurs
control
to
they
monies.
start
so
will
a
–
be
Then,
come
When
partial
up
some
shares
Who
is
I N T R O D U C T I O N
a
of
but
the
the
the
some
of
the
lenders?
of
do
capital
must
provides
the
not
will
M A N A G E M E N T
attract
or
equity
business.
want
be
capital
What
B U S I N E S S
entrepreneur,
someone
owner
business
the
business
from
T O
tnemnorivne
will
A N
in
to
the
may
kind
of
lose
form
be
of
loans
terms
will
want?
Table 1.1.4. Possible problems for a star t-up
Problems a new business may face
Organization
Market research
Business plan
Legal
●
The location of the business is inappropriate.
●
The name does not register.
●
The structure does not work .
●
Supplies are unreliable.
●
The research was poor.
●
The target market wasn’t appropriate.
●
The test was too optimistic.
●
Channels of communication were weak .
●
The business plan did not convince.
●
Goals were too vague or contradictory.
●
Labour laws were not addressed.
●
Registration was too dicult.
●
Tax obligations were not addressed.
●
The accounts were not kept properly – cash ow, in
requirements
Finance
par ticular, was a problem.
The market
6.
Testing
How
“pilot”)
of
the
will
the
be?
respond
types
and
of
that
of
the
suggest
The launch failed.
●
The pilot was inconclusive.
●
Success was limited – the product failed to inspire.
In
to
by
the
–
nal
the
types
of
reactions
restaurants,
changing
the
The
idea
will
business
in
for
well
a
launch
on
will
only
a
–
enough
the
or
by
the
way.
respond
is
to
rm
Other
quickly
changing
market
of
(a
success
and
slow
often
received
chance
for
capital-intensive
and
recipes,
business.
scale
expensive
can
testing
the
criteria
limited
changing
reasonable
of
small
especially
example
of
a
the
extremely
purpose
be
the
begin
What
is
menu,
has
is
business,
launch
business.
the
stage
business
reaction?
initial
market
business
that
The
Will
some
the
business
easily,
aspects
●
consumer
manufacturing,
can
Raising medium-term to long-term nance was dicult.
occur?
test
pilot
Raising star t-up capital was too dicult.
●
market.
that
to
●
other
verify
consumers
to
success.
13
dna noitazinagro ssenisuB 1
1 . 1
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
Even
tnemnorivne
dna noitasinagro ssenisuB 1
Pbl  w b y fc
when
probability
they
did
basic
all
of
these
before
or
poor-quality
to
investors
operate,
of
these
Even
if
of
from
is
or
a
plan,
the
the
and
New
were
certainly
and
strained
successfully.
cause
it
sales
and
to
high
had
upon
or
of
in
insufcient
unconvincing
properly
did
what
problems
satised,
insufcient
not
develops
Sometimes
the
Other
right
cannot
have
funds
to
materialize.
All
failure
skills.
often
Therefore
results
failure
In
the
capital
not
strong
times
control
less
would
a
anticipate
business
which
not
had
accurately
start-up
executives
can
fail.
generally
a
poor
a
fail.
idea
with
always
a
to
have
because
based
were
marketplace.
labour
cannot
or
still
the
recruit
operating
control
may
was
and
so
business
business
business
business
businesses
managers
business’s
a
good
weakens,
the
still
do
were
planning
unsuccessful
in
the
requirements
cause
a
often
services
and/or
business
businesses
economy
business
was
start-ups
fail
opened:
or
research,
recognition
competitors
between
has
that
ever
legal
kept
can
to
followed,
products
launch
inability
competitors.
the
its
market
start-up
name
business
poorly
the
are
Businesses
lenders,
problems
because
of
or
were
business
lack
the
organization,
accounts
steps
failure.
other
the
rely
brings
be
things
of
it
its
upon
out
present
many
cases
reactions
actions
to
from
stems
if
if
problems
the
outside
a
fail.
th l f  b pl
A
business
plan
objectives.
asking
The
is
a
the
It
where
plan
the
applies
detailed
heads.
targets
A
for
to
business
required
out
plan
of
be
from
the
period,
and
of
the
regularly
all
measured
what
and
its
of
against
several
clearly
achieve
business
stated
years,
objectives
to
such
and
should
necessary,
the
organization,
business
priorities
over
if
its
operations
needed
and,
elements
the
meet
long-term
resources
reviewed
the
in
will
day-to-day
potentially
short-term
analysis
be
organization
back
heading
individuals
the
is
is
delivering
will
in
the
specic
an
key
Success
set
a
should
Responsibility
how
stepping
business
to
with
It
allocated
out
statement
business
objectives.
be
sets
involves
as
be.
and
of
these
updated.
plan
will
department
performance
plan.
usually
combined
with
detailed
budgets
to
nance
the
activities.
th pp f  b pl
A
14
business
plan
the
is
drawn
●
support
●
attract
●
support
strategic
●
identify
resource
●
provide
a
●
work
new
as
a
launch
funds
focus
of
up
a
from
to:
new
organization
banks,
grant
needs
measure
development
of
business
business
providers,
planning
for
or
success.
or
idea
venture
capitalists
business
want
of
to
new
years
with
be
have
some
low
If
condent
business
in
a
may
experience.
they
failure
sectors
risk
business
needs
is
going,
and
A
good
of
to
–
is
it
is
plan
will
To
may
lend
paid
high
will
–
has
to
get
be
of
back
only
it
ideas,
funds
up
persuade
that
going
original
to
be
very
failure.
of
are
banks
prove
how
business
plenty
banks
I N T R O D U C T I O N
with
to
80
want
a
its
there.
cent
signicant
other
use
to
Since
it
knows
it
they
risk
rst
two
businesses
money,
words,
M A N A G E M E N T
lack
the
the
those
homework,
In
often
over
to
lend
B U S I N E S S
businesses,
interest.
lend
to
they
new
per
to
bank
done
but
to
T O
tnemnorivne
Entrepreneurs
A N
a
where
needs
stakeholders.
a
it
plan.
For
Student workpoint 1.3
potential
detailing
investors,
how
the
it
will
provide
business
will
a
use
basis
a
for
bank
assessment
loan
or
of
risk
investment.
by
For
Be a communicator
employees,
it
will
identify
specic
objectives
and
goals
and
provide
a
Using
focus
for
action
and
a
source
of
motivation.
For
suppliers,
analysis
in
the
business
plan
may
identify
whether
there
are
likely
to
be
the
from
a
commercial
relationship
with
the
the
will
local
provide
Businesses
a
clear
plan”
community
the
that
plan.
which
groups
basis
such
have
This
can
as
for
is
pressure
become
often
be
the
and
assessing
in
the
groups,
successful
the
presented
style
to
government
of
will
a
the
have
to
in
usually
investors
bank
the
role
document
potential
or
access
organization’s
you
on
discussed
page
12,
a
business
plan
and
present
business.
it
For
business
workpoint
long-term
create
advantages
the
of
business
the
or
the
other
the
rest
of
the
class.
plan
community.
started
called
to
off
with
“Business
interested
manager.
th l f  b pl
There
are
six
elements
●
the
●
business
●
HR
●
nance
●
marketing
●
operations.
Each
set
business
in
a
aims
business
and
plan:
objectives
organization
element
out
idea,
of
has
Table
a
specic
focus
and
should
address
key
questions,
as
1.1.5.
15
dna noitazinagro ssenisuB 1
1 . 1
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
Element
tnemnorivne
dna noitasinagro ssenisuB 1
Table 1.1.5. The key questions for a business plan
For this element
Key questions to address are:
the focus is on:
Star ting the
setting out the
What is the core idea and what are the objectives of the business? How will the
business – the
business idea in
product work? Does it have a unique selling point (USP)? How will the product
idea
the right context
be developed? Why should it succeed?
Business
how the business
Where will the business be located? What structure will it have? What type of business
organization
will be organized
will it be? Who will make what decisions? How will the owner or owners share out the
prots? Are there any legal requirements necessary to start up the business?
HR
Finance
Marketing
Operations
how the business
Who will have what responsibilities and what rewards should they expect? What will
will be staed
be the HR plan? What type of contract will be used?
how the business
Where and how will the entrepreneur source the start-up capital and at what cost? This
will be nanced
unit should include projected budgets, income statements, and cash-ow forecasts
how best to
What market research has been done? Has a sales forecast been made? Is the
market the
product to be targeted at a particular segment of the market or will it be mass
product
marketed? What will the promotional mix be? How will the product be distributed?
how the product
How will production be organized? How many units will the business produce?
will be made
How long will production take? Is there likely to be a lead time? What is the
supply chain likely to be?
r chckl
✓
Businesses
produce
✓
Human
the
resources
raw
make
There
✓
the
✓
the
✓
four
tertiary
✓
the
quaternary
An
intrapreneur
products
A
new
both
The
or
are
business
resources
to
to
carry
out
the
buildings,
include
the
aims
of
machinery
money
needed
to
business
involves
activity:
the
acquisition
processing
raw
of
raw
materials,
materials.
usually
where
provides
individual
make
an
most
a
service
services
who
businesses
that
focus
demonstrates
sit
on
knowledge
enterprise
and
prot.
individual
employed
by
thinking
a
in
large
the
organization
development
of
services
for
many
researching
might
a
resources,
its
face
nance,
raising
and
plan
Steps
market,
challenges
control
business
reasons.
the
requirements,
within
of
is
an
started
legal
elements
of
entrepreneurial
include:
things
human
16
is
new
business
nancial
include
resources
involves
sector
to
demonstrates
establishing
✓
is
order
who
Businesses
needed
resources
generally
sector
entrepreneur
in
people
sectors
sector
the
An
and
product
✓
a
✓
a
physical
service.
sector
secondary
create
the
Financial
or
main
primary
initiative
✓
are
Physical
product
are
human,
services.
materials.
the
to
✓
and
organization.
and
✓
combine
goods
nance
at
each
external
are:
the
marketing
involved
planning
starting
new
testing
stage.
factors
idea,
and
and
in
the
the
These
beyond
business
operations
market.
can
its
up
business,
be
control.
organization,
A N
I N T R O D U C T I O N
T O
B U S I N E S S
M A N A G E M E N T
Pcc q
®
and
Tata
Coffee
tnemnorivne
Starbucks
®
Starbucks
is
a
multinational
coffee
shop
chain
based
in
the
United
States
®
(US).
Starbucks
is
in
discussions
with
Tata
Coffee,
an
Indian
company,
®
about
opening
The
Indian
into
India.
Tata
Coffee
Starbucks
government
grows
and
coffee
limits
sells
its
shops
the
own
in
entry
the
of
coffee.
fast-growing
Indian
foreign-owned
It
is
owned
by
retail
Tata
market.
chains
Group,
the
®
largest
Indian
considering
seven
business
forming
years,
the
a
two
conglomerate*.
strategic
Starbucks
alliance
companies
have
or
a
done
and
joint
Tata
venture.
business
with
Coffee
For
are
the
each
past
other.
®
Starbucks
coffee
has
shops
Forming
a
purchased
in
Europe
strategic
coffee
and
from
the
alliance
or
US),
a
various
suppliers
including
joint
venture
from
with
in
Tata
Tata
India
(for
its
Coffee
Coffee
will
®
allow
Starbucks
to
enter
the
Indian
market.
Additional
advantages
for
®
Starbucks
include:
®
Starbucks
●
could
nationwide
open
hotel
coffee
shops
inside
hotels
of
the
Tata
Group’s
chain
®
Tata
●
the
Coffee
Over
has
Group
numerous
has
the
long
past
increased
choice,
would
retail
been
popular
decade,
of
to
1
that
in
however,
young
over
allowing
chains
signicantly,
appeal
population
consider
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India
consumption
coffee
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to
open
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shops
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owns.
southern
new
Indians
billion)
it
Starbucks
but
of
shop
coffee
chains
disposable
developing
not
fast
in
in
the
with
income.
(with
a
the
north.
north
more
India
growth
(with
rate
its
of
®
8%
of
its
GDP
this
year).
Starbucks
has
carried
out
research
and
found
®
that
the
global
brand
name
“ Starbucks
”
is
already
well-known
in
India,
®
although
there
are
no
Starbucks
coffee
shops
there
yet.
®
The
competition
dominates
shop
the
chain,
in
India
market.
is
An
intense.
Italian
Café
Coffee
company
Day
owns
,
an
the
Indian
other
big
company,
coffee
Barista™
[Source: adapted from “Starbucks to broaden dealings in India”, International Herald
Tribune, 14 January 2011]
a)
Dene
the
b)
Explain
term
the
multinational
importance
of
company.
branding
for
the
decision
[2
marks]
[4
marks]
of
®
Starbucks
c)
Explain
to
one
enter
PEST
the
Indian
factor
that
market.
may
inuence
the
decision
®
of
IB,
*
Starbucks
Nov.
to
enter
the
Indian
market.
[2
marks]
2012
conglomerate: a company that is made up of a number of dierent companies and business that is
typically in diversied elds and, often, dierent sectors of the economy
17
dna noitazinagro ssenisuB 1
1 . 1
tnemnorivne
dna noitasinagro ssenisuB 1
1.2 Types of business organi zation
By the end of this chapter, you should be able to:
➔
Distinguish between the private and the public sectors
➔
Outline the main features of the following types of for-prot
(commercial) organizations:
●
sole traders
●
par tnerships
●
companies/corporations
Outline the main features of the following types of for-prot social
➔
enterprises:
●
cooperatives
●
micronance providers
●
public-private par tnerships (PPP)
Outline the main features of the following types of non-prot social
➔
enterprises:
●
non-governmental organizations (NGOs)
●
charities
m f f p-b (ccl)

Prot-making
businesses
existence,
the
but
●
sole
●
partnerships
●
companies
●
for-prot
or
social
micro-nancers
■
public–private
common
the
to
feature
generate
following
partnerships
of
revenues,
business
18
in
a
all
prot.
types
the
of
legal
organization
and
following:
of
(PPPs).
these
The
types
prots
a
of
business
business
is
that
receives
one
can
be
of
their
shown
formula:
Prots
Total
many
are
enterprises
■
is
in
corporations
cooperatives
aims
come
common
traders
■
The
by
most
often
=
total
called
specied
revenues
“sales”,
period
of
are
time.
all
total
the
Total
costs
income
costs
are
received
all
the
by
costs
the
incurred
that
and
business
expenses
formula
The
in
are
suggests,
difference
the
same
measured
but
for
between
period
is
now
them
of
time.
actually
the
simple
can
be
The
more
way
that
complex
form
is
expressed
O F
B U S I N E S S
O R G A N I Z A T I O N
revenue
than
this
simple
tnemnorivne
by
T Y P E S
enough.
as
shown
in
Figure
1.2.1.
equity
sole trader
turnover
cooperative
par tnership
company
assets
employees
Figure 1.2.1. Revenue, expenses, and prots in dierent types of organization
sl 
Most
people
budget
and
choose
to
a
is
fullls
many
seeing
a
The
●
the
main
The
the
in
the
a
features
sole
decisions,
business
trader
form
of
reasons
of
a
sole
and
runs
but
sole
decisions
and
have
No
distinction
to
traders
ultimate
the
those
just
include
a
the
business.
responsibility
sole
their
trader
own
boss,
creating
their
Sole
the
often
dream.
following:
to
make
for
limited
they
quickly,
living
a
proprietor),
a
being
empowered
themselves
sole
Being
respond
or
with
constraints,
called
business:
business
including
begin
organize.
a
community,
people,
the
these
to
start
wanting
trader
owns
Facing
business
the
typically
(sometimes
people
and
serving
trader
other
sole
market
product,
employ
the
of
own
organization.
as
simplest
gap
own
their
simple
operate
which
their
starting
traders
make
may
some
of
management
business.
Monique owns and runs her own
●
legal
trader.
the
The
debts
lawsuit).
●
The
that
from
of
the
institutions
●
The
a
high
or
sole
limited
may
is
business
customer.
be
Sole
other
sole
or
or
from
nance,
family,
reluctant
rate
close
that
of
to
get
can
the
banks,
their
sole
for
to
as
café business - she is a sole trader
all
the
the
a
sole
of
a
money
personal
loan
traders
personal
other
trader
sole
liability”.
from
such
and
the
outcome
refers
come
because
the
liable
Regardless,
savings
nancial
money
because
businesses.
customer.
the
as
is
and
“unlimited
sources,
bank.
lend
thus,
nance
It
other
either
to
the
to
use.
business
(such
have
friends,
start-up
allows
traders
a
and,
Here,
for
from
the
claims
traders
limited.
trader
friends
failure
or
business
available
because
business
small
has
between
the
words,
usually
and
have
limited
the
is
is
business
business
family
typically
of
the
trader
other
nance
the
savings
are
of
In
sole
exists
sole
know
A
trader
their
sole
to
trader
interact
customers
is
usually
with
on
an
each
individual
19
dna noitazinagro ssenisuB 1
1 . 2
1
B u s i n e s s
which
larger
tnemnorivne
dna noitasinagro ssenisuB 1
basis,
●
The
the
allows
sole
time,
trader
sole
the
business
tax
has
money
or
sole
in
for
of
the
the
a
sole
the
complete
●
exibility
privacy,
●
minimal
●
close
The
have
a
more
personalized
service
than
to
do
consensus
of
the
the
and
being
sole
a
business.
a
a
In
Sole
easy
from
sole
the
traders
lease)
and
general,
and
country
trader
traders
Sole
have
is
usually
traders
to
to
simpler
make
devote
time
all
to
decisions.
sole
trader,
vary
as
not
prot
sole
as
of
anyone
privacy.
le.
for
(such
Most
to
much
well,
relatively
laws
organizations.
out
as
statements.
of
operating
ll
nances
how
contract
degree
therefore
advantages
know
nancial
generally
and
to
building
to
their
Sometimes,
nancial
see
accountability.
declare
Although
legal
and
limited
to
want
high
is
starting
from
a
to
quick.
belong
control
in
trader
as
Other
no
is
legal
that
all
prots
distinction
advantages
of
operating
as
over
terms
of
all
the
important
working
hours,
decisions
products
and
services,
and
operations
sole
legal
ties
Sole
to
owner
as
success
into
paperwork
and
to
to
of
enthusiasm,
falter.
a
include:
●
●
which
need
of
and
have
purposes.
business
and
greatest
changes
enter
themselves
trader
not
tax
may
types
business
separates
for
general
legal
discussion
from
–
other
less
decisions
One
e n v i r o n m e n t
provide
privacy
do
traders
the
inexpensive
country,
or
lessors
Registering
have
to
authorities,
made
lenders
however,
has
traders
borrow
than
them
a n d
businesses.
except
●
o r g a n i z at i o n
traders
generally
not
need
to
divulge
information
formalities
customers,
businesses
and
do
health
traders
also
which
can
operating
of
the
have
sole
as
give
sole
traders
other
a
competitive
traders
depends
themselves.
disadvantages,
advantage.
on
Any
which
of
the
drive,
these
include
can
the
following:
●
Competing
daunting
●
There
trader
and
●
●
●
will
her
on
for
There
is
20
lack
businesses
death
–
all
by
yourself
the
limited
the
made.
seek
will
be
for
with
advice
in
business
scope
the
business.
unlimited
to
ineffectiveness
often
continuity
running
there
potential
decisions,
of
day-to-day
mistakes
and
the
opportunity
be
time
Generally,
cash
established
stress
all
be
may
burden
●
be
makes
owner’s
There
or
may
limited
There
the
against
can
be
a
challenge.
the
limited
from
event
itself
may
expansion
time
to
the
sole
make
them
others.
of
a
not
as
because
serious
accident
or
continue.
the
owner
spends
all
his
business.
limited
The
operations
liability
of
capital,
focus
will
than
the
on
which
be
may
more
looking
owner
for
any
on
to
also
create
having
the
a
sufcient
future.
faults,
debts,
or
the
majority
business
Sometimes,
a
decent
of
sole
living
complexities
niche
to
in
enough
to
surviving
up
or
an
traders
not
often
support
be
within
to
to
on
a
see
growth,
the
chief
rst
stay
the
goal
few
to
too
risks
of
a
years
which
Sole
great.
of
and
allows
growth
them
are
too
to
the
sole
prots
many
O R G A N I Z A T I O N
dies.
often
When
Their
trader:
or
about)
traders
B U S I N E S S
typically
retires
worry
expand.
sole
of
trader
(and
scale.
need
are
businesses
sole
small,
larger
no
or
the
manage
challenges
the
small
when
want
have
and
the
remain
end
operating
market
may
fail
traders
to
and
of
the
expand,
sole
comes
O F
have
a
not
great.
sole
make
many
traders
are
tnemnorivne
The
T Y P E S
want
large
Just
traders
give
existence.
Php
An
alternative
business
is
associates
type
formed
or
people
popular
with
doctors,
lawyers,
The
●
main
each
●
The
all
the
No
legal
Most
to
partner
who
is
business
or
●
they
The
bring
of
no
a
law
commercial
role
vary.
of
and
but
the
run
they
business,
number
the
partners
business
and
of
the
than
and
debts
legally
partnership’s
the
and
can
debts
other
be
even
called
if
a
business.
for
capital
which
person.
a
of
one
unlimited,
partners.
some
as
than
tecÚically
partnership’s
more
(their
a
sole
to
usually
to
trader
start
Also,
willing
up
provide
is
the
means
banks
partnership
in
partners” ,
investment
Otherwise,
the
more
and
other
nance
considered
to
a
more
as
a
partnership
a
sole
and
could
the
however,
than
This
in
which
a
means
that
partnership)
sleeping
and
partner
business.
the
trader.
product
situation
professionals
rm
law,
own
own
more
is
liability
the
“sleeping
prot.
expertise,
partnerships
example,
be
operated
can
the
the
one
trader,
nance
the
service
different
business
as
2–20
business,
only
usually
sole
may
other
varied
are
as
rms.
trader.
some
of
of
of
by
partners
available
the
are
such
people
also
of
following:
who
other
Partners
between
contribute
by
the
partners ,
percentage
more
Partnerships
consultancy
employ
unlimited
small
a
of
all
cent
into”
to
sole
business
more
the
a
share
performs
●
“buy
than
provide
a
a
per
provided
partners
expect
have
100
type
friends,
qualications,
include
managed
have
for
This
are
ownership.
difcult
exists
liable
partners
if
and
number
more
institutions
than
Some
are
only
to
partnership
stable
is
usually
All
than
nancial
the
the
may
they
skills.
business
decisions.
partnerships
for
owns
business.
capital
owned
Often
business
by
Partners
partnership.
related
even
percentage
Partners
pay
Finance
or
a
related
with
jointly
distinction
obligations.
●
is
a
of
people.
or
people
management
agreement
partners,
upon
made
with
that
partnership
Although
increases.
●
a
is
more
similar
together.
business
getting
of
are
partner
person.
with
or
accountants,
features
business
make
business
two
professional
Decisions
the
of
by
have
international
such
is
as
or
or
often
lawyers
the
doctors.
specializing
civil
in
in
a
partners
offerings
true
or
offer
different
service
especially
lawyers
law,
can
Often,
of
case
For
criminal
law,
law.
21
dna noitazinagro ssenisuB 1
1 . 2
1
B u s i n e s s
Partnerships
than
tnemnorivne
dna noitasinagro ssenisuB 1
●
o r g a n i z at i o n
a
legally
do.
it
is
the
It
sole
required
Having
a
typically
trader.
a
legally
includes
responsibilities
■
nancing
■
division
■
liabilities
■
procedures
a
major
of
deed
for
of
a
Partners
Usually,
get
Partnerships
in
general,
are
partnerships
business
sense
the
rights
and
their
rights
and
not
often
because
duties
of
of
the
of
than
sole
Drawing
business
If
some
traders
up
but
one
a
and
deed
will
of
help
the
determining
percentage
advantages
different
that
the
skills
are
expect
are
the
partner’s
provided
a
allocated.
active
In
partners
considered
partnership’s
prots
are
prot.
allocated
to
ownership.
compared
production
each
has
may
partners
partners”,
drawings
equally.
to
partner
person
other
the
prots
according
that
the
“sleeping
or
the
out
then
than
determined,
efcient
all
paid
business.
with
their
bring
of
and
to
sole
traders:
qualities,
through
the
partnerships
specialization
and
labour.
partners
generally
●
Partnerships
Partnerships
can
are
bring
more
in
have
end
also
perceived
have
help
partner
legally
other
the
salaries
to
likelihood
decreases.
stable
share
and
nance,
is
the
continuity.
registering
prots
certain
partnerships
Each
of
of
and
partners
more
of
allocated
of
know
expertise
to
a
business
than
one
can.
necessarily
22
out
accountability
term.
purpose
often
the
necessarily
prot
more
Partners
of
the
have
partners
down
long
are
according
●
is
not
the
division
they
●
the
amount
for
have
person
slow
partnerships
partners
often
As
good
sets
partnership,
typically
ownership
after
partners
In
partnership,
makes
that
of
partnerships
circumstances.
between
agreed-upon
expenses
●
in
do
the
likelihood
proportion
addition,
Then,
are
will
substantial
greater
may
within
prots
percentage
●
of
degree
countries
about:
partnership,
higher
organization
the
most
deed
document
changing
disagreement
partnership
As
a
greater
prots
Partnerships
have
●
up
a
in
partnership
information
■
a
draw
of
binding
responsibilities
●
have
Although
e n v i r o n m e n t
partners.
With
●
to
deed
a n d
if
more
partnership,
a
have
for
one
stability
and
lower
risk,
when
others
continuity
as
are
the
ill
or
on
business
holiday.
will
not
dies.
all
liability,
of
the
exception
partner
or
of
greater
nance.
disadvantages:
unlimited
The
to
more
chance
partner
certain
responsible
partner.
to
emergencies
one
have
has
access
or
which
means
businesses
to
certain
this
debts
liability
partners
are
is
that
or
each
partner
actions
when,
declared
in
of
the
any
deed
“limited
limited
Although
partners
specied
in
Compared
●
the
to
partnerships
nancial
from
An
●
deed
individual
Prots
●
Partners
and
have
or
to
may
access
Limited
does
rely
but
as
to
nance
not
on
shared
disagree,
according
operate
less
maximizing
to
be
that
have
partner
has
vary
liability
to
also
country,
limited
B U S I N E S S
in
O R G A N I Z A T I O N
general,
control
(both
partnership).
businesses
institutions.
business
laws
limited
of
usually
expanding
●
the
have
O F
tnemnorivne
partners”.
T Y P E S
often
in
and
control
partners.
the
worst
case
of
and
a
making
goodwill
the
(corporations),
banks
prevent
for
complete
work
among
which
can
from
opportunities
have
the
companies
loans
other
business
prots.
over
the
others.
could
break
up
the
partnership.
In
summary,
partnerships
organizations.
sole
traders
more
of
a
of
a
As
and
because
chance
chance
of
are
multiple
of
safer
of
the
surviving
expanding
than
partners
if
can
greater
traders
inherent
changing
the
sole
typically
market
conditions
are
but
raise
also
more
stability,
more
complex
nance
than
partnerships
conditions
and
have
have
more
right.
Cp  cp
Perhaps
the
most
(corporation
may
have
in
the
important
North
type
America)
following
–
Incorporated
LLC
–
Limited
PLC
–
Private
or
PTE
–
Private
Limited
LTD
–
Limited
Company
Public
Limited
SA
–
Sociedades
can
after
is
the
company
recognize
its
Anónima
(United
a
company
as
it
logo:
States)
Company
Company
Company
Sociedad
you
(USA/Canada)
Liability
–
business
abbreviations
INC
SA
of
and
(UK)
(UK)
(various)
(Latin
Anônimas
America
(Brazil,
except
Brazil
and
Mexico);
Portugal)
This business in the USA has registered
itself as a corporation
SpA
AB
–
–
Bhd
Società
Aktiebolag
–
GIE
per
–
Berhad
Azioni
(Finland,
(Malaysia,
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23
dna noitazinagro ssenisuB 1
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25
dna noitazinagro ssenisuB 1
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27
dna noitazinagro ssenisuB 1
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B u s i n e s s
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F-p cl p
Although
the
term
“social
enterprise”
has
a
slightly
different
meaning
TOK discussion
or
of
legal
standing
business
that
in
different
has
a
social
countries,
purpose.
in
general
Social
it
refers
purpose
to
a
generally
form
means
Is the label “social enterprise”
that
the
organization
aims
to
improve
human,
social,
or
environmental
appropriate?
well-being.
Although
social
enterprises
should
and
typically
do
operate
Can businesses be separated
to
a
professional
standard
(regarding
legal
existence,
proper
accounts,
from a prot motive? Can any
management
structure,
and
reporting
procedures,
etc.),
the
social
business be separated from a
aim
nevertheless
takes
priority
over
any
other
aim
such
as
growth,
social purpose?
maximizing
prot
The
they
social
we
do
making
prots,
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not
want
to
which
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are
typical
enterprises
maximize
prots
aim
if
objectives
to
make
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so
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of
for-
prot.
compromises
purpose.
for-prot
models
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or
organizations.
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their
sales,
social
have
enterprises
organization,
enterprise
seen
already
often
including
have
the
can
(sole
one
take
the
trader,
of
form
of
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partnership,
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other
of
or
models
the
three
company).
of
business
following.
Cooperatives
Cooperatives
and
run
by
countries
are
all
can
a
the
form
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a
partnership
“members”
have
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more
but,
than
whereby
unlike
20
the
business
partnerships
partners),
(which
cooperatives
is
owned
in
most
may
have
29
dna noitazinagro ssenisuB 1
1 . 2
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particularly
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money
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services)
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or
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most
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industry
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money
small
use
model
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business
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have
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repayment
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use
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Bangladesh
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Public–private par tnerships (PPP)
A
PPP
is
public
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a
social
a
specic
or
a
business
sector.
aim
part
in
such
doing
reserve.
a
projects.
in
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France
the
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construct
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for
prots.
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return
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the
the
also
be
for
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sector
expertise.
large
the
with
energy
on
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small
company
Eurotunnel,
and
facility
alternative
private
involve
Swedish
the
site
to
not
private
multinational
the
of
incentives
may
business
education).
expected
the
tax
sector
construction
or
priority
and
offers
help
the
development
business
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private
healthcare
the
but
a
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sector
to
take
partnerships
businesses
Skanska
channel
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tunnel
UK.
features
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PPP
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social
enterprise)
include
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need
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it,
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big
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as
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a
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created
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sufcient
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activity
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and
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enterprises
business
need
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to
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business.
between
social
between
recognize
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ensure
however,
collaboration
community.
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prots
aim,
prots
but
aims
being
usually
community
met
by
and
the
signify
and
ordinary
a
local
desire
government
business
government.
31
dna noitazinagro ssenisuB 1
1 . 2
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community.
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problems
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which
32
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status
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to
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activities
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enterprises
governance
are
to
other
making
interests.
have
report
to
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stakeholders
same
of
enterprises,
properties
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prots).
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convey
of
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those
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style
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and
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willingness
business.
traders,
spirit
landlords
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greater
for-prot
competitors
stems
support
wages,
the
devise
from
partially
on
democracy
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consultative
from
a n d
for
not
growth.
sufcient
margins
in
and
property,
working
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in
prots,
plant,
capital
business
the
long
much
and
model
term.
of
equipment
requirements
social
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●
with
the
prot
may
social
be
their
products
less
can
business.
services
them
to
to
as
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survive
and
for
have
not
survive
a
prot
because
inexpensive
tend
to
large
as
have
recession
B U S I N E S S
prots,
O R G A N I Z A T I O N
for-prot
expand.
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lower
businesses
enterprises
permit
to
capital
tend
for-prot
and
social
the
struggle
insufcient
traditional
for-prot
of
may
enterprises
than
that
size
enterprises
O F
strength.
margins
they
often
possible.
deep
or
As
a
nancial
times
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and
try
when
tnemnorivne
increase
T Y P E S
prots
to
make
result,
strength
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is
available.
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The
main
(NPOs)
Some
●
features
are
as
businesses
prots
at
where
the
from
main
these
aim
similar
the
which
A
surplus
costs.
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operating
These
to
aim
is
social
Red
to
a
social
business,
the
is
any
and
Foundation,
than
the
extra
is
(commercial)
a
private
are
also
social
surpluses
to
set
revenue
social
=
as
sector
social
purpose
in
that
organizations
do
not
aim
enterprises
–
but
they
do
they
not
–
are
aim
to
make
that
is,
different
to
make
any
enterprises
can
is
used
as
businesses,
than
revenue)
than
to
prots.
be
A
is,
they
conceptually,
distributed
advance
the
generate
surplus
to
social
the
very
owners
purpose
for
up.
generated
after
subtracting
an
NPO’s
follows:
the
revenues
are
very
total
large:
Mohammed
Gulbenkian
organizations,
traditional
run
surplus
enterprises
Calouste
are
rather
rather
total
Crescent,
the
as
surplus
was
calculated
Red
and
These
many
Social
for
However,
business
non-prot
examples.
the
enterprises
referred
prot.
surplus
Cross
in
enterprises
Surplus
Many
based
businesses
generate)
(sometimes
of
non-prot
whatsoever.
Though
(or
all.
for-prot
prots
●
of
follows:
and
many
bin
costs
the
United
Rashid
Foundation
other
large
Al
are
Way,
Maktoum
just
NPOs,
a
are
few
bigger
businesses.
take
many
possible
forms,
and
the
differences
Student workpoint 1.4
between
them
categories
of
can
be
subtle
non-prot
(and
social
confusing).
enterprises
Nevertheless,
exist:
NGOs
and
two
broad
charities.
Be a researcher
Look
Non-governmental organizations (NGOs)
NGO
was
become
aim
of
a
a
single
such
as
rst
common
these
considered
a
term
way
various
socially
issue,
such
used
as
United
describe
Save
Some
the
Others
Network,
the
a
of
is
to
may
be
or
of
NGOs
with
have
it
social
apolitical,
others
and
support
these
Whales
while
Nations
variety
enterprises
desirable.
Greenpeace.
Development
to
social
by
a
a
has
enterprises.
cause
are
such
as
when
The
is
concerned
broader
political
that
with
the
Aga
Amnesty
International
and
the
National
Rie
a
common
element
of
these
is
that
they
websites
one
local
Kahn
they
news
articles
any
funding
do
for
and
Make
were
they
notes
about
established,
and
any
about
the
recent
them.
information
and
two
one
Can
about
you
their
organization?
such
are
the
main
similarities
Association .
and
Regardless,
the
work
nd
spectrum
aims,
–
international.
since
What
as
at
NGOs
are
not
organized
differences
between
the
two
or
NGOs?
run
by
any
government.
33
dna noitazinagro ssenisuB 1
1 . 2
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
Charities
tnemnorivne
dna noitasinagro ssenisuB 1
Charities
relief
that
as
are
their
help
focus
charities
emergency
a
the
such
is
form
those
on
as
may
Sky.
the
of
in
NGO
need.
whose
aim
Charities
philanthropy
sector
the
Save
and
a
is
to
differ
desire
the
can
run
such
be
any
that
disasters
Children
as
or
the
partisan
Charities
by
charities
natural
apolitical
Others
not
addition
above,
be
single-event
specic
Catholic
is
of
for
issue:
business
In
for
are
aid
single
charities
Half
specic
provide
from
to
help
as
other
those
much
NGOs
who
in
cannot
themselves.
Some
on
a
possible
USA.
provide,
or
war.
Oxfam.
Red
and
As
Cross
or
with
and
have
and
example,
charities
regular
Red
that
the
it
focus
NGOs,
Crescent
particular
Nevertheless,
government
for
Other
idea
and
preferences,
is
operates
that
in
the
the
private
economy.
to
the
common
common
features
features
of
of
social
enterprises
mentioned
non-prot
social
enterprises
include
the
The surplus generated from a
following:
charity’s business activities, such
●
Prots
are
not
generated
–
instead,
these
businesses
generate
as this second-hand clothes shop,
surpluses
and
surpluses
are
used
to
advance
the
social
purpose
of
the
are used to advance the social
business.
Sometimes
a
similar
non-prot
social
enterprises
retain
surpluses,
in
purpose of the organization.
●
fashion
the
organization.
the
goods
and
Donations
revenues
cases
has
welcome
There
Who
is
large
unclear
to
others?
of
such
executive
of
a
are
skill-set,
questions
among
Finally
NGOs
it
34
have
United
ofcers
also
worth
are
social
of
if
be
To
not
not
example),
all
when
salaries
the
be
the
selects
charity
new
of
than
compensation?
charity
the
the
the
These
source
of
is
skills
head
CEO
necessary
necessary?
can
to
and
amounts
Should
as
want
–
charity?
requires
amount
of
a
the
the
charity
organizations.
large
of
their
some
provide
Who
appropriate
companies.
and
and
operation
executives
the
need
owns
management
same
in
of
In
charities
those
Who
thorny
provide
on
part
endowment
directors?
is
rely
large
individuals.
contribute
the
to
of
a
calibre
kinds
of
discontent
effectively.
there
because
paying
is
of
one
their
taxes.
clear
distinction
charitable
Other
status
NGOs,
as
between
and
with
all
exempt.
enterprises
discussed
its
charities
that
of
What
the
attract
from
in
for-prot
paid
handled
noting
exempt
and
corporate
charities,
are
say
especially
major,
plague
who
a
individuals
control.
board
selected?
is
Way,
for-prot
charities:
businesses
larger
for
directly
of
created.
so
for
the
requirements
cannot
virtually
from
individuals
a
from
services
and
the
used
was
from
Foundation,
Nevertheless,
on
are
income,
donations
and
capital
charity
of
proceeds
sits
the
businesses
donations
charity
company?
are
businesses,
Non-prot
the
the
routinely
philanthropy,
other
who
stakeholders
is
and
small
the
these
goods
managers
multinational
multinational
and
the
compensation
as
of
and
for
surpluses
forms
Gulbenkian
Should
charity
How
issue
huge,
a
–
ownership
decide
members?
money
the
which
voluntary
more
and
prots,
other
revenues.
provide
should
board
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Calouste
–
or
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ongoing
more
for
important
endowment
reliable
do
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funding
comes
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an
retaining
services
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government
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to
have
above.
many
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compared
the
to
any
advantages:
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help
people
governments
the
needs
enterprises
specic
of
or
local
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groups
or
social
enterprises
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can
causes
almost
people
address
causes
is
in
never
need.
have
and/or
all
that
crucially
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are
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sufcient
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important
and
B U S I N E S S
to
solve
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work
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all
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Nevertheless,
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organizations,
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for
CULTURE
tnemnorivne
●
T Y P E S
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the
non-prot
valuable.
boundaries, providing assistance
and aid all over the world.
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they encounter? Do some
●
foster
a
philanthropic
spirit
in
the
community.
research to nd examples of such
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may
feel
good
about
helping
others,
which
can
foster
diculties.
socially
a
constructive
community
general
●
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can
all
of
needs
non-prot
and
distant
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can
creative
–
solutions
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any
of
the
to
almost
local
–
never
can
turn,
to
positive
live
lead
and
attitudes
can
to
in
improve
non-prot
better
or
the
various
decision
to
to
solve
actions
for
about
of
and
local
information,
government
making.
are
address
often
“forced”
problems
are
not
disadvantages
These
about
organizations,
working
better
enterprises
many
above.
With
members
tactics
The
information
causes.
social
have
community
resources
individuals
including
and
discussed
sufcient
informed
Employees
ideas
the
individuals,
communities.
the
and
more
enterprises
businesses
have
and
in
above,
and/or
issues,
out
new
because
social
place
noted
organizations,
carry
try
In
discussions
As
enterprises
innovate.
to
general.
better
people
them
and
can
a
informed
problems,
individuals
agencies,
of
social
contributing
it
resources.
governments
the
make
in
climate.
foster
allocation
and
can
business
views
and
tied
to
compared
disadvantages
to
be
nd
prots.
to
include
the
following:
●
The
lack
of
control
undesirable
lobbies
for
goods.
Artic
but
For
coastal
intense
lobbying
example,
High
communities
can
North
and
lead
to
Alliance
seeks
to
socially
in
protect
Norway
the
rights
1
of
whalers.
the
United
National
lobby
In
States,
Rie
state
hand
related
it
the
supports
power
Association
and
meaningful
of
effect,
national
restrictions
guns
and
deaths
are
two
Gun
gun
in
in
the
the
Both
of
meat.
lobbying
America,
groups,
to
the
ownership
States
than
In
the
effectively
States
including
gun
United
whale
United
ownership,
weapons.
higher
of
non-prot
Owners
legislatures
on
assault
far
of
and
consumption
prevent
possession
and
in
gun-
other
2
industrial
●
Sometimes
have
a
cause.
direct
illegal
●
countries.
the
passion
employees
and
Greenpeace
action,
and
acting
can
Funding
can
generally
very
economic
lead
be
zeal
of
that
employees,
as
to
pirates
loss
of
irregular.
reliant
on
non-prot
ill
for
by
serve
example,
boarding
support
for
Non-prot
donations,
social
the
have
times
ships,
organization
social
which
at
whaling
the
enterprises
organization
enterprises
can
be
a
or
its
taken
which
or
is
business.
are
problem
in
recessions.
1
http://www.reuters.com/ar ticle/2008/03/03/us-climate-whaling-idUSEIC37493020080303.
Accessed 5 October 2013
2
http://abcnews.go.com/blogs/health/2013/09/19/u-s-has-more-guns-and-gun-deaths-than-any-
other-country-study-nds/. Accessed 5 October 2013.
35
dna noitazinagro ssenisuB 1
1 . 2
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
✓
Businesses
tnemnorivne
dna noitasinagro ssenisuB 1
Revision checklist
and
in
the
controlled
private
by
sector
individuals
are
or
✓
owned
groups
Companies
owners
of
–
business
individuals.
and
has
Businesses
in
the
public
sector
are
owned
by
governmental
Sole
trader
by
single
businesses
are
owned
and
person.
The
from
individual
is
liable
any
debts
Registering
relatively
the
a
businesses
business
quick
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sole
A
partnership
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by
be
extra
a
made
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✓
is
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social
social
easy.
business
more
kinds
and
Multiple
of
of
owned
one
jointly
liable.
sources
than
are
legally
the
business,
so
they
are
no
and
social
but
enterprises
still
aim
to
have
make
a
a
social
prot.
mission
is
enterprises.
Most
the
main
Any
aim
money
charities
fall
of
non-prot
made
into
this
is
called
category.
Decisions
partners
partners
expertise,
debts.
and
person.
all
for
incur.
trader
surplus.
✓
themselves
a
or
liable
mission,
for
company
managed
✓
a
owners
a
authorities.
longer
✓
as
multiple
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and
separate
controlled
the
have
shareholders.
registered
corporation,
✓
corporations
usually
can
may
will
bring
also
bring
nance.
Practice question
quality
Ecosoluciones
as
Ecosoluciones
is
a
non-prot
research
a
is
to
in
try
Madrid,
to
electricity
Spain.
introduce
in
One
of
their
non-polluting
developing
the
successful
sources
Alumbre
created
by
Project.
wind
This
of
Europe
their
research
provided
generators
to
the
of
the
of
and
Peru,
which
previously
to
government
develop
other
saw
this
depressed
its
in
the
2008
a
Spanish
funding
for
severe
nancial
government
research
crisis
hit
suspended
organizations
such
was
as
Ecosoluciones.
of
Ecosoluciones
As
a
direct
result,
the
management
electricity
remote
village
had
felt
it
may
no
longer
be
able
to
of
maintain
Alumbre,
Peruvian
country.
Unfortunately
of
countries.
application
The
solution
objectives
part
One
life.
organization
areas*
located
of
practical
Alumbre’s
wind
generators.
none.
[Source: adapted from http://ecoworldly.com/2008/06/17/
In
Alumbre,
wind
generators
were
installed
by
wind-power-blows-into-peru-and-brightens-future/, 17 June
Ecosoluciones
to
supply,
for
the
rst
the
few
time,
electricity
2008]
to
a
textile
operating
agreed
was
a
to
factory,
in
the
of
secondary
maintain
complete
one
and
sector.
repair
the
transformation
in
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in
the
area
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generators.
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also
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term
secondary
sector.
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buy
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increased
[6
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the
objectives
jobs
were
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promised,
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non-prot
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to
those
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in
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process.
marks]
government,
to
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help
stakeholders
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entire
community
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IB,
May
2010
their
depressed area: a region or locality where business, employment, and stock-market values have
declined severely or are at a very low level of activity
36
the
allowed
Project.
[7
marks]
tnemnorivne
By the end of this chapter, you should be able to:
Explain the denitions and roles of vision statement and mission
➔
statement
Dene aims, objectives, strategies and tactics and explain their
➔
relationships
Explain why organizations change objectives and innovate in
➔
response to changes in internal and external environments
Describe ethical objectives and corporate social
➔
responsibility (CSR)
Outline the reasons why organizations set ethical objectives
➔
and the impact of implementing them
➔
Explain the evolving role and nature of CSR
➔
Prepare a SWOT analysis of a given organization
➔
Examine the Anso matrix for dierent growth strategies of a given
organization
v   
Successful
of
businesses
purpose
this
that
identity,
purpose,
will
both
of
types
focused
Mission
and
however,
looking
of
a
other,
way
with
mission
or
one
statement
to
vision
speaks
business.
the
have
day
A
accomplishing
on
businesses
different
and
have
to
these
of
help
and
mission
others
a
shared
with.
values,
these,
statements
purposes.
to
the
vision
are
The
To
values
create
maintain
and
both.
business
vision
When
reach
long-term
to
is
achieve
The
two
statement
the
sometimes
vision
statement
vision.
statement,
identity,
identify
produce
can
objectives
the
clear
its
and
or
a
sense
reinforce
focus
on
the
statements.
properly
loftiest
Some
done,
aims
and
day.
mission
the
a
stakeholders
communicate
many
businesses
stay
all
vision
aims
and
more
the
mission,
an
a
aspirations
in
the
aim
of
step
complement
rst.
as
have,
forward
intermediate
should
serves
They
more
highest
produced
statement
is
grounded
statements
being
confused.
statement
Less
specic
guiding
each
than
a
principle
principles.
37
dna noitazinagro ssenisuB 1
1.3 Organi zational objecti ves
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
Vision
tnemnorivne
dna noitasinagro ssenisuB 1
Table 1.3.1. Comparison of vision and mission statements
Mission
Concept
What do we want?
Why are we doing what we are doing?
Purpose
A vision statement points to the future. It is
A mission statement, based upon where the business is
what the business would like to see itself as.
now, communicates what needs to be done in order to
achieve the vision.
Audiences
To internal stakeholders, the vision
To internal stakeholders, the mission statement provides
statement inspires and motivates
a means for accountability by dening key performance
employees.
indicators.
For external stakeholders, the vision statement
For external stakeholders, the mission statement measures
binds them to the business by giving a sense
how successful the business is at achieving its vision.
of shared beliefs.
Change
As an expression of the business core
A mission statement may change: in a world of
values, the vision should never change.
dynamically changing external environments, a mission
statement may need to be modied to meet new
circumstances.
a, bjc, ,  cc
Businesses
may
also
distinguish
between
aims
and
objectives
and
TOK discussion
between
and
all
strategies
these
and
terms,
tactics.
including
All
of
vision
these
and
concepts
mission,
are
are
interdependent
linked
in
some
“Futurists” or “futurologists”
way
or
another.
Figure
1.3.1
is
an
attempt
to
show
their
relationship
are regularly wrong. In light
with
each
other.
of the unpredictability of
the future, to what degree
is planning for the future
vision
good use or a misuse of a
business’s resources?
strategies
mission
tactics
strategies
objectives
aims
Figure 1.3.1. The vision and mission statements – relationship between aims,
objectives, strategies, and tactics
The
the
aims
year
aim
38
of
future.
a
through
might
business
An
be
are
example
the
of
its
production
more
long-term
an
focused
aim
of
on
goals
might
tasty,
the
be:
–
what
“We
high-quality
delivery
of
it
want
the
wants
to
meat
be
to
achieve
protable
products”.
service:
“We
aim
in
every
Another
to
deliver
staff”.
the
The
sum
high-quality
vision
of
these
plant
statement
aims,
at
is
and
a
garden
summary
other
times
products
of
with
these
through
aims
modied
a
helpful
(sometimes
O B J E C T I V E S
sales
literally
tnemnorivne
consistently
O R G A N I Z A T I O N A L
wording).
T
wo examples of vision statements of major corporations you probably know
(and the products of which you might use) are from Microsoft and T
oyota USA.
Examine
their
Microsoft:
●
vision
“A
statements:
personal
computer
in
every
home
running
Microsoft
software”.
Toyota
●
USA:
“To
be
the
most
successful
and
respected
car
company
Key term
in
America”.
Vision statement
In
both
are
cases,
high
sense
of
and
in
In
or
in
at
are
lofty
being
will
aims,
the
They
purpose.
this
USA
they
to
how
statements
term.
not
Toyota
contrast
mission
long
are
America),
clarify
vision
condence
companies
home
the
not
the
give
summarizes
will
these
brief
and
inspirational.
Further,
place
yet
most
up
objectives
business
are
Both
(Microsoft
they
the
achieve
aims
sense
to
and
convey
that,
car
their
if
its
a
a philosophy, vision or set of
the
in
principles which steers the
every
company
direction and behaviour of an
organization
aspiration.
short-term
reach
that
software
respected
reached
medium-
its
the
running
and
have
aspirations
statements
convey
successful
until
are
they
express
goals
vision.
that
A
objectives.
Student workpoint 1.5
Be reective
You
might
might
What
Does
for
your
your
grade
a
What
7
in
IB
statement
mission
mission
does
in
Business
Management.
What
be?
statement
statement?
mean
for
be?
If
so,
your
what
does
teachers?
If
it
mean
not,
try
one!
the
middle
a
vision
have
have
specic
objectives
medium-
Tactical
for
personal
pupil?
should
the
guide
●
school
Strategic
are
●
your
a
design
Objectives
●
as
aiming
personal
might
you
and
be
to
company
Operational
in
to
the
are
achieve
(and
can
its
tactical
referred
direction
medium-
the
are
sometimes
They
objectives
right
the
objectives
managers
reach
sometimes
long-term
objectives
managers
–
characteristics.
to
strategic
the
to
set
to
as
by
come
global
senior
achieve
short-term
in
three
types:
objectives
managers
the
–
to
aims.
objectives
set
by
objectives.
day-to-day
workers
also
objectives
themselves)
so
that
set
the
by
oor
company
objectives.
Table 1.3.2. Vision and the three types of objective
Vision (summary of aims)
Long-term and
Strategic objectives
highest aspiration
Long-term goals
Tactical objectives
Medium or
Operational objectives
shor t-term goals
Day-to-day goals
39
dna noitazinagro ssenisuB 1
1 . 3
1
B u s i n e s s
use
the
term
a n d
hierarchy
of
e n v i r o n m e n t
objectives
to
describe
the
Student workpoint
relationship
between
all
of
these
goals.
few
in
number
At
the
top
of
the
hierarchy
are
1.6
tnemnorivne
dna noitasinagro ssenisuB 1
Businesses
o r g a n i z at i o n
the
aims,
the
chief
which
are
executive
ofcer
(CEO).
and
The
set
by
aims
the
are
entrepreneur
(and
should
be)
or
rather
Be reective
general.
How
the
business
achieves
these
aims
is
through
the
next
level
Here
of
managers
–
the
senior
managers
(directors
or
executives).
are
the
statements
strategic
objectives
will
be
greater
in
number
and
concrete.
vision
These
Ideally,
of
two
large
these
organizations:
objectives
will
objectives,
to
assess
the
are
set,
the
did
be
SMART
entrepreneur
performance
objectives
or
also
the
not
met,
the
directors
the
objectives?
the
CEO
may
If
the
decide
of
or
below
CEO
the
has
must
executives
set
for
or
more
details).
some
executives
CEO
directors
to
(see
or
ask:
not
fair
and
their
Were
the
perform
executives
ambitious
With
and
SMART
measurable
divisions.
objectives
properly
vastly
exceed
objectives
the
in
If
way
SMART
properly
meeting
the
without
year.
earth’s
achieve
those
their
that
strategic
are
tactical.
objectives
Tactical
through
objectives
the
next
tend
to
tier
be
than
managers
At
the
will
–
strategic
the
lowest
level,
determine
objectives
will
objectives
middle
operational
specic
be
managers
and
are
(heads
usually
of
objectives
objectives
that,
in
set
by
the
department
will
be
sum,
set:
or
where
to
nd
that
level
buy
the
What
do
reveal
tactical
and
they
and
the
of
objectives
shown
in
Table
build
can
discover
might
want
about
statements
the
attitudes
of
organization?
met.
hierarchy
to
people
online.
carefully
Consider
to
of
managers
the
is
customer
in
supervisors).
oor
ensure
vision
of
greater
next
Our
most
company;
place
to
number
world
a
anything
objectives,
just
centric
come
Businesses
A
poverty
Amazon:
be
objectives,
following
Oxfam:
at
aims
the
Look
the
words
that
1.3.3.
each
statement
affect
do
they
uses
have
–
what
on
you?
Table 1.3.3. The hierarchy of objectives
Aim
Strategic objective
To be the most successful
To have the highest market
To hire and retain enough
To have the average amount
car dealership in the city
share of car dealerships in
salespeople so that the
of time that a customer
the city
dealership has sucient
waits to be greeted by a
salespeople to serve
salesperson to be less than
customers at all times
two minutes
In
the
example
dealership
determines
market
that
to
means
that
share
have
the
of
car
highest
more
realizing
greet
go
more
by
a
An
during
vision
allows
is
even
if
in
share
sales
their
means
city.
of
a
The
by
particular
head
having
sales
time
customers.
making
group
a
sale
that
greeted
salespeople
will
the
highest
realize
frame
Then
the
the
customer
offered
not
car
sales
increases
no
and
of
managers
specied
serve
a
being
that
is
The
a
that
city.
success
to
as
aim
the
within
chance
agree
the
in
the
staff
without
it
sets
measure
market
minutes
will
service
nish
their
break.
be
“To
not
between
translated
be
everyone
are
to
customer,
motivating,
almost
abstractness
as
way
CEO
successful
dealership
that
difference
can
such
America”
–
their
important
and
the
two
salesperson
concrete
A
than
the
most
qualied
sooner
they
1.3.3
the
best
any
the
having
Table
be
salespeople,
coffee
40
in
should
Tactical objective
the
most
but
to
it
is
feel
qualities
aims
into
and
successful
also
and
to
it,
employees
is
specic
that
and
respected
(purposely)
connected
that
objectives
something
vague.
but
can
objectives
car
This
company
vagueness
vagueness
act
on
in
are
measurable.
and
unison.
in
Operational objective
specic
are
effective
objectives.
objectives
are
as
The
when
best
they
take
business
that
vision
objectives
are
and
transform
SMART.
it
O B J E C T I V E S
into
SMART
Specic
tnemnorivne
Businesses
O R G A N I Z A T I O N A L
follows:
Measurable
Specic
–
Is
the
objective
clear
and
well
dened?
Objectives
should
Achievable
relate
to
the
nature
of
the
business
and
be
unambiguous.
Rather
Relevant
than
set
an
objective
objective
would
“increase
the
Measurable
been
of
also
–
Achievable
objectives
are
have
they
goals
also
support
Is
that
are
school,
for
or,
not
the
Telling
car
a
A
staff
business
to
work
to
long
is
by
the
a
of
to
it
reach
the
the
it
has
specic
were
but
it
(number
When
Objectives
its
that
employees
giving
up
because
objective.
distractions
of
be
realistic)?
or
Time-specic
share).
motivational.
business
or
share”.
whether
cases
market
(is
smart
membership”
see
above
employees
to
of
IB
that,
(when
business
the
to
a
by
plan
aims
of
Achievable
employees
are
going
to
lower
time
staff
5
that
achieve
the
by
specic
or
to
is
a
that
the
per
not
they
cent
set?
sales
strategic
managers
need
is
If
of
are
to
relevant.
objectives
cars
For
sold
unless
target
do
a
per
the
is
to
be
objective
in
order
strategy
to
a
relevant.
meaningful.
number
At
objectives
meaningless
This
the
responsibility.
been
new
can
of
employees
particularly
7
are
the
cent
business.
of
purpose
expenses,
frame
the
for
staff
not
they
per
senior
and/or
is
Businesses
main
area
supplies
which
the
require
owners
by
use?
the
custodial
deadline,
sales
date
any
objectives
scores
sufcient
increase
will
the
high
or
of
from
employees’
a
tell
is
set
cleaning
the
the
actually
the
staff
frame
told
and
be
aspects
of
Has
strategy
term
approved
–
must
towards
to
member
time
dealership
sales
and
the
its
a
market
objective
achieved
of
with
the
size
be
distractions
achieve
amount
salesperson
of
can
commonly,
custodial
the
have
a
to
Time-specic
not
are
more
telling
the
reduce
objective
that
relevant
students
each
sold,
other
“increase
“increase
measured
cannot
dissonance
to
or
grow”,
objectives).
objectives
company
they
how
be
“should
should
reach
effect,
that
wonder
–
as
they
reasonable
fear
sold”
objective
opposite
or
wants
only
units
achievable,
the
it
objective
Not
of
the
business
units
measurable,
Can
these
Relevant
the
the
that
of
not?
reduce
managers
set
–
the
think
or
number
are
beyond
can
Can
be
members,
clarify
number
achieved
should
that
make
will
the
be
met.
medium
decisions
STRATEGY
Whatever the business, devising
CEO.
a strategy means asking ‘who,
when, what, where, why?’
Strategies
are
not
unplanned
or
spur
of
the
moment;
they
involve
What are the implications of
careful
analysis
of:
missing one of these questions?
●
where
●
development
wants
the
to
●
careful
●
a
be
of
a
is
plan
periodic
has
(strategy)
of
how
to
get
where
the
business
(aims)
consideration
determine
time,
business
evaluation
whether
of
how
to
process
the
plan
implement
(in
is
well-run
working
the
strategy
organizations)
or,
after
a
to
specic
period
of
worked.
41
dna noitazinagro ssenisuB 1
1 . 3
1
B u s i n e s s
business
towards
tnemnorivne
dna noitasinagro ssenisuB 1
A
to
the
the
managers.
long-term
business
objective,
area.
customer
on
a
or
might
to
the
be
observing
(but
otherwise
to
it
t
change.
They
rather
be
but
offering
the
be
work
the
short
are
less
on
path
term
approved
focus
poor
food
by
and
the
closely
how
more
not
be
a
tactical
that
quality
customers’
a
the
a
highest
customers’
might
will
decisions
to
are
to
tied
achieve
strategy.
obtain
with
objective
themselves
tactic
the
but
strategy
of
tactical
This
to
rm
determining
be
a
which
make
easier
the
might
e n v i r o n m e n t
achieve
business,
sound
to
a n d
business.
are
of
within
for
quality
not
Tactics
example,
count
to
the
the
health
have
tactic
tactic
food
does
of
customers
One
better
can
plan
of
managers
targets
for
restaurant
a
aims
middle
measurable
A
is
strategies
require
senior
to
tactic
the
reaching
will
o r g a n i z at i o n
reactions
better
as
form
form
mix
of
type
in
might
they
of
if
A
perceived
its
satisfaction
direct
marketing
is
of
plan.
eat
by
a
the
market
be
the
customer
the
strategic
direct
food.
A
feedback
feedback
restaurant).
th  f   ch bjc
Businesses
changing
often
need
strategic
tactical
objectives
change
operational
because
the
●
of
●
and,
the
change
day
in
to
either
objectives.
More
day,
objectives.
changes
internal
within
to
objectives.
environment,
oor
these
it
of
the
this
involves
managers
Regardless
of
Sometimes
commonly,
and
level,
requires
changing
supervisors
objectives
change
environments:
which
refers
to
changes
in
the
conditions
business
the
external
environment,
the
business
that
which
nonetheless
has
refers
a
to
anything
bearing
on
its
outside
operation
or
performance.
Changes
in
the
Leadership
and
to
a
Apple.
–
the
business.
down
an
changes
as
when
organization
In
other
modify
of
all
from
can
when,
brought
their
resources”
related
to
lead
in
the
to
1996,
into
a
a
following:
change
Steve
company
predecessor,
of
covers
HR
Industrial
forms
–
business
Kraft
the
aspect
business
–
can
action,
organized
a
vast
change
which
labour,
of
its
organizations
which
array
and
can
of
can
refers
Cadbury,
new
organization
internal
to
often
are
sold
product
in
strategic
in
in
to
a
in
Jobs
will
can
aims
returned
have
require
elements
alter
of
a
objectives
actions
taken
precipitate
merger
ripple
area
tactical
the
can
or
all
by
change
an
acquisition,
effect
many
cause
given
marketplace.
the
a
rethink
may
one
or
A
have
However,
changes
to
can
pressures
business.
changes
the
change.
over
functions,
products
performance
the
some
of
including
Product
took
causing
instances,
one
another,
42
leaders
often
is
include
organization.
Organization
such
example
might
objectives.
“human
other
leadership
style
to
hierarchy.
or
of
new
leadership
term
environment
famous
Conditions
the
unions
A
Sometimes
signicant
in
change
objectives.
different
HR
–
internal
of
through
its
an
objectives.
organization
to
interconnectedness
require
changes
in
objectives.
Sometimes,
marketplace
may
the
require
changes
in
for
the
product
example,
sports
drink,
of
product,
the
sports
and
drink,
objectives
changes
Finance
to
All
of
become
and
2009,
had
their
FIFA
modied
to
how
other
recession
sets
and
limited
by
more
of
everyday
any
of
Social
change
to
–
or
the
this
result,
the
1980s,
itself
branded
as
a
identity
energy-providing
strategic
and
tactical
number
could
When
when
of
their
Play”
on
of
nance
organizations
of
Fair
spend
the
sources
decreases,
“Financial
to
product
a
because
of
have
business.
rule,
players,
In
which
and
teams
is
the
are
a
in
force
of
an
environment
can
products
can
also
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if
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or
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methods
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occur
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rapid
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few
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struggles
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attending
ago
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course
women.
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ways.
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new
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Blackberry
compete
force
changes
methods
businesses.
for
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objectives.
uncompetitive
quickly
innovation
for
Aroma).
change,
number
or
issues
follows:
decades
number
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people
frame
its
objectives,
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business
demographic
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women
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often
preference
technological
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as
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and
to
reappraise
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competitor
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greater
rendered
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such
or
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increased
More
business
to
factors
culture,
of
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Usually,
Often,
Starbucks
many
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framework
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they
Technological
techniques
–
environment,
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by
than
product
“hot”
they
operations
then
by
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education.
being
a
better
environment.
business
innovation
smartphones).
in
changes
them
to
(such
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offers
world
constantly,
product
factory.
altered,
society
the
degrees
is
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“STEEPLE”
supplied
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or
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external
technological
production
producing
–
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business
residential
are
external
change
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environment.
obtaining
the
in
changes
these
by
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raised
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nance.
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students
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capital
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line.
in
to
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to
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change
operations.
above
to
limited
and
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of
must
circumstances
delivering
other
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have
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has
or
2008,
new
or
their
innovation
well
led
change,
amount
money
ideally,
offering
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activity
businesses
–
producing
innovating
of
in
access
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for
aspects
introduced
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product
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objectives).
strategies
began
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football
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illness-curing
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operational
–
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of
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circumstances
to
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sales
from
many
had
in
or
because
O B J E C T I V E S
tnemnorivne
either
O R G A N I Z A T I O N A L
for
Technological
reasons.
All
43
dna noitazinagro ssenisuB 1
1 . 3
1
B u s i n e s s
in
tnemnorivne
dna noitasinagro ssenisuB 1
businesses
it
need
because
previously
time
those
Economic
new
global
company
a
sells
on
–
a
Paul
many
business
were
if
the
concerned
certainly
diversity
changes
to
to
in
in
their
have
and
in
a
harder
using
companies
actions
ways
child
could
often
the
force
demand
years
ago,
to
capital
of
changing
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can
changing
is
in
a
strategic
economic
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income
an
as
have
the
investment.
fall
presence
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raising
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as
them
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economy,
because
can
sales
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of
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elastic
economic
economic
conditions
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change.
quickly,
in
or
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values
of
their
harm.
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attentiveness
society’s
values
of
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have
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Fifty
to
years
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ethics
harassment,
changes
in
society
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practices–
of.
Today,
genuinely
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–
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or
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sexual
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unheard
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harm
to
values
encourage
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other
led
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society
capitalism”
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business
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about
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slowly,
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practices.
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sustainable
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change
owners
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when
several
and
preventing
reasons,
concept
expect
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4.x),
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economies
conditions,
changes
loans
the
and
communication
discovered.
example,
on
and
deeply
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minimize
For
environment
allow
ago,
market
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Unit
Changes
Hawken’s
even
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being
businesses
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their
example,
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rates
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businesses
to
For
change.
force
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this
business
Ethical
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objectives.
interest
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force
on
of
e n v i r o n m e n t
low-income
simply
crisis
businesses
more
in
or
for
in
without
nancial
for
aware
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changes
a n d
technologies
several
inuence
tactical
(see
to
tactics
–
conditions
capital
more
shoes
competitors,
profound
and
be
unknown.
compared
follow
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to
information
manufacturing
labour
of
o r g a n i z at i o n
in
or
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lending,
product
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at
safety–
businesses’
objectives.
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change
and
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risk
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change
will
can
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that
scandal,
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a
“country
country
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the
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of
political
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though,
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legislature
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or
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a
can
occur
an
in
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outcome
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decide
accident,
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could
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turn
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at
risk,
election
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take
put
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change.
in
determine
political
changes
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to
possibility
investing
to
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there.
business
this
before
unexpectedly
can
forces
for
attempts
business
environment
Legislatures
even
change
of
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of
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plan
assessment”
assessment
political
home.
very
businesses
risk
risk
operations
business
election.
crime,
system
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investment
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country.
likelihood
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to
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action
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the
of
business
environment.
Legal
–
to
other,
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when
environment
can
be
1980s
the
country
occurring
44
one,
in
to
one
often
changed
the
by
responsibility
or
tired
young
state
to
statute,
States,
of
legislation
another,
Regulation,
by
United
grew
most
occur.
merely
the
for
coalition
the
people
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legislatures
to
taxes,
and
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the
or
the
host
have
many
fatal
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raised
and
from
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businesses
example,
number
due
changes
changes
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of
to
other
traumatic
factors
respond.
individuals
alcohol
minimum
party
legal
In
across
injuries
consumption.
drinking
age
One
in
the
States
from
targeted
customers
business
strategies.
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revolution
example
affect
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with
had
the
businesses
Canada,
change
in
ways
in
sources
or
oil
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taverns,
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and
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spills,
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demand
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force
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off
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especially
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business
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factors
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businesses,
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mining,
clubs
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oil
bars,
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cars.
the
of
new
rising
as
on
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than
range
awareness
effect
companies,
as
search
anticipation
energy,
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depletion,
such
they
of
other
some
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disasters
energy,
signicant
through
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years.
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environmental
a
Ecological
or
innovative
21
the
emergence
strategies.
ecological
to
in
growing
have
sustainability.
of
18
O B J E C T I V E S
tnemnorivne
United
O R G A N I Z A T I O N A L
clean
traditional
oil.
Why   hcl bjc
Ever
more
ethical
codes
of
social
or
the
commonly
objectives.
behaviour
business
might
objective
might
are
Businesses
and
is
set
up
likely
a
certainly
at
the
are
the
its
goals
a
not
prot.
employees
to
favouritism.
customers
range
themselves
to
to
hurt
For
be
on
established
provide
treated
or
a
without
ethical
respect
activities
some
society
example,
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with
of
for
based
business
least,
making
whole
including
customer
and
positive
true:
establishing
allow
even
treat
a
themselves
shop
of
are
these
and
and
honesty.
today
many
them.
Customers
to
to
or,
all
or
cover
respect,
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expect
as
met,
process
always
can
setting
businesses.
trust
to
such
benet
the
reasons,
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are
be
may
commercial
business
when
harassment,
objectives
businesses
●
in
aim
discrimination,
●
that,
environmental
environment
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today,
Objectives
at
ethical
loyalty
are
more
ethical
image
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repeat
likely
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objectives
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businesses
customers
objectives
for
some
very
good
these:
and
existing
with
will
customers
return
good
avoid
to
a
ethical
and
are
action
potential
reputations.
businesses
vital
to
business
with
most
they
foster
this.
customers
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opposite
reputations
for
This poster from the clothing company
Matalan clearly states the business’s
untrustworthiness.
ethical policy
●
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have
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and
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to
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risk
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returning
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potential
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with
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businesses
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strong
employees
the
business
ethical
and
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have
objectives
serve
to
improve
motivation.
company
legal
work
advantage.
attractive
morale
a
positive
well-motivated
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can
●
a
by
the
the
be
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bad
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government,
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expensive
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Sometimes
themselves.
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legal
if
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by
other
business
cause
unethical
can
customers
reports
generated
behaviour
businesses
“wins”
signicant
cost
not
in
can
or
by
court,
damage
to
by
lead
to
the
the
the
reputation.
45
dna noitazinagro ssenisuB 1
1 . 3
1
B u s i n e s s
Satisfying
customers’
behaviour
tnemnorivne
dna noitasinagro ssenisuB 1
●
o r g a n i z at i o n
decisions
–
with
and
consumers
behaviour
and
patronizing
are
aware
often
certain
of
e n v i r o n m e n t
ever-higher
improved
actions
are
a n d
ICT
more
what
the
visible
is
“punish”
expectations
and
than
ever
considered
unethical
businesses.
Few
for
worldwide
before.
ethical
and
behaviours
businesses
can
ethical
web,
by
business
Today,
unethical
not
disregard
public
opinion.
●
Increasing
are
prots
growing.
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manufacturers
use
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from
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trade”
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will
not
coffee.
businesses
that
often
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not
for
businesses
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to
“sweatshop”
Many
behave
people
dubious
workers,
today
ethically,
to
seek
which
ethically
businesses,
and
out
can
behave
coffee
and
lead
clothes
houses
purchase
to
higher
prots.
th pc f pl hcl bjc
When
a
business
business
implements
environment
will
ethical
be
objectives,
affected.
The
many
effects
areas
may
be
of
on
the
the
following:
●
The
business
experience
short
term
certain
●
policy
have
●
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a
objectives
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if
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long
to
rise,
and
run
ethical
the
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competitors
may
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business
objectives,
employees,
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the
business
to
respond
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in
may
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accustomed
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brand
community
generally
local
to
maintain
their
recognizing
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and
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ethical
to
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trust
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businesses,
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suppliers
orders.
the
business
more
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loyalty
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businesses
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community,
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see
implementing
from
order
customers
strong
employment
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local
with
in
implementing
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of
Customers
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position
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and
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●
costs
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and
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relationship
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in
terms
of
goodwill.
feeling
local,
pressure
regional,
businesses
government–business
with
and
from
voters
national
ethical
environment
and
levels
objectives,
fostering
of
other
stakeholders,
government
overall
ethical
creating
are
a
objectives.
th c bw hcl bjc 
cp cl pbly
Ethical
based
are
objectives
on
closely
concept
have
a
would
46
are
established
related
that
a
to
impact
assess
of
goals
has
on
its
that
a
behaviour.
corporate
business
positive
want
to
specic
codes
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social
business
Ethical
responsibility
obligation
society.
actions.
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As
a
may
part
to
of
result
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operate
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of
set
objectives
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itself
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way
policy,
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for
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will
business
assessment,
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example,
day-care
a
may
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business
centre)
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implement
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for
its
open
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a
particular
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facility
ethical
(an
objective.
early
O B J E C T I V E S
For
childhood
tnemnorivne
the
O R G A N I Z A T I O N A L
employees.
th pc f cp cl pbly
CSR
is
broader
committed
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as
a
whole.
the
likely
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of
position
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for
and
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its
objectives.
good
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business
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citizen”:
benets
laws
society
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business
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the
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A
“ corporate
manner
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business
increasingly
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as
for
more
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and
businesses,
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and
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to
links
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an
the
–
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integration
do
not
in
of
of
companies
reach
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and
setting
international
opinions
multinational
1980
dramatic
citizens
different
greater
of
themselves
leading
businesses
around
to
of
the
actions
many
as
behaviour.
because
globalization
possible.
of
a
a
with
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everyone
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in
to
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environment,
economies
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might
values,
world’s
and
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to
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CSR
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standard
this
business
have
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intending
responsibly
responsibly
part
context
the
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A
society
want
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is
environment.
to
Many
and
CSR
matters
interacts
on
to
the
their
towards
attitudes
businesses.
sWot ly
SMART
a
objectives
business
set
these
tool
–
are
the
objectives.
criticism,
in
planning
purposes.
SWOT
helps
general
analysis
is
managers
opportunities,
combined
in
a
part
a
coherent
analysis
Although
many
meant
to
of
SWOT
use
–
of
this
businesses
tool
rely
on
be
the
rst
the
perceived
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matrix
as
facing
shown
in
stage
the
Table
plan.
developed
brainstorm
and
to
strategic
was
has
not
SWOT
in
the
In
to
been
planning
These
1960s,
business
without
analyses
strengths,
business.
the
help
for
process.
It
weaknesses,
elements
are
1.3.4.
Table 1.3.4. The SWOT matrix
Positive factors
Negative factors
Internal to the business
Strengths
Weaknesses
Ex ternal to the business
Oppor tunities
Threats
The
the
SWOT
more
SWOT
poor,
Like
matrix
reliable
factors.
sloppy,
any
is
The
or
based
the
data,
on
opposite
uninformed
business
tool,
it
is
perceptions.
the
is
stronger
also
true.
fashion,
useful
it
only
The
will
If
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can
be
wider
the
SWOT
actually
when
the
sources
analysis
analysis
mislead
thoughtfully
of
is
a
and
the
done
in
a
business.
and
properly
applied.
47
dna noitazinagro ssenisuB 1
1 . 3
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
Student workpoint
Table
tnemnorivne
dna noitasinagro ssenisuB 1
a sWot ly f   
1.3.5
January
shows
an
example
of
a
SWOT
matrix
for
Apple
Inc.
(as
of
1.7
2013).
Be a thinker
Table 1.3.5. SWOT matrix for Apple Inc.
Choose
Strengths
●
Well recognized among
Weaknesses
●
Patent infringement lawsuit may aect
a
business
–
such
well-known
in
as
Complete
■
January 2010
■
Nokia 2012 Samsung dispute
Four th largest player in the
global mobile phone market
analysis
Think
the
●
18.5% market share of
●
■
2010, antennae problems in iPhone 4
Strong brand image
●
Product defects harm Apple’s reputation
and add signicant warranty and other
competitors
expenses
Very protable – $100 billion
■
cash reserves
2012 embarrassing discard of Google
maps and the failure of Apple’s own
●
Focused research and
maps for the iPhone 5.
development creating
●
Poor design and limited innovation in the
stylish products
latest products
●
Provides integrated
●
Death of the inspirational leader Steve
operating systems,
Jobs in 2012
hardware, application
software and service to its
●
Loss of share value (25% in three months
Sep–Dec 2012)
customers
●
Proprietary systems that do not allow
individuality
●
Price – other products are more
aordable and of similar quality
●
Oppor tunities
●
●
Strong growth in
Foxcom – has been a PR disaster for Apple
Threats
●
Rising popularity of Google Android may
smar tphone
aect its market share
Strong growth in tablet
■
markets
350,000 Android smar tphones are
activated daily; 150,000 iPhones are
activated daily
●
Mobile adver tising market
■
More rms like HTC and Motorola are
is forecast to reach
using Android
approximately $25 billion
by 2015
●
Intense competition may aect revenues
and protability
●
●
Increased scope in the
educational market
●
Increasing popularity of Kindle Fire
Streaming and television
●
The business sector is not dominated by
markets have great potential
Apple – the eld is more open
Source: Adapted from Datamonitor ’s Apple Inc. Company Prole SWOT Analysis
http://paigebalash.wordpress.com/2012/02/28/where-is-apple-going-now-swot-
analysis-of-apple-inc-2/
48
carefully
business.
about
factors
all
which
Product recalls may harm Apple’s
four
●
food.
SWOT
that
different
could
provides an edge over
a
for
affect
each
reputation
global smar tphone market
●
sector
or
nancial condition and operating results
most consumers
●
another
tourism
sections.
of
the
that
strengths
of
the
purpose
and
developing
weaknesses
can
be
of
a
weaknesses
the
of
strategy
the
analysed
SWOT
of
by
business.
and
so
a
a
analysis
business
identifying
Once
strategy
these
can
is
not
strategy
the
are
be
to
brainstorm
itself;
it
different
known,
is
the
the
rst
strengths
the
O B J E C T I V E S
SWOT
part
tnemnorivne
Note
O R G A N I Z A T I O N A L
and
matrix
formulated.
sWot ly  k p
Use
of
from
the
each
Table
SWOT
matrix
quadrant
and
can
be
then
strengthened
adopting
a
by
“pairing”
relevant
key
strategy,
as
factors
shown
in
1.3.6.
Table 1.3.6. Pairing key factors to determine the relevant strategy
Oppor tunities
Threats
Strengths
Weaknesses
S–O
W–O
Growth strategies
Re-orientation strategies
S–T
W–T
Defusing strategies
Defensive strategies
Source: Adapted from: http://www.quickmba.com/strategy/swot/
Growth
a
strategies
business
positive
should
issues
with
short-term
pursue
in
any
Defensive
business
help
the
other
When
to
Re-orientation
addressing
available
term.
its
in
Their
Defusing
focusing
the
can
a
act
business
simply
neutral
the
considered
its
re-orientating
which
it
the
is
the
strengths
produces
matrix.
condent
the
The
that
of
most
business
it
has
no
big
when
and
a
business
exist
quickly.
strategies,
in
is
at
Defensive
but
its
most
combination,
they
may
the
strategies
be
are
necessary
to
survive.
can
are
that
re-orientate
of
a
to
threats
medium-
to
–
Table
a
for
on
strategy.
then
positive
rst
and
address
in
the
strategies
long
its
market
assume
opportunities
core
For
it
on
direction.
market
focus
1.3.5)
are
focuses
opportunities
threats
Defusing
new
a
the
will
new
eliminate
through
(Table
see
in
business
for
strategies
business.
look
a
them
business
itself
to
when
use
the
short-term
matrix
strategies
to
designed
need
the
adopted
order
Re-orientation
are
not
SWOT
in
assumes
strengths
does
combining
from
weakness
short-term
market.
defuse
and
adopted
and
strategies
then
by
when
defensively
strategies
on
are
threats
adoption
weaknesses,
available
strategies
weaknesses
the
achieved
opportunities,
area.
“negative”
business
best
strategy
growth
needs
most
are
market
strategies
vulnerable.
the
the
strengths.
instance,
may
have
if
by
that
but
This
Apple
focused
is
had
on
1.3.7.
49
dna noitazinagro ssenisuB 1
1 . 3
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
Strengths
tnemnorivne
dna noitasinagro ssenisuB 1
Table 1.3.7
. Apple SWOT analysis – re-orientating strategies
Weaknesses
Product defects harm Apple’s reputation and add
●
signicant warranty and other expenses
2012 embarrassing discard of Google maps and
■
the failure of Apple’s own maps for the iPhone 5.
Poor design and limited innovation in the latest
●
products
Death of the inspirational leader Steve Jobs in 2012
●
Threats
Oppor tunities
Mobile adver tising market is forecast to reach
●
approximately $25 billion by 2015
●
Increased scope in the educational market
●
Streaming and television markets have great potential
Apple
may
business
products
rescue
also
conclude
lives
(in
its
signal
moved
digital
the
a
move
as
needs
–
to
signal
To
do
and
innovative
from
just
the
Jobs.
streaming
an
away
from
it
Steve
growing
markets
away
that
after
reputation
smartphone
it
on
as
the
the
home
to
so,
it
the
market
must
television
producer.
intensely
company
computer
a
in
market
the
and
the
new
markets)
Such
to
move
competitive
did
that
create
tablet
past
would
and
when
into
music.
th a x
Another
is
the
1957.
Many
growth
The
business
Ansoff
to
help
which
businesses
use
businesses
was
the
Ansoff
matrix
looks
and
markets
at
the
considers
and
growth
both
products
(see
existing
Figure
gnitsixE
Existing
New
Market
Product
penetration
development
Market
Diversication
a
r
k
e
weN
t
development
Figure 1.3.2. The Anso matrix
50
by
and
Igor
matrix
potential
the
Product
M
plan
designed
to
set
objectives
Ansoff
help
in
plan
their
strategies.
product,
new
tool
matrix,
in
terms
markets
1.3.2).
of
the
and
market
products,
and
and
There
are
four
possible
growth
strategies,
explored
O R G A N I Z A T I O N A L
O B J E C T I V E S
below.
TOK discussion
penetration
market
share,
Market
penetration
for
increasing
market.
in
order
to
lure
to
or
same
would
fall
into
to
the
growth
●
the
strength
●
the
power
Market
and
or
for
development
business
may
a
was
had
underestimated
unsuccessful
from
Key
to
factors
effective
●
having
local
●
having
an
market
development
market.
different
existing
Australian
Product
to
on
●
effective
●
having
a
●
having
rst
When
business
●
lack
●
the
of
risk
add value? To what degree, if
more
Man”,
any, do they obscure rather
than clarify?
are:
market
in
new
the
For
in
new
as
public
Starbucks
Wal-Mart
Wal-Mart
to
development
Market
the
example,
Australia.
Germany.
German
market
for
market.
penetration,
stores
into
looking
existing
markets.
coffee
of
by
the
market
expanded
of
on
market
development
the
existing
requires
different
are:
ground
channel.
development
it
may
be
so-called
the
other
this
a
of
products
2,
was
iPad
3,
iPad
case
ght
is
when
off
for
the
wholly
are
product”
the
to
and
products
“new
“Scoot”
new
genuinely
iPad
times,
airline
a
“new”
iPad,
example,
is
risk
new
upgrades
mini
a
and
of
all
variation
Singapore
competition
the
on
an
Airlines
from
the
of
product
research
and
riskiest
are
penetration,
to
the
development
familiarity
development
growth
introducing
two
untestedness
market
with
original
much
products.
Key
are:
system
advantage.
the
–
than
customers
research
mover
is
riskier
loyal
strong
combines
successfully. Do these tools
operas,
tell
businesses operated
airlines.
the
diversifying
the Anso matrix existed,
loyalty
that
“Iron
such as SWOT analysis and
the
general
soap
sequels
or
in
Long before business tools
penetration.
the
budget
market
Diversication
it
loyalty
as
At
For
how
reduce
the
distribution
is
development
depending
factors
their
Television
with
in
brand
promotion
“Shrek”
success
than
Successful
such
budget
the
opened
however,
product.
of
segments
Sometimes
variations.
introduced
it
knowledge
products
market.
competitors
promoting
on
same
opportunities
research
existing
existing
the
but
its
competitors.
when
effective
Often,
of
the
Product
product.
and
the
increasing
market
strategy
market
reduce
●
on
blockbusters
expands
the
superstores.
approaches
by
by
loyalty
understand
when
also
(German)
limited
Story”,
in
option
competition.
“Toy
the
market
riskier
not
unsuccessful
products
safest
heavily
chance
of
ability
new
is
be
the
as
customer
development
markets
was
the
potential
of
the
grows
category.
increase
●
business
customers
from
such
a
existing
relies
Hollywood
story,
this
its
may
repeat
away
even
the
factors
of
share
encourage
customers
when
considered
penetration
less
Key
more
is
market
Market
telenovelas,
or
selling
occurs
tnemnorivne
Market
elements
and
of
a
of
new
a
product
business
into
a
can
new
pursue.
market
–
a
risk:
experience
any
strategy
new
in
the
new
market
product.
51
dna noitazinagro ssenisuB 1
1 . 3
1
B u s i n e s s
o r g a n i z at i o n
tnemnorivne
dna noitasinagro ssenisuB 1
When
Apple
moved
digital
music
market
diversied.
Many
example,
British
a
lawnmowers.
garden
failed
of
the
Key
Its
patios
at
business
to
●
effective
●
due
and
from
then
attempts
at
cement
rationale
would
attempt
factors
away
want
computing
handphone
diversication,
producer
was
a
e n v i r o n m e n t
that
‘Blue
was
a
using
to
cut
factor
entered
it
however,
Circle’
people
lawnmower
and
market,
have
decided
their
the
the
successfully
failed.
to
cement
grass.
Blue
contributing
to
For
produce
to
build
Circle’s
the
takeover
2001.
reduce
market
diligence
home
the
diversication
in
a n d
the
risk
diversication
are:
research
testing
to
■
the
attractiveness
■
the
cost
of
entering
●
recognition
of
the
●
possible
tie-ups
of
determine:
of
the
the
existing
with
other
market
market
business
businesses
with
the
necessary
experience.
Apple’s iPod is an example of
r chckl
successful diversication
✓
A
in
✓
A
vision
the
statement
future.
mission
might
✓
Aims
✓
Objectives
meet
its
A
✓
to
✓
Ethical
✓
have
an
impact
✓
A
on
SWOT
inside
The
new
be
a
hopes
to
be
what
time
the
business
is
doing
now.
It
passes.
goals.
and
is
are
codes
social
an
should
goals
be
which
SMART
allow
(specic,
a
business
to
measurable,
time-specic).
over-arching
plan
of
objectives
which
will
the
actions
and
objectives
which
allow
a
business
are
of
goals
that
a
business
sets
for
itself
based
on
behaviour.
responsibility
to
operate
(CSR)
in
a
is
way
the
concept
that
will
that
have
a
all
businesses
positive
society.
analysis
is
a
strengths,
Ansoff
matrix
penetration,
It
used
in
is
business
planning.
opportunities
and
It
involves
threats,
both
externally.
used
products
allows
market
diversication.
tool
weaknesses,
and
existing
opportunities.
52
business
strategy.
business
and
as
the
met.
obligation
analysing
✓
to
objectives
Corporate
describes
what
constant.
short-medium-term
tactics
established
remain
Objectives
strategy
implement
encapsulate
modies
relevant
aims
Business
be
are
aims.
business
enable
to
long-term
achievable,
✓
should
statement
need
are
It
should
a
to
plan
and
business
new
business
development,
and
to
growth.
existing
identify
product
It
considers
markets
areas
of
to
identify
market
development
and
O R G A N I Z A T I O N A L
O B J E C T I V E S
Practice question
Traditional
provide
has
online
holidays)
To
research
seasonal
a
as
forecasting
correlation
and
levels
of
many
is
to
and
identify
cyclical
products
becoming
between
online
trends,
are
sold
popular.
sales
of
Google™
to
variation
forecast
is
through
Google™’s
products
searches
(such
for
and
to
increasingly
e-
commerce.
chief
as
economist
cars
and
information
about
products.
make
using
about
particularly
found
those
future
secondary
data
outdated,
Today
the
tnemnorivne
Predicting
market
predictions,
social
media*
to
consumers’
moods.
They
measure
of
consumer
market
collect
use
online
researchers
messages
web-based
emotions
and
data
are
in
to
increasingly
order
build
preferences
and
to
a
understand
“real
then
time”
use
the
results
®
for
predicting
consumers’
behaviour.
Some
companies
such
as
Coca
Cola
,
®
Starbucks
and
Dr
of
Bollen
Twitter
A
Indiana
users’
after
of
an
unclear
Users
exists
Twitter
increase
why
Investors
of
software
order
to
media
media
such
forecast
Technologically
meanings
anxiety
and
expressions
social
United
changes
trends
and
in
media
States,
coincide
national
changes
levels,
for
share
in
online
found
with
prices
events.
(expressed
prices.
tend
research.
that:
national
mood
share
market
to
Three
fall
in
days
(although
it
is
happens).
to
share
intentions.
using
mood
between
social
social
use
University,
messages)
in
this
use
purchasing
already
collective
correlation
millions
Disney
as
guide
their
information
They
are
“Wise
decisions.
online
unconcerned
Window”
to
about
by
follow
feelings
market
them
and
researchers
constantly
in
demand.
advanced
cultural
remains
software
references.
a
challenge.
Internet
researcher
can
recognize
However,
sarcasm,
interpreting
double
slang
®
Mr
a
Watts,
an
forecasting
known.
other
The
technique
use
sources
methods
of
based
of
must
social
on
the
add
media
information
at
analysis
only
limited.
of
,
something
will
are
Yahoo!
Twitter
said
add
He
that
new
to
value
to
warned
messages,
to
be
what
useful,
is
already
forecasting
that
blog
if
sophisticated
postings
or
®
Facebook
pages
have
limitations.
[Source: adapted from “Can Twitter predict the future?” The Economist Technology
Quar terly, 4 June 2011 and John Plunkett, Media Guardian, 25 July 2011]
*
social media: refers to various forms of relatively new electronic technologies that allow individuals,
groups and organizations to communicate with one another. The communication is “vir tual” (across
the world wide web and through electronic transmission) and is typically interactive. One frequent
feature is the ability of a par ticipant to pass on a communication it has received to other persons,
groups, or organizations.
53
dna noitazinagro ssenisuB 1
1 . 3
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
Age
tnemnorivne
dna noitasinagro ssenisuB 1
Twitter Demographics (Infographic)
Caucasian 35–49
Caucasian 50+
(38.54%)
(25.4%)
(17%)
African American
African American
yticinhtE
Caucasian 18–34
African American 18–34 (3.3%)
Asian 18–34 (2.4%)
35–49 (2.2%)
50+ (1.5%)
Asian 35–49 (1.6%)
Asian 50+ (1.1%)
Hispanic 35–49
Hispanic 50+
(1.6%)
(1.1%)
Hispanic 18–34 (2.4%)
a)
Describe
one
organization
b)
(i)
Explain
(ii)
Examine
identify
d)
in
order
the
the
to
IB,
54
Nov.
2013
benet
one
disadvantage
to
an
of
sales
[4
forecasting
seasonal
and
for
cyclical
an
usefulness
trends
use
of
of
and
“social
traditional
for
variations
secondary
media
to
collect
moods”
research
online
for
[4
marks]
[4
marks]
[6
marks]
to
to
forecasting.
consumers’
marks]
organization.
trends.
understand
predictions.
and
e-commerce.
between
sales
market
Evaluate
using
one
Distinguish
predict
c)
advantage
of
message
making
market
[9
marks]
tnemnorivne
By the end of this chapter, you should be able to:
➔
Outline the interests of internal stakeholders
➔
Outline the interests of external stakeholders
➔
Discuss possible areas of mutual benet and conict between
stakeholders’ interests
Stakeholders
direct
affect
a
interest
them
stake
or
nancial
and
at
in
any
a
interest
(they
They
in
are
the
or
it
is
the
called
business.
less
groups
because
are
shareholders,
times
operates.
individual
business
directly.
other
business
the
are
individuals
actions
Sometimes
such
all
of
stakeholders
lenders,
direct,
Nevertheless,
of
as
the
the
stake
or
is
have
a
will
they
have
directly
employees)
community
stakeholders
have
business
because
suppliers,
the
who
an
in
which
interest
a
in
business.
il  xl khl
In
●
general,
Internal
the
●
●
●
grey
areas
employees,
As
democratic
and
citizens
have
Consultants
the
they
in
have
Small
a
an
in
some
of
stakeholder:
individuals
or
groups
individuals
a
as
or
are
ability
to
are
of
in
are
way
on
that
groups
work
within
that
are
outside
such
area.
large
inuence
where
stakeholders;
the
as
business
residents
is
of
stakeholders.
(internal
external
nancial
brought
However,
publicly
in
stakeholders)
stakeholders,
planners,
largely
once
a
hired,
are
as
are
voting
voting
external
because
in
of
some
the
company,
someone
publicly
business
companies,
stakeholders,
traded
However,
large
traded
internal
publicly
(GE).
of
stakeholders:
government.
as
people
external
their
fashion
position.
large
shares,
are
and
community
internal
the
considered
a
the
employees
business,
internal
in
internal
external
some
They
Electric
100
they
particular
fraction
live
claim
shareholders
General
such
the
types
are
are
societies,
to
shareholders,
tiny
they
thus
business.
expertise
no
two
between
business
community,
citizens
or
a
exist
located.
a
are
stakeholders
of
In
about
stakeholders
Employees
to
●
talk
business.
practice,
the
●
usually
business.
External
the
In
we
traded
and
in
who
for
if
all
they
example
owns
company
most
like
even
a
small
has
respects
is
own
Apple
stake,
virtually
external
to
business.
55
dna noitazinagro ssenisuB 1
1.4 Stakeholders
1
B u s i n e s s
addition,
in
other
instances
a n d
e n v i r o n m e n t
individuals
have
multiple
stakeholder
Key terms
interests:
tnemnorivne
dna noitasinagro ssenisuB 1
In
o r g a n i z at i o n
employees
management
team,
who
have
own
shares
multiple
and
managers,
stakeholder
who
are
part
of
the
interests.
Stakeholder
an individual or group who has
The interests of internal stakeholders
an interest, often nancial, in
Shareholders
●
focus
on
returns
on
their
investments.
the activities and success of
The
●
CEO
business
or
managing
strategy
and
director
delivering
focuses
prots
on
and
coordinating
returns
that
an organization
the
satisfy
the
Shareholder
shareholders.
an individual who owns a
Senior
●
managers
focus
on
the
strategic
objectives
for
their
share or shares in a company
functional
areas.
Competitor
Middle
●
managers
functional
focus
on
the
tactical
objectives
for
their
another business or
areas.
organization oering very
Foremen
●
and
supervisors
focus
on
organizing
tactical
objectives
similar goods or services
and
formulating
Employees
●
working
operational
and
their
objectives.
unions
focus
on
protecting
their
rights
and
conditions.
The interests of external stakeholders
Government
●
in
the
●
Suppliers
●
Customers
their
in
business
focus
on
and
the
in
●
Financiers
●
Pressure
●
all
levels)
focuses
on
how
the
business
operates
environment.
maintaining
consumers
a
stable
focus
on
relationship.
the
best
product
that
meets
needs.
People
●
(at
business
local
the
local
focus
on
groups
area
of
The
media
community
focus
on
the
impact
of
the
area.
returns
focus
on
on
their
how
the
investments.
business
has
impact
on
their
concern.
focuses
on
the
impact
of
the
business
in
terms
of
news
stories.
Note
a
that
competitors
business
actions
directly
wants
in
at
the
may
the
have
an
are
stake
with
the
to
considered
indirect
marketplace,
business
not
the
impact
on
to
itself.
In
stakeholders.
competitors
competition
business
be
does
fact,
not
the
Although
through
have
its
anything
competitor
usually
fail.
Possible areas of mutual benet and conict between
stakeholders’ interests
Groups
have
of
people
differences
stakeholders
Consider
object
on
56
to
the
the
with
of
have
a
investment.
At
common
“stake”
example
idea,
a
opinion.
as
it
the
of
a
This
in
pay
could
other
interest,
situation
the
business,
rise
for
decrease
end
such
of
as
makes
their
the
and,
spectrum
business,
may
although
focuses
employees.
prots
a
sense:
are
different.
Shareholders
therefore,
are
the
also
all
may
their
return
employees
higher
In
between
mixed
these
CEO
paying
meeting
worried
and
the
that
extrinsic
more
this
feature
of
a
theory
shop
community,
business
for
complicated.
pay
to
be
for
in
other
may
be
the
a
the
pay
for
of
of
with
support
happier.
responsibility
ratios,
reinforcing
might
for
would
the
undermine
in
principle
that
also
use
be
of
their
in
any
community
such
as
a
from
and
favour
employees
community
–
at
way
efforts
higher
would
general
not
pay
different
have
restaurants
threatened
would
alliances
the
is
that
time.
particularly
trader
and
have
(though
the
favour
rise
and
at
the
may
be
idea.
the
stakeholders.
formed
always)
the
business,
satisfying
required
the
and
has
shop
and
have
are
the
mostly
sole
of
In
as
each
An
or
suppliers,
such
being
a
such
in
as
external
stake
in
inconsequential.
of
an
internal
While
these
small
stakeholders
protable
with
government
few
two.
stakeholders,
interests
trader
managing
individual
relatively
relatively
is
stakeholders
instances,
employee
external
of
laws
an
nanciers
not
interests
some
typically
several
provide
the
In
complicated.
perhaps
decisions
with
probably
employees
position.
sole
is
the
by
mean
rises
friction
trader
business,
operates
in
for
the
into
especially
a
have
case
of
was
working
be
(who
Even
major
a
It
in
enough
income,
regulations
not
might
be
in
to
the
that
and
make
this
and
with
is
if
up
their
the
for
town,
this
of
lead
might
year-end
losing
not
to
in
a
reduced
out
were
workforce.
the
CEO
bonuses).
their
like
the
business.
retained
smaller
as
would
instance,
the
a
factory
productivity
workers
the
When
the
employer
might
greater
Those
jobs
In
main
outcome,
greater
a
success
the
the
challenge.
in
area.
the
mean
dissatised.
keeping
coordinating
or
workforce
also
receive
city
in
retrenched,
with
ones,
formidable
small
stake
the
might
harder
would
a
factory
happy
those
in
large
more
employer
a
reduction
that
however,
much
factory
business.
might
managers
unhappy.
a
is
important
the
workforce
workers,
be
of
most
Shareholders
senior
a
rise
reactions
not
stakeholders
20-per-cent
pressured
is
and
stakeholders
expenses
of
types
of
example,
town,
be
standards.
business
various
For
a
prots.
would
businesses
What
compliance
interests
large
of
expenses
community
For
type
pay
government,
the
is
to
this
be
would
the
Thus,
not
them
would
principle
investment
that,
local
the
most
as
sole
typically
that
the
jockeys
business
stakeholders
the
give
motivation.
importance,
may
on
would
the
different
satised
the
it
in
if
successful
small
the
of
interests
stakeholders:
a
community
as
in
make
lower
intrinsic
business,
there
group
stakeholders’
the
would
stakeholders
managers,
return
concerned
spend
the
elicit
sufciently
running
to
senior
factors,
of
local
decision
will
stakeholder
are
which
would
would
would
be
However,
of
situation,
One
also
this
and
employees,
etc.
any
business,
and
rises
culture
money
existence
as
targets
pay
the
for
shops,
CEO
may
a
in
wages
Thus,
rises,
various
managers
wages,
motivating
foster
Those
●
pay
positions,
senior
prot
Managers
to
favour
living.
two
higher
However,
●
would
of
mind.
The
●
who
standard
tnemnorivne
themselves,
S T A K E H O L D E R S
jobs
and
The
would
seeing
their
57
dna noitazinagro ssenisuB 1
1 . 4
1
B u s i n e s s
workers
tnemnorivne
dna noitasinagro ssenisuB 1
co-workers
a
to
general
Many
go.
●
sense
other
if
the
harder
of
fear
–
for
the
a n d
business
make
up
of
more
job
would
local
be
e n v i r o n m e n t
were
to
stakeholders
for
not
the
cuts
–
and
work
would
affected
community
pressuring
lost
as
the
well.
remaining
those
affect
local
the
of
the
Just
a
retrenched,
workers.
few
of
government
the
would
be
follows:
Many
employees
expenses
●
Even
work
implications
as
o r g a n i z at i o n
Probably
houses
would
(support
many
or
for
people
moving
struggle
the
out
would
of
to
nd
unemployed
move
rental
new
away
ats,
jobs,
persons)
thus
from
and
government
would
the
increase.
town,
depressing
the
selling
real
estate
market.
●
When
fall,
●
families
thus
Local
businesses
would
shops
Large
mean
and
approach
decision
or
to
away,
the
lay-offs
would
of
suffer,
people
number
teachers
as
with
fewer
the
of
in
children
the
employees
resources
in
the
school
may
school.
to
of
the
factory
purchase
at
local
restaurants.
often
prioritize
to
fewer
businesses
interests
move
leading
or
those
perform
rank
this
making
the
step
in
a
businesses
interests
is
the
that
stakeholder
to
of
various
determine
business.
have
is
The
rst
stakeholders.
how
This
complicated
analysis.
“close”
shown
in
each
stakeholder
step
One
is
to
conceptual
stakeholder
Figure
is
to
1.4.1.
government
employees
suppliers
owners
pressure
media
groups
managers
nanciers
consumers
local community
Figure 1.4.1. The comparative closeness of stakeholders to decision making
Under
this
making,
further
media
approach,
while
the
stakeholders
Another
local
closest
the
valued
and
to
managers
employees,
distant
are
community.
the
models
model
power–interest
are
nanciers,
government,
Decision
central
and
to
consumers
pressure
makers
decision
try
to
are
groups,
satisfy
the
those
centre.
approach
Numerous
particularly
58
Most
conceptual
mapping.
called
suppliers,
removed.
and
owners
was
involves
for
a
tool
mapping
formulated
model.
called
stakeholder
stakeholders
by
Johnson
exist.
and
One
Scholes
and
1 . 4
S T A K E H O L D E R S
Level of interest
High
tnemnorivne
Low
Low
Degree of power
Figure 1.4.2. The power–interest model (Johnson and Scholes)
Source: Johnson, G and Scholes, K (1999) Exploring Corporate Strategy, 5th edition,
Prentice Hall Europe
By
placing
on
likely
each
Stakeholders
interest
in
problem
the
for
or
group
feel
conveying
kept
A.
and
business.
at
group
a
least
in
These
stakeholders,
have
the
limited
Owners
devote
to
must
business
on
satisfy
in
and
matrix,
power
a
business
energy
who
over
managers
limited
in
C.
have
ways
to
feel
group
not
any
needs
For
belonging
group
must
their
B.
owners
important.
They
them
before
these
is
of
nd
make
them
group
sense
Stakeholders
focus
in
satised.
business
with
group
included
Stakeholders
The
group
can
decide
have
it,
fairly
and
minimal
are
rarely
safely
attention
a
ignore
to
these
satisfying
interests.
Stakeholders
be
in
business
the
stakeholders,
their
stakeholder
strategies.
events,
making
and
this
other
ways
of
pivotal
the
group
to
of
stakeholders
inuence
self-esteem
other
of
must
groups.
members
of
The
this
important.
D.
These
merely
stakeholders
communicate
decisions
preference
stakeholders
managers,
important.
power
atter
major
in
are
This
the
and
Newsletters,
can
to
have
are
the
very
are
with
made.
others.
the
them
The
but
important.
also
business
Failure
negative
most
to
consult
should
involve
consequences
for
and
the
business.
Group
Least
to
A
important
the
business
Group
B
Group
C
Group
Most
to
D
important
the
business
59
dna noitazinagro ssenisuB 1
1
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
✓
tnemnorivne
dna noitasinagro ssenisuB 1
r chckl
Stakeholders
the
✓
Internal
such
External
such
✓
individuals
stakeholders
business,
✓
are
or
groups
who
have
a
direct
interest
in
business.
The
as
as
stakeholders
customers
interests
include
are
of
return
conditions
are
and
the
on
and
individuals
employees
and
groups
that
work
within
the
individuals
or
groups
outside
the
business,
suppliers.
various
stakeholders
investment,
the
or
managers.
quality
of
the
the
will
impact
product
on
differ.
the
Interests
local
area,
might
working
produced.
Pcc q
Anigam
Anigam
animal
is
one
drugs
promotional
of
the
biggest
industry.
In
campaigns.
multinational
many
It
uses
countries,
both
companies
Anigam
above
the
is
line
operating
well
and
in
known
below
the
for
the
its
line
promotion.
Anigam
has
life
cycle:
●
Anitox
is
a
a
is
portfolio
the
rst
of
animal
animal
business-to-business
worldwide.
That
gure
Anitox
has
established
has
been
product
drug
a
a
at
that
(B2B)
high
stable
in
drugs
Anigam
product
25%
for
different
the
market
that
of
10
is
of
developed
used
share
last
stages
in
their
and
sold.
veterinary
the
global
years.
and
It
clinics
market.
Anitox
saturated
product
is
a
well-
growing
very
slowly.
●
A
range
Anisan,
a
high
animal
15%
share
however,
which
is
as
u
and
Last
year,
helps
to
other
is
the
rst
whether
a)
Analyse
b)
With
group
reasons
companies.
IB,
60
Nov.
2013
performing
launched
in
to
new
efforts
were
for
it
as
It
Anislim
of
well:
is,
The
and
in
has
animal
Aniplus,
against
products
such
Anislim
Thanks
appropriate
which
to
signicant
promotional
too
early
to
maintained.
drugs
other
the
mix,
forecast
by
applying
the
Boston
[5
one
increase
them,
competitive.
called
be
other
systems
for
of
already
example,
market
very
however,
will
animal
for
One
it
Some
immune
animals.
an
ago.
animals;
market.
drug
and
good.
is
years
matrix.
Anigam
the
but
domestic
portfolio
for
a
four
aging
animals’
diseases.
rapidly,
(BCG)
in
growing
strengthen
sales
Anigam’s
reference
discuss
not
marketing
present
consulting
rapidly
obesity
results
launched
attacks
contagious
Anigam
sales
to
was
heart
a
growing
reduce
introductory
of
are
designed
Aniplus
drugs
prevent
drugs,
the
●
of
helps
company
number
of
of
your
marks]
choice,
multinational
[7
marks]
tnemnorivne
By the end of this chapter, you should be able to:
➔
Prepare a STEEPLE analysis of an organization
➔
Exaplain the consequences of a change in any of the STEEPLE factors
for a business’s objectives and strategy
The impact of the external environment
on a business
All
In
businesses,
business,
“ecology”,
as
the
environment
to
the
a
business
Businesses
external
plans
word
for
analysis,
–
to
Even
that
will
have
tool
for
which
have
All
STEEPLE
in
They
the
highlights
elements
framework,
alone
means
of
to
of
those
focuses
to
environment.
meaning
in
ecological)
control
difcult
–
of
business,
its
external
internal
elements
external
it.
plan
on
were
elements
make
a
of
with
external
PEST
the
contingency
environment.
begins
these
included
the
and
external
process
analyses
in
be
an
Rather,
(including
inuence
the
in
narrower
implies.
however,
analysis
shown
on
planning
operate
the
manages
can
impact
and
STEEPLE
or
conditions
can,
of
big,
have
means
elements
type
or
not
business
an
limited
this
of
a
challenge
still
small
does
various
when
only
changes
versions
analysis.
how
usually
environment.
common
Earlier
matter
refers
business.
environment
to
no
“environment”
a
One
STEEPLE
elements.
or
a
incorporated
PESTLE
in
the
Figure1.5.1.
Ethical
Economic
Political
Technological
Legal
Social
The business
Ecological
Figure 1.5.1. The STEEPLE framework
What
is
the
–
difference
●
PEST
Political,
●
PESTLE
–
between
Economic,
Political,
PEST,
PESTLE
Social
Economic,
and
Social,
and
STEEPLE
analyses?
Technological
Technological,
Legal
and
Ecological
●
STEEPLE
Legal
and
–
Social,
Technological,
Economic,
Ecological,
Political,
Ethical
61
dna noitazinagro ssenisuB 1
1.5 The ex ternal environment
1
B u s i n e s s
addition
ethical)
tnemnorivne
dna noitasinagro ssenisuB 1
The
the
last
of
reect
50
has
the
an
years
multinational
legal
o r g a n i z at i o n
occurred
years
ago
as
businesses
practices
have
and
in
businesses
even
in
with
many
elements
evolution
and
frameworks
extra
addition
broader
treating
so
legal
of
A
had
on
and
have
consider
then
over
become
the
different
transformation
ethical.
making
including
stakeholders
and
thinking
Many
to
similar
ecological
only
ecological
and
larger.
have
operate.
focused
and
practices
grown
they
concerns,
all
(rst
have
they
businesses
e n v i r o n m e n t
business
global,
which
the
a n d
Whereas
prots,
striving
50
today
towards
most
sustainable
ethically.
th pc f ch  y
f h steePLe fc
If
any
of
the
objectives
rst
considers
Then
the
are
in
a
of
particular
Once
develop
listed
factors
strategy
business
inuences.
can
STEEPLE
and
inuences
most
strategy
change,
business.
conducts
the
Table
a
to
an
of
them
a
will
have
STEEPLE
each
analysis
important
take
this
In
to
element
on
determine
inuences
into
an
are
account.
impact
analysis,
the
the
a
on
the
business
business.
most
isolated,
Common
important
the
business
inuences
1.5.1.
Table 1.5.1. Common inuences in a STEEPLE analysis
Social inuences include:
Technological inuences include:
Economic inuences include:
Ethical inuences include:
Political inuences include:
Legal inuences include:
Ecological inuences include:
Not
all
with
need
62
businesses
the
to
same
be
react
degree
concerned
to
of
the
lifestyles
●
education
●
social mobility
●
fashions or tastes.
●
demographics
●
technological improvements
●
ICT
●
new technology transfer
●
research and development costs.
●
infrastructure
●
the economic or business cycle
●
the rate of unemployment
●
the rate of economic growth
●
the exchange rate
●
the rate of ination
●
interest rates.
●
corruption
●
codes of business behaviour
●
transparency
●
fair trade.
●
political stability
●
regional policies
●
trade policies
●
lobbying or electioneering.
●
regulations
●
health and safety legislation
●
employment laws
●
competition laws.
●
depletion of renewable resources
●
organic farming
●
global warming
●
carbon footprints.
inuences
energy
with
●
or
or
purpose.
changes
in
changes
Often,
particular
a
shown
in
business
laws
(if
they
Table
might
are
1.5.1
not
not
relevant
to
the
business)
or
to
changes
in
fashion
or
T H E
tastes
(if
E X T E R N A L
its
E N V I R O N M E N T
product
ToK discussion
service
react
to
is
(or
not
try
determined
to
pre-empt)
by
fashion
these
or
tastes).
inuences
How
will
be
a
the
business
function
of
will
tnemnorivne
or
their
To what degree are
relevance
to
its
current
strategy
and
objectives.
businesses limited in how
Businesses
successful
an
early
useful
factors,
to
than
have
are
exible
businesses
adaptor
for
elements
that
and
businesses
often
which
a
rst
may
a
can
are
it
the
adapt
to
change
inexible
rst
move
mover
fast
business
give
mover
that
having
that
allows
and
to
and
not
advantage
enough.
Planning
determine
opportunity
do
will
to
adapt.
can
to
much they can “know” about
more
be
based
changes
respond
be
Being
the external environment?
very
on
STEEPLE
environmental
and
perhaps
even
advantage.
yduts esaC
C’ s, Jp
Cat’s Store was the rst ‘cat café’ to open in Tokyo,
Economic – visiting a cat café is a luxury that people
Japan. Customers pay a fee to visit the café, where
may not be able to aord if the economy slows down.
they can sit with the cats who live there. There are
Can the café owners aord to pay for vet bills?
now around 40 cat cafés in Tokyo, with many more
Ethical – is it ethical to keep the cats in the café? Are
throughout Japan and, increasingly, across the world.
the standards of cleanliness and hygeine adequate?
A STEEPLE analysis for Cat’s Store might consider the
Political – is there a risk that animal rights
following factors:
campaigners could call for laws to be changed? Could a
new goverment change the rules?
Social – is the interest in cats a fad or a trend? Is
there a risk that a new animal could become more
Legal – the café is subject to strict health and safety
‘fashionable’? Is the population ageing? Is the café
and animal rights regulations. Could these change?
visiting by more young people than elderly people?
What if a customer was injured by a cat? Do customers
need to sign a disclaimer?
Technological – How can the café best market itself
in an online world? Social media such as Instagram
Ecological – each cat will require food, shelter and
and Twitter could be used to generate buzz. Is the café
warmth. What is the ecological eect of this?
utilizing the most ecient technology?
Student workpoint 1.8
Be a thinker
Work
in
a
following
pair
or
●
local
●
international
●
high-street
●
local
●
global
●
online
You
to
create
a
STEEPLE
analysis
for
one
of
the
restaurant
car
hotel
to
chain
bookshop
mechanic
electronics
might
ndings
group
businesses:
clothing
base
the
retailer
your
rest
manufacturer
analysis
of
the
on
class
a
and
real
company.
discuss
the
Present
your
differences
in
your
ndings.
63
dna noitazinagro ssenisuB 1
1 . 5
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
✓
tnemnorivne
dna noitasinagro ssenisuB 1
Revision checklist
A
STEEPLE
which
✓
The
factors
legal
✓
If
analysis
might
and
any
of
is
a
inuence
are:
social,
way
the
of
evaluating
success
of
technological,
a
all
the
external
factors
business.
economic,
ethical,
political,
ecological.
the
factors
change,
a
business
may
need
to
adapt
its
strategy.
Practice question
China
China,
with
economic
9.7%
on
per
population
year
mobile
night
a
growth.
the
neon
Nestlé,
Beijing
and
years
With
world
as
40
demand
and
in
the
of
with
Trade
70%
of
down
from
15%
music
and
of
is
hungry
grew
coffee
their
news
foreign
Standard
dynamic
as
to
and
and
costs.
each
year.
pay
Acer
now
at
for
at
Starbucks,
and
investment.
as
Hong
talk
fashions.
Chartered .
as
a
China
By
They
Shanghai,
Kong
Taiwan
full
million
more
was
and
of
companies
have
than
about
$6.
US
50
a
two
towns
million
cents
Sony
per
such
technology
mobile-phone
as
such
and
manufacturers
in
turned
companies
Japan’s
motor
Boom
falling,
particular,
are
than
Foreign
country
178
In
in
Wages
taxpayers.
and
services
Japan
more
of
China.
rules,
a
gap
between
centrally
new
tariff
to
government,
cuts
12%.
such
as
rms
rich
planned
Organization
the
foreign
and
well
users
US
cutting
China
the
about
new
as
products
the
Chinese
wealth
with
the
against
Pepsi
are
GDP
drink
for
extent
people,
its
Hitachi
are
now
Shenzen
fanatics.
owners
It
has
which
is
America.
associated
World
as
qualify
as
Internet
bureaucratic
ICT
production
highest
than
However,
and
2000,
Chinese
the
manufacturers,
image
million
more
for
towards
Siemens
the
an
billion
Internet
Canon,
cities
such
graduates
moved
create
1.3
and
Young
the
illustrate
coastal
American
among
use
Samsung,
the
innovation
Dell
have
signs
markets,
university
hour.
and
some
1979
ago.
expensive
from
average.
phones
display
few
on
of
Between
(WTO),
agreed
However,
health
who
also
and
to
and
poor
economy.
but
after
China
on
safety
complain
a
can
entry.
some
is
widening.
There
year
are
as
claim
Overall
agricultural
member
have
tariffs
tariffs
requirements,
about
a
to
illegally
China
political
is
risks
of
achieved
have
have
come
risen
discriminate
copied
books,
software.
[Source : IT puts re in the belly of dragon economy – The Times, 12 Dec 2002 and
China: Welcome the Final Frontier – Sunday Times 3 Nov 2002]
a)
Evaluate
the
the
extent
development
of
to
which
new
ICT
globalization
(information
is
encouraged
and
technology).
b)
Using
a
IB,
64
May
[7
STEEPLE
disadvantages
2004
by
communication
to
framework
foreign
analyse
rms
of
the
locating
potential
in
advantages
China.
marks]
and
[6
marks}
tnemnorivne
By the end of this chapter, you should be able to:
➔
Dene the terms economies and diseconomies of scale
➔
Discuss the merits of small versus large organizations
➔
Outline the dierence between internal and external growth
➔
Explain the following external growth methods:
●
mergers and acquisitions (M & As) and takeovers
●
joint ventures
●
strategic alliances
●
franchising
Explain the role and impact of globalization on the growth and
➔
evolution of businesses
➔
Outline reasons for the growth of multinational companies (MNCs)
➔
Evaluate the impact of MNCs on the host countries
ec  c f cl
Businesses
use
to
the
the
that
larger
size
or
operations,
increases
efcient,
“economies
business
increase
of
has
Efciency
more
refer
as
to
in
is
Unit
size.
the
variable
in
to
and
the
cost
in
of
think
of
of
rent
the
process
of
costs
of
of
a
situation
of
as
a
experiences
the
to
an
size.
per
cost
production
term
cost
refers
production
of
more
unit
in
refers
business
occurs,
which
types
often
scale
The
business
increases
different
costs
a
scale ,
business
scale.
average
sometimes
this
When
its
becomes
of
can
operations
increases
volume.
in
of
unit.
of
with
For
a
production,
the
formula:
costs
abbreviations
costs,
costs
example,
the
When
the
operations
business
reduction
the
terms
explanation
now,
as
the
TC
formula
=
xed
for
total
if
a
are
payments
business.
costs
that
business
are
the
do
same
=
not
operates
Variable
cost
cost,
+
variable
FC
for
xed
cost
cost
and
VC
for
is:
TC
Fixed
in
of
Scale
economies
However,
larger.
a
greater
diseconomies
unit
measured
For
or
scale
efcient.
When
achieved
refers
Total
Using
has
achieved
5.
more
their
more
output.
becomes
average
complete
following
it
increase
operations
scale”
increases
in
of
business
inefciencies
business
of
or
become
produces
scale
the
to
volume
it
its
expand
scale
in
FC
change
a
are
VC
as
rented
regardless
costs
+
costs
of
production
(leased)
the
that
quantity
vary
as
changes.
factory,
of
the
For
monthly
production
production
of
changes.
65
dna noitazinagro ssenisuB 1
1.6 Growth and evolution
1
B u s i n e s s
example,
if
a
furniture
a n d
e n v i r o n m e n t
manufacturer
expands
production,
then
it
will
Key terms
require
tnemnorivne
dna noitasinagro ssenisuB 1
For
o r g a n i z at i o n
more
Further
raw
costs
unit
costs.
with
the
are
All
materials
known
three
(wood,
as
refer
metal
average
to
total
springs,
costs
cost
or
per
cloth,
unit
unit,
leather,
costs
which
or
can
etc.).
average
be
Fixed costs
calculated
costs which do not change
following
formula:
according to the amount of
goods or services produced
total cost
__
Average
cost
=
by the business.
quantity
produced
Variable costs
And
if
AC
quantity
is
average
produced,
cost
the
(Unit
costs
formula
or
average
Unit
costs)
and
Q
is
becomes:
costs which increase or
decrease according the
TC
_
AC
amount of goods or services
=
Q
produced
As
we
Thus,
saw
above,
average
TC
cost
refers
can
to
also
be
total
cost,
derived
calculated
with
from
the
adding
following
FC
and
VC.
formula:
FC + VC
_
AC
=
Q
Expressing
the
economies
and
producing
costs
are
a
spread
average
has
achieved
Sometimes
scale.
year.
is
For
As
that
units
It
have
In
example,
it
will
at
factory,
for
of
can
a
or
the
some
it
concepts
produced.
of
expands
However,
becomes
As
the
a
more
spread
point
next
grow
changing
year
for
is
or
years
locations
(See
to
by
xed
result,
efcient.
It
a
growth
for
the
Unit
for
greater
come
on
for
number
of
The
its
this
of
continues),
the
factory.
business
will
production.
year
next
amount
without
on
year.
factory
probably
the
of
year
reason
size
5).
another
should
even
One
larger
expand
–
inefciencies
diseconomies
production
expanding
space
to
(if
level
space
signicantly
to
scale.
over
time
utilization
business
of
out
in
business
experience
refers
economies
additional
the
to
expands
production
the
–
starts
situation
additional
or
a
the
business
increase.
units
business
being
capacity
acquire
business
disruption
at
example
space
that
is
remember,
for
This
achieves
different
of
the
business
expands,
maximum
cent
different
probably
the
its
per
scenario,
enough
and
at
acquiring
should
way,
be
explain
as
costs
quantity
costs.
rent
However,
100
acquire
initially
of
variable
the
to
First,
scale.
imagine
cost
helps
scale.
Thus,
of
unit
way
of
greater
business
xed
this
larger
a
average
does,
to
When
just
when
it
be
a
down.
economies
produced.
will
go
the
business
this
quantity,
over
costs
increase
in
diseconomies
greater
the
that
formula
not
two
of
or
a
acquire
years.
space.
having
It
That
the
cost
TOK discussion
frequently.
As businesses grow, how do
When
a
business
doubles
its
factory
size,
its
capacity
utilization
will
go
down
their methods of knowing
(initially)
and
its
rent
will
increase.
In
our
example,
in
the
old
factory
or
old
(knowing their customers,
space,
the
business
had
100
per
cent
capacity
utilization.
When
the
space
is
knowing the business
doubled
but
production
remains
the
same
(initially),
capacity
utilization
will
environment, knowing their
decrease
from
100
per
cent
to
50
per
cent.
The
business’s
rent
expense
will
markets, etc.) change? Are
increase
signicantly
(it
will
probably
double).
The
higher
rent
will
now
be
these changes for the better,
spread
over
the
same
(or
a
slightly
higher)
number
of
units
produced.
With
or worse? How are they
the
higher
rent,
initially,
the
business
will
have
higher
average
unit
cost.
dierent?
Thus,
66
it
will
have
achieved
diseconomies
of
scale.
Figure
1.6.1
shows
this
G R O W T H
A N D
E V O L U T I O N
progression.
tnemnorivne
Costs
average
costs
economies
diseconomies
of scale
of scale
0
Optimum
Quantity
production
produced
Figure 1.6.1. Progression from economies of scale to diseconomies of scale
As
the
costs
of
business
go
down.
lowest
our
average
example
would
grows,
The
costs,
using
produces
rent
the
as
the
point
utilization.
As
the
business
inefcient.
Average
curve
costs
are
Efciency
more
the
is
at
the
the
is
not
efcient
business
if
in
it
can
which
to
to
is
of
to
cost,
is
at
average
per
their
alone.
unit
unit
After
it
At
the
the
average
point
production”.
100
per
cent
to
point
that
In
production
starts
minimum
production.
at
initially
optimum
expand,
The
are
and
efcient.
“optimum
business
production
savings
at
xed
rise.
prots
lower
the
the
level
and
related
chief
output
more
continues
start
optimum
lowest
business
where
costs
more
becomes
the
be
cost
also
it
business
capacity
become
of
point,
the
more
average
average
maximum.
A
business
costs,
can
regardless
become
of
the
area
of
occur.
T
able 1.6.1. Internal economies of scale (eciencies that the business itself can make)
Type
Explanation
Example
Technical
Bigger units of production can reduce
Operating a container ship with one crew, fuel bill
costs because of the law of variable
and ber thing fee is cheaper than running two or more
propor tions – the increase in variable
smaller vessels.
costs spread against a set of xed costs.
Similarly, the A380 passenger airline will be cheaper
to operate than two traditional long-haul aircraft; an
articulated lorry will be cheaper to operate than two or
three smaller vehicles.
Managerial
A bigger business can aord to have
Managers specializing by function, such as production,
managers specializing in one job as
marketing, nance, and HR, as opposed to having a
opposed to trying to do everything.
“general” manager, can typically work with greater
eciency.
Financial
Bigger businesses are less risky than
Banks and other nancial institutions charge lower
smaller businesses.
rates of interest on loans or overdrafts to businesses
they consider safe.
Marketing
Bigger businesses can direct more
Only large business can aord sponsorship of major
eective marketing campaigns.
spor ting events such as the Olympic Games, the Super
Bowl or the Football World Cup, which are especially
higher yielding promotions per dollar, pound or euro.
67
dna noitazinagro ssenisuB 1
1 . 6
1
B u s i n e s s
tnemnorivne
dna noitasinagro ssenisuB 1
Purchasing
Risk bearing
o r g a n i z at i o n
a n d
e n v i r o n m e n t
Big businesses can gain discounts by
Supermarkets such as Wal-Mar t or Tesco buy large
bulk buying – buying in large quantities.
quantities of food at very low prices from farmers.
Big businesses can aord to produce
Pepsi Co owns a number of dierent brands such as
a bigger product range and in doing so
Pepsi, Gatorade, Tropicana, Lipton’s Teas, Quaker Oats,
spread the risk of one product failing –
and Lays.
hedging their bets
Table 1.6.2. External economies of scale (eciencies that the business achieves
because someone else has expanded)
Type
Explanation
Example
Consumers
A shopping mall increases the number of
A shopping mall, an international airpor t, and a
potential of customers as more people go to the
business park or zone all require servicing and
mall compared to an independent shop because
maintenance as well as their core business.
of the ease of one-stop shopping. So, a whole
range of other businesses benets from someone
else building the infrastructure.
Employees
Labour concentrations – some cities or
Hollywood is famous for having many actors
geographic areas concentrate on cer tain
and others skilled in various aspects of lm and
industries or sectors. Individual businesses
television production.
located in those areas and operating in the
London is a major banking centre, where
industry that has the concentration can often
numerous professionals in nancial services live
benet from lower recruiting and training costs.
and work .
As
we
have
achieve
noted,
however,
diseconomies
of
if
scale
a
in
business
the
expands
same
too
much,
then
it
can
area.
Table 1.6.3. Internal diseconomies of scale (ineciencies that the business itself can make)
Type
Example
Technical
A container ship can be too big to berth in a harbour, an airplane too big to land at smaller airports, or a lorry too
large to drive on minor roads.
Managerial
Businesses may have “over-specialized” managers who cannot (or will not) work outside their area of
exper tise or for everyone’s benet, which often occurs in the investment and commercial banking sectors.
Financial
Sometimes big businesses with large amounts of “surplus” cash make poor investments. Poor decisions
occur because the businesses do not think through the consequences of investment choices – Singapore
Airlines bought a 49% stake in Virgin Atlantic for US$ 965 million in 1999 but in 2012 sold its stake to
Delta Airlines for US$ 360 million.
Marketing
Sometimes big businesses can make big marketing mistakes. In the 1990s, Hoover oered free ights
to anyone who spent more than US$150 on a vacuum cleaner. Hoover did not realize that, for many
people, an expensive vacuum cleaner was wor th buying if it included a free ight anywhere in the world!
When Hoover refused to honour the deal, the cour ts ordered the company to pay US$ 50 million in
compensation to customers. Weakened by this expense, Hoover was acquired by a competitor, Candy.
Purchasing
Large businesses often buy too much stock , which can be costly if the capital funds used to purchase
the stock are greater than the cost savings from buying in large quantities. Stock can also become spoilt,
obsolete or unfashionable. The rst stock market crash was as a result of too many tulips being bought by
Dutch traders in the 17th century.
Risk bearing
68
In 2005 eBay bought Skype in the hope of broadening its range but in 2011 sold it to Microsoft.
G R O W T H
A N D
E V O L U T I O N
Table 1.6.4. External diseconomies of scale (ineciencies that the business
Type
Example
Employees
If one geographic region becomes too concentrated on one
tnemnorivne
achieves because someone else has expanded)
economic activity, typically a shor tage of skilled workers in
the industry will occur. For an individual business this relative
shor tage of skilled workers means that the business will have to
pay higher wages than before to attract and retain skilled workers.
th  f ll  l 
Not
all
businesses
remain
small.
growing
Many
their
and
their
only
a
used
and
few
by
make
big-wall
manufacturers
entrenched
Many
law
are
the
–
the
example,
rms
In
their
of
Big
small
close
are
portable
niche
pool
to
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to
of
specialized
their
markets
manufacturers,
hanging
market
of
tents
means
customers
that
and
the
remain
climbing.
to
stay
small.
preferring
major
However,
businesses
(high-quality,
stay
companies,
four
prefer
headache
business.
many
small
lawyers
Four.
to
simply
the
the
this
prefer
want
products
big-wall
accountancy,
so-called
needs
also
businesses
not
large
which
their
of
a
prefer
Serving
to
do
among
multinational
exist,
world
high-end
culture
large
clients.
managing
businesses
close
Many
owners
“portaledges”,
the
practices
expand.
climbers.
stay
familiar
serve
For
professional
rms
small
in
or
offering
service
clients.
to
business
business
businesses
products)
want
Some
but
to
In
the
serve
rms
a
serve
countless
everywhere
legal
around
in
sector,
world
small
some
many
group
clients
small
the
the
of
around
accounting
the
rms
world.
Advantages of being a big business
These
●
are
Survival
less
●
of
the
large
to
Economies
fail
of
balance
sheet.
Higher
status
advantages
rms
and
into
–
rm
status
to
such
large
as
fast-food
leader
rms
some
and
status
restaurants
McDonald’s
large
can
in
to
shape
be
rms
have
&
higher
or
is
by
enjoy
and
be,
giving
and
market
smaller
can
a
of
This ‘por taledge’ tent is an example of
a niche market product
scale,
healthier
working
ones.
for
a
provide
other
employees.
leader
world.
it
a
are
rm.
economies
Benetton
the
They
another
than
may
industrial
habits,
surviving.
returns,
managers
McDonald’s
market
of
over
status
brands
Fitch
the
business:
chance
motivate
of
big
taken
greater
clothing
most
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typically
prots,
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greater
Abercrombie
employees
Market
–
a
of
likely
greater
fashionable
larger
have
less
scale
translate
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●
–
likely
which
●
some
All
in
by
itself,
competitive
advantage.
●
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market
market
share
deciding
can
which
share
control
services
–
large
the
will
companies
market
be
the
by
that
have
determining
industry
a
large
prices
and
standard.
69
dna noitazinagro ssenisuB 1
1 . 6
1
B u s i n e s s
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a n d
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●
tnemnorivne
dna noitasinagro ssenisuB 1
Advantages of being a small business
Greater
“be
all
where
lies.
they
They
they
●
focus
things
Greater
greater
some
cachet
small
Greater
and
by
and
–
small
businesses
to
that
they
have
they
a
are
and
–
to
prot
having
matter
to
time
can
the
greatest
sometimes
charge
on
have
for
to
protability
but
often
investment.
more
businesses.
more
business
investments
businesses
returns
larger
small
focus
As
their
cachet,
a
a
result,
goods
and
margins.
more
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hard
expect
larger
higher
than
able
not
believe
than
businesses
higher
do
businesses
prots
protability
employees.
idea
where
lower
motivation
sometimes
small
exclusiveness,
leading
other
the
of
customers
people”,
have
greater
sense
services,
●
because
all
want
may
have
–
to
prestige
as
the
well,
business.
conveying
can
motivate
employees
the
Very
are
large
sense
that
managers
motivated
businesses
all
employees
matter.
●
Competitive
service,
●
Less
and
advantage
being
exible
competition
niche
market)
getting
that
involved.
–
–
being
can
sometimes
big
This
small,
give
a
a
businesses
situation
providing
competitive
market
do
not
often
is
so
even
means
a
a
more
personalized
advantage.
small
want
(a
to
market
true
consider
with
limited
competition.
th c bw l 
xl wh
Businesses
choose
with
●
internal
●
external
Internal
slowly
without
major
or
by
strategy
another
may
of
such
the
The
its
internally
as
out
take
risks.
outlays,
have
two
broad
options
to
a
organic
of
the
long
product
still
as
time,
business
have
to
from
expands
or
because
by
money
expand
can
from
property,
is
occurs
the
this
selling
most
growth
of
grow
simply
Although
internal
it
operations
business
borrow
update
expansion
a
range.
to
growth
existing
way
more
businesses
banks
plant,
for
and
self-nanced
prots.
growth
Instead
by
known
occurs
developing
most
retained
expands
it
many
growing
External
70
a
growth.
often
and
Although
capital
growth.
is
steadily
equipment,
using
as
growth
(fast-track)
taking
products
are
(organic)
growth
and
business.
that
growth
from:
of
is
entering
business,
●
a
merger
and
●
a
joint
●
a
strategic
●
a
franchise.
a
quick
selling
into
such
some
alliance
riskier
of
its
type
method
own
of
of
products
or
growth
itself,
arrangement
as:
acquisition
venture
and
more
takeover
(M
&
A)
to
than
the
work
internal
business
with
the
risks
increase
growth
are
usually
greater,
market
requires
the
share
signicant
potential
and
rewards
decrease
external
are
that
competition
nancing.
the
very
A N D
E V O L U T I O N
Although
business
can
tnemnorivne
External
G R O W T H
quickly.
External growth methods
There
are
common
many
are
as
ways
of
expanding
externally
but
some
of
the
most
follows:
M & As
This
INNOVATION
type
of
expansion
occurs
when
two
business
become
integrated,
When two businesses are
either
by
joining
together
–
one
and
forming
a
bigger
combined
business
–
integrated, they nd themselves
a
merger
When
term
the
or
by
business
acquisition
typically
used
is
is
taking
unwanted
“takeover”
over
by
or
the
the
other
–
company
“hostile
an
acquisition.
being
acquired,
sharing ideas, people and
the
resources.
takeover”.
How might this encourage
innovation?
One
result
of
a
merger,
business.
However,
can
In
vary.
reasons,
Integration
●
not
line
of
Unit
was
●
can
1.1).
the
the
further
vertical
a
of
to
vertical
outlet
for
and
its
business
among
its
for
the
the
one
bigger
integration
following
four
two
of
businesses
but
actually
production
acquisition
of
(as
integrated
in
the
same
outlined
Chrysler
in
Motors
occurs
further
wants
to
bought
sure
a
when
back
vertical
protect
coffee
its
one
(at
business
an
earlier
integration
supply
chain.
manufacturer,
Starbucks
had
control
stage)
usually
In
The
2008,
Clover
over
processing
still
later
in
occurs
products.
(Disney)
The
occurs
stage)
(and
chain
when
For
with
company,
has
a
a
business
in
the
wants
2002
major
the
US
television
ABC
with
an
to
Forward
ensure
Walt
television
Broadcasting
Disney–ABC
secure
integrates
production.
American
rm,
provides
one
of
business
example,
merged
combined
Disney
when
the
Television
and
multimedia
additional
supplier
programming).
and
occurs
occurs
type
for
For
Motors
and
or
businesses
integration
many
Taj
the
successful
two
of
example,
businesses
business
have
when
This
risk.
many
Tata
chemical
would
its
that
corporate
Television,
the
Fiat’s
Backward
usually
integrate.
diversication
has
a
products
high-quality
overall
the
broadly
chain
business
multimedia
Conglomeration
of
of
same:
integration.
integration
(ABC).
ensures
for
the
reason
one
when
same
maker
make
(to
integration
Corporation
●
Starbucks
is
different.
integration
business
for
industry
production.
a
very
horizontal
Corporation
Group,
car
business
occurs
occurs
the
takeover
ways:
same
in
or
beans.
broadcasting
of
of
is
four
another
forward
secure
Disney
outlet
and
System,
Forward
the
vertical
example,
coffee
in
Italian
with
when
Brewing
●
The
chain
occurs
for
in
example
integrates
process
integration
merely
Backward
in
the
business
an
underlying
integration
happen
Horizontal
are
the
general,
although
acquisition,
Tata
reasons
the
but
Indian
If
any
business
businesses
in
–
known
mainly
to
company
Tata
one
were
other
unrelated
also
Chemicals,
Hotels.
steel
in
is
of
the
reduce
Tata
Steel,
to
lines
as
Group
Tata
businesses
fail,
Tata
–
Group
industries.
71
dna noitazinagro ssenisuB 1
1 . 6
1
B u s i n e s s
reason
that
complementary
tnemnorivne
dna noitasinagro ssenisuB 1
Another
o r g a n i z at i o n
sales
its
in
the
sales
have
in
Integration
has
scale,
of
production.
in
addition
of
many
to
the
M
of
company,
new,
for
activities,
&
the
Sometimes
Employees
diversify
a
is
business
purchased
the
advantages
cost
If
a
to
have
that
business
combined
does
that
most
had
enterprise
of
its
most
would
of
not
inactivity.
However,
fees.
another
occurs.
months
e n v i r o n m e n t
may
activity.
months,
complementary
consulting
with
summer
periods
of
business
seasonal
winter
long
a
a n d
As
can
the
two
costly
being
one
if
control
be
business
when
especially
from
businesses,
and
or
and
do
the
typically
high
acquires
takeover
companies
economies
down
acquired,
company
the
including
up
is
legal
or
hostile,
not
work
chain
include,
and
combines
a
culture
well
clash
together.
Joint ventures
Joint
for
a
ventures
specic
business
the
or
is
occur
goal
created
dened
time
incorporated
rms
decide
temporary
transfer
and
to
in
of
specialist
venture
then
buys
Examples
out
of
by
the
the
partners
Although
areas
This
party
is
begins
of
the
to
a
the
a
separate
After
dissolved
two
parent
venture
business,
skills,
future.
play
a
businesses.
joint
of
resources
result,
either
or
a
transfer
in
combine
As
“parent”
business
new
occur.
either
to
time.
businesses,
frame.
up
agree
of
two
new
parent
opening
can
period
the
the
time
benet
of
the
the
by
businesses
nite
over,
of
skills
could
one
is
one
extend
a
funding
period
into
two
over
with
nature
expertise
joint
when
and
may
be
considerable
knowledge,
Sometimes
dominant
role
in
a
and
other.
joint
ventures
include
Sony–Ericsson
(2001–2012),
Channel
The Channel Tunnel, which links
Tunnel
Group–France-Manche
(1985–1994),
New
Zealand
Post–DHL
the UK and France, was built as
2004–2012),
and
BMW
–
Brilliance
(formed
in
2003
and
ongoing).
Joint
par t of a joint venture
ventures
sales,
also
but
the
can
other
company
doing
At
least
loses
joint
brings,
ventures
realizes
without
that
All
will
effectiveness
it
having
that
legal
that
different
conceptually
partners
its
advantage
bring
partnership.
joint
advantage
business
sometimes
is
the
neither
have
venture
the
have
do
to
not
Sometimes
of
partnership
breaks
a
or
its
expertise,
a
identity.
the
prots
risk
the
with
the
legally),
a
disagreement
a
or
with
the
other
joint
be
or
joint
a
venture
company.
venture
so
the
what
However,
disagreement
may
compromised
ventures
outcome
what
greater
joint
combination
combination.
desired
that
enjoy
Joint
forming
in
powerful
always
the
is
typically
accomplished
the
run
rms
businesses
produce
not
occur.
venture)
of
have
share
(though
partnerships
the
two
create
could
two
existence
the
areas
to
the
is
a
between
severe
that
partnership
the
(or
apart.
Strategic alliances
Strategic
alliances
businesses
differ
●
from
More
joint
than
Strategic
similar
including
United,
in
for
ventures
two
In
in
the
often,
airline
Singapore
the
a
to
joint
several
goal.
because
However,
fundamental
may
though
be
not
industry,
Airlines,
alliance.
ventures
specied
businesses
alliances
businesses.
72
are
collaborating
part
of
always,
the
Star
Lufthansa,
they
involve
strategic
alliances
ways:
the
alliance .
involve
Alliance
South
more
has
African
27
than
two
airlines,
Airways
and
new
business
existence
work
but
together
Individual
●
existing
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strategic
the
All
of
these
businesses
a
a
the
agree
share
otherwise
are
legal
is
alliance
to
more
membership
join
entity
typically
remain
resources
compete
uid
can
comes
an
into
agreement
to
independent .
but
against
than
change
the
members
also
alliance,
enterprise.
joint
they
each
The
remain
other.
ventures .
without
alliance?).
external
means
that
more
think
However,
do
not
nor
get
do
the
In
a
destroying
businesses
will,
they
capital
enjoy
lacks
has
may
less
gain
otherwise
remaining
the
that
coordination
alliance
businesses
they
provide.
alliance
more
challenging
Individual
growth
the
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existence,
they
enterprises,
of
the
legal
businesses
other
forms
weaknesses.
(presumably
individual
with
also
Without
extant
alliance
other
are
strategic
becomes.
they
the
merger
that
alliances
new
alliance
benet.
in
may
often
alliance,
legally
the
would
that
and
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strategic
mutual
strengths
in
agreement
from
created .
a
E V O L U T I O N
alliance.
involved
than
for
businesses
independent
●
is
rather
A N D
tnemnorivne
No
●
G R O W T H
and
force
benet
why
independent
means
strength
of
legal
economies
of
scale
Lastly,
greater
are
uidity
of
stability.
Franchises
Franchising,
popular
the
original
business
to
offer
the
to,
external
want
have
sells
the
a
also
to
that
rapid
to
right
or
the
other
the
concept
local
know
growth,
expand
grow
There
are
business,
other
is
becoming
globally.
increasingly
Franchising
involves
of
where
the
concept
languages,
many
many
it
is
or
The
conditions,
which
is
of
of
developed
businesses
the
right
the
in
the
by
the
the
right
business
can
then
expand
–
as
franchisees
local
(the
to
long
identical
is
actually
franchisor)
is
can
proving
franchisor
other
as
it
typically
cultures.
if
not
Franchisees
The
sell
helpful
franchisee
franchisor.
Franchising
globally.
The
the
sells
instances
does
franchisees).
grow
offer
Franchising
franchisor
the
to
franchisee
some
franchisor.
the
and
the
franchisor.
and
especially
the
buy
the
companies.
to
other
developed
franchisor
wants
examples
by
(the
to
to
words,
with,
Instead,
means
countries
other
because
enterprise.
local
In
originally
new.
The
sells
that
product.
franchisees,
franchise
a
franchisor,
then
the
businesses
as
country.
markets,
in
to
the
consistent
partnerships,
places
local
be
growth
attractive
home
the
business
of
sell
product.
anything
to
individuals,
to
starts
form
produce
that
as
the
as
product,
and
developed
has
original
particularly
host
sell
known
and
known
products
business
often
to
of
that
concept
and
usually
of
concept
the
concept
be
form
business,
Businesses,
●
A
another
businesses
following:
An
●
for
nds
have
buyers
a
in
of
knowledge
Franchisees
the
has
businesses
also
franchisor
wants
world.
franchises
in
many
different
areas
of
including:
●
McDonalds
●
Budget
–
–
car
fast
food
hire
73
dna noitazinagro ssenisuB 1
1 . 6
1
B u s i n e s s
tnemnorivne
dna noitasinagro ssenisuB 1
–
o r g a n i z at i o n
●
Hilton
●
Kumon
●
Blockbuster
●
Wokinabox
–
●
Spar
stores
●
Benetton
●
Body
●
Edo
–
e n v i r o n m e n t
hotels
–
education
food
–
fast
–
entertainment
fast
food
clothes
Shop
–
a n d
–
cosmetics
food.
An outlet of Spar in Berlin, Germany
The
cost
must
of
pay
business
for
fee
franchise
the
–
must
concepts
and
agreements
(KFC,
Taco
franchise
the
as
to
would
division
of
pay
not
and
parts.
essentially
concept
royalties
franchisor.
somewhat
agreement
–
two
–
For
be
exactly
other
for
a
in
according
example,
the
responsibilities
a
the
right
the
their
same
between
operate
as
Then
of
sales
franchisor
those
and
a
the
These
business
of
Yum!
the
and
Brands
same
However,
franchisor
or
franchisee
exactly
Cars.
a
the
relationship.
individual
nor
Rental
to
percentage
to
franchisee
product.
McDonald’s
restaurants),
Enterprise
First,
and
Both
responsibilities
industries.
Bell,
itself
the
specic
vary
in
franchisor’s
goes
have
responsibilities
the
typically
which
franchisee
comes
franchise
offering
franchisee
at
the
in
as
the
general,
franchisee
are
follows.
The
franchisor
will
provide:
The
franchisee
●
the
stock
●
employ
●
the
ttings
●
set
prices
●
the
uniforms
●
set
wages
●
staff
●
pay
●
legal
●
create
●
global
advertising
●
sell
●
global
promotions
training
and
nancial
help
an
will:
staff
agreed
local
only
royalty
on
sales
promotions
the
products
of
the
franchisor
advertise
●
Which
party
start-up
of
the
costs
brand.
strong.
Only
McDonald’s
name
74
can
very
to
the
vary
Some
a nd
brands
hav e
the
hi g h
rights
respons i b i l i ti es
businesses
has
many
(regardless
advantages
of
mar ke t
less
and
as
a c c o rd in g
cer t ai n
so
of
the
o wni ng
po w e r.
the
legal
pa r ty
to
M cD on a ld ’s,
b ar g ai ni ng
of
wh i c h
McD on al d’s
sa le s ,
te rms
may
For
a
a lmos t
franchisor
and
s uch
doe s
is
less
ha v e
and
cons id er a bl y
rarely
dictate
o utl e t
b r a nds ,
restaur a nt
recognition
position
Other
provi d e s
pr ov i de s
the
ar e
the
s tr en g t h
e s pe c ia l ly
re s tau r an t
clo se .
i m m ed ia t e ly
to
ha ve
f ra n c h is or
in
a
a
In
is
Mc D on a ld ’s
t h o se
st r e n gt h
fra n c h is or
A
and
n ew
s t ro n g
s t r on g
f ra n c h is e .
cir c u m s t a n c es ,
wh e n
organization),
disadvantages
locally.
s e t t in g
the
the
fr a n c h is e e.
acquiring
compared
to
a
franchise
developing
their
are
business
as
model.
For
the
franchisee,
The
well
exists
and
The
is
format
product
is
for
selling
has
the
has
●
The
set-up
●
The
franchisee
The
of
costs
and
are
has
reduced.
a
can
nancial,
tecÚical
Franchisors
to
pay
royalties
secure
no
control
over
what
●
has
no
control
over
supplies
●
makes
also
have
advantages
and
all
the
quick
access
to
wider
loses
●
some
of
local
knowledge
can
●
not
see
its
franchise
gains
●
some
hand,
enjoy
Perhaps,
expertise
many
the
break
way
to
image
fails
or
in
the
the
suffer
does
day-
business
if
a
not
properly.
and
franchise
and
the
for
into
gain
to
eventually
but
by
start
franchisees,
great
Regardless,
to
prots
risks
the
of
fees.
franchisees
company?
enough
the
running
more
sign-up
Do
assume
of
control
running
perform
liability
decisions.
franchisor:
to-day
use
global
disadvantages.
expertise
does
sell
help.
markets
●
to
managerial,
The
and
the
provide
franchisor:
makes
to
has
The
●
the
●
Disadvantages
gains
for
franchisor
Advantages
●
liability
stock.
franchisor
legal,
unlimited
franchise
established.
●
supply
franchisee:
known.
●
The
●
disadvantages
Disadvantages
product
usually
●
and
E V O L U T I O N
follows.
Advantages
●
advantages
A N D
tnemnorivne
own
G R O W T H
new
an
their
even
protability
the
markets
the
own
if
can
over
a
its
of
the
of
independent
of
the
come
selling
with
tired
operators
tired
that
franchisor,
advantage
become
then,
franchises
minimum
of
a
of
an
the
the
easy
difculty
parent
may
On
the
have
other
franchisor,
successful
is
of
franchise
business.
control
with
control
the
franchise.
and
and
fast
risk
way
and
is
a
competitors.
th pc f lbl
Globalization
evolution.
the
the
different
and
The
of
Roman
in
services
is
and
War,
earlier
terms
being
of
the
one
impact
process
other
forms
intensity,
exchanged,
which
the
unit.
Road,
the
examples
known
growth
world’s
The
Age
and
interdependence.
phenomenon
of
businesses’
global
Silk
historical
global
the
the
on
by
integrated
Empire,
economic
World
from
just
signicant
becoming
Empire
degree
Second
First,
are
new.
British
some
had
Globalization
economies
wholly
has
and
regional
process
of
periods
not
saw
Nevertheless,
as
is
Exploration,
since
“globalization”
is
interdependence.
scale,
global
speed,
and
economic
interdependence
value
today
is
of
on
goods
a
75
dna noitazinagro ssenisuB 1
1 . 6
1
B u s i n e s s
or
tnemnorivne
dna noitasinagro ssenisuB 1
completely
o r g a n i z at i o n
different
order
of
a n d
e n v i r o n m e n t
magnitude
from
that
seen
in
earlier
periods
circumstances.
Second,
small
current
number
national
record
means
(the
businesses
record,
their
any
are
home.
to
can
for
domestic
is
c h ar a c t e ri z e d
“po st - n at ion a l”
the s e
le g al l y
co m pa n ie s
re g is t e re d
tr a ns na ti ona l ;
cons id er
do
no
busi ne ss
co mp a ny
cost
ap ar t
pl ac e
and
to
in
on e
fr om
a
a
r el a tive ly
P ost -
h om e
of
c ou n t ry) ,
the
hom e
t h ey
its
by
bu si n es s es .
h a ve
t h ei r
wh e re ve r
itse l f,
of
c an
pr o t s ,
l e ga l
or
t he
hom e
eve ry
ma ke
an d
a
of
pl ace
pr o t .
n ot
to
has
mo r e
and
–
large
be come
choi ce .
se r v i ce s
become
its
to
for
mo r e
work e r s
impact
on
the
growth
of
domestic
reasons:
foreign
mo re
“Gr ea ter
is
e xtra cti ng
as
by
s lo wi n g
mea n
on e
the
for ce
dome st i c
can
Ho we ver,
g re a t er
ca n
the
e f c i en c y”
cons ume r s.
e fcie nt
a nd
bus i ne s s e s
e f c i en t
l ower-
way
th a t
g ro w t h
pr odu c t i vi t y
in
o ut
them.
Greater
with
big
selling
local
sold
a
which
lead
multinational
particular
and
a
at
global
new
they
and
to
producers
create
do
products
do
their
this
by
have
own
rms.
can
make
to
compete
unique
emphasizing
compared
global
so,
businesses,
least
two-way
rm
while
to
the
the
“foreign”
Regardless,
many
businesses
some
no
of
transfer
will
those
matter
their
of
learn
how
knowledge
from
workers
big,
workforce
the
can
and
workers
learn
must
must
new
use
be
skills.
hired
local,
The
in
approaches
skills.
collaboration
strategic
their
to
efcient.
foreign
to
or
of
forced
and
countries,
develop
Closer
–
if
knowledge:
will
domestic
need
multinationals
even
transfer
–
so
Sometimes
origins
by
USP
,
local
and
(USP).
competitive
Skills
some
awareness
names
national
creating
more
brand
brand
point
or
products
or
signicant
compe t i t i on
businesses
of
a
following
produce r s
goods
wages
have
the
consumer
●
be in g
country.
Increased
●
o fce
wi l l
the
is
l a rg e
a l tho ug h
othe r wi s e
They
are
businesses
●
tha t,
busine s s e s
Globalization
●
e x tr e me l y
“home ”
these
Loyalties
g l o b a l i za ti on
of
alliances,
–
whether
domestic
through
producers
joint
can
ventures,
create
new
franchises,
business
opportunities.
r f h wh f ll
cp
A
multinational
one
country
connotation
many
a
of
legally
the
but
in
the
United
Multinational
they
often
is
business
multinational
in
in
that
more
“multinational”
the
small
whereas
States
companies
generate
a
registered
word
operating
multinational,
only
76
company
is
countries,
company
is
or
more
is
a
has
a
may
be
one
of
company
in
more
than
country.
global
narrower
countries
large
operates
than
or
meaning.
Luxembourg
registered
in
The
operating
A
and
and
in
small
Belgium
operating
not.
are
the
biggest
revenues
than
type
the
of
business
country
and
they
in
fact
operate
in.
example,
countries
Table
and
1.6.5
shows
businesses
in
a
comparison
terms
of
GDP
and
of
the
sales
world’s
A N D
E V O L U T I O N
leading
revenues.
tnemnorivne
For
G R O W T H
Table 1.6.5. The world’s leading countries and businesses – GDP and sales revenues
Rank
Economy
US$ millions
Rank
Economy
US$
millions
1
United
14,991,300
18
Turkey
774,983
States
2
China
7,318,499
19
Switzerland
659,308
3
Japan
5,867,154
20
Saudi Arabia
576,824
4
Germany
3,600,833
21
Sweden
539,682
5
France
2,773,032
22
Poland
514,496
6
Brazil
2,476,652
23
Belgium
513,661
United
2,445,408
24
Norway
485,803
2,193,971
25
Royal Dutch
7
Kingdom
8
Italy
484,489
Shell
9
Russian
1,857,770
26
Exxon Mobil
452,926
1,847,977
27
Wal-Mar t
446,950
Federation
10
India
Stores
11
Canada
1,736,051
28
Austria
417,656
12
Spain
1,476,882
29
South Africa
408,237
13
Australia
1,379,382
30
BP
386,463
14
Mexico
1,153,343
31
Sinopec Group
375,214
15
Korea, Rep.
1,116,247
32
United Arab
360,245
Emirates
16
Indonesia
846 ,832
33
Thailand
345,672
17
Netherlands
836,074
34
Denmark
333,616
Source: Adapted from World Bank & For tune Global 500, 2011
Four
and
●
factors
with
have
such
a
Improved
●
●
of
materials,
transfer
Increasing
trade
of
of
the
economic
which
and
world’s
funds
and
and
companies
–
middle-
low-income
and
–
not
barriers
components
Deregulation
easier
companies
to
grow
so
rapidly
only
ICT
but
also
transport
and
networks
Dismantling
raw
multinational
communications
distribution
●
allowed
reach:
can
be
–
allowing
nished
nancial
also
tax
easier
movement
of
markets
–
allowing
for
avoidance
political
of
for
products
power
enormous
of
benet
the
multinational
especially
in
countries.
The impact of multinational companies on the
77
dna noitazinagro ssenisuB 1
1 . 6
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
h c
tnemnorivne
dna noitasinagro ssenisuB 1
th pc f ll cp  h
Multinational
the
host
companies
(domestic)
can
have
countries
in
both
which
positive
they
and
negative
Ad vantages for the host country include:
●
●
impacts
on
operate.
Disad vantages for the host country include:
economic growth – multinational companies
prots being repatriated – the multinational
●
can boost the domestic economy by providing
companies may pay into the local tax system but the
employment, developing a local network of suppliers,
bulk of their prots will be rerouted away from the host
and paying taxes and providing capital injections.
country.
new ideas – multinational companies may introduce
loss of cultural identity – the appeal of domestic
●
new ways of doing business and new ways of
products, ways of doing business, and even cultural norms
interacting socially.
may suer. This is especially important for the younger
generations who are more likely to buy global brands.
●
skills transfer – multinational companies may help
brain drain – many highly skilled employees may
●
develop the skills of local employees. Domestic
look to work for the multinational company in another
businesses can benet from star ting their own
country.
business with the skills learned.
●
more choice of products – the domestic market will
loss of market share – as multinational companies
●
benet as the variety of products will increase.
take over more of the domestic market, domestic
producers may suer.
●
shor t-term infrastructure projects – multinational
shor t-term plans – multinational companies may not
●
companies often help to build infrastructure (for
plan on staying for a long time – if lower-cost producers
example roads to the factory, schools for workers’
can be found elsewhere, they may move out at shor t
children).
notice.
r chckl
✓
An
as
✓
the
might
only
printed
The
✓
Small
External
an
this
is
gets
example,
negotiate
a
a
if
costs
a
of
a
business
publisher
cheaper
diseconomy
larger
i.e.
might
and
might
high
the
benet
competitive
organic)
growth
this
can
sort
acquisition,
✓
Multinational
✓
Due
to
price
of
scale
business
from
advantage
benet
market
growth
and
MNCs
have
which
they
be
of
prints
for
go
down
7000
paper
books
than
if
they
from
–
where
becomes
greater
and
the
less
focus,
less
cost
goes
up
efcient.
greater
cachet
competition.
economies
of
scale,
market-
share.
is
the
quicker
growth
through
companies
improved
number
✓
the
gradual
expansion
of
a
business
within.
experience
78
of
status,
(or
For
when
500.
organizations
Internal
or
to
organizations
Large
occurs
grows.
motivation,
from
✓
scale
able
business
leader
✓
be
reverse
the
and
of
business
they
as
✓
economy
size
both
a
and
joint
(MNCs)
MNCs
positive
operate.
has
and
a
of
operate
and
grown
A
less
with
through
in
more
in
effects
might
another
than
the
one
country.
regulations,
recent
on
company
franchising.
restricting
rapidly
negative
business
merger
venture
communication
of
riskier.
through
years.
countries
in
the
G R O W T H
A N D
E V O L U T I O N
Practice question
The
panettone
large
Italian
company
Bauli
produces
a
variety
of
baked
tnemnorivne
Bauli’s
products
1
such
a
as
croissants
specialty
luxury
easily.
at
bakeries,
the
technology
bakeries
success
luxury
Bauli
year
a
hard
mainly
major
on
challenge
on
its
costs
is
few
a
A
workforce
of
his
investment
be
planning.
12
and
in
were
is
relatively
million
meets
luxury
that
produced
costs
and
small
however,
,
small
what
research
that
Bauli’s
by
a
€8.
panettoni
American
Bauli
panettone
panettoni
product
panettone
Baking
its
panettoni
panettone
European
for
quality
argued,
A
Bauli
scale.
in
of
uniform
price.
€30.
famous
expensive
quality
could
low
and
a
most
producers
“High
It
industrial
Italy
it
the
guarantee
achieve”.
an
of
bake
that
success:
to
based
across
but
original
could
typically
produces
sales
us
to
The
claims
company’s
bakery
for
which
Bauli
allows
nd
is
biscuits,
Christmas.
Michele
explains
and
per
markets
the
is
seasonal
2
demand
each
for
year
panettoni
(from
by
August
signicant
technological
According
to
Michele,
technologies
Bauli
cake,
has
Bauli
also
which
product
mix
has
relied
two
market
panettoni
“Attention
at
give
a
The
workers
company
product
for
internal
of
the
will
time
a
for
has
and
of
the
growth.
four
also
months
made
also
help
use
of
including
year.
The
of
ve
the
new
months”.
Colombo
broader
workers.
In
2009,
multinational
these
the
shelf-life
mix,
temporary
panettoni,
They
ingredients
panettone
different
on
American
to
the
broader
need
produce
share.
in
a
the
only
temporary
innovations.
subsidiaries
subsidiaries
Bauli’s
for
popular
reduces
1200
November).
production
developed
is
not
purchased
both
in
hiring
to
food
acquisitions
Bauli
meet
the
company
group
have
the
Nestlé.
As
increased
growing
demand
markets.
[Source: adapted from http://www.economist.com/, 10 December 2009]
With
reference
large
organizations.
IB,
Nov.
to
Bauli,
evaluate
the
benets
of
small
versus
[7
marks]
2011
1
panettone: in Italian panettone is singular, panettoni is plural
2
seasonal demand: demand that varies at dierent times of the year
79
dna noitazinagro ssenisuB 1
1 . 6
tnemnorivne
dna noitasinagro ssenisuB 1
1.7 Organi zational planning tools (HL only)
By the end of this chapter, you should be able to:
Describe the planning tools that organizations can use:
➔
shbone diagram
●
decision tree
●
force eld analysis
●
Gantt char t
Evaluate the value to an organization of these planning tools
➔
To
●
help
businesses
organizational
●
shbone
●
decision
●
force
●
Gantt
Each
of
aware
achieve
their
tools,
objectives,
managers
may
wish
to
use
including:
diagrams
trees
eld
analysis
charts.
these
of
to
planning
tools
their
has
strengths
limitations,
these
and
weaknesses.
tools
can
help
As
long
managers
as
to
users
are
plan.
The shbone diagram
While
working
for
shbone
diagram
attempts
to
usually
show
used
Ishikawa
tool
procedures,
all
these
terms
The
the
causes
shbone
whys”,
and
and
a
service
get
or
customer
of
people
what
some
so,
symptom
areas
of
not
only
(and
the
is
to
business).
Ps”
and
is
to
for
deeply
In
as
its
a
to
tool
is
of
materials.
Since
then,
(places,
administration
to
tool
Sakichi
The
into
“5
the
x
to
may
use
individual
to
help
Toyoda’s
provide
whys”
nature
form,
may
When
underlying
Ms”
Managers
a
The
circles
businesses
for
the
diagram
brainstorm
problem.
simplest
other
Ss”
developed
and
“4
according
problem
problem.
many
“4
The
problems.
and
service
skills).
developed
problems.
quality
the
provide
linked
he
or
for
the
and
quality
determine
the
possibly
“4
Ishikawa
quality
machine,
Corporation.
more
reports
is
a
closely
underlying
goal
idea
of
diagram
combinations
of
Kaoru
quality
managers,
systems,
dissatisfaction.
the
the
technique
Toyota
probe
someone
other
followed,
doing
the
to
to
general
is
effects
of
politics)
effects
diagram
at
to
that
and
questioning
and
1960s,
identify
manpower,
various
the
the
help
shbone
suppliers,
in
in
groups
applied
circumstances.
The
80
the
people
to
cause
method,
been
(surroundings,
tool
small
designed
has
a
the
with
manufacturing:
the
Kawasaki
as
the
the
problem
“5
technique
of
the
just
quality
“5
be
whys”
resolved
showing
is
presumes
a
symptom
problem.
so
up
“5
intended
technique
but
of
quality
problems
whys”
merely
underlying
symptoms
concept
better
is
in
the
is
In
original
various
same
problem
1.
The
asked
idea
sh.
by
principle
is
For
an
is
applies
to
that
dig
the
example,
airline
to
effect
Figure
losing
the
deeper
shbone
and
of
the
1.7.1
market
look
diagram.
at
the
problem
shows
share
the
and
A
P L A N N I N G
group
T O O L S
discussing
( H L
O N LY )
a
interconnections.
is
placed
shbone
wishing
to
in
the
head
diagram
address
of
tnemnorivne
The
O R G A N I Z A T I O N A L
the
prepared
the
issue.
Loss of
market share
Figure 1.7
.1. Fishbone diagram – the eect of the problem
2.
Then
each
caused
shbone
the
possible
to
is
problem.
create
allocated
Typical
other
to
a
factors
factors
particular
are
relevant
set
to
factor
out
a
that
below,
particular
may
but
it
is
have
also
problem.
Table 1.7
.1. The “4 Ms”, “4 Ps” and “4 Ss” in relation to dierent types of business
Manufacturing
Ser vices
Administration
Manpower
Places
Surroundings
Methods
Procedures
Suppliers
Materials
People
Systems
Machines
Politics
Skills
In
this
shown
case
in
the
airline
Figure
may
decide
to
use
the
“4
Ps”
to
brainstorm,
as
1.7.2.
procedures
places
Loss of
market share
politics
people
Figure 1.7
.2. Fishbone diagram using the “4 Ps”
3.
After
and
discussion
is
drawn
as
by
a
the
group,
smaller
each
shbone
factor
is
coming
procedures
broken
out
of
down
the
into
original
a
subfactor
one.
places
routes
bookings
airpor ts
depar tures
Loss of
market share
management
strategic
employees
politics
people
Figure 1.7
.3. Fishbone diagram showing subfactors
81
dna noitazinagro ssenisuB 1
1 . 7
1
B u s i n e s s
Finally,
issues
tnemnorivne
dna noitasinagro ssenisuB 1
4.
the
o r g a n i z at i o n
after
brainstorming
(“shbones”,
problem,
this
thus
example,
analysis
that
large
and
or
determined
an
that
that
which
airline
the
e n v i r o n m e n t
discussion,
small)
identifying
involving
expanding
a n d
group
not
shbone
losing
airline
the
are
the
is
the
market
had
discards
root
cause
problem.
share,
insufcient
the
Asian
those
of
In
shbone
routes
in
market.
poor website
procedures
places
gates are far away
routes
bookings
airpor ts
not enough Asian
depar tures
destinations
Loss of
check-in too slow
market share
bureaucratic
poor par tners
management
over worked
strategic
employees
slow coordination
politics
too much
of ser vices
low wages
people
micro-managing
Figure 1.7
.4. Fishbone diagram showing the root cause of the problem
The
shbone
diagram
has
many
benets
shbone
is
●
is
to
exible
virtually
is
●
simple
The
diagram:
motivating
together
●
limitations.
Limitations
Benets
The
and
as
it
brings
discuss
–
and
may
●
problems
applicable
any
people
but
to
be
can
highlight
before
many
singling
out
causes
show
of
a
specic
divisive
and
problem
solutions
lead
to
arguments
attractive
requires
●
honesty
●
diagram:
show
not
can
●
situation
visually
shbone
knowledge
to
justify
and
assertions
factors
the
most
begins
●
signicant.
a
the
problem
follow-up
process
and
of
xing
requires
a
process.
dc 
A
decision
tree
decisions.
It
providing
a
make
To
1.
is
is
clear
sensible
construct
a
planning
visual
a
tool
structure,
decision
tree,
a
‘node’
choice
has
and
the
designed
probability
decisions.
square
with
to
strategic
Where
node
a
similar
to
the
choice
a
decision
help
in
tree
conventions
made,
possible
written
to
used
simplify
complex
mathematics.
can
help
By
managers
Site A
certain
be
tree
the
decision
choices
above
as
the
should
is
lines
be
followed.
represented
stemming
by
a
from
the
line.
Site B
1
For
example,
from
in
2.
If
a
choice
order
any
are
to
a
business
of
three
identify
given
by
new
them
decision
represented
a
has
to
sites
decide
(A,
correctly,
has
multiple
circle
node.
B
as
whether
or
C).
These
shown
possible
Possible
to
in
build
nodes
Figure
new
are
factory
numbered
1.7.5.
outcomes,
outcomes
a
these
are
outcomes
represented
Site C
by
lines
stemming
from
the
circle
with
the
outcome
written
above
Figure 1.7
.5. Decision tree – initial
the
line.
Again,
the
nodes
are
numbered
to
help
identify
them
(see
stage of analysing three new sites
Figure
82
1.7.6).
O R G A N I Z A T I O N A L
P L A N N I N G
T O O L S
( H L
O N LY )
tnemnorivne
succeed
Site A
2
fail
succeed
Each outcome has a possibility of being
Site B
3
1
a success or a failure.
fail
succeed
Site C
4
fail
Figure 1.7
.6. Decision tree – sites analysed for success or failure
3.
Then,
the
using
whatever
probability
mathematics
from
one
These
as
that
in
node
are
Figure
is
available,
outcome
probability
outcome
possibilities
shown
data
the
trees,
must
put
the
sum
always
below
the
actually
the
of
be
all
1
line
manager
happens.
with
probabilities
(or
for
estimates
As
100
that
per
the
stemming
cent).
particular
outcome,
1.7.7.
succeed
0.4
Site A
2
fail
0.6
Choice
Outcome and probability
succeed
• succeed
40%
A
0.7
• fail
60%
Site B
1
3
• succeed
70%
B
• fail
30%
fail
0.3
• succeed
60%
C
• fail
succeed
40%
0.6
Site C
4
fail
0.4
Figure 1.7
.7
. Decision tree – probability of outcomes
4.
Using
the
estimate
values
best
of
are
outcome,
data
the
written
as
available,
values
at
shown
of
the
in
that
end
Figure
the
manager
outcome
of
the
must
actually
line
then
make
happening.
represented
by
an
These
that
1.7.8.
83
dna noitazinagro ssenisuB 1
1 . 7
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
60
0.4
tnemnorivne
dna noitasinagro ssenisuB 1
succeed
Site A
2
fail
Returns
20
Choice
0.6
Outcome
Probability
(US$ m)
succeed
30
0.7
succeed
40%
60
fail
60%
20
succeed
70%
30
fail
30%
10
succeed
60%
40
fail
40%
30
A
Site B
3
1
B
fail
10
0.3
C
succeed
40
0.6
Site C
4
fail
30
0.4
Figure 1.7
.8. Decision tree – probability of outcomes
5.
Then,
costs
again
of
the
using
the
choices
are
incurred
are
written
in
the
under
best
being
choice,
the
data
available,
considered
a
gure
respective
(see
“0”
the
need
choice
manager
Figure
not
estimates
1.7.9).
be
If
no
shown.
the
costs
The
costs
lines.
succeed
60
0.4
Site A
2
15
fail
20
0.6
Cost
succeed
Choice
US$ m
30
0.7
Site B
A
15
C
20
3
1
25
fail
10
0.3
succeed
40
0.6
Site C
4
20
fail
30
0.4
Figure 1.7
.9. Decision tree – cost of outcomes
6.
The
manager
values
(EV).
following
Expected
can
now
Each
calculate
outcome
the
node
results,
will
in
value
EV
this
node
=
(probability
case
the
calculations
are
as
=
(0.4
×
60)
+
(0.6
×
20)
=
36
=
(0.7
×
30)
+
(0.3
×
10)
=
24
=
(0.6
×
40)
+
(0.4
×
30)
=
36
3
EV
4
84
×
EV
as
the
based
return
×1
2
EV
known
an
expected
upon
the
formula:
x
So
have
follows:
)
×1
+
(probability
×
×2
return
)
×2
7.
The
decision
would
normally
be
the
O R G A N I Z A T I O N A L
outcome
that
P L A N N I N G
gives
the
T O O L S
( H L
O N LY )
succeed
highest
60
0.4
EV
.
However,
in
this
case,
the
manager
must
include
the
Site A
costs
by
building
the
factories.
The
cost
is
subtracted
from
the
tnemnorivne
2
incurred
15
EV
fail
20
for
each
choice.
This
process
then
indicates
the
best
choice:
the
EV
0.6
succeed
with
the
highest
value:
30
0.7
Site B
EV
cost
2
=
36
15
=
US$21
3
1
million
A
25
fail
10
EV
cost
3
=
24
25
=
(US$1
million)
0.3
B
succeed
40
EV
cost
4
=
36
20
=
US$16
million
0.6
C
Site C
4
8.
The
decision
taken
is
to
build
the
factory
at
site
20
A
fail
30
0.4
As
shown
crossing
in
out
Figure
the
1.7.10,
choices
this
not
is
indicated
taken
with
on
the
the
decision
symbol
tree
by
Figure 1.7
.10. Decision tree –
//
selection of site A
Using
a
decision
tree
has
benets
and
Benets
A
Limitations
decision
gives
●
limitations.
a
tree:
A
clear
complex
answer
to
a
decision
is
●
decision
tree:
based
on
outcomes
estimates
and
of
both
probabilities
of
outcomes
is
●
exible
to
many
and
can
be
applied
situations
is
●
based
and
is
●
simple
and
so
on
quantitative
ignores
data
qualitative
visually
issues
attractive.
can
●
be
highly
with
difcult
to
complex
multiple
interrelated
draw
for
decisions
outcomes
and
choices.
Fc l ly
Force
for
a
eld
use
in
analysis
planning
tool
management
and
1.
against
First,
was
psychological
a
the
example,
for
of
change
change
factor
may
It
Lewin’s
concept
change
business
designed
experiments.
businesses.
planned
a
originally
in
an
being
be
to
has
by
force
focus
Kurt
since
eld
on
Lewin
been
analysis
the
as
a
adopted
factors
uses
model
as
the
working
for
organization.
considered
thinking
of
is
highlighted.
changing
its
For
logo.
Change
the
logo
85
dna noitazinagro ssenisuB 1
1 . 7
1
B u s i n e s s
Then
the
change,
tnemnorivne
dna noitasinagro ssenisuB 1
2.
against
o r g a n i z at i o n
decision
which
that
makers
are
Driving
Market
research
consumers
current
The
are
e n v i r o n m e n t
brainstorm
driving
change,
a n d
forces,
so-called
factors
and
acting
factors
restraining
positively
working
for
that
negatively
forces
forces
reveals
tired
of
Restraining
that
The
the
created
logo
logo
founder
of
the
and
do
has
not
for
20
logo
not
the
want
to
Change
research
reveals
of
the
logo
is
familiar
not
New
potential
are
recognize
brands
gaining
innovative
3.
The
being
a
reect
Market
consumers
current
are
each
factor
eld
a
weight
managers
analysis
weighting.
their
costly
products
the
can
scale
Sometimes,
weighting
to
give
is
the
a
corresponding
use
any
from
1
forces
simple
scale
to
5,
are
visual
to
they
logo
with
drawn
reveals
tired
of
logo
a
not
as
a
products
patented
one
design
would
and
with
picture:
that
the
be
protect
5
Restraining
The
1
5
and
that
founder
created
the
of
logo
not
forces
the
and
want
business
her
to
family
change
it
been
The
20
is
new
to
do
has
for
recognized
want,
logo
changed
is
good-quality
creating
for
forces
research
logo
The
market
Although
force
Driving
The
gives
strongest
that
the
modern
then
of
logo
recognition
and
with
the
arrows
the
importance.
typically
the
customers
entering
manager
factor’s
to
customers
logo
symbol
do
it
that
The
60%
family
change
years
loyal
Market
business
her
been
The
changed
forces
logo
is
familiar
to
the
3
2
years
loyal
customers
Change
Market
research
reveals
that
the
60%
do
of
not
potential
recognize
logo
The
customers
the
a
logo
logo
symbol
is
recognized
of
as
good-quality
products
New
the
brands
market
recognition
entering
are
for
gaining
The
innovative
creating
4
and
86
modern
products
logo
a
is
new
patented
one
and
would
be
2
costly
to
design
and
protect
The
forces
action
to
are
be
Restraining
Driving
In
Using
this
then
up.
The
forces
case,
=
the
eld
=
●
gure
indicates
O N LY )
the
14
decision
analysis
would
has
many
be
to
change
benets
and
the
logo.
limitations.
Limitations
eld
gives
total
( H L
7
Benets
Force
greatest
T O O L S
taken.
forces
force
added
P L A N N I N G
tnemnorivne
4.
O R G A N I Z A T I O N A L
a
analysis:
clear
difcult
Force
answer
to
a
eld
analysis:
involves
●
decision
interpretations
determining
which
in
factors
to
include
●
is
exible
many
and
can
be
applied
to
situations
is
●
based
value
●
is
simple
and
of
on
estimates
each
of
individual
the
factor
visually
attractive.
is
●
based
data,
on
not
mainly
qualitative
quantitative
issues.
g ch
The
Gantt
work
have
chart
schedules.
multiple
determine
labour,
the
key
The
or
the
It
most
deadlines
charts
It
project.
on
wants
to
developed
is
tasks.
capital.
whole
who
was
commonly
It
is
a
use
gives
Progress
of
Henry
used
means
efcient
also
by
of
of
for
Gantt
as
a
tool
production
organizing
resources,
the
project
the
whole
to
production
whether
managers
project
a
can
help
projects
in
raw
clear
be
plan
that
order
to
materials,
overview
measured
of
against
(milestones).
the
following
plan
the
pages
production
take
of
a
the
example
new
of
a
music
producer
CD.
87
dna noitazinagro ssenisuB 1
1 . 7
1
B u s i n e s s
First
the
shown
tnemnorivne
dna noitasinagro ssenisuB 1
1.
weeks
tasks
o r g a n i z at i o n
producer
in
or
Table
must
1.7.2.
months)
that
need
to
and
be
create
The
the
a n d
the
e n v i r o n m e n t
framework
horizontal
vertical
completed
axis
axis
before
is
is
split
the
by
creating
measured
CD
up
is
into
in
the
nally
a
matrix,
time
(days,
individual
produced.
Table 1.7
.2. Gantt char t matrix
Tasks
1
Band writes
the music for
10 songs
2
Band writes
the lyrics for
10 songs
3
Initial
recording by
the band
4
Full production
by the band
and other
musicians
5
Creation and
design of the
cover ar twork
6
Production of
the completed
CDs
7
Production
of the online
version
8
Promotion
of individual
songs on radio
shows
9
Promotion by
interviews and
press releases
10
Promotion
of the music
through
concer ts
88
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
The
tasks
others
by
are
need
shading
then
not
in
scheduled.
be.
parts
The
of
Some
order,
the
time,
matrix,
as
must
and
follow
sequentially
sequence
shown
in
P L A N N I N G
of
Table
tasks
is
T O O L S
( H L
O N LY )
but
denoted
tnemnorivne
2.
O R G A N I Z A T I O N A L
1.7.3.
Table 1.7
.3. Gantt char t matrix showing timing of tasks
Tasks
1
Jan
Feb
Mar
Apr
May
Jun
July
Aug
Sep
Oct
Nov
Dec
Band writes the
music for 10 songs
2
Band writes the
lyrics for 10 songs
3
Initial recording by
the band
4
Full production by
the band and other
musicians
5
Creation and
design of the cover
ar twork
6
Production of the
completed CDs
7
Production of the
online version
8
Promotion of
individual songs on
radio shows
9
Promotion by
interviews and
press releases
10
Promotion of the
music through
concer ts
89
dna noitazinagro ssenisuB 1
1 . 7
1
B u s i n e s s
Once
the
always
tnemnorivne
dna noitasinagro ssenisuB 1
3.
check
schedule
check
by
colours
o r g a n i z at i o n
the
the
has
been
progress
marking
in
Consider
for
off
chart
the
as
example
in
e n v i r o n m e n t
created,
as
the
tasks
each
a n d
as
task
Table
then
project
time
has
the
is
management
running.
elapses.
been
team
Managers
Typically,
the
do
can
this
manager
completed.
1.7.4.
Table 1.7
.4. Gantt char t matrix showing progress checks
Tasks
1
Jan
Feb
Mar
Apr
May
Jun
July
Band writes the
music for 10 songs
2
Band writes the
lyrics for 10 songs
3
Initial recording by
the band
4
Full production by
the band and other
musicians
5
Creation and
design of the cover
ar twork
6
Production of the
completed CDs
7
Production of the
online version
8
Promotion of
individual songs on
radio shows
9
Promotion by
interviews and
press releases
10
Promotion of the
music through
concer ts
If
in
the
April
the
project
artists
are
running
readjust
90
its
plans
looks
like
slightly
accordingly.
Table
1.7.4,
behind
the
schedule.
business
The
knows
business
that
needs
to
Aug
Sept
Oct
Nov
Dec
Using
a
Gantt
chart
has
many
benets
O R G A N I Z A T I O N A L
and
P L A N N I N G
T O O L S
( H L
O N LY )
limitations:
Limitations
A
A
tnemnorivne
TOK discussion
Benets
If business is a human
Gantt
chart:
Gantt
chart:
enterprise, is it possible to
●
gives
a
clear
progress
of
picture
the
of
current
various
is
●
tasks
based
timings
on
of
estimates
each
of
the
task
quantify (express in numerate
form) various business
scenarios? What role should
●
gives
a
clear
picture
of
the
is
●
difcult
to
follow
when
“human” methods, such
overall
project
applied
to
very
complex
as intuition, emotion, and
projects
●
is
exible
many
and
can
be
applied
to
“hunches” play in business
situations
is
●
based
data,
●
is
simple
●
allows
and
visually
not
to
plan
of
resources
to
quantitative
as
project
in
the
decision making?
data
costs)
cannot
separate
out
complete
interdependent
the
qualitative
the
●
use
mainly
attractive
(such
managers
on
most
tasks
efcient
manner.
places
●
a
premium
deadlines
may
lead
quality
to
of
on
meeting
(milestones),
erosion
the
of
which
the
work.
The value of these planning tools
Each
of
these
However,
and
be
for
the
borne
Also,
in
each
have
same
tool
with
depends
on
is
by
just
other
the
factors
planning
different
reasons.
mind
together
indicates
organizational
they
All
of
potential
one
tools,
are
tools
can
not
have
be
useful
applied
at
for
a
the
limitations,
business.
same
which
time
should
users.
data,
should
tools
and
the
available
circumstances
that
uses
or
managers
techniques.
and
be
to
the
taken
way
into
it
and
The
has
should
value
been
account
of
be
used
each
applied.
before
using
tool
Table
the
1.7.5
tools.
91
dna noitazinagro ssenisuB 1
1 . 7
1
B u s i n e s s
o r g a n i z at i o n
a n d
e n v i r o n m e n t
tnemnorivne
dna noitasinagro ssenisuB 1
Table 1.7
.5. Factors relating to dierent business analysis tools
Tool
Fishbone diagram
Decision tree
Force eld analysis
Gantt char t
What is its major
It is used to help a
Senior managers use
It is used to facilitate
It is used for day-
area of focus?
business react to
it to indicate the most
management of
to-day project
issues that require
eective direction
change.
management by
quality improvements
from a variety of
middle managers but
and may involve the
options.
is open to all to view.
whole business.
What time frame is
It is a shor t-term
It is used for medium-
It is used for medium-
It is used for shor t-
involved?
response to an
to long-term planning
to long- term
to medium- term
identied problem.
of future directions.
planning of future
projects.
directions.
At what level of
Tactical planning
Strategic planning
Strategic planning
Which par t of the
Initial –
Final – based on as
Initial –
decision making
brainstorming
much information as
brainstorming
Tactical planning
planning is it used?
process is it used
Ongoing
possible
for?
What should it be
Quantitative data
Qualitative data
Quantitative data
Which depar tments
Mainly production
Mainly production
should use it?
(but it can be used by
and marketing
Quantitative data
used with?
All depar tments
all depar tments)
r chckl
✓
A
shbone
identify
✓
A
diagram
underlying
decision
simplify
tree
allows
provides
complex
businesses
to
look
closely
at
problems
and
causes.
a
clear
decisions
and
visual
structure
identify
the
to
most
help
mangers
appropriate
outcome.
✓
A
force
eld
focusses
✓
Gantt
on
charts
enable
of
are
the
is
factors
used
businesses
overview
92
analysis
the
to
used
to
plan
allocate
entire
to
which
help
might
businesses
inuence
complex
resources
workow.
manage
the
projects
change.
planned
and
schedules.
appropriately
and
It
change.
give
They
a
clear
Production
O R G A N I Z A T I O N A L
P L A N N I N G
T O O L S
( H L
O N LY )
Primature
Following
Inc
is
a
Option
factory
$3.5m.
1
two
–
2
–
just
in
Capacity
could
invest
in
growth
will
be
at
next
of
remain
asked
The
outcomes
of
last
six
months,
facilities.
The
Primature
It
is
production
additional
a
presently
manager
on
of
the
costs
present
by
at
a
16%.
cost
of
production
and
resource
provide
advantages.
price
and
for
the
it
is
next
can
that
over
in
the
will
economic
prot/loss
predictions:
Option
1
Option
line)
(new
$m
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factory)
(no
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strengthens
economic
Declining
a)
(i)
growth
economic
Construct
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growth
fully
increase
with
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6
9
4
3
4
3
1
2
1
labelled
decision
nancial
costs
tree
and
showing
outcomes
Primature
for
each
Using
your
should
working
b)
Describe
c)
Evaluate
and
to
IB,
of
the
on
benets
extent
tree,
purely
support
to
factors
option
question
May
to
three
nancial
choice
decision
select
your
of
selected
(a)(ii).
which
using
decision
additional
support,
for
option
grounds.
Inc’s
option.
Primature
Show
or
Inc
trees.
[4
marks]
[3
marks]
[ 10
marks]
non-nancial
not
Primature
marks]
full
choice.
which
may
decide
nancial
unit
$m
[3
(ii)
3
expansion,
price)
Constant
be
years.
period
decline
following
to
constant
ve
strengthen
a
wise
economic
remains
the
over
be
in
revenues
growth
will
will
economic
increase
growth
there
the
cell
convinced
forecasts
estimates
in
unit
for
improved
economy
believe
(new
Economy
is
40%.
not
unit
average
manager
cut
economic
their
the
of
that
believes
allow
human
is
line
capacity
factory
to
would
and
result
clear
that
30%
these
This
director
is
that
believe
increase
designed
provided
differ
production
will
maximum
as
it
He
believe
whilst
each
an
be
a
is
before
production
for
extra
This
exibility
by
output,
30%
of
nance
maintained.
years.
an
could
orders
the
option
constant,
growth.
in
the
production
capacity.
management.
Economists
those
ve
of
of$I.5m.
increased
current
over
its
options:
production
However,
improves.
40%
cost
(JIT)
of
production
building
be
either
increased
a
increase
conditions.
its
construction
new
time
orders
construction
future
recent
of
at
The
in
expansion
expansion
The
The
additional
or
increase
the
98%
building
Option
The
13%
at
examining
and
Inc
considering
producing
tnemnorivne
Pcc q
Inc
support,
in
your
the
answer
2008
93
dna noitazinagro ssenisuB 1
1 . 7
2
H u m a n
r e s o u r c e
m a n a g e m e n t
2.1 The functions and evolution of human
resource management
tnemeganam
ecruoser namuH 2
By the end of this chapter, you should be able to:
➔
Dene human resource planning (workforce planning)
➔
Explain the concept of labour turnover
➔
Identify internal and external factors that inuence human resource
planning (such as demographic change, change in labour mobility,
new communication technologies)
➔
Outline common steps in the process of recruitment
➔
Dene the following types of training:
➔
●
on the job (including induction and mentoring)
●
o the job
●
cognitive
●
behavioural
Dene the following types of appraisal:
●
formative
●
summative
●
360-degree feedback
●
self-appraisal
➔
Outline common steps in the processes of dismissal and redundancy
➔
Describe how work patterns, practices and preferences change and
how they aect the employer and employees (such as teleworking,
exitime, migration for work)
➔
Explain outsourcing, oshoring and re-shoring as human resource
strategies
➔
Evaluate how innovation, ethical considerations and cultural
dierences may inuence human resource practices and strategies
in an organization
Hr ( wkf) pli
Human
resources
resources
tertiary
94
(HR)
and
is
are
critical
especially
quaternary
for
any
business.
important
sectors.
for
The
issue
businesses
Nevertheless,
all
of
human
operating
businesses
in
must
the
ensure
2 . 1
they
have
the
(the
the
as
they
part
correct
the
plan
of
of
of
employee
director
many
can
that
of
HR
a
and
or
clear
HR
that
and
O F
that
H U M A N
those
R E S O U R C E
employees
(which
resources
M A N A G E M E N T
are
is
be
to.
referred
owner
of
employees
the
its
that
to
are
in
jobs
At
the
same
future
HR
needs
as
possible
increases
costs)
or
too
framework
referred
plan
by
how
continuous
rarely
With
upon
for
a
as
This
this
decided
so
is
suited.
estimates
businesses,
the
their
employees),
productivity).
but
framework
planning
properly
business
of
human
can
a
sure
employees
large
written
have
make
hurt
their
to
resources.
trained
number
With
be
to
planning,
too
document
not
strive
and
from
plan.
likely
human
properly
HR
has
most
may
the
are
(which
workforce
written
types
are
their
type
business
employees
get
from
Businesses
which
time,
businesses
best
process.
for
right
E V O L U T I O N
effectively.
Successful
get
the
A N D
as
the
almost
smaller
and
small
to
will
for
how
HR
to
plan
always
businesses,
remain
“in
few
the
tnemeganam
working
F U N C T I O N S
be
or
a
the
head”
business.
Lb v
Labour
a
turnover
business
how
in
stable
Labour
a
a
refers
given
business
turnover
is
to
the
time
movement
period
of
(usually
employees
a
year)
and
into
is
an
and
out
of
indicator
of
is.
usually
measured
by
the
number
of
following
staff
formula:
leaving
over
a
year
_____
Labour
turnover
=
× 100
average
A
high
labour
problems.
period
of
For
by
may
lead
turnover,
the
problems
for
New
the
business.
some
with
in
they
be
look
the
aspect
their
should
can
for
can
to
affect
employees
high
hire
than
remain
business
that
training
those
the
turnover
at
can
who
In
business
if
This
the
lead
a
year
a
long
business
labour
which
be
are
source
high
are
can
cause
expensive.
established
as
addition,
has
workers
may
for
workers
motivation,
routines.
Even
stay
has
in
labour
that
labour,
employees’
and
not
situation.
new
and
there.
labour
a
do
has
suggests
who
When
practices
employment
a
are
them
it
in
leads
high
problem
otherwise
to
believe
dissatised.
anticipate
than
new
workers
employed
business
employment
productive
work
the
staff
employees
Recruitment
less
in
jobs,
be
their
of
turnover
frequently
turnover
of
reasons,
affect
must
that
labour
productivity.
often
High
or
of
business.
are
higher
younger
also
communicates
some
Business
will
may
lower
suggests
high
aspect
interruption
satised
that
reason
some
to
rate
itself,
business
workers
turnover
to
By
dissatisfaction
and
to
some
time.
dissatised
of
turnover
number
certain
others.
In
opportunities
employees
tend
to
circumstances
a
booming
since
swap
jobs
jobs
when
economy,
are
more
labour
plentiful.
often
turnover
employees
In
than
tend
addition,
middle-aged
employees.
Finally,
some
rate
may
and
lack
ideas,
labour
indicate
of
a
stable
progress.
especially
if
turnover
New
they
can
be
business,
but
employees
have
just
good
left
for
a
stability
tend
to
college
business.
can
bring
or
lead
A
to
energy
have
been
low
turnover
complacency
and
new
retrained
and/
95
ecruoser namuH 2
that
T H E
2
H U M A N
or
reskilled.
or
who
R E S O U R C E
Sometimes,
M A N A G E M E N T
a
business
has
employees
of
lesser
productivity
TOK discussion
provide
make
no
minimal
basis
for
contributions
separation
to
(being
the
business
red
or
but
sacked).
otherwise
When
a
worker
To what degree should
such
as
this
leaves
a
business,
managers
may
actually
be
happy.
businesses resist workforce
The
HR
rate
is
plan
kept
industry
grocery
tnemeganam
ecruoser namuH 2
labour
see
and
an
the
against
might
any
can
make
which
experience
expect
its
its
will
if
but
it
a
experienced
or
business
sure
get
can
try
did
the
rm
in
a
the
for
the
want)
would
business.
of
By
internal
turnover
to
the
fairly
not
want
would
factors
of its current and available
to
workforce?
pay
change
the
or
strengths and weaknesses
rate.
signicant
tracking
A
high
turnover
a
planning and instead base
human resources on the
position.
Managers
labour
result
correct
labour
according
not
lawyers.
as
the
to
vary
law
changes
higher
outside
that
requirements
(even
cashiers,
signicant
in
to
level,
quickly
either
the
external
and
among
to
circumstances
rate,
designed
among
turnover
turnover
skill
turnover
attention
be
acceptable
chain
turnover
Labour
in
at
store
high
close
should
labour
mitigate
factors.
th il d xl f h i
Hr pli
Many
factors
business
on
the
pool
business
that
is
can
employs
of
itself
inuence
labour
may
already
in
an
someone,
organization’s
some
available
change
place.
for
and
This
is
external
potential
internal
shown
in
HR
plan.
factors
Even
can
employment.
factors
Figure
before
have
an
Also
inuence
the
a
effect
the
HR
plan
2.1.1.
technological
change
government
regulation/
laws
changes in
changes to
the business
business
demographic
organization
nance
change
Pool of
labour
available for
social
work
trends
The HR plan
state of the
economy
changes in
changes in
labour
the business
reactions
strategy
changes to
education
labour
mobility
External factors can aect the
Internal factors can
labour pool of potential
aect an organization’s
employees
current hr plan
Figure 2.1.1. External and internal factors aecting the HR plan
96
2 . 1
The
of
external
the
pool
T H E
F U N C T I O N S
factors
of
have
potential
an
A N D
E V O L U T I O N
impact
employees
for
on
the
the
O F
size
H U M A N
and
business
R E S O U R C E
M A N A G E M E N T
availability
and
include
the
following:
more
improvements,
make
●
Government
potential
equality
disability.
or
just
the
to
or
of
a
pool
a
of
the
an
or
easier
laws
issues
of
lead
transport
or
links,
than
can
issues,
gender,
obligations
can
before.
inuence
regulations
age,
to
government
can
contractual
ageing
and
such
population,
external
changes
available
and
available
levels
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which
to
can
a
affect
such
as
ethnicity,
as
or
pension
reduced
migration
that
can
their
have
specic
fertility
patterns
an
are
impact
on
Recent technological change has
meant that more people in cer tain
sectors can work from home
requirements
refer
labour
case,
–
opposite
may
a
accept
would
direct
relevant
is
can
boom
consequently
demography.
have
role
of
women
families,
balance”
economic
and
some
the
all
or
the
have
pool.
an
the
so
as
parent
effect
lower
as
consider
on
range
lead
to
more
to
a
strain
increased
unemployed
wages.
changes
Regardless,
impact
the
will
lead
the
and
rising
in
or
suitability
type
of
levels
falling
of
labour
courses
or
the
–
many
either
to
factors
geographical
mobility
can
occupational
of
mobility
the
inuence
mobility
labour
(changing
workforce
mobility,
(changing
locations).
signicantly
In
affects
the
pool.
internal
impact
have
–
such
single
students.
occupations)
either
labour
and
of
of
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the
will
factor
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society,
the
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in
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●
–
number
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on
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the
hours
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changes
in
of
state
the
workers
of
–
rise
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wages;
an
in
safety
can
Infrastructural
away
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The
changes
determine
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on
●
other
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ICT
retirement.
in
signicant
of
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importance
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potential
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●
age
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workplace
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regarding
weekly
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as
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someone
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maximum
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●
change
teleworking
tnemeganam
Technological
on
factors
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which
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will
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have
result
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Changes
they
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in
business
organized
reorganization
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to
organization
better
affect
meet
the
–
their
current
businesses
strategic
HR
plan.
change
the
objectives.
way
Any
Organizational
97
ecruoser namuH 2
●
2
H U M A N
●
R E S O U R C E
changes
affecting
acquires
another
Changes
in
labour
chooses
unionize,
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with
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tnemeganam
ecruoser namuH 2
circumstances
Changes
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to
●
in
also
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labour
on
example,
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when
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the
requirements
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change.
in
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market
business
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whether
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to
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decreases,
exibility
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impact
to
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business
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the
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not
affect
an
increase
be
in
the
the
able
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HR
to
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resources
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and
the
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situation
A
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pension
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that
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retention.
allow
of
business
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for
protability
plan.
pay
recruitment
impact
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on
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th Hr ( wkf) pl
There
path
●
are
as
parts
to
employee
recruitment
right
●
four
the
–
the
HR
plan,
progresses
how
the
in
which
the
business
follow
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individual’s
recruits
the
right
person
–
how
the
business
professional
development,
professional
development
●
appraisal
how
●
termination
situation
–
or
when
the
leaves
employee
is
of
red
ensures
whether
employee’s
dismissal
the
employee
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job
how
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his
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for
her
cause
or
is
employees
training
performance
the
employee
or
that
initial
business
whether
free
will)
or
is
receive
98
the
evaluated
manages
stage
of
●
identication
●
application
●
selection.
the
HR
plan
can
split
into
(the
involuntarily
retrenched).
be
the
voluntarily
or
three
proper
ongoing
The processes of recruitment
rst
for
job
training
The
career
business:
parts:
(the
2 . 1
T H E
F U N C T I O N S
A N D
E V O L U T I O N
O F
H U M A N
R E S O U R C E
M A N A G E M E N T
Identication
The business realizes that it needs a new employee because of a change in its internal factors.
Job description
This gives details about the job, such as:
the job title
●
what the employee will have to do
●
the employee’s responsibilities.
This gives details about the type of person required to do the job, such as:
●
the skills required to do the job
●
the qualications necessary
●
what experience is necessary.
Internal or ex ternal
The business has to weigh up the advantages of recruiting internally by promotion (or
recruitment
redeployment), such as it being:
●
cheaper
●
quicker
●
more ecient as the person would know how the business works.
tnemeganam
Person specication
●
It then has to weigh up the advantages against the disadvantages. For example, recruiting internally:
●
limits the pool of potential candidates
●
may cause resentment
●
causes the “domino” eect as the person promoted would leave a vacancy to be lled, and
so on down the hierarchy.
Searching externally would be the reverse of all of the above.
The application process
Application
The business has to decide how to nd the best applicants for the job.
Job ad ver t
The business will need to consider:
●
where to place the adver t so it is seen by the right people
●
what should be included in the adver t so the applicants have sucient information
●
the legal requirements that have to be met.
Application form
What is the most appropriate tool to process the applications? Every tool should include
or résumé (CV)
the same elements (personal details, skills and qualications, work experience, interests
and hobbies, and references) but application forms are:
●
standardized (so they are useful for jobs with lots of possible applicants)
●
designed specically to match the job requirements
●
focused on the issues that the business wants
●
legally binding.
However, a résumé (CV):
●
is better for jobs with limited applicants (such as senior posts)
●
is more personal and can reveal more about the applicant
●
can be more exible
●
is quicker as it can be prepared beforehand.
99
ecruoser namuH 2
The identication process
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Internal or ex ternal agency
The business has to weigh up the advantages of nding the best applicants internally
by using its HR depar tment, such as it being:
●
cheaper
●
quicker
●
more ecient as the HR depar tment will know precisely what the business
requires.
It then has to weigh up the advantages against the disadvantages. For example, using
tnemeganam
ecruoser namuH 2
its HR depar tment:
limits the pool of potential candidates; agencies may have plenty more applicants
●
in their databases
●
may cause a lack of focus in other areas
●
may not cater for specialist skills, in contrast with an agency, for example that
specializes in administrative vacancies.
The selection process
Selection
The nal par t of the process of recruitment is the selection of the best applicant for the
job.
Shor tlisting
The business will have to discard many applicants on the basis of:
Testing
●
their overall quality
●
how many are required for interview
●
any legal requirements that have to be taken into account.
Many businesses like to subject the shor tlisted applicants to some form of test, to be
used as a complement to the nal interview. These tests can be:
aptitude (task-oriented activities, designed to test understanding and application of
●
theories or concepts)
psychometric (personality questionnaires, designed to test reasoning skills and
●
personality traits)
team based (exercises designed to focus on the qualities necessary for working in
●
project teams).
Inter views
The interview is the nal par t of the recruitment process and there is no one best style
of interview. It will depend on circumstances but may include the following:
●
face to face (one to one)
●
panel (with more than one person)
●
video conference (or telephone)
●
multi-stage (one interview leads to another)
●
multi-day (conducted over a number of days).
Training
The
second
stage
professional
the
latest
career
from
100
ideas
path
losing
of
the
HR
development.
by
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and
technologies.
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Training
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Training
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date
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with
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employee
2 . 1
training
●
improve
●
lead
●
motivate
●
reduce
some
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quality
greater
the
Training
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for
a
business.
O F
It
H U M A N
R E S O U R C E
M A N A G E M E N T
can:
work
employee
labour
to
important
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productivity
turnover.
countries
off
also
A N D
a
full-time
worker
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the
right
to
be
allowed
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take
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can
take
many
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tnemeganam
In
to
the
is
F U N C T I O N S
following:
On-the-job training is often led by an
Induction
●
–
training
that
focuses
on
making
a
new
employee
experienced employee
familiar
with
authority
(who
programme
that
the
they
their
to
can
to
begin
–
normal
business
to,
ensure
work
when
job.
the
report
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On-the-job
●
way
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example).
that
new
straight
employees
Often
functions
and
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with
good
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lines
of
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settle
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are
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while
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are
Student workpoint 2.1
doing
through
Be a thinker
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employee
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is
when
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an
Another
when
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experienced
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common
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type
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A
on-the-job
follows,
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in
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your
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food
highly-trained
Off-the-job
●
–
when
the
employee
is
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time
off
from
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training
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from
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That
training
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or
course
run
by
consultants,
agencies,
or
of
Today,
their
many
managers
employer.
In
light
choose
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to
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description
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Draw
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the
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up
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will
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attend
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town.
education
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contemporary
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post-industrial
local
of
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universities,
the
employees
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better
–
economies,
even
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businesses
many
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coursework
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pay
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Once
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you
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description
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busy
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food
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think
the
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discrete
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training
of
●
of
training
aspect
of
or
the
training
the
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Rather,
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thinking
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Behavioural
does
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helps
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on
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and
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more
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others)
teams
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and
to
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how
and
Most
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other
where
often,
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ways.
it
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about
performance.
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other
Other
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business.
quicker
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knowledge
enhance
training
the
of
thinking
make
●
skills
include
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about
aim
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–
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skills
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interpersonal
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skills
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work
emotions).
in
on,
project
for
example,
management.
101
ecruoser namuH 2
However,
T H E
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Appraisal
The
third
stage
performance
Appraisal
know
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tnemeganam
ecruoser namuH 2
in
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indicators
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employee
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employees’
Often,
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to,
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and
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process.
Benets of appraisal
For
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●
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●
help
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For
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102
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can
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is
–
standards.
these
focus
done
The
A N D
appraisal
at
The
presumably
Summative
to
time
difculties.
appraisal
include
continuous
cycle.
appraisees
●
may
employee’s
three-year
F U N C T I O N S
tnemeganam
Appraisal
T H E
to
not
eight
with
only
the
from
their
co-workers,
customer/
subordinates
and
even
customers
or
clients.
This
method
involves
manager
client
an
element
multiple
CEOs
upward
perspectives.
and
several
of
other
groups
appraisal
The
360-degree
executives
of
and
who
stakeholders
serve
(see
is
the
most
appraisal
and
Figure
is
complex,
often
interact
having
used
directly
with
with
2.1.2).
Appraisee
Self-appraisal
●
processes
of
which
this
is
reection
or
it
can
done
can
during
be
also
used
the
on
suggest
strengths,
the
part
reect
with
themselves
accomplishments,
faced
important
employees
is
rate
employees
problems
an
above
individual
employees
Typically,
their
this
outlined
appraisal,
Usually
–
of
the
by
on
help
itself.
their
of
various
their
a
time
With
own
this
method
self-appraisal
training
and
appraisal
performance.
performance
weaknesses,
relevant
performance
needs,
any
form
on
indicators.
and
subordinate
co-worker
discuss
potential
period.
Figure 2.1.2. 360-degree appraisal
Termination, dismissal, and redundancy
The
nal
This
stage
situation
in
the
might
●
the
employee
●
the
business
●
both
best
Good
of
For
HR
plan
of
to
that
and
both
will
to
is
when
an
employee
leaves
the
business.
because:
leave
the
the
the
business
employee
employee
should
agree
no
that
longer
work
separation
is
there
in
the
parties.
have
a
minimize
set
of
the
procedures
impact
of
ready
losing
to
deal
employees
with
and
this
part
acquiring
ones.
several
happen
●
employer
interests
plan
chooses
decides
businesses
the
new
the
HR
happen
As
too
reasons,
termination
of
a
business
relationship
does
not
often:
employees
develop
replacing
them
reluctant
to
go
more
increases
through
skills
and
considerably
the
whole
HR
experience,
and
so
the
cost
businesses
process
of
are
very
again.
103
ecruoser namuH 2
2 . 1
2
H U M A N
●
Many
of
R E S O U R C E
businesses
recession,
workers
go”
business
●
Finally,
only
to
tnemeganam
ecruoser namuH 2
business
such
the
have
and
to
Nevertheless,
on
have
the
can
from
as
redeployment,
hours
re-employ
rights.
it
basis
one
to
of
If
could
of
a
rather
them
business
face
“unfair
legal
than
(or
or,
in
having
other
time,
three
breaks
action
dismissal”.
additionally,
dismissed
time
in
to
result,
unfairly
occur
policies
working
times
to
people)
“let
when
again.
unnecessarily,
expensive
can
up
employees
ex-employee
which
prefer
reducing
picks
contracts
M A N A G E M E N T
in
employment
initiated
Court
damages
by
cases
paid
by
the
are
the
employees.
an
employee
has
to
leave
a
business,
ways.
Termination
Employees
contract
can
for
a
●
change
●
professional
●
promotion
●
retirement
●
lifestyle
●
family
These
to
of
“terminate”
variety
in
the
business
at
the
end
of
their
including:
development
reasons.
to
employees
their
leave
choice
their
according
or
reasons,
career
employees
use
of
would
search
country,
should
resignation
their
some
be
to
receive
new
industry,
give
will
expect
for
and
job.
the
advance
a
reference
Though
the
from
the
practice
level
of
the
notice
to
their
employer
varies
employee,
employer
in
general
of
when
effective.
Dismissal
Dismissal
their
is
when
contract.
employee
reasons
●
continually
●
poor
discipline
●
drug
or
alcohol
●
theft
or
dishonesty.
Employees
the
●
a
conviction
●
an
●
refusal
of
unresolvable
to
their
accept
an
be
dismissed
employment
when
the
for
employment.
broken
one
(or
more)
of
the
terms
of
include:
work
sometimes
occur
image
has
may
abuse
under
circumstances
harm
missing
may
performance
104
an
The
an
employee
business,
offence
personality
a
which
or
company
for
reasons
contract.
has
may
other
Generally,
done
than
non-
these
something
that
might
be:
imprisonment
clash
with
a
co-worker
reorganization
that
changes
the
terms
of
employees
reference.
a
length
a
of
so
bad
property
fears
of
commonly
the
the
business
the
business).
the
they
a
to
example,
may
some
dismissals
(either
damage
not
actual
take
a
to
continue
can
physical
computer
receive
to
or
will
a
(for
that
do
takes
when
the
damage
damage
or,
are
or
M A N A G E M E N T
notice”–
which
happen
systems)
les
of
work
dismissal”,
also
R E S O U R C E
employees
dismissal
les
H U M A N
“period
instances,
facing
computer
O F
expect
receive
“summary
employee
business
(for
would
In
face
Summary
that
today,
when
they
E V O L U T I O N
should
notice”).
that
immediately.
employer
time
A N D
they
employees
“two-week
something
effect
dismissed,
However,
specied
example
are
F U N C T I O N S
the
more
steal
the
from
property
of
tnemeganam
If
T H E
Redundancy
Redundancy
an
may
employee,
drop
in
●
a
●
changing
●
a
●
restructuring
●
the
business
●
the
job
done
demand
market
by
a
restructure
●
a
merger
these
their
would
to
(one
the
business
no
longer
has
any
work
for
include:
business’s
products
industry
becoming
has
the
or
or
insolvent
been
or
doing
introducies
bankrupt
being
new
replaced
by
technology
mechanization
(i.e.
the
job
can
be
reorganization
because
(that
is,
of
employees
their
expect
The
the
month’s
to
amount
country
with
business
the
business
takeover.
normally
been
of
of
cases,
own
reference.
country
be
the
a
may
machine)
●
has
for
employer
relocation
of
when
which
circumstances
someone
the
●
of
for
recession
when
In
happen
causes
and
receive
of
by
for
the
lost
a
the
every
is
their
not
year
of
the
through
for
the
longer
employment,
and
can
redundancy
or
no
fault
“cause”),
payment
payment
Typically,
greater
job
ended
redundancy
redundancy
industry.
business,
pay
have
employment
a
vary
an
they
letter
from
employee
payment
some
will
other
formula).
When
a
large
employees
have
●
two
to
number
retain
options
Voluntary
it
reduces
With
made
the
lose
stress
They
prefer
to
it
–
made
for
redundant,
managers.
typically,
animosity
approach,
They
will
with
employees
would
and
receive
which
problem
are
difcult
redundancy
the
voluntary
reference,
positions
be
They
deciding
would
which
normally
offer:
redundant.
anyway.
The
to
of
can
the
may
the
some
have
them
voluntary
prefer
is
in
the
the
to
may
look
payment
their
efforts
approach
to
preferred
decision
employees
wanted
redundancy
help
would
this
that
retain
or
is
and
that
retain
a
a
get
the
as
generate.
choose
for
to
option
can
to
be
new
job
letter
of
a
new
job.
business
employees
may
it
lose.
105
ecruoser namuH 2
2 . 1
2
H U M A N
R E S O U R C E
Involuntary
●
than
on
the
age,
other
redundancy
voluntary
years
constrained
form
approach
employees
of
by
of
is
M A N A G E M E N T
service,
a
some
labour
that
will
–
option.
the
this
approach
Involuntary
or
some
type
of
other
leave
based
the
can
upon
with
benet
have
the
typically
criterion
agreement
agreement,
business
is
redundancy
criteria.
it
based
If
not
unions
the
involuntary
inuence
criteria
desirable
be
the
of
more
or
less
may
or
over
some
which
selects.
tnemeganam
ecruoser namuH 2
ch i wk p, pi, d
pf
Over
the
past
employees
Some
the
to
of
these
pool
want
of
a
respond
Some
of
the
of
the
For
in
have
of
internal
the
new
factors
the
and
external
many
affecting
employers
practices,
trends
employees.
factors
work
affect
from
social
balance
their
that
patterns,
stemmed
have
and
factors
led
social
businesses,
affecting
many
businesses
Other
and
preferences.
are
employees
trying
trends
which
to
have
can
benet
practices.
changing
and
changes
work
example,
work–life
desires
privatization
●
many
changes
from
some
years,
occurred
labour.
better
to
stemmed
from
50
have
the
move
working
away
environment
from
public-sector
include:
to
private-sector
employment
increased
●
and
migration
across
●
increasing
●
changing
●
increasing
●
an
ageing
the
of
potential
employees
in
a
country
or
region
globe
participation
educational
females
in
the
workforce
opportunities
urbanization
population
of
and
and
the
consequent
increasing
rise
average
in
age
stress
of
the
levels
workforce.
Changes in work patterns
One
by
change
has
businesses
the
results
selected
of
as
been
well
some
in
as
the
the
opinion
patterns
types
polls
of
of
work
jobs
–
the
people
analyzing
the
types
want.
most
of
jobs
Table
required
2.1.1
sought-after
shows
jobs
in
countries.
Table 2.1.1. The ten most sought-after jobs in selected countries in 2013
US A
India
Singapore
South Africa
El Salvador
1
Actuary
IT personnel
Financial adviser
Engineer
Skilled labour
2
Bio-medical engineer
Retail sta
Electronics
Driver
Sales agent
specialist
3
Software engineer
Healthcare worker
Engineer
Skilled
Technician
tradesperson
4
Audiologist
Hospitality sta
IT personnel
5
Financial planner
Engineer
Media personnel
Labourer
Manager/
executive
106
Engineer
Bilingual
administration sta
T H E
F U N C T I O N S
A N D
E V O L U T I O N
O F
H U M A N
R E S O U R C E
M A N A G E M E N T
US A
India
Singapore
South Africa
El Salvador
6
Dentist
HR personnel
Accountant
Teacher
Manager
7
Occupational therapist
Aviation personnel
Actuary
Legal sta
Driver
8
Optometrist
Psychologist
Retail worker
Secretary/PA
Mechanic
9
Physical therapist
Financial adviser
Proper ty agent
Technician
Logistics personnel
Computer systems
Teacher
Brand manager
Accountant
Accountant
10
Table
2.1.2
United
One
shows
States,
the
based
signicant
ten
on
change
least
a
sought-after
recent
that
opinion
has
jobs
in
2013
in
the
Table 2.1.2. The ten least sought-after
poll.
happened,
tnemeganam
analyst
jobs in 2013 in the United States
especially
with
the
US A 2013
improvements
geographical
determine
of
Traditional
will
mail
and
then
seek
Similarly,
positions
skills.
of
of
For
for
letter
acquire
is
both
pharmacists
or
which
are
or
skills
common
re g io ns
than
wi t h
a nd
che fs.
which
the
and
in
those
match
s ho rt a g e s
B e lg iu m ,
need
online
in
of
for
t he
Lumberjack
3
Military personnel
4
Actor
5
Oil rig worker
6
Dairy farmer
7
Meter reader
8
Mail carrier
9
Roofer
10
Flight attendant
for
bill
are
growing
Thus,
eras.
s e ek in g
p eo pl e
wi t h
e xa m p le ,
h ave
ICT
2
contracting
pe opl e
c ou n t ri e s
Be fo re
number
positions.
earlier
News repor ter
contracting.
occupations
for
1
to
the
are
individuals
to
Man y
pro fe ss io na l s .
for
banking
which
and
individuals
decreasing
op por tuni t ie s
a nd
for
occupations
other
learn
Kingd om
nur s e s
occupational
easier
electronic
to
in
occupations
necessary
more
ICT
–
carriers,
p r o vi de s
and
much
and
easily
Uni te d
increase
example,
the
countr i e s
The
is
–
email,
relatively
also
an
occupations
mobility
with
it
expanding
services,
to
ICT
shortages
of
is
been
Today
because
it
occupational
certain
be
services.
professions,
has
mobility.
carriers
payment
ICT,
“growing”
positions
letter
in
h a ve
s h or t ag e s
re vol u t io n,
Source: http://www.careercast.com/
matching
skilled
pe o p l e
to
pl ace s
whe re
t h ey
we re
n ee de d
was
va s t ly
jobs-rated/worst-jobs-2013
more
data
challenging
(who
has
geographic
that
an
tha n
wha t
regions ) .
information.
interactive
it
is
s k il ls
to da y.
and
T he n,
wha t
I CT
R e ce ntl y,
sch e ma ti c
I CT
s ki ll s
a ll ow s
B BC
Ne w s
s howi ng
a ll ow s
a re
for
an
t ype s
fa s t e r
ne e de d
e a si er
ra n
what
fo r
in
tha t
sk il le d
of
pa rt i c u l ar
dis s em i na t i on
ar t i c le
of
pr oc e s si n g
of
c on t a in e d
Student workpoint 2.2
e m pl oye e s
1
different
that
countrie s
many
people
ne e de d .
are
A
result
mi g ra ting
of
this
be cau s e
of
im p r o v e d
infor mati on
is
wor k.
Changes in work practices
Be reective
Look
at
2.1.1
and
surprise
are
Not
only
have
the
types
of
jobs
the
changed.
The
nature
of
work
changed
as
businesses
have
responded
to
greater
likely
working
to
listed
Do
What
in
any
tables
results
factors
inuence
people’s
routines
demands
for
Do
you
think
money
is
more
the
exible
2.1.2.
you?
opinions?
has
jobs
only
consideration?
practices.
Work practices in decline
Full-time
work
When
week
35
employees
accepted
hours
Permanent
An
contracts
without
a
week
employee
a
by
work
law
in
who
the
(for
maximum
example,
hours
per
working
Europe).
has
been
predetermined
hired
time
for
a
position
limit.
1
http://www.bbc.co.uk/news/business-21938085
107
ecruoser namuH 2
2 . 1
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Work practices on the increase
Student workpoint
Part-time
When
employees
work
weekly
work
maximum
less
than
the
2.3
full-time
hours.
Be an inquirer
Talk
Temporary
Work
that
is
temporary
leave).
a
xed-term
nature
The
tnemeganam
ecruoser namuH 2
agency
on
(for
employee
who
nds
contract
example,
would
work
for
to
usually
cover
normally
the
of
a
maternity
sign
up
to
to
know
an
employee.
and
Freelance
When
someone
who
different
is
self-employed
employers
at
the
works
same
Work
taking
place
from
telecommunication
would
to
Homeworking
work
When
the
he
at
an
the
has
When
the
at
an
on
a
own
have
work
dress
at
the
hours
from
have
work
work?
remainder
works
would
to
the
of
a
employee
he
or
from
home.
core
the
she
in
does
work
the
xed?
has
work
of
a
Are
hours
similar
these
Where
do
per
hours
they
from?
home.
Usually
number
ofce,
–
for
a
Usually
number
ofce,
involving
would
Fridays
centre.
or
ways
work
nd
of
hours
remainder
home.
employee’s
Casual
core
employee
she
Work
to
a
employee
or
from
Flexitime
have
home
their
you
time.
number
Teleworking
can
the
they
everyone
several
parents
about
What
about
which
you
teachers,
friends
work.
out
people
–
a
set
core
the
ofce;
Friday
so
the
is
of
of
rest
it
is
the
hours
is
allowed
that
hours
Usually
number
employee
a
number
choosing.
up
to
to
to
an
employee
he
or
the
wear
easier
of
she
employee.
less
go
has
formal
away
at
weekends.
Three-day
Instead
weekend
employee
of
works
working,
three-day
weekend.
say,
four
ve
days
days
of
ten
of
eight
hours
hours,
and
so
the
has
a
yduts esaC
Wk-lif bl i F
In 2000, the French government reduced the statutory
temptation to look at work-related material on their
working week from 39 hours to 35 hours. Now, under
computers or phone–during their free time. Companies
a new deal, French employers’ federations and unions
must ensure that their employees come under no
have signed a legally binding labour agreement that
pressure to do so.
requires employers to make sure sta “disconnect”
outside of working hours.
Exam-style questions
The deal, which aects around 250,000 employees
Explain the impact on a) employers and
in the technology and consultancy sectors (including
b) employees of this new change.
[6 marks]
the French sectors of Google, Facebook , Deloitte and
Discuss the impact this change might have
PwC), means that employees will have to resist the
on the culture of businesses in France.
108
[8 marks]
2 . 1
T H E
F U N C T I O N S
A N D
E V O L U T I O N
O F
H U M A N
R E S O U R C E
M A N A G E M E N T
Changes in work preferences
of
business,
working
many
changing
lifestyles.
Career
●
usually
same
c a r e e r.
take
These
breaks
time,
to
continuously
employees
the
a
–
an
year
are
are
for
now
some
20
of
employee
or
more,
Sometimes
employee
the
back
to
30
adapting
the
most
decides
before
the
for
the
work
to
stop
to
–
this
to
suit
methods:
working
work
formalizes
break
same
routines
common
returning
employer
after
years
their
this
is
for
in
a
the
and
agrees
known
as
a
Job
●
free
share
up
–
two
more
Downshifting
●
–
paid
employment
eld
or
Study
●
or
time
new
area
of
leave
–
more
for
an
in
employees
other
to
share
a
job
in
order
to
activities.
employee
order
decide
tnemeganam
“sabbatical”.
to
gives
up
change
a
senior
career
into
position
another
or
highly
lower-paid
interest.
an
qualication
employee
such
as
is
an
granted
time
off
work
to
acquire
a
MBA.
oi d hi  Hr i
HR
costs
based
can
businesses
in
work
and
One
signicant
have
a
has
out
operations
employ
as
Imagine
design,
shown
therefore
a
been
many
focus
their
or
HR
particularly
quaternary
plans
preferences.
Outsourcing
on
In
to
match
doing
for
service-
sectors.
so,
the
they
Many
changes
cut
costs
its
core
(also
known
occurs
when
activities.
This
as
a
subcontracting
business
way,
it
or
cuts
back
not
need
does
on
to
workers.
smartphone
Figure
adapted
and
businesses,
tertiary
advantage.
company
manufacturing,
in
many
the
outsourcing
work).
to
in
practices,
competitive
method
for
operating
patterns,
gain
contracting
its
be
businesses
and
with
current
distribution
of
annual
US$42
salary
million
costs
per
for
year,
as
2.1.3.
Design team (50 workers)
with an annual salary bill
of US$2 million
Manufacturing (1,000 workers)
with an annual salary bill
of US$25 million
Design team (50 workers)
Distribution (500 workers)
with an annual salary bill
with an annual salary bill
of US$2 million
of US$15 million
Figure 2.1.4. Smar tphone manufacturer
Figure 2.1.3. Smar tphone manufacturer before using outsourcing
However,
it
would
if
the
have
business
US$40
were
million
to
outsource
available,
as
manufacturing
shown
in
Figure
and
after using outsourcing
distribution,
2.1.4.
109
ecruoser namuH 2
Instead
2
H U M A N
Although
the
to
the
work,
be
R E S O U R C E
it
business
could
specialists
have
fewer
expertise
cut
in
M A N A G E M E N T
would
costs
either
smartphone
so
would
business
to
doing
pay
this.
manufacturing
inefciencies
and
have
by
and
most
doing
greater
likely
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subcontractors
The
or
distribution.
productivity
charge
work
to
complete
subcontractors
less
in
than
are
They
these
the
probably
areas
cost
likely
of
of
the
ETHICS
It is easy to say that, because
production costs are cheaper
elsewhere, then production
should be moved oshore.
itself.
But there are many ethical
In
addition
to
the
lower
production
costs
(which
can
in
3),
be
calculated
implications for businesses to
by
the
cost
to
buy/cost
to
make
formulas
Unit
the
smartphone
consider. Think about the people
tnemeganam
ecruoser namuH 2
business
other
p a y,
not
costs
of
and
are
thumb”,
saves
on
employing
pensions,
employees
of
only
wage
people.
other
bill.
that
expensive.
benefits
are
It
will
Medical,
benefits
extremely
these
its
also
m a t e r n i t y,
businesses
In
typically
save
the
to
and
provide
United
equal
on
per
the
holiday
to
States,
50
all
full-time
as
cent
a
of
“rule
an
in the original location, and the
people in the ‘oshore’ location –
what eect will o-shoring have
on them? Hold a debate arguing
for and against oshoring for a
business of your choice.
e m p l o y e e ’s
than
the
US$40
significant
the
cost
million
savings.
of
the
cost
wage
bill.
m o n e y.
N o w,
it
can
saving
By
The
focus
is
likely
to
outsourcing,
benefit
on
its
to
the
core
be
even
the
business
business
activity
greater
–
is
saves
not
just
designing
products.
extension
outsources
of
outsourcing
outside
communication,
business
Thus,
amounts
innovative
An
s a l a r y.
its
home
offshoring
environment.
is
offshoring :
c o u n t r y.
has
been
Businesses
Wi t h
a
when
growth
take
a
business
improved
area
advantage
global
in
of
the
the
modern
huge
Key terms
wage
Outsourcing
differences
areas
of
have
the
been
where
between
world.
Many
offshored
wages
fluently
workers
and
are
wages
are
to
the
customer
from
high,
doing
the
far
service
United
India,
same
job
call
Kingdom
where
many
but
in
centres,
and
the
people
different
for
example,
United
speak
States,
English
when a business subcontracts
a process, such a
manufacturing or packaging,
to another business or
l o w e r.
organization
Why
offshoring?
Simple
Oshoring
mathematics
is
often
the
outsourcing a process or
answer:
service to another country in
●
In
the
USA,
an
architect
might
be
paid
$3,000
a
month.
An
order to reduce costs
architect
●
A
Java
and
Philippines
$5,000
outsourcing,
earns
would
get
$60,000
annually
businesses
in
a
around
year
in
£250
the
a
month.
United
States
India.
can
cut
their
operational
costs
by
percent.
British
every
the
programmer
makes
Through
20–40
in
Airways
1,000
calculates
jobs
it
that
relocates
to
it
saves
US$23
million
a
year
for
India.
Adapted from http://www.economist.com/media/globalexecutive/outsourcing_
revolution_e_02.pdf
Examples
of
typical
●
in
marketing,
●
in
operations
business
using
an
functions
that
advertising
management ,
can
be
outsourced
agency
licensing
a
producer
to
make
product
110
●
in
HR,
employing
●
in
nance,
hiring
an
agency
to
accountants
“headhunt”
to
include:
run
an
potential
external
staff
audit.
your
2 . 1
T H E
F U N C T I O N S
A N D
E V O L U T I O N
O F
H U M A N
R E S O U R C E
M A N A G E M E N T
th ip f ivi, hil idi,
d ll di
Innovation,
have
an
ethical
impact
on
considerations,
the
HR
plan
and
and
cross-cultural
the
business’s
differences
ability
to
can
also
implement
it
successfully.
or
HR
business
plan.
strategic
come
A
focus
from
unless
it
its
on
recruits
stimulating
will
help
the
business
creative
this
than
The
and
as
any
retains
creative
such
inertia
to
–
will
the
can
being
other
business
business
have
business
right
a
major
innovative
not
be
–
a
impact
must
function.
part
of
a
the
greater
innovative
Developing
vital
on
have
Innovations
successfully
people.
environment
a
HR
supportive
planning
–
process.
Google
individuals.
–
committed
HR
people.
and
A
opposite
tnemeganam
Innovation
The
prides
Google
itself
on
ofce
being
shown
innovative
in
Figure
and
2.1.5
employing
reects
approach.
Figure 2.1.5. One of Google’s oces
Ethical considerations
A
strong
ethical
reected
should
so.
connection
behaviour.
in
the
With
the
information.
employees
a
result,
the
way
businesses
least
that
Internet,
Social
treated
create
always
plans
treat
are
the
their
people
network
badly
businesses
to
has
HR
have
that
can
to
existed
based
business
between
on
treats
employees
have
sites,
tell
be
in
its
ability
particular,
careful
how
to
planning
act
today
to
can
they
in
which
employees.
ethically,
greater
other
HR
relationships,
send
be
have
an
it
Not
must
and
places
been
ethical
and
are
only
do
receive
where
treated.
manner
–
As
or
at
appearance.
111
ecruoser namuH 2
Innovation
2
H U M A N
Ethical
in
R E S O U R C E
issues
Figure
that
might
M A N A G E M E N T
be
addressed
through
the
HR
plan
can
be
seen
2.1.6.
Performance
appraisal
Salaries and
Right to
privacy
tnemeganam
ecruoser namuH 2
nancial
renumeration
Lay-os
Ethical
Health &
and/or
issues in
safety
redundancies
the HR plan
Discrimination
Restructuring
Employment
Figure 2.1.6. Ethical issues in the HR plan
One
example
intersected
in
the
banking
perception
excessive
by
their
very
of
with
how
improved
ethical
sector.
emerged
salaries
Through
that
and
angry
nancial
about
this
packages
to
some
other
performance.
information
considerations
the
news
and
executives
forms
Many
of
As
executives
of
a
the
in
result,
many
contemporary
executive
other
were
nancial
stakeholders
situation.
in
involved
forms
awarding
rewards
the
many
has
of
ICT,
a
themselves
not
banking
era
compensation
matched
sector
changes
got
occurred
in
banks.
Cultural dierences
Cultural
plan
for
differences
any
businesses
in
workers.
as
varied
of
diverse
the
country.
workforce.
a
include
Many
of
workers
Businesses
many
if
businesses
countries
up
adapt
more
effect
multicultural
multinational
grow
that
are
especially
signicant
a
domestic
citizenry
workforce
workforce,
have
employs
naturally
migrant
cultural
also
that
countries.
Lastly,
children
adopted
112
would
different
can
business
as
their
to
also
is
HR
be
markets
the
businesses
citizens
their
likely
on
Such
operating
employ
migrant
increasingly
in
plan
their
to
as
diverse,
parents’
suit
successful
are
HR
workforce.
a
more
with
diverse
as
a
their
2 . 1
In
the
affect
HR
the
T H E
context,
cultural
F U N C T I O N S
Figure
2.1.7
A N D
E V O L U T I O N
highlights
expectations
of
a
some
business’s
of
O F
H U M A N
the
R E S O U R C E
factors
that
M A N A G E M E N T
might
employees.
Power
distance
Dress
tnemeganam
Body
Masculinity
language
Cultural
dierences
Personal
Uncer tainty
space
avoidance
Long-term
Humour
orientation
Figure 2.1.7
. Cultural dierences in the HR plan
The
concept
indicate
the
According
power
a
low
this
the
to
Training
would
are
score
axis
and
to
misunderstanding
It
can
also
important
creativity.
When
help
and
of
a
the
and
diverse
novel
of
society
opposite.
that
take
a
are
have
perspectives
will
be
Table
to
can
of
see
are
the
parts
from
of
potential
differences.
most
innovation
problem
the
countries
scores
cultural
of
gathered
increases
of
decision
expectations.
from
a
in
2.1.3.
reduce
one
level
from
different
increased
people
high
example
in
from
emerge
workforce:
a
included
different
workforces
can
and
Some
people
backgrounds
solution
Hofstede
Employees
shown
advantage
when
Geert
with
consulted
authority.
shows,
to
different
be
(PDI)
diverse
occurs
diversity
from
of
by
inequality.
cultures
friction
businesses
from
successful
in
developed
of
to
the
index
different
work
benets
problems,
expect
difference
Innovation
people
expect
accepting
distance
of
was
society
employees
more
from
people
by
not
would
power
one
world
distance
Hofstede,
They
Hofstede’s
As
power
distance
making.
with
of
acceptance
and
and
solve
together
likelihood
to
it.
solve
that
a
found.
113
ecruoser namuH 2
Individualism
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Table 2.1.3. PDI scores for selected countries
tnemeganam
ecruoser namuH 2
Country
PDI
Country
PDI
Malaysia
104
Spain
57
Panama
95
Pakistan
55
Philippines
94
Japan
54
Mexico
81
Italy
50
China
80
Argentina
49
Egypt
80
South Africa
49
Saudi Arabia
80
Hungary
46
Ecuador
78
United States
40
Indonesia
78
Netherlands
38
India
77
Australia
36
Singapore
74
Costa Rica
35
Brazil
69
Germany
35
France
68
United Kingdom
35
Hong Kong
68
Switzerland
34
Thailand
64
Finland
33
Zambia
64
Norway
31
Chile
63
Sweden
31
Por tugal
63
Ireland
28
Uruguay
61
New Zealand
22
Greece
60
Denmark
18
South Korea
60
Israel
13
Iran
58
Austria
11
Taiwan
58
Source: http://www.clearlycultural.com/geer t-hofstede-cultural-
dimensions/power-distance-index/
114
2 . 1
T H E
F U N C T I O N S
A N D
E V O L U T I O N
O F
H U M A N
R E S O U R C E
M A N A G E M E N T
rvii hkli
resource
selected,
✓
Labour
Human
The
over
a
most
the
✓
✓
by
Off-the-job
of
can
to
ensure
most
of
that
effective
employees
employees
are
way.
in
and
out
of
a
time.
be
inuences
by
both
internal
and
steps
in
application
an
takes
the
and
place
experienced
process
of
recruitment
are
selection.
as
part
of
employee
day-to-day
who
can
work.
act
as
a
It
is
mentor
to
training
allows
employees
time
off
work
to
attend
training.
Cognitive
training
but
helps
Behavioural
Appraisals
formative,
Employees
is
not
helps
a
leave
and
given
summative,
360
a
to
on
a
particular
develop
employees
employees
during
may
focussed
employees
training
allow
performance
✓
the
movement
period
planning
training
led
business
✓
the
strategy
in
trainee.
external
✓
is
common
On-the-job
usually
a
factors.
identication,
✓
is
developed
given
resource
external
✓
planning
and
turnover
business
✓
used
tnemeganam
Human
their
business
and
due
of
the
skills.
interpersonal
employers
The
aspect
thinking
develop
timeframe.
degree
their
to
main
skills.
review
methods
are:
self-appraisal.
to
termination,
dismissal
or
redundancy.
✓
As
working
had
✓
to
practices
adapt
Outsourcing
to
carry
out
their
and
HR
occurs
certain
patterns
have
changed,
businesses
have
strategies.
when
organizations
functions,
allowing
contract
them
to
other
organizations
concentrate
on
core
activities.
✓
Offshoring
perhaps
is
when
because
functions
labour
is
are
outsourced
cheaper
or
to
another
production
is
country,
quicker.
115
ecruoser namuH 2
✓
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Pi qi
Dome
Today,
such
the
13
as
000
of
nurses
tnemeganam
ecruoser namuH 2
The
States
who
as
the
Hospital
trained
in
Ghana
a
to
agencies
vacancies.
ight
Hospital
working
in
They
the
non-nancial
of
Hospital
to
changes
has
in
UK
Kingdom
has
saved
Ghanaian
similar
amount
African
(UK),
millions
ones.
in
of
The
training
countries
Canada
US$
and
in
the
government
the
same
UK.
by
Given
also
and
offer
workforce
these
shortages
demographic
severe
have
difculty
tried
nurses
have
set
of
of
a
to
up
improved
payment
conducted
and
for
a
in
in
countries
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recruiting
number
come
web
pay
moving
job
has
has
of
back
site
and
Dome
locally
different
home.
to
They
attract
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enrichment
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Afua
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Ghanaian
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a
lack
non-governmental
about
determined
to
with
they
Afua,
concerned
countries.
has
that
promotion.
recruitment
however,
research
discovered
experience
(NGO),
Afua,
nancial
Ghana
Ghanaian
international
and
funding.
in
and
UK
retain
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sub-Saharan
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Dome
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events
home
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the
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recruiting
spent
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the
experiencing
encourage
recruitment
free
by
the
nurses.
methods
ll
had
the
is
trained
Recently,
nurses
and
were
Australia,
nurses
work
of
US
Recruitment
used
UK
now
who
in
(US).
however,
migration
such
Ghana
work
training
Ghana,
in
nurses
Ghana
United
cost
of
Hospital
to
and
mobility
will
and
Ghanaian
help
probably
retention,
considerable
of
is
nurses
offer
but
knowledge
hospitals’
calling
not
of
for
from
Dome
Hospital
direct
other
NGOs
with
resources.
[Source: adapted from http://www.medicalnewstoday.com/ar ticles/98545.php,
21 September 2009]
a)
b)
Dene
Explain
use
c)
to
term
two
the
Discuss
116
May
research.
non-nancial
rewards
Ghanaian
likely
benets
nurses
for
that
to
Dome
Dome
stay
in
Hospital
Hospital
the
advantages
2011
strategy.
and
disadvantages
[2
marks]
[6
marks]
[5
marks]
[7
marks]
could
Ghana.
of
support.
recruitment
IB,
primary
encourage
Analyse
Afua’s
d)
the
of
Dome
Hospital’s
2.2 Organi zational structure
By the end of this chapter, you should be able to:
tnemeganam
dierent types of organizational structures:
●
delegation
●
span of control
●
levels of hierarchy
●
chain of command
●
bureaucracy
●
centralization
●
decentralization
●
de-layering
Describe the following types of organization char ts:
➔
●
at/horizontal
●
tall/ver tical
●
hierarchical
●
by product
●
by function
●
by region
Explain changes in organizational structures (such as project-based
➔
organization, Handy’s “Shamrock Organization”)
Describe how cultural dierences and innovation in communication
➔
technologies may impact on communication in an organization
Even
have
the
it
the
most
some
business
must
is
of
to
develop
organization.
and
chaotic
sense
formal
in
When
plan
the
of
a
with
roles,
a
more
and
business
clearly
organizational
responsibilities
individuals
start-ups
survive.
a
An
of
organization,
as
well
the
formally
as
one
succeeds
outlining
structure
business,
than
owner
responsibilities,
the
and
least
grows,
structure
of
represents
reporting
must
at
the
the
lines
if
then
roles
between
business.
oizil h
The
is
most
formal
in
common
through
an
roles,
Figure
form
of
presenting
organizational
responsibilities,
chart
and
–
the
a
structure
diagram
reporting
lines.
of
that
An
an
organization
outlines
example
the
is
given
2.2.1.
117
ecruoser namuH 2
Dene the following terminology to facilitate understanding of
➔
2
H U M A N
R E S O U R C E
M A N A G E M E N T
CEO
PA (to CEO)
Production
Marketing
Finance
HR
Administration
executive
executive
executive
executive
executive
Assistant 2
Assistant 1
tnemeganam
ecruoser namuH 2
Assistant 1
Assistant 2
Assistant
Assistant 1
Assistant 2
Junior
Figure 2.2.1. An organizational char t for a business
Terminology
Figure
A
few
2.2.1
shows
terms
help
organizational
Levels
●
of
senior,
hierarchy
Each
the
level
Note
that
CEO
of
of
someone
from
to
of
often
the
the
Note
be
●
the
one
Span
this
how
business.
in
many
indicates
four
(CEO),
line
and
to
level
case,
ofcer
assistant
This
an
levels
to
the
a
levels
level
range
most
of
of
from
most
junior,
the
department.
managers
who
the
to
–
(PA)
to
bear
for
and
–
people
who
responsibility
as
is
that
would
junior
pass
executive
the
formal
In
in
to
this
the
not
a
have
for
the
Other
route
chain:
marketing
made
types
by
which
Traditionally,
case,
in
manager
by
of
–
the
staff
staff.
and
if
a
decision
decisions
are
the
marketing
the
included
staff
decision
downwards
through
then
a
is
as
decision.
organization.
commands.
the
CEO
known
administrative
organization
with
the
is
communicate
this
the
to
employee
secretarial
PA
the
outside
to
control
are
managers
CEO
included
such
is
typically
of
whom
118
In
refers
Each
marketing
authority
of
subordinates
of
a
CEO
wants
department,
from
assistant
the
1,
travel
therefore
CEO
and
to
then
to
the
nally
to
junior.
that
the
term
responsibility
referred
message
this
business.
indicates
through
top
–
the
command
marketing
for
structure
decisions.
be
communicate
the
chart
organizational
decisions
personal
travel
the
in
make
the
a
executive
hierarchy.
could
Chain
organizational
the
business.
chief
those
without
must
the
in
hierarchy
with
managers
●
of
the
levels
are
working
authority
outcomes
the
in
the
“junior”
typical
chart:
responsibility
seniority
a
describe
as
is
–
the
the
PA.
Span
directly
are
ve.
in
the
chain
communicate
control
under
the
responsible
Note
span
of
of
the
of
and
but
of
course
would
message.
refers
to
how
authority
for.
various
control
command
the
In
this
many
a
case,
assistants
nor
of
and
would
be
manager
the
span
the
any
and
of
junior
staff
control
are
not
manager
Assistant 1
Assistant 2
2 . 2
following
though
Delegation
a
particular
of
that
–
this
decision.
likely
has
narrow
a
major
have
key
–
a
how
a
the
of
control
high
an
organization
manager
with
the
control
usually
is
structured
chart:
gives
responsibility
managers
of
can
rarely
likely
to
be
strategic
authority
for
manager.
is
wide.
keeps
a
A
the
for
outcome
Delegation
manager
tighter
with
and
spans
happen
to
in
is
keep
is
who
control
on
centralization
within
the
the
head
usually
more
of
narrow
effective
in
such
an
small
business.
associated
and
indicates
a
with
spans
control
of
that
group
This
businesses
of
control
their
organization
of
type
of
that
–
so
that
subordinates.
and
leadership
is
autocratic.
–
this
is
the
but
other
This
of
opposite
senior
of
that
control
centralization.
may
–
so
that
fewer
key
organization
and
is
of
is
a
core
delegated
is
usually
hierarchy
allow
more
leadership
is
structure
levels
managers
Delegation
In
maintain
authority
organizational
have
subordinates.
an
of
managers
decision-making
type
businesses
their
such
of
maintained
hierarchy
managers.
wider
to
organization
associated
freedoms
is
happens
decisions,
middle
degree
close
structure
Decentralization
greater
likely
more
to
likely
to
democratic
Bureaucracy
serving
in
system.
rules
originally
business
and
well
they
are
more
organizations
“red
tape”
to
Delegation
show
is
not
De-layering
hierarchy
strategy
is
The
are
–
by
and
more
concept
of
is
have
been
many
is
of
any
doing
not
associated
levels
get
of
have
importance
things.
with
for
This
businesses
many
years.
As
correctly
and
type
that
Typically,
accomplished
been
of
has
Personal
expected.
hierarchy.
tasks
ofcials
administrative
“bureaucratic”
are
operating
to
non-elected
relative
that
ways
procedures
occurs
likely
been
to
typically
with
built
is
decision-making
reduces
levels
of
a
business
of
businesses
for
up
such
such
have
followed.
to
capability
as
the
levels
of
levels
business
well
As
such
hierarchy.
bureaucracy
middle
business
are
years.
reduce
of
the
This
that
many
many
intended
costs
reduces
management.
operating
have
de-layering
layering
when
layers
associated
have
many
set
usually
have
removing
the
so
the
delegation
paperwork
that
this
increase
employ
to
and
to
means
likely.
usually
established
they
likely
require
term
indicates
and
structure
and
referring
this
organization
thinking
established
term
term
An
procedures
exible
organizational
are
a
today
the
procedures.
rules
initiative,
–
government,
In
and
many
of
span
making
levels
decentralized
●
of
operating
many
more
of
when
not
remains
the
decision
Delegation
●
but
to
organizational
occurs
span
organizational
be
an
decisions.
managers
to
relevant
to
That
when
Centralization
all
●
are
decision
more
all
●
terms
necessarily
tnemeganam
●
not
S T R U C T U R E
managers.
does
not
have
and
De-
to
managers.
119
ecruoser namuH 2
The
O R G A N I Z A T I O N A L
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Types of organizational char t
TOK discussion
There
are
common
many
are
different
described
types
of
organizational
structure.
The
most
Why can organizational char ts
below.
be misleading?
T
all organizational structure
A
tall
of
a
organizational
business
following
and
is
structure
common
is
in
the
traditional
organizational
well-established
businesses.
It
form
has
the
features:
tnemeganam
ecruoser namuH 2
●
many
levels
●
narrow
●
centralized
●
long
●
autocratic
●
limited
of
spans
hierarchy
of
control
decision
chains
of
making
command
leadership
delegation.
Flat organizational structure
A
at
of
organizational
the
more
popular
with
with
those
structure
traditional
businesses
attempting
organizations
have
is
a
structure
set
to
the
up
modication
and
since
reinvent
following
has
the
become
1960s
themselves.
or
Flat
features:
Senior managers
●
few
levels
of
●
wider
●
decentralized
●
shorter
●
democratic
●
increased
spans
hierarchy
of
control
Middle managers
decision
(though
more
making
diffuse)
chains
of
command
Junior managers
leadership
delegation.
Super visors
Organizational structure by hierarchy
Another
way
to
show
an
organizational
structure
is
by
showing
Workers
hierarchy.
below
Individuals
them.
This
is
at
the
the
top
have
traditional
more
way
of
authority
presenting
than
an
those
organizational
Figure 2.2.2. Organizational
structure
and
is
shown
in
Figure
2.2.2.
structure by hierarchy
Organizational structure by function
An
organizational
what
employees
Figure
2.2.3).
structure
do.
They
can
Employees
will
then
be
be
presented
are
grouped
organized
by
by
by
function
–
department
indicating
(see
seniority.
Board of
directors
Production
Marketing
Finance
Figure 2.2.3. Organizational structure by function
120
HR
Administration
2 . 2
O R G A N I Z A T I O N A L
S T R U C T U R E
Organizational structure by product
Another
the
typical
business
organized
way
of
produces.
by
what
presenting
For
types
an
example,
of
books
it
organizational
Figure
2.2.4
structure
shows
a
is
by
what
publisher
produces.
Board of
tnemeganam
Current
Fiction
Technical
Educational
Translations
aairs
manuals
Figure 2.2.4. Organizational structure by product
Organizational structure by region
A
further
typical
according
example
to
way
where
structure
of
the
for
a
presenting
business
an
organizational
operations
multinational
are.
structure
Figure
2.2.5
is
shows
an
corporation.
Head oce
(Germany)
Asia
Americas
Europe
Africa
Oceania
Figure 2.2.5. Organizational structure by region
ch i izil 
As
well
as
these
businesses
changes
standard
have
in
the
types
attempted
business
●
project-based
●
shamrock
to
of
organizational
adapt
their
environment.
structure,
structure
Two
to
examples
take
of
some
account
this
of
are:
organization
organization.
Project-based organization
This
structure
demands.
human
In
focusing
is
many
each
on
split
teams
other
project.
designed
up
more
around
managers
projects.
at
once,
each
After
such
as
to
but
team
“borrows”
project
exible
organizational
reassembled
operate
team
be
organized
project
and
because
the
marketing
are
have
individual
Each
complete
to
project-based
resources
organizations
team
is
a
is
many
who
the
run
members
teams
on
of
accountants,
is
another
have
focused
responsive
a
projects.
project
begin
they
and
structure,
no
employees
completed,
need
market
Project-based
of
project.
to
completing
different
to
business’s
the
Typically,
interact
its
with
own
departments
operations
managers
to
and
specialists.
121
ecruoser namuH 2
directors
2
H U M A N
This
type
where
of
business
businesses
different
projects
structure
(see
R E S O U R C E
as
Table
structure
are
at
often
M A N A G E M E N T
often
the
the
is
common
under
same
in
contract
time.
It
organizational
is
construction
to
also
teams
run
a
known
are
or
number
as
a
shown
IT,
of
matrix
as
a
matrix
2.2.1).
Table 2.2.1. Matrix of organizational teams
Operations
Finance
Marketing
HR
Administration
tnemeganam
ecruoser namuH 2
management
Project 1 manager
4 employees
2 employees
1 employee
1 employee
1 employee
Project 2 manager
3 employees
2 employees
2 employees
2 employees
1 employee
Project 3 manager
3 employees
2 employees
1 employee
1 employee
1 employee
Project 4 manager
3 employees
2 employees
2 employees
2 employees
1 employee
Project 5 manager
3 employees
2 employees
1 employee
1 employee
1 employee
Shamrock organizations
This
type
of
organization
is
based
on
a
model
suggested
by
the
Irish
1
management
theorist
Charles
Handy
Core
He
argued
the
that
changes
planning.
which
The
is
a
or
model
The
a
The
●
clover
that
increase
of
a
second
of
the
and
leaf
or
core,
The
leaf
consists
calls
All
its
of
is
impact
Ireland
on
other
essential
costs,
the
the
to
exible
seasonal
on
out
to
of
workforce
shamrock
–
gain
important
element
communicates
a
business
both
their
with
its
functions.
internal
of
the
with
the
to
creation
non-central
periphery:
Figure 2.2.6. The shamrock model
managers,
business.
fringe,
specialist
workforce
made
because
businesses.
up
of
workers.
organizational
stakeholders.
Successful
and
their
structure
is
how
Communication
is
integral
businesses
external
communicate
a
business
to
how
effectively
stakeholders.
1
Handy, C, 1989, The Age of Unreason, Harvard Business School, Boston MA, USA
122
Contractual
competitive
workforce
Communication
An
Temporary
stem.
their
core
the
advantage
the
supporting,
to
contractual
a
–
each
concerned
possible
and
taking
trimming
represents
the
by
reduce
by
subcontracted
of
and
leaets
which
service.
shamrock
temporary,
can
time
wherever
are
exible
symbol
three
businesses
Handy
activities
third
has
employees
non-core
part-time,
more
environment
response
product
leaf
be
national
and
outsourced
technicians
●
the
multiskilled
are
rst
can
external
uses
suggests
delivery
●
of
and
only
functions
the
idea
type
advantage
retain
in
His
businesses
with
2 . 2
Communication
is
channelled
communication
in
Figure
can
take
through
2.2.7
outside
shows
two
the
the
the
routes:
formal
organizational
“proper”
process
by
communication,
structure,
channels.
which
O R G A N I Z A T I O N A L
a
and
The
which
informal
communication
message
S T R U C T U R E
is
loop
communicated.
Media
tnemeganam
Sender
Receiver
Feedback
Figure 2.2.7
. The process of communicating a message
The
sender
what
or
form
she
the
The
some
understood
can
outside
has
is
–
the
delivered
upon
encode
then
media
person
feedback
to
from
of
the
either
the
the
gets
that
party.
the
the
background
choice
of
Background
what
deliver
and
has
noise.
to
can
he
the
decodes
it.
should
been
message
media
noise
deciding
sender
message
However,
so-called
to
message
then
the
by
chooses
which
the
successfully,
show
wrong
message
sender
through
who
successfully.
because
of
to
take,
may
not
Background
something
even
be
due
to
interference.
which
Sometimes,
most
of
anything
Communication
media,
said
appropriate
acted
control
is
should
been
form
clearly
be
the
deliberate
the
and
through
noise
message
message
receiver
message
receive
get
the
considers
message.
If
of
the
can
take
increases
different
common
forms
several
the
methods
of
forms
likelihood
of
using
that
a
the
variety
communication
communication
of
message
include
are
the
different
will
get
across.
combined.
The
following.
Verbal
This
communication
communication
●
interviews
●
meetings
●
lectures
●
presentations
●
telephone
Informal
relies
occurs
on
conversations
verbal
the
spoken
word.
Formal
verbal
in:
(recorded).
communication
might
include:
Open plan oces like this are becoming
●
face-to-face
●
gossiping
●
telephone
conversations
more common. What eect could
this have on formal and informal
communication?
conversations
(unrecorded).
123
ecruoser namuH 2
Background
2
H U M A N
Verbal
R E S O U R C E
communication
M A N A G E M E N T
can
be
quick,
direct
and
effective,
especially
if
Student workpoint
combined
with
other
forms
of
communication.
It
also
allows
for
immediate
2.4
feedback.
the
However,
wrong
the
language,
message
does
not
can
speak
be
misunderstood
clearly,
or
does
if
not
the
sender
allow
for
uses
feedback.
Be reective
Visual
What
This
form
of
communication
communication
can
take
relies
place
on
sight.
Formal
visual
would
appropriate
through:
be
the
most
method
communication
in
of
these
situations:
tnemeganam
ecruoser namuH 2
●
presentations
●
videos
●
your
to
●
notice
●
signs
●
sign
manager
tell
all
staff
needs
that
boards
the
ofce
closed
for
will
be
tomorrow
emergency
language
maintenance
●
symbols
●
maps.
●
Informal
visual
communication
might
include:
you
want
your
new
is
gestures.
good
of
have
one.
communication
can
be
effective
as
it
can
be
and
immediate.
However,
this
type
lots
and
gures
and
permanent,
data
recognizable,
done
research
have
Visual
a
that
product
language
You
●
persuade
managers
idea
body
●
to
your
of
to
back
up
your
communication
arguments
can
be
difcult,
communication
effective
may
if
the
respond
especially
is
not
image
for
those
positioned
or
picture
differently
to
the
who
have
limited
appropriately.
requires
same
It
sight
can
also
interpretation,
as
or
be
if
the
less
some
●
cultures
image.
a
new
product
launching
is
globally
two
months’
will
be
the
in
time.
rst
of
It
its
Written
kind
Written
communication
relies
on
the
written
word.
Formal
to
communication
is
found
reports
●
letters
●
notices
sell
might
than
one
scenario.
what
●
forms
●
press
Informal
releases.
written
●
memos*
●
emails*
●
texts
●
blogs.
Written
kept,
written
“tone”
*
communication
communication
and
written
the
can
be
message
can
may
be
be
might
include:
effective.
communication
communication
of
it
method
Think
so
that
more
for
can
be
Records
considered
lost.
In
of
amended
the
or
impersonal
addition,
message
revised.
and
feedback
is
often
not
may
be
However,
the
immediate.
In some organizations, memos and emails would be considered formal communication.
your
each
about
your
you
can
bulletins
justify
124
want
choose
inuences
choices
●
you
well
in:
You
●
and
written
decision.
2 . 2
O R G A N I Z A T I O N A L
S T R U C T U R E
rvii hkli
Delegation
occurs
decision
someone
outcome
✓
The
of
span
of
authority
✓
A
level
✓
The
of
a
of
Bureaucarcy
✓
Centralization
✓
group
strategic
✓
at
have
✓
A
tall
to
is
is
of
the
employees
are
responsibility
formal
are
rules
and
when
found
the
in
a
route
made
for
a
particular
responsibility
directly
within
though
at
the
a
for
the
under
the
business.
which
highest
procedures
within
majority
decisions
senior
where
management
occurs
layers
wide
of
span
structure
control
many
level
individuals
a
decision
level
and
are
of
position
decisions
is
likely
to
an
within
are
made
retain
organization.
are
made
the
by
by
a
business.
middle
control
of
key
when
of
has
Leadership
a
business
reduces
the
levels
of
hierarchy
by
management.
organizational
a
holds
manager.
decisions
occurs
Senior
De-layering
A
authority
still
decisions.
removing
✓
refers
of
gives
manager
down.
Decentralization
managers.
a
command
✓
manager
The
how
is
Usually,
communicated
small
is
particular
hierarchy
travel.
a
else.
decision.
control
of
chain
must
that
when
tnemeganam
to
structure
control.
many
tends
has
levels
to
few
Decision
be
of
levels
of
making
hierarchy
autocratic
is
hierarchy
and
and
and
tends
to
decentralized.
narrow
decision
spans
making
of
in
centralized.
✓
Organizational
by
product
or
structures
by
can
be
organized
by
hierarchy,
by
function,
region.
125
ecruoser namuH 2
✓
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Pi qi
Casas
Paolo
the
Carreras
Carreras,
largest
fashion.
Casas
Managers
tnemeganam
ecruoser namuH 2
By
their
2001,
Brazil.
items
of
Paolo
will
cut
more
have
At
required
by
a)
by
a
to
tall
become
Casas
cards
at
in
Paolo
and
the
Casas
to
a
on
are
become
structure.
decisions.
complained
management.
chain
large
store
to
in
a
the
business
was
is
too
bureaucratic:
key
most
recent
of
in
household
machines)
available
slowed
to
autocratic
major
retail
washing
has
vision
very
senior
sells
made
Carreras
ownership
a
salespeople
largest
Carreras
and
had
in
organizational
slow
being
1950,
business
consult
was
refrigerators
and
that
exible
do
not
as
and
by
5%
as
that
10%,
executive
the
are
one
organization
per
as
a
driver
Brazilians.
years.
passed
to
his
to
market
incentives
atter
long
store
a
as
and
is
she
needs.
meet
manager
regional
planning
She
proposing
organizational
they
is
would
manager
believes
to
have
by
and
the
up
to
Evaluate
the
salespeople
right
a
monthly
salary
on
to
will
sales.
salary
$200
be
As
(the
able
a
to
of
$350.
improve
result,
Suzanna
minimum
the
wage
their
average
as
income
salesperson
Casas
and
one
Carreras
disadvantage
from
a
tall
to
a
of
changing
atter
the
structure.
their
of
the
job
proposed
satisfaction,
payment
scheme
motivation
and
126
Nov.
2009
marks]
for
productivity.
[7
IB,
to
25%,
month.
impact
on
They
prot
[5
b)
offer
structure.
revenue
to
management.
salespeople
advantage
of
a
and
paid
monthly
but
responsive
sufcient
commission
$500
Analyse
more
creating
proposes
much
law)
business
independence
salespeople
by
earn
the
have
freedom
reduce
earning
could
had
credit
consulting
to
had
his
communicated
items
growth
Suzanna
present,
wants
stoves,
greater
prices
without
rarely
the
was
believes
greater
targets.
of
2006
managers
them
were
Carreras
ran
Suzanna.
Suzanna
it
in
He
expected
Carreras
sales
died
daughter
make
as
Casas
always
always
many
growth
However,
the
ideas
(such
this
of
Brazil.
decision-making
Casas
As
in
Carreras
were
Consequently,
that
founder
retailer
marks]
2.3 Leadership and management
Outline the key functions of management
➔
Describe management versus leadership
➔
Discuss the following leadership styles:
●
autocratic
●
paternalistic
●
democratic
●
laissez-faire
●
situational
tnemeganam
➔
Explain how ethical considerations and cultural dierences may
➔
inuence leadership and management styles in an organization
Management
making
sure
not
the
the
people
of
the
people
with
making
on
sure
standards.
and
functions
a
do
in
various
(HR,
work
set
of
oor.
are
Other
To
of
For
and
levels
the
of
organizations
are
roles
a
are
not
they
and
Top
of
nance,
a
television
some
marketing,
even
exist,
they
are
to
and
of
work
the
role
company
includes
the
business
operations
the
part
the
manufacturing
major
all
are
that
making
management
the
are
they
supervisory
according
of
with
They
Rather,
ensure
actually
each
management
degree,
who
have
made
range.
charge
in
charged
accomplished.
organizations.
example,
Rather,
in
in
small,
responsibilities
covers
some
or
made,
people
accounting
supervisors.
people
large
management
shop
Management
management).
the
performed.
televisions
the
of
the
special
is
the
up
whether
who
those
televisions
oor
made
company
company,
CEO
is
tasks,
way
down
to
the
management.
th ky fi f 
1
In
Administration
ve
major
manager
tactical
functions
at
Planning
a
–
large
Organizing
sufcient
organization,
as
the
too
plan.
the
must
many
based
Henri
upon
his
Fayol
outlined
experiences
as
a
They
must
set
objectives,
strategic
all
of
objectives,
which
have
organization.
achieve
then
its
make
sure
objectives.
resources
organization’s
(1916),
mine:
operational
managers
to
Générale
coal
must
even
throughout
–
et
management
French
resources
that
of
managers
objectives,
implications
mean
Industrielle
tie
objectives
up
that
This
too
cannot
the
business
process
much
be
has
requires
capital;
too
careful
few
met.
1
Fayol, Henri, 1916,
Administration Industrielle et Générale
127
ecruoser namuH 2
By the end of this chapter, you should be able to:
2
H U M A N
R E S O U R C E
Commanding
know
also
which
make
perform
–
sure
are
that
going
tnemeganam
ecruoser namuH 2
each
on,
activity
situation
to
have
managers
In
with
is
power
to
then
make
perform.
receive
done
–
If
sure
that
necessary,
instruction
when
to
and
or
together
business,
contributing
in
all
individuals
managers
how
They
They
can
reduce
it
is
they
must
are
to
the
have
output
scale
of
if
of
sure
that
be.
over
to
to
activities
the
making
to
power
power
resources
different
activities,
changed
the
various
supposed
have
be
the
various
to
these
where
control.
processes
expand
of
coordinate
objectives.
that
bring
types
activity
must
managers
so
must
many
each
achieve
quality
must
are
employees
Managers
Controlling
for”,
–
objectives.
businesses.
they
tasks.
Coordinating
achieve
managers
duties
their
M A N A G E M E N T
test,
a
given
or
necessary.
operations
as
“control
They
also
conditions
require.
Fayol
argued
applied
to
that
any
these
functions
were
universal
and
could
therefore
be
organization.
Management versus leadership
A
manager
group,
is
put
into
would
on
instruct
●
help
●
generally
and
bear
●
generally
thus,
the
like
a
To
by
to
leader
●
motivate
●
often
a
is
to
therefore
is
on
ensuring
deals
with
in
a
the
that
work
the
complexity.
that
timely
accomplished,
is,
a
of
Many
manager
manner
a
plan
is
rather
than
managers:
people
resolve
strict
problems
expertise
and
schedules,
virtue
the
overseeing
and
task-oriented;
of
the
their
bring
precise
position
organization
that
technical
expertise
instructions)
in
the
organization
function
(and
therefore
tend
organization).
role
inspire
is
more
people
deal
of
emotional
to
time
follow
and
relationship-oriented.
and
rely
to
and
progress,
tasks
make
great
planning
accomplished
get
technical
leader’s
ability
spends
a
tasks
challenge
contrast,
leader
manager
manager
setting
authority
to
for
group’s
coordinate
have
(by
have
have
a
subordinates
●
In
A
that
people.
●
not
the
getting
leading
to
responsible
effect.
argue
focused
on
is
monitoring
inspire
with
instincts
their
even
in
energy
or
a
great
her
building
leader
will
voluntarily.
A
relationships
and,
Leaders:
personal
the
since
him
face
of
qualities
evidence
that
they
are
TOK discussion
choosing
the
less
safe
option
To what degree is it misleading
●
have
●
often
vision
–
and
others
follow
them
because
of
that
vision
to claim that a manager and
have
the
vision
that
the
organization
should
be
doing
things
a leader are dierent? How
in
a
totally
different
way
and
inspire
the
condence
that
can
lead
to
helpful is this terminology?
systemic
128
change
and
innovation.
2 . 3
L E A D E R S H I P
A N D
M A N A G E M E N T
Ldhip yl
Leadership
styles
can
be
categorized
as
follows.
Autocratic
leaders
as
minimally
should
be
they
consult)
obeyed
environment
This
style
of
unskilled,
likely
in
on
an
Autocratic
have
the
do
things
and
A
may
benet
be
their
of
own
leave
the
leader
is
the
what
way
are
is
make
be
are
on
used
not
the
when
valued.
results
and
only
Their
orders
structured
some
do
be
by
they
just
to
an
urgent
military
rely
detailed
subordinates
when
are
more
make
very
systems
tolerate
also
the
described.
democratic
to
is
cannot
unsuccessful
those
in
situations
since
subordinates
It
has
Many
accompanied
to
to
leadership
is
come
to
the
that
What
to
The
employees
or
all
(or
decision.
welcome
In
unlikely
quickly.
that
decision-making
consult
may
second-guess.
employees
Highly
and
skilled
who
autocratic
like
to
manager
–
organization.
precisely.
own
a
manager.
often
experienced
made
their
focuses
probably
Employees
style
on
will
the
instructions
manage
told
to
ideas
on
to
receive.
likely
characteristics
have
be
they
and
not
making
should
supervision.
be
autocratic
can
leadership
can
who
followed.
execute
to
leadership
well
decisions
to
–
that
power
tend
when
their
which
close
like
much
They
most
highly
style,
opposite
individuals
is
and
depend
and
and
as
rewards
organization
instructions
–
the
trusted,
that
to
can.
employees
leadership
autocratic
expect
on
employees
and
and
not
an
decisions
hold
possibly
tnemeganam
authority
make
lines
the
depend
major
tend
of
leader
on
authority
the
guidance
negative
not
to
decisions.
are
clear
communicates
aspect
develop
And
of
the
rarely,
in
is
but
an
also
is
to
autocratic
ability
any
and
what
to
business,
decisions.
Paternalistic
Paternalistic
in
that
the
autocratic
as
leadership
leader
leaders,
“family”
–
a
“Paternalistic”
heart
for
of
the
the
business
total
of
A
it
will
loyalty,
become
positive
great
part
The
stand
even
will
like
parents.
come
As
trust,
a
do
some
not
place
They
to
a
for
autocratic
leadership
employees.
views
family
leaders
the
all
“father”,
Unlike
employees
the
same.
which
have
great
employees.
it,
the
at
do
want
to
If
gets
at
the
concern
is
leaders
that
the
the
leader
on
for
a
like
leader’s
of
down.
loyalty,
the
the
get
this
long
necessary
a
what,
often
employees
is
“ownership”
importance
with
matter
employees
and
whatever
let
no
business
leader,
(gurative)
great
the
leadership
and
employees
that,
paternalistic
remain
to
provide
believe
result,
from
paternalistic
they
leaders
leader
but
word
Paternalistic
probably
take
certainly,
Latin
with
over
business.
organization
They
because
the
committed
of
features
authority
paternalistic
style.
them.
blind
they
the
are
by
some
family,
from
the
a
employees
totally
in
paternalistic
of
leaders
aspect
pride
successful.
in
gurative
derives
safety.
leadership,
and
however,
employees
of
shares
considerable
paternalistic
Paternalistic
sense
has
style
time
aims.
take
to
make
business,
However,
which
may
mean
129
ecruoser namuH 2
Autocratic
2
H U M A N
that
they
do
employees’
“playing
R E S O U R C E
not
have
fully
performance.
favourites”
employees,
advantage
a
M A N A G E M E N T
(and
knowing
of
the
they
they
leader
objective,
Thus,
are
and
critical
paternalistic
may
part
his
actually
of
or
a
her
eye
when
leaders
play
“family”,
loyalty
to
evaluating
may
come
favourites).
may
at
across
as
Further,
times
take
them.
Democratic
The
democratic
tnemeganam
ecruoser namuH 2
informs
occur
type
them
across
of
leader
as
possible
or
any
consults
leader
is
will
major
terms
and
The
be
of
for
of
and
a
democratic
as
a
is
to
it
in
is
matter
of
the
as
This
much
business
make
leader
practical
decisions
rare
is
can
leader.
honours
leader
and
one
and
team,
who
because
the
most
They
especially
democratic
many
that
with
it.
the
also
like
style
word
like
when
leader
employees
go
popular
people
being
the
can
the
among
“democracy”
involved
decisions
produce
trust,
Employees
feel
have
results
a
in
cooperation,
as
though
they
voice.
democratic
leadership
effective
may
also
absent,
when
who
belonging
process
since
belonging
of
making
leadership
democratic
leadership
the
the
most
connotations.
them.
quantity,
for
probably
The
on
process
of
decision
truly
role
type
in
Democratic
say.
because
emotional
subordinates
is
is
the
However,
impact
most
style
common
one
responsible
leadership
is
democratic
process,
a
from
Truly
nal
them.
democratic
regularly.
the
end
decision-making
sense
have
more
possibly
positive
one
the
employees
affect
ultimately
ultimately
have
employees,
the
a
as
that
At
practical.
employees
Democratic
in
facilitates
Thus,
leader
has
spectrum.
and
involves
issues
organization,
decisions.
the
a
manager
about
enjoy
to
slow
a
no
the
highly
down
requires
style
used
a
always
making
democracy
and
team.
can
out.
chaos
in
may
the
that
make
prove
team.
the
If
style
It
and
Nevertheless,
and
“chemistry”
work
free-thinking,
relationships
decision
of
not
skilled,
effective
positive
amount
may
with
is
can
the
to
result
democratic
too
this
likely
experienced
costly.
The
characteristic
work.
Laissez-faire
Laissez-faire
gives
Employees
resolve
This
can
do
Universities
tend
told
working
The
work
the
130
to
to
a
it
of
a
may
goals,
be
other
based
on
and
interests
are
it
of
as
when
style
their
the
manager
work.
decisions,
employees
university
experts
professions,
and
as
freedom.
the
It
skilled,
lecturers,
in
their
well,
may
can
and
be
educated.
researchers
eld,
resist
individual
be
individual
appropriate
and
where
when
people
own.
style
can
the
do
own
motivated,
world
around
their
laissez-faire
they
their
appropriate
they
considerable
culture
leadership
how
t.
generally
In
this
in
make
“laissez-faire”,
are
do.
provides
individual
see
In
freedom
because
be
successfully
benet
freedom
job
demand
with
alone”.
own
they
style
who
what
practitioners
leave
their
as
their
professors,
being
can
set
problems
to
“to
considerable
management
trusted
and
means
employees
is
that
foster
many
creativity
employees
may
employees
and
enjoy
innovations.
diverge
too
far
the
However,
from
the
2 . 3
style
and
eye
the
and
may
may
can
be
give
provide
it,
the
and
an
to
as
and
results
organization
this
type
the
can
of
be
leader
Precise
whereas
employees.
can
perspective,
feedback.
employees,
disciplined
style
the
employee’s
much
comfort
and
laissez-faire
under
From
unnerving,
not
condent
a
organization,
aims.
In
employees
does
away
a
not
from
laissez-faire
not
give
instructions
where
disposed
style
a
to
a
guidance
watchful
requires
leader
be
its
leadership
much
and
laissez-faire
instances
are
veer
a
M A N A G E M E N T
adopts
successful
disastrous.
tnemeganam
of
vision
A N D
Situational
Situational
different
ever
be
lead
the
allow
The
to
the
but
may
benet
the
the
either
situation
of
these
arbitrary,
In
●
the
the
styles
may
determining
may
the
of
in
other
will
the
often
for
even
the
In
determine
nature
the
autocratic:
efciently
where
the
of
emergency
become
and
require
would
employees
will
style.
quickly
morale,
the
outcome
organization
autocratic
as
leaders
a
may
decide.
is
the
that
leaders
other
switch
leader
of
times,
situations
change
demotivate
style
subordinates
the
the
At
situations
leadership
appropriate
leaders
leadership
or
nature
consequential
On
of
professionals)
organization
employees
hand.
scenarios,
which
summary,
at
most
different
style
the
situation.
the
employee
situational
change
the
that
one
trained
Sometimes,
the
circumstances
frequently
of
of
let
no
Sometimes,
altogether
inuence
democracy:
notion
democratic
and
emergency.
not
the
Thus,
highly
ts
highly
is
on
determine
employees
decision
whole
best”.
versus
style
will
even
the
through
of
“the
leadership
situations,
rests
leadership.
workers
circumstances
to
of
deemed
(unskilled
which
leadership
styles
hand,
styles
are
may
match
a
when
not
come
their
leader
clear
the
to
across
may
style
too
circumstances
employees.
as
In
unpredictable
or
employees.
leadership
(subordinates’
is
likely
skills,
to
age,
be
inuenced
education,
by:
expectations,
Student workpoint 2.5
and
motivation)
●
the
decision
●
the
leader
(whether
(the
leader’s
urgent,
important,
character,
values,
or
consequential)
experience,
and
Be reective
expectations)
Draw
a
table
advantages
●
the
environment
(whether
creative,
standardized,
or
the
disadvantages
of
repressive,
the
democratic,
showing
and
ve
leadership
styles
discussed
compliant).
here.
ehil idi d ll di
Now
let’s
inuence
look
at
how
leadership
ethical
and
considerations
management
styles
and
in
cultural
an
differences
may
organization.
Ethical considerations
Ethical
considerations
management
opposed
their
to
to
can
inuence
though
managers,
people,
their
styles,
whereas
focus
in
on
both
somewhat
“doing
managers
tend
leadership
different
the
to
right
do
the
styles
ways.
thing”
right
and
Leaders,
with
thing
as
respect
with
to
respect
organizations.
131
ecruoser namuH 2
focus
L E A D E R S H I P
2
H U M A N
Leaders
are
R E S O U R C E
focused
relationships
leaders
and
have
people”.
to
They
on
on
do
people.
inspiring
more
must
M A N A G E M E N T
than
actually
As
a
result,
employees.
merely
say
they
To
that
demonstrate
focus
on
building
accomplish
they
that
care
care
these
about
when
objectives,
“their
INNOVATION
‘If a manager is innovative, the
circumstances
business will be innovative’
require.
How true do you think this
statement is? Does an innovative
Leaders
guide
organizations
toward
ethical
ends.
In
the
military,
management style necessarily
for
example,
leaders
are
those
who
risk
their
own
lives
to
protect
mean that the business will
the
lives
of
their
subordinates.
In
business,
leaders
are
willing,
if
produce innovative goods and
to
take
the
blame
for
bad
outcomes
to
the
organization
if
it
services?
tnemeganam
ecruoser namuH 2
necessary,
means
serving
unwarranted
a
manager
judgment
leader
on
ethical
object
putting
Most
for
of
of
the
is
own
time,
as
of
to
a
leader
leader
at
criticism
an
when
error
of
a
the
of
personal
employee
when
have
a
a
–
but,
make.
adopts
stakeholders
nancial
many
risk
might
leader
some
a
The
employee
judgment
when
or
would
cost.
So
argue
that
all.
managers
and
rewards
of
intervene
give
taking
that
excessive
inexperienced.
to
the
is
even
bureaucratic
and
is
error
objectives
leadership
from
made
was
is
judgment
considerations,
positions
who
do
considerations
ethical
being
this
the
to
organization,
not
ethical
criticized
their
the
thing
them
example,
employee
employee’s
errors
behaviour
leader
right
for
employee
the
the
ethical
protecting
might,
young
that
for
because
ethical
issue
are
leader
a
the
future
of
by
instance,
only
any
typically
is
the
They
not
that
this
example
unethical
On
In
objectives
–
central
an
for
A
sack
grounds
argue
responsibility
Another
to
the
chance.
arguably,
employees
criticism.
wants
might
second
their
ahead
managers
are
“rule
is
of
often
criticized.
followers”
their
and
for
employees’.
somewhat
Student workpoint
2.6
unfair.
Be a thinker
Managers,
to
the
in
contrast
organization
supervising
judgment
a
sees
perspective,
employee
the
business
consideration,
in
If,
to
sacking
is
the
but
In
most
people,
on
the
whereas
or
they
managing
interests
an
ahead
and
When
others’.
a
to
the
in
own
is
thing
too
due
type
to
hasty
of
in
could
ethical
considerations
these
managers,
are
roles
they
are
are,
by
behave
really
are
unethically,
●
Paternalistic
●
Democratic
●
Laissez-faire
●
Situational
cost
too
hasty
of
their
ethical
on
centred
unethically,
not
Autocratic
mentioned
centred
are
●
fair
interests
inuenced
following
styles:
sack
career.
are
the
this
to
sacking
and
managers
the
is
Dene
leadership
in
From
do
criticism
on
more
manager
which
process
considerations
in
The
error
business.
judgment,
focusing
managers
They
major
the
criticism,
not
ethical
a
right
manager
the
obligations
employees.
made
individual
people
or
that
from
their
organization.
of
if
ethical
the
errors
are
managers
leaders
to
has
liability
the
they
on
their
deserves
leaders,
with
are
a
themselves
leaders
organization.
whether
as
further
manager
With
than
believes
giving
rather
see
who
However,
not
employee,
considerations.
132
prevent
organization
summary,
employee
protect
an
business
manager
to
or
leaders,
employee
money.
employee
above.
the
the
the
an
or
young
to
leading
putting
their
people
own
2 . 3
L E A D E R S H I P
A N D
M A N A G E M E N T
Cultural dierences
(see
and
differences,
most
also
famous
Unit
rened
cultural
2.1),
his
cultural
●
power
●
individualism
●
uncertainty
●
masculinity
●
long-term
and
or
will
be
manage.
would
his
to
leadership
concept
business
dimensions
relevant
value
is
the
and
theory.
business
of
(such
inuenced
be
low
probably
by
the
inuenced
from
function
leaders.
as
leadership
Employees
with
individualism
others
style
also
arguably
autocratic
cultures
over
this
and
of
academic
According
have
management.
work
ve
Geert
career
to
Hofstede
developed
Hofstede,
dimensions:
orientation.
The
should
(and
inuence
of
avoidance
whereas
cohesion.
can
distance
cultures
example,
adopts
who
inuences
Different
too,
treatment
tnemeganam
The
On
power
perform
or
culture
by
at
other
the
from
culture)
with
least
under
of
great
initially)
the
in
resent
they
for
group
individual
originate
people
they
distance
organizations
from
an
democratic
cultures),
value
an
power
employees
might
that
which
cultures
hand,
distance
better
Japanese
management
cultures
better,
the
(Anglo-American
the
lead
prefer
with
countries
autocratic
or
leader
and
leadership.
rvii hkli
✓
The
key
functions
command,
✓
A
manager’s
contrast,
✓
is
management
to
for
and
plan
role
hold
their
leaders
laissez-are
see
A
and
concern
Employees
✓
role
leaders
Paternalistic
A
of
coordinate
leader’s
decisions
have
✓
a
Autocratic
all
✓
to
is
as
have
a
style
own
plan,
the
and
much
to
organize,
to
of
of
a
group.
be
as
they
can.
allows
instil
trust
and
employees
and
In
They
make
obeyed.
decision-making
and
goals
work
inspire.
power
should
lot
employees
their
to
oversee
motivate
onto
also
are
control.
instructions
their
set
and
to
leadership
can
to
manage
power.
They
loyalty.
much
freedom.
problems
as
they
t.
democratic
inform
them
leader
of
will
issues
involve
which
will
employees
affect
in
decision
making
and
them.
133
ecruoser namuH 2
Cultural
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Pi qi
Rox
and
Rox
was
Inclusive
a
music
considerable
style.
local
He
CD
tnemeganam
ecruoser namuH 2
In
personally
and
awards
“Action
June
band
2010,
their
Michel
music
to
young
support
was
very
realized
of
nance
grow.
market
In
June
2011,
To
students
to
many
Michel
help
low
afford
only
nance
given
from
a
The
the
Music”
nance
band
plan.
Rox
Their
last
fame.
IM’s
At
of
a
aim
rst,
new
was
Michel
Unfortunately,
fully.
would
limited
to
received
start-up
( IM).
families.
IM
enjoyed
leadership
generously
band
responsibility.
business
have
The
autocratic
considerable
income
a
to
contributions
would
opened
External
be
budget
needed
for
he
sources
for
IM
marketing
to
and
it
mission
offered
the
school’s
hoping
attendance
months,
were
no
Michel
not
allowed
popular
adopted
creativity
than
expected
music
could
a
Louis
instruments
Louis
“Action
and
asked
allow
lower
attending
and
lessons
director.
would
was
many
longer
deteriorating,
it
statement
free
instruments.
be
style,
three
were
the
had
former
a
among
and
gone
quickly
missing
lessons.
not
attract
external
nance.
action
examined
Michel
argued
that
and
IM’s
Without
media,
poor
to
student
Within
with
mission,
musical
students
of
problem.
its
leadership
took
also
and
to
from
had
social
them
“Inclusive
prepared
not
Rox
corporate
asked
Michel’s
organizations.
brought
called
and
Marsaud,
nances
sources
IM
Initial
worsened.
He
IM
borrow
Louis
students.
IM’s
was
could
support
laissez-faire
and
of
had
musicians
than
then
decisions.
Mbappe.
to
research.
words”.
singer,
Rox
other
Until
acts
school
enthusiastic
that
all
Michel
thanks
non-prot
Words”
non-prot
by
success
made
other
for
Not
(IM)
managed
commercial
schools
many
Music
consulting
received
the
two
a)
Dene
b)
Identify
c)
Explain
in
the
the
term
two
how
problems
by
Rox
discovered
he
to
Louis.
dismissing
IM’s
aimed
vague
to
promote
signicant
dismissed
for
were
Michel
a
In
Louis.
the
music
Journalists
mission
ensure
IM.
liquidity
that
statement
IM
became
term.
corporate
possible
the
concert
criticism
However,
long
a
and
anyone,
much
main
marketing.
sustainable
organized
accounts
social
causes
following
responsibility .
of
a
may
liquidity
have
problem.
contributed
to
IM’s
[2
marks]
[2
marks]
nancial
problems:
d)
(i)
its
mission
(ii)
its
limited
Analyse
for
e)
the
the
statement.
marketing
appropriateness
running
Discuss
two
nance
that
budget.
of
an
possible
IM
could
of
Michel’s
organization
medium-
use
to
to
help
such
autocratic
as
its
marks]
[3
marks]
leadership
IM.
long-term
solve
[3
external
nancial
style,
[6
sources
of
problems.
[9
IB,
134
Nov.
2012
marks]
marks]
2.4 Moti vation
By the end of this chapter, you should be able to:
Taylor
●
Maslow
●
Her zberg (motivation –hygiene theory)
●
Adams (equity theory)
●
Pink
tnemeganam
●
Explain the following types of nancial rewards:
➔
●
salary
●
wages (time and piece rates)
●
commission
●
prot-related pay
●
performance-related pay (PRP)
●
employee share ownership schemes
●
fringe payments (perks)
Dene the following types of non-nancial rewards:
➔
●
job enrichment
●
job rotation
●
job enlargement
●
empowerment
●
purpose/the oppor tunity to make a dierence
●
teamwork
Discuss how nancial and non-nancial rewards may aect job
➔
satisfaction, motivation and productivity in dierent cultures
Iii d xii ivi
In
this
work.
unit
If
managers
will
be
Intrinsic
to
●
be
will
be
can
achieve
about
studying
the
motivate
their
in
goals.
this
factors
that
employees,
unit
All
will
the
be
it
inuence
is
more
writers
and
referring
to
a
person
likely
that
researchers
intrinsic
to
those
you
and
motivators.
motivation
without
can
they
occurs
threats
intrinsically
They
if
will
reading
extrinsic
itself
we
managers
see
put
in
or
when
rewards
motivated
that
their
more
if
someone
from
they
success
work
they
are
is
a
will
gets
outside.
in
the
result
following
of
achieve
satisfaction
Employees
work
something
more
from
are
activity
likely
situations:
they
positive
an
more
have
done;
outcomes.
135
ecruoser namuH 2
Describe the following motivation theories:
➔
2
H U M A N
They
●
R E S O U R C E
have
some
M A N A G E M E N T
control
over
their
results
–
they
are
given
a
degree
Key terms
of
freedom.
They
are
interested
Rewards
are
extrinsic
●
the
individual.
motivators
may
In
the
provide
compensate
in
the
work
motivators
–
workplace,
satisfaction
workers
for
they
that
is
an
the
“pain”
that
obvious
job
or
Intrinsic motivation
doing.
motivators
pay
the
are
itself
come
from
example.
may
not
the satisfaction of carrying out
Extrinsic
provide
dissatisfaction
motivation which comes from
outside
that
a par ticular activity
and
they
Ex trinsic motivation
experience
at
work.
tnemeganam
ecruoser namuH 2
motivation derived from
external factors, such a
Frederick Winslow Taylor
money
Taylor
was
a
mechanical
contribution
Revolution
to
achieve
1912
and
since
his
is
of
maximize
output
this
have
of
that
be
ways
Taylor’s
were
to
it
is
a
provoked
and
a
of
will
the
it
took
get
cooked
will
position
to
consistent
low
Industrial
to
management
between
scientic
apply
1894
and
management,
scientic
for
at
a
given
a
and
of
to
with
a
his
its
large
is
in
often
that
worth
educated
factories.
managers
component
One
may
making.
resented
a
will
in
his
that
on
system,
The
by
side.
The
studies
watch
restaurant,
arise
far
This
measuring
famous
you
if
at
each
a
The
amount
move
efciently
so
If
study.
and
cooked
each
precise
not
can
is
movement.
and
most
fast-food
burger
time
for
of
parts
example.
busy
The
of
quickly
the
It
poorly
work
decision
was
benets
and
wasted
to
enforced
ensure
time.
many
that
in
and
to
time-and-motion
and
huge
role
from
when
starting
different
temperature
little
possible
style
task.
amount
cooked
removed
for
a
ways
strikes.
precisely.
time
and
methods
into
each
the
specic
food,
shortest
adopted
and
take
in
precise
minimize
fast
we’ll
idea
a
the
methods
the
understandable
down
managed
have
largely
cost
the
circumstances
work
were
hands-on
famous
prepared
is
in
were
perform
of
working
ideas
job
but
some
system
worker
been
is
a
to
shovels,
temperature,
also
of
to
controlled
numerous
most
breaking
hamburger
you
founder
phenomenal
methods
research
attempted
agriculture
more
Taylor’s
perhaps
long
of
perhaps
take
workers
involved
the
under
ideas
leaving
of
how
as
the
and
scientic
published
to
maximized
introduction
is
observed
agriculture
standardization
best
situation
involved
to
apply
management
that
the
decided
Taylor
He
referred
on
to
who
output.
Americans
In
made
measurement
would
recalling
had
wanted
results.
often
believed
adoption
he
similar
ideas
methods
Taylor
science
and
engineer
of
from
result
how
then
“bit”
given
fries
are
time.
his
of
all
at
low
cost.
employees
can
be
Each
or
her
this
Skill
is
has
employed
at
training.
Abraham Maslow
Maslow
explain
is
arranged
136
most
famous
motivation.
these
in
He
for
proposing
argued
terms
of
that
their
a
hierarchy
people
have
importance.
a
of
human
number
needs
of
to
needs
and
2 . 4
M O T I V A T I O N
morality,
creativity,
spontaneity,
problem solving,
lack of prejudice,
acceptance of facts
Self-actualization
tnemeganam
Esteem
respect by others
friendship, family, sexual intimacy
Love/belonging
security of: body, employment resources,
Safety needs
morality, the family, health,
proper ty
food, warmth, shelter
Basic needs
1
Figure 2.4.1. Maslow’s hierarchy of needs
The
basic
needs
individual
will
considered
longer
The
basic
cause
strive
to
people
areas
One
of
nd
the
factories,
needs
Once
are
they
new
key
the
diagram
they
these
their
growth
do
ways
issues
more
of
workers
warmth,
higher-level
labour
of
if
are
not
needs
are
met.
are
most
The
met,
important
rst
they
four
go
and
levels
away
or
an
are
no
not
to
go
needs.
away.
satisfy
potential;
these
being
Once
In
these
fact,
needs.
the
best
the
needs
are
individual
These
they
needs
can
will
involve
be
in
as
many
possible.
providing
food,
bottom
anxiety
needs.
fullled,
fullling
as
the
anxiety.
remaining
initially
at
suffer
for
the
will
and
needs
managers
same
will
have
shelter,
may
is
not
initially
but
the
explain
that,
once
motivate
been
his
a
need
of
is
worker.
motivated
failure
why
a
his
by
in
the
factories
methods
satised,
So
often
Taylor’s
need
to
for
satisfy
resulted
in
unrest.
Frederick Herzberg
Herzberg
developed
a
two-factor
theory
of
motivation
based
on
2
hygiene
factors
to.
At
not
are
needs
that
or
you
if
don’t
are
drive
Motivators
intrinsic
the
are
however,
to
the
reward
probably
heating
things
you
needs.
dissatisfaction
will
the
satisfactory,
factors
motivational
provide
school
clean,
and
that
is
it
is
are
be
not
at
Hygiene
work
if
they
demotivated
working
unlikely
to
necessary
needs
if
are
the
properly.
lead
for
to
you
are
not
those
attended
classrooms
If
these
motivation.
to
get
are
things
Hygiene
started,
but
they
succeed.
things
from
that
them.
get
For
you
working
example,
if
because
you
play
in
you
a
get
some
football
team
1
“Hierarchy of needs”, developed 1943–54 and published in Maslow, Abraham, 1954, Motivation and
Personality, Harper & Row, New York
2
Herzberg, Frederick I, 1959, The Motivation to Work, Wiley and Sons, New York
137
ecruoser namuH 2
self-esteem, condence,
achievement, respect of others,
2
H U M A N
you
will
and
the
R E S O U R C E
probably
be
recognition
Herzberg’s
tnemeganam
ecruoser namuH 2
company
●
relationship
●
work
●
salary
●
company
●
status
●
security
●
relationship
●
personal
policy
with
by
the
successes
playing
as
part
you
of
have
the
notched
up
team.
are:
administration
supervisor
identied
different
achievement
●
recognition
●
the
●
responsibility
●
advancement.
work
argued
subordinates
life.
●
of
for
car
research
completely
order
needs
and
with
get
conditions
Herzberg’s
He
motivated
you
“hygiene”
●
M A N A G E M E N T
that
true
motivators
were
other
factors:
itself
that
their
people
have
a
number
of
needs
and
arranged
these
in
importance.
John Adams
Another
theorist,
John
Adams
developed
a
theory
called
the
equity
3
theory
His
based
theory
balance,
outputs
Inputs
to
a
upon
is
or
that
are
exists
of
will
“inputs”,
be
between
motivated
their
inputs
or
affective
and
organization.
cognitive
Inputs
●
knowledge
●
adaptability
●
loyalty
●
attitude
●
personal
●
dedication
●
skill
●
determination
●
support
●
effort
●
time
●
exibility
●
tolerance
●
hard
●
trust
work
are
can
into
qualities
ability
Outputs
when
and
they
the
“equity”.
perceive
business
that
and
their
what
be
an
employee
negative
and
in
receives
thus
in
that
an
employee
brings
sacrice
from
co-workers
and
colleagues
superiors.
from
some
working
sense
at
subtract
the
organization.
from
the
positive
3
Adams, John S, 1965, “Inequity in social change”,
pp. 335–43
138
a
include:
●
Outputs
“outputs”,
it.
those
business
concepts
employees
equity,
from
the
Advanced Experimental Social Psychology, 62:
2 . 4
(though
quantied).
●
fringe
●
job
●
●
that
positive
inputs
and
and
outputs
●
sense
●
stimuli
praise
●
reward
●
thanks.
recognition
●
salary
employees
will
an
be
organization
based
The
believe
motivated.
want
and
upon
sense
of
relationship
inputs
to
perceives
a
they
is
suffer
B
a
achievement
than
giving
they
between
Motivation,
will
what
their
more
be
demotivated.
they
according
inputs,
(inputs)
give
to
to
this
the
theory,
fairness.
restricted
has
loss
of
greater
are
(outputs),
equity
a
of
solely
by
Employees
compare
employee
will
of
are
employees
receive.
of
not
and
outputs
receive
organization.
outputs
A
they
perception
the
their
however,
degree
what
fairness
to
that
employee
than
some
that
If,
could
include:
responsibility
organization
of
believe
are
reputation
security
Employees
is
not
●
they
benets
did
outputs
●
When
to
Adams
Typically,
tnemeganam
be
it
to
other
more
the
also
employee’s
compare
employees.
favorable
their
If
“ratio”
employee
input-to-output
A
ratio,
motivation.
Daniel Pink
Pink
argued
1900s
and
that
older
largely
motivational
stemming
from
models
the
developed
premises
of
in
the
Taylor’s
early
scientic
4
management
These
series
way
older
of
to
largely
century,
Today,
and
old
to
Pink,
when
require
reward
negative
why:
the
capacity
to
stemming
business.
they
focus
and
rather
innovate
the
Workers
face.
These
of
in
tasks
both
be
ideas
have
accomplish
tasks
and
satisfaction
from
their
of
do
the
are
also
their
Rewards
era
skills.
jobs,
of
In
and
of
problem),
to
and
that
can
humans
increase
etc.)
or
older
are
workers
may
business.
actually
focus
diminishes
of
ineffective
the
the
actually
(employees
systems
lose
controlled.
context,
it
the
which
employees.
20th
challenging,
punishment
accomplish
for
early
highly
this
for
punishments
the
and
employees
actually
bad
a
best
carefully
and
of
ineffective;
threats
Thus,
capacity
and
the
benets,
complex
merely
the
Taylor
less
systems
more
range
creative.
mostly
assume
manager
industrial
employees
or
solving
A
(pay,
unchallenging,
are
the
intellectual
or
rewards
changed.
the
not
was
perform.
problem-solving
is
work
perspective,
theories
rewards
to
has
rewards
than
of
punishments.
failure
system
for
that
this
them
types
routine,
and
control
From
give
more
today
were
results,
from
for
employees’
promises
reward
and
employees
creativity
is
to
These
offering
work
tasks
and
Here
the
by
assumed
tasks.
was
rewards
motivated
have
on
to
either
however,
narrow
work
punishments
According
have
to
performance.
respond
increasing
theories
uninteresting
people
their
productivity
may
awed.
motivational
simple,
get
monitor
are
for
the
complex
With
their
motivation
less
motivation
tasks
capacity
and
get
to
less
work.
4
Pink , Daniel H, 2009, Drive: The Surprising Truth About What Motivates Us, Riverhead Books (Penguin
USA), New York
139
ecruoser namuH 2
outcomes
M O T I V A T I O N
2
H U M A N
Pink
argues
which
of
that
is
Harry
biological:
biological
needs.
The
satisfaction
to
outside.
Pink
motivation
that
self-determination
tnemeganam
ecruoser namuH 2
be
autonomous,
other
people
these
ends,
Businesses
●
and
they
can
Autonomy
own
lives.
freedom
in
(technique),
●
Mastery
create
tasks
Easy
–
cause
who
bore
employees
to
that
work
work
that
them
anxiety.
“stretch”
SDT,
and
that
with
will
are
tasks
Tasks
for
neither
beyond
fostering
themselves
and
approach
businesses:
beings
want
“connected”
to
rewarding
employees
do
and
to
to
to
pursue
lives.
employees’
mastery
develop
are
their
jobs
they
do
(task).
innovate,
when
nor
shape
employees
their
learn,
easy
to
give
what
mastery
too
rewards
revised
liberated
should
employees
achieve
when
or
and
and
and
following:
they
(team),
be
more
permits
how
to
are
the
businesses
allow
and
have
a
jobs
drive
sex,
occurs
human
and
people
allow
(time),
Employees
to
to
thirst,
threats
adopt
motivation,
rst
rewards
which
post-industrial
When
more
to
without
should
The
hunger,
response
itself
According
large.
employees;
excessive
with
possible,
they
things.
matter
tasks
at
opportunities
new
that
they
satisfy
the
intrinsic
drive”.
motivation,
activity
environment
when
to
is
“third
self-determination,
settings
as
employees’
the
businesses
(SDT).
accomplish
an
drive
closely
world
much
into
called
intrinsic
an
that
more
create
–
As
is
from
achieve
the
should
drive
theory
to
tap
requirement
second
proposes
ts
to
Harlow
their
someone
from
third
have
F
.
The
punishments.
gets
M A N A G E M E N T
businesses
psychologist
humans
other
R E S O U R C E
they
too
are
and
given
difcult.
TOK discussion
capabilities
those
their
skill
that
set
allow
further.
Business and psychological
studies of motivation
assume that a “science”
●
Purpose
–
a
sense
that
their
work
betters
their
own
lives
and
the
to understanding human
world.
Employees
must
know
and
understand
the
organization’s
motivation is possible. To what
purposes
(other
than
prot)
and
how
each
person
contributes
to
degree, at both an individual
these
purposes.
To
Pink,
businesses
should
emphasize
“purpose”
goals
and group level, is the science
as
much
as
prot
goals
as
reaching
prot
goals
has
no
positive
impact
of motivation misleading?
on
a
person’s
well-being
(it
may
actually
have
a
negative
impact).
yduts esaC
Happiness at work
A happy working environment is a win-win situation.
●
Research shows that happy people are healthier, more
make an eor t to understand what makes your
employees happy
productive, have more ideas, are more likely to go
●
focus on people’s strengths
●
give feedback which encourages growth and
beyond the responsibilities of their job, and are less
likely to leave or be o sick . Happiness is contagious
improvement
so, if your team is happy – you and others around
●
acknowledge and celebrate successes in
them are more likely to be happy too.
meetings – don’t just focus on problems
As a manager or leader you can inuence the happiness
●
give your employees the oppor tunity to shape
of those in your team. This doesn’t mean that work can’t
their own jobs
be serious, or that you need to be telling jokes constantly.
adapted from www.actionforhappiness.org
There is a lot more to happiness at work than that.
Recent research is suggesting more and more ways
Exam-style questions
that we can increase happiness at work .
Dene the terms ‘motivation’ and ‘hierarchy’
[4 marks]
Changing an organization’s culture or incentive system can
be complicated and take a long time, and may not always
Outline the benets of using non-nancial
be possible if you are not near the top of the hierarchy, but
rewards to motivate employees.
here are some ideas for things that will make a dierence:
140
[4 marks]
2 . 4
M O T I V A T I O N
mivi i pi
Many
to
organizations
reward
and
devise
motivate
payment
systems
nancial
rewards
exists.
that
complex
their
Table
need
payment
employees.
to
2.4.1
be
systems
in
Unfortunately,
identies
some
of
an
no
the
effort
perfect
major
issues
of
considered.
Table 2.4.1. Financial rewards – main issues
How it is paid
Motivation factors
Disad vantages
tnemeganam
nancial
reward
Salary
Employees are paid
The main motivator is
The employer is typically relying on the
a sum of money per
likely to be the security of
professionalism of the sta to provide the
month.
receiving a regular income.
quality and quantity expected.
Wages (time
Employees are paid
The main motivator is likely
It is possible that employees will work slowly
rates)
an hourly rate, or for a
to be the security of receiving
since their pay is not based on output. If
number of hours per
a regular income and the
overtime rates apply then employees could
week . It is possible
opportunity to receive
benet nancially from ensuring that the
that over time rates of
overtime pay.
work is extended to cover time over the usual
pay are used too.
hours of the working day.
Wages (piece
Employees are paid
The main motivator is likely
This might involve tedious and repetitive
rates)
for each unit (or batch)
to be the fact that increased
work and employees may not have control
produced.
output will bring a measurable
of their results if they rely on others, for
benet.
example to supply materials.
Employees may work quickly to get as
much money as possible. It may be that
a system of checks will have to be put in
place to ensure that quality standards have
been met. There may be an emphasis on
quantity rather than quality.
Commission
Employees are paid by
The main motivator is likely
Employees may not have control over
results, for example, a
to be the fact that employees
results (and this income). For example,
at fee or a percentage
will be rewarded by results.
during a recession sales commission will
for each item sold.
fall in many industries.
Employees may be tempted to sell
products that are not in the best interests
of the customer or business and this could
create problems for the organization. For
example, a bank employee who sells a
mor tgage to a customer will receive the
commission, but the bank may suer
nancially if the customer subsequently
defaults on the loan.
Prot-related
The amount an
Sharing the nancial
Productivity may be a consequence of the
pay
employee receives is
rewards of a business
protability of the business rather than the
linked to the amount
may encourage a sense of
cause.
of prot the business
belonging and a desire to
makes.
contribute to its success.
If prots fall then employees could
experience a demoralizing loss through no
fault of their own.
141
ecruoser namuH 2
Type of
2
H U M A N
R E S O U R C E
Type of
M A N A G E M E N T
How it is paid
Motivation factors
Disad vantages
Performance-
PRP is usually a bonus
PRP is ordinarily used with
As long as the tasks are repetitive tasks
related pay
paid in addition to the
those employees whose
that involve physical skills, PRP can
(PRP)
employee’s ordinary
productivity or output cannot
enhance performance. However, when
compensation.
be measured precisely.
cognitive tasks are involved, PRP may
However, the pay is based
actually reduce productivity. In addition,
upon pre-established
PRP can cause divisions in a business if the
performance targets.
evaluation of employees’ performance is
Ordinarily, in a PRP system,
based upon subjective factors.
nancial
reward
tnemeganam
ecruoser namuH 2
employees receive a salary
and are expected to reach
certain targets. Employees
exceeding the targets are then
paid an additional amount. The
assumption is that employees
will be motivated by the
opportunity to make extra
money by performing better
than the targets.
Employee
These come in two
Employee share schemes,
When oered as a bonus, the basis for
share-ownership
forms. The rst is
when oered as a bonus, can
awarding the bonus must be clear and,
schemes
as some type of
motivate in the same ways
ideally, measurable to avoid accusations
bonus; however, the
that other types of bonuses
of “favouritism” in granting them. If
payment is shares
do. Even when an employee
employees have all their savings in a
in the business
share-ownership scheme
company match plan, both their salaries
rather than cash.
is simply a savings plan, a
and their savings are tied to the viability of
The second is some
benet is that employees
the business.
type of employee
become partial owners of the
savings plan whereby
business, which is thought
employees are
to provide an incentive for
allowed to purchase
employees to work harder (as
shares through a
they now have a “stake” in the
payroll deduction
business.)
(typically a xed
amount per pay
period) without having
to pay brokerage fees.
Some employers will
also oer a “match”
programme (for
example, for every $1
the employee invests
in shares the company
will give (or “match”)
the employee’s
contribution with
$0.50.)
142
2 . 4
Type of
M O T I V A T I O N
How it is paid
Motivation factors
Disad vantages
Fringe
Fringe payments, or
Employees like fringe
If fringe benets are not given equally to all
payments
perks, are the many
benets, as often they have
employees or on a clear, fair basis, division
(perks)
types of extras that
substantial value. While
among the sta can result. In addition,
businesses oer their
employees may have to claim
employees can come to expect certain fringe
employees. They
some fringe benets for tax
benets and may become angry if some
can include medical
purposes, many do not have to
perks are taken away.
insurance, a car, and
be claimed. This provides the
private pension plans,
employee with an additional
among other forms of
benet: for the business to
payment. They often
pay for fringe benets on a
include perks related
pre-tax basis is much cheaper
to the nature of the
than for employees to pay
business (a hotel chain
for these items with after-tax
may oer discounted
salary. Thus, the business
rates at its hotels to
is able to give more value to
employees).
employees than if it paid them
nancial
tnemeganam
the equivalent amount in
additional salary.
Table
2.4.2
gives
examples
of
types
of
non-nancial
reward.
Table 2.4.2. Non-nancial rewards – main issues
Type of non-
Main features
Motivation factors
Disad vantages
nancial reward
Job enrichment
Job enrichment makes an employee’s job
Employees typically prefer to
Job enrichment
“richer ”, or more meaningful and rewarding,
have responsibilities that are
cannot be
by allowing employees to use the full range
challenging. Employees who
applied in all
of their abilities. Typically, job enrichment
are more satised are typically
work situations,
involves supervising employees less and
more motivated to work hard.
either because
making the responsibilities of the position
of the type of
more challenging. Often enrichment will
work involved or
mean that an employee does the entirety
because of the
of a production process to have a greater
calibre of the
sense of ownership and responsibility in
workers.
what they produce.
Job rotation
Job rotation involves having an individual
Job rotation benets companies
Job rotation means
employee rotated through dierent
as it gives them employees who
employees go
divisions in a business over a period of
have a better sense of the “big
through periodic
time. It is often used with young employees
picture” of the business. For
productivity dips
as a form of training but can be used at
employees, rotation provides
as they begin in a
many dierent stages of a career.
additional training and the
new division and
acquisition of new skills and
must go through
knowledge, which can lead
a training phase
to new opportunities with
before they
the business (or with other
understand fully
organizations).
the new position.
143
ecruoser namuH 2
reward
2
H U M A N
R E S O U R C E
Type of non-
M A N A G E M E N T
Main features
Motivation factors
Disad vantages
nancial reward
Job
Job enlargement may include job rotation
In general, employees prefer
If job enlargement
enlargement
or job enrichment. It may involve giving
some variation in the tasks
is nothing more
employees more tasks to do, sometimes
they must do.
than giving
because of a shor tage of sta.
employees
additional duties,
it may increase
tnemeganam
ecruoser namuH 2
employee
dissatisfaction.
Empowerment
Empowerment involves giving individuals
Empowered employees
Businesses run
access to resources and information to do
generally believe that they can
some risk that
their jobs and the power to make decisions.
be instrumental in changing
the empowered
In an employment context, empowerment
things and learning new skills
employees will
means giving employees considerable
so that they can be par t of the
not be able to
control over how their jobs should be done.
change process. Employees
manage the
nd this rewarding.
responsibility they
have been given.
Employees may
make decisions
that are not fully
productive or
cost the business
unnecessarily.
Purpose or
Purpose or oppor tunity to make a
Many individuals want to
If for-prot
oppor tunity
dierence in the world refers to the ability
do more than merely make
organizations
to make a
of businesses or other organizations to
money. They want to know
overemphasize
dierence
connect employees to the aims of the
that they are making a
social or
organization other than prot. Non-prot
dierence in the world and
environmental
organizations have this advantage, as
are connected to purposes
aims, employees
they typically exist to meet some social
larger than themselves or
may lose focus on
or environmental need. Many for-prot
their organization. People
the prot-making
businesses today, however, have adopted
tend to nd these purposes
objectives.
the other-than-prot aims to their
intrinsically motivating.
objectives.
Teamwork
Teamwork involves working cooperatively
The success of teams can
When successful,
with a group of people to achieve a goal.
be crucial to organizations’
teamwork can
performance, so an
have great yields
organization will strive to
for organizations.
have high-performance
However,
teams. Individuals tend to
team failures
be energized by working in
can amplify
teams, which creates a sense
dissatisfaction
of group cohesion and common
and, thus, weaken
purpose.
employees’
productivity.
All
of
the
degrees
in
144
above
of
nancial
effectiveness
developing
and
in
countries,
non-nancial
different
many
rewards
countries
people
are
and
have
differing
cultures.
unaccustomed
In
to
general,
making
2 . 4
traditional
remain
Wages
In
incomes.
forms
strong.
based
last
50
countries
of
In
largely
tend
social
be
to
more
increasingly
work,
some
people
mostly
social
such
as
in
and
to
village,
especially
high
have
have
in
tend
changed
(and
of
in
weakened.
a
be
many
etc.)
important.
signicantly
many
where
processes.
In
these
rewards.
difference
in
in
developed
Economies
sectors,
cognitive
non-nancial
making
Further,
association,
to
living.
quaternary
require
traditional
tasks.
motivating.
standards
and
and
of
labour
rewards
accustomed
cohesion
the
work
Finally,
contexts,
Personally
world
are
of
workers.
the
mostly
interested
are
tertiary
teamwork
are
(family,
be
interested
importance
Generalizations
can
version
uninteresting
nancial
circumstances
the
forms
considerable
rates
complex
people
satisfying
of
simple,
cohesion
guaranteed)
traditional
are
contemporary
of
contexts,
piece
shifted
to
a
Individuals
virtually
tasks
is
series
countries,
years.
have
a
these
upon
developed
the
Work
production:
tnemeganam
industrial
above
can
interested
in
non-nancial
be
misleading.
making
money,
In
all
economies,
while
others
are
objectives.
Revision checklist
✓
Frederick
practices
were
✓
the
more
✓
of
to
Maslow
motivated
Frederick
motivate
John
✓
since
Pink
needs
standardization
effecient
in
needs
an
the
can
shortest
be
employer
of
ways
of
working
working
time.
categorized
can
satisfy,
in
the
be.
distinguished
between
Motivational
Financial
what
can
they
needs
must
enlargement,
and
of
‘hygeine
are
the
needs’
ones
employees
between
and
which
truly
pay,
fringe
include
will
what
be
the
most
but
into
a
it.
their
has
time
changed
theories.
employee’s
salary,
empowerment,
that
balance
workplace
their
include
rewards
out
the
prot-related
Non-nancial
a
developed
nurture
schemes
suggests
see
get
that
observers
rewards
ownership
theory
they
suggests
earlier
commission,
✓
will
the
most
output
human
more
worker
equity
when
and
businesses
✓
that
The
needs’.
that
the
workers.
Adams’
Daniel
a
of
maximum
argued
Herzberg
motivated
business
believed
adoption
ensuring
importance.
‘motivational
✓
Taylor
enforced
key
Abraham
levels
Winslow
and
Pink
in-built
and
piece
performance
dramatically
argues
that
motivation.
rate
related
wages,
pay,
share
payments.
job
enrichment,
purpose,
and
job
rotation,
job
teamwork.
145
ecruoser namuH 2
signicant
M O T I V A T I O N
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Pi qi
Fish
The
Packaging
rm
Iceland,
plant
They
are
tnemeganam
ecruoser namuH 2
happens
the
are
●
an
●
a
lack
●
a
shortage
●
insufcient
autocratic
pack
go
stay
has
led
more
feels
a
it
(i)
has
hit
to
rate
b)
Using
the
2008
to
sh
into
there
and
a
are
shing
kg
per
nothing
still
number
in
Reykjavik,
Workers
in
the
boxes.
13
is
plant
market.
of
boats
paid
hour.
to
$4
issues
When
pack.
per
local
When
this
hour.
including:
shing
less,
so
workers
are
style
in
day-to-day
decision
making
clothing
during
the
workers
working
seldom
about
Furthermore,
competition
changes
of
the
the
is
exceed
possible
sh
Russian
and
day
the
target
imposition
packaging
factory
considering
13
kg
shing
industry
ships.
the
of
of
has
Management
introduction
of
system.
difference
between
time
rate
and
piece
systems.
[2
disadvantages
payment
external
and
system
factors
at
that
one
Fish
could
advantage
Packaging
of
motivation
management
improve
the
of
theory,
Fish
evaluate
of
[6
marks]
[4
marks]
[8
marks]
inuence
Packaging
motivation
marks]
introducing
Ltd.
Ltd.
appropriate
introduce
May
two
rate
Packaging
changes
IB,
the
two
local
that
some
payment
piece
Explain
Fish
c)
make
Explain
a
the
payment
Describe
rate
(ii)
by
home
concerned
governments.
badly
piece
a)
by
also
packaging
domestic
pack
about
to
breaks
complains
been
at
protective
rest
sh
shing,
leadership
are
and
to
a
the
often
involvement
of
to
approximately
out
per
quotas
146
hour
Management
hour
owns
sh
concerned
home
of
to
not
weather
staying
per
workers
workers
poor
●
$10
do
Ltd
frozen
expected
boats
Reykjavik
Packaging
sells
paid
are
shing
The
Fish
and
in
the
Ltd
possible
could
work
force.
2.5 Organizational and corporate cultures (HL only)
Dene the meaning of organizational culture
➔
Outline elements of organizational culture
➔
Outline types of organizational culture
➔
Discuss the reasons for, and consequences of, cultural clashes
tnemeganam
➔
within organizations when they grow, merge and when leadership
styles change
Explain how individuals inuence organizational culture and how
➔
organizational culture inuences individuals
The
term
organizational
attitudes,
are
generally
that
an
and
the
beliefs,
is
Managers
so,
it
low
and
is
staff
set.
the
an
to
as
an
to
will
behave
in
factors
the
a
of
the
or
the
treat
does
will
culture.
each
of
not
not
of
with
a
to
the
the
These
The
other
ways
and
those
organization.
share
stay
its
there
values
long.
way
spell
out
their
manner
that
inuence
the
organization
department
is
old
This
get
beliefs
reects
the
norms
these
senior
done
and
beliefs
be
in
the
managers,
operating
culture).
is
a
values
exist
will
Doing
institutions
corporate
things
cultural
team,
organization.
and
strong
the
will
an
established
and
the
refers
organization.
culture
culture
at
different
that
culture,
an
clash.
the
values
of
corporate
and
person
(institutions
the
which
of
that
especially
members
in
reect
culture
organization,
The
country
a
managers
the
nationality
often
of
dress,
organization
inuence
turnover
corporate
values
elements
likely
difcult,
staff
In
department,
the
try
setting
departments.
of
the
or
and
organization
highly
New
expect
have
joins
is
may
Nonetheless,
managers.
an
described
however,
with
in
organization
individual
situation
culture,
beliefs,
considered
individuals
outside
If
experiences,
and
role
to
managers
different
head
the
the
of
staff
of
culture
culture
of
members.
typ f izil l
Charles Handy
Handy
introduced
culture
culture,
when
role
he
a
highly
described
culture,
task
memorable
four
distinct
culture
and
way
of
viewing
organizational
person
organizational
cultures
–
power
culture.
147
ecruoser namuH 2
By the end of this chapter, you should be able to:
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Power culture
A
power
power.
culture
Control
organization.
usually
since
but
the
The
comes
Power
judged
ends
exists
are
by
collapses
tnemeganam
ecruoser namuH 2
merchant
of
bank
their
the
represented
the
reward
spider;
or
unlikely
and
a
punish.
to
not
US
Handy
work
these
a
be
few
rather
than
in
the
Bank
are
merchant
power
with
a
than
no
there
for
and
how
giant
as
spider
a
culture,
those
results
of
and
have
web.
the
are
achieved,
can
result,
organization.
family-owned
power
cultures.
cultures.
The
strength.
individuals
are
the
power
spider’s
across
People
making
the
dominant
no
out
decision
Enron
has
essential
spreads
interests
to
often
the
procedures.
Swift
attributed
banks
retain
and
long-term
culture
power
rules
means.
energy-trading
web
In
individuals
individuals
have
results
Barings
businesses
few
important
may
Family
from
from
a
cultures
more
decisions
when
power
The
who
do
comes
spider
not
can
t
in
are
operate
in
a
long.
Role culture
In
a
role
highly
are
culture,
controlled
usually
Power
tall
stems
procedures)
and
military
Handy
play
In
a
uses
person’s
role
the
symbol
oldest
cultures
–
or
buildings
buildings
in
position.
roles
a
decision
avoid
a
temple
are
town
ofces
or
old
often
and
a
long
and
a
and
building
house
to
in
is
post
ofce
slow
services,
role
describe
stable
(corporate
often
have
a
cultures.
role
environments.
organizations
main
command.
book”
Civil
often
organizations
of
which
risks.
industries
exist
These
chain
“rule
making,
taking
and
the
roles
structure.
with
Position
nationalized
of
in
in
people
buildings
government
dened
organizational
cultures,
and
clearly
bureaucracies
dominant
Temples
have
precise
organizations,
culture.
oldest
and
hierarchical
from
detailed.
The
employees
with
are
role
often
the
town.
T
ask culture
The
task
culture
describes
specic
problems.
person,
since
different
like
to
with
in
deal
highly
net
can
features
is
used
its
(or
a
the
will
production
a
and
a
net
a
for
task
then
team
new
to
a
can
This
matrix
an
project.
In
Different
strong
team
for
The
team
because
However,
true.
task
is
culture.
often
up
schools,
emerges
the
to
a
at
they
spirit
divisive
team
task
can
be
culture
structure.
break
teams
lead
passion
address
person
culture
A
organization
will
teams
from
can
task
be
the
culture
team
team
a
emerge.
also
describe
enters
skills
of
can
team.
task
the
another
culture.
a
the
The
completed,
form
resemble
of
idea
shifts
environment.
reverse
of
short-term
culture
different
the
energy
lines
strands.
where
is
with
damage
the
when
task
changing
but
image
a
like
emotional
crossing
different
project
net)
may
the
situation
people
rapidly
of
a
within
people
seriously
consultancies,
Once
a
constructive,
Handy
a
Many
great
decisions
often
different
times.
work
a
Power
found
to
for
the
work
and
drama
produce
The
in
a
next
a
strength
on
new
projects.
team
departments
major
theatrical
one.
Person culture
A
person
superior
These
148
culture
to
the
exists
where
organization
organizations
are
individuals
and
where
just
believe
want
employees
to
do
themselves
their
simply
go
own
to
of
management
to
be
thing.
work
and
they
2 . 5
see
themselves
as
separate
O R G A N I Z A T I O N A L
from
it
–
as
free
A N D
spirits.
C O R P O R A T E
Some
C U LT U R E S
( H L
O N LY )
professional
Student workpoint
partnerships,
such
departments,
can
as
architecture
rms
and
some
university
2.7
specialist
brings
be
a
predominantly
particular
person
expertise
to
cultures.
the
There,
each
organization.
Be a thinker
person
culture
as
a
constellation
of
stars.
Each
star
Suggest
(or
person)
is
unique
and
different,
and
individuals
operate
on
one
business
own.
Person
cultures
are
difcult
to
manage.
Individuals
preferring
will
constraints
often
they
nd
working
impose
on
in
these
organizations
individuals
difcult
seem
of
because
organization
this
which
culture
type
their
would
suit:
the
●
power
culture
●
role
culture
●
task
culture
●
person
unbearable.
tnemeganam
represents
Edgar Schein
1
Schein
described
three
levels
of
organizational
culture.
culture
Organizational attributes
Are
You
sense
organizational
attributes
when
you
walk
into
an
there
advantages
disadvantages
When
entering
a
government
building
in
a
communist
and
organization.
country,
in
every
stern
case?
signs
of
a
or
warnings
dominant
are
leader.
conformist
fashion.
heard,
felt
and
everywhere.
People
may
Outsiders
reects
the
are
Often
speak
visible
in
viewed
is
a
hushed
with
picture
tones
or
and
suspicion.
statue
dress
What
is
in
a
seen,
culture.
Professed culture
Some
organization
images
give
that
clues
to
how
organizations
believe
or
a
These
as
culture
image.
organization
clear
of
contain
charities,
elements
of
with
These
slogans,
slogans,
operates.
statements
sites
customers,
classied
their
certain
the
give
value.
employees,
Schein
“profess”
project
what
Websites
the
other
professed
of
most
businesses
statements
and
statements,
statements,
about
or
large
profess
to
commitment
stakeholders.
or
images
These
are
to
what
culture.
Organizational assumptions
People
talk
who
about
channels.
This
will
These
aspect
People
are
not
have
“how
of
often
really
They
This
an
insight
helps
organization
for
work”,
organizational
an
to
to
talk
some
the
to
time.
may
best
nd
to
be
also
it
if
long
get
have
difcult
to
if
that
assumptions.
or
understand
there
the
the
“ofcial”
people
understand
who
person
explain
to
often
otherwise.
has
knows
unmentionable.
helps
who
been
done—even
someone
that
will
“ofcial”
assumptions
people
who
difculty
way
time
the
organizational
state
the
to
ephemeral.
The
those
best
Even
a
organizational
really
with
for
opposed
the
them.
are
explain
The
as
most
literature
may
assumptions
organization
the
about
closely
truth
is
things
have.
work
done”
referring
and
Schein
often
to
organization
get
articulate
how
structure
is
to
able
know
organization
“really
are
assumptions
assumptions
an
really
organization
afraid
be
organizational
with
people
the
organizational
longest.
been
things
The
why
initiate
new
to
organizational
been
how
with
existence
some
the
things
of
managers
new
change.
1
Schein, Edgar H., 1965, Organizational Psychology, Englewood Clis, Prentice-Hall, NJ, USA
149
ecruoser namuH 2
Handy
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Culture clashes
Reasons for culture clashes
When
individuals
organizations
these
clashes
used
to
tnemeganam
ecruoser namuH 2
formal
comfort
is
the
experience
exist
in
Different
●
a
an
of
can
Different
Different
country,
are
from
some
cultures
an
have
a
–
more
Reasons
–
some
for
organizations
organizations
typically
speak
–
when
to
are
to
also
a
are
highly
language
well
occur
if
that
often
differences
or
–
styles.
leadership,
style
both
merge,
For
example,
acquires
leaders
and
difcult.
tasks
and
and
in
organizations
leadership
to
people
others
organizations,
are
be
–
some
relationship-oriented.
even
practices
can
those
from
compared
greater
to
when
the
same
other
organizations
cultures.
in
some
schedules
uid
can
have
language
leadership
democratic
situation
time
the
two
in
authoritarian
all
and
more
some
not
differences
of
–
changes
countries
times
or
occur.
communication.
difference
These
senses
appointment
do
task-oriented
different
Different
●
who
styles
the
practices
have
two
can
informal.
Misunderstanding
with
nd
when
diversity
organizations
orientations
organizations.
are
–
accustomed
organizations
●
are
experience
will
or
clashes”
ethnocentric.
non-verbal
organization
company
with
are
formality
leadership
employees
●
of
others
difculties.
individuals
if
levels
Individuals
mode
“culture
following:
languages
norm.
organization
others
degrees
whereas
Different
●
the
diversity;
Different
●
an
together,
include
Different
●
enter
merge
sense
cultures,
are
of
taken
time
very
is
xed:
seriously.
exact
Other
time.
Consequences of culture clashes
Businesses
combine
management
of
economies
scale
resources
of
of
the
organization
combine,
different
two
or
rms
organizations.
has
similar
culture
goals.
clashes
that
the
organization
The
consequences
new
should
including
in
new
the
of
at
may
consequences
leadership
signs
a
of
themselves
can
such
–
a
for
culture
a
of
a
not
reasons
include
serious
the
be
for
managing
may
need
the
take
are
The
acquiring
overarching
combine
Leaders
the
is
when
to
or
several
the
a
change
anticipate
The
most
prepare
business.
prepared
of
merger,
style.
cultures
of
the
benets.
Similarly,
leadership
as
the
businesses
above.
signicant.
failure
accounts
when
companies
managers
new
such
takeover,
expected
harmonize
actual
nal
the
and
combining
noted
more
cultures.
consequence
when
or
can
plan
the
to
or
owners
benets,
from
sometimes
achieve
two
with
merger,
achieving
organization,
failure
a
share,
two
clash
the
In
acquisition
the
strategic
of
an
an
when
does
struggle
typically
In
clash
develop
occurs
employees
severe
culture
harmonization
leadership
that
a
market
However,
occur
of
reasons.
anticipate
increased
consequence
business
150
the
for
years
after
for
However,
to
the
reveal
rst
2 . 5
years
of
the
signicant
as
potential
managers
a
●
culture
Lack
of
focus
new
–
Sense
the
on
their
of
common
new
that
Sense
new
with
have
of
the
fact
of
jobs.
–
from
purpose
they
about
a
Evidence
long
time
recognizing
of
to
( H L
O N LY )
problems
appear,
early
so
indicators
of
may
the
not
new
understand
leader
and,
the
values
thus,
are
focus
their
and
not
aims
focused
aims.
own
and
or
take
C U LT U R E S
include:
employees
division
leader
may
sensitive
indicators
the
employees
organization.
failure
organization
energy
on
larger
keenly
Preoccupation
than
●
be
Early
organizational
and
●
of
the
on
●
must
clash.
new,
C O R P O R A T E
employees
and
isolation
organization,
their
out
–
the
and
fact
job
on
the
a
new
some
Or,
the
employees
rather
suffer.
between
than
in
attention
leader,
differences
rather
similarities.
styles,
of
performance
companies
many
of
employees
or
focus
merging
leadership
fallen
–
merger
Productivity
the
new
merger
the
tnemeganam
as
A N D
on
their
case
may
of
a
think
favour.
while
managers
employees
feel
focuses
isolated
on
and
the
strategy
ignorant
of
of
what
the
is
happening.
●
Unresponsive
not
If
these
concerned
early
experience
●
Lower
●
efciencies
difcult
seek
new
troublesome
greater
●
when
human
types
cultures
merger
can
Decreased
will
have
Bankruptcy
and
run
risk
of
–
the
nd
that
managers
organization
have
the
new
are
with
a
labour
in
with
the
then
it,
not
produce
organization
procedures.
new
organization
many
is
do
new
and
the
in
turnover
of
the
norms
place
purpose
can
following:
organization
working
dissatised
not
primary
conict
out
to
or
and
to
in
the
–
is
employees
especially
merger
workplace
likelihood
worst”
if
in
was
to
form
in
the
to
–
when
differences
increase.
The
stress
of
people,
workers
conict
devote
lower
the
conict
are
less
productive,
workplace
important
resources
if
increases,
to
these
labour
the
problems,
prots.
failure
protability
of
in
unfamiliarity
may
the
including
actually
protability
likely
enough
workers
occur,
increases,
which
the
of
“bring
business
is
–
Increased
a
feel
capital.
between
turnover
●
jobs.
Various
a
●
they
employees
unaddressed,
problems,
turnover
that
–
well-being.
but
because
labour
fearful
may
go
serious
productivity
Higher
and
their
indicators
more
expected
more
management
for
–
if
the
falls
bankruptcy
problems
too
or
much,
from
the
a
merger
organization
are
can
severe
actually
failure.
oizil l d idividl
Now
how
let’s
look
at
how
organizational
Culture
is
a
very
simultaneously
individuals
culture
tricky
issue
everything
inuence
inuences
to
and,
organizational
culture
and
individuals.
address
in
organizations,
paradoxically,
nothing.
as
it
is
Culture
is
151
ecruoser namuH 2
several
O R G A N I Z A T I O N A L
2
H U M A N
R E S O U R C E
everything
because
and
norms
of
and
thus
it
is
M A N A G E M E N T
the
sum
of
values,
attitudes,
beliefs,
practices,
TOK discussion
can
an
organization.
inuence
It
is
the
everything
sum
that
total
of
happens
in
the
a
organization
business.
Even
Culture cannot be heard, seen,
though
businesses
with
high-performing
cultures
typically
attract
high-
smelled, tasted, or touched,
performing
individuals,
such
businesses
usually
also
transform
people
only behaviour can.
into
high-performing
individuals.
New
employees
can
“feel”
the
energy
Is it correct to speak of
of
the
organization
and
intuitively
sense
the
hierarchy
of
values
in
the
“culture” at all?
business.
Employees
attitudes,
tnemeganam
ecruoser namuH 2
knowing
all
serious
priority
On
the
“feel”
an
of
with
other
the
individual
asserts
“We
change.
In
inuence
an
other
emails.
only
What
“She
for
the
takes
email,
in
make
think
what
all
odd
guilty
about
break
with
will
long
the
the
shaping
their
organization.
over
issue
of
values,
Today,
individuals,
culture
as
a
virtually
high
of
and
breaks
of
and
will
–
new
the
employee
to
but
for
lacking
organization.
grumbling
employee
employees
change
does.
employees,
emails
new
and
personal
the
fellow
going
personal
practices
employees,
to
that
employees
sending
of
can
imagine
occasional
Possibly
not
of
these
culture
fellow
are
other
many
the
hostile
practice.
they
the
what
individuals
practices
time
must
rather
example,
follow
only
be
For
they
norms
but
perspective,
much
to
and
“culture”,
norms
someone
organization”,
the
too
not
Culture
and
When
can
cannot.
touched.
practices,
not
this
sends
any
others
the
is
Possibly
care;
and
beliefs,
inuence
bad”,
what
our
they
they
practices,
employees.
of
that
sense
or
beliefs,
where
decides
to
remark
literal
signicantly.
company
inspire
of
From
breaks
scenario?
not
a
smelled,
changes
culture
look
culture
by
often
in
culture
do.
breaks
and
regardless
she
and
starting
this
us
groups
organization
unofcial
her
behaviours
is
the
tasted,
the
employee
person
to
in
culture
attitudes,
attitudes,
unauthorized
new
happens
will
however,
values,
authorized
that
violating
will
and
organizational
long,
If
heard,
change
an
treat
t
individuals
values,
value,
joins
norms
organization,
words,
think,
individual
include
an
seen,
that
to
purpose.
employees
mean
and
businesses
from
to
strive
organizational
though
of
be
need
actually
individuals
of
hand,
cannot
of
great
culture
abstraction
then
practices,
power
leaders
and
Culture
is
beliefs,
the
will
their
Possibly,
example,
the
feeling
courage
to
organization.
rvii hkli
✓
Organizational
culture
is
the
attitudes,
beliefs
and
values
of
an
organization.
✓
Power
✓
In
culture
role
within
✓
In
task
exists
culture,
a
each
when
few
employee
highly-controlled
culture,
a
teams
individuals
has
a
clearly
retain
most
dened
role
of
the
and
power.
operates
structure.
address
specic
problems
within
a
dened
time-
frame.
✓
Person
to
✓
the
culture
Reasons
different
and
152
exists
organization
for
culture
leadership
urgency.
where
and
just
clashes
styles,
individuals
do
their
include:
different
believe
own
that
they
are
superior
thing.
different
degrees
languages,
of
different
formality,
senses
of
time
2 . 5
O R G A N I Z A T I O N A L
A N D
C O R P O R A T E
C U LT U R E S
( H L
O N LY )
Pi qi
Recruiting
A
company
known
the
and
a
new
can
spend
successful
organization.
recruiting
CEO
a
large
Chief
However,
externally
is
not
amount
of
Executive
recently
only
money
Ofcer
published
costly,
but
it
to
recruit
(CEO)
research
is
also
a
from
well-
outside
suggests
risky,
that
disruptive
and
long-term
found
the
The
●
that
failure
The
CEOs
those
assert
is
the
often
Dell™,
American
and
A
limited
American
internally
externally)
CEOs
for
two
reward
have
(recruited
years
or
package
companies
performed
better
a
signicantly
internally).
higher
40%
of
less.
for
“outsider”
incentives,
was
CEOs,
65%
including
higher
feel
empowered
on
the
are
followed
very
advantage
to
impose
company,
culture.
by
good
needs
the
at
products/activities,
a
to
The
skill
change
before
arrival
departure
rapid
be
rapid
even
of
they
of
is
gained
very
or
an
and
managers.
eliminating
valuable
restored
to
“outsider”
senior
cost-cutting
that
and
really
in
when
a
environment.
Microsoft®,
companies
comparison
Intel®,
that
McDonalds®
appointed
CEOs
and
Nike®
internally
are
successful
between
1998
is
of
shown
average
performance
indicators
between
1998
and
below:
Companies led by
Companies led by an
an “insider ” CEO
“outsider ” CEO
Return on capital employed (ROCE)
20.3%
15.8%
Revenue growth
11.9%
4.4%
Earnings per share
13.9%
4.6%
7.9%
6.0%
Net prot margin
Some
critics
promoting
the
than
2007.
2007
and
than
internally.
organizational
CEOs
competitive
CEOs
prot-related
quickly
competitive
Apple,
stayed
authority
unprotable
a
public
externally.
(recruited
and
CEOs
their
“Outsider”
●
large
“insider”
appointed
understand
CEO
36
promoted
nancial
bonuses
“Outsider”
●
than
average
salary,
for
CEOs
rate
“outsider”
that
recruited
“Outsider”
●
of
following:
companies
those
●
studies
tnemeganam
Two
are
of
the
CEOs
already
of
American
efcient
performance
contribution
two
internally
and
indicators
individual
studies
usually
have
protable.
in
the
table
argue
a
These
do
that
strong
not
companies
corporate
critics
also
measure
culture
argue
the
that
exact
CEOs.
[Source: adapted from Alexandra Frean, “ The value of hiring chief executives on the
inside track”, The Times, 4 April 2011]
153
ecruoser namuH 2
demotivating.
2
H U M A N
a)
Describe
b)
(i)
R E S O U R C E
two
Explain
possible
the
M A N A G E M E N T
inuences
importance
of
on
organizational
earnings
per
share
to
culture.
Distinguish
that
c)
an
Examine
the
management
tnemeganam
ecruoser namuH 2
d)
Discuss
are
IB,
154
usefulness
imposed
whether
more
Nov.
between
organization
likely
2013
two
external
could
to
by
a
an
use
be
methods
recruit
organization
new
organizations
to
to
“outsider”
that
successful.
a
of
of
promote
CEO.
rapid
CEOs
[2
marks]
recruitment
new
CEO.
marks]
a
shareholder.
(ii)
[4
[4
marks]
[6
marks]
change
internally
[9
marks]
2.6 Employer and employee relations (HL only)
By the end of this chapter, you should be able to:
tnemeganam
representatives
Dene the following industrial/employee relations methods used by:
➔
employees: collective bargaining, slowdowns/go-slows, work-to-
●
rule, over time bans and strike action
employers: collective bargaining, threats of redundancies,
●
changes of contract, closure and lock-outs
➔
Outline sources of conict in the workplace
➔
Explain the following approaches to conict resolution:
●
conciliation and arbitration
●
employee par ticipation and industrial democracy
●
no-strike agreement
●
single-union agreement
Outline reasons for resistance to change in the workplace (such as
➔
self-interest, low tolerance, misinformation and interpretation of
circumstances)
Evaluate human resource strategies for reducing the impact of change
➔
and resistance to change (such as getting agreement/ownership,
planning and timing the change and communicating the change)
Describe how innovation, ethical considerations and cultural dierences
➔
may inuence employer-employee relations in an organization
This
of
unit
discusses
business
situations
is
that
can
generally
is
employer
governed
differ
from
applicable
in
and
or
employee
inuenced
country
many
to
relations.
by
country.
the
As
laws
of
with
a
any
aspect
country,
Nevertheless,
what
follows
countries.
clliv bii
The
situation
when
representatives
employment
have
and
the
time
Sometimes
industrial
when
the
negotiate
they
go
on
team
and
terms
individual
and
workers
and
Large
of
organizations
employees.
employee
have
conditions
For
do
both
representatives
not
workers
to
sense.
collective
may
with
the
bargaining.
employer
better
dispute
on
collective
having
makes
management
negotiate
called
to
managers,
negotiate
is
is
the
who
bargaining
arise.
strike.
A
A
system
common
strike
is
may
way
when
in
not
work
which
employees
and
workers
stop
an
take
working
action
to
155
ecruoser namuH 2
Discuss the role and responsibility of employee and employer
➔
2
H U M A N
force
an
R E S O U R C E
employer
other
means
try
keep
to
rule”,
and
a
which
standstill.
Finally,
tnemeganam
ecruoser namuH 2
At
to
work
following
overtime.
the
try
with
In
same
case,
also
in
an
lock
or
disputes.
may
ban
the
strictly
occurs
make
that
is,
“go
the
can
The
may
use
a
company
nd
it
public
rule
refuse
very
also
contract
of
may
book
bring
to
they
“work
–
it
to
work
difcult
their
relations
might
have
means
may
probably
withdraw
their
which
they
employees
employer
to
slow”,
would
workers
changes
employees
by
when
organization
case.
a
employees
representatives
Alternatively
organization
employer
its
However,
Employee
start
potential.
the
occurs;
forward
demands.
working
rule
action
time,
put
their
overtime
this
their
labour
Workers
involves
redundancy
might
meet
below
every
An
strike
to
to
resolving
negotiating.
deliberately
to
of
M A N A G E M E N T
to
operate.
labour.
(PR)
campaign
threaten
workers
employment.
It
out.
Sources of conict
The
primary
team
●
in
the
Change
Either
well
–
this
way,
to
poorly
●
causes
to
in
higher
goals,
conict.
●
External
resources
new
and
●
available
workers
workers
–
changes
political
or
of
individuals
any
in
to
the
see
a
or
external
conict
in
exibility
believe
that
respond
adapting
the
respects
shareholders,
factors.
will
employees
certain
workplace.
have
focus
in
the
a
on
lesser
their
workplace
workers
do
not
business.
the
of
of
more
the
world
these
culture
number
the
the
business,
can
do
to
lead
not
resources
of
differently.
differences
that
differs
–
external
economic
unaccustomed
changes
managers
Insufcient
in
sometimes
have
management
can
from
Lack
cause
that
of
the
team.
factors
workplace:
or
understanding
workers
the
employees
Having
who
include
goals
all
likelihood
managers
may
and
internal
Not
example.
workers,
the
–
either
stress.
the
Managers
and
Often,
–
than
values
management
for
workers
following:
by
cause
increases
consider
acceptance
the
driven
can
which
wages.
Different
of
be
technology,
business
between
include
interests
sufciently
●
can
change
individual
or
conict
change
new
Different
stake
of
workplace
an
to
factors
environment
migration
of
laws
and
disrupt
affect
labour
organization’s
new
can
can
can
bring
traditional
regulations
the
the
in
culture,
that
like.
no
organization
has
unlimited
resources.
TOK discussion
Managers
must
employees
just
to
do
think
their
employees’
demand
decide
jobs.
pay.
more
that
how
they
have
Having
Conict
resources
to
are
compete
insufcient
often
allocated.
arises
for
available
resources
when
Frequently,
also
workers
or
resources
touches
managers
pay.
When looking out at the
world, capitalists tended to
see the world as composed
of individuals. Peoples of
left-wing political persuasions
●
Poor
communication
–
sometimes
managers
and
workers
clash
generally see the world in
because
lack
of
communication
has
created
misunderstanding.
groups – groups of capitalists,
Even
when
managers
or
workers
have
tried
to
communicate,
groups of workers, etc. Which
misunderstandings
can
occur.
perspective is closer to the
●
Poor
performance
–
sometimes
people
do
not
do
their
jobs
truth?
properly,
156
a
situation
that
can
happen
at
all
levels
of
an
organization.
2 . 6
People
not
has
impact
an
addressed
or
even
doing
their
on
(the
jobs
others
properly,
and
can
non-performing
sacked),
that
too
E M P L O Y E R
can
whether
lead
to
E M P L O Y E E
managers
conict.
employee
cause
A N D
is
If
the
or
R E L A T I O N S
O N LY )
workers,
problem
reprimanded,
( H L
is
demoted,
conict.
apph  i li
from
a
the
third
conciliation
the
groups
third
and
in
party
employer
party
is
to
arbitration.
dispute
usually
situation,
both
evidence.
This
and
resolve
and
The
in
is
aim
them
to
outline
evidence
dispute.
help
called
parties
employee
a
of
to
process
is
conciliation
nd
conciliate
their
then
representatives
This
a
assessed
the
by
and
is
to
a
seek
An
dispute.
providing
judgment
help
referred
bring
resolution.
on
positions
will
often
to
tnemeganam
Sometimes
as
together
independent
In
this
appropriate
is
made.
Employee par ticipation and industrial democracy
In
industrial
workforce
industrial
linked
worker
workers’
trade
For
negotiate
sharing
seen
to
as
implies
and
more
consult
workers’
on
of
means
to
is
consultation
the
and
representatives
one
industry,
boards
form
which
places
of
before
but
as
changes
are
with
of
governing
”worker
unions
on
power
managers
make
the
perhaps
stress
communication:
decisions
or
trade
less
by
extreme,
appointment
the
in
At
production,
company
approach
for
over
of
takes
bargaining
fourth
participation
occurs.
control
democracy
responsibility
employee
complete
approach
collective
A
or
the
representatives
as
all
partial
organization
Another
managers.
retaining
an
industrial
such
with
of
ownership
union
others,
participation”,
often
running
cooperatives.
or
bodies.
the
democracy
with
producer
democracies,
in
are
arrangements
introduced.
No-strike agreement
A
no-strike
undertake
agreement
industrial
undertaken.
possibility
when
the
example,
rises,
be
or
It
of
can
also
taking
the
mean
team
management
to
between
when
unless
that
industrial
management
agreed
made
occurs
action
refer
all
a
has
team
and
trade
union
action.
union
may
to
to
have
has
steps
has
Unions
agreed
disputes
managers
a
procedural
agreed
usually
certain
agreed
arbitration
agreed
have
to
not
rst
rule
agree
out
not
conditions.
to
to
been
any
to
strike
For
ination-proof
should
no
pay
agreement
unions.
Single-union agreement
Where
it
is
one
called
difculties
between
helps
to
unions
one
a
union
of
is
the
in
recognized
negotiating
unions
avoid
union
is
single-union
the
with
get
a
with
disrupt
the
to
the
managers.
the
only
This
several
higher
disruption
dispute
can
to
as
agreement.
representative
situation
unions
pay
and
increase
organization
When
production
saves
reduces
than
if
for
unions.
one
unions
the
employees,
the
competition
rival
only
multiple
process
of
managers
of
are
whole
It
also
several
involved,
organization.
157
ecruoser namuH 2
Conciliation and arbitration
2
H U M A N
R E S O U R C E
M A N A G E M E N T
r f i  h
Student workpoint
For
many
Change
the
reasons,
is
employees
typically
internal
or
“forced”
external
change
as
desirable
(or
and
protability,
may
on
resist
them
by
environments.
necessary)
for
change
in
managers
Whereas
the
the
workplace.
because
managers
health
of
the
of
2.8
changes
typically
in
view
Be a researcher
organization
Use
for
workers
are
often
threatened
by
change.
There
the
internet
research
specic
●
reasons
that
Discomfort
tnemeganam
ecruoser namuH 2
and
want
to
–
workers
and
employees
maintain
employees
are
the
often
status
often
happy
resist
with
the
to
are
an
industrial
change:
current
situation
dispute
that
in
country.
your
has
occured
quo.
Describe:
●
Fear
–
changes
often
makes
employees
afraid
simply
because
they
do
●
not
know
what
will
What
casued
dispute?
●
Insufcient
the
change
the
happen.
reward
requires
–
employees
them
to
do
often
more
perceive
work
for
that
no
or
implementing
increase
a
it
one
combination
many
in
Was
of
factors?
compensation.
●
●
Lack
of
job
perform
in
skills
the
–
employees
changed
work
may
not
have
the
skills
necessary
What
strategies
adopted
to
by
employees
environment.
a)
were
the
and
b)
the
employers
●
Loss
that
of
control
they
do
–
not
when
have
managers
control
over
insist
their
on
change,
employees
feel
●
lives.
What
was
outcome
●
Mistrust
–
employees
sometimes
do
not
trust
Poor
communication
needs
●
Poor
to
timing
personal
Prior
with
or
●
in
current
might
may
–
an
do
not
know
why
the
business
is
brought
occur
t
an
at
about
a
poorly
time
with
employee
another
for
the
needs
of
for
either
professional
that,
the
may
needs
have
organization
or
of
had
at
an
the
or
employees.
a
bad
experience
earlier
time
with
his
employer.
support
resist
social
change
experience
Social
who
–
but
reasons,
change
her
employees
change.
organization
●
–
–
change
an
employee
may
choose
who
to
works
resist
for
with
the
a
group
sake
of
of
people
maintaining
relationships.
Hr i  d h ip f h
Good
lead
organizations
and
done,
a
manage
change
organization
to
Organizations
various
change,
the
steps.
degree
1.
helps
and
for
Forecast
new
is
vision
the
and
for
the
forward
change
the
of
reduce
can
team
may
impact
the
control
to
change
but
When
and
of
rather
effectively
transition
change
potential
the
take
process
have
resistance
reaction
should
with
process.
the
circumstances.
the
assessing
change
business
set
potential
managers
management
a
reduce
can
simply
employees’
which
the
to
desired
managers
rst
move
through
and
necessary,
vision
158
a
blindly
its
The
the
Develop
If
2.
to
not
process
assessing
Thereafter,
do
employees
to
it,
the
and
its
of
the
determining
process.
following
the
through
impact
and
change
realign
desired
largest
steps:
outcomes.
aims
and
organization.
allocate
the
necessary
resources
the
managers.
dispute?
●
the
of
to
implement
the
change.
clear
Was
there
‘winner’?
a
2 . 6
3.
Involve
employees
employees
4.
Regularly
change
report
in
the
are
not
in
the
is
problems
process
employees’
successes
or
are
the
to
and
all
unfolding.
process
so
that
not
occurring
change
On
from
the
other
process
to
E M P L O Y E E
the
do
outset
not
feel
stakeholders
should
dips.
when
A N D
they
appropriate
Managers
implementation
condence.
in
change
surprised
communicate
process
E M P L O Y E R
not
be
Pretending
they
clearly
hand,
inspire
so
how
that
managers
O N LY )
Innovation, ethical considerations,
weaken
should
INNOVATION, ETHICS
AND CULTURE
the
to
problems
will
( H L
that
powerless.
afraid
are
R E L A T I O N S
report
and cultural dierences may inuence
employer–employee relations in an
organization.
condence.
Train
employees
in
advance
of
those
changes
that
affect
them
an organization dynamic and often
directly,
which
should
allow
them
to
see
the
benets
of
change
enhances the reputation and increases
immediately.
If
employees
are
not
properly
trained,
the
fears
of
lack
the protability of a business. However, if
of
competence
will
be
heightened.
an organization is “too dynamic” (that is,
6.
Routinely
7.
Be
communicate
the
benets
of
the
constantly changing), employees may nd
changes.
the situation too stressful. They may grow
aware
of
the
stress
that
change
can
cause
and
support
employees
weary.
as
much
as
possible,
before,
during,
and
after
change.
Ethical considerations can also inuence
employer–employee relations. When
going through the change process, for
rvii hkli
example, if managers fail to consider fully
✓
Employee
and
employer
representatives
act
on
behalf
of
employees
the human element, employees may
and
employers
in
negotiations.
draw the conclusion that changes being
✓
Collective
bargaining
through
trade
is
a
negotiation
between
employees
(usually
under taken benet only the organization’s
managers and owners, especially if
a
union)
and
their
employers
to
agree
wages
and
retrenchment of employees is involved.
working
conditions.
Conversely, managers can build trust if
✓
Slowdowns
than
they
occur
when
workers
deliberately
work
less
efciently
they treat employees ethically: whenever
possible, retraining employees for new
can.
jobs, giving them adequate time to learn,
✓
When
employees
work-to-rule
they
follow
every
rule
and
regulation
and providing suppor t throughout. In
exactly,
which
often
means
slowing
down
production.
general, whether it is a static situation
✓
An
overtime
ban
is
when
employees
refuse
to
work
any
more
than
or a changing environment, employers
should treat employees well, with ethical
their
contracted
hours.
considerations in mind. Treating employees
✓
When
workers
outside
✓
their
Employers
changing
strike,
refuse
to
work
and
may
also
protest
workplace.
may
the
they
so generally pays o.
negotiate
terms
of
well can be costly, but in the long run doing
by
making
employees
threats
contracts.
of
redundancies
This
would
put
or
pressure
Finally, cultural dierences, both within
an organization and relating to the broader
culture of where the business is located,
on
workers
and
might
persuade
them
to
agree
to
a
settlement.
play a role in employer–employee
✓
A
lock-out
employees
involves
from
closing
working
the
and
business
being
for
a
short
time,
preventing
paid.
relations. Some cultures have traditions
of workplace democracy, others of
paternalism, still others of authoritarian
✓
Potential
sources
of
conict
involve
change,
differing
interests
or
management. Regardless, these internal
values,
external
factors
such
as
the
economy,
poor
communication
and external cultures inuence managers’
and
poor
performance.
and workers’ expectations and, thus,
✓
Conicts
can
industrial
be
resolved
democracy,
through
no-strike
conciliation
agreements,
and
and
arbitration,
employer–employee relationships.
single-union
agreements.
✓
Successful
through
organizations
the
process
of
use
their
HR
strategy
to
manage
employees
change.
159
tnemeganam
On the one hand, innovation makes
5.
ecruoser namuH 2
Innovation is a two-edged sword.
2
H U M A N
R E S O U R C E
M A N A G E M E N T
Pi qi
Get
Get
Going
Going
is
a
wheelchairs
been
charity
to
experiencing
employees
and
Recent
changes
the
tnemeganam
ecruoser namuH 2
the
to
communication
issues.
employees
a)
how
those
the
a
Identify
two
Evaluate
IB,
May
are
problems
aims
prot
effects
and
2005
the
a
chief
and
led
to
a
a
to
provide
the
low
the
at
and
business
charity.
is
this
keen
has
of
charity
moving
of
solutions
in
Get
to
formal
that
the
Going.
and
might
two
be
from
may
a
be
tall
problems
examples
used
of
have
to
led
solve
to
change.
different
organization.
Going
has
motivation
structure
executive
losses
fearing
of
to
leaving
tall
job
objectives
Get
has
ago
start,
to
in
Get
[4
marks]
[6
marks]
[4
marks]
[6
marks]
a
structure.
examples
two
This
about
unhappy
years
successful
from
and
making
on
fteen
a
considering
started
communications
communications
After
organization
more
organizational
informal
d)
the
of
created
problems.
some
have
becoming
Examine
at
c)
Rumours
Explain
from
b)
in
was
people.
nancial
among
led
160
that
disabled
of
Going.
poor
3
F i n a n c e
a n d
a c c o u n t s
3.1 S ources of nanc e
By the end of this chapter, you should be able to:
explain the role of nance for businesses in terms of capital
➔
expenditure and revenue expenditure
comment on the following internal sources of nance: personal
➔
stnuoccA dna ecnaniF 3
funds, retained prot and sale of assets
comment on the following external sources of nance: share capital,
➔
loan capital, overdrafts, trade credit, grants, subsidies, debt
factoring, leasing, venture capital and business angels
➔
dene shor t-, medium- and long-term nance
➔
discuss the appropriateness, advantages, and disadvantages of
sources of nance for a given situation.
All
forms
they
of
including
future
or
business
undertake.
be
starting
growth
clear
classied
The
on
as
a
and
the
organization
money
business,
for
expansion.
exact
either
be
its
As
purpose
capital
need
could
a
of
funding
needed
day-to-day
result,
their
for
for
a
or
various
of
operations,
businesses
nance.
expenditure
the
variety
need
This
revenue
activities
reasons,
or
to
for
its
ascertain
purpose
can
be
expenditure
Capital expenditure
This
is
more
are
money
than
known
vehicles,
of
a
as
and
initial
security
bank
to
purchasing
long
for
assist
benets
for
most
van
be
items
used
and
These
the
xed
accrued
include
xed
assets
a
to
business
to
the
can
of
expenditures
businesses
by
in
a
over
that
over
be
are
the
used
longer
as
and
from
For
be
to
their
(nancial
such
as
investments
example,
expenditure
will
purpose
Due
nance
long-term
grow.
this
the
term.
of
for
items
buildings,
for
collateral
source
capital
last
Such
land,
needed
therefore
termed
will
again.
machinery,
particular
are
business
business
and
assets
succeed
is
a
over
business
repayment
Capital
a
acquire
may
assets
income
pledged
intended
the
xed
cost,
loans).
to
and
equipment.
generating
high
spent
year
spread
because
over
the
term.
Revenue expenditure
This
is
money
payments
and
fuel.
Revenue
business
or
spent
on
expenses
They
do
not
expenditure
operational
the
day-to-day
include
involve
needs
and
rent,
the
to
be
should
running
wages,
purchase
covered
therefore
raw
of
of
a
business.
materials,
longer-term,
immediately
provide
to
These
insurance,
xed
keep
immediate
assets.
the
benets,
161
3
F i n a n c e
unlike
capital
a n d
a c c o u n ts
expenditure
which
has
a
long-term
focus.
Businesses
need
Key terms
to
be
will
cautious
make
it
not
to
difcult
have
for
consistently
them
to
build
high
revenue
sufcient
expenditure
capital
in
order
as
to
this
make
Capital expenditure
long-term
investments.
In
addition,
it
may
make
it
extremely
difcult
money spent to acquire xed
for
them
to
get
out
of
a
sudden
crisis
situation.
For
example,
if
a
school
assets in a business
is
spending
paying
most
food
of
its
money
suppliers,
and
paying
these
salaries
costs
are
and
not
bonuses
checked,
it
to
teachers
may
be
or
unable
to
Revenue expenditure
build
new
classrooms
to
accommodate
any
increases
in
student
demand.
money used in the day-to-day
In
a
business,
a
high
level
of
expenses
may
also
erode
the
prots.
running of a business
Student workpoint 3.1
Be a researcher
Choose
in.
any
Using
stnuoccA dna ecnaniF 3
each
sources
internal
list
of
multinational
Internet
company
Separately
The
two
the
what
each
its
or
any
main
for
a
companies
other
and
can
you
revenue
be
are
resource,
expenditures
business
external
that
available
capital
company’s
nance
sources
or
on
a
interested
nd
out
for
expenditures
are.
table.
obtained
from
either
sources.
irl r f 
Internal
usually
include
nance
from
the
is
money
already
obtained
established
from
within
businesses.
the
Some
business
of
these
and
is
sources
following.
Personal funds
This
is
their
sole
a
key
own
traders
shows
investors
to
approach
of
nance
need
to
traders
if
these
or
for
because
business,
for
By
their
it
is
they
especially
if
it
over
the
and
be
is
of
a
may
the
the
that
It
risk
their
prove
only
the
and
is
to
life’s
of
In
is
a
a
mostly
addition,
good
no
start
source
or
In
or
to
need
interest
savings.
this
signal
might
owners
to
from
savings,
preferred
and
the
difcult
source
comes
personal
business
available,
great
it
their
business.
nance.
investing
it
and
with
business
easily
poses
large
this
to
sources
could
not
traders
institutions
cheap
However,
are
sole
investing
control
nancial
additional
paid.
savings
nance
commitment
because
be
of
savings.
maximize
investment
other
source
personal
will
sole
addition,
maintain
a
Key terms
funding.
Personal funds
Retained prot
a source of nance for sole
This
is
the
prot
that
remains
after
a
business
has
paid
tax
to
the
traders that comes mostly from
government
(corporation
tax)
and
dividends
to
shareholders.
It
is
also
their own personal savings
known
as
business,
ploughed-back
becoming
Importantly,
an
retained
prot
important
prots
do
and
may
source
not
of
be
reinvested
nance
necessarily
for
into
the
represent
the
organization.
surplus
Retained prot
cash
prot that remains after a
available
to
a
business.
Rather,
they
represent
how
the
business
has
business has paid corporation
managed
its
prots.
For
example,
whether
it
has
distributed
them
as
tax to the government and
dividends
or
reinvested
them
in
the
business.
If
reinvested,
they
are
dividends to shareholders
reected
of
162
as
retained
increases
prot
to
assets
include
the
which
could
following.
include
cash.
The
advantages
3 . 1
●
It
is
cheap
because
●
It
is
a
●
It
is
exible
as
●
The
owners
have
permanent
interference
However,
are
does
source
can
be
businesses
incur
nance
used
other
some
not
of
control
from
there
Start-up
●
it
it
in
over
a
interest
as
it
way
their
nancial
O F
F I N A N C E
charges.
does
the
S O U R C E S
not
have
business
retained
such
be
deems
prots
institutions
to
repaid.
t.
without
as
banks.
disadvantages:
will
not
have
any
retained
prot
as
they
are
new
ventures.
●
If
retained
●
In
some
buffer
prot
cases
for
is
too
owners
low,
may
emergencies
or
it
may
not
overuse
for
be
the
future
sufcient
retained
growth
for
prot
expansion.
and
leave
no
opportunities.
Key term
A
●
high
retained
prot
may
mean
that
either
very
little
or
nothing
paid
out
to
shareholders
as
stnuoccA dna ecnaniF 3
Sale of assets
was
dividends.
when a business sells o its
unwanted or unused assets to
Sale of assets
raise funds
This
is
when
a
funds.
These
assets
obsolete
could
The
business
from
also
sell
capital
interest
or
only
an
that
be
may
off
obsolete
needs
rm
any
of
that
or
may
option
lack
nd
a
back
to
option,
use.
that
In
then
be
tied
case
leases
to
to
some
which
this
the
is
up
are
unwanted
longer
or
sell
sell.
the
cases
a
that
The
In
by
not
will
to,
the
an
of
the
not
that
asset
be
not
be
in
a
to
it
No
may
new
ones
time-
the
sale
the
using.
cash
used.
that
may
adopt
asset
sell
and
especially
may
include
raising
is
raise
businesses
being
drawback
it
to
business
may
way
are
assets
cash,
they
businesses
assets
to
the
raise
addition,
selling
back
unused
good
businesses
business
asset
is
assets
involves
the
it
established
to
To
equipment
that
in
or
required
buildings.
incurred.
assets
buyer
In
its
land
assets
costs
excess
machinery.
no
excess
available
any
to
are
off
redundant
selling
borrowing
consuming
lease
that
machinery
advantage
sells
case
business
a
of
and
still
specialist
business.
Student workpoint 3.2
Be a researcher
Using
an
Internet
organizations
nance
and
to
search
that
rely
operate.
engine
to
What
a
such
large
are
the
as
extent
main
Google,
on
nd
internal
internal
at
least
sources
sources
ve
of
they
use,
why?
exrl r f 
Key term
External
business.
provide
nance
These
the
is
mo ne y
coul d
funds .
be
S o me
obta ine d
fr om
of
fr om
s ou r c es
i ns ti tut io ns
the se
ex t er n a l
or
out si de
i nd ivi du a ls
so ur c e s
of
t he
wil li n g
n a n c e
to
Share capital
i n c lu de
money raised from the sale of
the
following.
shares of a limited company
163
3
F i n a n c e
a n d
a c c o u n ts
Share capital
This
is
is
money
also
raised
known
as
shareholders
The
the
term
and
company
shares
it
as
Other
will
stnuoccA dna ecnaniF 3
that
a
there
be
paid
public
or
and
are
no
limited
shareholders
be
via
the
are
it
limited
the
is
a
the
by
and
of
the
to
In
stock
of
of
new
share
capital
Another
may
be
is
from
expect
addition,
company
to
willing
business
will
stock
Nairobi,
source
the
prot.
shareholders
the
securities
business).
relieves
a
public
as
advantage
shareholders
makes
limited
London
Tokyo,
The
the
sold
the
Bombay,
this
ownership
is
as
made.
amount
of
where
and
world
are
private
known
market
and
known
prots
shares
market
by
are
maximum
permanent
(repaid
hand,
when
Unlike
public,
share
company
shares
the
raise.
exchanges.
that
original
stock
to
in
business
the
the
suggests
include
other
a
purchased
payments
the
of
these
organized
stock
is
of
dividends
the
exchange
the
when
from
to
redeemed
On
to
special
and
York
companies
hands
a
exchanges
interest
dividends
sold
in
nance
to
shares
intend
bonds)
stock
New
expenses.
change
not
sold
and
of
Buyers
capital
regulated
of
need
sale
entitled
share
global
source
not
additional
a
be
are
oldest
Johannesburg,
capital
is
the
capital.
company
are
shares
The
exchange.
a
that
This
example
investors.
as
of
companies
exchange
(for
may
authorized
shareholders
limited
from
equity
to
for
diluted
investors
or
exchange.
Loan capital
Also
known
institutions
however,
until
the
rates
not
debt
these
full
may
does
as
such
as
either
repayment.
A
periodically
based
of
this
source
quickly
for
a
lower
The
to
to
of
pay
owners
on
it
still
their
in
that
a
have
is
sum.
full
on
Its
on
of
is
and
the
is
burden
the
amount
business
if
no
one
that
loan
The trading oors of the New York
(top) and Tokyo (bottom) stock
advantage
exchanges
arranged
the
can
they
interest
changes
spread
to
organizations
is
the
The
be
repaid;
evenly
The
of
hand,
can
be
rate
conditions.
repayment
the
paid.
term
other
to
spread
interest
the
nancial
loan
usually
entire
accessible
Large
control
the
from
the
interest)
xed
reducing
depending
on
are
market
purpose.
time,
lump
it
A
for
rate,
prevailing
is
of
charges
xed
sourced
charged
plus
variable.
interest
specic
period
money
is
(principal
or
the
is
(installments)
remains
nance
rm’s
interest
dilute
xed
and
variable
predetermined
having
amount
uctuate
this
Interest
repayments
loan
be
capital,
banks.
out
over
business
negotiate
wish
to
shares
a
of
for
borrow.
are
issued
ownership.
Key terms
However,
there
are
drawbacks.
The
capital
will
have
to
be
redeemed
even
Loan capital
though
will
be
the
business
required
lead
to
the
that
took
before
seizure
this
is
of
option
a
making
any
funds
rm’s
may
losses
be
and
are
assets.
faced
lent
If
in
some
out.
Failure
variable
with
a
cases
interest
high
debt
collateral
to
pay
rates
the
(security)
loan
increase,
repayment
may
a
rm
burden.
money sourced from nancial
institutions such as banks,
with interest charged on the
loan to be repaid
Overdrafts
Overdrafts
This
is
when
a
lending
institution
allows
a
rm
to
withdraw
more
when a lending institution
money
than
it
currently
has
in
its
account,
which
is
called
overdrawing
allows a rm to withdraw more
from
the
account.
In
most
cases
the
overdrawn
amount
is
an
agreed
money than it currently has in
amount
that
has
a
limit
amount
overdrawn.
placed
on
it.
Interest
is
charged
only
on
the
its account
164
However,
exceeding
the
limit
set
may
attract
higher
3 . 1
additional
costs.
The
advantage
of
a
bank
overdraft
is
that
it
S O U R C E S
O F
F I N A N C E
provides
Key terms
an
opportunity
(even
in
for
rms
situations
to
where
spend
there
more
is
no
than
they
money
in
have
the
in
their
account),
account
which
Trade credit
greatly
helps
in
settling
short-term
debts
such
as
paying
suppliers
or
the
an agreement between
wages
of
staff.
It
is
a
exible
form
of
nance
as
its
demand
will
depend
businesses that allows the
on
the
needs
of
the
business
at
a
particular
point
in
time.
Charging
buyer of goods or services to
interest
only
on
the
amount
overdrawn
may
make
it
even
cheaper
than
pay the seller at a later date
loan
to
capital.
prevent
With
them
an
overdraft
from
facility,
bouncing.
The
banks
major
can
cover
drawback
a
is
rm’s
that
cheques
banks
can
Grants
ask
for
the
overdraft
to
be
paid
back
at
very
short
notice.
In
addition,
funds usually provided by a
due
to
the
variable
nature
of
an
overdraft,
the
bank
may
at
times
charge
government, foundation, trust,
high
interest
rates.
or other agency to businesses
that do not need to be repaid
Trade credit
or
is
an
agreement
services
cash
by
to
pay
transaction
most
between
the
is
creditors
seller
done
at
(trade
at
businesses
a
the
later
time
credit
that
date.
of
In
allows
essence,
trading.
providers)
the
The
usually
buyer
no
goods
immediate
credit
lasts
of
period
from
30
nancial assistance granted
offered
to
Subsidies
stnuoccA dna ecnaniF 3
This
by a government, a non-
90
governmental organization
days;
jewellery
businesses
are
known
to
extend
it
to
at
least
180
days.
(NGO), or an individual to
A
major
advantage
of
trade
credit
is
that
by
delaying
payments
to
suppor t business enterprises
suppliers,
businesses
are
left
in
a
better
cash-ow
position
than
if
they
that are in the public interest
paid
for
cash
the
credit
immediately.
length
purchased
after
and
of
receivers)
the
by
the
agreed
out
also
the
In
may
even
an
period.
on
cash.
period
may
is
credit
lose
paying
suppliers
It
interest-free
A
disadvantage
possibility
addition,
lead
refuse
to
to
means
of
that
getting
delaying
the
is
in
of
funds
debtors
payment
future
raising
discounts
development
engage
of
to
(trade
had
they
creditors
poor
relations
transactions
with
the
debtors.
Grants
These
or
will
the
be
In
prefer
high
that
write
on
of
its
who
offer
recipient.
The
depending
on
a
so
as
grant
is
the
to
is
the
that
it
it
Bill
how
does
that
and
they
of
agree
welfare
Melinda
promoting
not
grant
foundation,
grant,
have
comes
to
of
plan
for
be
with
in
people
Gates
use
are
example,
up
areas
living
in
Foundation
including
to
to
grant)
set
social
trust,
businesses
the
Governments,
organizations
on
a
(providers
the
mostly
the
receive
showing
grant.
focus
of
to
improve
that
objective
government,
businesses
as
a
a
makers
US-based
with
downside
the
to
such
to
by
order
proposal
receives
grants
of
In
grant
grants
organizations,
advantage
a
cases
Foundations
most
exempt
to
most
to
provided
businesses.
unemployment
area.
offer
usually
to
expected
selective
would
key
funds
agency
money.
very
of
are
other
other
tax-
responsibility.
paid
back
“strings
by
A
the
attached”
maker.
Subsidies
A
subsidy
is
nancial
governmental
enterprises
assistance
organization
that
subsidies
given
subsidies
are
are
to
in
the
to
help
(NGO)
public
domestic
given
granted
or
a
government,
individual
interest.
farming
these
an
by
Farm
industries.
industries
to
In
most
in
non-
support
subsidies
survive
a
a
are
cases
very
business
common
the
cash
competitive
165
3
F i n a n c e
environment
while
still
market
by
price
businesses
their
able
goes
A
to
a c c o u n ts
being
being
subvention.
for
a n d
increase
especially
marred
political
sell
their
nancial
the
produce
gain.
In
cost
of
production,
of
granting
their
demand
grants,
with
for
government
interference
in
the
do
low
this
is
market
by
not
is
that
charging
need
subsidies,
is
to
the
as
it
helps
lower
be
that
subsidization
prices,
where
known
subsidies
goods
subsidies
at
situations
advantage
Like
drawback,
to
reap
below
major
products.
by
able
to
prices
repaid.
they
are
A
often
process.
Debt factoring
This
is
debt
where
factor.
a
It
responsibility
may
stnuoccA dna ecnaniF 3
these
the
on
the
the
debt
higher
the
In
to
use
customer
it
to
does
it
not
for
to
of
of
may
of
to
risk
pay
to
the
a
The
the
is
loses
is
a
from
counts
of
getting
a
a
business
projects.
and
to
as
willing
on
percentage
fees
factor
money
more
or
customer
as
the
passed
repayment
loyal
the
debt
that
activities
debt
a
on
amount
possibility
service
such
of
revenue
owed
the
debt
debt
full
as
takes
cent
factoring
other
and
losing
the
the
business
full
per
sales
debt
debt
fund
a
the
collecting
failing
the
collecting
that
receive
80–90
of
known
factor
business.
collect
due
administrative
business
means
court
use
party
the
the
cent
higher
upfront,
are
third
to
to
per
advantage
can
a
where
between
proceed
The
pay
An
high
to
owed
10–20
responsibility
charge
a
debt
then
prot.
that
or
harsh
to
be
cash
addition,
factors
and
prot.
invoice
business
disadvantages
because
known
the
remaining
will
risk
The
the
factor’s
factors
factor.
job.
The
immediate
prots
are
pay
its
arrangement
collecting
invoices
debt
sells
nancial
percentage
addition,
the
for
debtors.
of
gets
a
immediately
owed
part
business
is
if
its
factors
their
the
threatening
of
debt
do
In
to
to
debt
take
the
debt.
Leasing
This
is
where
company
a
business
(lessor)
to
(lessee)
acquire
or
enters
use
into
a
particular
contract
assets
with
such
a
as
Key terms
leasing
machinery,
Debt factoring
equipment,
or
to
it
by
purchase
get
period,
of
into
a
which
usually
car
leasing
that
purchase
a
the
lasts
are
rm
a
or
rm
for
more
lessee.
to
than
lease
need
Second,
the
use
to
three
lessor
at
high
takes
cases
the
as
on
without
payments
years,
assets.
a
asset
some
such
their
have
an
leasing
In
where,
organizations
known
not
to
monthly
and
agreement
Large
does
asset.
lessor
lease
asset.
companies
is
allows
Periodic
the
nance
the
This
cash.
between
purchasing
and
to
with
agreement
may
property.
is
of
A
major
the
the
given
airlines
initial
are
made
and
leasing
the
option
electronic
advantage
capital
of
responsibility for collecting
the debt owed to the business
and provides the business
with a percentage of the owed
debt in cash
outlay
responsibility
a nancial arrangement where
the debt factor takes on the
businesses
end
it
having
of
Leasing
repair
and
particular
In
the
maintenance
assets
long
are
haul,
the
outright
the
leasing
of
required
though,
purchase
charges.
the
of
asset.
only
leasing
an
asset
Moreover,
a
In
for
can
due
addition,
short
turn
to
leased
periods
out
the
leasing
to
of
be
is
time
more
accumulated
asset
cannot
useful
act
or
when
occasionally.
expensive
total
as
costs
collateral
than
a rm to use an asset without
having to purchase it by cash
of
for
a source of nance that allows
a
Venture capital
business
seeking
a
loan
as
an
additional
source
of
nance.
nancial capital provided by
investors to high-risk , high-
Venture capital
potential star t-up rms or
This
is
nancial
capital
provided
by
investors
to
high-risk,
high-potential
small businesses
start-up
166
rms
or
small
businesses.
Venture
capitalists
usually
fund
3 . 1
start-ups
that
nd
it
difcult
to
access
money
from
other
S O U R C E S
O F
F I N A N C E
nancial
Key terms
institutions
or
organizations
capital
and
markets.
investment
Venture
banks.
capitalists
They
own
include
a
stake
specialist
in
the
businesses
Business angels
they
invest
in
with
the
expectation
of
beneting
from
future
prots.
highly auent individuals
However,
due
the
to
to
the
high
risks
involved,
they
expect
the
rms
needing
who provide nancial
funds
produce
a
thoroughly
researched
business
plan
to
help
capital to small star t-ups or
mitigate
the
risk
of
investment.
The
key
advantage
of
venture
capitalists
entrepreneurs in return for
is
that
they
provide
funding
to
businesses
that
other
institutions
ownership equity in their
might
regard
as
too
high
a
risk.
In
addition,
in
an
effort
to
protect
businesses
investment
providing
is
that
up
the
increase
their
are
required
venture
businesses
they
guidance
capitalists
they
involved
may
invest
equity
in
stake
in
the
where
set
and
in
very
if
it
is
prot
are
rms,
decision
needed.
high
these
these
rm’s
not
often
making
The
disadvantage
targets
for
attained
by
a
by
the
they
large
start-
usually
percentage.
stnuoccA dna ecnaniF 3
their
Business angels
Also
known
provide
ownership
that
show
provide
a
that
good
they
to
invest
In
addition,
the
or
their
or
they
is
of
rather
on
the
in
A
They
nancial
angel
how
a
businesses
growth.
continually
terms
This
viable
they
is
a
of
than
succeed
by
invest
a
in,
may
the
angels
institutions
are
venture
using
known
is.
their
capital.
good
for
businesses
They
they
nancial
who
return
support
other
business
assume
in
business
because
good
may
individuals
high-risk
advantage
with
investors
in
future
or
business
coupled
afuent
entrepreneurs
invest
or
major
businesses.
than
very
or
returns
helping
the
are
injection
lifetime.
favourable
that
these
start-ups
high
capital
experience
ownership
ownership
for
start-up
focus
business
small
businesses.
initial
person
disadvantage
control
their
more
small
the
to
potential
give
of
in
extensive
in
through
lenders
investors,
capital
equity
or
key
angel
one-time
businesses
is
as
nancial
The
degree
therefore
of
diluting
entrepreneur.
yduts esaC
Vf  sfrm Ky: exg h Rg  Rlbly
f Fl srv  h Pr  Rrl Ky
customers. Micro-Finance Institutions (MFIs) such
as Faulu Kenya do successfully provide nancial
services for the poor, but they are hampered by poor
infrastructure and low levels of technology.
In order to address this problem Safaricom Kenya, one
of the two mobile service providers currently operating
in Kenya, developed an appropriate technology.
In Kenya there are less than two million bank accounts
The result was MPESA, an electronic money transfer
serving the country’s population of 32 million people.
product aimed at making nancial transactions faster,
The reasons for this disparity include the high cost of
cheaper and more secure. MPESA allows transfer
banking and the fact that the majority of the people
of money between individuals, transfer of money
have low incomes with a large percentage of them
between individuals and businesses, cash withdrawal
living on an average of one dollar a day. Such people
and deposit at registered retail outlets as payment
do not feel comfor table interacting with commercial
for goods and services through the mobile phone
banks that typically target middle and upper income
shor t message service (SMS). MPESA account holders
167
3
F i n a n c e
a n d
a c c o u n ts
can deposit or withdraw money into or from their
institutions and retail outlets. Trials on new training
vir tual accounts at Safaricom vendor shops or at an
methods for potential MPESA users are also under way.
increasing number of outlets such as supermarkets
Vodafone also plans to introduce the system in other
and petrol stations. Once the money is in their
developing countries.
accounts, they can use it to pay bills, transfer to other
people or purchase goods and services.
Exam-style questions
In October 2005, MPESA trials were successfully
1.
Describe two challenges encountered by
launched in Kenya, featuring eight Safaricom dealer
Micro-Finance Institutions such as
shops and 450 Faulu Kenya clients and concluded
Faulu Kenya.
[4 marks]
in May 2006. Vodafone Group Plc provided 990,000
2.
Explain two advantages and one disadvantage
Sterling pounds and DFID 910,000 pounds sterling to
of Micro-Finance Institutions for Kenyan
nance the pilot project. Consult Hyperion a British
people.
[6 marks]
ICT rm developed the technology that was utilized
by mobile service provider Safaricom Kenya through
3.
Compare and contrast the nancial services
stnuoccA dna ecnaniF 3
dealers, retailers and MFIs among others. The product
provided by Safaricom’s MPESA with those of
has been successfully launched by Safaricom
commercial banks in Kenya.
[10 marks]
and plans are underway to recruit more nancial
Student workpoint 3.3
Be a researcher
Find
out
how
the
organizations
various
compare
sources
with
the
of
nance
sources
for
for
private
public
sector
sector
organizations.
shr-, mm-  lg-rm 
In
determining
long
the
be
term,
type
of
be
to
of
following
under
the
with
nance.
duration
whether
a
to
important
classify
to
of
with
asset
is
source
no
of
source
the
being
long-term
medium-term
There
a
consider
consideration.
type
nanced
nanced
term
is
asset
matched
should
be
it
The
of
nanced.
nance
but
nance
type
nance,
uniformly
nance,
of
investor’s
a
and
agreed
most
as
short,
personal
nance
Thus,
a
should
a
short-term
of
nancial
asset
asset
literature
asset
should
with
determining
the
uses
or
or
therefore
long-term
medium-term
way
medium
preference
short-
exact
the
denitions.
Shor t-term nance
This
is
money
therefore
one
to
year
be
term
needed
provides
or
paid
less.
with
nance
its
for
the
needed
External
12
short-term
months
include
day-to-day
working
bank
of
a
running
capital.
sources
trading
overdrafts,
or
of
This
of
a
business
nance
nance
nancial
trade
is
credit
are
year.
and
and
that
lasts
usually
Examples
debt
for
expected
of
short-
TOK discussion
factoring.
What role does intuition play
in nancial decision making?
Medium-term nance
Is there a moral obligation for
This
is
money
mostly
used
to
purchase
assets
such
as
equipment
or
nancial institutions to lend to
vehicles
that
have
useful
lifespans
for
a
specic
period
of
time.
This
every star t-up business?
source
ve
nance
years.
term
168
of
bank
has
Examples
loans
and
a
of
duration
period
medium-term
grants.
of
between
sources
one
include
year
and
leasing,
about
medium-
3 . 1
S O U R C E S
O F
F I N A N C E
Long-term nance
This
is
assets
funding
or
nance
term
other
may
obtained
be
nance
for
expansion
anywhere
sources
the
purpose
requirements
from
include
more
of
of
purchasing
a
than
long-term
business.
ve
bank
to
long-term
The
around
loans
and
xed
duration
30
of
years.
share
the
Long-
capital.
Student workpoint 3.4
Be knowledgeable
Prepare
and
nance
into
complete
short,
●
debt
●
retained
●
trade
●
leasing
●
sale
●
venture
●
share
●
overdrafts
●
loan
●
subsidies.
a
table
medium
that
or
classies
long
the
following
sources
of
term:
factoring
stnuoccA dna ecnaniF 3
prot
credit
of
assets
capital
capital
capital
Fr g h h f 
r f 
In
determining
for
a
given
inuence
the
appropriateness
situation,
their
rms
decision.
need
Some
to
of
of
using
consider
these
a
a
particular
number
factors
are
source
of
of
factors
explored
nance
which
can
below.
Purpose or use of funds
Businesses
specic
it
be
term
be
will
need
used
for
the
day-to-day
appropriate
suitable
to
requirements.
if
raw
match
What
purchase
running
when
of
of
the
are
will
long-term
the
of
the
a
xed
needed
nance
carefully
nance
xed
business?
purchasing
materials
source
exactly
assets
be
or
Long-term
asset,
urgently
while
in
the
used
for
loan
trade
to
their
for?
the
Will
short-
capital
credit
may
may
be
business.
Cost
Businesses
obtaining
a
will
administration
the
need
source
costs,
opportunity
choosing
when
one
of
on
consider
nance.
and
cost
source
deciding
to
over
the
costs
(the
most
costs
associated
next
the
thoroughly
Such
best
other)
all
the
include
with
a
alternative
is
also
appropriate
an
source
costs
interest
share
that
with
payments,
issue.
is
In
addition,
forgone
important
of
associated
after
consideration
nance.
169
3
F i n a n c e
a n d
a c c o u n ts
Status and size
INNOVATION
Public
limited
companies
can
obtain
nance
from
various
sources,
Read the summary from the
whereas
sole
traders
less
known
will
not
be
able
to.
This
is
because
sole
traders
are
Finance for Innovation (http://
well
and
smaller
in
size
than
public
limited
companies.
For
www.awt.nl/upload/documents/
example,
the
issue
of
shares
is
a
source
of
nance
that
is
only
possible
publicaties/tekst/as36.pdf)
for
public
limited
companies
and
not
sole
traders.
In
addition,
large
What in your opinion would you
organizations
have
added
collateral
that
they
can
use
to
negotiate
for
consider to be the best source
lower
interest
rates
from
nancial
institutions.
of nance for innovation?
What factors may inuence
Amount required
your decision on this source of
nance? Carry out research on
For
small
amounts,
rms
may
consider
mostly
short-term
sources
of
how various global businesses are
nance
such
as
bank
overdrafts
while,
for
larger
amounts,
long-term
funding their innovations.
bank
loans
sources
or
will
the
be
issue
used
of
shares
depending
are
on
available
the
options.
amount
Therefore
varying
required.
stnuoccA dna ecnaniF 3
Flexibility
This
one
looks
into
sour ce
additional
which
to
sources
could
demand
the
be
that
availability
at
wi th
In
p a r ticula r
r e q ui r e
such
how
whi ch
s ome
inue nce d
may
of
determines
ease
anothe r.
by,
bu si n es s
p oi n t s
for
it
of
can
bu si n e ss e s
d ur in g
e x am pl e,
shor t- te r m
s o urce s
e x i b l e
a
ca se s
in
t he i r
of
su c h
a
fr om
need
tra d in g
s e a so na l
so urc e s
fundi ng
s w it c h
wi ll
p er io d
c h a n ge s
fu n di n g.
sh o rt
in
T he
pe r iod
a l so
i s.
State of the external environment
This
involves
increases
prices
both
in
in
an
factors
interest
economy)
consumers
businesses
rising
and
make
interest
increased
that
rates
cost
in
the
or
will
greatly
producers.
sourcing
rates
business
ination
may
not
no
control
affect
the
nance.
the
best
of.
this
Taking
choice
For
increases
purchasing
Consequently,
their
be
has
(persistent
for
will
up
a
a
example,
in
average
decisions
affect
bank
rm
the
loan
because
of
choices
with
of
the
involved.
Gearing
This
refers
If
a
is
said
company
to
smaller
there
total
may
are
a
large
of
while
loan
companies,
and
share
capital
Company
is
high
A
geared.
institutions
These
(see
is
way
section
of
US$40
therefore
of
3.6).
they
will
share
A
and
A
will
capital
capital
that
million,
are
reluctant
need
gearing
to
is
to
B,
each
loan
to
lend
a
of
B
US$20
company
as
risky
money
alternative
calculating
a
assume
company
of
it
has
with
capital
capital
viewed
seek
by
capital
geared
while
share
capital.
example,
compared
businesses
therefore
a
loan
share
low
For
have
and
and
to
company
geared
be
is
capital.
may
US$50
low
measuring
loan
million
High-geared
and
businesses
One
to
Company
capital
of
of
share
company
company
million
loan
a
capital
million.
a
between
proportion
geared ,
$60
nance.
ratio
has
of
nancial
rms.
relationship
high
two
have
which
the
proportion
million.
170
be
capital
US$10
of
to
the
to
B
by
such
sources
gearing
3 . 1
S O U R C E S
O F
F I N A N C E
grwh r wrkg wh Fm
MTN Uganda’s MobileMoney
The power of the MTN Fundamo
service achieved one of the
most remarkable and rapid
par tnership
growth rates ever witnessed
MTN MobileMoney was launched as a way to allow the
in the mobile nancial
consumers to send and receive money, top up airtime
services industry. In a year
and perform many other services using a mobile phone.
after launching, the service
MTN Uganda saw the pressing need to oer services to a
had registered more than
population desperate for nancial inclusion, and it turned
one million users, 16% of its
to Fundamo to help roll out the ambitious national project.
subscriber base. Today, it
MTN MobileMoney makes use of the basic Fundamo
remains one of the world’s most
platform with an additional layer of services designed
successful MFS deployments.
stnuoccA dna ecnaniF 3
yduts esaC
Mtn ug hv  f h m rmrkbl mbl my
specically for the Ugandan environment and to meet
The success of the service, however, has gone far fur ther
regulatory requirements.
than simply connecting the previously unbanked.
MTN and Fundamo spent over a year in Africa before the
The introduction of mobile payments has led to a
launch of Mobile Money, interviewing potential users of
fundamental shift in the rural and peri-urban economies.
the service from all age-groups and business sectors. This
market research allowed Fundamo to rene aspects of the
About MTN Uganda
service to make sure that it would be well received and met
In October 21 1998, MTN Uganda launched commercial
the needs and aspirations of the Ugandan communities.
services in Uganda. MTN has since grown to be the
MTN MobileMoney is an electronic wallet service that
leading mobile operator in the country.
enables you to send and receive money anywhere in
MTN adopted a wireless approach to providing
Uganda using your phone. MTN MobileMoney users are
telecommunications services to the Ugandan market,
able to:
which proved to be a convenient and fast method of
●
Send money to any MTN mobile phone user;
rolling out services. Despite insucient infrastructure
registered or not.
(power, roads etc.) MTN now covers the majority of
●
Send money to mobile phone users on other local
both the urban and rural population
networks using the MTN agent network .
●
Withdraw cash at any authorised MTN
Uganda’s nancial position – the
MobileMoney agent.
oppor tunity for MTN
●
There are over 30 banks in Uganda, but a banking
Pay bills such as DStv, anywhere conveniently
with immediate results.
penetration rate of no more than 10%.
●
Buy air time for themselves and others on the MTN
network directly and conveniently.
The traditional banking model involves taking branches
to various locations, an option that is not compatible with
●
Manage their MTN MobileMoney accounts.
poor countries such as Uganda that cannot aord to make
The go-to-market strategy was designed to ensure rapid
the investment required for such a complex infrastructure.
uptake of the services. However, even the highest hopes
Furthermore, some traditional banking branches were
of the par tners were exceeded by the response. It was
unable to support the number of customers they can
testament to the robust Fudamo platform that MTN was
generate in an area. The advent of mobile money provided
able to continue to sign up new customers onto the
everyone with the opportunity to access nancial inclusion.
system, relying on the integrity of the Fundamo solution.
This presented an oppor tunity for MTN Uganda to
The system was designed at the outset to handle
provide banking services using mobile.
complex transactions as the long-term view was
to migrate the users onto newer services like
international remittances and mobile insurance.
171
3
F i n a n c e
a n d
a c c o u n ts
MTN Uganda’s success has been referenced in a number
MTN Uganda continues to be one of the most successful
of articles looking at mobile money implementations in
Mobile Money deployments globally to date. It continues to
the developing world. The reason for the success has
innovate introducing new, useful services on a regular basis
been the non-traditional, below the line methods used
such as paying government pensions through the system.
by MTN. The distribution model of “by the people, for the
Due to the success of the project, Western Union
people” has relied on empowering the local population
announced that it had chosen Uganda as the rst
through education and solid entrepreneurial opportunity.
country to roll out its international remittance service
Over 2500 MobileMoney ‘foot soldiers’ were trained on
in par tnership with MTN.
the system. Equipped with basic infrastructure such as
Once the new international remittance service was
photocopiers, marquees, relevant marketing material
activated, MTN subscribers registered for MobileMoney
and transpor t, the foot soldiers canvassed new users
were able to receive Western Union Money Transfer
across the country.
transactions in their mobile accounts. In addition,
stnuoccA dna ecnaniF 3
Fundamo invested an enormous amount of time
MobileMoney users in cer tain countries are now able
ensuring that the sign-up process was both simple
to send Western Union Money Transfer transactions
and logical, while complying with all regulatory
directly from their mobile phones for pay-out at one of
requirements. The service menu was also designed
Western Union’s agent locations in territories around
to work with even the most rudimentary handsets to
the world.
ensure the service is as inclusive as possible.
Adapted from : http://www.fundamo.com/PDF/Case%20
Service agents are incentivised using a commission-
study/MTN%20Uganda%20Case%20Study.pdf
based system which rewards them immediately upon
the sign-up of new user, and on transactions levels.
Exam-style questions
This was a signicant boost to local communities
1.
Outline the main activities of MTN Uganda
and was warmly welcomed by governments who are
in the nancial services sector.
[ 4 marks]
looking for SMME job creation. More impor tantly, it
2.
Explain how three dierent stakeholders
has meant that agents are driven to ensure customer
have been aected by the introduction of
satisfaction and are always on the lookout for ways to
MTN Mobile money.
[6 marks]
make the user-experience more rewarding.
3.
Results
To what extent have MTN and Fundamo reached
their strategic objectives in Uganda?
[10 marks]
In just over a year MTN Uganda registered 1 million
MobileMoney service users - 16% of its subscriber base.
Rv hkl
✓
Capital
xed
expenditure
assets
in
machinery,
a
business
wages,
✓
Internal
within
✓
External
outside
capital,
debt
172
of
sources
of
day
that
of
✓
and
include
and
are
that
are
share
credit,
venture
less
lasts
of
rent,
as
a
thirty
obtained
of
mostly
years,
obtained
capital,
grants,
loan
subsidies,
capitalists
and
In
nance
the
the
to
and
state
to
more
funding
use
the
size,
of
the
the
year
its
xed
of
a
amount
external
that
about
assets
ve
ve
such
nance
years
for
assets
the
or
to
purpose
other
business.
appropriate
funds,
year
nance
to
obtained
term
one
needed
Long-term
than
businesses
of
for
with
purchase
vehicles.
of
long
on
purpose
status
used
one
requirements
deciding
lasts
Medium-term
or
is
purchasing
which
business
than
duration
expansion
✓
more
equipment
with
loans,
is
a
capital.
from
years
nance
provides
working
is
fuel.
personal
Short-term
or
assets.
include
trade
acquire
running
which
include
leasing,
angels.
to
nance
business
factoring,
vehicles
insurance
sale
to
include
expenditure
nance,
and
overdrafts,
business
day
expenses
business,
prots
the
the
spent
which
revenue
materials,
sources
the
retained
on
with
raw
money
buildings,
while
spent
is
business,
land,
equipment,
money
a
need
cost,
source
to
of
consider;
exibility,
required,
gearing
environment.
their
and
3 . 1
S O U R C E S
O F
F I N A N C E
Pr q
Three
Hills
Hills
interested
18
to
25
is
Her
her
Driving
in
owned
by
sell
increased
loan
a)
or
to
a
licence
mostly
Maria
driving
to
students
who
business
she
Therefore,
fund
bank
this.
set
was
expenditure
her
demand
instructors.
nance
are
provides
a
expenditure
revenue
to
School
drive
who
instructions
a
car.
have
They
to
people
target
nished
high
people
school
was
she
ve
on
will
is
up
half
after
plans
She
it
about
two
years
$90,000
that
buying
debating
to
as
a
more
seek
using
the
amount
years
need
ago
in
in
rst
the
going
cars
while
same
year.
and
taking
Due
employing
up
sources
a
long
Comment
c)
between
capital
expenditure
and
help
d)
Evaluate
term
[4
on
two
her
more
of
revenue
two
benets
and
two
drawbacks
of
raising
[6
medium
expand
the
her
view
preferable
option
expansion
plans.
term
sources
of
nance
available
to
than
taking
a
bank
[6
up
a
long
overdraft
term
for
loan
would
Maria’s
be
using
marks]
Maria
business
that
marks]
money
savings
Explain
She
to
overdraft.
Differentiate
ones
or
savings.
concern.
alternative
between
her
year
expenditure
b)
aged
and/
students.
capital
plans
School
obtaining
who
university
It
Driving
stnuoccA dna ecnaniF 3
Three
to
marks]
a
business
[9
marks]
173
3.2 C osts and revenues
By the end of this chapter, you should be able to:
➔
explain the dierent types of costs, using examples
➔
comment on the meaning of the term revenue and, using examples,
suggest various revenue streams available to organizations.
ir
Costs
and
success
of
revenues
any
stnuoccA dna ecnaniF 3
information
Cost
run
refers
its
the
Businesses
them
total
important
for
factors
therefore
effective
expenditure
need
decision
incurred
that
determine
accurate
the
and
reliable
making.
by
a
business
in
order
to
operations.
Revenue
and
very
business.
about
to
are
is
a
measure
of
the
money
generated
from
the
sale
of
goods
services.
Prot
costs.
is
A
calculated
high
by
positive
nding
out
difference
the
is
a
difference
good
between
indicator
of
revenues
business
and
success.
typ f 
Fixed costs
These
are
services
costs
any
business
and
are
They
of
include
if
a
is
at
goods
rent,
rm
week’s
usually
therefore
in
the
in
pays
a
in
run.
factor
does
rent
of
will
to
the
per
of
with
that
have
note
short
per
to
xed
to
are
run
paid
mostly
is
costs
do
and
time
or
or
of
related
per
as
year.
a
xed
For
period
to
costs
instance,
decides
despite
not
goods
needed
of
payments.
paid
of
regardless
dened
(resource
month
be
amount
be
Examples
interest
need
the
bi-annually,
short
change.
$5,000
that
They
production
and
still
in.
quarter,
The
not
salaries,
rent
vary
engages
short
one
important
output
rm
the
or
expenses
month,
services)
this
change
are
per
least
or
not
insurance,
holiday,
change
paid
xed
when
produce
do
They
activity
usually
remain
time
that
produced.
the
change
to
take
a
holiday.
due
to
It
a
run.
Variable costs
These
are
costs
produced.
activity.
long
are
leads
to
costs,
174
These
run
They
variable
are
Variable
produced.
the
that
They
(a
also
an
sales
costs
are
pegged
are
or
are
costs
period
increase
costs
vary
change
expenses
of
to
in
that
volume
that
time
sales,
can
in
commissions,
the
related
be
when
variable
incurred.
with
change
costs.
Examples
packaging,
as
number
they
factors
an
If
of
units
energy
goods
to
paid
in
the
in
sales
per
usage
services
quantity
short
or
are
run
include
costs.
or
in
variable).
output
produced
costs
or
business
production
are
variable
and
are
both
increase
no
of
of
proportion
incurred
all
that
in
then
raw
sold
no
material
3 . 2
All
xed
costs)
costs
gives
(TFC)
+
(total
us
total
the
xed
total
variable
costs)
costs.
costs
added
Hence,
to
all
total
variable
costs
costs
(TC)
=
C O S T S
(total
total
A N D
R E V E N U E S
variable
xed
costs
(TVC).
Semi-variable costs
are
costs
comprising
Semi-variable
costs
consumption,
after
exceeded.
costs.
The
however,
Labour
be
the
while
greater
costs
the
phone
call
are
extra
also
are
hours.
for
is
known
(number
of
level
variable
as
levels
the
the
the
such
example
which
calls
as
would
make
costs
be
incurs
costs.
for
the
will
still
The
regular
be
a
a
or
its
or
level
the
xed
total
cost
would
for
rental
variable
costs;
costs.
worked,
made
xed
is
mixed
xed
monthly
rm’s
up
set
hours
overtime
constitutes
made)
production
when
higher
rm
worker
payment
components.
of
semi-xed
semi-variable
to
Another
variable
given
become
of
any
charge)
and
a
produced
month
cost
(standing
charges
they
example
per
xed
xed
production
units
an
paid
are
the
no
variable
line
which
costs
when
salary
working
the
Such
both
remain
cost,
for
a
stnuoccA dna ecnaniF 3
These
while
cost.
Direct costs
These
the
can
are
directly
(known
of
costs
that
production
our
as
used
in
in
can
a
restaurant
be
specic
traced
cost
production
food
be
of
to
a
centres).
making
identied
goods
Some
bread
only
with
a
of
bakery,
rm,
chicken
and
clearly
They
product,
examples
in
or
services.
particular
manufacturing
selling
or
expenses
department,
direct
the
the
attributed
are
cost
cost
products.
costs
of
of
or
labour
Generally,
that
Rent on business premises is
process
include
chicken
to
the
used
in
direct
a
an indirect cost
cost
in
car
fast-
costs
Key terms
include
raw
materials,
direct
labour,
and
packaging
costs.
Fixed costs
Indirect costs
These
of
are
costs
specic
traceable
that
goods
to
a
costs that do not change
or
are
not
clearly
services.
given
cost
They
centre
identied
are
such
with
expenses
as
the
that
product,
with the amount of goods or
production
are
not
activity,
or
directly
services produced
department.
Variable costs
As
a
result,
They
are
include
they
also
rent,
advertising
are
difcult
known
ofce
as
staff
expenditure,
to
assign
overheads
salaries,
or
audit
security,
to
particular
overhead
fees,
interest
legal
on
cost
centres.
costs.
loans,
and
costs that change with the
Examples
expenses,
insurance,
warehouse
costs.
number of goods or services
produced
Semi-variable costs
costs comprising both xed
and variable components
Direct cost
costs that can be identied
with the production of specic
goods or services
Indirect cost
costs that are not clearly
identied with the production
of specic goods or services
Raw materials are a direct cost
175
3
F i n a n c e
a n d
a c c o u n ts
Student workpoint 3.5
Exam tip
Be a researcher
In most cases indirect costs
are usually xed costs while
Research
the
following
organizations
and
identify
the
various
costs
direct costs are usually
they
incur:
variable costs. However, both
●
An
airline
●
A
mobile
●
A
high
●
A
hospital
●
A
bank
indirect and direct costs can
phone
be either xed or variable
company
depending on the specic
school
nature of business activity.
Classify
of
the
these
costs
costs
into
can
either
also
be
xed,
variable
categorized
as
or
semi-variable.
direct
or
Which
indirect?
stnuoccA dna ecnaniF 3
Total revenue
This
is
the
total
calculated
Total
by
revenue
Abbreviated
where
For
TR
is
amount
=
as
price
TR
total
example,
if
a
(US$8
200,000)
revenue,
per
P
×
month,
=
also
a
price
unit
×
rm
per
receives
unit
quantity
by
from
the
its
sales.
number
of
It
is
units
sold:
sold
Q
P
is
price
toy-producing
toys
Total
a
=
money
the
revenue,
200,000
×
of
multiplying
then
its
rm
total
US$1,600,000
known
as
per
sales
unit
and
charges
US$8
revenue
or
for
US$1.6
revenue
Q
is
the
per
the
quantity
toy
and
month
sold.
sells
will
be
million.
or
turnover,
should
not
be
Key terms
confused
account.
the
with
In
goods
earnings
addition,
or
services
or
prots,
total
which
revenue
were
sold
on
take
includes
credit
or
costs
all
or
expenses
income
cash.
into
received,
However,
a
whether
Revenue
rm’s
a measure of the money
revenue
is
obtained
not
only
from
its
trading
activities.
Other
revenue
generated from the sale of
streams
include
the
following:
goods and services
●
Rental
income
–
a
business
could
receive
income
from
rent
it
collects
Total revenue
from
out
property
its
ofce
products
is
it
or
has
invested
factory
space
in.
A
seasonal
during
times
business
when
could
demand
also
for
hire
its
low.
the total amount of money a
rm receives from the sale of
goods or services, found by
●
Sale
of
xed
assets
–
this
could
be
from
the
sale
of
unused
or
multiplying the price per unit
underutilized
assets
in
Dividends
business
a
business.
by the number of units sold
●
and
●
is
–
a
entitled
Interest
on
to
a
could
share
deposits
–
of
be
the
holding
a
shareholder
prots,
also
substantial
in
other
known
amounts
as
of
businesses
dividends.
cash
in
the
TOK discussion
bank
can
interest
lead
on
to
the
a
business
money
if
earning
the
good
interest
rates
levels
are
of
accumulated
favourable.
To what extent is mathematics
●
Donations
–
organization
these
could
targeting
be
a
mostly
cash
gift
made
charitable
by
an
individual
organizations.
or
a vital input in knowing the
costs and revenues of a
business?
●
176
Grants
and
subsidies
–
see
section
3.1.
3 . 2
C O S T S
A N D
R E V E N U E S
Rv hkl
✓
Fixed
costs
services
rm
are
engages
goods
costs
produced
or
in.
that
and
Variable
services
do
are
not
paid
costs
produced
or
change
with
regardless
are
costs
that
of
that
change
the
any
amount
business
vary
in
with
of
the
proportion
goods
activity
number
to
or
the
of
business
activity.
Total
cost
is
the
✓
Semi-variable
components
✓
Direct
costs
product,
clearly
✓
Total
and
are
revenue
xed
are
are
It
is
is
with
the
also
xed
that
that
the
have
as
can
as
be
centres
streams
gained
sales
to
and
both
xed
directly
while
of
businesses
on
costs
the
or
or
traced
mixed
to
a
costs
of
costs
particular
are
or
not
services.
goods
and
turnover
include
deposits,
variable
goods
sale
sales
costs
and
indirect
specic
from
revenue
interests
variable
semi-xed
production
income
dividends,
all
known
cost
known
revenue
assets,
also
or
of
costs
expenses
department
Available
of
costs
identied
services.
✓
summation
stnuoccA dna ecnaniF 3
✓
rental
income,
donations,
sale
grants
and
subsidies.
177
3
F i n a n c e
a n d
a c c o u n ts
Pr q
TAK
TAK
is
a
sole
providing
a
good
down
on
prot
stnuoccA dna ecnaniF 3
178
of
the
his
by
Dene
had
(ii)
(iii)
and
close
his
and
of
his
in
next
him
on
for
up
variable
his
was
He
the
In
He
that
set
his
focuses
up
grew
quite
as
costs
he
aware
rst
approached
performance
of
a
so
his
semi-variable
year
therefore
streams
on
included
ran
of
he
insignicant
has
revenue
has
Tom
The
became
costing.
more
year.
by
costs
Tom
economy.
improve
following
set
tourists.
revenue
the
seek
to
business
impact
because
help
the
xed
an
business
services
costs
downturn
the
(i)
xed
costs
to
travel
operated
prot
consultant
a)
he
also
any
following
a
As
that
make
and
amount
business.
costs
proprietorship
tour
did
resorted
as
not
especially
to
to
cut
guarantee
nancial
his
business.
terms
costs
[2
marks]
revenue
[2
marks]
prot
[2
marks]
[5
marks]
[9
marks]
b)
Using
examples
c)
Explain
three
Tom
how
on
explain
ways
to
the
the
term
nancial
improve
his
“semi-variable
consultant
revenue
may
streams
costs”
advise
3.3 Break-even analysis
By the end of this chapter, you should be able to:
➔
distinguish between contribution per unit and total contribution
➔
draw a break-even char t and calculate the break-even quantity,
prot and margin of safety
➔
calculate target prot output, target prot and target price
➔
analyse the eects of changes in price or cost on break-even quantity,
prot and margin of safety, using graphical and quantitative methods
stnuoccA dna ecnaniF 3
examine the benets and limitations of break-even analysis.
➔
crb
Contribution
protability
vital
to
note
calculating
costs.
and
It
is
that
prot
unit
how
after
and
example,
per
table
towards
is
per
if
a
$60,
unit
Total
from
of
xed
is
the
$150
will
Alternatively,
contribution
contribution
using
Total
the
=
sells
above
the
business.
sold
in
order
contributes
to
overall
However,
can
to
its
be
cover
xed
it
used
a
is
in
rm’s
costs
costs.
per
unit
for
–
$150
makes
total
a
when
variable
a
between
the
variable
cost
each
its
and
contribution
example,
variable
=
$9,000
×
–
the
of
the
can
number
of
contribution
than
from
total
of
selling
per
price
unit
variable
$90
rm’s
be
per
×
sells
table,
per
cost
table
is
sold.
sales
It
is
revenue:
cost
100
tables
at
the
then:
100)
total
xed
calculated
units
unit
total
variable
per
($60
one
the
business
$60
100)
towards
the
if
cost
contribution
by
more
costs
revenue
($150
=
be
a
Contribution
difference
tables
=
total
the
price
total
above
unit
to
in
unit:
calculated
and
prot.
variable
business
contribute
the
per
=
as
product
to
determining
costs.
the
contribution
$9,000
Total
the
contribution
price
per
when
products
need
a
refers
cost
subtracting
Following
the
business
its
same
much
unit
then
given
products
how
per
concept
by
the
deducting
paying
by
Total
Still
not
contribution
found
This
is
variable
For
same
it
about
many
Contribution
Total
important
determines
Contribution
per
an
brought
by
costs
and
prot.
multiplying
the
sold:
unit
×
number
of
units
sold
examples:
contribution
=
$90
×
100
=
$9,000
179
3
F i n a n c e
a n d
a c c o u n ts
Contribution and prot
Key terms
After
establishing
Here
we
will
business.
also
Using
what
need
this,
the
to
the
contribution
know
the
formula
is,
total
for
prot
xed
prot
is
can
costs
be
calculated.
incurred
by
Contribution per unit
the
therefore:
the dierence between the
selling price per unit and
Prot
=
total
contribution
-
total
xed
costs
variable cost per unit
If
the
business
prot
will
described
above
incurs
a
total
xed
cost
of
$5,000
then
its
Total contribution
be:
the dierence between the
Prot
=
$9,000
=
$4,000
total sales revenue and the
$5,000
total variable costs
Prot
Clearly
we
can
contribution
in
see
only
calculating
that
contribution
removes
prot
rms
the
is
not
variable
must
also
the
costs
subtract
same
from
the
as
prot,
sales
xed
as
revenue,
while
costs.
obtained by subtracting total
xed costs from the total
stnuoccA dna ecnaniF 3
contribution
Student workpoint 3.6
Be knowledgeable
A
mobile
each
sell
month
of
Model
and
phone
for
B
while
January
phones
Model
mobile
company
$250
B’s
2012,
were
was
phone
per
company
the
contribution
b)
the
total
c)
the
prot
1,000
sold.
$70
a)
sells
per
the
B
phone
phones
Model
Model
unit.
that
A
’s
If
for
for
mobile
A
for
phones
total
Model
$180
were
cost
xed
amounted
each
each
models.
sell
variable
the
month
unit
contribution
for
two
Model
to
A
each.
sold
per
costs
phones
In
the
while
unit
was
incurred
$10,000,
1,500
$90
by
the
calculate:
model
model
phone
company
that
month.
Breaking even
After
a
gathering
rm
needs
total
to
to
At
Breaking
businesses
of
to
calculate
cover
equal
point.
number
information
need
sell
costs
even
loss.
will
the
this
even
all
total
products
how
costs.
a
in
This
new
level
will
to
sell
of
is
xed
or
output
also
for
so
as
to
cover
to
and
what
of
occurs
make
start-up
establish
all
variable
level
known
neither
important
ventures
need
and
units
which
business
especially
they
pricing
many
revenue,
point
is
engaging
its
about
their
as
a
costs,
output
where
the
break-
prot
nor
businesses
the
it
the
a
or
minimum
costs.
Break-even char t
This
is
a
graphical
revenues
against
identied
The
When
axis
given
axis
the
a
that
level
total
measures
measures
drawing
carefully
a
plotting
horizontal
vertical
180
by
method
the
(See
of
output.
cost
the
costs
break-even
considered.
measures
and
chart,
Figure
The
total
output
and
the
or
value
of
a
rm’s
break-even
revenue
units
of
costs
point
gures
can
on
production
a
the
following
points
need
be
graph.
while
revenues.
3.3.1.)
and
to
be
the
3 . 3
Fixed
●
costs
(FC)
need
to
be
paid
no
matter
what
B R E A K - E V E N
level
A N A LY S I S
costs/
TR
of
output
they
are
and,
because
represented
they
by
a
are
constant
horizontal
at
these
continuous
levels,
revenue($)
TC
line.
prot
With
●
no
units
of
output
there
will
be
no
variable
VC
break-even
costs
point
(VC).
The
the
Therefore
higher
the
variable
found
by
the
VC
line
number
costs
will
multiplying
of
be.
starts
units
The
the
from
zero
produced
total
number
variable
of
(origin).
the
units
higher
costs
R = C
are
produced
loss
by
the
may
variable
not
be
cost
per
included
unit.
in
the
In
most
cases
break-even
the
VC
FC
line
chart.
0
xed
produced,
cost
same
trend
no
The
the
as
of
units
line.
break-even
The
●
sold
left
of
whereas
At
the
the
the
point
level
is
will
this
be
no
no
Q (break-even quantity)
output/sales
output
where
it
Figure 3.3.1. A break-even char t
the
follows
revenue.
origin
the
point
the
output
of
with
begins
the
greater
break-even
right
line
from
the
point
of
paid
Importantly,
there
sold
be
the
line.
begins
this
to
(TC)
starts.
VC
line
break-even
TR
have
cost
line
the
(TR)
number
still
total
(FC)
output
revenue
●
the
xed
With
●
costs
total
where
be
point
point
read
shows
shows
The
revenue
the
break-even
can
Therefore
(zero).
TC
will
line
the
the
the
loss
intersects
as
well
with
as
the
graph.
made
prot
total
the
be.
revenue/costs
from
the
greater
stnuoccA dna ecnaniF 3
Since
●
by
a
rm,
obtained.
Margin of safety
Businesses
produce
or
sales
could
between
level
It
is
of
the
in
to
know
is
of
the
its
a
outp ut
the
gr e a te r
l os s
l ev el
k no wn
prot
how
b r e a k- e ve n
before
betwee n
levels,
be
the
brea k - e v e n
range
difference
will
need
fall
output
the
sales
may
beyond
as
is
of
the
o ve r
the
as
no t e d.
o ut pu t
whi ch
s afe ty
( Se e
ou t p ut
we l l
A
of
pr o t
net
or
they
ho w
the
is
the
n ee d
much
of
the
a ct u al
safety
q u an t i t y
F ig u r e
as
m e as u r e
and
margin
br e ak -e ve n
e a r ning s .
much
p oi nt
or
m ad e.
and
to
ou t pu t
d if fe r en c e
( c u r re n t )
safety
Th e
margin .
g re a t e r
the
the
safer
a
rm
3. 3. 2.)
costs/
TR
revenue($)
Margin
of
safety
=
current
output
-
break-even
prot
output
TC
break-even
For
example,
if
the
break-even
quantity
is
2,500
units
and
point
actual
safety
or
is
current
1,500
quantity.
As
a
output
units
or
positive
is
60
4,000
per
value
units
cent
this
is
then
above
a
the
the
margin
of
break-even
favourable
R = C
position
safety
for
a
rm.
margin
loss
FC
However,
or
a
making
rm
a
producing
loss
will
be
below
the
experiencing
break-even
a
negative
point
margin
0
of
safety
position.
For
example,
if
the
Q
Q1
output/sales
break-even
Figure 3.3.2. A break-even char t with margin
quantity
is
2,500
units
and
the
current
output
is
1,800
of safety
units
the
negative
the
margin
sign
of
safety
denoting
break-even
level
of
will
that
be
700
current
output.
units,
output
with
level
is
the
below
Note: Q denotes break-even output and Q1
denotes current output.
181
3
F i n a n c e
a n d
a c c o u n ts
Student workpoint 3.7
Exam tip
It is very impor tant to label
Be knowledgeable
the break-even char t fully,
The
following
information
was
provided
by
David,
a
candle
producer,
including the axes and
based
on
his
monthly
production
and
sales.
lines, and to provide an
appropriate title or caption.
In addition, you should be
able to interpret and modify
the break-even char t when
required.
stnuoccA dna ecnaniF 3
Table 3.3.1
Quantity
Price per
Revenue
Fixed
Variable
Total
Prot/
of candle
candle
from
costs
costs
costs
(Loss)
boxes
box
candle
(US$)
(US$)
(US$)
sold
(US$)
box sold
[Total]
[Total]
(US$)
(US$)
0
$10
0
2,000
0
2,000
200
$10
2,000
2,000
1,200
3,200
400
$10
4,000
2,000
2,400
4,400
600
$10
6,000
2,000
3,600
5,600
800
$10
8,000
2,000
4,800
6,800
1,000
$10
10 000
2,000
6,000
8,000
1,200
$10
12 000
2,000
7,200
9,200
Referrring
to
Table
1.
Complete
2.
Calculate
3.
Draw
a
show
the
4.
Show
the
the
3.3.1,
prot/(loss)
variable
break-even
on
graph
the
per
candle
using
quantity
the
questions
1200
below.
column.
cost
graph
break-even
the
answer
(2,000)
margin
the
on
of
box.
information
your
safety
in
the
table
and
graph.
at
1,200
candle
boxes
sold.
Calculating break-even quantity
1. Using contribution per unit
Break-even
quantity
can
be
calculated
using
the
following
xed costs
___
Break-even
quantity
=
contribution
182
per
unit
formula:
3 . 3
For
example,
month.
shirt
is
The
a
shirt
retailer
variable
$22.
Using
cost
the
incurs
per
above
shirt
xed
is
costs
$12
and
amounting
the
selling
to
B R E A K - E V E N
$3,000
price
for
A N A LY S I S
a
each
formula:
$3,000
_
Break-even
quantity
=
=
$22
300
shirts
$12
2. Using the total costs = total revenue method
saw
total
costs
where
Using
can
P
(TC)
the
be
section
TVC
is
=
above
Q
=
as
+
Q
=
3,000
10
×
Q
=
3,000
Both
300
(TFC)
unit
the
(TR)
+
(VC)
shirt
=
total
×
P
×
Q
and
variable
costs
(TVC)
Q.
retailer,
the
break-even
quantity
below:
total
costs
(TC)
+
(12
×
Q)
shirts
methods
retailer
of
=
costs
per
shown
revenue
TVC
×
=
cost
(TR)
TFC
total
xed
example
22
Q
that
variable
revenue
×
3.2
total
calculated
Total
the
in
stnuoccA dna ecnaniF 3
We
shown
needs
to
above
sell
in
give
order
a
break-even
to
break
quantity
of
300
shirts
that
even.
Prot or loss
The
break-even
quantity
break-even
Prot
chart
generate
can
quantity
be
Moreover,
showed
prot
lead
calculated
prot
or
for
to
any
sales
business,
that
while
exceed
sales
that
the
are
break-even
less
than
the
losses
using
loss
that
a
can
contribution
also
be
as
seen
calculated
earlier
using
the
above.
following
formula:
Prot
=
Assuming
month
The
total
the
would
revenue
shirt
be
retailer
=
TR
Prot
=
[P
=
[22
=
$22,000
=
$7,000
shirt
What
would
were
sold,
a
as
-
total
1,000
costs
shirts
a
(TC)
month,
the
prot
per
follows:
TC
×
Q]
×
retailer
shirts
sold
calculated
Prot
1,000
(TR)
[TFC
1,000]
+
TVC]
[3,000
+
(12
×
1,000)]
$15,000
would
therefore
be
making
a
prot
of
$7,000
on
selling
month.
be
the
prot
assuming
the
or
loss
price
if
and
in
another
other
costs
month
remain
only
200
shirts
constant?
183
3
F i n a n c e
a n d
a c c o u n ts
Target prot
Target prot output
The
is
break-even
needed
as
target
As
to
prot
shown
$8,100)
in
the
chart
earn
a
can
given
output
Figure
bicycle
be
used
level
and
3.3.3,
the
to
of
to
expected
attain
producer
determine
prot.
will
a
prot
target
need
the
Output
to
is
80
of
of
this
known
prot
sell
level
found
as
output
way
is
target
$1,500
that
known
prot.
($9,600
bicycles.
costs/
revenue($)
TR
prot
TC
9600
8100
stnuoccA dna ecnaniF 3
6000
loss
2500
FC
0
50
80
output/sales
The producer needs to sell 80 bicycles
Figure 3.3.3. The break-even char t of a bicycle producer
to reach the target prot
An
alternative
following
method
formula,
of
getting
which
is
a
target
prot
modication
xed
costs
+
of
output
the
target
is
by
using
break-even
the
formula:
prot
___
Target
prot
output
=
contribution
Using
the
amount
and
as
the
information
to
$2,500,
target
for
the
variable
prot
is
bicycle
cost
$1,500,
per
the
per
producer,
unit
is
target
where
$70,
prot
unit
price
xed
per
output
costs
bicycle
can
be
is
follows:
2,500 + 1,500
__
Target
prot
output
=
The
result
obtained
The
above
target
obtained
using
the
using
the
can
also
=
70
be
80
bicycles
50
calculation
break-even
formula
4,000
_
=
120
chart
method
conrms
what
was
method.
used
in
calculating
target
prot
and
price.
Calculating target prot
Assuming
that
contribution
100
184
$120,
calculated
bicycles,
the
per
bicycle
unit
what
is
is
producer’s
$50
the
and
target
the
xed
target
prot?
costs
prot
remain
output
at
is
$2,500,
now
3 . 3
This
is
found
as
follows
by
incorporating
the
target
prot
B R E A K - E V E N
A N A LY S I S
output
Key terms
formula:
Break-even char t
$2,500
+
target
prot
__
=
100
a graphical method that
$50
measures the value of a rm’s
$2,500
+
target
prot
=
100
×
$50
costs and revenues against a
Target
prot
=
$5,000
Target
prot
=
$2,500
$2,500
given level of output
Break-even quantity
a measure of output where
Calculating target price
total revenue equals total costs
Target
price
can
also
be
calculated
using
the
formula
above.
If
the
xed
Prot
are
$6,500
be
$2,500,
and
the
calculated
the
variable
target
as
prot
cost
per
output
bicycle
is
200
is
$50,
bicycles,
the
the
target
target
prot
price
is
can
the positive dierence
follows:
between total revenue and
stnuoccA dna ecnaniF 3
costs
total costs
$2,500 + $6,500
__
200
=
target
price
$50
Margin of safety
200
(target
price
$50)
=
$9,000
the output amount that
exceeds the break-even
200
(target
price)
$10,000
=
$9,000
quantity
$19,000
_
Target
price
Target prot output
=
=
$95
per
bicycle
200
the level of output that is
Therefore
the
to
bicycle
target
a
producer
prot
will
of
$6,500
need
to
sell
at
a
target
each
prot
bicycle
for
output
of
200bicycles,
$95.
needed to earn a specied
amount of prot
Break-even revenue
The
break-even
seen
of
in
50
Figure
bicycles.
point
where
required
break
even
It
to
even.
revenue
3.3.3,
It
is
the
At
clear
total
cover
be
that
the
point
determined
establishes
the
revenue
both
this
can
which
the
to
and
the
using
be
break-even
equals
xed
it
break-even
revenue
total
variable
break-even
a
$6,000
costs,
costs
revenue
is
an
chart,
output
obtained
i.e.
in
is
at
it
is
order
equal
the
for
to
at
as
level
the
revenue
a
the
rm
to
break-
costs.
can
also
be
calculated
using
the
following
formula:
xed costs
___
Break-even
revenue
=
×
contribution
Using
the
$120,
variable
the
above
previous
example
costs
formula
are
we
$70
of
a
and
bicycle
xed
per
producer,
costs
price
per
unit
unit
are
if
price
$2,500,
per
then
bicycle
is
applying
get:
$2,500
_
Break-even
revenue
=
×
$120
=
$6,000
50
This
as
calculation
that
shown
shows
in
that
Figure
the
break-even
revenue
is
$6,000
the
same
3.3.3.
185
3
F i n a n c e
a n d
a c c o u n ts
Student workpoint 3.8
Be a thinker
XYZ
Ltd
has
per
month.
the
variable
is
the
The
capacity
xed
costs
to
costs
are
$15
produce
amount
per
unit.
180,000
to
units
$600,000
The
selling
of
per
its
key
month,
price
for
each
product
while
product
$20.
1.
Calculate
2.
the:
a)
monthly
b)
break-even
quantity
c)
break-even
revenue.
The
prots
company
Calculate
has
at
a
maximum
prot
target
capacity
of
$250,000
per
month.
the:
stnuoccA dna ecnaniF 3
a)
output
level
b)
price
will
it
capacity
of
needed
need
to
150,000
to
reach
charge
the
to
target
achieve
prot
the
prot
target
at
a
units.
Eects of changes in price or costs
The
it
break-even
can
show
safety
the
as
a
the
result
changes
future
chart
can
impact
can
of
any
then
direction
in
on
used
as
a
break-even
changes
be
the
be
in
helpful
price
compared
decision-making
quantity,
or
with
prot,
cost.
the
The
and
new
previous
tool
margin
position
position
to
as
of
after
provide
business.
1. Changes in price
Figure
shift
of
3.3.4
the
shows
total
the
effect
revenue
of
line
an
from
increase
TR
to
1
sales
revenue
break
even
every
output
of
at
has
a
increased
lower
level.
level
This
at
of
can
all
also
lead
.
price.
This
of
and
to
output.
there
an
The
will
increase
safety.
costs/
TR
revenue($)
2
TR
1
TC
R
1
R
2
= C
1
= C
2
0
BEQ2
BEQ1
output/sales
Figure 3.3.4. Break-even char t showing an increase in price
186
This
leads
indicates
to
that
a
the
2
levels
output
in
TR
be
in
rm
will
higher
a
rm’s
also
prots
at
margin
3 . 3
B R E A K - E V E N
A N A LY S I S
2. Changes in costs
a)
Increase
Figure
in
xed
3.3.5
costs
shows
the
effect
of
an
increase
in
xed
costs
(FC
to
1
FC
),
leading
to
an
upward
parallel
shift
of
the
total
cost
line
from
2
TC
to
TC
1
.
An
increase
in
xed
costs
leads
to
an
increase
in
total
2
costs
by
the
quantity
This
same
also
also
amount
increases
decreases
the
at
and
every
prots
margin
of
level
of
output.
decrease
at
all
Break-even
levels
of
output.
safety.
costs/
revenue($)
TR
TC
2
TC
1
= C
2
R
2
stnuoccA dna ecnaniF 3
R
= C
1
1
FC
2
FC
1
0
BEQ1
BEQ2
output/sales
Figure 3.3.5. Break-even char t showing an increase in xed costs
b)
Increase
Figure
in
variable
3.3.6
Increases
in
line.
is
This
shows
costs
the
variable
shown
effect
costs
by
the
of
an
increase
shift
of
increase
the
the
in
variable
gradient
total
cost
of
the
line
costs.
total
from
cost
TC
to
1
TC
.
This
leads
to
a
rise
in
the
break-even
quantity
and
reduces
the
2
margin
of
safety.
costs/
revenue($)
TR
TC
2
TC
1
R
2
R
1
= C
2
= C
1
0
BEQ1
BEQ2
output/sales
Figure 3.3.6. Break-even char t showing an increase in variable costs
187
3
F i n a n c e
a n d
a c c o u n ts
Student workpoint 3.9
Student workpoint
3.10
Be a thinker
Be knowledgeable
A
chocolate
prices
to
business
charge
its
is
considering
customers
per
which
of
the
following
three
1.
chocolate:
JTS
Ltd
and
A
$1.50
B
$2.00
C
produces
sells
following
information
is
useful
in
its
decision
making:
of
globally.
costs:
$100
a
countries
The
monthly
xed
●
clocks
to
$2.50
number
The
them
following
information
is
000
provided.
variable
●
cost
per
chocolate:
$1
Maximum
current
●
1.
For
output:
each
price,
300
000
chocolates.
capacity:
200,000
clocks
Current
output
and
calculate:
sales:
stnuoccA dna ecnaniF 3
a)
the
break-even
b)
the
margin
c)
the
prot
160,000
quantity
Selling
of
or
clocks
safety
Fixed
price:
costs:
Variable
loss
$12
$900,000
cost:
$
4
per
clock
d)
break-even
quantity
as
a
percentage
of
the
current
output.
The
2.
If
the
variable
costs
per
chocolate
increase
to
$1.20,
management
recalculate
propose
parts
(a)
to
(d)
that
reduction
3.
Comment
on
a
possible
above.
your
observations
from
questions
1
and
2.
unit
to
$10
lead
to
an
sales
and
reach
Benets of break-even analysis
in
price
per
would
increase
help
their
in
them
maximum
capacity.
●
Break-even
rm’s
charts
nancial
provide
position
at
an
easy
various
and
visual
levels
of
means
of
analysing
a
a)
output.
Construct
even
●
At
a
glance,
by
using
the
charts,
the
management
of
a
business
to
determine
quantity,
and
the
prot
break-even
or
loss,
revenue
margin
or
of
safety,
Formulae
can
calculating
also
the
be
used
to
give
Changes
even
or
●
in
current
output
Use
chart
by
more
accurate
results
when
the
such
as
should
and
and
costs
margin
of
and
their
safety
can
impact
be
on
prot
compared
by
or
loss,
using
the
quantity
charts
(ii)
The
analysis
deciding
relocate
on
or
Break-even
sold
many
can
key
be
used
as
a
investment
merge
with
analysis
no
with
demand.
assumes
possibility
businesses
Stocks
strategic
projects
another
decision-making
or
whether
a
(iii)
tool
may
may
of
hold
also
that
all
rm.
stocks
stocks
build
being
to
up
the
It
assumes
c)
built
cater
for
because
produced
up
any
goods
or
held.
sudden
cannot
by
In
be
straight
that
all
lines.
revenue
This
is
not
and
cost
always
lines
the
are
case.
linear,
i.e.
Offering
current
calculation
check
your
after
in
the
the
a
in
second
chart
to
situation
price
reduction.
sold.
method
answers.
Construct
show
reality,
Repeat
part
(b)
the
above
represented
price
the
new
chart.
reductions
d)
Recommend
the
which
proposals
should
188
at
break-even
rms
changes
the
using
by
of
output
Use
output
Prot
business
tasks
●
margin
safety
to
is
Break-even
break-
Limitations of break-even analysis
●
to
determine:
calculation.
Break-even
level
above.
prices
point,
the
and
break-even
(i)
●
price
cost.
b)
●
break-
using
is
original
able
a
chart
JTS
pursue.
of
Ltd
3 . 3
or
discounts
will
inuence
the
slope
of
the
revenue
line.
B R E A K - E V E N
The
slope
A N A LY S I S
of
Exam tip
the
in
variable
an
effort
cost
to
line
will
increase
also
change
output.
This
if
a
rm
change
pays
will
overtime
then
wages
inuence
the
Most IB examination
slope
of
the
total
cost
line.
questions require te use of
●
Apart
are
from
not
makes
●
A
showing
represented
the
process
break-even
business
xed
on
the
more
chart
and
break-even
costs,
semi-variable
chart.
If
these
are
costs
models wit straigt revenue
included
it
and cost lines.
complex.
may
environments.
variable
not
For
be
very
useful
example,
the
in
changing
break-even
or
dynamic
chart
may
not
TOK discussion
cope
with
sudden
changes
in
prices,
costs,
or
technology.
“ Wat you measure is wat
●
The
accuracy
and
quality
of
the
cost
and
revenue
data
used
you get.” Wat, if anyting,
determine
the
effectiveness
inaccurate
data
of
break-even
analysis.
Unreliable
or
does tis tell you about te
may
inuence
the
conclusions
reached
in
the
overall
role of measurable objectives
analysis.
Fixed
costs
may
change
at
different
levels
of
activity.
It
would
stnuoccA dna ecnaniF 3
in business decision making?
●
be
Do results obtained from
preferable
to
represent
these
xed
costs
as
a
“stepped”
line.
For
quantitative metods always
example,
in
order
to
increase
output
a
rm
may
need
to
double
outweig qualitative ones?
its
capacity.
This
complicating
may
lead
break-even
to
sharp
rises
in
xed
costs,
thereby
analysis.
Revision checklist
✓
Contribution
per
unit
and
difference
✓
Prot
can
✓
A
a
break
rm’s
in
✓
✓
the
be
total
even
costs
is
the
the
chart
the
Margin
of
level
output
safety
is
total
by
a
to
obtain
measures
the
costs
contribution
a
and
total
difference
or
by
a
selling
is
between
the
the
the
cost.
total
total
costs
value.
that
given
price
variable
subtracting
positive
difference
(current)
calculated
per
the
the
contribution
measures
level
of
the
output
value
and
of
helps
point.
the
be
total
method
against
actual
can
the
cost
graphical
quantity
the
xed
between
while
revenue
break-even
and
unit
getting
revenues
Break-even
by
difference
per
total
revenue
and
the
cost
obtained
and
identifying
of
unit
between
contribution
from
per
variable
between
level
by
of
the
break-even
output
dividing
the
in
a
total
business.
xed
unit.
Fixed
costs
+
target
prot
___
✓
Target
prot
output
formula
is
Contribution
per
unit
Fixed costs
__
✓
Break-even
revenue
formula
×
is
Contribution
per
Price
per
unit
unit
189
3
F i n a n c e
a n d
a c c o u n ts
Pr q
Dan
Dan
He
Electro
Bowen
owns
the
is
an
business
located
Dan
sole
name
together
started
amount
of
collateral*
The
a
online
for
the
are
an
from
who
Electro’s
customers
money.
Repeat
stnuoccA dna ecnaniF 3
for
the
Dan
and
is
ow
in
now
an
to
very
have
worried
in
difculties
order
are
Dan
He
cameras
are
ofce,
storage
ago
by
used
directly
processed
desirable
years
about
the
prevent
has
place
city
to
consumers.
electronically
and
centre
borrowing
his
from
high
to
pay
and
their
the
in
see
a
call
under
centre
are
location.
a
residential
considerable
property
cash
the
is
would
the
rise
Dan
He
for
percentage
and
and
as
good
in
of
good
Dan
pay
a
may
value
Electro’s
he
rates,
face
and
Dan
higher
service
considering
ow
cameras
cameras.
as
interest
Electro
reliable
quality
purchase
they
forecasted
years.
good
their
that
competition.
reputable
for
advance
large
quality
possible
a
price
indicated
coming
such
a
comprise
of
online
in
shipped
loyal
even
because
increase
digital
sales
and
bank.
and
purchases
cameras
The
three
a
charges
transportation.
customers
all
loan.
prompt
Some
sells
and
expensive
bought
supplier
who
Electro.
business
money
cameras
overseas
Dan
in
the
trader
business
for
sales.
price
provides.
ination
some
various
cash
strategies
difculties.
Financial information for 2010 (all gures in US$)
Fixed costs per year
Rent
Marketing
Administration
Interest payments
20 000
4000
5000
1000
Camera
Transpor tation
Direct labour
135
45
20
Variable costs per camera
Dan
a)
is
expected
(i)
(ii)
Dene
b)
the
Identify
sole
(i)
2010.
(show
order
all
to
Calculate
IB,
*
190
Nov
fully
safety
the
in
2010.
costs.
for
Explain
Dan
of
operating
as
tool
and
and
break-even
indicate
the
the
projected
chart
for
Dan
break-even
prot
at
700
the
price
sales
of
per
of
possible
Dan
possible
difculties.
all
Electro
point,
the
cameras
marks]
needs
in
must
to
order
be
to
sell
in
charged
double
working).
of
the
for
Dan
the
[2
break-even
model
Electro.
strategies
marks]
(show all your working). [2
that
limitations
[2
marks]
cameras)
your
marks]
[7
Dan Electro
prot
camera
700
(show
for
cameras
projected
[2
a
working).
prot
two
two
ow
labelled
number
the
expected
Examine
cash
a
double
decision
c)
variable
advantages
your
projected
(iv)
cameras
Calculate
of
Calculate
(at
700
term
two
margin
(iii)
sell
250
trader.
Construct
for
(ii)
to
Price per camera
Electro
to
marks]
as
a
[4
marks]
[6
marks]
prevent
2010
collateral: the borrower ’s proper ty is oered to the lender as security if the loan is not paid back
3.4 Final accounts
By the end of this chapter, you should be able to:
➔
discuss the purpose of accounts to dierent stakeholders
➔
examine the principles and ethics of accounting practice
➔
prepare and interpret nal accounts, namely the prot and loss
account and the balance sheet
➔
describe the dierent types of intangible assets
➔
calculate and distinguish between the straight-line and reducing-
stnuoccA dna ecnaniF 3
balance depreciation methods (HL only)
explain the strengths and weaknesses of the straight-line and
➔
reducing-balance methods (HL only).
Prp f   r khlr
Final
end
accounts
of
a
trading
and
the
year.
nancial
expenses
examples
of
to
of
inform
and
period
internal
shareholders,
stakeholders
competitors,
to
and
of
at
these
by
the
an
of
a
and
the
employees,
or
revenues,
about
while
the
community.
is
the
Internal
suppliers,
local
stakeholders
at
scal
stakeholders
organization.
customers,
and
businesses
end
transactions,
external
of
managers,
are
nanciers,
each
as
including
performance
include
accounts
compiled
such
accounts
external
government,
of
help
records
position
stakeholders
statements
accounting
These
nancial
purpose
are
particular
explored
The
below.
Shareholders
Shareholders
is
becoming
how
will
protable
investment.
capital
in
the
They
order
performance
whether
be
interested
throughout
of
they
its
business
check
to
on
make
the
need
a
is
be
in
the
knowing
year.
order
is
to
efciency
worthwhile
directors
to
in
nancial
also
motivated
of
how
They
assess
of
or
be
safety
their
to
the
keen
business
on
interest
further
the
the
return
valuable
will
of
in
business
to
establish
their
investing
investment.
them:
they
The
want
to
see
replaced.
Managers
Final
accounts
judge
or
and
number
then
help
of
in
the
used
in
by
their
years.
Knowing
strategic
managers
to
performance
These
monitoring
departments.
managers
are
compare
will
and
the
help
set
them
controlling
nancial
planning
for
targets,
within
in
which
particular
setting
will
they
decision
use
in
to
year
which
patterns
therefore
effective
can
nancial
budgets,
expenditure
records
more
a
will
various
greatly
making
assist
in
businesses.
191
3
F i n a n c e
a n d
a c c o u n ts
Employees
A
protable
secure.
This
for
business
job
security
does
not
involve
business
may
growth
and
could
also
to
to
to
that
pay
employees
they
help
increases.
lead
unions
signal
indicate
salary
necessarily
trade
could
also
to
could
increases
further
an
for
their
pay
strengthen
However,
negotiate
that
get
these
increase
their
will
The
two
in
employees,
on
jobs
rises.
be
potential
aspects
of
protability
leading
them
to
behalf.
Customers
Customers
constant
how
a
will
be
supply
dependent
rm
lacks
elsewhere
interested
of
a
rm’s
they
should
security,
where
in
be
perhaps
supply
knowing
products
is
on
due
in
the
to
reliable
whether
the
future.
business
low
and
there
This
and
will
will
how
protability,
be
a
determine
secure
it
customers
is.
will
If
go
guaranteed.
stnuoccA dna ecnaniF 3
Suppliers
Suppliers
with
can
rms.
immediate
ability
to
use
They
cash
pay
nal
can
accounts
either
payments.
off
its
debts
to
negotiate
extend
The
will
the
security
be
a
better
trade
key
of
cash
credit
the
business
concern
or
period
for
credit
or
and
terms
demand
thus
its
suppliers.
The government
The
is
government
abiding
A
authorities
law
in
the
protability
loss-making
because
tax
the
interested
pays.
and
by
it
could
detrimental
to
regarding
mean
a
of
business
an
the
will
check
of
in
on
whether
regulations.
business
be
increase
country’s
will
accounting
to
grave
see
how
concern
unemployment,
the
They
much
to
the
business
will
be
tax
it
government
which
could
be
economy.
Competitors
Businesses
of
other
look
for
Are
●
●
will
rms
the
want
to
see
answers
their
to
compare
how
to
well
key
competitors’
protability
struggling
How
competitors’
the
nancial
are
statements
performing
with
nancially.
those
They
will
questions:
competitors
do
their
they
levels
higher
than
theirs
or
are
the
nancially?
sales
revenues
compare
with
theirs?
Financiers
These
to
include
establish
on
the
gearing
problems
Banks
banks
how
of
the
soliciting
will
condent
that
much
it
will
check
business
funding
thoroughly
that
will
money
able
on
the
to
the
can
because
from
assess
be
they
a
creditworthiness
lend
it.
This
will
high-geared
institutions
accounts
of
back
its
a
(see
business
loan
with
in
the
business
depend
business
nancial
pay
of
also
will
have
section
order
3.1).
to
be
interest.
The local community
Residents
living
protability
192
and
around
a
particular
expansion
business
potential.
This
is
will
want
because
it
to
know
may
its
create
job
3 . 4
opportunities
the
residents
for
will
environmentally
as
air
or
noise
them
also
and
be
lead
to
growth
concerned
friendly
and
about
whether
in
the
community.
whether
their
the
accounts
F I N A L
A C C O U N T S
However,
businesses
consider
will
costs
be
such
pollution.
Prpl  h f g pr
They
not
should
accountants
only
have
observe
and
Ethics
in
in
accounting
the
usually
based
and
study
is
the
process.
the
need
respective
principles
case
on
that
have
satisfy
comply
accounting
standards
with
to
be
study
ethics
the
are
needs
a
of
code
core
moral
of
A
applied
in
of
is
code
of
Chartered
public
or
and
set
of
the
“rules”
but
conduct.
judgments
a
interest.
client
as
on
for
the
behaviour
understanding
practice,
Certied
read
applied
principles,
accountants
out
deeper
accounting
the
ethics
and
guide
a
in
therefore
spells
For
act
employer
values
that
code
to
their
ethics
warnings.
Association
of
particular
values,
upheld.
pre-emptive
about
responsibility
with
A
rm’s
to
a
the
the
of
how
following
Accountants
yduts esaC
stnuoccA dna ecnaniF 3
Professional
(ACCA).
acca  f h  
The Association of Chartered Certied Accountants
Code of Ethics for Professional Accountants (the
(ACCA) is a global body for professional accountants that
IESBA Code). Whenever the IESBA Code is revised, the
oers business-relevant qualications to people seeking
ACCA Rulebook is reviewed, and updated as necessary,
careers in accountancy, nance and management.
to ensure that it remains aligned with the IESBA Code.
The Code of Ethics and Conduct (the Code) is binding
The fundamental principles set out the obligations
on all members of ACCA , and any par tner (or director)
placed on all members, whether or not they are in
in an ACCA practice. However, it is also binding on the
practice. The ve principles are set out below.
sta of such a practice, regardless of whether or not
●
Integrity – members shall be “straightforward
they are members of ACCA or any other professional
and honest in all professional and business
body. The Code is divided into three par ts. Par t A
relationships”. The ACCA Rulebook (and the IESBA
sets out the fundamental principles of professional
Code) goes on to state that integrity implies not
ethics for professional accountants and provides a
merely honesty, but fair dealing and truthfulness.
conceptual framework for applying those principles.
●
Objectivity – members shall not allow bias,
Par ts B and C illustrate how the conceptual framework
conicts of interest or the undue inuence of
is to be applied in specic situations. These par ts
others to compromise their professional or
provide examples of safeguards that may be
business judgment.
appropriate to address threats to compliance with the
fundamental principles and also provide examples
●
of situations where safeguards are not available to
Professional competence and due care –
members have a continuing duty “to maintain
address those threats.
professional knowledge and skill at a level
required to ensure that clients or employers
Some of the most impor tant areas of the Code, from the
receive competent professional service”. Members
point of view of a practitioner, are discussed below and
shall “act diligently in accordance with applicable
in other available fact sheets.
technical and professional standards when
providing professional services”.
The fundamental principles
●
Condentiality – members shall respect the
Within the Code, as noted above, the fundamental
condentiality of information “acquired as a result
principles are set out in Par t A . As a member body
of professional and business relationships”, and
of the International Federation of Accountants
shall not disclose any such information to third
(IFAC), ACCA is required to apply ethical standards
par ties “without proper and specic authority or
that are at least as stringent as those stated in the
unless there is a legal or professional right or duty
International Ethics Standards Board for Accountants
193
3
F i n a n c e
a n d
a c c o u n ts
to disclose”. Similarly, condential information
Exam-style questions
acquired as a result of professional and business
1.
Outline the objectives of the ACCA Code of Ethics
relationships shall not be used to the personal
and Conduct.
[4 marks]
advantage of members or third par ties.
2.
Apply three principles of the ACCA Code of
Professional behaviour – members shall comply
●
Ethics and Conduct to an organisation of
with relevant laws and regulations and shall avoid
your choice.
[6 marks]
any action that may discredit the profession.
3.
The ACCA Rulebook goes fur ther, and states
Discuss the benets and the limitations of
a Code of Ethics and Conduct such as the
that members shall “behave with cour tesy and
one produced by the ACCA .
consideration” towards all with whom they come
[10 marks]
into contact in a professional capacity.
Source: http://www.accaglobal.com/content/dam/acca/
global/PDF-members/2012/2012c/CofEC.pdf
stnuoccA dna ecnaniF 3
th m l 
TOK discussion
The prot and loss account
Many businesses are
This
is
also
income
It
and
therefore
and
how
three
the
to
the
statement
Gross
Sales
of
whether
trading
account
that
a
a
at
statement
business
business
the
account,
end
the
and
over
has
of
a
given
made
that
prot
shows
a
It
loss
records
time
prot
period.
and
the
is
of
period.
or
divided
account ,
prot
producing
formula
of
social or ethical performance
into
and
then
during
=
is
or
information. How can we
social variables?
a
of
the
is
+
revenue
part
business
is
of
the
(see
and
the
income
Table
3.4.1).
used:
sales
sold
goods
or
(COGS)
were
purchases
beginning
stock
with
the
sales
top
sold
services
is
the
during
over
direct
that
a
cost
period.
follows:
stock
more
that
the
the
selling
goods
goods
as
of
from
of
of
as
formula
cost
earned
sales
period
prot
-
cost
between
shown
following
or
the
bought
this
gross
is
of
a
trading
during
stock
-
this
valued
at
closing
period
period
$200.
stock
had
$500
valued
What
is
at
its
worth
$800.
COGS
period?
$500
COGS
=
$1,100
Gross
sales
at
It
revenue
opening
rm
=
Sales
cost
=
COGS
What
the
the
income
of
difference
sales.
purchasing
then
closed
the
the
for
sales
It
sales
would
its
revenue
prot
+
$800
gross
=
$10
$200
prot
×
=
$4,000
=
$2,900
together with other nancial
eectively measure these
the
those
prot
Cost
example,
stock.
shows
of
introducing statements
about their environmental,
loss
account
establishes
gross
period.
Cost
194
ows
distributed
business
revenue
given
It
the
calculating
For
was
income
The trading account
trading
of
establishes
parts:
cost
The
the
expenditure
this
The
of
as
appropriation
(a)
In
known
be
400
=
if
it
sold
$4,000
$1,100
400
units
of
a
product
at
$10
each?
3 . 4
(b)
A C C O U N T S
The prot and loss account
This
is
before
and
To
F I N A L
the
interest
tax
nd
from
(see
out
the
and
net
and
of
tax,
the
net
income
prot
statement
before
tax,
that
and
shows
net
the
prot
net
after
prot
interest
3.4.1).
prot
prot
indirect
sold.
rent,
part
Table
gross
comprise
units
second
before
shown
costs
Examples
insurance
or
interest
in
the
and
overheads
include
costs.
tax,
trading
which
advertising
expenses
account.
are
costs,
not
are
These
subtracted
expenses
directly
linked
administration
to
the
charges,
Key terms
Therefore:
Prot and loss account
Net
prot
before
interest
and
tax
=
gross
prot
-
expenses
also known as the income
Net
prot
loans
before
from
the
tax
net
is
calculated
prot
before
by
subtracting
interest
and
interest
payable
statement, shows the records
on
of income and expenditure
tax:
stnuoccA dna ecnaniF 3
ows of a business over a
given time period
Net
prot
before
tax
=
net
prot
before
interest
and
tax
-
interest
Cost of goods sold (COGS)
Then,
the
net
corporation
prot
tax
after
(tax
on
interest
and
company
tax
prots)
is
found
from
by
net
deducting
prot
before
the direct cost of producing
tax:
or purchasing the goods that
Net
prot
after
interest
and
tax
=
net
prot
before
tax
were sold during that period
-
corporation
tax
Gross prot
found by deducting cost of
(c)
The appropriation account
goods sold from sales revenue
This
is
the
company’s
This
net
part
prot
following
Retained
of
prot
distribution
retained
the
nal
is
in
the
after
two
prot
and
interest
forms,
(ploughed-back
loss
and
tax
either
prot).
account
as
is
that
shows
distributed
dividends
Retained
to
prot
(see
how
Table
the
3.4.1).
shareholders
is
calculated
or
using
formula:
prot
=
net
as
Net prot before interest
and tax
the dierence between gross
prot and expenses
prot
after
interest
and
tax
-
dividends
Net prot before tax
found by subtracting interest
from net prot before interest
Table 3.4.1 Prot and loss account for XYZ Ltd
and tax
X YZ Ltd
Net prot after interest
Prot and loss account for the year ended 30 June 2012
and tax
US$ million
Sales revenue
Cost of goods sold
800
Trading account
equal to net prot before tax
less tax
250
___
Gross prot
550
Dividends
Expenses
300
___
Net prot before interest and tax
Interest
250
Prot and loss
a sum of money paid to
shareholders decided by
20
___
account
the board of directors of a
Net prot before tax
Tax
230
company
40
___
Net prot after interest and tax
190
Retained prot
Dividends
50
___
Appropriation
the amount of earnings left
Retained prot
140
account
after dividends and other
deductions have been made
195
3
F i n a n c e
a n d
a c c o u n ts
Student workpoint 3.11
Be a thinker
Prot and loss account for BTW Ltd for the year ended 31 December 2012
$000
Sales revenue
950
Cost of goods sold
?
Gross prot
650
Expenses
?
Net prot before interest and tax
350
Interest
10
Net prot before tax
?
Tax
40
stnuoccA dna ecnaniF 3
Net prot after interest and tax
?
Dividends
50
Retained prot
a)
Complete
missing
b)
four
loss
Explain
in
this
the
above
numbers
Identify
and
c)
?
prot
stakeholders
account
how
the
and
(indicated
for
who
BTW
above
loss
by
account
question
would
by
lling
in
the
marks).
be
interested
in
the
prot
Ltd.
stakeholders
would
use
the
information
account.
The balance sheet
Also
known
assets,
the
liabilities,
snapshot
rm’s
as
of
net
including
the
requirement
and
It
gives
much
of
equity
nancial
worth.
how
statement
a
of
of
a
nancial
rm
position
of
the
an
rm
shareholders
balance
sheet
is
at
a
position,
a
rm
idea
have
that
specic
and
of
what
a
outlines
point
is
used
what
invested
this
it
in
in
to
time.
and
The
business
It
is
calculate
owns
it.
the
a
a
owes,
In 2002, the Sarbanes-Oxley Act
was passed to deter unethical
accounting.
basic
owns
ETHICS
(total
The Act was passed in
response to high-prole scandals
including Enron and WorldCom.
assets)
must
equal
what
it
owes
(total
liabilities)
plus
how
the
assets
(http://www.sox-online.com/act.
are
nanced
(equity).
This
is
what
makes
the
balance
sheet
balance.
html)
The
three
explored
main
components
of
assets,
liabilities,
and
equity
are
Are there any other global
below.
examples of unethical behaviour
in accounting that come to mind?
a
How did the rms concerned
handle the situation?
These
are
include
Fixed
12
xed
assets
months.
buildings,
196
resources
assets
are
of
value
and
that
that
vehicles,
owns
or
are
owed
to
it.
They
assets.
assets
examples
equipment,
business
current
long-term
Tangible
a
and
are
last
in
a
physical
machinery.
business
in
for
nature
Some
of
more
than
include
these
assets,
3 . 4
such
case
as
machinery,
depreciation
Intangible
value.
Current
12
the
from
bank
or
that
have
also
known
and
nished
by
bought
from
at
later
short-term
sale
the
of
cash,
assets
on
inventory,
and
credit
that
last
and
are
owe
raw
over
get
time.
net
tend
to
In
xed
be
A C C O U N T S
this
assets.
difcult
to
unit.)
in
a
stock.
services
and
to
nature
the
Debtors
includes
value)
assets
in
in
debtors,
goods
business.
goods
(lose
xed
non-physical
looked
include
the
as
are
be
are
They
depreciate
deducted
that
will
assets
months.
received
at
assets
(These
usually
is
F I N A L
business
Cash
which
could
individuals
the
is
be
or
business
materials,
for
up
to
money
held
other
either
rms
money.
Stock,
semi-nished
goods,
goods.
Lbl
or
are
a
rm’s
individuals.
are
usually
term
a
12
source
liabilities
Long-term
months
legal
They
and
debts
arise
of
funding
current
liabilities
by
the
or
what
during
the
for
it
owes
course
the
to
of
rm.
other
rms,
business
They
are
institutions,
operation
classied
stnuoccA dna ecnaniF 3
These
and
into
long-
liabilities.
are
long-term
business.
They
debts
include
or
borrowings
long-term
bank
payable
loans
after
and
mortgages.
Current
the
liabilities
business
suppliers
(see
within
who
sold
section
3.1),
corporation
tax).
When
its
we
know
working
capital
whether
the
shown
below.
efciency
of
Working
To
get
total
deduct
Total
It
a
on
is
can
also
a
credit
to
has
pay
off
known
measure
is
as
of
of
its
that
the
a
the
the
bank
are,
assets.
current
overdraft
it
bills
assets
short-term
we
The
because
day-to-day
net
a
by
(unpaid
government
business
net
payable
creditors
rm),
to
important
its
are
include
owed
liabilities
establish
business
is
debts
These
(money
the
and
business
capital
tax
what
a
short-term
months.
goods
and
capital
working
Working
are
12
such
can
as
calculate
amount
of
indicates
or
running
and
is
nancial
costs.
calculated
health
as
and
business.
capital
assets
current
=
less
total
current
current
assets
liabilities,
we
-
total
rst
add
current
all
the
liabilities
assets
and
liabilities:
assets
less
current
liabilities
=
(f ixed
assets
less
current
liabilities
=
f ixed
assets
+
current
assets)
-
current
liabilities
or
Total
assets
+
working
capital
197
3
F i n a n c e
Then
as
to
get
a n d
net
a c c o u n ts
assets,
we
subtract
long-term
liabilities
from
the
above,
shown:
Net
assets
Having
out
=
(total
calculated
how
they
the
were
assets
net
less
assets
current
of
the
liabilities)
business,
we
-
then
long-term
need
to
liabilities
nd
nanced.
eqy
Also
known
includes
as
two
shareholder’s
aspects,
equity
namely
share
or
shareholder’s
capital
and
funds,
retained
equity
prots.
Share capital
This
refers
stnuoccA dna ecnaniF 3
shares
and
to
the
bought
does
not
exchange
original
by
capital
shareholders.
include
market
or
the
the
daily
invested
It
is
a
buying
current
into
the
permanent
and
market
selling
value
of
business
source
of
of
shares
through
capital
in
a
stock
shares.
Retained prot
As
noted
obtained
as
is
it
purchase
From
the
Equity
the
been
prot
to
above,
=
helps
sheet
3.4.2
is
=
this
the
then
but
the
note
+
nance
prot
ploughed
account.
business
in
capital
to
the
loss
owners
assets
to
is
and
has
which
It
is
made
has
back
also
in
into
known
previous
been
the
as
business
reserves
years.
reinvested
so
This
as
to
business.
that:
retained
the
net
prot
assets
of
the
business
and
enables
balance:
equity
an
discussed
that
the
we
share
assets
3.1,
prot
necessary
equity
Table
the
owed
balance
Net
198
section
includes
money
This
in
from
example
above
and
of
a
balance
uses
the
sheet
required
that
IB
incorporates
format.
what
has
3 . 4
F I N A L
A C C O U N T S
Table 3.4.2 A statement of nancial position
Key terms
X YZ Ltd
Balance sheet
Balance sheet as at 30 June 2012
$m
$m
a nancial statement that
Fixed assets
outlines the assets, liabilities
Fixed assets
600
and equity of a rm at a
Accumulated depreciation
30
specic point in time
______
Net xed assets
570
Assets
Current assets
resources of value that a
Cash
20
Debtors
15
business owns or that are
owed to it
Stock
55
____
Total current assets
Liabilities
90
stnuoccA dna ecnaniF 3
a rm’s legal debts or what
Current liabilities
it owes to other rms,
Overdraft
10
Creditors
20
institutions or individuals
Shor t-term loans
15
Working capital
____
Total current liabilities
45
also known as net current
assets, helps establish
______
Net current assets (working capital)
45
whether a rm can pay its day-
Total assets less current liabilities
615
to-day running costs
Long-term liabilities (debt)
250
Net assets
found by subtracting long-term
______
Net assets
365
liabilities from total assets less
Financed by:
current liabilities
share capital
220
retained prot
145
Equity
equity
365
also known as shareholders’
equity, shows how the net
assets are nanced using
Student workpoint 3.12
shareholders’ capital and
retained prot
Be a thinker
1.
Using
ended
Table
30
3.4.2,
June
●
Cash
●
Creditors
●
Stock
●
A
●
Debtors
●
Retained
●
The
●
Net
xed
the
same.
prepare
2013
increased
rose
after
by
by
decreased
another
the
US$10
US$15
by
balance
following
sheet
for
adjustments
the
year
occurred:
million.
million.
US$5
million.
TOK discussion
long-term
loan
increased
by
10 %
Do nancial statements
rose
by
US$5
million.
reect the “truth” about a
prot
bank
fell
overdraft
by
US$26
reduced
business?
million.
by
US$4
What role does interpretation
million.
play in accounting? For
assets,
share
capital
and
short-term
loans
remained
example, how can we compare
businesses just by looking at
2.
Explain
two
uses
and
two
limitations
of
the
balance
sheet.
their nancial statements?
199
3
F i n a n c e
a n d
a c c o u n ts
igbl 
These
are
nature.
can
xed
prove
Some
assets
However,
of
to
be
them
that
even
very
are
lack
physical
though
valuable
explained
they
to
a
substance
do
not
rm’s
have
or
a
are
non-physical
physical
long-term
success
value
or
in
they
failure.
below.
Patents
These
sell,
provide
or
with
control
legal
Anyone
a
fee
is
to
the
wishing
stnuoccA dna ecnaniF 3
kidneys
to
granted
20
years;
patent.
others
their
and
can
with
that
use
of
the
at:
to
this
for
rights
product.
others
it.
period
also
a
to
manufacture,
inventors
copying
ideas
The
include
horses’
The
from
holder’s
use
patents
shoes
found
a
patent
however,
rubber
exclusive
prevents
permission
Interesting
be
the
invention
protection
be
about
of
inventors
must
legal
life
depends
pen
health.
More
apply
for
on
with
are
their
a
provided
ideas.
and
most
the
pay
patents
useful
scanner,
details
use,
on
life
steel
these
and
http://www.prv.se/en/Patents/Why-apply-for-a-
patent/Examples-of-patents/.
Goodwill
This
to
refers
a
to
the
business.
brand
name,
reputation
one
rm
valued
book
a
is
as
It
value
includes
highly
rm
value
a
enjoys
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good
favourable
customer
its
by
being
the
base
attributes
and
desirable
clients.
another.
paid
rm
or
employees,
with
by
amount
of
positive
skilled
purchased
the
of
During
an
relations,
location
Goodwill
rm
over
relate
strong
and
usually
acquisition,
purchasing
that
the
arises
good
when
goodwill
and
above
is
the
bought.
Copyright laws
These
the
are
laws
musicians,
if
that
production
the
lasts
a
for
patents,
a
sale
of
authors,
and
lm
original
novel,
provide
and
ideas
music
album
between
anyone
permission
are
50
put
or
to
them
or
producers.
to
use
such
the
as
in
computer
use
copyright
do
the
the
laws
of
the
holder’s
to
protect
Creators
will
creation
software.
death
right
work.
Copyright
after
a
exclusive
literary
years
to
to
with
artistic
developed
100
wishing
from
creator
their
of
only
a
Most
published
copyright
creator.
works
include
apply
As
must
with
seek
so.
Trademarks
These
are
registered
help
to
a
recognizable
and
the
Trademarks
be
depending
Coca-Cola,
symbol,
KFC,
and
one
sold
on
the
Donald
a
rm’s
trademarks
can
symbol,
identies
distinguish
infringes
period,
that
of
for
their
Nike
word,
product
products
others
a
fee
use.
can
and
from
be
design
last
of
by
the
for
a
popular
“You’re
is
Anyone
ofcially
also
who
trademark
15-year
McDonald’s
catchphrase
that
Trademarks
another’s.
sued
most
the
or
business.
Examples
“swoosh”,
Trump’s
phrase
or
owners.
renewable
trademarks
golden
include
arch
red”.
‘ You’re red!’
Intangible
and
in
value
200
assets
many
can
are
cases
difcult
they
uctuate
will
over
to
value,
not
time
be
and
due
to
their
shown
in
the
simple
subjective
balance
changes
in
the
nature
sheet.
Their
reputation
of
American
businessman Donald Trump
has attempted to trademark his
famous catchphrase
3 . 4
an
organization
can
either
inate
or
deate
a
rm’s
value.
As
a
F I N A L
A C C O U N T S
result,
Key terms
intangible
value
of
assets
a
rm
can
just
be
used
before
a
to
“window
purchase.
dress”
The
or
setting
articially
of
specic
increase
the
parameters
Intangible assets
to
be
used
to
complexity
quantify
and
an
intangible
inaccuracy
of
asset
including
just
it
in
serves
the
to
increase
balance
the
xed assets that lack physical
sheet.
substance or are non-
physical in nature
Depreciation (HL only)
Patents
This
is
cash
the
decrease
expense
that
in
is
determine
the
net
depreciate
include
the
value
recorded
prot
the
of
in
before
a
xed
the
asset
prot
interest
and
and
over
loss
tax.
time.
It
account
Two
is
in
reasons
a
non-
order
why
provide inventors with the
to
assets
exclusive rights to manufacture,
use, sell or control their
following:
invention of a product
Wear
●
and
tear
machinery
maintain
–
the
causes
repeated
them
to
use
fall
in
of
xed
value
assets
and
such
more
as
cars
money
is
or
needed
to
Goodwill
them.
improved
“old”
–
existing
versions
assets
are
become
xed
assets
introduced
obsolete
or
fall
in
out
in
the
of
value
when
market.
date
and
With
are
new
time
or
stnuoccA dna ecnaniF 3
the value of positive or
Obsolescence
●
favourable attributes that
these
relate to a business
eventually
Copyright laws
withdrawn.
laws that provide creators with
The
IB
expects
you
to
know
two
methods
for
calculating
depreciation,
the exclusive right to protect
the
straight-line
method
and
the
reducing-balance
method ,
as
the production and sale of
described
below.
their ar tistic or literary work
Straight-line method
This
is
a
equally
commonly
over
depreciation
elements
in
its
of
its
used
lifetime
the
Trademark
method
by
asset’s
that
deducting
value
per
spreads
a
given
annum.
out
the
cost
constant
It
of
an
amount
requires
the
asset
of
a recognizable symbol,
word, phrase or design that
following
calculation:
is ocially registered and
that identies a product or
business
the
●
to
expected
be
used
before
●
the
original
●
the
residual
or
value
useful
cost
or
over
Incorporating
of
the
asset,
i.e.
the
length
of
time
it
intends
replacement
of
the
scrap
its
the
life
asset,
value
useful
above,
i.e.
of
its
the
purchase
asset,
i.e.
or
an
historical
estimation
cost
of
its
worth
life.
the
annual
depreciation
original
cost
-
can
residual
be
calculated
as:
value
___
Annual
depreciation
=
expected
Example
costing
1:
four
years.
year
ended
First,
the
it
1
is
January
It
is
Calculate
31
apply
value
the
is
to
2012
expected
the
December
important
residual
Then
On
$30,000.
ABC
life
Company
have
depreciation
a
value
expense
of
asset
purchased
of
$6,000
on
the
at
a
vehicle
the
vehicle
end
for
of
the
2012.
identify
$6,000
annual
to
useful
the
and
key
the
elements:
expected
depreciation
the
useful
original
life
is
cost
four
is
$30,000,
years.
formula:
$30,000
$6,000
__
Annual
depreciation
=
=
4
$6,000
years
201
3
F i n a n c e
The
above
value
a n d
a c c o u n ts
information
over
four
can
be
shown
in
a
table
to
show
the
net
book
years.
Table 3.4.3 Straight-line depreciation at $6,000 per annum
Year
Annual depreciation
Net book value on
expense ($)
vehicle ($)
0 (present)
0
30,000
1
6,000
24,000
2
6,000
18,000
3
6,000
12,000
4
6,000
6,000
Example
stnuoccA dna ecnaniF 3
was
In
2:
Calculate
purchased
such
year
as
a
case
on
1
we
the
July
will
depreciation
2012
be
with
required
the
to
expense
year
of
the
ending
charge
above
on
31
vehicle
if
December
depreciation
for
half
it
2012.
the
follows:
($30,000
6 months
_
Depreciation
expense
=
(
)
12
×
[
$6,000)
__
]
=
$3,000
4
months
Advantages of straight-line depreciation
It
●
is
simple
over
It
●
is
a
to
mostly
can
calculate
number
be
of
suitable
written
as
it
is
a
predictable
expense
that
is
spread
years.
off
for
less
within
expensive
the
asset’s
items,
such
estimated
as
furniture,
useful
that
life.
Disadvantages of straight-line depreciation
It
●
is
as
not
it
suitable
does
expenses
It
●
is
the
known
It
for
cater
over
to
greatest
motor
●
not
the
expensive
for
the
useful
inate
amount
the
of
assets
loss
life
in
of
the
value
value
of
in
such
as
efciency
plant
or
and
increase
machinery
in
repair
asset.
some
their
assets
rst
or
which
second
may
have
years,
such
lost
as
vehicles.
does
not
take
environment
into
that
account
may
the
render
fast-changing
certain
xed
technological
assets
obsolete
very
quickly.
Reducing-balance method
This
the
method
asset.
applies
adopts
a
percentage
depreciation
rate
an
accelerated
depreciation
technique
depreciation
amount
depreciation
is
charged
in
Year
Net
202
It
at
1
the
may
book
charged
charged
end.
be
value
at
Under
Year
1
an
asset
beginning
the
calculated
in
to
the
declines
of
an
over
over
asset’s
reducing-balance
the
useful
life
whereby
the
time,
i.e.
lifetime
method
net
of
higher
and
less
book
is
value
as:
=
Cost
of
original
asset
-
(cost
of
original
asset
×
rate
of
depreciation
[%])
3 . 4
This
●
is
net
book
the
depreciation
its
A C C O U N T S
where:
rate
●
F I N A L
of
value
annual
an
3:
rate
asset’s
from
depreciation
useful
Example
is
is
net
value
of
and
the
cost
the
the
percentage
is
calculated
by
deducting
asset
fall
in
the
value
of
an
asset
over
life.
Using
of
example
33%*
(see
1
above,
the
vehicle
was
depreciating
at
an
below).
Table 3.4.4 Reducing-balance depreciation
Depreciation ($)
0
0
1
20 100
13 467
6,633 (20 100 × 33%)
3
9,022.89
4444,11 (13 467 × 33%)
4
net
30 000
9,900 (30 000 × 33%)
2
The
Net book value ($)
6,045.34
2,977.55 (9,022.89 × 33%)
book
value
at
the
end
of
four
years
stnuoccA dna ecnaniF 3
Year
using
this
method
is
about
$6,045.
*33%
the
is
an
approximation
depreciation
shown
rate.
The
obtained
exact
using
rate
is
the
about
calculation
33.126 %.
formula
The
for
formula
is
as
below:
________________
residual value
__
N
Depreciation
rate
=
1-
√
cost
Where
N
Residual
end
of
represents
value
its
is
useful
the
the
expected
estimated
of
xed
useful
scrap
or
life
asset
of
the
salvage
asset.
value
of
an
asset
of
the
at
the
life.
Advantages of reducing-balance depreciation
●
It
more
This
the
is
realistically
because
early
years
generated
the
●
●
It
new
by
the
is
the
provides
a
cost
and
of
against
the
matched
increased
more
straight-line
the
years.
increases
income
the
amount
revenue
depreciation
larger
production
amount
brought
business.
provided
of
about
in
revenue
by
the
use
of
asset.
the
it
matches
higher
tax
accurate
method,
non-cash
expense
measure
especially
expenses
in
the
of
in
depreciation
the
valuation
immediately,
early
years,
which
thereby
compared
of
assets
lowers
improving
to
over
the
cash
ow.
Disadvantages of reducing-balance depreciation
●
It
is
the
●
It
a
more
complex
straight-line
charges
may
not
high
be
method
of
calculating
depreciation
compared
to
method.
amounts
realistic
for
of
depreciation
some
less
in
the
expensive
early
years,
which
assets.
203
3
F i n a n c e
●
The
a n d
formula
a c c o u n ts
used
to
obtain
the
rate
of
depreciation
may
be
subjective
Key terms
because
without
residual
value
it
cannot
be
used.
Depreciation
●
It
that
lowers
company
is
prots,
publicly
which
traded
some
on
a
stakeholders,
stock
especially
exchange,
might
if
the
object
to.
the decrease in the value of a
xed asset over time
●
It
defers
tax
payments
for
later
years.
This
is
not
a
problem
if
the
Straight-line depreciation
company
keeps
company
experiences
and
the
company
income
ow
growing
tax
has
burden
pressures
to
will
from
and
increasing
difculty,
delay
future
increase
slowed
or
in
growth
just
prots.
and
capital
as
the
declining
However,
prots
slow
or
expenditures,
company
sales
and
is
if
go
a
down
the
facing
operating
a method that spreads out
the cost of an asset equally
cash
prots.
over its lifetime by deducting
a given constant amount of
depreciation of the asset’s
value per annum
Student workpoint 3.13
Residual value
stnuoccA dna ecnaniF 3
Be knowledgeable
an estimation of an asset’s
Suppose
a
business
has
an
asset
with
$2,000
original
cost,
$200
scrap
wor th or value over its useful
value,
and
ve
years
of
useful
life.
life, also known as scrap or
1.
Use
the
straight-line
method
to
determine
its
annual
depreciation
salvage value
charge.
Net book value
2.
Using
the
formula,
calculate
its
rate
of
depreciation
in
the
an asset’s net value at the
reducing-balance
method.
beginning of an accounting
3.
In
questions
book
values
1
and
over
2
draw
the
and
complete
the
table
to
show
the
net
years.
period, calculated by
deducting the accumulated
(total) depreciation from the
cost of the xed asset
Rv hkl
✓
Final
the
accounts
end
of
an
stakeholders
accounting
the
Internal
employees
customers,
Reducing-balance
nancial
about
organisation.
and
are
while
suppliers,
statements
period
that
nancial
inform
position
stakeholders
examples
compiled
of
external
government,
businesses
internal
and
include
by
and
external
performance
shareholders,
stakeholders
competitors,
at
of
an
managers
are
nanciers
✓
Ethics
in
accounting
as
applied
in
of
principles
on
A
loss
prot
and
known
as
A
balance
is
used
what
to
it
than
204
a
is
based
of
local
a
last
a
of
moral
process.
on
A
the
rm’s
that
need
shows
the
business
values
code
core
to
a
judgements
is
a
that
set
guide
upheld.
of
given
and
ethics
values
be
records
over
of
income
time
and
period
and
is
also
statement.
snapshot
a
(assets)
have
assets
year.
study
standards
income
sheet
the
account
calculate
owns
Current
the
ows
an
shareholders
✓
is
accounting
usually
accountants
expenditure
✓
the
rm’s
and
owes
invested
to
up
of
net
to
in
a
the
nancial
worth.
It
(liabilities)
it
position
gives
the
of
rm
including
a
an
how
rm
idea
and
of
much
(equity).
year
while
xed
assets
last
for
a method where a
predetermined percentage
depreciation rate is used and
subtracted from the net book
and
community.
✓
depreciation
more
value of the previous year
3 . 4
✓
Long
term
liabilities
✓
For
a
liabilities
are
are
payable
balance
sheet
payable
within
to
a
balance
after
a
year
while
short
F I N A L
A C C O U N T S
term
year.
a
rm’s
net
assets
should
equal
its
equity.
✓
Intangible
assets
non-
physical
term
success.
in
are
xed
nature
These
assets
and
include
that
can
be
lack
very
patents,
physical
valuable
copyrights,
substance
to
a
rm’s
trademarks
or
are
long
and
goodwill.
Straight
equally
of
line
over
depreciation
its
depreciation
lifetime
of
the
depreciation
method
depreciation
tecÚique
asset
declines
over
method
by
asset’s
on
the
value
other
whereby
time
spreads
deducting
based
per
out
given
the
useful
of
an
life
asset
balance
accelerated
amount
of
an
amount
Reducing
adopts
depreciation
the
cost
constant
annum.
hand
the
on
a
the
charged
asset.
(HL
to
an
only)
stnuoccA dna ecnaniF 3
✓
205
3
F i n a n c e
a n d
a c c o u n ts
Pr q
BBT
BBT
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online
Mark
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maintain
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software,
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companies
education
His
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provision
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position.
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enjoys
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The
expansion
selling
presence
his
of
limited
States.
company.
copyright
future.
nance
improve
United
the
unique
near
established
has
of
have
private
the
owns
many
Mark
him
expire
Mark
who
small
in
running
enjoyed
provides
will
currently
the
staff
education.
based
have
market.
software
manager
Ex tract from the balance sheet
for BBT for the year ended
31 October 2010
to
has
US$
refused
stnuoccA dna ecnaniF 3
Capital employed
to
lend
funds
software.
balance
He
for
the
said
sheet
research
“software
has
and
has
a
development
short
product
(R&D)
life
of
cycle,
the
and
Cash
your
accountant
has
just
presented
the
following
nancial
BBT
as
liquidity
a)
(i)
(ii)
of
31
(i)
2010,
which
raised
some
working
capital
Dene
the
Identify
term
two
the
balance
the
copyright
for
BBT
of
operating
as
Depreciation
1500
Fixed assets
30 000
missing
for
[2
gures
X,
information
BBT
for
Y,
Z
and
provided,
with
those
construct
marks]
Loan capital
0
Net assets
Z
a
company.
nancial
sheet
[2
disadvantages
limited
Calculate
from
marks]
gures
a
and
Retained prot
8500
Share capital
2000
complete
2010.
[7
marks]
Shor t-term
(ii)
28 000
and
issues.
private
b)
October
Y
information
Debtors
for
2000
deteriorated”.
Creditors
Mark’s
X
new
BBT’s
net
prot
before
interest
and
tax
as
at
31
October
0
2010
borrowing
was
US$27
and
corporation
paid
and
695.
total
If
interest
tax
was
payments
30%
corporation
were
Calculate
10%
the
of
value
this
of
value
interest
tax.
[2
Stock
Total (current
(iii)
Using
the
nancial
bank
educational
c)
Examine
use
IB,
206
Nov
to
two
fund
2010
and
manager
to
factors,
nance
the
explain
R&D
of
R&D
the
new
[6
alternative
of
new
sources
of
educational
nance
that
software.
30 000
assets)
why
the
software.
possible
the
non-nancial
refused
0
marks]
Mark
[6
Total (current
marks]
might
marks]
liabilities)
48 000
3.5 Protability and liquidity ratio analysis
By the end of this chapter, you should be able to:
➔
calculate and interpret the protability and eciency ratios: gross
prot margin (GPM), net prot margin (NPM), and return on capital
employed (ROCE)
➔
examine possible strategies to improve the above protability and
eciency ratios
➔
calculate and interpret the liquidity ratios: current ratio and
➔
stnuoccA dna ecnaniF 3
acid test ratio
discuss possible strategies to improve the above liquidity ratios
R ly
This
of
a
is
a
nancial
rm’s
performance
strengths
The
by
and
meaningful
ratios
analysis
nancial
and
determining
weaknesses.
historical
ratios
following
efciency
tool
of
and
other
types
ratios,
used
statements.
of
It
in
certain
aids
in
be
liquidity
in
interpretation
evaluating
trends
and
decision
inter-rm
will
the
helps
businesses
ratio
and
It
the
making
same
explored
and
rm’s
exposing
comparisons
in
a
by
its
analysing
different
below:
nancial
various
making
through
or
assessment
past
industries.
protability
ratios,
ratios
Prbly r
These
ratios
generating
assess
ability.
protability.
(GPM)
and
Two
net
the
performance
Other
types
prot
variables
of
of
a
rm
in
are
used
in
protability
ratio
are
margin
terms
of
its
interpreting
gross
prot-
this
prot
margin
(NPM)
Gross prot margin (GPM)
This
as
a
is
found
by
percentage.
dividing
As
gross
the
shown
gross
prot
by
the
sales
revenue,
expressed
below:
prot
__
GPM
=
×
sales
Example:
prot
of
A
100
revenue
business
US$70
has
million.
sales
revenue
Calculate
its
of
US$100
GPM,
using
million
the
and
above
gross
formula:
US$70 million
__
GPM
=
×
US$100
The
for
business
every
every
will
$1
aim
generates
$100
of
for
of
sales
sales
a
GPM
the
revenue
higher
100
=
70%
million
gross
of
70 %.
business
brings
prots
in
to
This
makes
70
cents
help
is
interpreted
$70
as
them
as
its
gross
pay
to
gross
prot.
their
mean
prot,
that
i.e.
Businesses
expenses.
207
3
F i n a n c e
a n d
a c c o u n ts
Possible strategies to improve GPM
A
●
rm
or
might
markets
Raising
case
just
A
●
of
on
sales
stnuoccA dna ecnaniF 3
rm
will
A
will
the
its
goods
should,
the
very
damage
less
with
the
as
or
competitive
to
revenue
few
this
in
sensitive
signicantly
cheaper
to
could
the
to
costs.
increase
not
need
price
changes
even
lack
the
in
quantity
prices.
In
substitutes.
of
the
a
of
“ripping
way
markets
changes.
because
image
the
to
lead
to
more
ensure
aim
to
more
produced.
however,
remaining
GPM.
to
buy
that
business
The
with
them
off”
materials
in
business
the
so
reducing
will
quality
of
as
to
the
need
the
cut
cost
to
be
materials
resentment.
promotional
its
they
of
help
The
on
customer
products
do
not
use
strategies
(see
that
section
expensive
4.5).
campaigns
costs.
reduce
direct
productive
or
Unproductive
be
will
aggressive
increased
are
suppliers
This
compromise
customers
might
staff
less
sales
perceive
source
adopt
lead
business
that
of
help
might
could
they
are
have
purchase
which
Businesses
●
might
persuade
that
if
though,
bought,
may
this
products
prots.
these
and
careful,
A
that
for
increase
change
market
higher
business
may
not
consumers
for
down
●
is
prices
consumers
here
may
the
drawback
loyal
where
prices
purchased
this
increase
taken
not
to
labour
are
able
staff
costs
to
may
need
demotivate
by
sell
or
ensuring
more
to
be
units
shed.
decrease
the
of
Care
morale
staff.
Net prot margin (NPM)
This
the
is
a
measure
sales
and
tax
of
revenue.
by
the
net
It
sales
the
is
prot
revenue,
prot
that
calculated
before
remains
by
after
dividing
expressed
interest
as
a
and
deducting
the
prot
all
before
costs
from
interest
percentage:
tax
____
NPM
=
×
sales
Example:
before
A
rm
interest
shown
has
and
sales
tax
of
100
revenue
revenue
US$75
of
US$150
million.
million
Calculate
its
and
a
NPM.
net
This
prot
is
here:
US$75 million
__
NPM
×
=
US$150
The
rm
$100
of
every
that
$1
a
NPM
therefore
sales
of
rm
could
should
is
indicate
performance.
208
can
In
to
its
50
NPM
the
=
50%
addition
to
in
expenses
for
ways
to
boost
of
50 %.
business
cents
difculties
look
help
an
made,
leads
meeting
therefore
following
makes
revenue
sales
100
million
NPM.
very
This
A
well;
in
controlling
to
improve
the
strategies
NPM.
means
generates
high
on
its
their
used
that
an
NPM
the
NPM
to
i.e.
a
low
Businesses
better
increase
$50,
mean
hand,
costs.
for
every
of
could
other
overall
for
NPM
nancial
GPM,
the
3 . 5
P R O F I T A B I L I T Y
A N D
L I Q U I D I T Y
R A T I O
A N A LY S I S
Additional strategies to improve NPM
rm
can
carefully
unnecessary
expenditure
could,
A
●
rm
costs,
for
to
with
It
is
could
for
a
a
be
may
expensive
the
be
indirect
avoided,
holiday
demoralize
negotiate
example
moving
poorer
the
costs
for
to
see
example
packages
managers
note
key
for
where
reduce
senior
who
stakeholders
landlords
However,
to
customer
to
used
with
with
discounts.
rm
important
should
on
have
managers.
been
used
This
to
holidays.
product
lead
expenses
on
however,
expensive
check
that
another
cheaper
location
rent
for
the
or
aim
with
cheaper
which
may
to
suppliers
rent
not
cut
be
could
ideal,
image.
measures
collectively
for
negotiating
with
in
an
to
effort
increase
to
raise
revenues
both
and
GPM
and
cut
costs
NPM.
stnuoccA dna ecnaniF 3
A
●
Eciency ratios
These
ratios
liabilities.
example
assess
They
of
how
also
such
well
help
ratios
is
to
a
rm
internally
analyse
the
the
return
utilizes
performance
on
capital
its
of
assets
a
and
rm.
employed
One
(ROCE).
Return on capital employed (ROCE)
This
ratio
invested
measures
capital.
employed.
liabilities
as
noted
is
Capital
(loan
both
the
assesses
efciency
the
employed
capital)
to
is
its
returns
found
share
and
a
by
protability
rm
is
making
adding
capital
and
a
of
rm’s
also
to
a
rm’s
from
its
capital
long-term
its
retained
prot,
below:
Capital
This
It
employed
then
used
in
=
long-term
calculating
liabilities
the
return
+
on
share
capital
capital
+
employed
retained
as
prot
shown
below:
net
prot
before
interest
and
tax
____
ROCE
=
×
capital
Example:
prot
net
of
prot
First,
the
Capital
Suppose
US$0.5
before
capital
a
business
million
and
interest
employed
tax
will
=
US$1
=
US$3.5
has
loan
and
employed
100
employed
share
capital
of
of
US$2
US$700,000.
need
million
capital
of
+
to
be
US$1
It
Calculate
calculated
US$0.5
million,
million.
million
as
+
retained
generated
its
a
ROCE.
follows:
US$2
million
million
209
3
F i n a n c e
Then,
ROCE
a n d
is
a c c o u n ts
calculated
as
follows:
Key terms
US$0.7 million
__
ROCE
=
×
US$3.5
The
business
$100
of
is
capital
interest
and
businesses
business
get
making
an
owners
to
20%
Gross prot margin (GPM)
ROCE
the
Generally,
from
=
million
invested,
tax.
100
their
the
20 %.
more
This
generates
higher
capital
inject
of
rm
the
as
ROCE
employed.
money
means
$20
This
into
the
acts
their
that
its
net
for
greater
as
every
prot
an
calculated by dividing the
before
the
returns
incentive
businesses
for
for
gross prot by the sales
revenue, expressed as a
percentage
higher
Net prot margin (NPM)
returns.
well
a
It
is
rm
an
is
able
Comparisons
with
of
a
those
important
to
generate
should
of
other
ratio
also
be
rms,
because
prot
made
to
get
a
it
analyses
from
on
the
better
its
key
ROCE
and
judges
sources
of
past
assessment
of
nance.
years,
on
how
the
calculated by dividing the
together
performance
rm.
net prot before interest and
tax by the sales revenue,
expressed as a percentage
Additional possible strategies to improve ROCE
Return on capital employed
stnuoccA dna ecnaniF 3
In
addition
following
to
the
could
above
be
strategies
used
to
on
improve
improving
GPM
and
NPM,
the
capital
while
still
(ROCE)
ROCE:
assesses the returns a rm
●
A
rm
should
ensuring
problem
that
rm
This
raising
of
might
will
reduce
prot
is
the
such
as
decrease.
The
less
ploughed-back
prot
be
capital
sold
is
for
the
prot
that
or
may
be
will
remains
fall.
aid
to
to
in
more
dividends
retained
not
needed
generate
reducing
future
does
which
to
additional
net
loan
unchanged
reducing
drawback
of
machinery,
pay
of
assuming
not
amount
loan
could
and
effect
ROCE,
the
that
declare
the
remains
that
assets
goods
have
the
to
this
xed
production
A
net
with
essential
●
try
is making from its capital
employed
The
purchase
the
further
prot.
shareholders.
prot,
and
unchanged
retained
hence
or
prot
does
leads
to
investment.
Lqy r
These
ratios
obligations.
meeting
measure
their
asset
can
such
as
be
ability
need
day-to-day
converted
stock
important
the
Businesses
and
bills.
into
debtors
liquidity
ratios
of
a
rm
sufcient
Liquidity
cash.
that
are
Liquid
can
the
be
to
pay
levels
is
a
of
its
measure
assets
quickly
current
off
liquid
of
include
turned
ratio
and
short-term
assets
to
how
cash
into
the
debt
help
in
quickly
and
cash.
acid
others
Two
test
ratio
Current ratio
This
ratio
makes
liabilities.
It
is
a
comparison
calculated
using
of
a
the
rm’s
current
following
assets
to
its
current
formula:
current assets
__
Current
ratio
=
current
Example:
current
A
business
liabilities
has
amount
liabilities
current
to
$250
$500 000
_
Current
ratio
=
=
$250
210
000
2
assets
000.
totalling
What
is
$500
its
000
current
an
while
ratio?
its
3 . 5
above
This
is
rm
has
rm’s
$2
of
range
This
will
range
off
means
could
the
put
a
high
mean
the
of
is
●
There
●
Too
ratio
the
are
of
number
are
$1
of
of
also
be
expressed
sufcient
than
industry
be
current
as
liabilities
differ
recommend
business.
less
also
of
accountants
many
difculties
the
should
but
the
can
every
L I Q U I D I T Y
a
working
the
of
A
current
ratio
the
current
liabilities,
when
the
it
rm
avoided.
A
comes
to
operates
high
1.5:2.
to
below
1:1
which
paying
in.
current
2:1.
capital
of
A N A LY S I S
the
on
range
R A T I O
its
Moreover,
ratio
could
following:
cash
converting
many
much
on
which
availability
nancial
much
by
the
assets
depends
too
example
in
A
2
for
ratio
debts
current
rm
current
There
●
assets.
for
is
that
current
allow
the
This
any
of
ratio
mean
short-term
that
creditors.
to
current
acceptable
pay
current
interpreted
A N D
being
to
debtors,
stock
is
being
held
and
not
non-current
increasing
held,
the
leading
being
invested,
for
assets.
to
possibility
high
of
bad
warehouse
debts.
storage
stnuoccA dna ecnaniF 3
The
P R O F I T A B I L I T Y
costs.
Possible strategies to improve current ratio
A
●
rm
might
long-term
hence
loans
●
reduce
loans.
improve
could
the
(see
liquidity
position.
Another
strategy
disadvantage
business
will
the
section
increases
is
be
if
the
ratio.
the
to
sell
existing
the
its
efciency
assets
for
are
the
seek
and
long-term
gearing
long-term
capital
to
liabilities
increasing
and
affecting
leasing
instead
current
However,
working
of
choose
the
payable
long-term
cost
and
reduce
thereby
available
that
face
to
interest
3.6),
would
the
overdrafts
helps
current
increase
business
This
bank
This
ratio
and
assets
for
business.
needed
back
of
the
future
cash.
The
the
them.
Acid test (quick) ratio
This
is
a
more
short-term
current
stringent
obligations.
assets.
It
is
indicator
This
is
calculated
of
how
because
using
it
the
well
a
rm
removes
following
is
able
stock
as
to
meet
part
of
its
the
formula:
current assets - stock
___
Acid
test
ratio
=
current
Example:
US$
150
Suppose
000.
in
What
is
the
its
liabilities
example
acid
test
above
the
business
has
stock
worth
ratio?
US$500 000
US$150 000
___
Acid
test
ratio
=
=
US$250
In
the
$1.4
of
In
above
of
the
least
some
leading
a
mean
a
for
assets
liquid
cases
to
rm’s
notice.
case,
current
of
there
obsolete
short-term
As
that
liquidity
therefore
with
the
$1
is
no
(the
assets
This
can
current
is
be
not
with
liabilities
removing
to
ratio
an
focus
that
by
stock
in
sound
to
pay
its
extreme
test
the
can
to
selling
acid
the
stock
on
indicates
met
ratio,
inability
scrutinized
current
By
guarantee
items.
debts
of
stock.
current
business
crisis
be
the
every
less
1.4
000
its
be
liquid
sold,
liquid
of
by
at
may
and
nancial
gets
rid
them.
much
than
it
debts)
of
eventually
how
assets
less
health;
short-term
caution
most
has
business
creditors
ratio
nancial
business
the
of
short
1:1
could
be
facing
should
institutions.
211
3
F i n a n c e
However,
as
a n d
with
a c c o u n ts
the
current
ratio,
the
variation
of
acid
test
ratios
in
Key terms
different
same
industries
implications
needs
as
a
to
high
be
considered.
current
ratio
A
high
except
acid
that
test
there
ratio
is
no
has
the
stock
to
Current ratio
be
considered.
a ratio that compares a rm’s
Additional possible strategies to improve acid test ratio
current assets to its current
In
addition
can
help
to
the
strategies
with
the
acid
test
to
improve
the
current
ratio,
the
following
liabilities
ratio:
Acid test ratio
●
A
rm
could
sell
off
stock
at
a
discount
for
cash.
This
will
help
a stringent ratio that subtracts
improve
the
liquidity
working
capital
position
of
the
business
and
avail
more
stock from the current assets
to
pay
off
its
short-term
debts.
However,
selling
stock
and compares this to the
at
a
discount
may
reduce
the
revenue
generated
from
the
sold
stock,
rm’s current liabilities
thereby
●
A
rm
reducing
might
stnuoccA dna ecnaniF 3
stock
on
debts
in
rm’s
increase
credit.
the
the
The
the
prots.
credit
problem
period
here
is
for
that
it
debtors
may
to
lead
purchase
to
more
increased
bad
TOK discussion
business.
Often nancial information
is presented to the wider
Student workpoint 3.14
audience in statistical,
Be a thinker
1.
Referring
graphical or another form
to
Tables
3.4.1
and
3.4.2,
calculate
and
of quantitative summary.
interpret:
Do such simplifying
a)
two
protability
b)
ROCE
c)
two
ratios.
presentations limit our
2.
Which
knowledge of accounts?
liquidity
of
the
ratios
improvement?
those
ratios.
from
Evaluate
(a)
to
(c)
possible
are
in
need
strategies
to
of
further
improve
each
of
ratios.
yduts esaC
c-cl içk (cci) – trky
interest in Turkmenistan Coca-Cola Bottlers Ltd., the
Coca-Cola bottler in Turkmenistan.
In addition, CCI is a par ty to joint venture agreements
that have the exclusive distribution rights for brands
of The Coca-Cola Company in Iraq and Syria. CCI
oers a wide range of beverages, including sparkling
beverages as well as an expanding por tfolio of still
beverages (juices, waters, spor ts drinks, iced tea and
hot tea). The core brands in all markets are Coca-Cola,
Coca-Cola Light, Fanta and Sprite.
Coca-Cola içecek (CCI) has a vision to be one of the
Dening the Problem
leading bottlers of alcohol-free beverages in Southern
CCI needed a protability system with channel, brand,
Eurasia and the Middle East. They currently distribute in
customer and SKU repor ting that was accurate, scalable
Turkey, Kazakhstan, Azerbaijan, Jordan and
and had fast turnaround. All managerial levels needed
Kyrgyzstan. CCI also has over a 33%
the right information to make good decisions quickly.
212
3 . 5
P R O F I T A B I L I T Y
For Example:
A N D
L I Q U I D I T Y
R A T I O
A N A LY S I S
Each ASM can now see the top and bottom 20 outlets
in their area and act on that information. They can
●
Marketing wanted to see net protability by
understand the impact of promotions and discounts
channel, brand, and SKU so they could focus
on the protability of each outlet by SKU and direct the
marketing eor ts and budget direct marketing
sales developers under their responsibility to push for
expenses accordingly.
protable SKU sales via the right mix and amount of
●
Sales wanted to analyze net protability by
promotions and discounts.
channel and SKU to segment customers based on
growth potential, size of business, and protability.
Product Protability
●
Supply Chain wanted accurate costing information
Previously, CCI regional nance teams had to
for each SKU regarding warehouse and delivery
perform independent, manual analysis to generate
expenses.
Executive Management wanted to track net
very accurate and it was dicult to compare SKU
protability at various dimensions to set company
protability across regions and sales centers. In
strategy.
addition, they could not analyze SKU protability
stnuoccA dna ecnaniF 3
SKU protability. That analysis took days, was not
●
by trade channels. The Acorn solution allows all
Goals for an Innovative Solution
depar tments of CCI to use one model that provides
very accurate information overnight, using minimal
●
Make net protability for customers, channels,
resources. CCI can also analyze SKU protability by
SKUs and brands more transparent, standard, and
trade channels.
easy to access.
Analysis of net SKU protability by trade channels for
●
Facilitate growth through market segmentation
each region and sales center provides tremendous
and enable CCI to institutionalize revenue growth
benet and some surprises. For example, the same
management.
SKU for the same channel can be protable in one
●
Identify protable and unprotable customers,
channels, SKUs, brands etc. and understand the
drivers of protability.
region or sales center but unprotable in another due
to local ways of doing business. CCI can now capture
these dierences within regions and sales centers and
take action to improve protability. Pricing decisions
●
Help create sales and promotion strategies by
are managed through promotions and discounts by
channel and product based on net protability.
trade channel and SKU. Prior to implementing Acorn,
●
Track actual customer net protability and
the sales team did this manually, at a high level and
compare it with estimated contract protability.
with no trade channel detail available. CCI can now
●
Provide suppor t to channel-based marketing
decisions (i.e. direct marketing expense).
produce very accurate and detailed information,
enabling more accurate pricing decisions.
CCI has analyzed the net protability of SKUs and
●
Make it easier to drill down protability information
package sizes by channel and brand. For instance, the
through repor ting layers (channel à customer à
protability of Pet 2 liter vs. Pet 2.5 liter has historically
SKU or brand à SKU à customer).
been a point of discussion within the CCI management
Business Value Realized
team. CCI can now compare the protability of these
As a result of the protability system implemented
package sizes within any dimension such as trade
with Acorn and Batuman Consulting, CCI has accurate
channel (i.e. traditional, on-premise and modern
information they did not have before.
channels) and brand (i.e. Coca-Cola, Fanta, Sprite, etc.)
within each region and sales center.
Outlet Protability
For the rst time, CCI can see the net protability for
Customer Protability
each outlet (i.e. customer sales location) under each
CCI has a system called Customer Investment Analysis
Area Sales Manager.
(CIA) to measure the value of a customer at the time
of signing the contract. The system is widely used
213
3
F i n a n c e
a n d
a c c o u n ts
internally and is created based on contract terms.
●
Mix and amount of promotions and discounts applied
●
Level of sales and marketing organization suppor t
●
Direct marketing expenses
●
Delivery and warehouse expenses
CCI now has the capability to compare CIA and Acorn
results side by side so that they can track whether
the customer is generating the value CCI anticipated
before signing the contract. The nance team has
completed the protability analysis of National Key
Adapted from http://www.acornsys.com/
Accounts and National Cold Drink customers, and the
Por tals/76901/docs/coca-cola-case-study.pdf
results have been shared with the sales team. CCI also
plans to analyze the protability of customers by Area
Sales Manager and grow additional relationships by
Exam-style questions
understanding protable customer proles. Customer
1.
Dene the following terms:
proles show NET protability and can be created
(a)
Revenue
[2 marks]
(b)
Net prot
[2 marks]
based on segment, sub-trade channel, income level,
SKU mix, etc.
stnuoccA dna ecnaniF 3
Operating results used to create these proles include:
2.
●
Gross revenue per unit case
●
Number of unit cases sold
Examine how the new data could help CCI
increase its protability (per outlet, per
customer, per product).
Rv hkl
✓
Ratio
analysis
nancial
meaningful
past
is
a
nancial
statements
ratios
and
historical
and
ratios
and
of
analysis
aids
its
tool
inter-rm
other
that
decision
assesses
making
by
comparisons
businesses
in
the
a
rm’s
making
through
same
or
analysing
different
industries.
✓
Protability
include
✓
✓
An
example
that
prot
of
an
utilizes
employed
(ROCE).
Liquidity
ratios
ratio.
its
assets
measure
obligations
(quick)
assess
margin
with
rm’s
ratio
and
the
two
a
(GPM)
efciency
internally
debt
214
ratios
gross
ability
and
that
net
assesses
liabilities
ability
examples
of
to
a
is
to
prot
margin
how
return
rm
being
generate
prot
pay
current
well
on
(NPM).
a
rm
capital
off
ratio
its
short
and
term
acid
test
[10 marks]
3 . 5
P R O F I T A B I L I T Y
A N D
L I Q U I D I T Y
R A T I O
A N A LY S I S
Pr q
Woolman
Woolman
The
Windows
windows
WW’s
a
Windows
are
windows
special
glue
(WW)
sold
have
that
energy-efcient.
the
two
pieces
of
suppliers
two
In
glass,
windows.
construction
manufactures
to
pieces
prevents
are
efcient
(WW)
industry
of
any
a
in
from
is
in
passing
to
widely
a
Table 1. selected items from WW’s
houses.
in
wooden
appears
many
frame
The
with
(all gures in $ thousands)
windows
Cash
150
Creditors
515
Debtors
850
between
other
recognized
balance sheet as at 31 May 2009
Canada.
through.
never
common
brand
for
materials
sealed
moisture
problem
WW
windows
building
glass
air
addition,
The
of
in
energy-
the
residential
Canada.
Loan capital
Because
and
its
of
the
housing
nancial
crisis
position
in
North
America,
WW
has
seen
its
sales
Shor t-term borrowing
deteriorate.
Retained prot
WW
manufactures
only
standard-sized
windows
using
ow
X
fall
285
1300
production.
WW
offers
trade
considering
that
of
are
not
windows
production.
order
with
“special
per
special
point).
For
and
Doing
order
WW
special
the
payment
orders”,
standard-sized.
(break-even
the
credit
taking
were
would
orders,
remainder
in
that
so
a
30
is,
days.
to
might
be
minimum
manufacture
the
upon
buyer
protable
of
100
special
would
delivery.
However,
manufacture
is
the
300
Stock
400
number
Total (net xed assets)
windows
50%
Share capital
windows
orders
pay
The
if
WW
stnuoccA dna ecnaniF 3
*
using
upon
disadvantage
is
1800
batch
placing
that
an
Table 2. selected items from WW’s
additional
employee
would
have
to
be
employed
to
plan
the
production
prot and loss account for the year
process
for
each
special
order.
WW
is
uncertain
if
special-order
sales
will
ended 31 May 2009 (all gures in
be
sufcient
to
cover
the
cost
of
the
recruitment
and
training
of
the
$ thousands)
new
a)
b)
employee.
Dene
the
following
(i)
share
(ii)
debtors
(i)
capital
Using
sheet
the
for
capital
(ii)
Using
acid
(iii)
the
(iv)
Using
c)
the
Nov,
May
interest
relevant
nancial
and
start
1,
2009
information
ratio
(show
information
construct
and
a
calculate
from
all
Table
your
from
1,
4700
1,
and
marks]
Expenses
2150
[2
marks]
Gross prot
2195
Sales revenue
6895
balance
the
loan
calculate
[5
marks]
[2
marks]
the
working).
Table
[2
calculate
[1
information
margin.
to
31
Table
ratio.
prot
Using
at
in
X).
relevant
Using
decision
IB,
as
(quick)
gearing
before
(v)
WW
relevant
test
Using
information
(gure
Cost of goods sold
terms:
in
tax
Table
( show
information
all
2,
calculate
your
from
the
net
prot
working).
Table
2,
calculate
[2
the
marks]
gross
[1
non-nancial
producing
information,
special-order
examine
mark]
mark]
WW’s
windows.
[5
marks]
2012
*
trade credit: credit extended to a business from its suppliers. Trade credit is usually listed on the
balance sheet of a business as “creditors” or, in some countries, “accounts payable”.
215
3.6 Eciency ratio analysis (HL only)
By the end of this chapter, you should be able to:
calculate and interpret the eciency ratios: stock (inventory) turnover,
➔
debtor (trade receivable) days, creditor days and gearing ratio
evaluate possible strategies to improve the above ratio
➔
Eciency ratios
As
indicated
stnuoccA dna ecnaniF 3
resources
efciency
days,
in
in
section
terms
ratios
creditor
of
will
3.5,
its
be
days
these
assets
ratios
and
explored,
and
assess
liabilities.
namely,
gearing
the
In
utilization
this
stock
section
of
a
rm’s
further
turnover,
debtor
ratio
Stock turnover ratio
This
over
ratio
a
measures
given
replenished.
One
It
approach
year)
a
rm
how
period.
can
It
be
looks
sells
its
quickly
considers
calculated
at
how
stock.
a
rm’s
the
using
many
The
stock
number
two
times
formula
in
is
of
sold
and
times
replaced
stock
is
sold
and
approaches.
a
given
period
(usually
a
is:
cost
of
goods
sold
__
Stock
turnover
ratio
(number
of
times)
=
average
Average
the
stock
beginning
is
calculated
of
the
year
by
and
(opening
nding
at
the
stock
the
end
+
average
of
the
closing
value
of
stock
the
stock
at
year:
stock)
___
Average
stock
=
2
Example:
Supposing
started
year
the
with
$50,000
worth
of
Average
stock
is
Average
stock
=
a
rm
goods
goods.
rst
has
a
worth
Calculate
cost
of
sales
$150,000,
its
stock
totalling
and
$400,000.
closed
turnover
the
year
It
with
ratio.
calculated:
$150,000 + $50,000
__
$200,000
_
=
=
2
$100,000
2
$400,000
_
Stock
turnover
ratio
=
=
4
times
$100,000
Another
number
be
approach
of
days
it
in
calculating
takes
to
sell
stock
the
turnover
stock.
The
is
to
consider
following
the
formula
can
used:
average
stock
_
_
Stock
turnover
ratio
(number
of
days)
=
×
cost
216
of
goods
sold
365
3 . 6
Using
the
number
above
of
days
example,
is
stock
calculated
turnover
E F F I C I E N C Y
ratio
in
R A T I O
A N A LY S I S
( H L
O N LY )
the
as:
$100 000
_
turnover
ratio
=
×
$400
=
The
or
above
every
(number
stock
the
a
high
This
days,
of
also
quickly
and
to
stock
that
its
stock
–
of
or
means
earning
goods
do
lower
goods
do
times
gures
In
that
year,
for
considering
the
of
rm
prot
from
become
not
a
turnover
(number
more
not
four
stock
days).
turnover
ratio
perishable
days
Higher
preferred
thereby
means
over
(number
turnover
quickly,
91.25
average.
is
ratio
approach
stock
turns
on
times)
turnover
rst
stock
business
91
365
000
times),
sells
its
sales.
obsolete
expire,
showing
stnuoccA dna ecnaniF 3
Stock
A supermarket has a high stock
that
the
rm
has
good
control
over
its
purchasing
turnover ratio
decisions.
It
is
signicantly
companies
stock
ratio
between
such
turnover
is
not
“tangible”
stock
therefore
level
the
faster
a
important
gross
than
as
an
car
to
their
business
this
service
of
stock
turnover
example,
have
such
industries
item
of
ratio
working
over
done
or
For
may
businesses
turnover
turns
is
margins
industries.
that
as
that
on
differs
manufacturing
average
lower
supermarkets.
do
not
quite
This
hold
stock.
important
stock
though,
producers
retail
effectiveness
that
prot
is
note,
different
relevant
the
to
luxury
times
very
and
assessing
as
products
The
the
important
its
still
at
a
a
good
capital
stocks
protably,
worse
working
is
the
rather
capital
in
a
business
instrument
management.
better;
than
for
Generally,
however,
selling
it
stocks
is
at
low
loss.
This luxury car dealer is likely to have a low stock turnover ratio
Possible strategies to improve stock turnover ratio
●
Slow-moving
reduce
losses
the
due
or
obsolete
rm’s
to
lost
level
sales
of
goods
stock.
revenue
should
The
that
be
disposed
downside
these
is
goods
of.
that
This
it
could
will
could
have
help
lead
to
generated.
217
3
F i n a n c e
Firms
●
a n d
with
a
wide
better-selling
minimize
Keeping
●
costs
for
of
rms
method,
are
delays
stock
able
to
stocks
(see
affect
to
the
the
raw
5.3).
delivery
production
the
to
benet
low
are
major
raw
is
a
narrower,
that
this
may
of
reducing
increases
levels
of
in
stock
the
demand
may
not
market.
just-in-time
and
offer
consumers.
sudden
with
the
materials
The
of
to
added
during
sustain
adopt
need
disadvantage
offered
businesses
of
section
the
has
will
The
However,
amounts
are
products
products
customers,
in
negatively
of
of
of
products.
stock.
where
needed
any
levels
holding
by
of
variety
sufcient
Some
●
low
range
range
the
goods
have
a c c o u n ts
(JIT)
ordered
drawback
materials
eventually
to
production
only
is
when
that
if
they
there
producers
it
are
could
sales.
Debtor days
stnuoccA dna ecnaniF 3
This
to
ratio
collect
measures
its
customers
ratio
is
the
who
also
efcient
a
debts
the
owe
referred
business
following
number
from
the
to
is
of
customers
business
as
in
the
its
days
it
takes
sold
money
debt
credit
it
has
are
average
to
known
collection
control
on
goods
on
as
It
is
a
debtors
period .
systems.
for
credit.
It
rm
These
and
assesses
calculated
the
how
using
formula:
debtors
__
Debtor
days
ratio
(number
of
days)
=
×
total
Example:
while
the
debtor
A
rm’s
total
days
total
number
sales
of
revenue
debtors
amounts
equals
US$2
sales
to
365
revenue
US$16
million.
million
What
is
its
ratio?
US$2 million
__
Debtor
days
ratio
×
US$16
It
therefore
The
takes
shorter
because
the
operations
period
the
and
to
range
from
credit
period
leading
to
the
30
a
can
days
will
also
as
could
invest
many
land
liquidity
an
the
have
customers
to
=
45.625
average
of
46
a
days
million
business
debtor
business
given
365
=
better
working
this
varies
as
it
in
days
the
to
run
to
However,
into
serious
to
collect
business.
other
business
days.
business
for
capital
money
from
120
is
its
debts.
This
is
day-to-day
projects.
business
allowing
cash-ow
The
and
too
credit
could
long
a
problems
crisis.
Possible strategies to improve debtor days ratio
●
A
rm
can
debtors
to
business
A
rm
may,
●
A
might
their
218
their
debts
less
impose
might
with
goods.
chase
stop
payment
though,
discounts
or
other
earlier.
income
The
from
incentives
drawback
these
to
encourage
here
customers
is
that
than
the
was
agreed.
however,
rm
until
pay
receives
originally
●
provide
is
stiff
penalties
away
any
further
nalized.
some
late
loyal
transactions
This
debtors
for
long-time
still
opting
does
to
payers
with
not
seek
such
as
nes.
This
customers.
overdue
guarantee
alternative
debtors
payment,
suppliers
for
3 . 6
A
●
business
may
consistently
in
dealing
have
late
with
to
resort
payers.
This
to
legal
may
E F F I C I E N C Y
means
harm
the
such
as
R A T I O
court
reputation
a
A N A LY S I S
action
business
( H L
O N LY )
for
has
customers.
Creditor days
This
its
ratio
measures
creditors.
able
to
pay
following
It
its
the
assess
average
how
suppliers,
number
quickly,
for
of
usually
example.
The
days
a
within
ratio
is
rm
a
takes
year,
a
to
pay
rm
calculated
is
using
the
formula:
creditors
__
days
ratio
(number
of
days)
=
×
cost
Example:
of
US$7
A
business
million.
owes
Calculate
its
its
creditors
creditor
of
goods
US$700,000
days
with
a
365
sold
cost
of
sales
ratio.
stnuoccA dna ecnaniF 3
Creditor
US$700,000
__
Creditor
days
ratio
=
×
US$7
This
means
creditor
short-term
long
may
leading
as
to
rm
the
future
has
enables
obligations.
investors
rm’s
the
ratio
strain
reconsider
a
that
days
investing
in
The
its
as
days
use
=
36.5
with,
a
In
rm
creditor
suppliers
to
pay
days
this
for
period
period
other
to
to
high
its
too
suppliers,
stakeholders
trouble
will
A
full
extend
its
other
nancial
days
creditors.
cash
example,
addition,
in
or
its
available
allowing
problems.
this
it.
with
to
relations
perceive
relationship
37
rm
However,
rm’s
nancial
may
about
the
365
million
and
vary
such
may
according
to
creditors.
Possible strategies to improve creditor days ratio
●
Having
enable
some
the
●
good
a
rm
to
suppliers
business
Effective
will
relationships
to
long
they
easy
task
business
in
should
and
at
–
control
assess
the
will
in
depend
creditors
an
to
when
risks
delay
will
that
for
object
future
credit
need
negotiate
could
with
extended
the
it
might
on
the
in
period.
refuse
need
days
creditors
their
suppliers
and
dire
creditor
paying
making
be
as
credit
extension
improve
of
such
payment.
cash-ow
However,
to
of
ratio.
early
may
support
assistance.
Managers
versus
This
position
may
and
how
not
needs
be
of
an
the
time.
Gearing ratio
This
measures
nanced
from
the
extent
loan
business
while
retained
prots.
to
capital.
capital
The
which
Loan
employed
commonly
loan
the
capital
capital
is
includes
used
a
employed
long-term
loan
gearing
capital,
ratio
by
a
rm
liability
share
formula
in
is
the
capital
and
is:
capital
__
Gearing
ratio
=
×
capital
Example:
employed
A
of
business
US$25
has
100
employed
a
million.
loan
of
What
US$10
is
its
million
gearing
with
a
capital
ratio?
US$10 million
__
Gearing
ratio
×
=
$25
100
=
40%
million
219
3
F i n a n c e
The
business
a n d
has
a c c o u n ts
a
gearing
ratio
of
40
per
cent,
which
means
that
two
Key terms
fths
of
loans.
the
A
capital
gearing
requirements
ratio
can
help
of
the
assess
business
the
level
come
of
from
debt
a
long-term
business
is
Stock turnover ratio
burdened
ratio
of
above
gearing
ratio
reluctant
debt
with.
to
A
50
per
could
lend
burden.
business
cent
be
to
is
seen
and
low
viewed
as
businesses
Shareholders
as
geared
risky
in
and
high
by
such
a
geared
if
if
below
has
this
nanciers,
situation
potential
it
to
will
gearing
gure.
who
due
investors
a
A
may
the
be
high
measures how quickly a rm’s
stock is sold and replaced
be
over a given period
large
concerned
Debtor days ratio
about
high-geared
dividend
their
will
payments
long-term
worsen
other
businesses
hand,
because
loans.
the
loan
In
because
of
these
addition,
repayment
low-geared
they
rms’
any
that
not
main
sudden
position
businesses
may
of
obligation
interest
such
might
foresee
any
to
rate
viewed
measures on average, the
pay
increases
businesses.
be
future
as
On
the
“safe”
number of days it takes for a
rm to collect its debts
may
Creditor days ratio
in
fact
not
be
initiatives.
stnuoccA dna ecnaniF 3
offering
with
borrowing
Shareholders
minimal
good
enough
may
returns
growth
fund
therefore
and
strategies
to
may
see
even
promising
future
growth
low-geared
prefer
higher
and
businesses
high-geared
future
expansion
as
businesses
returns
measures the average number
of days a rm takes to pay its
creditors
on
investment.
Gearing ratio
Possible strategies to improve gearing ratio
Businesses
in
a
difcult
following
●
that
A
are
very
nancial
highly
position.
geared
This
can
ratio
measures the extent to which
generally
could
be
place
themselves
reduced
using
the capital employed by a rm
is nanced from loan capital
the
measures:
business
related”,
may
for
the
seek
alternative
example
are
that
issuing
the
objective
preferring
of
shares
sources
to
may
issue
take
a
of
funding
more
long
that
shares.
time
are
The
and
go
not
“loan
drawbacks
TOK discussion
against
What role does today’s
of
any
existing
shareholders
who
do
not
want
to
lose
nancial evidence play in
ownership
of
the
business.
making judgments about
●
A
rm
might
decrease
or
not
declare
and
issue
dividends
to
an organization’s future
shareholders
so
as
to
increase
the
amount
of
retained
prot.
This
performance?
may
the
however,
reasons
lead
for
to
doing
resentment
so
are
not
among
well
shareholders,
especially
explained.
Student workpoint 3.15
Be a thinker
1.
2.
Referring
to
Tables
interpret
the
a)
stock
turnover
b)
debtor
c)
creditor
d)
gearing
Which
of
220
and
3.4.2
in
section
3.4,
calculate
and
ratios:
days
days
ratio.
the
ratios
improvement?
these
3.4.1
following
ratios.
from
Evaluate
(a)
to
(d)
possible
are
in
need
strategies
to
of
further
improve
each
of
if
3 . 6
E F F I C I E N C Y
R A T I O
A N A LY S I S
( H L
O N LY )
Rv hkl
Other
in
days,
✓
efciency
terms
of
creditor
Stock
stock
to
✓
it
sell
its
✓
days
collect
Creditor
rm
✓
is
by
a
it
many
utilize
stock
their
turnover
resources
ratio,
debtor
ratios
how
period.
It
fast
can
times
considers
measures
days
to
ratio
rm
geared
how
rm’s
in
the
a
rm’s
be
a
stock
measured
given
number
period
of
days
is
in
a
it
sold
two
rm
and
ways.
sells
takes
for
its
a
rm
money
the
average
from
its
number
debtors.
It
is
of
days
also
it
takes
known
as
for
a
debt
period
able
Gearing
measures
how
include
stock.
rm
collection
assess
gearing
given
secondly,
Debtor
to
a
that
liabilities
and
ratio
over
assesses
and
and
days
turnover
replenished
Firstly,
ratios
assets
or
is
assesses
pay
its
fast
in
number
of
days
within
a
year
a
creditors.
measures
nanced
low
how
the
from
percentage
loan
capital
to
to
which
the
establish
capital
whether
stnuoccA dna ecnaniF 3
✓
employed
it
is
high
geared.
221
3
F i n a n c e
a n d
a c c o u n ts
Practice question
CU
CU
Ltd
Ltd
started
computers.
quality
initial
and
of
consistent
recent
salary
prot
stnuoccA dna ecnaniF 3
given
sales
and
the
CU
by
been
the
at
growth
months
of
At
up
looking
loss
of
has
has
to
company
the
boom.
it
at
a
on
account
CU
Ltd
Unlike
the
faced
grew
was
many
to
to
of
Stock
other
at
solutions
sheet
cash
to
for
a
it
staff
2003
to
The
new
and
nancial
the
capital.
2004
are
Balance sheet as at 31 December
$0 0 0
20 03
20 04
Fixed assets
1500
1400
Current assets
910
1220
Debtors
550
650
10
5
Cas
Total current assets
1470
1875
Current liabilities
Creditors
300
250
Overdraft
350
475
Total current liabilities
650
725
2320
2550
Sare capital
250
250
Prot and loss account
320
350
Loan capital
1750
1950
Capital employed
2320
2550
Net assets
Prot and loss account for the year ended 31 December
$0 0 0
20 03
20 04
Turnover
5750
6100
Cost of goods sold
4175
4750
Gross prot
1575
1350
Marketing and admin expenses
1250
1300
325
50
Interest
175
225
Taxation
100
10
Net prot before interest and tax
222
the
but
since.
below:
Stock
an
the
delay
suggesting
inject
of
at
survived
slow
for
high
result
million
ow.
is
for
problems
with
and
cameras
despite
nancial
with
As
$75
rms,
However,
Exchange
web
customers
rapidly.
negotiate
help
balance
its
valued
signicant
had
range
and
producing
amongst
century.
weeks
the
ago
company
even
two
years
reputation
capital
start
Ltd
seven
a
rst
venture
technology
crash
has
otation
business
developed
of
payments
director
in
reliability.
the
technology
The
up
has
injection
height
In
It
Prot after interest and tax
50
(185)
Dividends
20
0
Retained prots
30
(185)
3 . 6
a)
Calculate
b)
Assess
the
Internet
d)
Using
IB,
a
Nov
working
impact
the
of
value
CU
on
CU
capital
Ltd
of
for
2003
and
increasing
2004.
the
of
liquidity,
nancial
potential
these
accounts
to
the
efciency
position
investor.
of
CU
and
Ltd
marks]
[4
marks]
[4
marks]
[10
marks]
( H L
O N LY )
worldwide
board
of
protability
from
A N A LY S I S
[2
Ltd
appropriate
analyse
of
likely
of
access.
Examine
directors
level
R A T I O
the
ratios
perspective
2005
stnuoccA dna ecnaniF 3
c)
the
E F F I C I E N C Y
223
3.7 Cash flow
By the end of this chapter, you should be able to:
➔
distinguish between prot and cash ow
➔
explain the working capital cycle
➔
construct and interpret cash-ow forecasts
➔
comment on the relationship between investment, prot, and
cash ow
➔
evaluate possible strategies for dealing with cash-ow problems
stnuoccA dna ecnaniF 3
th r bw pr  h w
Cash
is
goods
money
or
shareholders.
current
assets
running
of
a
given
business
a
period
nancial
It
gets
the
the
of
cash
will
and
is
the
enable
ow
A
asset
in
This
a
of
the
time.
lack
money
Cash
is
a
to
cash
is
ows
are
ow
meet
in
the
of
a
their
found
to
the
out
out
rm’s
by
its
of
a
a
failure
or
business
by
business
ability
by
under
received
inows
day-to-day
of
smooth
business
and
cash
sale
investment
is
monies
paid
(where
in
the
or
and
essential
result
monies
Cash is generated by selling goods or services
224
business
indicator
cash
either
institutions,
could
that
the
key
businesses
it
a
inows
are
positive
through
nancial
sheet.
outows
Cash
business
from
liquid
balance
obligations.
outows)
most
ow
period
time.
into
borrowing
business
Cash
while
of
is
in
any
bankruptcy.
over
that
services,
to
meet
exceed
running
a
over
its
cash
costs.
3 . 7
Prot
is
obtained
by
subtracting
total
costs
from
total
revenue.
It
C A S H
F L O W
is
Key terms
prot
great
if
the
difference
indicator
of
the
is
positive
nancial
and
a
success
loss
of
a
if
it
is
negative.
rm’s
core
Prot
is
a
operations.
Cash ow
Prot
and
cash
ow
are
different.
When
buying
goods
or
services,
money that ows in and out of
customers
can
either
use
cash
or
buy
on
credit.
If
either
of
the
two
a business over a given period
methods
are
used,
this
will
still
count
as
part
of
the
sales
revenue
of
of time
a
business.
business
will
purchases
point
Moreover,
in
be
said
were
time
if
to
credit
for
the
the
sales
have
revenue
earned
purchases
business
a
prot.
then
will
exceeds
the
differ
the
total
However,
cash-ow
with
its
if
costs,
most
position
of
at
a
Prot
the
that
the positive dierence
protability.
between sales revenue and
total costs
Example:
goods,
During
incurring
a
a
particular
total
cost
month
of
a
$4,000.
business
The
sold
business
$10,000
offered
worth
of
customers
Insolvency
one
month’s
credit
of
50
per
cent
of
sales.
What
was
the
prot
and
cash
a situation where a business
ow
for
that
month?
stnuoccA dna ecnaniF 3
runs out of cash but may still
be protable
Prot
=
Prot
Net
the
bringing
sold,
the
sold
Two
a)
is
50
ow
the
lower
per
as
●
business
long
can
paying
●
purchasing
b)
A
of
during
positive
between
in
the
gure
sales
$4,000
was
two
revenue
for
but
be
funds,
have
brought
possibly
$1,000
month
ow
of
even
the
that
business
clearly
cash-ow
the
goods
month.
were
However,
month.
or
about
by
the
$1,000,
The
though
in
between
little
that
only
concepts.
received
differentiating
may
the
cash
because
not
=
no
prot
cash.
and
This
cash
is
ow.
known
by:
allowing
customers
a
very
too
capital
early
and
leaving
equipment
or
little
many
or
no
cash
non-current
for
operations
assets
at
the
time
servicing
business
a
it
see
outow
period
overtrading
achieve
a
protable
suppliers
eventually
●
be
cash
can
but
prot
as
and
$6,000
10,000)
money
arise
collection
●
●
the
the
can
credit
same
we
difference
insolvency
poor
of
$6,000
of
=
costs
inow
(50%
counted
possibilities
A
of
than
cent
goods
cash
=
total
$4,000
example
prot
out
=
ow
above
a
revenue
$10,000
cash
incurred
gure
=
cash
Net
From
sales
–
purchasing
tied
loans
can
sourced
from
●
gained
●
obtained
from
a
the
the
too
much
stock
with
cash
that
is
business
cash.
positive
cash
bank
from
in
with
have
positive
●
up
ow
in
cash
the
ow
but
following
be
unprotable.
ways.
Cash
It
could
can
be:
loans
sale
of
a
rm’s
shareholders’
xed
assets
funds.
225
3
F i n a n c e
a n d
a c c o u n ts
th wrkg pl yl
Key terms
Working
costs
raw
of
a
is
the
business.
materials,
capital,
by
capital
also
These
and
as
for
the
current
needed
costs
paying
known
subtracting
money
could
to
pay
include
electricity
net
current
liabilities
for
from
and
the
day-to-day
paying
gas,
assets
current
wages,
among
of
a
running
Working capital
purchasing
others.
business,
is
Working
calculated
assets:
the dierence between
current assets and current
liabilities
Liquidation
Working
capital
=
current
assets
current
liabilities
a situation where all a rm’s
assets are sold o to pay any
Current
assets
debtors,
and
are
the
liquid
assets
of
the
business
and
include
cash,
funds owing
need
to
be
stock.
paid
in
Current
the
liabilities
short
term,
are
such
the
as
monies
creditors
the
and
business
bank
owes
that
overdrafts.
Working capital cycle
To
have
sufcient
working
capital,
businesses
need
to
ensure
that
their
the period of time between
current
assets
exceed
their
current
liabilities.
If
the
opposite
is
the
case,
the
payment for goods supplied to
business
could
run
into
working
capital
problems
and
face
insolvency
or
a
stnuoccA dna ecnaniF 3
a business and the business
serious
liquidity
crisis.
An
illiquid
business
(one
that
is
not
able
to
pay
its
receiving cash from their sale
short-term
assets
are
sold
Working
assets
A
the
sale.
the
in
net
order
raw
to
are
(see
working
to
to
asking
for
by
cycle
or
and
the
is
cash
The
the
payments
–
effectively
the
to
keep
the
as
way
of
as
these
cash
in
capital
the
in
as
gains
for
their
out
of
possible
cases
stocks
of
nished
greater
cycle,
to
the
assets.
many
extending
credit
for
from
short
selling
is,
current
and
purchasing
example,
rm’s
payment
assets
However,
extending
the
maximize
levels
after
a
important
to
cycle
interval
working
(suppliers
capital
is
all
closure).
receiving
debtors
For
its
between
between
this
business.
(when
the
It
liquid
capital.
from
so
time
other
occur
longer
of
to
of
optimal
business
and
the
leading
assessment
working
that
liquidated
administered.
period
desirable
lengthens
working
an
capital
cash
the
of
is
and
lags
3.7.1).
needs
owing
being
the
of
receiving
customers
later
on
time
be
maintaining
business
usually
Figure
shorten
working
assets
maximize
capital
period
a
is
delays
funds
are
movements
materials
goods
any
liabilities
capital
It
eventually
management
current
shows
also
pay
manage
business.
there
to
to
supplied
It
to
current
working
goods
off
could
capital
and
businesses
from
debts)
while
are
the
the
credit
suppliers
businesses)
help
cycle.
purchase of
materials, etc.
from suppliers
cash received
production
from debtors
of goods
goods sold
on credit
Figure 3.7
.1. A simple working capital cycle
Therefore
having
226
businesses
enough
to
levels
of
working
assets
providing
need
run
capital
no
to
their
control
daily
could
returns,
their
working
operations.
mean
creating
that
great
On
funds
capital
the
are
other
tied
opportunity
well
by
hand,
up
in
costs.
high
current
3 . 7
C A S H
F L O W
Cash-ow forecasts
These
a
are
given
that
future
period
shows
business
include
banks.
cash,
have
sales
cash
Cash
cash
repaying
time.
expected
that
cash
debtors,
predictions
of
This
yet
from
outows
and
rm’s
the
occurred.
selling
investments
loans,
a
in
cash
form
month-by-month
not
expenses
of
is
include
such
as
making
a
receipts
or
purchasing
rent,
wages
dividend
and
of
business
shareholders,
payments
or
to
over
of
a
inows
payments
borrowing
salaries,
payments
cash
assets,
and
outows
document
likely
materials
and
and
nancial
Examples
goods
from
inows
of
xed
assets
paying
from
from
for
creditors,
shareholders.
Constructing cash-ow forecasts
is
●
constructing
Opening
month.
●
Total
It
cash
Total
Net
and
●
forecast,
knowledge
of
the
following
terms
a
end
of
Table
3.7.1
–
–
this
by
this
is
a
is
the
cash
business
a
at
that
the
summation
a
business
start
of
of
all
a
starts
trading
cash
with
every
year.
inows
during
a
is
It
is
opening
shows
this
is
a
summation
of
all
the
cash
outows
the
difference
between
the
total
cash
inows
outows.
balance
month.
the
–
month.
this
cash
cash
to
–
held
outows
ow
the
month
cash
inows
total
Closing
balance
particular
cash
the
the
month.
cash
during
●
cash-ow
cash
is
particular
●
a
important:
stnuoccA dna ecnaniF 3
In
how
–
this
found
is
balance
the
above
the
by
estimated
adding
of
the
terms
the
same
are
cash
net
available
cash
ow
of
at
the
one
month.
applied.
Table 3.7
.1. Cash-ow forecast for XYZ Ltd company for the rst ve months of trading
All gures in $
Opening balance
January
2,000
February
March
April
May
4,500
5,600
4,650
3,250
9,000
8,000
9,500
7,500
Cash inows
Cash sales revenue
10 ,000
Payment from debtors
6,000
5,000
4,500
4,000
4,750
Rental income
4,000
4,000
4,000
4,000
4,000
20,000
18,000
16,500
17,500
16,250
Electricity
1,500
1,800
1,750
2,000
1,900
Raw materials
5,000
4,000
4,500
5,500
6,000
Rent
3,000
3,000
3,000
3,000
3,000
Wages
5,000
5,000
5,000
5,000
5,000
500
600
700
900
450
2,500
2,500
2,500
2,500
2,500
17,500
16,900
17,450
18,900
18,850
Net cash ow
2,500
1,100
Closing balance
4,500
5,600
Total cash inows
Cash outows
Telephone
Loan repayments
Total cash outows
(950)
4,650
(1,400)
3,250
(2,600)
650
227
3
F i n a n c e
In
the
above
a n d
a c c o u n ts
example,
XYZ
Ltd
shows
a
positive
closing
balance
at
the
Key term
end
be
of
May,
but
attributed
this
to
the
amount
negative
has
net
been
cash
on
a
decline
ows
in
from
March,
March.
April
and
This
can
May.
Cash ow forecast
Can
you
identify
the
specic
reasons
for
this?
Assuming
the
cash
sales
the future prediction of a rm’s
revenue
in
December
of
the
previous
year
was
$12
000,
what
does
this
cash inows and outows
tell
you
about
the
credit
period
offered
to
customers?
over a given period of time
It
is
important
and
accuracy
predict
its
to
of
note
the
future
that
cash-ow
gures
cash
depends
inows
and
forecasts
on
how
are
well
based
the
on
estimates,
business
is
able
to
outows.
Benets of cash-ow forecasts
Some
of
A
●
the
advantages
cash-ow
to
start
a
business
and
stnuoccA dna ecnaniF 3
Cash-ow
●
intending
is
forecast
business.
provides
apply
they
Predicting
the
A
●
cash
business
By
gures
where
and
its
the
can
to
clarify
for
support
to
follows:
document
helps
from
as
future
base
nancial
check
for
anyone
the
for
the
of
the
performance.
businesses
institutions.
on
wishing
purpose
This
solvency
and
business.
help
cash
can
actual
are
projections
banks
managers
and
gures,
lies
and
identify
therefore
assist
comparisons
problem
it
good
funding
the
need
a
forecasts
planning
because
provide
forecast
making
the
of
useful
is
estimated
for
ow
may
cash-ow
ow.
a
enable
creditworthiness
●
is
cash-ow
This
forecasts
to
because
of
in
the
business
seek
the
in
advance
accordingly
monitoring
between
a
plan
and
should
be
cash
able
to
solutions
where
source
managing
estimated
respective
periods
to
it.
cash
ow
assess
to
solve
it.
th rlhp bw vm, pr,
 h w
Investment
or
the
property.
about
by
of
hoping
Examples
The
investing
expectation
including
to
generally
business,
of
All
that
forms
of
unexpected
different
is
the
the
act
earnings.
bought
investment
changes
of
in
state
asset
the
a
of
investing.
purchasing
involves
appreciates
include
come
in
on
Investing
buying
with
market
investment,
growth
or
money
investments
between
stages
to
spending
future
nancial
relationship
the
refers
in
value
prot,
and
business.
cash
This
is
in
over
an
ow
noted
with
creation,
stocks,
especially
conditions
nance
asset
wealth
bonds,
risks,
In
an
time.
or
risks
brought
economy.
can
in
be
linked
Table
3.7.2.
Table 3.7
.2. The relationship between investment, prot, and cash ow, using various
stages in a business
Business stage
Star t-up
Investment (owner ’s funds)
Prot
Cash ow
This involves very high investment
There is no prot because
Cash ow is negative – cash outow is
due to the purchase of initial
costs are not yet met
signicantly higher than cash inow
assets or set-up costs
Growing
Investment could still be high
There is a small prot, as
Cash ow may be positive (i.e. cash
because the business is not yet
more revenue star ts to be
inow is higher than cash outow)
fully established
generated to cover costs
but low until cash inows increase
especially from sales revenue
228
Established –
Investment may be minimal as the
thriving
business can plough back prots
High prot is achieved
Cash ow is positive – cash inow is
higher than cash outow
3 . 7
Table
3.7.2
provides
a
simplied
model
of
how
investment
in
terms
C A S H
F L O W
of
Key term
the
owner’s
cash
ow.
injection
However,
of
it
capital
is
into
the
important
to
business
note
that
relates
the
to
prot
above
and
features
could
Investment
be
affected
by
qualitative
attributes
that
are
beyond
the
control
of
the
the act of spending money on
business.
(A
more
detailed
explanation
of
the
difference
between
prot
purchasing an asset with the
and
cash
ow
has
been
covered
earlier.
expectation of future earnings
Strategies to deal with cash-ow problems
As
it
noted
is
its
said
earlier,
to
be
working
that
there
major
business
capital
can
causes
following
a
facing
be
are
a
to
run
various
lack
strategies
can
be
liquidity
of
can
its
and
day-to-day
causes
of
effective
be
protable
crisis
used
is
deal
insolvent,
We
problems
and
with
which
difculties
operations.
cash-ow
planning
to
yet
facing
poor
these
in
have
in
a
credit
means
sustaining
already
business.
control.
seen
The
The
problems.
The
a
●
following
methods
aim
to
decrease
the
amount
of
cash
stnuoccA dna ecnaniF 3
Reducing cash outow
leaving
business:
A
business
payment.
will
This
short-term
be
time
future
negotiate
helps
needs.
the
The
consuming
suppliers
to
drawbacks
and
relationships,
with
business
delaying
including
or
have
with
this
payment
their
creditors
working
are
to
refusal
so
as
that
delay
for
CHANGE
its
negotiations
suppliers
to
to
capital
supply
could
in
may
affect
The cash ow statement will
only change if the inows and
outows impact on cash and cash
future.
equivalents. The net change in
●
Purchases
of
xed
assets
can
be
delayed.
Assets
such
as
machinery
cash position is the dierence
and
equipment
may
take
up
a
lot
of
cash
helps
to
avail
for
the
business
and
between the total amount of
delaying
purchases
However,
if
the
outdated,
a
efciency
and
of
them
machines
lack
of
or
equipment
purchasing
higher
costs
in
cash
are
replacements
the
long
in
the
business.
becoming
may
lead
money brought in by the business
obsolete
to
or
decreased
and the total amount that it
expended over the repor ting
period.
term.
The cash ow statement
●
A
business
may
decrease
specic
expenses
such
as
advertising
costs
therefore provides information
that
will
not
affect
production
capacity.
If
not
well
checked,
though,
on an organization’s liquidity
this
may
reduce
future
demand
of
a
business’s
products.
and solvency and its ability to
●
It
might
costs
A
on
be
possible
materials
possible
danger
to
or
of
source
cheaper
essential
this
is
stock,
that
the
suppliers.
decreasing
quality
of
This
the
the
will
help
outow
nished
of
reduce
funds.
product
change cash ows in future
circumstances. In addition, it
provides additional information
for evaluating changes in assets,
may
be
compromised,
affecting
future
customer
relationships.
liabilities and equity.
Improving cash inows
Using the internet, do some
●
A
business
may
purchased.
debtors,
may
This
which
lose
insist
that
avoids
tie
the
down
customers
customers
problem
cash.
who
The
prefer
to
pay
of
cash
only
delayed
goods
goods
payments
disadvantage
buy
for
on
is
that
research on the various cash
from
the
ow statements of dierent
business
organizations? How do the
changes in the other nancial
credit.
documents inuence their cash
●
Offering
discounts
or
incentives
can
encourage
debtors
to
pay
early.
ow statements?
This
will
than
reduce
earlier
businesses
●
A
of
It
rm
is
and
debt
The
receive
diversify
on
worth
with
agreed.
will
may
goods
the
offer
for
its
clear
on
limitation
less
cash
product
sale
remembering
no
burden
to
debtors
here
than
guarantee
that,
earlier
offering.
customers,
that
is
they
after
will
the
pay
less
discount,
expected.
This
will
help
potentially
diversication
of
as
comes
avail
increasing
with
a
variety
sales.
higher
costs
sales.
229
3
F i n a n c e
a n d
a c c o u n ts
Looking for additional nance sources
Reference
to
these
sources
is
as
seen
in
unit
3.1
and
they
include
the
following:
●
Sale
to
of
assets
generate
reduced
●
allows
during
Sale
a
bank
of
on
and
assets
stnuoccA dna ecnaniF 3
●
be
denies
Debt
the
be
that
on
are
selling
still
obsolete
needed
xed
could
assets
lead
to
loan
is
that
cash
which
–
by
business
a
also
short-term
accounts.
be
sold
prove
use
of
to
there
helps
are
interest
high.
use
asset
facility
greatly
generate
for
costly
the
loan
It
However,
usually
business
can
the
is
their
setbacks.
can
the
leasing
this
are
assets
back
–
from
in
as
in
cash
and
these
production.
the
long
run
collateral
in
The
and
this
seeking
loans.
factoring
bills
owed
business
affecting
Grants
and
immediate
hired
the
immediate
●
overdraw
leaseback
can
future
should
assets
overdraft
to
the
disadvantage
also
focus
Selling
rms
times
payments
●
the
production.
Arranging
that
–
cash.
cash
does
its
to
not
the
get
debt-collecting
in
a
business.
the
subsidies
subsidies
specic
external
customers
full
business,
The
companies
thereby
major
amount
drawback
owed
by
its
can
purchase
providing
is
that
the
customers,
protability.
and
inows.
–
by
The
from
the
–
businesses
government
to
is
sources
drawback
conditions
struggling
that
that
have
these
to
be
help
met
can
apply
increase
of
before
for
their
nance
money
cash
come
is
grants
with
guaranteed.
Limitations of cash-ow forecasting
Prediction
generally
are
to
bound
causes
●
of
these
impact
Poor
poor
may
●
●
market
in
change
affecting
negatively
affect
the
machine
is
difcult
position
a
include
forecast
and
effectiveness.
the
economy
by
improperly
can
cash
cash
machinery
inaccuracies
Some
of
the
following:
–
for
rms
example
and
have
uctuating
a
negative
a
sales
negative
forecasts
effect
on
due
future
to
cash
inows.
competitors’
often
actions
ow
or
to
have
done
of
and
and
a
it
struggling
and
hard
compete
equipment
predict,
behaviour
make
it
with
competitors
other
them.
This
can
business.
failure
can
–
for
–
breakdown
drastically
affect
of
the
cash
business.
Demotivated
employees
productivity
cash
–
their
Unforeseen
less
the
strategies
predict
cash-ow
borrowing
predicting
their
a
forecast’s
needs.
research
to
in
in
predictions
thereby
the
could
affect
cash-ow
businesses
the
230
its
Difculty
limit
changes
could
demand
sales,
●
rates
on
characterizes
that
inaccuracies
Unexpected
interest
●
occur
inow.
of
workers,
–
being
demotivated
reducing
output
or
can
sales
negatively
and
affect
leading
to
3 . 7
C A S H
F L O W
Student workpoint 3.16
TOK discussion
Be knowledgeable
Is it morally right for
businesses to insist on early
Juma
plans
to
open
a
restaurant
next
year
beginning
in
January.
Use
payments from debtors while
the
following
information
to
answer
the
questions
that
follow:
they delay payments to
●
He
has
$4,000
of
●
He
has
secured
his
own
money
to
inject
into
the
business.
creditors?
a
bank
loan
of
$6,000
to
add
to
his
capital
requirements.
estimates
trading
to
Material
●
paid
in
●
Wages
●
Total
in
cash
and
A
loan
●
Rent
1.
Using
are
every
salaries
and
$6,000
the
forecast
50 %
are
costs
the
a
of
for
the
$4,000,
cash
constant
of
is
in
$500
sales
rst
ve
$5,000,
months
$5,500,
revenue
per
of
$6,000.
month
and
gure
are
of
paid
$5,000
in
two
every
month.
installments,
one
April.
each
month.
month.
shown
Juma’s
$6,000
other
every
format
for
revenue
$2,000,
month.
repayment
is
sales
follows;
advertising
●
2.
as
expenses
cash
February
of
the
be
stnuoccA dna ecnaniF 3
He
●
in
Table
restaurant
3.7.1,
construct
business
for
the
a
rst
cash-ow
ve
months
trading.
Comment
on
recommend
the
a
cash-ow
way
forward
position
for
faced
by
Juma’s
business
and
him.
Rv hkl
✓
Prot
is
when
the
other
only
✓
The
the
both
hand
considers
working
goods
sale.
Cash
outows)
include;
of
✓
and
✓
wages
When
a
cash
strategies
some
purchases
to
reduce
in
and
the
revenue
and
considered.
and
out
of
the
total
Cash
costs
ow
business
and
and
reduce
to
for
on
and
improve
cash
their
capital
the
it
is
cash
expected
payments
Cash
assets,
outow
cash
cash
to
shows
and
occurred.
the
from
for
possible.
business
inows
expenses
to
(cash
payments
examples
from
include;
such
as
shareholders.
following
inows,
need
total
to
be
cash
balance.
include;
delaying
incentives
that
cash,
outow
and
as
payment
cash
working
payments
total
closing
cash
payment
or
forecasts
balance,
ows
offering
assets
yet
Cash
dividend
ow
short
inows)
not
banks.
xed
the
document
goods
between
receiving
on
as
(cash
have
from
cash
interval
nally
cycle
selling
cash
time
maximise
that
or
strategies
and
the
receipts
salaries
net
money
nancial
from
materials
opening
while
a
borrowing
outows,
to
keep
is
constructing
creditors
is
business
business
included;
Some
cycle
cash
sales
and
of
total
are
transactions.
to
forecast
purchasing
rent,
a
ow
between
transactions
effectively
month
cash
credit
the
to
to
desirable
by
debtors
is
capital
order
ow
month
difference
and
cash
supplied
In
usually
✓
positive
cash
to
negotiating
purchase
inow
include;
encourage
xed
with
assets,
insisting
debtors
to
pay
on
cash
early.
231
3
F i n a n c e
a n d
a c c o u n ts
Pr q
New
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Philanthropy: voluntary action for the public good. An activity performed with the goal of promoting
the well-being of fellow man.
232
results
November
3.8 Investment appraisal
By the end of this chapter, you should be able to:
➔
calculate and evaluate the payback period as an investment
appraisal method
➔
calculate and examine the average rate of return as an investment
appraisal method
➔
calculate and discuss the net present value method as an
stnuoccA dna ecnaniF 3
investment appraisal method (HL only)
Introduction
Investment
evaluating
It
attempts
particular
business
appraisal
the
to
assess
project.
venture
is
to
justify
worth
investment
projects.
investment
appraisal
also
In
quantitative
the
of
capital
aims
to
pursuing
assists
this
–
the
attractiveness
therefore
appraisal
present
or
and
It
Investment
net
refers
viability
an
expenditure
establish
and
section
we
in
look
period,
it
will
a
at
three
in
a
protable.
different
methods
rate
to
particular
be
comparing
average
used
proposal.
allocated
whether
whether
businesses
payback
techniques
investment
of
of
return ,
and
value
The payback period
This
method
project
will
to
take
ows.
It
estimates
pay
to
back
its
recover
can
be
the
length
initial
its
cost
principal
calculated
of
time
outlay.
required
It
looks
investment
using
the
at
for
amount
following
an
how
investment
long
from
its
a
business
net
cash
formula:
initial investment cost
____
Payback
period
=
annual
Example
new
1:
A
construction
cement-mixing
$50,000
in
annual
ow
engineer
machine
cash
cash
ow.
and
from
plans
on
estimates
Calculate
the
investment
investing
that
it
will
payback
$200
000
generate
period
for
in
a
about
the
machine.
$200,000
_
Payback
period
=
=
4
years
$50,000
Hence
the
Example
a
new
2:
period
Another
timber-cutting
following
and
payback
cash
ows
for
the
new
construction
machine.
in
the
rst
machine
engineer
The
aims
machine
four
years:
would
is
to
be
invest
expected
$60,000,
four
to
years.
$300,000
generate
$80,000,
in
the
$100,000
$120,000.
233
3
F i n a n c e
Its
payback
ows
over
a n d
period
the
a c c o u n ts
can
four
be
years,
identied
as
by
shown
calculating
in
the
table
the
cumulative
cash
below:
Table 3.8.1. Expected cash ows of a new machine
Year
Annual net cash ows ($)
Cumulative cash ows ($)
0
(300,000)
(300,000)
1
60,000
(240,000)
2
80,000
(160,000)
3
100,000
(60,000)
4
120,000
60,000
The
but
initial
in
investment
which
month
outlay
exactly?
will
be
This
paid
can
back
be
sometime
calculated
in
using
year
the
four
–
following
stnuoccA dna ecnaniF 3
formula:
Extra
cash
inow
required
___
×
Annual
The
in
extra
year
year
is
4
3
to
cash
cash
it
$120,000.
in
inow
has
pay
ow
been
off
year
shown
in
calculated
the
initial
Therefore
12
months
4
Table
that
3.8.1
only
investment.
applying
this
to
is
$60,000.
$60,000
The
the
This
needs
annual
formula
cash
we
to
is
because
be
paid
ow
in
in
year
4
get:
$60,000
_
×
12
months
=
6
months
$120,000
It
therefore
investment
The
results
other
in
projects
payback
The
takes
of
to
aid
of
may
“cut-off”
that
years.
example
the
In
one
in
years
examples
period
business
three
and
six
months
to
pay
back
the
initial
$300,000.
an
1
and
decision
the
project
also
have
investment
1
example
the
2
is
2
can
be
making.
the
better
decided
on
should
investment
better
off
compared
As
a
it
is
an
not
six
for
the
internal
go
below,
project
by
with
general
just
results
rule,
the
investing
payback
for
meets
from
shorter
period
example
this
the
business.
or
four
criterion
while
months.
Advantages of the payback period
●
It
is
simple
●
It
is
a
and
useful
technology.
will
be
fast
to
method
It
helps
recovered
calculate.
in
to
rapidly
changing
estimate
before
how
another
fast
industries
the
machine,
initial
for
such
as
investment
example,
can
be
purchased.
●
●
It
helps
cash-ow
Since
short-term
it
is
prone
Business
a
to
the
that
can
problems
pay
measure
inaccuracies
managers
obtained.
234
with
projects
less
●
rms
investment
can
easily
of
back
of
because
more
quick
they
quickly
returns
long-term
comprehend
on
can
choose
than
investment,
forecasting.
and
use
the
the
others.
results
it
is
3 . 8
I N V E S T M E N T
A P P R A I S A L
Disadvantages of the payback period
It
●
does
could
It
●
not
inuence
ignores
focusing
The
●
consider
the
in
major
overall
only
annual
changes
the
on
cash
earned
investment
protability
how
fast
ows
demand
cash
it
will
could
which
be
after
payback
period
which
decisions.
of
an
pay
investment
project
by
back.
affected
could
the
by
unexpected
negatively
affect
the
external
payback
period.
The average rate of return
method
percentage
generated
measures
of
by
accounting
its
a
the
capital
project
rate
of
annual
cost.
over
return.
It
a
It
net
return
assesses
period
can
be
the
of
on
an
investment
protability
time.
It
calculated
(total
is
also
using
returns
per
known
the
as
a
annum
as
the
following
capital
formula:
stnuoccA dna ecnaniF 3
This
cost)
_____________________
years
of
usage
___
Average
rate
of
return
(ARR)
=
×
capital
Example:
A
photocopier
streams
for
$100,000
Total
business
at
a
the
cost
next
considers
of
ve
respectively.
returns
purchasing
$150,000.
years;
=
$30,000
$345,000
+
its
a
expects
$30,000,
Calculate
=
It
new
the
commercial
following
$50,000,
100
cost
revenue
$75,000,
$90,000
and
ARR.
$50,000
+
$75,000
($345,000
+
$90,000
+
$100,000
$150,000)
___
Net
return
per
annum
=
=
$39,000
5
$39,000
_
ARR
=
×
100
=
26%
$150,000
The
business
can
compare
project
if
this
showing
interest
case
therefore
rates
banks
on
expects
gure
the
highest
loans,
offer
with
an
to
an
the
rate.
assess
interest
ARR
ARR
The
the
rate
of
of
ARR
level
of
26%
other
can
of
15%,
on
its
investment.
projects
also
risk.
be
For
and
compared
example,
businesses
may
A
choose
in
nd
it
business
the
with
the
banks’
above
Key terms
worthwhile
Investment appraisal
to
pursue
lending
investment
rate.
investment
the
project
criterion
rate
and
Other
rate
would
projects
businesses
should
was
still
20%
be
with
set
return
criterion
not
go
for
the
considered
a
below
if
above
a
it
of
11%
rates
is
to
desirable
or
be
business,
higher
a
than
minimum
selected.
the
project
ARR
to
the
For
is
base
rate
that
example,
6%
above
The
ARR
given
shows
period
of
the
the quantitative techniques
if
used in evaluating the viability
this
or attractiveness of an
investment proposal
pursue.
Advantages of the ARR
●
an
Payback period
protability
of
an
investment
project
over
a
time.
the length of time required for
an investment project to pay
back its initial cost outlay
●
Unlike
the
payback
period,
it
makes
use
of
all
the
cash
ows
in
a
business.
Average rate of return (ARR)
●
It
allows
better
for
easy
allocation
comparisons
of
with
investment
other
competing
projects,
for
funds.
measures the annual net
return on an investment as a
percentage of its capital cost
●
A
business
ARR
for
a
can
use
project,
its
to
own
assess
criterion
the
rate
viability
and
of
check
the
this
with
the
venture.
235
3
F i n a n c e
a n d
a c c o u n ts
Disadvantages of the ARR
●
Since
it
there
are
the
It
●
likely
accuracy
does
have
The
●
considers
not
the
a
to
of
longer
be
effects
on
period
forecasting
or
errors.
useful
life
Long-term
of
the
project,
forecasts
decrease
results.
consider
same
time
the
ARR
the
timing
but
time
one
of
cash
could
value
of
pay
inows.
back
money
are
Two
more
not
projects
quickly
might
despite
this.
considered.
Net present value (hL only)
This
is
future
value
dened
cash
is
as
today’s
example,
offering
$100
10
the
inows
difference
or
value
returns
of
an
invested
per
cent
at
in
the
and
amount
the
interest
summation
the
of
original
money
beginning
would
be
of
present
of
year
$110
in
at
values
investment.
available
the
worth
of
cost
in
a
the
future.
bank
end
of
Present
For
account
of
the
year:
stnuoccA dna ecnaniF 3
10
_
×
(
$100
)
+
$100
100
Hence,
$100
is
$110
the
another
you
grows
than
future
is
present
To
year
it
observe?
years
less
in
do
This
a
of
future
worth
less
of
future
than
ows
to
calculated
xed
a
their
a
$100
year’s
in
a
bank
i.e.
a
the
uses
present
interest
further
over
xed
a
interest
discount
rates
at
at
10
of
other
to
is
per
cent
money
per
do
This
affect
that
over
three
in
get
be
the
the
interest?
method .
the
present
converts
discount
do
will
paid
we
cent
for
What
period
cash-ow
rates
words,
invested
$133.
How
10
factor
today.
and
year
today.
years
In
$110
three-year
discounted
value
If
amount
paid
three
how
a
today.
time.
account
amount
over
called
It
in
received
considers
ows.
using
worth
and
in
$100
today,
a
is
that
cash
$121
invested
what
is
$110
invested
then
$100
use
time
of
to
received
technique
cash
usually
$100
$133,
$100
we
year’s
value
amounts
If
to
value
this
is
value
a
one
present
these
factor
is
time.
Table 3.8.2. Discount factors
Years
Discount rate
Exam tip
4%
6%
8%
10%
20%
1
0.9615
0.9434
0.9259
0.9091
0.8333
2
0.9246
0.8900
0.8573
0.8264
0.6944
3
0.8890
0.8396
0.7938
0.7513
0.5787
4
0.8548
0.7921
0.7350
0.6830
0.4823
5
0.8219
0.7473
0.6806
0.6209
0.4019
6
0.7903
0.7050
0.6302
0.5645
0.3349
7
0.7599
0.6651
0.5835
0.5132
0.2791
8
0.7307
0.6271
0.5403
0.4665
0.2326
9
0.7026
0.5919
0.5002
0.4241
0.1938
10
0.6756
0.5584
0.4632
0.3855
0.1615
Discount factors, as sown in
Table 3.8.2 are provided in te
Business management guide
Source: IB Business management guide p. 78
236
3 . 8
To
get
the
present
value
of
future
cash
ows,
the
appropriate
I N V E S T M E N T
discount
A P P R A I S A L
factor
Key terms
is
multiplied
the
present
by
the
value
net
of
cash
$100
ow
in
invested
the
given
over
year.
three
In
years
at
the
10
earlier
per
example,
cent
will
be:
Discounted cash ow
Present
value
=
0.7513
(taken
from
Table
3.8.2)
×
$100
=
$75.13.
This
uses a discount factor that
means
that
$100
received
in
three
years’
time
is
worth
only
$75.13
today.
conver ts future cash ows to
Example:
produces
Consider
net
cash
an
investment
ows
over
the
project
next
that
four
costs
years
as
$500,000
their present value
and
follows:
Net present value (NP V)
Year
1:
$100,000
the dierence in the
Year
2:
$200,000
Year
3:
$300,000
summation of present values
of future returns and the
original cost of investment
4:
$250,000
Calculate
The
the
working
net
is
present
shown
value
in
the
(NVP)
at
following
a
discount
factor
of
8
per
cent.
stnuoccA dna ecnaniF 3
Year
table:
Table 3.8.3 Calculating net present value
Year
Net cash ow ($)
0
(500,000)
1
100,000
0.9259
92,590
2
200,000
0.8573
171,460
3
300,000
0.7938
238,140
4
250,000
0.7350
183,750
NPV
=
NPV
The
a
total
=
NPV
viable
the
Present value in $
Discount factor at 8%
this
project
viability
pursued.
future
present
$685,940
in
of
An
cash
1
values
the
ows
is
a
should
project
increase
will
original
$500,000
example
that
in
be
be
value
less
If
in
discount
worth
cost
$185,940
ahead.
would
the
=
positive
go
(500,000)
of
the
$185,940,
value
question
rate
when
was
and
reduces
it
the
discounted
signifying
negative
should
NPV
at
then
not
be
because
higher
rates.
Advantages of NPV
●
The
opportunity
consideration
●
All
cash
●
The
ows
discount
economic
in
cost
its
and
including
rate
can
variables
time
value
of
money
is
put
into
calculation.
their
be
such
timing
changed
as
to
interest
are
included
suit
rate
any
in
its
expected
computation.
changes
in
variations.
Disadvantages of NPV
●
It
is
more
●
It
can
initial
●
The
complicated
only
cost
be
to
calculate
compare
than
the
investment
payback
projects
period
with
or
the
ARR.
same
outlay.
discount
which
used
to
may
rate
be
greatly
affected
inuences
by
the
inaccurate
nal
interest
NPV
rate
result
obtained,
predictions.
237
3
F i n a n c e
a n d
a c c o u n ts
Student workpoint 3.17
TOK discussion
Be knowledgeable
How certain is the information
we get from nancial accounts?
A
large
retail
business
has
the
following
forecasted
net
cash
ows
for
Can we, for example, know in
a
major
project:
advance if an investment will
Year
be successful?
Net cash ows ($)
0
(40,000)
1
15,000
2
30,000
3
10,000
4
5,000
Does the accounting process
allow for imagination?
stnuoccA dna ecnaniF 3
1.
Calculate
the
payback
2.
Calculate
the
ARR.
3.
Calculate
the
NPV
discount
factors
at
in
period.
a
discount
Table
3.8.2).
rate
of
[HL
6
per
cent
(use
the
only]
Revision checklist
✓
Investment
an
appraisal
investment
venture
in
is
✓
return
Payback
to
✓
Average
by
of
a
✓
does
project
It
the
Net
a
of
does
an
not
of
present
value
is
of
future
calculation.
It
It
complex
projects
to
different
useful
viability
particular
as
of
business
cash
the
time
the
in
businesses
projects.
period,
earned
of
and
is
also
ows
project
timing
average
after
over
per
the
rate
given
cash
It
cost
difference
inows
use
all
and
and
same
of
or
the
cash
time
can
initial
in
the
returns
project.
generated
accounting
and
rate
shows
period
inows
summation
and
discounted
ows
value
only
cost
in
of
be
the
cash
its
of
and
time.
effects
used
to
cost
as
However,
compare
(HL
present
method
computation
money.
outlay.
of
original
ow
only)
is
industries.
annum
as
its
ows.
payback
business
a
recover
cash
investment
known
a
to
net
changing
an
in
of
take
its
rapid
protability
cash
the
will
from
protability
investment
includes
of
business
assisting
investment
payback
outlay
method
the
assesses
all
a
cash
overall
the
cash
the
a
well
the
money.
calculate
with
as
include
long
consider
makes
opportunity
how
of
whether
of
value.
period
use
value
other
initial
a
assessment
protable
consider
the
return
over
investment.
238
not
makes
it
at
or
and
time
values
the
of
protability
However,
on
looks
ignores
rate
return.
the
it
and
establishes
or
with
present
calculate
quantitative
techniques
investment
However,
period
net
period
principal
simple
appraisal
and
It
pursuing
comparisons
Investment
of
the
proposal.
worth
making
is
in
of
its
well
it
is
as
more
investment
3 . 8
I N V E S T M E N T
A P P R A I S A L
Practice question
Easy
E
E
stable
Booking
Booking
online
motivated
for
their
director,
Maia
Reach”
two
A:
is
a
small,
reservation
take
great
quality
greater
software
Option
and
Maia,
has
Option
(EEB)
hotel
high
demand,
(EEB)
pride
customer
competition
has
decided
well-known,
service.
in
their
Due
changes
upgrade
reputable
employees
work.
service.
and
to
EEB
EEB
to
in
EEB’s
an
has
and
are
nancially
highly
received
increase
technology,
computers
in
recognition
global
the
nance
and/or
software.
options:
purchase
only
a
new
software
called
“Book-Fast”
from
a
local
designer.
B:
purchase
from
a
new
computers
manufacturer
with
installed
software
called
“Global
abroad.
Option A
Cost
Option B
$20,000
Technical suppor t
stnuoccA dna ecnaniF 3
Easy
$40,000
24 hours onsite at EEB
24 hours online
Fur ther payments payable:
Employees
No change
At the end of their contract 15% of employees to be made
redundant, cost: $15,000 in year 2
Training cost
On-the-job: free
Maintenance cost
Insurance cost
The
average
rate
of
return
(ARR)
Intensive: $12,000 in year 1
Free
$1000 per year
$500 per year
$1000 per year
of
Option
A
is
46.25%.
The
Maia
is
considering
using
a
straight
line
method
of
estimated
revenue
EEB
employees
favour
Option
A,
even
though
return/total
depreciation.
some
of
their
in
$
per
year
is
shown
competitors
below:
using
“Book-Fast”
security
more
It
a)
also
give
global
b)
your
c)
Calculate
For
IB,
problems
has
and
competitive
of
hotel
method
the
your
chosen
secure
with
the
Option
software,
B,
which
reservation
advantage
and
an
system
ability
average
to
one
weakness
of
EEB
using
depreciation.
period
rate
A
and
discount
advantage
method
Maia’s
of
for
of
Option
return
Option
rate
and
of
of
B,
handle
[4
A
( show
(ARR)
for
calculate
4%
one
investment
choice
provide
( show
all
the
disadvantage
appraisal.
Option
B.
Option B
Year 1
10,000
14,000
Year 2
12,000
16,800
Year 3
17,000
23,800
Year 4
20,000
28,000
a
marks]
all
Option
net
your
Option A
software.
a
present
working).
for
[2
marks]
[4
marks]
B
working).
a
including
will
reservations.
and
of
payback
Option
one
NPV
Examine
Nov
a
strength
the
using
Explain
the
f)
all
both
(NPV)
e)
line
Maia
working).
(show
d)
EEB
one
Calculate
reported
sophisticated
volume
Describe
straight
have
However,
up-to-date,
will
large
issues.
EEB
of
value
[5
marks]
using
[4
marks]
[6
marks]
2012
239
3.9 Budgets (HL only)
By the end of this chapter, you should be able to:
➔
explain the impor tance of budgets for organizations
➔
state the dierence bet ween cost centres and prot centres
➔
analyse the role of cost centres and prot centres
➔
calculate and interpret variances
➔
analyse the role of budgets and variances in strategic planning.
stnuoccA dna ecnaniF 3
ir
A
budget
is
a
expenditure
for
individuals,
Budgets
of
the
and
help
for
in
the
holder
is
being
the
specied
of
future
targets
and
enable
time
period.
a
plan
time
government,
They
responsible
met.
nancial
specied
setting
achievement
cost
a
organization.
within
are
quantitative
over
budget
for
is
for
are
the
any
person
known
used
estimates
aligned
efcient
The
ensuring
Commonly
or
that
period.
as
that
the
budgets
type
with
of
specied
are
sales
be
main
allocation
budget
can
and
prepared
organization.
the
involved
the
revenue
Budgets
of
in
resources
the
formulation
holder.
budget
revenue
objectives
The
budget
allocations
budgets
and
budgets.
th mpr f bg fr rgz
●
Planning:
provide
as
a
a
planning
problems
●
by
and
Motivation:
control
trusted,
involved
as
part
of
be
●
in
effective
240
line
also
who
assist
are
that
budgets
organizations.
in
anticipating
responsible
ensure
actual
their
in
for
A
help
to
budget
future
solutions.
that
with
boosts
the
that
the
the
In
budgetary
team,
which
for
feel
empowered
addition,
process
could
budgetary
budgeted
performance)
morale.
be
purposes
budgets
help
organization.
very
available
departments
all
holders
taken
organizational
Coordination:
helps
in
should
participate
could
that
specied
budget
ensure
purpose
possible
allocation:
used
resources
ensure
devising
managers
or
staff
feel
even
who
are
recognized
lead
to
productivity.
Resource
will
document
is
the
targets,
direction
which
and
increased
●
of
(modalities
performance
and
setting
sense
high,
budgets
resources
based
budgets
on
help
to
to
work
departments
to
reach
of
are
prioritize
the
set
not
designated
together
achievement
to
Since
the
bring
for
a
certain
resources
for
nancial
boundaries
overstretched
but
that
used
for
needs.
people
common
uniform
set
how
demands
targets.
from
different
purpose.
budget
Coordination
agreements
for
more
3 . 9
Control:
●
budgets
act
as
monitoring
and
evaluation
tools
to
B U D G E T S
( H L
O N LY )
check
Key terms
how
to
funds
ensure
are
that
being
they
spent
are
in
each
within
department.
the
budget
in
Budget
their
holders
spending
need
patterns
Budget
and
especially
ensure
that
they
do
not
exceed
the
budget
as
this
a quantitative nancial plan
could
lead
to
serious
nancial
debt
problems
in
the
organization.
that estimates the revenue
and expenditure over a
c  pr r
To
be
able
to
account
for
the
specied future time period
revenues
generated
and
costs
incurred,
Budget holder
different
parts
of
a
business
are
divided
into
cost
centres
or
prot
a person involved in the
centres
formulation and achievement
of a budget
Cost centres
is
a
part
recorded.
effectively.
include
or
Cost
section
centres
Examples
electricity,
Businesses
can
be
of
a
can
of
business
help
costs
wages,
where
managers
collected
advertising,
divided
into
cost
costs
to
and
and
are
collect
incurred
and
recorded
in
insurance,
centres
in
some
use
these
among
of
the
and
cost
data
stnuoccA dna ecnaniF 3
This
sections
others.
following
ways:
By
●
department
and
By
●
HR,
where
product
that
each
mobile
Each
By
phones,
of
these
in
world
cost
is
or
and
include
department
a
is
a
producing
cost
centre.
televisions,
products
geographical
the
examples
business
their
Corporation
as
a
product
measured
●
–
–
each
nance,
specic
several
For
be
cost
and
could
Samsung
many
centres
marketing,
centre.
products
example,
computers,
could
production,
cost
more
because
ensure
produces
products.
costs
are
production.
location
Coca-Cola
each
of
the
of
a
–
businesses
Company
areas
they
are
such
as
located
are
the
in
located
McDonald’s
different
in
could
parts
be
of
treated
centres.
Prot centres
This
is
a
part
identied
much
made
For
prot
to
which
by
section
recorded.
each
judge
example,
market
comparing
prot
makes.
can
prot
location
centres
can
location
Prot
in
identify
the
is
be
as
where
sections
performance
Toyota
geographical
business
These
centre
the
geographical
centres,
or
or
and
each
most
as,
protable
product
makes
addition
to
to
revenues
to
calculate
comparisons
of
car
or
the
by
to
be
in
the
comparing
just
product,
cost,
are
how
business.
models
Therefore,
according
in
and
sections
protable.
divided
long
enable
various
most
costs
businesses
centres
the
the
both
allow
as
in
is
world – each geographical area
could be treated as a cost centre
cost
department
revenue
McDonald’s has outlets all over the
Key terms
also
Cost centre
generated.
a section of a business where
The role of cost and prot centres
costs are incurred and recorded
●
Aiding
decision
managers
business
with
and
making:
nancial
this
cost
and
information
information
can
prot
centres
about
assist
the
them
help
in
different
in
providing
parts
deciding
of
a
whether
Prot centre
to
a section of a business where
continue
or
discontinue
producing
a
particular
product.
Production
both costs and revenues are
of
high-cost
and
the
least
protable
products
will
be
stopped
to
pave
identied and recorded
the
way
for
new
products.
241
3
F i n a n c e
Better
●
their
sections
in
their
problem
store
problem
of
of
a
staff
to
in
stnuoccA dna ecnaniF 3
and
areas:
lot
of
centres
example,
be
of
prot
to
help
to
managers
identied
such
targets
to
as
helps
centres
and
held
to
least
efciency.
help
improve
in
This
a
quick
staff
hold
who
specic
perform
accountable
and
the
monitoring
overall
efciency
resulting
this
can
of
in
be
for
or
in
to
individual
the
in
within
the
and
to
them
cost
and
managers
motivation.
the
check
one
by
enable
control
improving
help
in
high
sought.
to
morale
delegating
a
managers
bonuses
their
in
particular
if
checked
being
performances
can
enable
example,
departmental
helps
business
For
solutions
increase
also
centres
complaints
promotion
comparing
centres
prot
detected.
providing
Empowering
these
and
be
replacements,
leading
motivation:
set
cost
customer
product
centre,
centres.
charge
a
Benchmarking:
●
prot
For
can
business
incentives
achieve
prot
a
costly
cost
with
in
are
Increasing
●
and
accountable.
department
areas
there
number
use
cost
inefciency.
Tracking
●
a c c o u n ts
accountability:
business
poorly
a n d
various
areas
parts
of
of
a
cost
most
or
business
can
business.
Problems of cost and prot centres
Indirect
●
or
cost
insurance
centres.
They
business
as
competition
negatively
Centre
in
may
their
be
factors:
Competition
●
difcult
indirect
to
costs
allocate
allocated
such
as
specically
unfairly,
advertising,
to
particular
distorting
the
rent
cost
overall
performance.
External
●
allocation:
are
Factors
may
in
one
affect
conicts:
organization.
the
centres
for
a
be
control
cost
be
and
higher
managers
superior
could
rm’s
the
performance
and
to
This
may
the
staff
centres
the
specic
centre
inuencing
own
beyond
lead
resources
to
to
prot
than
of
the
may
the
of
a
centres
in
of
such
differently.
another,
consider
overall
lack
business
centres
unhealthy
and
the
thereby
there.
the
performance
performance
competition
sharing
of
of
between
vital
information.
Staff
●
be
stress:
very
could
high
lead
the
for
to
pressure
some
staff
of
staff,
managing
especially
a
if
cost
they
and
lack
prot
the
centre
right
may
skills.
This
demotivation.
Vr ly
In
budgeting,
the
actual
period
budgetary
sales
A
and
actual
revenue
This
the
actual
was
is
of
is
in
usually
are
This
can
when
one
then
calculated
the
analysis
the
rm
can
be
to
was
has
at
a
budgeted
the
Variance
be
end
the
$30
between
done
between
rm.
000
of
For
and
favourable
gure
a
analysis
for
favourable
difference
month
the
differences
either
benecial
the
between
determined.
assessing
nancially
000,
is
amount.
revenue
$40
difference
Variances
variance
gure
the
amounts
process
budgets.
sales
is
variance
actual
control
revenue
budgeted
242
the
favourable
and
variance
gure.
once
amount
a
or
the
budget
is
the
both
a
budgeted
cost
and
adverse
budgeted
example,
the
and
actual
variance
of
if
the
sales
$10
000.
3 . 9
If
the
budgeted
marketing
costs
were
$80,000
in
a
month
and
B U D G E T S
turned
( H L
O N LY )
out
Key terms
to
be
An
$65,000,
adverse
and
actual
then
the
variance
amounts
is
rm
has
occurs
a
favourable
when
nancially
the
variance
difference
costly
to
the
lower
than
of
$15,000.
between
rm.
For
the
budgeted
example,
if
Variance
the
the dierence between the
actual
sales
revenue
actual
costs
were
amount
was
the
budgeted
gure
or
the
budgeted gure and the actual
higher
than
the
budgeted
costs,
then
the
rm
has
an
gure
adverse
or
unfavourable
variance.
Favourable variance
Example:
Table
3.9.1
shows
some
of
the
budgeted
and
actual
amounts
when the dierence between
taken
from
Mr
Kamau’s
business.
the budgeted and actual gure
Required
is nancially benecial to
Complete
obtained
the
–
missing
write
(F)
gures
for
and
state
favourable
or
the
(A)
nature
for
of
the
the rm
variance
adverse.
Ad verse variance
stnuoccA dna ecnaniF 3
when the dierence between
Table 3.9.1 Calculating variance
the budgeted and actual
Par ticulars
Budgeted gure ($)
Actual gure ($)
Variance
amounts is nancially costly
to the rm
Sales of televisions
10,000
12,500
4,000
3,800
15,000
13,900
Cost of labour
5,000
5,700
Cost of rent
3,000
3,000
Cost of materials
Sales of laptops
Strategic planning
an organization’s systematic
process of dening its future
direction and deciding on
how to allocate its resources
accordingly to full this vision
Solution:
Par ticulars
Budgeted gure ($)
Sales of televisions
Actual gure ($)
Variance ($)
10,000
12,500
2,500 (F)
4 ,000
3,800
200 (F)
15,000
13,900
1,100 (A)
Cost of labour
5,000
5,700
700 (A)
Cost of rent
3,000
3,000
Cost of materials
Sales of laptops
From
●
the
above
Favourable
and
the
cost
and
Adverse
of
variances
materials.
business,
$2,500
●
of
example
the
which
declined
by
can
were
a
noted
both
higher
with
were
be
actual
reduced
nancially
$1,100,
while
in
the
presented
experienced
proved
that:
experienced
Here,
with
other
variances
labour,
sales
one
it
the
0
sales
actual
in
the
costly
cost
a
gure
costs
sales
to
of
sale
of
televisions
nancial
the
of
of
$200
to
expected
of
respectively.
laptops
rm.
labour
benet
than
and
Expected
increased
by
the
cost
laptop
$700.
The role of budgets and variances in
strategic planning
Strategic
its
future
planning
direction
is
and
an
organization’s
deciding
on
how
systematic
process
to
its
allocate
of
dening
resources
243
3
F i n a n c e
accordingly,
needs
are
to
to
before
a c c o u n ts
fulll
know
involves
and
a n d
its
this
pursuing
its
formulating
putting
carrying
in
out
important
following
place
a
in
In
position
desired
key
or
of
analysis
strategic
dening
and
course
goals
series
variance
role
vision.
current
of
its
to
one
planning.
future
available
action.
objectives
steps
is
the
those
This
course
derived
achieve
of
The
from
them.
steps
role
position,
is
it
rst
opportunities
of
the
action
vision
Budgeting
and
both
further
there
and
play
explored
an
in
the
points:
Advantages of using budgets and variances in strategic
planning
●
Budgets
money
●
help
is
Budgets
spent
stnuoccA dna ecnaniF 3
help
of
should
measurable,
the
●
minimize
the
be
in
set
the
ow
expenditure
and
that
the
coordination
agreed,
analysis
budgeted
and
losses
targets
aid
working
organization’s
Variance
to
improving
people
Budgets
revenue
realistic
in
departments,
●
to
stakeholders
Budgets
sense
control
provide
internal
●
to
wastage
are
clearly
attainment
of
the
of
by
of
regulating
resources.
understood
of
an
various
how
by
all
organization’s
goals.
business
communication
and
ensuring
a
together.
based
on
realistic
the
and
SMART
criteria
time-bound
–
and
–
being
all
in
performance
to
specic,
line
with
objectives.
aims
to
performance,
compare
thereby
actual
helping
to
assess
organizational
performance.
●
Variance
in
the
rectify
●
so
assists
that
in
detecting
corrective
the
causes
measures
can
of
be
any
deviations
taken
to
them.
Variance
holders
However,
analysis
budget
analysis
provides
responsible
in
an
organization,
for
attempt
budgeting
to
an
objective
their
various
full
the
brings
with
way
appraising
budget
departments.
strategic
it
of
some
objectives
of
the
of
an
following
limitations.
Limitations of budgets in strategic planning
●
Inexible
the
may
●
be
too
Signicant
make
●
Since
gains
the
such
Highly
in
●
difcult
lose
budgets
as
do
not
be
underspent
and
the
the
towards
involving
their
unforeseen
in
as
a
short
due
at
and
term,
to
results
long-term
the
could
tool.
unexpected
of
in
costs,
unrealistic.
actual
current
end
changes
material
future
increases
budgeted
year
in
amount.
could
result
managers.
some
motivation
be
planning
the
the
by
raw
therefore
budgeted
only
expenditure
without
affect
and
potential
looking
budgets
wasteful
budgets
sales
on
any
increases
importance
based
by
as
within
between
its
are
lost
consider
such
stay
increased
could
resentment
244
to
differences
unjustied
Setting
that
environment,
budget
most
demand
●
budgets
external
people
levels.
could
result
in
their
3 . 9
Despite
the
above
limitations,
budgets
do
play
an
important
role
B U D G E T S
( H L
O N LY )
in
TOK discussion
strategic
to
planning.
monitor
and
They
control
are
vital
income
nancial
and
planning
expenditure
so
documents
that
the
that
help
specied
Accounting practices such as
organizational
objectives
are
attained.
budgeting vary from country
to country. Is this necessary
Student workpoint 3.18
or could we have the same
accounting practices
Be a thinker
everywhere?
following
information
Par ticulars
refers
to
XA
V
Ltd:
Budgeted gure ($)
Material costs
Actual gure ($)
12,000
18,500
9,000
7,800
Sales of radios
25,000
25,600
Sales of the Apple iPod®
15,000
12,750
6,000
7,100
Direct labour costs
Adver tising costs
1.
Calculate
whether
2.
Interpret
for
3.
your
What
do
the
the
missing
gures
variance
the
is
material
from
the
favourable
costs
table
(F)
variance
or
and
above
adverse
suggest
and
Variance
stnuoccA dna ecnaniF 3
The
note
(A).
possible
reasons
answer.
the
overall
variance
gures
tell
you
about
the
business?
Revision checklist
✓
A
budget
the
a
revenue
time
✓
is
and
Budgets
Cost
are
centres
much
are
centres
the
other
each
of
a
centre
centres
and
and
of
is
a
in
target
business
setting
over
a
the
if
which
by
estimating
specied
future
resource
allocation,
are
rm
important
tracking
it
are
cost
costs
businesses
is
the
is
in
aiding
However,
indirect
the
control
budgeted
incurred
data,
and
to
while
and
prot
revenues
calculate
as
a
between
known
as
decision
areas,
some
costs
are
how
and
the
of
and
actual
actual
variance.
budgeted
adverse
faced
cost
assessing
the
favourable
an
particular
control.
process
gure
making,
increasing
challenges
to
rm’s
amount
budgeted
known
difference
costly
costs
use
both
problem
beyond
budgetary
it
where
allow
allocating
the
where
effectively
makes.
between
the
nancially
motivation,
business
and
business
factors
a
between
difference
hand
in
external
to
a
benchmarking.
analysis
benecial
are
of
planning,
collect
accountability,
differences
If
to
recorded,
difculties
Variance
for
sections
help
prot
motivation
include
are
and
improving
✓
helps
control.
sections
prot
and
and
and
identied
Cost
that
expenditure
important
centres
recorded
✓
plan
period.
coordination
✓
nancial
and
the
amount.
gure
On
is
the
actual
gure
variance
245
3
F i n a n c e
a n d
a c c o u n ts
Pr q
KJC
KJC
it
a
Ltd
Ltd
has
specialises
developed
a
well-developed
the
rst
sales
have
of
half
of
their
been
the
tasked
The
stnuoccA dna ecnaniF 3
for
table
this
year
shows
for
both
the
Some
over
a
shapes.
year.
half
budgeted
while
budget
He
may
Mr
Budgeted gures
Sales revenue
and
to
to
Direct labour costs
50
45
Direct material costs
80
90
Gross prot
370
265
Overheads
100
95
Net prot
270
170
Dene
the
following
(i)
Budget
(ii)
Variance
b)
Explain
increased
out
has
how
strict
centre
gures
sales
Juma
ascertain
carry
the
the
for
closely.
KJC
Ltd
c)
Complete
terms
analysis
importance
the
the
Comment
Variance
holder
the
whether
variance
results
on
the
of
budgets
column
obtained
in
are
performance
of
to
the
KJC
table
adverse
KJC
Ltd
Ltd
above
or
and
using
the
Evaluate
the
role
of
cost
and
prot
centres
to
KJC
[2
marks]
[2
marks]
[4
marks]
establish
favourable
[6
marks]
[4
marks]
[7
marks]
variance
results
246
that
Actual gures
400
e)
their
to
JoÚ
prot
actual
500
d)
as
this
For
in
year.
$0 0 0
a)
year
feel
have
and
the
attribute
so
years
have
overseas.
others
centre
gures
of
the
They
growth
holder
analysis
cost
and
signicant
stakeholders
each
Over
products.
nationally
second
variance
the
monitor
and
quality
experienced
company’s
out
the
sizes
high
experiencing
The
carrying
performed
is
all
for
network
drastically.
and
of
have
However,
cause.
controls
below
they
country
the
with
company
budgetary
the
is
pots
reputation
distribution
this
down
that
competition
making
products.
slowed
recession
in
good
Ltd
4
M a r k e t i n g
4.1 The role of marketing
By the end of this chapter, you should be able to:
➔
dene marketing and understand its relationship with other business
functions
➔
explain the dierence between the marketing of goods and the
marketing of ser vices
➔
distinguish between market orientation and product orientation
➔
explain the dierence between commercial marketing , social
marketing and social media marketing
➔
describe the elements that characterize the market in which an
organization operates
calculate market share
➔
discuss the impor tance of market share and market leadership
➔
compare and contrast the marketing objectives of for-prot
gnitekraM 4
➔
organizations and non-prot organizations
➔
evaluate how marketing strategies evolve as a response to changes
in customer preferences
➔
examine how the concepts of innovation, ethics and culture
inuence marketing practices and strategies.
Marketing
is
not
more
about
just
is
essential
about
than
that:
satisfying
acceptable
to
selling
it
is
the
or
more
consumer
denitions
of
success
of
advertising,
of
a
any
as
business
needs
or
marketing.
business.
many
philosophy
demands.
Some
However,
people
of
There
common
think.
how
are
best
many
ones
marketing
It
is
much
to
think
globally
include
the
following.
“Marketing is the management process involved in identifying,
anticipating and satisfying consumer needs protably.”
The
Chartered
Institute
of
Marketing
“Marketing is the activity, set of institutions, and processes for
creating, communicating, delivering, and exchanging oerings that
have value for customers, clients, par tners, and society at large.”
American
Marketing
Association
247
4
M A R K E T I N G
Kotler
(1994)
summarized
it
well
when
he
said
“Marketing
is
meeting
1
the
needs
getting
right
that
on
to
of
the
right
time.
every
the
your
This
customer
product
means
marketing
consumer.
products,
business
at
to
the
that
prot.”
right
department
all
Ultimately,
customers
marketing
However,
pricing,
a
should
aim
marketing
distribution,
or
at
involves
a
to
marketing
the
right
number
satisfy,
decisions,
promotion,
are
price
of
all
is
about
at
the
activities
centred
whether
affected
related
by
other
functions.
Fc d m
Since
have
marketing
to
work
department
the
costs
may
want
requirements
department
This
will
money,
together
may
cause
a
of
a
the
in
setting
to
spend
that
it
than
is
in
marketing
sticks
departmental
and
appropriate
more
demanding
advise
marketing
the
to
its
nance
its
plan,
given
department
budgets.
The
budget
but
to
the
marketing
meet
nance
budgetary
allocations.
conict.
Hum souc mm (HrM)
d m
Marketing
in
the
information
HRM
labour
in
an
gnitekraM 4
product
as
of
staff
extra
this
a
result
from
with
of
enable
This
organization.
demand.
those
can
department.
For
can
example,
improved
the
sales
Ensuring
innovative
the
minds
effective
an
marketing
and
that
more
inuence
and
a
workforce
demand
increase
may
production
right
the
in
and
the
require
of
in
salespeople
competitive
spirit
–
supply
demand
the
departments
quality
planning
will
of
for
a
recruitment
order
are
to
meet
hired
also
aid
–
in
Key terms
meeting
the
marketing
department’s
objectives.
Marketing
the management process of
Opos mm d m
getting the right product to the
The
production
and
marketing
departments
will
need
to
work
together
right customer at the right price
to
ensure
that
the
products
developed
meet
the
specications
of
the
to the right place and time
customers.
the
needs
Market
and
research
wants
of
the
will
help
the
consumers.
marketers
However,
in
determining
both
departments
Marketing of goods
need
to
balance
the
time
needed
to
test,
develop,
and
launch
products,
the use of the 4 Ps of product,
to
avoid
any
loss
in
sales
or
reputation
and
any
arousal
of
potential
price, place, and promotion in
stakeholder
conict.
the marketing mix
Marketing of ser vices
th m of oods d svcs
the use of the 7Ps of product,
In
deciding
how
to
distinguish
to
market
their
products,
businesses
rst
need
price, place, promotion,
between
goods,
such
as
cars,
and
services,
such
as
process, people, and physical
insurance.
This
is
because
goods
and
services
differ
in
a
number
evidence in the marketing mix
of
ways.
1
Kotler, P
. 1994. Marketing Management: Analysis, planning, implementation and control
. Englewood
Clis, NJ, Prentice Hall.
248
4 . 1
T H E
R O L E
O F
M A R K E T I N G
Table 4.1.1. Dierences between goods and services
Goods
Ser vices
are tangible, i.e. can be touched
are intangible, i.e. cannot be touched
can be returned if you did not like what you bought
cannot be taken back , e.g. a bad haircut
can be stored and consumed later, e.g. yoghur t.
cannot be stored and will need to be consumed immediately,
e.g. your consultant’s time.
There is ownership of the product.
There is no ownership of the product.
Goods are easier to compare because of the similar
Services are more dicult to compare because of dierent
nature of some products, e.g. one TV can easily be
experiences a customer may get from a given service, e.g. a
compared to another.
hotel may treat a customer dierently each time he or she visits.
selling
appeal
choose
have
in
a
goods,
to
the
one
over
over
the
mostly
and
type
about
customer
remain
clothing
service
globally
a
their
line
in
very
on
day-to-day
Therefore
In
help
the
by
in
to
of
the
in
both
goods
this
buy
characteristics
cellphone,
elaborate
as
but
of
a
hotel
their
features
may
to
one
may
about
angle
ensure
can
Managers
talk
marketing
service
that
customers
applications.
or
It
as
form
varied
their
of
that
the
is
the
a
of
goods
to
elements
physical
to
based
the
three
These
note
or
but
free
guard
the
the
four
promotion,
many
For
will
may
receive
foods.
their
who
example,
an
passengers
at
airline.
“Ps”
of
place .
aspects
be
a
of
explored
products
example,
maintenance
popular
increasingly
and
additional
aspects
that
them.
product
warranty
on
are
greeting
marketing
product,
evidence .
important
a
is
the
meat).
cultural
For
it
country
employees
image.
staff
specic
However,
to
from
(roast
their
a
example,
country
always
and
smiling
further
price,
sell
must
quality
for
franchises)
to
are
For
Europe.
choma
approachable
and
in
in
cuisines,
(mostly
today
costs.
manufacture
from
nyama
localities
includes
physical
is
help
can
living
country
and
lower
customers;
travel
services
product
can
services
to
at
USA
their
Kenyan
namely
service
iPad
the
–
the
to
people
offering
their
plane
in
restaurants
in
companies
producing
customers
well-groomed
and
unit.
to
well-trained
mix
of
it
closer
sampling
cafés
multinational
based
many
marketing
and
an
in
be
customers
the
processes,
later
service
the
such
has,
sumptuous
with
marketing
may
specic
number
countries
ship
to
for
enhancing
marketing
people,
and
having
industry
Essentially,
The
on
new
customer
company
basis
the
to
organizations
entrance
the
a
on
the
it
good
need
different
reputation
airline
to
closer
addition,
will
rooms
difcult
curry
drawing
as
competitive,
Asia
businesses
be
a
focus
company
goods
clothing
may
Indian
of
based
such
offering
can
buying
returns.
outsourcing
example,
In
another
other,
service-providing
number
To
businesses
consumer.
gnitekraM 4
In
now
have
customer
after-sales
for
a
year.
Market orientation verses product orientation
There
are
products.
two
distinct
They
can
market-orientated
table
approaches
either
use
a
that
businesses
can
product-orientated
approach .
These
two
use
to
market
approach
approaches
are
or
shown
their
a
in
the
below.
249
4
M A R K E T I N G
Table 4.1.2. Dierences between a product-orientated approach and a
market-orientated approach
Product-orientated approach
inward looking and focused on making the product rst
outward looking and focused on carrying out market
and then trying to sell it
research rst and then making products that can sell
product-led and assuming that supply creates its own
market-led and focused on establishing consumer
demand (Say’s law). Here businesses produce innovative
demand so as to supply products that meet consumers’
products and tempt the customers to buy them
needs and wants
Organizations
their
Sony,
are
As
a
of
Access
to
Firms
will
be
gnitekraM 4
heavily
on
in
a
rm’s
to
meet
It
rather
is
approach
Apple.
to
Many
including
Ford,
market-orientated:
have
increased
reducing
means
will
position
the
market
about
that
and
are
the
risk
rms
also
condence
of
can
able
respond
to
that
failure.
more
anticipate
by
have
associated
changing
have
can
be
the
result
challenge
of
regular
of
new
feedback
from
research.
some
costly
the
consumer
consumer’s
future
limitations:
and
therefore
weigh
tastes,
needs
could
also
rms
with
have
its
a
may
nd
available
negative
it
resources.
inuence
on
on
their
these
with
put
a
lot
potential
of
emphasis
customers.
A
on
the
production
product-orientated
Key terms
advantages:
the
Dyson takes a product-orientated
approach to marketing
strategy.
businesses
than
meet
a
market
does
research
to
as
budget.
every
about
Product-orientated
●
and
businesses,
being
rms
market
orientation
market-planning
business
the
strong
market
a
Uncertainty
process
in
of
therefore
information
frequently
difcult
●
business
research,
entering
market
to
a
sell,
brought
Conducting
Due
to
changes
consumers
●
Dyson,
changes.
competitors
However,
product-orientated
Ferrari,
market-orientated
will
market
to
market
a
Nokia.
market
products
quickly
●
now
and
adopted
Microsoft,
benets
result
their
●
are
the
have
include
Samsung,
These
●
that
products
organizations
●
Market-orientated approach
production
of
high-quality
products
such
as
Product orientation
luxury
sports
cars
and
safety
products
such
as
crash
helmets.
a business approach that
●
It
can
the
succeed
rm
has
in
industries
already
built
a
where
good
the
speed
of
change
is
slow
and
reputation.
focuses on making the
product rst before attempting
to sell it
●
It
has
will
control
purchase
over
its
its
activities,
with
a
strong
belief
that
consumers
products.
Market orientation
However,
the
major
limitations
such
a
rm
faces
include
the
following:
a business approach of
rst establishing consumer
●
Since
the
rm
ignores
the
needs
of
the
market,
failure
or
closure.
it
takes
risks
that
may
demand through market
lead
to
eventual
business
research before producing
●
Spending
money
on
research
and
development
without
considering
and selling a product
consumer
250
needs
could
be
costly
and
not
yield
any
promising
results.
4 . 1
T H E
R O L E
O F
M A R K E T I N G
Commercial marketing
This
involves
that
customers
out
to
making
specic
put
in
to
to
media)
or
emails).
to
possible,
be
is
the
to
habits
appropriate
The
of
to
will
the
of
into
type
the
or
minds
in
of
of
as
a
carried
what
is
involve
Once
to
be
commercial
product
a
traditional
local
Google
adopting
advertisements
not
need
used
include
(using
either
does
customers.
advertisements,
campaign
services
is
supply
strategies
may
or
research
and
strategies
strategies
option
targeted
value-free
specically
These
product
use
is
goods
market
businesses
buying
television
the
exchanging
case,
and
product.
marketing
also
get
or
the
tailored
selling.
online
There
on
the
billboards,
an
campaign,
is
and
this
demand
identied,
market
need
(using
is
In
marketing
judgments
commercial
focus
want.
consumer
product
place
marketing
developing,
and
Commercial
moral
the
as
need
establish
demanded.
the
creating,
print
Ad
Sense
or
mass-marketing
many
aimed
at
consumers
specic
demographics.
Social marketing
This
involves
changes
in
Marketing
the
use
of
behaviour
Institute
marketing
that
approaches
ultimately
(SMI)
denes
it
benet
that
help
society.
bring
The
about
Social
as:
“the use of commercial marketing concepts and tools in
gnitekraM 4
programmes designed to inuence individuals’ behaviour to
improve their well-being and that of society.”
Social
marketing
ensures
that
consumers’
society’s
wants
public
centred
on
and
also
concept
make
the
and
smoking,
welfare.
overeating
include
for
or
public
poor
but
also
of
the
dietary
based
on
social
on
benets
habits.
campaigns
on
and
marketing
dangers
eating
Social
to
only
campaigns
the
of
It
not
consumers’
anti-smoking
information
on
environmental
stakeholders.
decisions
Examples
example
providing
the
other
marketing
requirements
campaigns,
educating
involving
good
rm’s
interests
health
discourage
programmes
wide
and
reducing
drink-driving,
to
a
long-term
include
food
is
businesses
of
healthy
marketing
promote
recycling,
Key terms
clean
air,
and
marketing
water
also
as
looks
well
into
as
other
areas
such
measures
as
of
human
conservation.
rights
and
Today
family
social
planning.
Commercial marketing
Some
advantages
of
social
marketing
include
the
following:
marketing activities that
determine consumer needs
●
It
gives
rms
a
competitive
advantage
as
consumers
may
perceive
such
and wants before using
rms
to
be
socially
responsible
and
therefore
buy
products
from
them.
appropriate strategies to
●
Firms
can
charge
premium
prices
for
providing
goods
that
society
is
market the product
deriving
benets
from.
Social marketing
However,
getting
people
to
change
their
habitual
behaviour
poses
a
a marketing approach aimed
major
challenge
to
social
marketers.
As
a
result,
an
effort
a
number
of
non-prot
at inuencing a positive
organizations
(NPOs)
have
set
up
in
to
help
people
change
their
change in individual behaviour
behaviour,
for
example
Alcoholic
Anonymous
(AA).
and improvements in societal
The
Social
Marketing
Institute
encourages
the
use
of
a
wide
range
of
well-being
marketing
tools
by
going
beyond
just
“Promotion”
in
the
marketing
251
4
M A R K E T I N G
mix
and
well
in
fully
the
marketing
incorporating
effort
mix
to
in
bring
the
other
social
sections
4.2
elements
change.
and
(See
of
the
more
marketing
on
mix
promotion
in
as
the
4.5)
Social media marketing (SMM)
SMM
is
a
marketing
networking
is
a
approach
websites
marketing
tool
concepts
and
different
media.
from
that
the
adopted
by
Internet
to
incorporates
techniques
with
the
the
aim
businesses
market
use
of
of
its
that
uses
products.
social
SMM
technological
growing
a
business
through
Social media can be a powerful
SMM
has
increased
in
popularity
with
the
development
of
websites
such
way to reach lots of customers
as
Facebook,
Twitter,
LinkedIn,
and
YouTube.
very quickly
These
It
●
are
the
benets
enables
a
rm
of
to
SMM:
get
direct
feedback
from
its
customers
while
TOK discussion
still
appealing
that
and
●
them
personally,
customers
their
with
complaints.
relationship
management.
It
low-cost
provides
For
in
It
●
provide
voice
to
a
example,
April
can
enhance
gnitekraM 4
have
exposure
However,
by
will
and
a
to
join
a
to
stand
rm’s
opportunity
is
known
interactive
to
as
ask
social
sections
questions
In marketing, what role does
customer
language play in the dierent
areas of knowledge?
for
of
rms
users
simply
S MM
use
it
brand.
to
of
out
joining
is
as
a
a
reach
a
large
Facebook
the
these
ve ry
fo r
target
stood
at
audience.
1.11
billion
the m.
he nce
social
networking
communities,
rms
websites
can
gain
websites.
usefu l
we bs ite ,
cr owd ,
many
online
s up pl eme nt
ne tw o r k i ng
from
Since
established
replace me nt
social
marketing
a
large
while
businesses
as
number
its
2013.
already
not
the
way
the
This
through
m a r ke t in g
to
ot h e r
S i nc e
it
it
can
th e
is
be
t o ol ,
ea s y
fo r
dif c u lt
n ee d
m o st
ma r ke t in g
a ls o
to
m e t h ods
any
fo r
re l y
bus i ne s s
a
bu si n es s
on
ot h e r
techniq ue s .
Student workpoint 4.1
Be a thinker
Key terms
1.
Distinguish
2.
Using
between
marketing
a
good
and
marketing
a
service.
Social media marketing
specic
organizational
examples,
comment
on
the
benets
the use of the Internet through
of
market
orientation.
social networking websites
3.
Explain
how
social
marketing
differs
from
SMM.
to market a rm’s product or
service
Characteristics of the market in which an
organization operates
A
market
and
of
a
the
252
is
an
services.
product
It
arrangement
includes
whose
exchange
needs
process.
where
actual
or
as
buyers
well
wants
as
are
and
sellers
potential
satised
by
exchange
buyers
sellers
or
or
goods
customers
suppliers
in
4 . 1
elements
operates
●
are
Market
given
characterize
size
–
this
It
By
value
total
dollars
growth
●
Market
a
given
value
from
or
indicates
on
the
for
–
volume.
sale
a
the
gadget.
the
high
changes,
in
which
an
M A R K E T I N G
organization
of
this
time,
For
the
This
has
factors,
such
changes
in
a
as
e.g.
in
goods
in
bought
units
spent
It
by
is
sold
a
by
by
customers
the
total
shillings
on
the
revenue
(Kshs),
US
(ZAR).
identifying
change
This
their
the
many
However,
in
market
of
and
on
the
revenue
of
patterns,
over
market
resulting
smartphones
uses
product
are
for
because
inuenced
income,
size
million
multiple
the
is
market
US$80
Sales
growth
growth
tastes,
to
nding
suppliers
the
based
sales
market.
this
in
be
million
consumers
economic
can
increase
US$50
in
many
consumer
businesses
the
Kenyan
rands
year.
an
from
attracted
of
of
businesses.
percentage
growth
potential.
all
share.
example,
with
number
amount
by
of
maize.
rms
usually
televisions
globally,
prot
is
of
African
assists
sales
ways:
measure
terms,
market
60-per-cent
rise
external
size
–
the
the
sold
South
calculating
of
bags
measures
goods
or
total
two
measures
monetary
growth
in
quantitative
example
of
market
in
a
this
in
period
the
this
(US$),
of
and
market
the
measured
is
number
expressed
Knowledge
–
It
businesses,
represents
is
volume
customers.
■
the
O F
follows:
market.
By
■
that
as
R O L E
by
of
several
technological
among
gnitekraM 4
The
T H E
others.
Student workpoint 4.2
Be a thinker
Coca-Cola
published
2013
highlights
on
its
website:
http://www.
coca-colacompany.com
The
company
were
As
up
well
by
as
●
be
a
do
in
share
the
–
that
still
think
tool
this
market.
for
is
It
had
sales
of
its
increased
information
that
for
publishing
sparkling
by
investors
sales
drinks
6%.
gures
and
in
this
way
businesses?
the
is
volume
drinks
nancial
you
marketing
Market
sales
whilst
providing
stakeholders,
can
announced
3%,
percentage
calculated
by
of
one
using
rm’s
the
share
following
of
the
total
formula:
rm’s sales
___
Market
share
%
=
×
total
sales
in
the
100
market
253
4
M A R K E T I N G
Market
share
can
be
measured
by
value
(revenue)
or
volume
(units),
Key terms
just
like
market
business
is
size.
An
successful
increase
against
its
in
market
share
competitors
and
could
has
mean
adopted
that
a
effective
Market size
marketing
strategies
as
a
result.
This
could
be
associated
with
increased
the total sales of all rms
prots
and
result
in
the
business
being
the
key
player
in
the
industry.
in a market
Measuring
rm
or
is
a
market
market
competitors
share
leader.
to
is
A
follow
important
market
it.
Its
because
leader
status
as
can
it
could
indicate
inuence
market
leader
other
can
that
the
Market growth
businesses
also
affect
its
the percentage change in the
future
strategy
and
objectives.
total market size over a period
The
benets
of
being
●
The
market
●
The
business
in
the
a
leader
will
average
market
will
be
costs
have
able
of
leader
to
include
increased
gain
sales,
economies
production
as
a
the
translating
of
result
scale,
of
of time
following:
to
(i.e.
higher
a
increasing
prots.
the percentage of one rm’s
decrease
its
scale
share of the total sales in
of
the market
operation).
●
Since
the
product
Market share
market
with
the
leader
could
highest
also
market
be
the
share),
brand
the
leader
leading
(providing
brand
can
act
the
Market leader
as
a rm with the highest market
a
good
promotional
tool
for
consumers
who
would
like
to
associate
share in a given market
with
popular
However,
is
●
when
interpreting
the
market
share,
careful
thought
needed:
Since
market
gnitekraM 4
volume,
●
brands.
share
different
Changes
in
the
can
be
results
time
measured
may
period
be
and
in
different
obtained
market
in
can
the
ways,
same
inuence
by
value
time
and
period.
market
share
results.
●
The
type
market
of
products
included
may
also
inuence
the
calculation
of
share.
Student workpoint 4.3
Be knowledgeable
Table 4.1.3. Dierent sales volumes and values from dierent companies
Company
X YZ
Year
Sales of toys (million units)
254
Table
4.1.3
above
to
a)
Market
share
of
XYZ
b)
Market
share
of
ABC
c)
Market
share
of
PQR
d)
Market
growth
for
2011
2012
2011
2012
550
580
700
740
620
650
25
28
45
48
32
30
calculate
the
Company
Company
Company
the
PQR
2012
Sales of toys ($ million)
Use
ABC
2011
whole
following:
by
by
by
volume
value
in
volume
industry
in
by
2011
2012
in
2011
value
from
2011
to
2012
4 . 1
T H E
R O L E
O F
M A R K E T I N G
Marketing objectives of for-prot organizations and
non-prot organizations (NPOs)
achieve
the
objectives
through
organization’s
marketing
to
satisfy
This
market-led
wants
of
marketers
orphaned
are
which
using
major
affects
and
be
drawback
to
receive
Internet
As
number
a
in
global
such
as
NPOs
money
have
to
responsibility
other
or
private
be
organizations
Lee
are
such
to
includes
a
users,
public
to
marketing
money
helping
Increasingly,
achieve
nancing,
therefore
on
their
are
aims,
also
change.
the
which
seek
This
“customers”
as
of
needs.
donate
at
They
public
and
wants
those
in
the
use
social
clothing.
relations.
gain
of
and
and
the
needs
to
aimed
endorsements,
For
dangers
of
in
the
case
seriously
to
in
raise
an
funding
and
competitive
social
number
a
that
all
to
of
funds
effort
is
also
therefore
public
sector
advantages
times
as
the
and
of
With
charities
PayPal,
over
Swaziland,
raise
practise
beneting
a
public
a
lot
Other
increased
from,
by
supermarkets.
high
from
raised
have
money
most
also
growing
example.
in
in
is
the
have
for
to
till
maintaining
marketing,
NPOs.
using
seek
at
continue
well
of
home
they
containers
at
media
number
made
children’s
outlets
as
public
able
donations
ethical
they
limited
potential
among
collection
if
their
to
habits.
number
and
design
behavioural
the
aim
sole
sector.
Internet
retail
drinking
is
cases,
reputation.
certain
the
needs
engage
such
and
educate
the
identifying
the
many
should
elements
on
the
strategies
and
seminars
are
which
online
to
A
In
to
with
organizations
schools
food
noted,
protable
the
to
of
aim
line
identify,
be
campaigns
with
donations,
they
Sandra
of
NPOs
attract
popularity
from
number
having
the
to
way
some
inuence
seek
to
purely
encourage
image
budgets.
improve
result,
in
of
money
the
to
ability
marketing,
increasing
NPOs,
and
their
rivals
most
events,
sponsorships
colleges.
of
of
and
may
a
marketing
their
is
applying
is
in
Therefore
For-prot
reasons.
to
responsible
marketing
fundraising
heard
linked
adopting
and
children
inform
as
example
complex
government
and
for
earlier
ultimately
focus
are
businesses
responsive
research
campaigns
enhancing
to
their
very
marketing
cause,
more
will
charities,
vulnerable
using
a
run
As
that
protably.
objective.
are
businesses
which
organizations
that
where
that
objectives.
notion
appropriately
They
social
targets
wants
this
market
certain
their
through
their
for
marketing
smoking
to
a
include
example,
A
involve
churches,
would
support
NPOs
as
more
and
achieve
use
the
for-prot
approach,
and
such
activities
or
to
of
or
department,
strategic
strategies
consumers.
consumers
NPOs
will
mix
goals
include
needs
objective
marketing
marketing
a
overall
consumer
business.
the
marketing
denitions
marketing
develop
are
their
gnitekraM 4
Marketing
degree
free
interest
of
social
publicity
in
their
from
causes.
How marketing strategies evolve as a response
to changes in customer preferences
Due
to
a
variety
signicantly
various
over
ways
strategies
of
to
have
factors,
the
meet
been
past
customers’
two
these
decades
new
adapted
preferences
to
and
demands.
suit
these
have
businesses
The
new
ways
changed
have
in
responded
which
preferences
are
in
marketing
discussed
255
4
M A R K E T I N G
yduts esaC
BMW ’s m sy
BMW operates across the globe in a highly competitive
industry – the automotive industry. As a result, BMW
invests heavily in its marketing mix to maintain
its customer base and brand loyalty. However,
competitors Mercedes-Benz and Jaguar are similarly
well invested in marketing campaigns to increase their
market shares while maintaining their brand loyalties.
Previously, BMW used its unique selling point or
proposition (USP) of building high-performance, high-
quality spor ts cars with unique handling characteristics
to gain customers’ attention and loyalty. Slogans such
as “Pure driving pleasure” and “Perfection perfected”
punctuated BMW’s marketing campaign around the
world. Whereas BMW, in the context of the Anso’s
previously neglected to publicize) and products
Matrix (see Unit 1.3 on Organizational objectives), had
such as the BMW X-series cars were rebranded by
begun with a market-extension strategy into markets
taking par t in the gruelling Dakar rally. Considered a
such as China and India, it later switched to product
race that requires par ticipants to have vehicles with
development as its key strategy.
extraordinary fuel eciencies, the Dakar rally also
allowed BMW to challenge one of its main competitors
This shift in marketing strategies came about because
in the luxury SUV market – Volkswagen.
a market segment became the largest single market
gnitekraM 4
in which BMW operated. Customers have developed a
However, BMW’s shift in market strategy has not been a
new preference in the last two decades that continues
complete success. In an attempt to please the majority
to grow in strength and popularity – high fuel
of customers who desire fuel-ecient cars, BMW has
eciency. Due to dramatic increases in oil prices, in all
lost some of its most loyal customers to competitors.
but the OPEC nations (a PEST factor), customers have
This has largely been a result of changes to the product
sought out vehicles that use less fuel to travel fur ther.
element of its marketing mix. In order to increase fuel
For example, the Toyota Prius and Tesla car company
eciency and to lower carbon emissions, BMW ceased
have thrived because of their environmentally friendly,
using V10 engines in its M-Power 5 Series cars in
low fuel consumption features – a result of focused
favour of twin-turbo charged V8 engines that use less
dierentiation. In response to this development, BMW
fuel. As a result, BMW lost many loyal, high-income
instituted a raft of changes to its marketing strategy.
customers who preferred the more powerful V10. In
shor t, BMW’s pivot towards a new customer preference
First, as par t of product changes in the marketing
caused its protability to be damaged to some extent.
mix, BMW began designing and showcasing “vision”
However, with increased market shares in Africa,
concept cars at the largest automotive expos in
Nor th America, and Asia, BMW’s medium-risk strategy
the world. None was more denitive than the BMW
appears to have paid o.
i8, which was branded the “ecient dynamics”
concept car. Essentially, it showcased BMW’s latest
fuel-eciency technology to the world’s media and
Exam-style questions
immediately positioned BMW towards consumers’ new
1.
Dene the following terms:
preferences. BMW also changed many of its promotion
(a)
Marketing mix
[2 marks]
(b)
Market share
[2 marks]
techniques to t this new brand image. Below-the-
line methods including slogans such as “Exhilaration
without excess” became BMW’s new focus and
2.
Analyse how BMW can be customer-
ecient dynamics became its USP and major productfocused.
[4 marks]
dierentiation tool. The institution of new products
in BMW’s marketing strategy was paired with new
promotion strategies. BMW began to emphasize the
fuel eciency of its existing models (which it had
256
3.
Evaluate the success of BMW’s marketing
strategy.
[10 marks]
4 . 1
below
the
in
the
television
its
context
automotive
of
two
rms
industry
and
second,
broadcasting
marketing
penetrating
strategy
new
industry.
to
or
by
its
industries:
the
Each
improve
markets,
and
of
rst,
Multichoice
these
BMW
Group
businesses
protability
by
T H E
O F
M A R K E T I N G
and
and
has
R O L E
the
adapted
rebranding
and
diversifying.
The Multichoice Group has also shifted its marketing
premium customers (those most likely to purchase
mix and strategy to meet customers’ preferences.
these products) before reaching other customers
In par ticular, the arrival of high-denition (HD)
via television adver tisements (a result of market
technology in a variety of elds, ranging from
segmentation).
cellphones to cameras and televisions, has drawn a
However, the implementation of this strategy has
great deal of the customers’ attention. However, unlike
not come without some drawbacks – the largest
BMW, it is apparent that Multichoice does not operate
of which is the increased cost to customers. As a
in a highly competitive market. In fact, DSTV (owned
result of expensive technological upgrades to DSTV’s
by the Multichoice Group) could be considered a
broadcasting system to suppor t HD television,
monopoly as it beneted heavily from the rst mover
customers have suered a price increase to pay for
advantage. However, Multichoice has still changed to
both the new systems and the marketing campaign
meet customer preferences to ensure that there is no
to promote it. This increase in price also priced out
market gap for new entrants to exploit.
prospective customers who could have increased
Multichoice’s marketing mix has refocused in terms
DSTV’s market share. This demonstrates how
of techniques to reach customers rather than using a
responding to customer preferences can have negative
shift in focus like BMW’s. For example, DSTV’s premium
eects on the customers themselves.
gnitekraM 4
yduts esaC
Mulchoc’s m sy
subscribers (those who pay the highest rates) form
par t of the demographic in Southern Africa that has
Exam-style questions
the highest income. As a result, they are the most
1.
Describe two forms of market segmentation
technologically aware demographic in Southern
relevant for Multichoice.
[4 marks]
Africa and because of this DSTV has placed a greater
emphasis on online adver tising on social media and
2.
Analyse how eectively Mulitichoice’s
unique websites. DSTV now has Twitter and Facebook
marketing strategy has responded to
pages for customers to follow and prospective
customer preferences.
[6 marks]
customers to view that provide the latest information
3.
With reference to Multichoice and to one other
on new products brought to market. For example, the
organisation that you have studied, discuss the
arrival of HD channels such as HD Discovery Showcase
impact of changing technology on promotional
and M-Net HD were rst promoted online to their
strategies.
When
compared
Multichoice’s
However,
both
maintaining
response
to
these
example
have
In
a
Ford
to
protability
and
that
DSTV
have
market
has
and
huge
adapt
are
BMW’s
in
dire
what
just
customer
some
their
of
failure,
the
over
much
Failure
as
many
marketing
to
in
Each
wanted.
certain
make
share
strategies,
total
and
marketing
the
the
like
the
of
a
to
ve
changes,
of
for
and
strategies,
in
a
Hummer.
around
respond
years.
result
because
in
direct
companies,
business
can
vital
was
Failure
other
past
case
businesses
strategies
was
shift
necessary
all
adapt
strategy,
inconsequential.
strategy
positions.
to
in
seems
marketing
failed
relevant.
even
changed
the
market
marketing
remain
in
and
consequences
in
change
methods
shift
share
Chevrolet,
drops
or
complete
marketing
change
needs
seen
in
companies’
their
conclusion,
must
of
to
with
shift
[10 marks]
the
loss
BMW
world
changing
257
4
M A R K E T I N G
customer
preferences.
reconguration
adapt
to
of
changing
Whether
the
it
marketing
customer
is
a
change
mix,
in
marketing
marketing
methods,
strategies
can
and
or
must
preferences.
How innovation, ethical considerations and cultural
dierences inuence marketing
In
an
increasingly
markets
are
marketing
strategies
assessment
global
rms’
of
how
marketing
responses
include
globalized
integrating,
Nokia,
more
these
than
where
and
changes
Chevron,
in
Using
will
be
factors.
now
specic
and
companies,
and
to
in
an
inuence
including
companies
Apple,
and
affect
continue
explored,
The
Petroleum,
economies
culture
inuenced
strategy
these
world’s
and
before.
have
British
the
ethics
ever
factors
practices
to
world,
innovation,
the
question
Rolls-Royce.
Innovation
First,
in
it
is
important
innovation
There
is
no
great
threat
the
last
consider
of
of
new
all
six
their
more
technology
achievements
For
to
terms
industry
competitive
a
in
exposed
industry.
entrants
the
more
years,
the
gnitekraM 4
of
such
Ansoff’s
mostly
has
to
because
Nokia
has
and
the
new
This
channels
has
best
of
a
new
up
introduced
a
Lumia
and
on
its
,
highly
is
one
making
is
main
as
Nokia
most
strategies
of
marketing
on
Nokia
two
with
Apple’s
market
of
for
being
with
levels:
markets
and
a
cellphones
Apple
and
dynamic
technology.
challenged,
in
part
competitors.
to
reinvigorate
the
in
has
product
Samsung.
young,
itself.
First,
framework
objectives),
main
strategy
two
the
innovative
its
elements.
range
Within
penetration
tools
increasingly
which
new
rivals
and
occurred
these
technology
.
market
marketing
Nokia’s
terms
built
to
of
beat
its
mix
new
its
slogan,
products,
Apple
®
.
The
Lumia
range
has
a
physical
®
iPhone
the
iPhone
Organizational
newest
global
has
through
sums
competition,
the
changes
products.
®
,
products
marketing
shift
than
industry
involving
its
the
®
called
1.3
dominance
adopted
share.
“#Switch”
Nokia
the
Unit
strategies
need
innovation
erce
to
their
technology
dominated
iPad
out-compete
Apple’s
of
has
market
in
for
to
®
,
branded
businesses
impressive.
Apple
iPod
(see
on
mostly
demographic
However,
the
Matrix
focused
development
Apple
as
by
strategies
The
and
®
products
responses
marketing
design
similar
to
the
®
yet
more
styled
than
the
iPhone
.
It
is
sold
in
a
variety
of
vibrant
®
colours
to
suit
different
tastes,
unlike
the
uniform
iPhone
.
In
terms
of
®
performance,
the
Lumia
range
has
higher
processing
speeds
®
vivid
HD
touchscreens
than
the
iPhone
and
more
®
.
In
short,
the
Lumia
phones
are
®
designed
to
be
superior
versions
of
the
iPhone
.
This
is
mirrored
by
the
®
promotional
uses
to
campaign
motivate
Furthermore,
world
When
to
the
consumers
#Switch
follow
for
to
customers
is
a
receive
use
the
Lumia
to
range.
purchase
Twitter
address
real-time
hashtag
its
for
updates
on
#Switch
cellphones
Twitter
is
the
customers
about
it
slogan
instead
new
of
around
Nokia
automatically
Nokia
Apple’s.
the
products.
spreads
the
®
message
range.
used
258
to
all
Along
their
with
YouTube
to
a
followers
greater
brand
–
indirectly
emphasis
itself
as
the
on
new
advertising
social
Nokia’s
networking,
innovative
business
Lumia
Nokia
in
the
has
4 . 1
market.
young,
In
terms
of
energetic
customers.
place,
Samsung
business
with
range
cellphones.
of
unique
Nokia
employees
has
to
also
tried
state-of-the-art
features
of
Its
its
has
also
operate
to
products
stores
rebrand
products
advertising
mimicked
its
such
itself
as
campaign
rather
than
iStores
and
the
a
a
M A R K E T I N G
ETHICS
innovative
Galaxy™
showcasing
brand
O F
hiring
highly
on
R O L E
with
Samsung
centres
selling
by
interact
as
T H E
like
The primary concern of most
businesses is to make a prot. A
the
business’ marketing strategy is
therefore designed to make the
Apple.
service or product on oer seem
However,
the
shift
to
online
advertising
has
come
at
a
great
cost
to
Nokia–
as attractive as possible.
the
loss
of
customers
in
developing
nations.
Nokia
and
many
other
However, businesses
companies,
such
as
Sony
and
Microsoft,
have
failed
to
respond
to
the
large
should consider their ethical
customer
base
that
has
either
no
Internet
access
or
access
at
poor
speeds.
responsibility to promote their
Markets
in
China,
Sub-Saharan
Africa
and
Latin
America
have
been
left
products accurately. Many
largely
untapped
as
a
result
of
this.
Compared
with
the
Coca-Cola
Company
countries have a regulating body
and
PepsiCo,
penetration.
is
failing
to
these
As
a
companies
result,
exploit
it.
In
the
are
lagging
capacity
turn,
for
revenues
behind
growth
and
in
is
terms
of
major
immense;
prots
are
not
market
however,
being
to monitor adver tising (such
Nokia
maximized.
as the Adver tising Standards
Authority in the UK and South
Africa). Ethical adver tising is not
only a a moral choice but also a
Ethical considerations
pragmatic business decision – the
Ethical
considerations
businesses
resource
brand
have
also
themselves
exploitation
had
and
industry
a
major
their
impact
products.
provides
a
clear
on
The
the
way
energy
example
of
reputation and sales of a business
and
can be severely aected if
this.
adver tising methods are found to
be
Two
major
events
have
reshaped
the
consumer’s
perception
of
misleading or oensive.
oil
In 2011, the Coco-Cola company
companies
in
the
last
40
years.
These
are
the
Exxon
Valdes
oil
spill
was forced to amend an
1989
and
the
BP
Deep
Water
Horizon
spill
in
2010.
Each
incident
gnitekraM 4
in
adver t which claimed that it’s
caused
a
great
deal
of
damage
to
the
corporate
images
of
not
only
BP
Vitaminwater drink was ‘delicious
and
Exxon
but
all
oil
companies
around
the
world.
As
a
result,
most
and nutritious’. A number of people
have
rebranded
themselves
to
enhance
their
corporate
images
and
complained on the basis that the
improve
their
stakeholder
relations
–without
which
they
could
Texaco)
now
has
not
be
drink contained high levels of sugar
protable.
the
For
example,
environment”
as
Chevron
one
of
its
(formerly
core
values
and
“protecting
“sustainability”
as
and so was not ‘nutritious’.
one
Examples such as this can be
of
its
visions.
In
terms
of
its
marketing
mix,
particularly
promotional
rectied fairly easily and, for a
techniques,
Chevron
has
branded
itself
as
a
socially
responsible
company the size of Coca Cola, at
organization
interested
in
the
well-being
of
ordinary
people
and
relatively little cost. For a smaller
innovating
BP
the
has
oil
new
energy
similarly
spill
safety
possible
to
on
technologies
rebranded
Twitter
and
regulations
avoid
solve
social
promoting
other
and
major
by
to
social
policies
its
issues
as
compensation
media.
online
such
to
It
has
reach
also
as
poverty.
efforts
promoted
many
company, or where the adver tising
after
decision has more signicant
implications, the eects of
its
customers
as
unethical or misleading adver tising
can be extremely damaging.
losses.
Do some internet research to nd
This
shift
in
marketing
techniques
paid
off.
A
year
after
reporting
a
examples of unethical advertising.
loss,
BP
declared
a
US$3.3
billion
net
prot
in
2012
and
has
recorded
Can you nd wide-spread press
strong
results
in
the
rst
quarter
of
2013.
Similarly,
Nike
has
dropped
coverage? What sort of criticisms are
many
of
its
sponsorship
deals
with
athletes
who
have
fallen
from
grace
made, and how might these aect
in
the
public’s
eye.
Lance
Armstrong
and
Oscar
Pistorius
were
once
the reputation of the businesses?
among
of
Nike’s
their
strongest
transgressions.
representatives
In
short,
Nike,
but
BP
,
have
and
been
dropped
Chevron
all
because
recognize
TOK discussion
the
value
that
their
of
their
image
corporate
is
not
image
damaged
and
by
have
incidents
attempted
and
to
ensure
sponsorship
deals
To what extent are marketing
alike.
If
consumers
dislike
an
organization,
they
often
boycott
that
practices a reection of the
organization,
causing
it
to
lose
protability
and
possibly
even
causing
it
values of a given time and
to
close
down.
culture?
259
4
M A R K E T I N G
However,
many
and
strategies
and
other
Chevron
such
as
addition,
because
of
oil
been
they
This
fear
continue
of
largely
helped
of
to
are
such
as
legislation
the
mitigate
Royal
in
their
would
effects
of
Shell
in
share
such
as
groups
socially
extraction
prices.
long-term
new
public
and
pressure
enormously
of
the
themselves
their
adoption
the
Dutch
by
practices
from
environment
about
that
the
marketing
market
uctuations
uncertain
in
opposition
standards”
they
damage
However,
to
shifts
erce
“double
while
regular
new
more
Companies
because,
causes
production.
in
accused
shareholders
of
companies’
resulted
Greenpeace
processes.
has
the
stakeholders.
have
responsible,
costs
of
have
increase
marketing
market
In
protability
the
strategies
uncertainties.
Cultural dierences
Finally,
cultural
strategies
Martin
an
used
are
example,
increases
to
an
and
in
by
gnitekraM 4
America.
Gotham
its
In
the
to
cater
have
on
a
huge
regular
Martin
the
The
and
globe.
many
the
and
strategies
if
of
to
meet
to
Aston
such
than
in
its
Aston
from
Aston
has
among
marketing
and
strategy
North
and
the
customers
Rolls-Royce
that
led
Martin
desirable
young
and
large
This
franchise
new
Martin
as
Europe
Bond
products
and
base.
and
changed
enticing
latest
have
KFC
faith.
been
were
have
initially
a
large
China
globally;
changes
Nokia,
above
must
a
cultural
result
they
of
in
but
adapt
revenues
practices
with
the
Apple,
are
do
a
and
few
strategies
of
on
across
of
the
grounding
for
practices
ethics,
a
has
Aston
Samsung
marketing
prots
to
customers
examples
innovation,
and
around
appears
cases
provide
their
foods
differences
marketing
as
Halal
increased
practices
directly
directly,
however,
as
in
to
exploited.
and
marketing
interact
led
and
and
change
and
businesses
maximize
to
more
discussed
in
introduced
has
lled
strategies
change
media
have
This
considerations,
market
in
and
marketing
Similarly,
youth
rms
are
and
beneted
growth
modern
James
at
Muslim
social
conclusion:
they
both
their
common
businesses
competing
overall
the
aimed
gaps
on
Rolls-Royce
The
one
culture
use
basis.
target
the
ethical
impacts
most
have
consumer
brands
more
Martin
McDonald’s
of
market
innovation,
marketing
markets.
sector,
more
on
Rolls-Royce
that
economic
customers
with
showcase
Chinese
as
Aston
all
impact
world.
young
European
seen
deals
are
the
massive
younger
club
to
increased
to
result,
customers
as
world.
been
260
for
had
the
a
for
are
heavy
manufacturers
relatively
Furthermore,
pages
for
Overall,
As
car
fast-food
revenues
which
a
differences.
seen
a
demand
Sponsorship
products.
designed
be
in
has
for
have
around
vehicle
cultural
targeting
City
Facebook
the
China
Chinese.
China
of
income
increase
also
businesses
luxury
Rolls-Royce,
young
to
by
two
understanding
For
in
differences
and
global
scale.
4 . 1
T H E
R O L E
O F
M A R K E T I N G
rvso chcls
Marketing
is
customers
at
with
✓
✓
other
business
of
goods
services
Product
while
Commercial
focuses
marketing
before
using
Social
marketing
and
marketing
focuses
on
websites
Market
size
looks
Market
share
main
identify,
the
for
at
the
4
and
use
the
total
a
of
the
a
the
sales
of
of
the
the
the
right
working
customer.
mix
while
marketing
product
rst
out
mix
before
market
product.
consumer
to
market
needs
the
change
well-being.
in
individual
Social
through
and
product.
media
social
product.
all
one
to
carrying
internet
rm’s
to
involves
of
positive
societal
product
marketing
Ps
determine
strategies
in
percentage
the
the
It
needs
involves
selling
market
of
producing
inuencing
the
to
the
additional
activities
at
Ps
right
time.
rms
rm’s
in
a
share
market
of
the
while
total
sales
in
market.
The
to
is
3
on
improvement
networking
satisfy
the
appropriate
aims
behaviour
to
the
right
orientation
producing
wants
the
involves
market
before
getting
at
concerns
orientation
it
about
price
functions
of
the
✓
right
marketing
research
✓
the
Marketing
selling
✓
essentially
marketing
design
business.
prot
and
On
objective
develop
the
organisations
of
for-prot
marketing
other
hand,
(NPOs)
is
the
organizations
strategies
that
marketing
mostly
for
social
is
are
to
protable
objective
for
marketing
Not
reasons.
gnitekraM 4
✓
261
4
M A R K E T I N G
Pcc quso
Bajaj
In
a
India,
34%
For
the
some
target
satisfy
a
the
has
year,
In
an
and
safety
remote
the
other
was
of
the
its
Bajaj
years
is
that
each
One
proposal
is
international
primary
the
strategic
continued
to
their
are
and
network
This
in
even
in
Other
as
better
models
remote
through
about
to
the
either
gained
a
in
of
the
quality,
to
is
marketing
to
rst
share
of
This
long-term
markets.
determined
needs
in
Tajikistan.
company’s
local
focus
repairthem.
signicant
and
Twice
reliability
important
international
Bajaj
areas.
surveys,
serviceor
Colombia
satises
media
with
motorbikes.
such
different
particularly
One
India,
motorbike
social
is
also
alliances.
12
Bajaj,
factor.
features,
research
garages
has
is
for
proles.
penetration
as
important
customers
few
segments
extra
offers
Philippines,
markets
use
for
market
company
of
most
more
motorbikes.
there
model
the
manufacturing
market
consumer
with
the
international
sure
is
pay
orientated
including
this
many
distribution
out
where
10
to
various
interviews
through
objectives
For
of
carries
markets,
done
market
motorbike
are
price
willing
extensive
areas
last
is
in
There
markets,
are
needs
Bajaj
groups
and
target
Bajaj
leader
share.
markets
styling*.
Bajaj
market
market
and
to
make
preferences.
appeal
to
markets.
[Source: adapted from Globality: Competing With Everyone From Everywhere For
gnitekraM 4
Everything New York and Boston: Business Plus, 2008]
a)
Outline
briey
andproduct
b)
Comment
on
leadershipfor
c)
Analyse
the
d)
Evaluate
strategies
IB,
*
262
May
difference
the
between
market
orientation
importance
of
market
share
and
Bajaj
of
might
response
to
social
have
media
to
customer
marketing
change
its
[2
marks]
[6
marks]
[5
marks]
[7
marks]
market
Bajaj.
usefulness
how
in
the
orientation.
for
Bajaj.
marketing
preferences
2010
styling: the various features of style or design that consumers may prefer
4.2 Marketing planning (including
introduction to the four “Ps”)
By the end of this chapter, you should be able to:
➔
state the elements of a marketing plan
➔
explain the role of market planning
➔
comment on the four Ps of the marketing mix
➔
prepare and analyse an appropriate marketing mix for a par ticular
product or business
➔
discuss the eectiveness of a marketing mix in achieving marketing
objectives
➔
distinguish between target markets and market segments
➔
identify possible target markets and market segments in a given
➔
distinguish between niche market and mass market
➔
analyse how organizations target and segment their market and
gnitekraM 4
situation
create consumer proles
➔
draw a product position map/perception map and comment on it
➔
explain the importance of having a unique selling point/proposition (USP)
➔
evaluate how organizations can dierentiate themselves and their
products from competitors.
th lms of  m pl
A
marketing
that
are
objectives.
prepare
plan
marketing
increasing
●
key
the
how
to
pricing
order
likely
sell
to
by
or
6
that
cent
which
products
activities
be
are
are
plan
in
the
to
of
the
next
be
that
measurable,
example
provide
for
an
overview
example
of
plans
on
markets
carried
how
including
The
year
achieved,
providing
be
and
market.
components:
time-specic),for
steps
and
following
(specic,
strategies
marketing
to
SMART
will
marketing
adequately
and
the
the
organization’s
competition
existing
used
budget ,
marketing
in
actions
that
will
in
the
some
are
about
an
need
face
objectives
marketing
strategies
to
realistic,
per
plans,
new
document
achieve
include
objectives
relevant
sales
to
departments
in
marketing
overall
detailed
order
marketing
detailed
the
is
strategic
how
marketing
●
a
in
Marketing
achievable,
●
is
themselves
marketing
●
plan
developed
information
out,
the
the
for
the
example
products
nance
on
will
which
be
required
specic
to
distributed
fund
the
strategy.
263
4
M A R K E T I N G
th ol of m pl
Key term
Essentially,
marketing
organization’s
effective
in
facilitate
this,
planning
decision
attaining
about
its
is
a
process
which
overall
that
marketing
corporate
or
involves
an
strategies
strategic
would
be
objectives.
To
Marketing planning
the process of formulating
a
detailed
marketing
plan
is
drawn
up.
marketing objectives
and devising appropriate
The benets of marketing planning
marketing strategies to meet
those objectives
Marketing
●
and
seeking
Setting
●
planning
Sharing
●
on
A
●
marketing
a
or
clearly
in
identifying
improves
plan
and
sense
marketing
unprotable
inspire
rm
potential
problems
them.
objectives
coordination
picture
Devising
●
to
a
the
chances
of
success
of
a
rm’s
strategy.
the
improves
clearer
solutions
SMART
marketing
helps
of
with
other
provides
where
budget
it
business
the
is
whole
departments
organization
with
a
heading.
ensures
that
resources
are
not
wasted
activities.
spelled-out
condence
plan
in
could
them
improve
about
the
employees’
organization’s
motivation
and
future.
The limitations of marketing planning
Marketing
●
gnitekraM 4
to
The
●
●
may
changes
process
may
and
Failure
prioritize
be
to
to
tell
effective,
where
money
They
business
in
considerable
are
to
do
this
if
the
organizations
are
not
quick
resources
objectives
they
may
to
and
are
terms
of
time,
make
it
difcult
for
them.
needs
review
in
plans.
meeting
planning
constantly
if
conditions.
designing
they
marketing
need
outdated
market
marketing
whether
organizations
policies.
become
in
consume
expertise,
rms
To
plans
consider
to
be
a
reective
evaluate
survive
their
in
exercise
marketing
today’s
competitive
environment.
th fou “Ps” of h m mx
Central
mix.
the
to
to
This
market
is
a
successful
as
the
four
promotion,
●
planning
collective
marketing
“Ps”
and
of
–
such
television
is
as
a
this
intangible.
is
of
the
place.
Product
is
the
term
the
a
includes
product.
These
are
or
should
the
These
mix,
while
aim
to
that
a
of
a
key
rm’s
elements
is
satisfy
the
ensure
referred
price,
below.
offered
such
are
that
product,
briey
service
marketing
elements
namely:
explained
service
tangible
Products
development
marketing
good
is
that
in
as
needs
the
market.
health
and
A
good
insurance
wants
of
Key term
consumers.
to
ensure
So,
that
whether
the
providing
consumer’s
a
new
interests
or
are
existing
taken
product,
into
rms
need
consideration
if
Marketing mix
they
are
to
create
a
unique
selling
point
or
proposition
(USP).
the key elements of a
●
Price
–
this
is
the
amount
consumers
are
charged
for
a
product.
It
marketing strategy that
indicates
the
value
consumers
perceive
the
product
to
have.
For
ensure the successful
®
example,
when
the
Apple
iPad
1
was
rst
introduced,
consumers
marketing of a product
paid
264
a
high
price
for
it
because
of
its
perceived
good
quality.
On
4 . 2
the
other
new
an
M A R K E T I N G
hand,
ones
internal
and
are
–
product
this
promotion
order
to
Place
●
–
to
get
or
over
and
For
a
are
promotion
the
very
as
refers
product
the
agents,
are
number
of
that
the
used
to
also
a
to
promotions,
product’s
buy
consumer.
used
to
get
outlets
to
rm
or
a
in
such
as
of
the
various
consumers
consumer
or
“ P S ” )
brand-
the
product.
may
F O U R
behaviours.
which
a
T H E
Setting
because
and
T O
use
to
The
buy
above-the-
below-the-line
combination
of
both,
in
product.
or
who
products
many
the
channels
Products
distributed
as
ways
the
location
supermarkets
these
than
value.
behaviour
purchase
A
lower
lower
advertising
Intermediaries,
available
to
here.
to
a
I N T R O D U C T I O N
businesses
attract
television
the
for
various
important
as
priced
inuence
persuaded
sales
to
large
retail
are
to
are
having
purchasing
consumers
Internet.
example,
products
and
as
difcult
factors
refers
( I N C L U D I N G
clothes
seen
be
methods
convince
this
can
such
such
are
consumer
about
communication
line
of
external
informed
the
they
price
nature
Promotion
●
second-hand
because
appropriate
sensitive
P L A N N I N G
can
be
include
to
where
countrywide
as
distribution
purchased
in
wholesalers,
Shoprite
consumers
of
consumers
or
to
shops
retailers,
need
Nakumatt
ensure
used
them.
have
that
their
possible.
An appropriate marketing mix
appropriate
wants
right
are
marketing
adequately
product,
the
marketing
loss
in
not
sales,
identify
mix
which
advertising
●
selling
●
a
To
be
●
well
each
will
right
clear
affect
expensive
in
order
mix
coordinated
so
a
a
will
right
If
could
protability.
colourful
stall
to
a
where
sell
achieve
that
rm
not
and
produce
the
channels.
a
therefore
in
in
for
to
at
needs
the
risk
the
place
and
message
Consumers
buy
it.
of
potential
may
Examples
of
include:
car
to
focused,
long-term
attempting
marketing
available
promotion
and
perfume
agent
and
its
consumers’
businesses
price,
and
mixes
that
requires
right
product
exclusive
effective
be
the
not
the
an
real-estate
appropriate
is
ensures
This
the
marketing
●
an
at
through
with
inappropriate
met.
charged
communicated
mix
gnitekraM 4
An
its
in
a
marketing
will
elements
magazine
second-hand
houses
business
the
children’s
need
clothes
vegetable
are
sold
market.
objectives,
an
to:
consistently
complement
other
●
be
clear,
●
consider
●
look
●
target
focused,
the
into
the
and
market
the
degree
right
not
it
is
of
abstract
aiming
or
to
ambiguous
sell
competition
the
that
product
its
to
product
faces
consumer.
Student workpoint 4.4
Be a thinker
1.
Using
an
organization
marketing
as
2.
most
Explain
its
mix
that
of
you
your
think
choice,
your
discuss
the
organization
elements
would
in
the
prioritize
important.
the
desired
factors
that
marketing
limit
an
organization’s
ability
to
achieve
objectives.
265
4
M A R K E T I N G
M smo,  d
cosum pols
Market segmentation
A
in
segment
a
the
given
refers
market
specically
Markets
●
to
market.
into
to
may
be
age
■
gender
■
–
will
need
is
a
religion
–
businesses
to
no
kids)
no
kids
gnitekraM 4
Geographic
in
–
demand
nd
–
here,
their
characteristics
dividing
in
an
effort
ways:
in
a
the
for
varying
market,
teenagers
it
which
will
personal
difcult
radio
languages
young
to
sell
–
businesses
are
this
sectors
for
singles
young
stations
that
geographical
some
markets;
targets
segmentation
different
consumers
considers
while
of
want
care
include:
cellphones
products
for
pork
products
in
a
Muslims
targets
yet)
grouping
this
similar
process
wants.
population
will
by
segment
income,
of
and
following
–
with
the
men
characteristics
ethnic
the
diapers
to
is
groups
needs
higher
dominated
income,
into
in
human
compared
broadcast
●
the
there
acronyms
■
distinct
desired
women
family
consumers
segmentation
of
babies
country
■
or
their
of
segmentation
segmented
characteristics
■
sub-group
smaller
meet
Demographic
–
a
Market
in
while
married
many
geared
is
may
used
OINK
DINKY
creative
(one
(double
couples
African
towards
where
and
have
example,
the
countries
a
particular
market
consider
is
tribe.
divided
factors
including:
■
regions
in
a
businesses
consumers
■
climatic
demand
hot
●
country
could
in
the
same
conditions
in
Tibet
throughout
where
segment
–
for
example,
to
segmentation
people’s
choices
■
social
and
economic
individuals
not
■
of
a
values
for
–
belong
certain
animal
or
heavy
Botswana,
–
this
for
to
example,
urban
and
sweaters
will
which
usually
–
some
particular
rural
is
be
in
high
quite
the
market
characteristics,
based
such
on
as:
high-income-earning
luxury
clubs
that
exclude
people
status
morals
customer
divides
personality
status
to
wealth
people’s
example
–
year.
Psychographic
lifestyle
reside
differently
country
compared
the
consumers
products
and
beliefs
values
need
regarding
to
be
considered
recycling
of
here,
products
or
testing.
The advantages of segmentation
●
Segmentation
opportunities
●
Designing
sales
266
and,
helps
in
businesses
domestic
products
through
for
a
this,
as
identify
well
specic
as
group
protability.
existing
gaps
international
of
and
new
markets.
consumers
can
increase
4 . 2
Segmentation
●
identifying
By
●
However,
and
their
right
risks
market
segment
waste
their
in
actual
market
and
( I N C L U D I N G
resources
for
products,
the
production,
of
of
consumers
segmentation
development,
large
P L A N N I N G
minimizes
the
differentiating
spread
a
M A R K E T I N G
their
can
be
so
could
increase
expensive
promotion
potential
businesses
T O
T H E
F O U R
“ P S ” )
through
products.
businesses
and
and
by
I N T R O D U C T I O N
as
in
a
diversify
market
terms
rm
and
share.
of
research
attempts
to
reach
consumers.
Targeting
After
segmenting
market.
A
common
its
target
needs
market,
market
or
wants
a
rm
consists
that
a
must
of
a
now
decide
group
business
of
on
its
target
consumers
decides
to
serve
with
or
sell
to.
Key terms
Targeting
segment.
is
therefore
Targeting
can
Undifferentiated
●
this
strategy
segments
a
be
or
of
carried
ignores
targets
needs
process
marketing
rm
and
common
the
the
wants
–
out
also
the
using
known
market.
consumers
to
the
a
mass
in
the
Here
in
specic
following
as
differences
entire
of
marketing
market
marketing,
specic
market
a sub-group of consumers
in
with similar characteristics in
market
businesses
the
Market segment
strategies:
consider
and
aim
to
the
a given market
sell
Market segmentation
their
products
their
sales.
LG,
Dell,
to
a
large
Examples
HP
,
and
of
Coca
number
of
companies
customers
that
do
in
this
order
are
to
maximize
Samsung,
Nokia,
the process of dividing the
market into distinct groups of
Cola.
consumers so as to meet their
Differentiated
●
marketing
–
a
differentiated
or
segmented
strategy
appropriate
targets
marketing
example,
Toyota
of
in
several
mixes
designs
cars
market
for
each
for
the
of
segments
these
different
and
segments.
gnitekraM 4
desired needs and wants
marketing
develops
For
Target market
socio-economic
status
a group of consumers with
people
the
world.
With
segmented
marketing,
rms
hope
to
common needs or wants that
gain
a
stronger
position
in
each
of
their
segments
and
so
increase
a business decides to serve
their
sales
and
the
market
share
of
their
brands.
or sell to
Concentrated
●
marketing
or
niche
marketing
–
this
is
a
strategy
that
Targeting
appeals
to
strategy
may
smaller
for
serve
advantage
and
smaller
market
of
more
rms
specic
that
niches
may
where
opportunities
that
market
have
there
may
segments.
limited
are
few
have
It
is
resources.
competitors
been
a
good
These
and
overlooked
by
rms
the process of marketing to a
specic market segment
take
larger
Niche market
rms.
Products
provided
by
businesses
that
operate
in
niche
markets
®
include
Apple’s
strategy
can
targeting
iTunes
market
and
their
consumers
it
Rolls-Royce
products
can
serve
more
best
cars.
Businesses
efciently
and
most
and
using
a narrow, smaller or more
this
effectively
by
specic market segment
protably.
Mass market
a large or broad market that
Consumer proles
ignores specic market
Consumer
proles
consist
of
information
provided
about
the
characteristics
of
segments
consumers
include
also
of
a
gender,
consist
of
particular
age,
product
social
details
of
status,
the
in
different
and
spending
income
patterns
markets.
levels.
in
These
characteristics
Consumer
terms
of
the
proles
number
may
Consumer prole
and
the characteristics of
frequency
of
products
bought
by
consumers.
For
segmentation
and
targeting
consumers of a par ticular
to
be
successful,
it
is
very
important
that
rms
have
good
knowledge
target
their
products
of
who
product in dierent markets
their
consumers
are.
This
will
enable
them
to
effectively
based on their gender, age,
to
the
right
consumers,
using
appropriate
marketing
strategies.
In
addition,
and income levels, among
a
rm
aware
of
its
target
market
has
a
cost-effective
method
of
selling
its
other characteristics
products
as
it
will
make
savings
on
promotion
costs.
267
4
M A R K E T I N G
yduts esaC
nch M – toyo
Once Toyota took the plunge, it pursued an eective
niche marketing plan. It didn’t promote the Prius in
just any media. It focused on media outlets that were
watched, read or listened to by people concerned
about the environment. For example, it heavily
promoted the car through environmental groups and
their publications. As the only game in town at that
time, Toyota not only dominated the niche – it was the
niche. Today, with increased competition in this niche
market, the Toyota Prius is still highly regarded as the
niche leading brand.
Simply identifying holes in the market and lling them,
is, often times not enough. It takes extensive research,
careful planning, execution and extreme adversion to risk
Toyota, a huge company with a global focus on the
to successfully develop, introduce, execute and dominate
auto business, is an excellent niche marketer. They
a niche market with a specic product or service.
were one of the rst companies to realize there was
Adapted from http://www.smar tmarketingllc.
a group of car buyers who would be very interested
com/2012/05/07/successful-niche-marketing/
in environmentally friendly cars. Toyota answered
this need with development of the legendary Prius,
the rst mass production hybrid car. Where other car
Exam-style questions
manufacturers saw Toyota taking a huge risk, Toyota
1.
Dene the term “niche market”.
[2 marks]
gnitekraM 4
saw it as an oppor tunity to identify a new niche and
2.
Explain the statement “ Toyota not only
establish its brand in that niche. In marketing, it is often
dominated the niche – it was the niche”.
[4 marks]
the rst brand to market, if executed successfully, that
can own the niche market with their brand.
3.
Discuss the likely reasons for the success
of the Toyota Prius.
Student workpoint 4.5
Be a thinker
Suggest
for
268
the
possible
someone
a)
Louis
b)
Yamaha
c)
Nintendo
who
Vuitton
consumer
buys
the
prole
following:
handbag
motorbike
Wii
game
console.
[10 marks]
4 . 2
M A R K E T I N G
P L A N N I N G
( I N C L U D I N G
I N T R O D U C T I O N
T O
T H E
F O U R
“ P S ” )
of cosums
Beverage and snacks maker PepsiCo India is gunning for
split its go-to-market (distribution) model into three
the bottom-of-the-pyramid consumer for the rst time
divisions. There’s a premium arm for distributing
in the country, as its chairman, Manu Anand, drives the
Tropicana juices, Gatorade spor ts drinks and Quaker
New York-based $60 billion parent’s target to reach the
oats; a mid-rung one for aerated drinks like Pepsi and
‘next one billion’ consumers in the value segment.
Slice and snacks like Kurkure and Lays; and a division
catering to mass products like Lehar Iron Chusti.
In his rst media interaction since he succeeded
Sanjeev Chadha in January this year, Anand tells ET
“Had we put, for example, Iron Chusti in the Kurkure
that PepsiCo is creating ver ticals to cater to dierent
system, it would have been another product, hence the
segments of consumers, across functions like sales,
decision to set up dedicated sales teams. Communication
operations, distribution and marketing.
and marketing for these products will be dierent too,”
says Anand. Lehar Chusti packs, for example, are labelled
PepsiCo’s low-priced products will be aimed at
in Telugu. “We need to act like local players, but oer
330 million consumers graduating from the bottom-ofproducts that don’t compromise on taste or quality.”
pyramid to the socio-economic B and C classes.
The move is in line with global chairman Indra Nooyi’s
CHEAPER PRICE POINTS
target to generate $30 billion in revenues from ‘healthier ’
Low-margin products like Iron Chusti will obviously not
products-internally called better-for-you and good-forbe protable in the beginning, but PepsiCo is hoping
you products-by 2020, up from the existing $10 billion.
that the products will achieve scale in about 24 months.
India will be the rst country in the PepsiCo system to
target the value segment with multiple products.
Anand says even in PepsiCo’s core business of snacks,
such as Kurkure and Cheetos, the rm is stepping up
gnitekraM 4
yduts esaC
PpsCo  mss m wll c o d sms
“It’s a big transformation for us; we are targeting the
focus on 5 and 3 packs. These packs are growing the
next tier of consumers. We are looking at everything
fastest among PepsiCo’s foods arm and contribute
dierently and doing this in a very structured way. But
45-50% to the division’s foods sales. While in aerated
it’s not as if we are under-investing in our core business;
drinks, selling bottles and car tons for 5 amounts to
it’s more about creating new consumption spaces,” says
sacricing protability, PepsiCo will look at products at
Anand, who has been with PepsiCo for the past 17 years.
5 through its joint venture with Tata Global Beverages.
VERTICAL MOVEMENT
Anand says three-four ths of PepsiCo consumers are
common to foods and beverages. But beverages are
NourishCo, PepsiCo’s ver tical in par tnership with Tata
more asset intensive while the foods business is more
Global Beverages, has just rolled out its rst product,
systems-driven.
a lemon-avoured glucose-based drink , called Gluco
Plus, in Maharashtra. It is priced at 5.
This new strategy comes at a time when food ination
is running high. Anand says he’s using all global and
Lehar Foods, another ver tical, is a separate operating
local resources to minimise costs, including stepping
entity, which will launch value snacks priced at 5 and
up conversion eciencies, using cheaper sources of
lower. Its other two businesses are core aerated drinks
energy and better commodity procurement.
and snacks.
Adapted from http://ar ticles.economictimes.indiatimes.
An innovation ver tical has launched biscuits and
com/2011-06-06/news/29625847_1_sanjeev-chadha-
snacks priced at 2 under the Lehar Iron Chusti brand in
manu-anand-pepsico-india
Andhra Pradesh initially. This line-up of healthy foods
is targeted at women under ‘Project Asha’, PepsiCo’s
Exam-style questions
codename for Nooyi-commissioned plan to develop
low-priced nutritional foods for the poor.
1.
Describe two forms of market segmentation
relevant for Pepsico in India.
[4 marks]
Anand, back in India after ‘07 when he was heading the
foods division, says what has changed most at the rm
in the past four years is its “sheer scale of operations”.
While separate operations, sales and marketing teams
2. Analyse how PepsiCo caters for dierent
segments of consumers in India.
3. Justify PepsiCo’s new strategy in India.
[6 marks]
[8 marks]
have been set up for the ver ticals, PepsiCo has fur ther
269
4
M A R K E T I N G
Poso
Product
a
positioning
product
sometimes
their
faced
will
effective
a
tool
position
The
that
rst
step
the
in
to
in
will
need
target
to
must
This
for
customers
a
the
the
with
effort
position
in
to
plan
the
positions
price,
on
of
its
of
An
is
how
products.
product
and
aspects
image.
which
communicate
support
them
strategies
identify
are
simplify
market.
competing
features
perceive
to
representation
quality,
should
the
and
other
key
an
or
consumers
positioning
marketers
rm
dene
As
therefore
visual
to
example
choose
Finally,
is
in
advantage
their
relation
requires
important,
strategy.
products
planning
in
market.
information,
marketers
map.
consumers
the
competitive
product
positioning
nd
rm
its
a
a
use
of
how
in
categorize
mind,
perception
positioning
position
they
in
could
products
overload
products
perceive
consumers
Second,
its
they
or
consumers
an
this
their
analysing
other
process
With
give
to
with
purchasing
accordingly.
that
involves
compared
to
its
develop
desired
marketing
mix.
The impor tance of a position map
Prestigious to own
A
●
position
map
could
competitors
or
It
identify
help
threats
in
a
rm
the
to
establish
which
are
its
High
close
market.
Mercedes-Benz
●
also
It
●
is
the
a
rm
simple
research
gnitekraM 4
It
●
helps
could
and
important
ll
by
quick
gaps
creating
way
of
or
or
opportunities
offering
presenting
new
usually
in
the
market
products.
sophisticated
data.
a
rm
consumer
in
needs
targeting
and
specic
market
segments
to
best
satisfy
wants.
Jaguar
ssenevitcee laicnaniF
that
helps
Mitsubishi
BMW
Motors
Toyota
Ford
High
Low
Audi
Honda
Volvo
th uqu sll po o poposo (USP)
This
is
a
feature
products
unique
in
the
and
of
a
product
market.
helps
to
The
explain
that
differentiates
differentiating
why
it
from
factor
consumers
is
other
what
choose
one
Proton
competing
makes
a
product
Low
product
over
Figure 4.2.1. A position map for cars
another.
Source: http://www.12manage.com
The impor tance of having a USP
A
USP:
Key terms
helps
●
to
offering
leads
●
to
about
establish
a
and,
result,
as
a
customer
the
increased
rm’s
helps
loyalty
product
in
competitive
as
to
advantage
attract
customers
comparison
to
more
can
rival
in
its
product
customers
identify
products,
Product position map/
something
resulting
special
in
perception map
a visual representation of how
sales.
consumers perceive a product
in relation to other competing
By
appropriately
using
the
elements
of
the
marketing
mix,
businesses
products
can
effectively
competitors.
differentiate
Here
are
some
themselves
and
their
products
from
examples:
Unique selling point/
proposition (USP)
●
Product:
Apple
®
its
iPad
,
is
world
renowned
®
iPod
,
for
its
unique
product
quality
in
a product’s feature that
®
and
Mac
computer
products.
dierentiates it from other
●
Price:
Cellphone
affordable
270
prices
subscriber
to
its
Safaricom
consumers
in
has
the
always
Kenyan
managed
market
to
offer
despite
the
competing products in the
market
4 . 2
existing
high
●
M A R K E T I N G
competition,
after-tax
Place:
Coca
having
a
P L A N N I N G
and
the
( I N C L U D I N G
company
has
still
I N T R O D U C T I O N
managed
to
T O
post
T H E
F O U R
“ P S ” )
very
prots.
Cola
wide
has
range
managed
of
retail
to
differentiate
outlets
itself
providing
its
well
globally
product
close
by
to
its
consumers.
Promotion:
for
an
the
effective
Nike’s
Nike’s
company
“Just
do
because
strategy
in
it
it”
slogan
is
a
emphasizes
encouraging
powerful
the
action
customers
to
promotional
element,
go
ahead
tool
which
and
is
buy
products.
seiduts esaC
Uqu sll pos-
som xmpls
Successful businesses usually have a unique feature
which dierentiate them from their competitors. Here
are three examples of businesses which have thought
creatively about their USPs:
1. Love With Food (LoveWithFood.com)
Love with Food sells organic snack-boxes which are
delivered directly to customers for $10 a month.
For
every box sold, the company donates a meal to a food
bank to feed hungry children. This creates a unique
buying experience for their customers that they
gnitekraM 4
●
wouldn’t get anywhere else. Love with Food oers
something dierent, while still selling exactly what
their customers want.
2. Flinja (Flinja.com)
Flinja aims to solve a huge problem that college
students and alumni have; nding a job. Their unique
Exam-style questions
selling proposition is clear, and most impor tantly,
1.
benet-driven. “Flinja helps college students and alumni
With reference to Hear & Play, describe two
aspects of a USP (Unique Selling Point).
nd jobs.” They have dened their target market and
[4 marks]
stated how they’re going to help them solve a problem.
2.
With reference to Flinja, explain the link
3. Hear and Play
between target market and USP
.
Many websites and businesses help people learn
3.
[4 marks]
Discuss whether Love With Food’s USP is
music. Hear and Play focusses specically on learning
entirely ethical.
[8 marks]
to play the piano by ear, making it ideal for people who
don’t want to or can’t read sheet music.
Student workpoint 4.6
Be an inquirer
1.
Draw
the
2.
a
position
products
Using
the
or
map
of
brands
information
organizations
offering
an
on
in
industry
of
your
choice
and
identify
offer.
question
those
1,
products
why
and
is
it
important
brands
to
have
for
a
the
USP?
271
4
M A R K E T I N G
rvso chcls
✓
A
marketing
plan
development
✓
of
is
an
essential
marketing
organization’s
marketing
The
the
four
Ps
of
document
strategies
that
that
aid
in
concerns
the
achieving
an
objectives.
marketing
mix
are
product,
price,
promotion
andplace.
✓
An
appropriate
needs
and
product,
A
target
wants
isa
are
charged
communicated
✓
marketing
wants
a
the
through
market
that
at
is
a
of
right
the
group
business
sub-group
mix
for
sufciently
price,
right
of
decides
consumers
a
business
met
by
available
promotion
consumers
to
sell
with
to
ensures
producing
at
similar
consumers’
right
right
place
and
channels.
with
while
the
that
the
common
a
market
needs
or
segment
characteristics
in
a
givenmarket.
✓
A
mass
market
segments
while
is
a
a
broad
niche
market
market
that
ignores
focuses
on
a
specic
narrow
market
market
TOK discussion
segment
To what extent does marketing
✓
The
primary
focus
of
product
positioning
is
to
analyse
how
respond to, or change, the
consumers
perceive
a
rm’s
product
compared
to
other
products
perceptions of individuals and
in
the
market
in
an
effort
for
these
rms
to
gain
a
competitive
societies?
advantage
gnitekraM 4
272
in
the
market.
4 . 2
M A R K E T I N G
P L A N N I N G
( I N C L U D I N G
I N T R O D U C T I O N
T O
T H E
F O U R
“ P S ” )
Practice question
Marketing
in
Second
an
Life
the
is
Millions
sell
vehicles,
2006
Many
or
store
On
Rates
such
island”
The
Dell
computer
island
the
Life.
to
corporate
virtual
that
The
to
than
can
its
to
as
a
residents
in
a
exists
create,
life,
estate.
buy
and
clothes,
resident
buying,
only
second
real
designer
millionth
million
Life
that
lead
career
include
one
US$1
market
be
the
to
be
in
few
US
delivered
12
the
bands
is
at
Week,
into
in
selling,
virtual
rock
biggest
US$10,000
their
real
late
and
and
news
early
homes.
vice
and
Life
versa.
stable
order
pay
Life
an
retail
fairly
also
Second
have
has
a
Second
and
can
market
customers
virtual
ofcial
home
agency,
an
and
remained
within
to
instance,
dollars
have
their
news
to
the
Life
younger
factory
Customers
islands
frequently
the
US
Second
for
Dell
dollars,
Musicians
Reuters
use
target
Dell,
the
years
to
to
delivered
dollar.
simulations.
between
be
converted
the
which
Business
to
of
Linden
last
Kmart
and
segments.
replica
PCs
pay
and
audience
purchased
and
new
IBM,
virtual
order
(L$)
BBC,
clients
world
may
registered
Dell,
can
and
BBC
debut
According
a
over
recently
training
including
Second
but
dollars
IBM
online
which
world
subscribers
nightclub
daily
more
niche
aware
with
Linden
Linden
business
a
customers
uctuate,
dollars.
as
to
customers
250
Life
a
Second
property.
island,
currency.
hands
generated)
character,
visiting
services,
Second
services
where
the
from
environment,
(computer
virtual
making
technologically
“in-world
3D
and
user
companies
or
virtual
a
change
casinos.
one
virtual
products
and
dollars
products
with
renting
Using
everything
of
virtual
technological
online,
Internet.
mimicking
new
in
for
a
as
real
US
virtual
organizations,
a
presence
adopter,
uses
within
gnitekraM 4
on
a
the
festivals.
Second
and
Life
design
US$200,000
shops
to
charge
establish
a
presence.
[Source: adapted from http://secondlife.reuters.com and http://whatis.techtarget.com]
a)
Dene
b)
Explain
of
c)
the
the
market
Discuss
IB,
May
of
niche
market.
advantages
to
segmentation
how
marketing
growth
term
rms
mixes
Second
may
to
major
and
corporations,
consumer
adapt
changes
Life.
[2
their
in
like
Dell
and
IBM,
targeting.
marketing
technology
strategies
such
as
marks]
[8
marks]
[ 10
marks]
and
the
2008
273
4.3 Sales forecasting (HL only)
By the end of this chapter, you should be able to:
➔
calculate up to a four-par t moving average
➔
plot the sales trend lines and explain the relationship between the
trend and the actual sales revenue gures
prepare a forecast (including seasonal, cyclical and random
➔
variation) using given data
examine the benets and limitations of sales forecasting.
➔
Sales
forecasting
will
be.
and
trends
future
ow,
It
uses
over
reduces
and
decisions.
may
the
process
a
specied
better
information
However,
be
affected
predicting
period
helps
assist
to
of
in
planning
to
making
by
of
methods
uncertainty,
ensures
forecasting
and
is
quantitative
time.
a
for
accurate
sales
is
a
sales
levels
predicting
stock
and
the
cash
need
intelligent
predictions
external
of
Businesses
making
future
future
Accurately
growth.
in
rm’s
the
management
them
numerous
what
estimate
sales
business
complex
process
factors.
gnitekraM 4
tm ss lyss
This
is
a
quantitative
sales
levels
sales
information
it
occurred.
predict
time
●
from
the
series
The
The
sales
forecasting
sales
that
data.
It
businesses
businesses
future.
There
then
are
method
relies
have
rely
certain
on
kept
on
that
time
over
this
aspects
predicts
series
a
past
that
given
data
which
period
in
need
future
data,
an
to
is
since
attempt
be
to
identied
in
data:
trend
sales
past
data.
–
this
This
is
a
may
visible
pattern
indicate
the
noted
rise
and
after
fall
of
inputting
sales
the
over
a
past
given
period.
●
Seasonal
the
is
varying
when
the
middle
of
within
Cyclical
in
an
a
the
one
can
extend
Random
stand
phase
for
year.
year
in
any
time.
but
more
from
increase
day
winter.
year.
year
–
in
but
these
For
example
increase
in
variations
demand
of
in
experiences
a
because
seasonal
sales
of
in
usually
of
variation
clothing
decline
are
variations
example,
–
one
sales
at
in
repeated
and
sales
during
a
tied
could
be
to
the
on
recession.
business
the
rise
Cyclical
during
variations
year.
these
given
the
An
are
declining
Random
changes
less.
than
a
are
an
Seasonal
or
uctuations
out
these
the
new
economy.
growth
sudden
of
in
–
experiences
uctuations
the
that
274
seasons
business
beginning
cycle
●
a
the
occur
●
uctuations
are
trend.
demand
for
variations
notable
For
changes
example,
ice-cream
are
or
there
during
unpredictable
a
uctuations
may
rare
and
be
a
warm
can
occur
at
4 . 3
S A L E S
F O R E C A S T I N G
( H L
O N LY )
Moving averages
Key terms
This
is
a
useful
emphasizing
method
than
because
it
indicator
the
in
direction
simply
sales
of
a
forecasting
trend.
predicting
It
future
is
a
sales
for
identifying
more
from
accurate
actual
and
and
sales
complex
data.
This
Sales forecasting
is
the process of predicting the
helps
to
smooth
out
any
uctuations
from
sales
data.
future sales of a rm
Table 4.3.1. Yearly sales of a calculator manufacturer
Time series analysis
Year
a quantitative sales
1
2
3
4
5
6
7
8
400
600
800
650
700
850
950
1,200
forecasting method that
Sales (US$000)
predicts future sales levels
from past sales data
Calculating a three-year moving average
Using
year
1.
table
4.3.1,
moving
Calculate
the
following
steps
can
be
used
to
calculate
the
three-
average:
the
mean
sales
for
the
rst
three
(400,000
years.
+
For
600,000
+
example,
the
800,000)
______________________
mean
from
years
1,
2
and
3
is
US$
=
600,000.
3
2.
Do
the
same
(600,000
for
+
the
800,000
next
+
three
sets
of
data:
650,000)
______________________
US$
=
683,333
for
years
2,
3
and
4.
3
3.
The
same
process
should
(800,000
+
be
650,000
used
+
for
the
following
sets
of
threes:
700,000)
______________________
3,
4,
5:
US$
=
716,667
=
733,333
(650,000
+
700,000
+
gnitekraM 4
3
850,000)
______________________
4,
5,
6:
US$
3
(850,000
+
950,000
+
1
200,000)
_______________________
6,
7,
8:
US$
=
1,000,000
3
The
above
data
is
summarized
in
table
4.3.2
and
gure
4.3.1.
Table 4.3.2. Sales revenue with three-year moving average (trend)
Year
Sales (US$000)
1
2
3
4
5
6
7
8
400
600
800
650
700
850
950
1,200
600
683.333
716.667
733.333
1,000
Trend (three-year moving
average) (US$000)
1400
1200
1000
selaS
800
600
400
sales (US$000)
trend (three-year moving
200
average) (US$000)
0
1
2
3
4
5
6
7
8
Years
Figure 4.3.1. Actual sales and the three-year moving average trend for the
calculator manufacturer
275
4
M A R K E T I N G
Calculating a four-year moving average
Calculating
calculating
centring.
total
to
This
involves
Summation
Calculation
(ii)
+
of
800,000
Calculating
of
the
+
sales
next
of
use
For
in
+
(ii)
four-year
bit
four-year
example,
more
this
and
the
complex
case,
an
it
than
makes
eight-year
calculation
of
use
of
moving
the
rst
1,
2,
3
and
4
(US$):
400,000
+
600,000
+
2,450,000
years
moving
2,
3,
700,000)
eight-year
and
a
a
In
follows:
years
=
is
average.
of
four-year
sales
rst
(i)
as
of
650,000
in
rst
is
average
moving
mid-point.
total
the
the
summations
moving
the
650,000)
Summation
get
a
moving
800,000
To
four-year
three-year
establish
four-year
(i)
the
the
4
=
moving
(US$):
centred
total
and
5
is:
(US$):
(600,000
+
2,750,000
total
2,450,000
moving
involves
+
adding
2,750,000
average,
the
=
the
5,200,000
eight-year
moving
5,200,000
_______
total
is
divided
by
8
where
this
as
follows
(US$):
=
650,000.
It
is
important
8
to
note
line
where
Using
the
four-year
year
same
3
value
is
is
in
the
table.
It
will
be
placed
in
the
positioned.
approach
moving
placed
as
averages
above,
are
the
next
summarized
eight-year
in
table
moving
4.3.3
and
totals
gure
and
4.3.2.
gnitekraM 4
Table 4.3.3. Sales revenue with four-year moving average (trend)
Year
Sales ($000)
1
2
3
4
5
6
7
8
400
600
800
650
700
850
950
1,200
5,200
5,750
6,150
6,850
Eight-year moving total ($000)
Trend (four-year moving
650
718.75
768.75
average) ($000)
1400
1200
1000
selaS
800
600
400
sales (US$000)
trend (four-year moving
200
average) (US$000)
0
1
2
3
4
5
6
7
8
Years
Figure 4.3.2. Actual sales plotted against the four-year moving average (trend)
Extrapolation
Once
“line
276
the
of
trend
best
line
t”,
has
shown
been
by
a
drawn,
dotted
this
line,
line
to
can
be
predict
extended
future
using
sales.
This
a
is
856.25
4 . 3
known
as
extrapolation.
The
trend
lines
from
S A L E S
gures
4.3.1
F O R E C A S T I N G
and
( H L
O N LY )
4.3.2
Key terms
can
be
extrapolated
Figure
4.3.3
shows
to
provide
how
a
an
trend
estimated
line
can
be
sales
value
for
future
years.
extrapolated.
Moving average
sales forecasting method that
erusaem
identies and emphasizes the
direction of a trend
ytilauq ataD
Ex trapolation
an extension of a trend line to
predict future sales
Variation
dierence between actual
2007
2008
2009
2010
2011
sales and trend values
Time (year)
Figure 4.3.3. Example of an extrapolated trend line
Source: ops.fhwa.dot.gov
Calculating variations
Variation
the
is
trend
calculated
values.
This
by
is
getting
shown
the
in
difference
table
between
actual
sales
and
4.3.4.
Year
Sales (US$000)
1
2
3
4
5
6
7
8
400
600
800
650
700
850
950
1,200
Trend (four-year moving average)
650
718.75
768.75
gnitekraM 4
Table 4.3.4. Sales revenue with variations in each year
856.25
(US$000)
Variation in each year (US$000)
The
average
calculated
number
of
(US$:
cyclical
as
the
variation
sum
years
150
of
within
150,000
using
variations
the
the
over
above
the
table
period
can
68.75
68.75
6.25
be
divided
by
the
period:
68,750
68,750
6,250)
____
=
1,562.5
4
If,
for
year
of
example,
9,
then
1,401,562.5
Seasonal
then
years
(
the
is
the
For
25,500
for
extrapolated
1562.5
year
variations
calculating
period).
the
adding
example,
and
the
average
25,500
also
if
in
seasonal
as
give
seasonal
the
variation
calculated
value
(in
US$)
was
1,400,000
a
more
accurate
predicted
future
a
more
accurate
prediction
for
value
9.
can
average
trend
gives
in
variation
rst
the
in
quarter
rst
variation
each
of
quarter
for
the
quarter
year
of
rst
5
the
year
6
quarter
by
(three-month
variation
was
in
was
40,300,
those
two
follows:
40,300)
__
=
-32,900
2
277
4
M A R K E T I N G
Assuming
was
that
US$350
accurate
the
000,
sales
predicted
then
sales
revenue
subtracting
prediction
gure
of
for
32,900
year
from
317,100
for
7
in
its
350,000
the
rst
rst
gives
quarter
a
quarter
more
of
year
7.
The benets of sales forecasting
●
Better
and
cash
improve
●
ow
seasonal
the
Increased
●
Better
in
for
the
number
of
Improved
strategies
–
staff
of
sales
future
of
of
in
in
the
consideration
can
better
cyclical
plan
to
greatly
of
assists
goods
required
to
in
sales
the
the
and
in
future.
forecasting
succession
production
produce
planning
can
help
regarding
the
the
future.
–
and
an
into
managers
business.
accurate
planning
in
a
stock
–
trends
accordingly
taking
number
department
required
by
nancial
forecasting
the
planning
marketing
awareness
position
amount
resources
–
factors,
knowing
workforce
human
●
liquidity
efciency
department
planning
management
variation
marketers
be
effort
able
to
to
will
gain
adjust
increase
greater
their
their
marketing
market
share.
TOK discussion
The limitations of sales forecasting
To what extent does knowing
●
Sales
forecasting
is
time-consuming
–
it
takes
a
long
time
to
calculate
assist us in predicting?
because
of
its
complex
nature,
especially
when
considering
the
How do we know that our
calculation
of
average
seasonal
variations
in
each
quarter
over
a
gnitekraM 4
predictions are reliable?
number
●
Sales
of
years.
forecasting
ofpolitical,
ofsales
forecast
changesin
ignores
social,
and
qualitative
economic
predictions,
consumer
tastes
for
and
external
factors
can
example
factors.
A
inuence
political
preferences,
and
number
the
accuracy
instability,
exchange
rate
uctuations.
Student workpoint 4.7
Be knowledgeable
Table
4.3.5
shows
the
yearly
sales
gures
of
a
paper
manufacturer
over
a
period
of
eight
years.
Table 4.3.5. Paper manufacturer ’s sales 2004–11
Year
Sales revenue (US$000)
278
a)
Calculate
b)
Plot
c)
Comment
d)
Extrapolate
e)
Calculate
both
the
lines
the
the
the
20 05
20 0 6
20 07
20 08
20 09
200
350
400
600
500
750
three-year
trend
on
20 04
and
and
the
four-year
actual
relationships
four-year
average
sales
between
moving
cyclical
moving
trend
variation
line
over
900
averages.
revenue
the
2010
on
actual
and
the
graph
sales
predict
period.
paper.
revenue
the
and
likely
the
sales
trends
revenue
noted.
for
2012.
2011
1,000
4 . 3
S A L E S
F O R E C A S T I N G
( H L
O N LY )
rvso chcls
Sales
sales
✓
forecasting
levels
Seasonal
varying
tied
to
✓
Moving
smooth
✓
✓
in
out
is
any
a
involves
a
a
cycle
greatly
an
out
assist
complex
use
mid-point
the
of
a
from
of
from
a
sales
of
of
of
a
rm’s
future
time.
demand
while
given
on
the
due
the
other
random
hand
variations
are
are
trend.
trend
lines
that
help
to
data.
calculating
and
calculating
line
in
developing
method
a
estimating
variations
economy
in
of
period
changes
four-year
when
use
by
Cyclical
in
stand
process
specied
caused
year.
uctuations
the
is
over
are
that
more
Extrapolation
quantitative
the
business
averages
establish
a
variations
changes
Centring
that
is
trends
seasons
the
notable
and
an
four
best
t
moving
eight-year
year
moving
drawn
to
averages
moving
total
to
averages.
predict
futuresales.
gnitekraM 4
✓
279
4
M A R K E T I N G
Pcc quso
Fun-Games
Fun-Games
prides
A
is
itself
recession
economy,
into
showed
that
its
known
for
are
also
of
The
coming
preferred
rate
of
a
had
accepting
markets;
about
nancial
of
expansion
years,
to
the
need
linguistic
director
is
help
intend
make
a
a
option
are
to
and
of
years
is
in
the
Area*,
which
workforce.
domestic
expansion
expansion
Trade
into
nearby
although
signicantly
Dene
b)
Using
the
term
three
social
Calculate
the
in
research
the
Construct
a
and
to
use
(Show
Discuss
all
the
forecasting
Nov
it
trend
of
funds
best
data
be
for
option
from
the
games
sales
record:
last
in
director
overseas
encountered.
expansion.
for
The
external
previous
seven
200–2007
Sales
2002
5500 units
2003
4500 units
2004
8600 units
2005
9100 units
2006
9300 units
2007
11 000 units
limited
moving
sales
company”
(Show
using
the
all
your
the
the
yearly
and
and
trend
trend
limitations
their
marks]
[5
marks]
[3
marks]
the
working)
sales
sales
variation
gures
gure
for
from
(i)
2009.
working)
aiding
[2
average:
trend,
forecast
benets
in
the
may
5000 units
graph
your
lack
marketing
operating
2001
cyclicalvariation.
(ii)
the
of
difculties
about
sales
computer
“private
years
strategy,
experience
considering
use
gnitekraM 4
a)
(i)
decision
to
to
Fun-Games
expand
of
using
overseas
sales
[ 10
marks]
2008
Free Trade Area: a group of countries that have eliminated tarrif restrictions in order to trade together
more easily.
280
company,
dedicated
considering
uctuated
Financial year
*
are
and
decision.
Fun-Games
IB,
three
Free
growth
lack
worried
Fun-Games
and
for
Fun-Games’
cultural,
managers
c)
limited
games
Fun-Games
members
exchange
private
computer
the
managers
markets.
the
national
innovative
predicted
the
that
worried
The
well
years.
While
is
is
so
overseas
countries
few
a
on
4.4 Market research
By the end of this chapter, you should be able to:
➔
explain why and how organizations carry out market research
➔
analyse the primary market research methods
➔
comment on the secondary market research methods
➔
discuss the ethical considerations of market research
➔
distinguish between qualitati ve and quantitati ve research
➔
explain the various sampling methods
➔
interpret results from given data.
Market
data
of
research
related
goods
to
and
businesses
a
is
the
services
use
process
particular
and
market
of
collecting,
market,
on
competitors’
research
analysing,
including
data
on
behaviour.
information
to
make
and
reporting
consumption
Importantly,
decisions.
●
To
identify
consumer
consumers’
For
of
needs
satisfaction
example,
a
customers
beverage
buying
and
levels
wants
and
company
their
sodas
as
well
patterns
may
and
in
want
the
sales
as
aim
to
purchase
to
nd
understand
behaviour.
out
trends
gnitekraM 4
th puposs of m sch
the
over
a
type
given
period.
●
To
assist
For
for
To
business
decreases
decline
●
a
example,
in
reduce
●
To
of
the
by
●
To
by
offering
the
product
out
is
likely
may
patterns
to
signal
happen
rms
because
of
to
a
in
be
future.
prepared
possible
levels.
failure
market
effectiveness
its
or
(especially
research
or
example,
and
the
mix
a
that
marketing
how
in
latest
most
development
rst-mover
of
evaluating
marketing
current
For
research
spending
income
of
what
recession
of
new
products)
establishes
the
likes
by
and
consumers.
provide
market.
risk
assessing
required
predicting
overall
carrying
measure
done
in
in
upcoming
consumer
effectively
dislikes
an
a
rm
specic
market
information
large
strategy.
so
that
be
activities
activity
companies
they
can
the
segments.
regarding
technological
budgets
This
implements
keep
up
in
have
to
date
the
huge
in
advantages.
M sch mhods
Market
research
secondary
can
broadly
be
carried
out
in
two
ways:
primary
and
research.
281
4
M A R K E T I N G
Primary market research
This
is
hand
this
also
research
attempt
a
known
information
given
to
period
advantage
will
rivals.
that
or
of
be
For
a
is
nd
of
seek
rst
example,
particular
to
possibly
specialized
to
a
hotel
attract
for
is
a
it,
that
may
it
this
agency.
an
primary
and
time
key
over
the
its
research
use
many
eld
and
over
collects
can
for
However,
takes
A
that
It
rst-
research
advantage
waiting
ights.
process
of
conduct
behaviour
out
through
be
will
consumers
cancellations.
may
connecting
research
collection
organization
gives
ight
who
carry
research
discover
to
of
spending
to
the
which
customers
the
patterns
decide
the
organizations
their
market
is
prone
their
because
of
access
airline
days
expensive
help
in
may
research
involves
Most
buying
changes
Firms
the
and
market.
specic
any
time.
research
the
out
primary
the
information
and
eld
anticipate
themselves
data
to
as
from
this
hours
research
requires
researchers.
Secondary market research
This
Also
is
the
known
exists
in
primary
to
gnitekraM 4
is
of
specic
of
get
cheaper
out
data
desk
an
a
of
the
not
eld
be
picture
However,
been
rst
measure.
research
researching
and
and
for
the
data
carry
Desk
the
collected
from
analysing
should
background
than
have
information
involves
gap-lling
available.
and
it
Organizations
overall
as
readily
needs
second-hand
research,
method
date
may
of
form.
research
involved
be
as
some
research
and
collection
of
the
information
purposes
In
is
a
quicker
information
collected
other
some
already
secondary
conduct
research
most
organization.
that
out
then
market.
than
cases
may
the
the
source
reliable.
Pmy m sch mhods
d chqus
Surveys
These
are
enable
may
or
questionnaires
the
researcher
contain
“no”
survey
answers,
may
to
different
sent
gather
types
multiple
focus
on
out
of
a
useful
particular
target
information.
question,
choice,
getting
to
for
audience
The
example
to
questionnaire
those
needing
or
open-ended
questions.
specic
information
from
A
“yes”
consumer
consumers
Key terms
by
Market research
seeking
their
opinion
implemented
in
a
on
a
number
particular
of
product
different
or
issue.
Surveys
can
be
the process of collecting,
ways.
analysing, and repor ting data
Some
of
the
most
common
ways
to
administer
surveys
include:
related to a par ticular market
●
by
mail
–
an
example
would
be
an
alumni
survey
distributed
Primary research
via
direct
opinions
mail
from
by
the
past
development
students
about
ofce
an
in
a
school
seeking
the
the collection of rst-hand
issue
information from the market
●
by
telephone
–
an
example
would
be
a
researcher
calling
consumers
Secondary research
to
elicit
their
opinion
on
using
a
certain
product
or
service
the collection of second-hand
●
online
–
for
example,
workshop
leaders
may
use
online
surveys
as
an
information from the market
evaluation
282
tool
to
seek
participants’
opinions
of
the
workshop.
4 . 4
They
enable
amount
of
researchers
data
in
a
to
collect
relatively
a
short
large
Surveys
●
period
of
If
intended
designed
and
well,
completed
surveys
easily
by
can
the
be
administered
The
●
respondents.
can
be
used
to
collect
information
wide
range
preferences,
of
aspects
and
including
poorly
can
constructed
undermine
and
otherwise
well-
may
they
provided
not
truly
be
an
feel,
by
respondents
accurate
with
some
on
reection
results
a
of
also
on
being
a
are
research.
answers
survey
how
Surveys
●
that
administered
time.
●
R E S E A R C H
Disadvantages
Advantages
●
M A R K E T
biased.
attitudes,
opinions.
As
●
large
prove
samples
to
be
construction
sampling
response
is
are
costly
and
usually
and
used,
up
a
can
used
bias
the
to
surveys
lot
administration.
generally
rates
use
of
time
While
select
results
can
in
their
random
participants,
of
a
survey
.
Interviews
An
interview
is
a
conversation
during
which
the
interviewer
asks
the
TOK discussion
interviewee
conducted
questions
one
on
in
one,
order
face
to
to
gain
face
or
information.
by
Interviews
can
be
telephone.
How does the language used
in questionnaires inuence
Disadvantages
Advantages
consumers and businesses’
conclusions when doing
can
provide
detailed
The
●
whole
process
can
gnitekraM 4
They
●
market research?
information
perceptions
consumers
about
and
the
be
opinions
through
of
as
in-depth
very
it
the
questioning.
time-consuming
involves
out,
usually
achieve
a
up
carrying
analysing
gathering
They
●
setting
interview,
it
responses,
feedback,
and
high
reporting.
response
rate
one-on-one
Precise
to
the
because
attention
wording
can
respondent
precise
meaning
claried
during
the
provided.
be
and
of
of
Some
●
tailored
be
the
may
therefore
inuencing
questions
the
interviewers
biased,
interviewees’
responses.
interview
process.
Focus groups
Focus
to
groups
discuss
who
are
segment
new
consist
specic
of
of
customers.
prepared
opinions,
product.
researchers
small
of
In
by
ideas,
or
the
the
all
the
number
idea.
of
The
customers
discussion,
market
and
Usually,
predict
a
product
representative
questions
their
a
their
of
They
responses
reaction
of
the
brought
comprises
the
business
participants
researchers.
reactions.
people
group
also
or
of
respond
Participants
may
together
individuals
be
freely
asked
a
specic
to
share
to
try
are
viewed
and
studied
larger
market
population.
a
to
help
283
4
M A R K E T I N G
Disadvantages
Advantages
As
●
focus
groups
individuals,
way
of
They
●
gathering
can
be
customers
rm’s
consist
using
a
a
small
is
a
cheap
market
used
to
of
them
to
and
of
The
●
easy
new
the
or
to
reect
it.
There
is
of
●
strategies.
help
the
identify
key
product
the
group
well
as
other
needs
not
and
its
addressed
by
They
provide
the
rm’s
and
number
it
of
about
could
be
the
that
individuals
do
the
not
possibility
not
opinions
that
express
on
the
some
their
members
honest
discussion
of
and
be
hesitant
to
express
topic.
their
own
especially
when
their
opinions
oppose
competitors.
insights
on
the
current
competitors
in
the
of
another
participant.
position
Focus
●
of
information
the
those
●
small
may
may
views,
business
seek
segment
requirements
They
as
a
or
of
the
personal
They
●
may
market
opinions
reaction
product
business
entire
research.
measure
rm’s
group
mind
of
groups
are
more
costly
to
carry
out
than
the
surveys
as
each
participant
usually
has
to
be
customer.
compensated
in
cash
or
in
kind.
Observation
Observation
by
carefully
is
a
fundamental
watching
and
and
trying
to
behaviour.
Some
observations
are
follow
trend.
Observation
can
how
this
quickly
consumers
gnitekraM 4
spend
queuing
trafc
department
provide
as
they
to
notice
wait
to
observe
recommendations
method
understand
scientic
be
their
pay.
the
for
basic
used
in
by
displays
It
can
ow
of
getting
certain
nature;
It
is
a
how
be
trafc
long
used
in
or
by
certain
to
all
check
they
a
people’s
not
may
government’s
areas
and
help
improvement.
Disadvantages
direct
information
behaviour,
how
things
however,
Advantages
●
information
supermarkets
or
also
of
method
when
as
people
the
of
collecting
studying
researcher
behave
in
a
data
actual
can
given
or
●
human
see
Complete
cannot
exactly
so
situation.
be
market
this
with
answers
to
obtained
any
by
researchers
other
problem
or
observation
need
methods
to
such
issue
alone,
combine
as
issuing
questionanaires.
●
A
in
large
a
number
short
space
of
individuals
of
can
be
surveyed
time.
●
Observation
or
●
Observation
is
usually
a
cost-effective
way
opinions
a
verbal
data.
Scody m sch mhods
o chqus
Academic journals
These
are
articles
publications
should
information
students,
or
Academic
well
given.
others
journals
distributing
284
be
of
The
experts
with
are
scholarly
referenced
knowledge
will
rst-hand
written
and
for
not
articles
to
as
written
provide
usually
the
a
sole
by
in
experts.
exact
include
experience
the
be
used
individuals
to
study
because
attitudes
this
usually
of
requires
gathering
cannot
of
a
purpose
source
The
of
the
professors,graduate
particular
of
money-making
subject.
providing
and
opportunity.
response
from
the
participant.
4 . 4
Academic
where
journals
they
experts.
R E S E A R C H
Disadvantages
Advantages
●
M A R K E T
are
This
undergo
checked
increases
by
the
a
peer-review
academics
reliability
process
and
of
Since
●
other
they
specic
the
the
contain
academic
best
source
information
interest,
for
they
of
very
may
general-interest
not
be
topics.
information.
The
●
●
Most
academic
current
●
journals
research,
They
are
need
of
They
take
less
reports,
andtopic-specic
therefore
original
include
good
sources
research
time
to
on
a
reviews
of
information.
when
a
rm
is
peer-review
consuming,
provision
in
processcan
which
of
the
may
latest
also
or
betime-
affect
current
the
event
information.
topic.
publish
than
books.
Media ar ticles
A
include
newspaper
newspapers
is
a
advertisements,
means
of
printed
and
since
magazines.
publication
containing
correspondence.
communicating
readership
and
the
rise
world
of
Once
events,
television
news,
viewed
newspapers
and
the
have
than
via
a
newspaper
communicating
is
It
●
via
declined
is
As
television.
Most
serious
newspaper
articles
have
researched,
sources,
not
●
the
They
and
case
are
found
in
written
edited
for
widely
many
for
some
with
that
communicate
of
the
producing
nished
were
events
paper
written
in
content,
may
is
real-time.
printing,
and
time-consuming,
be
out
of
date
by
been
time
they
are
delivered
to
the
customer.
reliable
accuracy,
Internet
available
retail
to
process
distributing
the
well
in
difcult
the
articles
●
articles,
dominant
Disadvantages
Communicating
cheaper
feature
the
Internet.
Advantages
●
as
gnitekraM 4
These
and
which
is
Newspapers
●
resources.
can
of
be
The
●
stores.
can
organization
process
considered
of
a
be
biased,
that
owns
producing
waste
of
depending
on
the
type
them.
newspapers
paper
and
could
energy
be
resources.
Government publications
These
are
topics.
articles
They
produced
could
provide
population
census
surveys
consumer
on
in
a
by
the
government
businesses
country,
with
statistics
expenditure
on
useful
on
social
a
wide
variety
information
trends,
or
on
of
the
even
patterns.
Market analyses
These
that
include
gather
reports
They
quite
are
can
and
a b o ut
usually
be
costly.
Mintel
comme r cia l
data
ca r r ie d
source d
at
p ubl icati ons
pa r ti cula r
out
by
va ri ous
Orga ni za ti ons
tha t
or
mar ke t s .
m a rk et
Th e
sp ec i a li st
loca l
m a r ke t
bu s in e ss
pr ov i de
int e ll i ge n c e
h i gh l y
such
r e se a r ch
l i br a ri e s,
r e por t s
r e por ts
de t a il e d
bu t
a ge n t s .
they
i nc lu de
are
D un ,
Verdict.
285
4
M A R K E T I N G
ETHICS
Marketing research has experienced a resurgence with the
Breaches of condentiality
widespread use of the Internet and the popularity of social
Another signicant ethical consideration involved in market
networking. It is easier than ever before for companies to connect
research involves breaches of condentiality. Companies
directly with customers and collect individual information.
regularly share information about customers with par tners
The way a company conducts its market research these days
and aliates, requiring the customer to opt-out of the sharing
can have serious ethical repercussions, impacting the lives of
if he [or she] doesn’t want to be involved. Some companies
consumers in ways that have yet to be fully understood. Fur ther,
sell information they have gathered on customers to outside
companies can be faced with a public backlash if its market
companies. Ethically, any unauthorized disclosure of customer
research practices are perceived as unethical.
information is problematic.
Deceptive practices
Objectivity
The ease with which a company can access and gather data
Marketing and adver tising have a signicant impact on public
about its customers can lead to deceptive practices and
perceptions. Market researchers have an ethical obligation to
dishonesty in the company’s research methods. The type of
conduct research objectively, so data is available that allows for
ethical problems could range from not telling customers that
the development of the varying issues noted. Researchers who
information is being collected when they visit a website to
allow their own opinions to bias their work tend to contribute to
misrepresenting research numbers by changing database
the continuation of stereotypes in adver tising. For example, a
numbers. Any action that uses lies and deception to nd out or
market researcher with a one-dimensional view of minorities
establish information about consumers falls under this category.
could do a fair amount of harm if allowed to shape an adver tising
campaign based on biased data collection.
Invasion of privacy
One of the most serious ethical considerations involved in
Source: http://smallbusiness.chron.com/ethical-considerations-
market research is invasion of privacy. Companies have an
marketing-research- 43621.html
unprecedented ability to collect, store and match information
Exam-style questions
relating to customers that can infringe on a customer ’s right
gnitekraM 4
1.
Describe two forms of marketing research.
[4 marks]
to privacy. In many instances, the customer does not know
or understand the extent of the company’s inltration into his
2.
[or her] life. The company uses this information to reach the
Discuss how and why ethics and globalisation
impact upon marketing research.
[10 marks]
customer with targeted adver tising, but the process of targeting
can have a chilling eect on personal freedom.
th dcs bw qulv d
quv sch
Primary
research
quantitative
Table
4.4.1
in
or
secondary
research
can
be
either
qualitative
or
nature.
shows
the
differences
between
qualitative
and
quantitative
research.
Table 4.4.1. Dierences between qualitative and quantitative research
Qualitative research
286
Quantitative research
This involves the collection of data about opinions,
This involves the collection of numerical data or data that
attitudes or beliefs.
can be measured.
Information is open to a high degree of interpretation.
Information is open to less interpretation.
It is subjective.
It is objective.
Key research questions would include “ Why?”
Key research questions would include “How many?”
The researcher is par t of the process.
The researcher is separate.
It provides multiple realities, i.e. the focus is complex
It provides one reality, i.e. the focus is concise
and broad.
and narrow.
4 . 4
Generally,
data
by
research
refers
to
things.
use
of
qualitative
observing
refers
the
are
Quantitative
customers
counts
and
bought
like
used
say.
seek
things,
collecting
used
to
sports
seek
sports
and
Surveys
the
interpreting
research
descriptions
qualitative
collect
to
and
R E S E A R C H
quantitative
qualitative
characteristics,
answers
may
company’s
of
analysing,
Whereas
interviews.
company’s
research
the
in
usually
may
the
and
measures
in-depth
methods
research
Qualitative
customers
and
collecting,
do
denitions,
methods
groups
publications
2013?
to
is
people
meanings,
Common
focus
research
what
M A R K E T
data
and
the
government
quantitative
question:
of
include
data.
How
shoes
in
the
month
answers
to
the
question:
many
of
May
Why
do
shoes?
Smpl mhods
reality
there
or
equipment
population
an
of
effort
or
to
to
is
target
carry
gather
a
market
of
a
be
Below
number
a
and
survey
of
a
research.
out
Sampling
of
of
the
For
of
of
a
in
the
to
large
used
money,
market.
still
population
small
number
the
sampling
is
a
clear
in
idea
required.
the
A
population
group
of
process
The
However,
have
represent
a
labour,
population.
a
and
example,
simply
commonly
of
whole
selected
is
energy,
research
sample
people
disadvantages
time,
consumers
primary
selected
product.
sample.
are
a
enough
potential
taking
under
appropriate
advantages
out
all
group
could
not
adequate
views,
small
consumers
buyers
simply
comprises
consumers’
sample
is
of
potential
of
selecting
methods
and
the
gnitekraM 4
In
the
each.
Quota sampling
This
involves
that
share
such
who
of
as
age
must
500
may
segme nti ng
certain
or
be
gen d e r.
perception
15
of
of fe r i ng
ma l e s
the
gi ve n
Ta rg e ts
inter v i e w e d
students
target
a
cha r a cte ri s ti cs
in
the
a nd
20
are
e ach
IB
This
is
a
di pl o m a
and
where
proportions
groups
in
to
of
the
cost-
●
method,
fo r
the
For
the
Results
different
population
obtained
reliable
random
g r ou ps
p eo ple
a
sc h oo l
r es e ar c h e r
obtained
always
t h e ir
are
sampling
than
sampling.
are
as
(see
done;
are
statistically
population
statistical
more
a
of
in
r eg a rd in g
representative
not
Findings
nu m be r
pr og ra mm e ,
of
s ub- g ro up s)
e xa m pl e,
i nt e r vie w
not
the
known.
●
nu m be r
Disadvantages
sampling
especially
s et
a
p r o g r a mme .
quick
effective
the n
in t o
e xc l u si ve
s e gm e nt .
fe mal es
Advantages
●
p opu l a t ion
( mut u a ll y
this
of
the
random
below)
also
is
leads
to
errors.
usually
those
of
●
The
interviewer
biased
in
the
interviewees
those
most
who
in
and
will
the
may
be
selection
of
choose
cooperate
process.
287
4
M A R K E T I N G
Random sampling
CHANGE
In
this
case
every
member
in
the
population
has
an
equal
chance
of
Technological innovation
being
selected
as
part
of
the
sample.
The
sample
of
respondents
has
is
transformed the way market
selected
randomly.
With
technology,
a
list
of
random
numbers
can
research is done.
be
generated
from
a
target
population
by
the
use
of
a
computer.
An
Social media has expanded the
example
of
selecting
a
random
sample
may
be
choosing
any
50
people
landscape
from
a
telephone
directory
containing
the
names
of
1,000
is transforming it in
peo
exciting new ways. Social media
allows unltered feedback abut
Advantages
Random
●
bias
as
Disadvantages
sampling
everyone
chance
of
being
reduces
has
an
The
●
equal
be
chosen.
sample
too
not
chosen
small
consist
requires new researching skills.
may
and/or
of
the
it
With new technology, researchers
can be much more targeted in
may
what they measure and who they
target
target. Using the most recent
population:
It
●
is
a
relatively
easy
way
a
larger,
more
of
social media and online survey
representative
obtaining
a
sample
may
sample.
products, businesses are able
have
to
be
selected.
to collect data about all sor ts of
things. They can do it faster, better
and cheaper than ever.
Stratied sampling
What do you think are some of
In
this
method
the
target
population
is
made
up
of
many
different
the major drawbacks inherent
groups
who
are
subdivided
into
segments
or
strata
that
share
similar
in conducting market research
characteristics.
Members
are
then
chosen
from
each
stratum
to
form
using the recent changes
a
representative
sample.
For
example,
a
secondary
school
may
be
in technology? How do you
deciding
to
introduce
a
new
school
uniform.
It
may
divide
the
school
think these drawbacks can be
gnitekraM 4
population
based
on
the
different
forms,
from
Form
1
to
Form
5.
A
addressed?
random
sample
the
same
the
above
in
a
is
then
proportions
example,
telephone
randomly
chosen
of
for
the
a
directory,
selected
to
from
sample
sample
10
make
each
in
size
students
up
the
sample
50
from
these
forms,
category
people
each
is
ensuring
maintained.
whose
form
that
names
(10
×
5)
As
in
appear
would
be
sample.
Disadvantages
selected
representative
target
each
of
required
Advantages
The
of
of
a
is
more
It
particular
is
not
strata
population.
easy
from
similar
to
a
select
relevant
population
of
very
characteristics.
Cluster sampling
This
is
an
appropriate
dispersed.
then
taking
wishing
few
This
to
a
will
random
set
up
geographical
selected
will
method
involve
be
a
sample
plant
areas
to
in
a
from
to
It
is
a
of
research
and
cheap
carrying
from
populations.
out
widely
geographically
clusters.
town
may
the
and
whole
dispersed
●
Results
each
For
carry
the
is
geographically
region
example,
out
(cluster)
a
of
and
multinational
research
opinions
on
the
just
a
clusters
population.
obtained
representative
population
especially
obtained
share
288
population
from
Disadvantage
quick
method
the
group
location
represent
Advantage
●
the
when
a
the
certain
around
assumed
use
selecting
of
and
if
the
from
similar
may
the
may
not
be
cluster
areas
be
whole
biased,
sample
where
is
people
characteristics.
4 . 4
M A R K E T
R E S E A R C H
Snowballing
This
is
a
process
individual
who
participate,
refer
be
to
the
so
on.
of
that
suggests
ARVs
they
customers
is
of
quite
the
It
is
a
or
initial
hence
sensitive
group
the
rst
use
for
their
contacts
example
It
where
or
could
effect.
individuals.
products
group
who
snowball
research,
sophisticated
the
individuals
HIV-positive
is
It
a
survey
also
the
to
may
used
range
of
limited.
Advantage
●
surveying
groups
know,
among
expensive
involves
other
Members
that
conducting
use
researching
potential
sampling
people
when
on
when
and
other
used
done
of
then
Disadvantage
cost-effective
obtaining
method
information
of
There
●
through
a
referrals.
is
potential
biased
sharing
sample,
similar
for
getting
since
friends
lifestyles
may
Exam tip
refer
of
each
the
other
same
and
be
part
sample.
In determining the best
sampling method to use, it
Convenience sampling
is
easy
a
sampling
access
doing
research
physically
from
be
the
rst
proximity
on
present
canteen
when
the
and
technique
the
at
ten
names
to
the
school
and
the
are
researcher.
could
or
in
patient
hospital,
list
to
a
students
a
a
on
by
of each method. A key
example
consideration is the level of
being
purchasing
the
strengths and weaknesses
their
teacher
study
Another
when
select
based
example,
conduct
lunchtime.
a
selected
For
interviewing
time
research
in
groups
canteen
directly
break
conducting
where
items
would
researcher
may
use
bias in the sample and how
cost-eective the method is.
gnitekraM 4
This
is impor tant to analyse the
This could also be inuenced
by factors such as nancial
sample.
resources, business size, and
Advantage
It
●
is
a
fast,
method
the
rationale of the research.
Disadvantage
easy
of
and
cheap
sampling
research
groups
●
because
are
readily
The
sample
and
not
the
be
entire
may
be
biased
representative
of
population.
Key terms
available.
Quantitative research
the collection, analysis and
rsuls fom d collco
interpretation of numerical data
Businesses
are
interested
in
the
range
of
results
they
get
from
carrying
out
or data that can be measured
research.
It
is
therefore
of
prime
importance
that
they
ensure
that
their
Qualitative research
data
collection
Whether
both,
the
for
it
methods
using
is
either
essential
appropriate
their
correct
Benets
of
to
data
use
are
appropriate
quantitative
maintain
collection
reduces
properly
in
the
instruments
likelihood
data
offer
qualitative
integrity
the
collected
or
and
high
data,
or
research
and
of
a
degree
a
sampling
accuracy.
combination
process.
providing
of
clear
errors
of
Selecting
instructions
occurring.
the collection, analysis, and
interpretation of data about
consumer opinions, attitudes,
or beliefs
Sample
include:
a group of people selected to
●
the
ability
●
the
●
increased
of
research
to
answer
accurately
the
research
questions
posed
represent the population or
ability
to
repeat
and
validate
a
particular
study
where
needed
target market under research
accuracy
of
ndings
resulting
in
efcient
use
of
resources
Sampling
●
good
opportunities
further
for
investigation.
other
researchers
to
pursue
areas
needing
the process of selecting an
appropriate sample
289
4
M A R K E T I N G
The
heart
of
research
is
gathering
reliable
information
about
an
issue
or
TOK discussion
intervention
results.
and
analysing
Collecting
and
it
to
determine
analysing
the
quantitative
signicance
data
can
help
of
the
sample
highlight
To what extent is market
connections
(correlations)
among
variables
and
also
address
other
research information reliable?
factors
the
qualitative
researcher
data
experiences,
gaining
a
the
even
should
better
not
provide
including
required
researcher
obtain
can
may
what
have
insight
may
knowledge
continue
results
in
considered.Collecting
into
need
from
the
evaluating
the
next
the
to
varying
be
the
research
or
changed.
information
whole
analysing
participant
improved
research
and
process
in
On
provided,
an
effort
to
round.
yduts esaC
M sch – a cs sudy of Sfcom
Safaricom is the leading telecommunications company
Safaricom subscribers can par ticipate. The second
operating in Kenya. It provides a host of products and
solution Safaricom can have a charity event were the
services for telephony, GPRS, 3G, EDGE and data and fax.
money they make goes to a special cause for example
food aid, tree planting etc this would aect the market
It has been faced with a number of problems with
socially. And the nal solution would be Supremacy to
time, one of which is the entry of many other
control the telephony industry by outmatching other
telecommunication companies into the market over
operators to be the rst to launch Apple’s iPhone 3G. To
the years. The companies include, Telkom Orange,
do all this they have to carry out extensive research to
Yu and Zain. So far the main rival is Zain. The problem
help in a decision.
caused by the entry of other companies is that they
gnitekraM 4
bring about unwanted competition (decrease in market
Safaricom decided to be the rst to launch the Apple’s
share). This problem can be solved by conducting
iPhone 3G increasing the competitor advantage. The
marketing research.
third step would be to market research to enable
the rm to make an appropriate decision on all the
The rst step in the marketing research process is
elements of the marketing mix as well as reduce the
identifying and dening your problem. Dening the
risk of investing in an unprotable marketing venture.
problem would mean expanding on it and explaining
Since Safaricom is a long established rm and has
why it should be seen as a problem. In this case
a network running across Kenya they decided to
Safaricom has identied a number of competitors as
launch the product in a limited geographical area
the threat of losing customers and reducing the market
where demand is observed. The price was high as it
share, which will lead to lower prot margins and growth
was a unique product to capture non price sensitive
at the end of the year is contrary to what they want.
consumers who see new products as a novelty and as
Step two is to develop your approach, generally
the product would grow older the price is reduced to
speaking the approach should be developed almost
capture the more price sensitive consumer. It will be
exclusively around a dened set of objectives. Clearer
launched in Westland’s Nairobi next to two shopping
objectives developed in step one will lend them to
malls and excessive adver tisements will be done to
a better approach development. Developing your
ensure consumers receive information about the new
approach should consist of an honest assessment
and exciting product.
of your team’s market research skills, establishing
Step four is called data collection or survey elding.
a budget, understanding your environment and its
Generally data analysis is concerned with editing,
inuencing factors and formulating hypotheses.
coding and presenting collected raw materials into
Safaricom has to nd an approach to counter the
a form suitable for solving the research problem and
problem they are facing, which is competition. A
making decisions. The data collected from the test
chosen team at Safaricom came up with a number of
marketing research would include diagrams, sales,
possible solutions and chose one that was eective.
etc this would enable us to evaluate it and make the
The rst solution would be to introduce lower call rates
decision on whether to launch the product ocially in
for subscribers and introduce a competition which only
the whole of Kenya.
290
4 . 4
M A R K E T
R E S E A R C H
Step ve is the analysis of the collected information.
threats of launching the product. In this case Safaricom
Data presentations methods chosen should allow
launched the iphone 3G as their research in this
for easy interpretation of the research ndings by
area was positive, however this was a test on a small
the analyst. Use of char ts and diagrams make this
group that may not eectively represent the whole
possible as they can plot the data to show trends
market behaviors.
and relationships between variables. Test marketing
Adapted from http://www.123helpme.com/marketing-
provides rst hand information about the market and
research--view.asp?id=166275
also revenues are collected during collection of data.
For example the analyst can use a graph that shows
Exam-style questions
the trend of the sales to help in making decisions.
1.
Outline two challenges that companies such
Step six involves the market research repor t. The
as Safaricom may face when carrying out
repor t must provide the readers (sponsor) with the
market research.
[4 marks]
information they require in a format they are able to
understand and appreciate. Vocabulary, presentations,
2.
Evaluate Safaricom’s strategies to overcome
analysis methods used should match the readers
competition.
[8 marks]
levels and demands. Also the repor t should contain
Student workpoint 4.8
Be an inquirer
out
carries
an
out
investigation
market
1.
What
are
2.
Does
3.
Comment
it
the
use
primary
qualitative
on
on
research.
the
and
or
any
In
organization
the
process,
secondary
research
quantitative
sampling
method
of
or
your
consider
choice
the
following:
methods
research,
methods
or
it
that
gnitekraM 4
Carry
it
uses?
both?
uses.
rvso chcls
✓
Market
research
analysing
✓
Primary
are
✓
the
✓
In
in
business
data
decision
related
research)
which
and
market
methods
research
to
a
making
by
particular
secondary
research
include
methods
government
Quantitative
numerical
analyses
✓
(eld
ways
research
Secondary
of
in
can
surveys,
collecting,
market.
research
be
(desk
carried
interviews,
research)
out.
focus
groups
observations.
articles,
✓
aids
reporting
research
two
Primary
and
and
and
research
data
as
concerns
compared
interprets
conducting
market
methods
businesses
accuracy
while
include
publications
data
the
to
are
maintaining
market
collection,
qualitative
about
research
use
academic
and
it
consumer
is
analysis
research
integrity
in
and
the
that
offer
and
that
opinions,
important
appropriate
journals,
media
analyses.
attitudes
the
a
interpretation
collects,
data
high
research
or
beliefs.
collection
degree
of
process.
291
4
M A R K E T I N G
Pcc quso
Global
In
Brand
1984,
which
Professor
consumer
should
market
companies
single
global
the
is
bank
HSBC,
tool
Amazon
in
and
advertising.
decreasing
to
50%
of
through
gnitekraM 4
in
the
at
a
biggest
variety
at
brand
to
brand
brands
is
no
a
a
2005
by
that
in
the
operate
consistent
value
world
businesses
accident
in
such
in
global
as
as
impact.
20%
by
The
using
of
the
cable
have
mass
media
channels,
replaced
traditional
advertising
generation
brands,
value
little
with
Coca-Cola,
cut
and
TV
and
mass-market
as
just
including
traditional
McDonalds,
advertising
are
from
80%
2004.
advertising
The
Korean
brand
gadgets
the
and
into
video
electronics
value
sponsored
Samsung
use
New
McDonalds
in
through
groups
plan.
huge
online
and
It
created
successful
value
create
hundreds
increasingly
budget
gainer
of
into
smaller
children.
entertainment
which
building
gained
to
products.
in
had
that
worldwide.
spending.
shifted
aimed
and
increased
brands,
marketing
has
often
Samsung,
have
older
technology
world
marketing
traditional
its
Promotion
lms,
e-Bay,
the
split
brands
overall
Even
of
have
aimed
Today,
an
in
example,
approach
magazines
increase
message
networks
publications.
one
for
that
converging
standardized
biggest
advertising
TV
specialist
the
argued
were
everywhere
traditional
over.
Leavitt
tastes
globally
with
brands
same
The
Values
in
2005,
movie,
played
a
games
and
manufacturer,
promoted
“The
its
Fantastic
brand
Four”,
part.
[Source: adapted from Global Brands Business Week, July 2005 and Should Global
Brands Trash Local Favourites? brandchannel.com]
a)
Examine
the
bankHSBC
b)
Evaluate
advantages
operating
possible
thatcompanies,
toensurenew
Using
examples,
explain
media
292
2007
secondary
of
are
can
like
of
new
the
world.
[ 6marks]
research
conduct
effective
in
customers.
marketing
large
rms
the
market
McDonalds,
impact
the
of
around
approaches
the
on
brand
and
potential
promotionalstrategies
May
and
Coca-Cola
and
disadvantages
single
promotional
andadvertising
IB,
and
a
primary
like
targetingexisting
c)
as
[8
marks]
[6
marks]
technologies
objectives
corporations.
and
4.5 The four Ps (product, price, promotion, place)
By the end of this chapter, you should be able to:
➔
draw a product life cycle and identify its various stages
➔
analyse the relationship between the product life cycle and the
marketing mix
➔
examine and recommend various ex tension strategies that could be
used by rms
➔
comment on the relationship between the product life cycle,
investment, prot and cash ow
➔
evaluate an organization’s products using the Boston Consulting
➔
explain aspects of branding
➔
discuss the impor tance of branding
➔
examine the impor tance of packaging
➔
justify the appropriateness of using par ticular pricing strategies
➔
evaluate the impact of new technology on promotional strategies
➔
discuss guerrilla marketing and its eectiveness as an innovative
gnitekraM 4
Group (BCG) Matrix.
promotional method
➔
comment on the impor tance of place in the marketing mix
➔
examine the eectiveness of dierent types of distribution channel
A
product
that
or
is
is
any
offered
to
good
the
(tangible
market
item)
with
the
or
aim
service
of
(intangible
satisfying
offering)
consumer
needs
wants.
th poduc lf cycl
A
product
life
development
stages
in
their
saturation,
cycle
to
its
life
and
shows
decline
cycle:
in
the
the
course
that
market.
development,
a
product
Most
takes
products
introduction,
go
from
its
through
growth,
six
maturity,
decline.
Stage 1: Development
In
1.
this
stage
the
Generating
of
product
ideas
stakeholders
help
satisfy
include
others.
–
are
employees,
gaps
that
designed,
this
is
a
consulted
consumer
Conducting
potential
is
needs
may
to
come
and
in
up
wants.
These
the
also
series
session
with
managers,
research
exist
this
brainstorming
department
market
following
steps:
where
anything
a
that
stakeholders
and
helps
of
customers,
in
number
may
may
among
identifying
any
market.
293
4
M A R K E T I N G
2.
Screening
(poor
product
too
3.
and
ideas
product
a
Carrying
changes
the
A
costing
so
the
that
test
a
the
all
At
of
this
not
rm
are
no
the
sales
yet
are
well
is
rst
the
of
a
developed.
product,
ideas
to
(good
while
could
give
It
or
leave
ideas).
others
trial
allows
especially
customers
sell
to
out
Some
may
be
could
feedback
by
also
that
form
for
the
be
of
a
visualization
production
provided
would
help
with
if
any
and
and
after
of
making
the
representative
or
sales
well,
it
of
the
can
be
the
developed
part
of
product.
changed
the
At
or
necessary
product
market
this
are
to
stage,
removed
assess
if
the
without
much.
the
of
–
samples
but
–
after
a
market
the
research
money,
sell
prototype
marketing
too
elements
stage
time,
a
of
product,
small
product
the
–
they
demand
does
or
which
further
necessary.
the
in
deciding
research
practical
group
Commercialization
of
be
others
select
out
potential
product
not
to
produce.
which
are
to
launched
5.
to
prototype
alterations
4.
involves
ones
examination
department.
the
this
prototype
from
physical
–
which
may
expensive
Creating
or
ideas
ideas)
successful
takes
marketing
and
effort
is
development
no
marketing,
This
will
a
full
involve
launch
the
use
of
mix.
invested
therefore
test
place.
in
prot
costs
are
developing
is
very
the
experienced.
high
as
product.
Cash
a
lot
There
ow
is
also
negative.
gnitekraM 4
Stage 2: Introduction
This
is
the
because
Costs
that
as
the
or
is
an
used.
be
to
is
still
may
the
yet
are
used
Where
increase
and
than
it
the
there
are
low
is
could
of
the
be
cash
especially
is
be
likely
prices
or
products,
where
there
for
are
penetration
charged
long
informative
restricted
low
negative
High
competitors,
could
in
highly
ow
inow.
are
existence.
technological
product,
sold
Sales
product’s
therefore
the
many
prices
market.
the
cash
cellphones,
or
the
of
brand-new
awareness
products
to
Moreover,
for
or
on
aware
high
greater
be
strategy,
high-income
product
not
computers
Expensive
targeting
the
are
protable.
competitors.
might
effort
of
launch
not
outow
personal
no
pricing
In
the
is
skimming
example
few
in
product
cash
stage
consumers
incurred
the
price
launch
most
retail
term.
advertising
outlets
consumers.
Key terms
Price skimming
Stage 3: Growth
setting a high price when
Once
the
product
is
well
received
by
the
market,
the
sales
volumes
introducing a new product to
and
so
revenues
start
to
increase
signicantly.
This
translates
to
rising
the market
prots,
of
unit
prices
especially
costs.
that
with
Cash
were
the
ow
possibility
now
initially
low
of
becomes
economies
positive.
(through
of
After
penetration
scale
a
or
lowering
successful
pricing)
launch,
can
Penetration pricing
now
setting a low initial price for
be
increased
to
maximize
prots.
On
the
other
hand,
products
that
a product with the aim of
started
at
high
prices
(through
price
skimming)
can
have
their
prices
attracting a large number
reduced
slightly
because
of
increased
competition
attracted
by
the
prots.
of customers quickly and
Advertising
becomes
persuasive
so
as
to
convince
consumers
to
buy
more
gaining a high market share
products
294
and
establish
brand
loyalty.
A
larger
number
of
distribution
4 . 5
outlets
are
used
to
locations.
To
regarding
product
push
maintain
the
T H E
product
consumer
F O U R
to
and
( P R O D U C T,
different
demand,
improvements
P S
P R I C E ,
consumers
discussions
in
begin
P R O M O T I O N ,
P L A C E )
various
on
issues
developments.
Stage 4: Maturity
At
this
well
stage
positive
little
of
sales
established,
cash
growth
these
continue
with
ow.
as
role
to
maintain
as
range
Plans
on
of
new
or
competitors
sales
distribution
product
rms
introducing
(This
is
at
do
its
entered
at
bay.
growth
so
the
and
and
market
are
strategies
product
at
to
an
to
is
a
brand
has
the
high,
take
life
but
a
with
advantage
are
loyalty.
A
very
established.
stage,
of
is
in
reminding
been
advanced
extend
product
resulting
strategies
assumes
emphasize
the
The
share
prot
pricing
Promotion
for
slowly.
market
peak
promotional
developments
further
they
signicant
is
outlets
extension
discussed
but
and
have
Competitive
keep
rise
revenue
competitors
prots.
to
so
to
stable
Sales
preferred
wide
a
with
their
some
products.
below.)
Stage 5: Saturation
Sales
still
of
many
are
at
competitors
their
positive.
the
stiff
pricing
market
is
Many
and
also
use
in
consumers.
Prots
levels
effort
high
have
to
has
and
market
to
to
of
fall.
out
extension
outlets
are
the
begin
forced
will
use
high
an
distribution
and
are
Prices
rms
advertising
geographical
entered
point
businesses
competition.
share
aggressive
to
Some
used.
have
highest
of
be
and
the
reduced,
to
promotional
maintain
mostly
cash
market
strategies
been
saturated
However,
sales.
so
as
a
competitive
activities
established
to
is
result
stabilize
The
it.
ow
their
such
widest
get
the
gnitekraM 4
Here,
as
range
of
products
stable.
Stage 6: Decline
This
of
a
stage
signies
product.
product
models
sales
may
of
a
Promotional
that
are
in
have
too
steady
lost
drop
cash
its
have
appeal
been
in
product
activities
are
reduced
protable
to
sell
are
sales
begins
the
off
is
kept
through
fall
of
to
slowly
and
any
and,
to
eyes
introduced
the
cases
in
ow
low,
most
not
the
addition,
product
become
lowered
In
but
is
consumers
replace
the
withdrawn
at
existing
this,
still
a
prots
because
old
from
minimum.
stock.
the
positive.
model.
the
If
market.
Prices
Distribution
The
new
are
outlets
closed.
selaS
introduction
growth
maturity
saturation
decline
Time
Figure 4.5.1. The product life cycle.
295
4
M A R K E T I N G
exso ss
Extension
by
strategies
lengthening
at
the
Here
maturity
are
some
products’
They
●
life
sell
They
was
nd
They
They
For
gnitekraM 4
in
to
of
a
As
this
determine
on
be
sales
demand
life
mere
a
the
money
on
falling
done
cycle.
extend
They
and/or
example,
of
their
might
export
the
device
uses,
This
and
sell
them.
cellphone
but
including
could
colour
persuade
washing
of
now
the
offering
helped
include
the
them
detergent
has
a
be
opened
package
to
buy
OMO®
sustain
to
the
has
been
demand
for
it
to
accounts
a
example
based
is
on
banks
their
customers
for
“Sheria”
them
–
account
s tr a teg i es .
campa ig n s
pr oducts,
are
ther e
Fo r
to
by
to
its
in
may
to
having
income
with
for
various
example
appeal
e xa m p le ,
e n c ou r ag e
he lp in g
have
to
to
 rm s
c o n su m er s
r e vi ve
know
efcient
a
where
–
it
its
one
as
videotape
since
well
as
of
drop.
product
easy
to
businesses
forecasting
is
based
sales.
on
as
part
of
its
therefore
its
lie
in
be
the
resources.
product
would
recorders
Some
success
to
always
effects
products
declining
mature
always
is.
not
begin
external
would
example
a
future
negative
management
terminally
resources
may
introduced
situation
of
long-term
sales
not
product
any
products
the
and
is
However,
on
to
life
it
unexpected
have
existing
a
obtained
inuence
this
to
cycle
this.
Moreover,
the
However,
life
results
saturated
extend
starts.
in
may
important
becomes
assist
the
marketing
One
open
faith.
better
sales
In
on
may
accommodated
special
strategies
strong
it
rm
more
of
the i r
rm’s
that
also
p r o mo ti ona l
exactly
a
segments.
customers
have
recession
money
waste
markets.
For
and
which
market
market
trends,
for
for
Spending
is
p r o d uct.
in
strategy.
for
cycle
the
would
products
extension
life
to
from
This
selaS
the
critical
their
have
example,
use
country
packaging.
a d v e r tis ing
using
accurate.
For
sales
services.
the
bank
new
forecasting
may
p r o d u c t ’s
variety
interest
Muslim
new
where
entirely
new
the
decline
predicting
factors
296
as
it
a
stop
cycle.
communication
wider
have
and
extension
result,
before
use
for
business
a
of
continue
Essentially,
a
appearance,
that
Barclays
create
demand
new
product.
basic
times,
banks
beliefs
develop
could
a
example,
different
Some
Kenya,
They
of
to
life
time.
customers
●
into
p r o d u c t ’s
design,
accounts
religious
firms
businesses
within
online
many
target
different
stages
the
as
consumers’
long
levels.
for
much
the
the
repackaged
●
a
other
change
stimulate
a
by
p r o d u c t ’s
methods
regions
uses
has
and
product.
the
products
other
new
changing
for
saturation
common
smartphone
●
or
introduced
banking
attempt
cycles:
in
rst
an
extending
existing
products
●
are
or
be
today.
is
Time
a
spending
Figure 4.5.2. Extension strategies in a product
life cycle
4 . 5
T H E
F O U R
P S
( P R O D U C T,
P R I C E ,
P R O M O T I O N ,
P L A C E )
Table 4.5.1. Summary of the relationship between the product life cycle and
marketing mix strategies
Strategies
Introduction
Product
Growth
Maturity
Saturation
Decline
The basic product
Product
New product
Extension
Weak products are
is marketed.
improvements
development is
strategies are
withdrawn from
or new product
at an advanced
critical to maintain
the market.
development
stage. Extension
sales.
plans star t.
strategies are
introduced in
some cases.
Price
Cost-plus,
Penetration prices
Competitive or
Competitive
Price cuts are
skimming or
slightly increase.
promotional
pricing is used.
made.
penetration
pricing is used.
pricing is used.
Promotion
Informative
Persuasive
There is extensive
Aggressive
Adver tising is
adver tising is
adver tising is
adver tising to
adver tising is
reduced to a
used.
used.
remind customers
carried out to
minimum.
of the product.
emphasize the
brand’s benets
Selective or
Intensive
There is more
The widest range
There is selective
restricted
distribution or
intensive
of geographical
distribution and
distribution takes
more distribution
distribution or
distribution
unprotable
place.
outlets are used.
a wide range
outlets is used.
outlets are
of distribution
gnitekraM 4
and dierences.
Place
eliminated.
outlets.
Table 4.5.2. Summary of the relationship between the product life cycle, investment,
prot, and cash ow
Product life
Development
Introduction
Growth
Maturity
Saturation
Decline
Investment
High research
High costs on
Average
Lower costs
Cost focus is
Very low
level
and development
promotion
to high
on promotion
on extension
costs on
strategies
promotion
cycle stage
costs
costs on
promotion
Prot
None
Cash ow
Negative
None or
Some prot
High prot;
High and
Decreasing
negative
and rising
reaches its
mostly stable
prot
peak
prot
Positive
Positive
Negative but
Positive
Positive but
improves with
decreasing
sales
cash ow
th Boso Cosul goup (BCg) Mx
Product
up
a
portfolio
business.
protable
product
A
analysis
business
products
portfolio
and
is
a
will
phase
analysis
process
want
out
method
that
to
the
evaluates
invest
more
weaker
was
products
resources
ones.
developed
the
A
by
very
the
into
making
its
common
management
297
4
M A R K E T I N G
consulting
rm
Matrix
the
Matrix
on
the
is
has
a
captured
high
–
the
These
of
easily
Cash
in
a
mature
to
hold
on
gnitekraM 4
should
as
is
in
the
growth
and
and
However,
rapid
growth
market
a
tha t
a
product
matrix
is
new
high
need
status
slows
high
in
competing
customers.
growth
market
generate
they
and
where
ha ve
co mpr is e
r e sult,
g ener a te
ha ve
the
rms
With
down,
a
a
low
mar ke t
time,
they
gr owt h
wel l -e s t abl is h ed
bus i ne s se s
The
pr oduc t
g ood
wil l
of
pr e se n c e
hi gh e r
pr i c es
p ro du c t s
i nve s t
sa l es
a mo u nt
stro n g
sl ig htl y
for
prospects
ar e
l es s
h i gh
c as h
f or
and
the
in
the
to
in c r ea s e
mar ke t ,
th e ir
to
are
to
succeed.
could
be
market
Businesses
problem
should
to
increase
growth
children
eliminated.
Market share
high
or
and
little
rm
and
Stars
replaced.
many
may
of
be
cash-ow
if
to
competitive
which
ones
with
concern
needed
market
ercely
about
which
a
wol
with
high
a
products
are
money
they
selective
and
share
business.
with
faced
very
if
in
are
They
low
markets
the
products
strategy
of
the
operating
stars
future
be
these
sustaining
be
amount
Moreover,
These
share.
products
markets
the
large
are
into
marks.
market
growth.
in
low
Businesses
problems
and
growing
for
need
the
market.
generate
offer
of
low
htworg tekraM
income
question
and
market
market
not
or
marketing
are
operate
therefore
they
continue
them.
Figure 4.5.3. The BCG Matrix
298
rate
axis.
market,
market
growth–share
market
market
sha r e .
cha r ge
products
hard
low
declining
may
the
attracting
their
The y
a nd ,
develop
These
are
the
good
think
low
They
growth
horizontal
the
BCG
hgih
in
a
have
They
that
in
the
should
Dogs.
and
The
cows.
ma r k et
growth
because
that
need
that
by
and
p r o d ucts
children
share
mean
●
of
market
business.
their
products
the y
market
the
product
This
in
fast-growing
are
ev e n
the
share
a
much
Boston
margins.
businesses
they
the
can
market
their
so
high
products
for
s ha r e .
thei r
how
the
on
the
Matrix .
categories:
sustain
a
share
market.
with
cash
mark e t
As
Problem
and
into
protable
high
in
These
to
businesses
to
mature
market
business.
●
income
market
turn
cows.
prot
products
of
gain
four
at
as
(BCG)
measures
attractive
the
successful
products
high
in
known
Group
that
looks
following
are
Group,
market
how
share
strength
are
and
very
shows
especially
these
matrix
relative
investment
eventually
●
its
They
market,
as
rate
amounts
levels
and
market
into
share.
can
axis
growth
Stars.
Consulting
Consulting
growth–share
relative
classied
●
Boston
Boston
vertical
Market
while
or
Question marks
4 . 5
T H E
F O U R
P S
( P R O D U C T,
P R I C E ,
P R O M O T I O N ,
P L A C E )
BCG Matrix strategies
an
the
●
effort
Holding
market
in
●
to
following
the
support
strategy
share,
market.
Some
strategy
products
necessary
portfolio
be
the
–
focus
that
this
the
here
they
so
as
which
to
be
children,
products
needed
be
increase
here
be
their
turning
ow.
could
on
could
focus
cash
is
on
cows
the
positive
problem
maintain
will
centres
cash
–
cows,
and
dogs,
used:
on
in
a
high
position
ensure
problem
invested
These
used
to
market
is
with
current
in
sustained
children
into
promoting
or
share.
milking
the
products
investing
benets
provide
in
the
the
other
products.
strategy
or
well
sold
in
–
this
off.
The
boosting
is
where
the
resources
the
poor-performing
freed
performance
up
of
from
the
this
other
dogs
will
are
need
products
to
in
portfolio.
product
(nance
(high
a
cash
be
investment
strategy
with
out
used
the
product
nance,
Divesting
phased
from
the
Harvesting
of
A
–
Building
Money
stars,
could
ensure
demand.
distributing
●
to
consumer
stars.
●
the
strategies
portfol i o
tha t
generator s )
market
However,
seriously
a
wi ll
grow th)
relativ e l y
drain
an y
ha s
a
go od
n u m ber
e ffe cti ve ly
pr od ucts ,
l a r ge
for
ca sh
a ble
to
e xa m p le
numb er
p o s i ti ve
be
of
of
o w
do gs
s t a rs
i n ves t
in
p ro bl e m
and
fr om
and
the
c a sh
the
cows
oth er
c h il dr en .
pr oble m
b u s in e ss
c h i ld re n
if
this
is
gnitekraM 4
In
c an
no t
Key terms
well
checked.
Product
The limitations of the Boston Matrix
any good or service that is
oered to the market with the
●
It
focuses
on
the
current
market
position
of
the
rm’s
products,
with
aim of satisfying consumer
little
advice
or
information
for
future
planning.
needs or wants
●
It
may
be
a
time-consuming
and
complex
exercise
for
businesses
Product life cycle
to
dene
market
or
classify
their
products
according
to
market
share
and
the course a product passes
growth.
from its development to its
●
High
market
share
does
not
necessarily
equate
to
high
prots.
This
is
decline in the market
because
may
sales
have
a
revenue
could
downward
be
effect
gained
on
a
using
rm’s
competitive
pricing
that
Ex tension strategies
protability.
plans by rms to stop sales
from falling by lengthening
Student workpoint 4.9
the product’s life cycle
Be a thinker
1.
Draw
2.
Why
3.
Discuss
Boston Consulting Group
the
product
life
cycle
and
explain
each
of
its
Matrix
stages.
an analysis method of a rm’s
are
extension
strategies
important
to
a
business?
product por tfolio regarding
BCG
the
signicance
Matrix
for
a
large
of
the
varying
business.
product
portfolio
in
the
its market share and market
growth
299
4
M A R K E T I N G
Bd
A
brand
may
differentiates
process
add
of
value
to
consumers
global
brands
among
dened
rm’s
a
a
name,
one
view
or
from
a
product
can
or
design
a
is
another
strong
Examples
Coca-Cola,
that
Branding
from
have
product.
Samsung,
sign,
competitors.
Branding
perceive
Nike,
symbol,
its
business’s
product.
include
many
as
product
distinguishing
great
how
be
a
of
the
and
can
inuence
on
well-known
Google,
and
KFC,
others.
Aspects of branding
Brand awareness
This
refers
to
availability
creating
is
it
is
awareness
beverage
ability
rm’s
awareness
very
will
sell
the
showing
awareness
competitors
more
of
a
a
major
than
to
its
very
it
of
businesses
related
between
the
competitors’
is
soft
easily
in
sales
market
should
rm’s
with
the
their
share
by
serve
a
A
as
product
and
product,
take.
product
For
and
its
brand
example,
in
most
high
a
In
because
available
minds.
can
a
greatest
products.
drinks
recognized
and
existence
promote
products
one
product
many
the
effectively
step
portrays
higher
amount
recognize
To
promoting
result,
are
image
leads
the
is
to
service.
Coca-Cola®
the
often
or
difference
As
there
name
consumers
when
little
products.
industry
However,
of
good
important
usually
competitors’
clearly
a
brand
addition,
there
the
of
the
in
the
market.
consumers,
level
strong
of
brand
indicator
to
commands.
gnitekraM 4
Brand development
This
is
any
market.
It
plan
is
increasing
a
to
improve
way
the
of
or
strengthen
enhancing
power
of
its
the
name,
the
brand
symbol,
image
of
awareness
or
sign,
a
product
of
a
in
product
ultimately
the
by
leading
Key terms
to
higher
sales
and
in
promotional
to
persuade
market
campaigns
consumers
to
share.
such
Businesses
as
sales
purchase
may
have
promotions
their
products
to
and
and
invest
more
advertising
Brand
therefore
a name, symbol, sign, or
further
develop
their
brands.
Offering
free
samples
is
a
common
way
design that dierentiates
businesses
producing
consumables,
such
as
Cadbury’s,
use
to
provide
an
a rm’s product from its
opportunity
for
consumers
to
taste
or
try
their
products
in
an
effort
to
competitors,
woo
them
to
buy
their
brands.
Branding
Brand loyalty
the process of distinguishing
This
is
when
consumers
become
committed
to
a
rm’s
brand
and
are
willing
one rm’s product from
to
make
repeat
purchases
over
time.
Brand
loyalty
is
a
result
of
brand
another
preference,
with
brand
brands,
where
loyalty
despite
consumers
will
the
prefer
consistently
high
prices
of
one
brand
purchase
some
over
products
products,
another.
from
because
Customers
their
they
preferred
feel
Brand awareness
the
the ability of consumers to
added
value
the
brand
carries
justies
its
price.
Successful
businesses
will
recognize the existence and
often
employ
a
variety
of
marketing
strategies
to
cultivate
loyal
customers.
availability of a rm’s good or
In
so
doing,
these
businesses
develop
brand
ambassadors.
These
are
service
consumers
it
among
who
their
will
market
colleagues,
marketing
by
image
reputation
word
of
a
particular
friends,
mouth,
or
which
brand
relatives.
is
very
by
talking
They
help
effective
in
positively
provide
about
free
enhancing
Brand loyalty
the
when consumers become
and
of
a
business.
Samsung
is
a
name
that
is
establishing
committed to a rm’s brand
strong
brand
loyalty
in
the
electronics
industry
and
beneting
signicantly
and are willing to make repeat
from
consumer
recommendations
or
marketing
by
word
of
mouth.
purchases over time
300
4 . 5
T H E
F O U R
P S
( P R O D U C T,
P R I C E ,
P R O M O T I O N ,
P L A C E )
Brand value
This
refers
potential
business
have
This
is
a
coffee
high
One
at
much
and
make
because
brands.
brand’s
brand
value
its
are
would
value
value.
of
a
a
a
Brand
as
value
pay
consumer
coffee
act
as
terms
at
a
of
of
is
its
a
high
the
another
by
reputation,
extra
assets
café.
values
which
to
to
a
a
a
Brands
business.
obtain
such
higher-priced
Such
are
a
money
name.
price
purchasing
Brand
code
its
brand
considerable
to
business.
and
in
because
willing
be
of
“personality”
worth
products
are
instead
overall
is
regarded
consumers
example
the
a
market
from
Starbucks
increase
a
how
income,
can
that
of
to
brands
an
also
expression
particular
brand
The values associated with
lives.
Brand
values
are
also
those
things
that
cause
customers
to
buy
Starbucks keep many customers
a
rm’s
product
rather
than
its
competitor’s
product.
They
help
in
coming back , even though
differentiating
a
business
and
making
it
seem
in
some
way
special
and
cheaper alternatives are available
better
than
at
heart
the
its
competitors.
of
successful
Emphasizing
a
rm’s
brand
value
is
therefore
branding.
The impor tance of branding
heavy
known
from
For
one
and
the
work
that
to
can
audience
be
Businesses
high
the
with
minds
for
of
consistently
earn
and
high
by
most
simple
impact
men
to
of
its
and
not
in
As
can
because
on
a
consistently
provided
been
any
is
type
the
widely
of
business
–
companies.
a
clear
business
and
the
Despite
brand
try
to
it
image
grows,
with
it
establish
is
critical
expectations
expectations
of
can
its
brand
that
of
its
the
the
target
target
sales.
use
the
will
the
regular
have
of
a
for
Initially,
the
decreased
enabling
the
meets
meet
Consumers
quality,
marketers.
that
customers
image,
brands
products
of
factor
immediately.
result
brands
giving
business.
does
margins
their
essential
market
consumers.
high
tasks
ensuring
price
skimming
image
associate
businesses
basis.
For
the
such
to
as
charge
has
brands
make
example,
good-quality
viewed
or
brand
cars
in
with
good
sales
Mercedes
to
the
representing
and
Benz
global
good
quality
consumers.
Moreover,
services
the
in
well-established
about
the
well-known
have
and
is
that
their
prot
BMW
market
an
recognized
bound
prices
is
large,
perceptions
Branding
is
it
the
important
required
associate
brandcomplements
audience.
most
branding
can
customer
it
the
recognized,
start-up
they
on
of
investment
start-ups,
which
so
is
initial
gnitekraM 4
Branding
customers
based
as
on
the
choosing
on
may
the
not
way
make
way
the
it
judgments
they
right
is
are
colour
perceived
particularly
like
for
by
their
about
presented
a
the
gym
certain
to
rm’s
brand
general
being
products
them.
can
public.
painted
and
Something
have
For
a
as
massive
example,
pink.
Key term
A
rm’s
features
provides
brand
to
name
prevent
the
can
the
product
provide
product
with
a
legal
being
unique
protection
copied
name
by
that
to
a
product’s
competitors.
makes
it
specic
Branding
different
Brand value
from
how much a brand is wor th
its
competitors,
therefore
enabling
the
business
to
have
a
sense
of
in terms of its reputation,
ownership
of
its
products.
For
example,
companies
such
as
Nike,
Nestlé,
potential income, and market
and
Toyota
have
been
able
to
distinguish
themselves
well
in
their
value
respective
industries.
301
4
M A R K E T I N G
Effective
branding
can
enable
a
sense
of
personal
identication
and
TOK discussion
emotional
branding
connection
leaves
on
among
potential
consumers.
customers.
The
If
key
the
is
the
impression
impression
is
that
positive,
the
Is it possible to measure
chances
of
having
repeat
customers
are
high.
Good
brands
communicate
brand loyalty?
messages
There
is
that
a
saying:
Therefore,
a
good
ensure
to
that
“The
succeed,
brand
their
rst
target
customers
impression
businesses
need
is
the
to
respond
lasting
use
positively.
impression.”
enough
resources
to
build
reputation.
The impor tance of packaging
Key term
Packaging
container
refers
or
marketing
Together
getting
with
important
●
It
It
can
right
of
a
the
in
also
spoilt
production
Packaging
distinguishing
other
is
critical.
of
the
plays
one
elements
of
a
signicant
product
the
physical
from
marketing
Packaging
has
the
an
role
in
other.
mix
right,
following
or
provide
protection.
good
concerns the design and
production of the physical
product
damaged,
a
Packaging
container or wrapper of a
marketing:
physical
getting
and
product.
in
packaging
functions
must
designing
help
getting
provides
from
the
wrapper
and
the
to
Packaging
especially
cover
against
protects
during
dust,
a
product
transportation.
direct
light,
or
high
temperatures.
●
It
offers
the
gnitekraM 4
●
It
convenience.
ability
to
provides
relay
reuse,
●
item.
It
and
regarding
the
can
help
Packages
reduce
●
It
to
the
aids
the
is
a
great
best
302
of
impact
for
on
their
be
used
containers
how
companies
on
for
product.
can
Food
easy
to
to
may
use
producing
packages
products.
features
product.
can
These
help
features
deter
can
also
help
pilferage.
package
colour
and
the
a
brand
graphic
important
in
good
should
shape
rm’s
purchases
where
the
it
eye-catching
the
image
product
designs
by
be
of
of
the
from
can
potential
supermarkets
packaging
package
can
is
product.
its
appeal
in
This
can
competitors’.
encourage
buyers
that
and
key
impulse
of
a
product.
stock
a
wide
create
instant
variety
recognition
product.
the
deal
way
majority
product
the
of
packages
warnings
risks
The
on
make
information
tamper-proof
attractive
a
contain
security
The
dispose
requirement
with
should
consumer.
these
unplanned
of
labels
the
of
projecting
consumables,
to
easily
provide
differentiating
especially
rm’s
to
with
of
of
that
the
and
with
or
Considering
the
reduce
risks
in
may
legal
alcohol
promotion.
help
buying
a
package
and
The
consumption
consumer.
Packages
This
be
tampering
reinforcing
also
products
designed
intentional
recycle,
information
may
cigarettes
It
good
information .
important
Technological
the
A
of
the
important
of
time
designing
packages
packaging
money
and
consumers
their
role
and
to
is
producing
their
have
on
plays
spent
a
today,
rms
package
products.
the
by
Firms
it
is
on
that
will
should
environment
not
surprising
researching
and
attract
also
heed
the
consider
growing
Packaging fulls a variety of
roles. Here it not only protects
the product, but also provides
nutritional information
4 . 5
environmental
are
under
goods
for
concerns.
pressure
to
consumers
responsible
For
F O U R
example,
reduce
and
T H E
the
use
instead
go
in
of
P S
( P R O D U C T,
many
plastic
“green”
countries
bags
by
P R O M O T I O N ,
P L A C E )
supermarkets
when
using
P R I C E ,
packing
environmentally
packaging.
Price
Price
“P”
of
plays
that
the
a
marketing
customers
effort
signicant
generates
to
pay
meet
appropriate
mix
or
role
revenue
are
give
their
up
in
a
marketing
business.
associated
for
with
having
marketing
pricing
the
for
strategies
or
new
mix
because
essence,
costs.
using
objectives,
for
In
a
Price
good
existing
it
is
the
other
refers
or
businesses
and
the
to
the
service.
need
to
only
aspects
money
In
set
an
the
products.
Cost-plus pricing (mark-up pricing)
the
of
the
packets
each
it
of
it
biscuits
it
as
wishes
cost
it
is
sell
would
the
For
selling
gain
for
or
the
out
would
It
is
a
selling
It
●
is
a
that
costs
of
price
cost,
the
the
product
cost
total
a
cost
is
of
mark-up
percentage
it
to
to
The
number
10,000
calculate
mark-up
pricing
to
the
producing
method.
how
on
First,
(20,000/10,000).
which
cost
sells.
by
wants
US$2
prot,
average
that
a
a
50-per-cent
cost-plus
which
is
divided
business
get
mark-up
adding
is
the
$1
(50
per
mark-up
to
cent
get
price.
and
of
a
way
business
and
the
following
add
quick
calculating
good
a
the
to
mark-up
Disadvantages
simple
method
total
and
Advantages
●
if
and
for
The
every
the
example,
average
refers
product.
unit
packet
use
the
it
pricing)
a
US$20,000,
work
Finally,
to
per
each
would
calculate
US$2).
US$3
the
(mark-up
producing
produced.
packet,
Second,
of
rm
is
would
would
of
a
cost
products
much
cost
prot
average
of
pricing
average
gnitekraM 4
Cost-plus
It
●
the
product.
to
makes
a
to
consider
customer
market
value
when
needs
setting
prices.
ensure
covers
fails
or
Since
●
its
competitors’
considered,
prot.
sales
is
if
it
higher
a
sets
rm
a
than
prices
could
selling
its
are
not
lose
price
that
competitors’.
Penetration pricing
Setting
large
a
low
initial
number
of
price
for
customers
a
product
quickly
with
and
the
gaining
aim
of
attracting
a
high
market
be
used
by
a
share
Key term
is
known
either
new
as
penetration
introducing
markets
with
a
new
pricing.
product
existing
This
in
an
products.
could
existing
This
is
a
market
strategy
businesses
or
entering
used
in
Cost-plus pricing
mass
refers to adding a mark-up to
marketing.
As
a
rm
slowly.
example,
gains
market
share
it
also
can
start
to
raise
its
price
the average cost of producing
For
IKEA
is
known
to
have
entered
the
Chinese
market
a product
by
using
this
strategy.
303
4
M A R K E T I N G
Disadvantages
Advantages
As
●
the
prices
encouraged
leads
for
to
the
are
to
high
low,
buy
sales
consumers
the
products
volume
and
are
Gaining
●
and
this
market
mean
share
the
in
high
the
sales
costs
of
volume
can
production
lead
and
to
prices
are
Customers
decreases
increases
low
volume
high
too
does
prots,
not
necessarily
especially
where
low.
may
quality
if
perceive
the
price
is
the
product
kept
too
to
be
of
low.
in
Penetration
●
stock
sales
business.
●
The
●
high
achieving
pricing
is
only
suitable
for
use
in
turnover.
markets
as
that
are
businesses
very
increase
they
risk
losing
seek
lower-priced
price
their
potential
sensitive.
prices
over
customers,
products
from
Therefore,
time
who
rival
may
rms.
Price skimming
Price
new
skimming
products
period
high
rm
with
prices
can
the
are
when
gnitekraM 4
their
and
when
rms
market.
objective
of
at
such
as
as
so
as
when
usually
high
prot
are
products
its
that
the
as
for
high
to
a
limited
possible.
the
research
use
market,
These
where
produce
known
in
introducing
used
segments
recoup
companies
and
and
sell
price
skimming
before
lowering
time.
Disadvantage
Advantages
Consumers
●
is
market
to
Apple,
their
prices
a
various
prots
introducing
high
strategy
gaining
Technological
computers,
over
set
This
aimed
short-run
costs.
initially
prices
is
the
usually
obtain
development
phones
to
associate
the
high
The
●
high
prices
may
Key terms
price
with
a
high-quality
high-value
product
or
and
discourage
an
from
some
buying
the
consumers
product.
Psychological pricing
enhanced
brand
image.
when rms consider how
Firms
●
high
are
able
revenues
recovering
to
that
their
development
obtain
help
initial
pricing aects consumers’
in
research
perception of the value of their
and
products
costs.
Loss leader
charging a low price for
a product, usually below
Psychological pricing
its average cost, to attract
Psychological
pricing
refers
to
when
rms
consider
how
pricing
affects
consumers to buy other
consumers’
perception
of
the
value
of
their
products.
It
considers
the
higher-priced products
psychological
a
high-priced
On
the
other
effect
of
product
hand,
pricing
with
rms
on
high
may
consumers.
quality,
reduce
for
their
Consumers
example
prices
may
associate
designer
clothing.
slightly
to
Price discrimination
persuade
charging dierent prices to
consumers
who
may
be
looking
for
value
for
money.
For
example,
they
dierent groups of consumers
may
charge
US$9.95
instead
of
US$10
for
a
given
product
–
a
strategy
for the same product
common
304
in
most
supermarkets
that
sell
frequently
purchased
products.
4 . 5
T H E
F O U R
P S
( P R O D U C T,
P R I C E ,
P R O M O T I O N ,
P L A C E )
Advantages and disadvantage of psychological pricing
Disadvantages
Advantages
The
●
psychological
selling
can
for
at
a
obtain
a
rm
effect
slightly
large
of
lower
Using
●
price
revenues
selling
in
be
large
it
numbers
looks
at
such
as
US$9.99
inconvenient
for
Since
or
businesses
quantities.
●
prices
US$199
that
in
for
require
their
example
may
some
whole
transactions,
transport
consumers’
businesses.
perceptions,
that
can
many
be
it
is
a
strategy
suitably
market
applied
in
segments.
The loss leader
that
average
cost,
strategy
is
strategy
by
will
also
charge
refer
to
to
attract
selling
buy
compensate
the
for
a
some
price
product
many
other
any
low
that
for
as
customers.
products
at
a
higher-priced
losses
The
below
aim
supermarkets
with
the
view
of
use
that
products
its
this
this
customers
and
therefore
Disadvantages
selling
number
frequently
of
purchased
a
large
products
many
benet
Large
loss
usually
leader.
made.
Businesses
attract
product,
loss
(protable)
Advantages
●
a
a
from
Firms
●
be
may
customers
higher
using
accused
this
by
undercutting
and
unfair
strategy
may
competitors
them
business
by
gnitekraM 4
Businesses
of
using
practices.
overall
prots.
Businesses
●
leaders
as
strategy
may
a
to
loss
encourage
consumers
brand
use
promotional
to
instead
competitors’
switch
of
to
their
buying
the
brands.
Price discrimination
Charging
product
different
is
referred
discrimination
has
to
to
have
charge
the
patterns
in
price
This
are
a
very
should
is
a
to
we
a
of
in
a
how
changes
that
have
This
than
in
of
be
is
consumers
price
price
in
have
price.
of
First,
rm
very
a
the
can
in
elastic
same
the
business
vary
its
prices
Second,
or
elasticities
in
their
product.
other
the
price
competitive.
respond
change
price
On
a
for
effective
sensitivities
consumers
the
For
satised.
that
not
proportional
consumers
changes
to
means
that
different
of
groups
discrimination.
market
have
greater
to
different
ability.
measure
say
sensitive
to
price
conditions
prices
result
leads
demanded,
as
certain
higher
as
to
price-setting
consumers
demand.
prices
If
the
the
change
quantity
demand,
hand,
of
buying
if
a
i.e.
they
change
305
4
M A R K E T I N G
in
price
leads
to
a
less
than
proportional
change
in
demand,
we
say
Key terms
that
to
consumers
changes
in
have
price.
price
For
inelastic
example,
demand,
sellers
i.e.
will
they
lower
are
the
less
prices
sensitive
of
their
Competitive pricing
products
if
the
demand
is
elastic
as
there
is
a
possibility
of
getting
separated
to
ensure
higher
charging a price that is in
total
revenue.
Finally,
the
markets
should
be
that
the
line with or just below the
product
is
not
easily
traded.
For
example,
the
prices
for
children’s
and
competitors’ prices
adults’
tickets
may
differ
for
the
same
music
Disadvantages
Advantages
Time-based
●
price
discrimination
benet
or
to
prices
During
revenues,
off-peak
benet
so
times
about
For
as
high
to
a
lower
charge
prices
elastic
charged.
their
producing
products
extra
rms
that
with
could
lower
lead
and
does
were
price
they
the
of
higher
revenue.
market,
ensure
certain
consumers.
market
if
be
elasticity
charging
sales
a
to
of
demand
addition,
consumers
lower
of
in
elastic
higher
need
type
example,
prices
charge
during
the
the
demand
peak
generate
while
from
of
such
companies
and
be
consumers
businesses
phone
Businesses
●
can
either
producers.
times
concert.
in
to
the
should
extra
cost
selling
not
In
still
of
more
exceed
the
revenue.
gnitekraM 4
Competitive pricing
Competitive
consideration
It
involves
of
Charging
driving
also
them
known
opposition,
average
the
commonly
the
as
a
a
It
is
of
could
lower
the
market
in
or
and
is
If
saturation
successful,
stages
in
prices,
benet
from
especially
competitive
After
using
aims
to
prices
prices.
This
product
gain
revenue
higher
306
as
the
similar
aim
pricing ,
eliminate
than
any
their
subsequently
strategy
the
is
products
are
cycle.
in
the
very
markets.
●
Predatory
pricing
is
illegal
in
destroyer
form
competitive
destroyer
dominant
or
a
higher
a
prices
anti-
many
and
countries
pricing,
it
is
used
rms
sales
result
of
behaviour
competition.
could
with
can
life
the
selling
lower
where
because
remaining
product.
below
predatory
businesses
is
●
it
markets
the
just
businesses
as
charging
higher
or
competitors
known
competitive
into
their
Disadvantages
Consumers
low
the
to
takes
for
with
because
rms
Advantages
●
line
than
charge
highly
in
is
that
charging
applicable
pricing
include
strategy
are
market
production.
used
maturity
that
mostly
destroyer
of
pricing
price
prices
out
and
costs
dominate
in
prices.
is
competitors
charging
competitors’
products.
pricing
what
of
charged.
the
to
restrict
4 . 5
T H E
F O U R
P S
( P R O D U C T,
P R I C E ,
P R O M O T I O N ,
P L A C E )
Student workpoint 4.10
Be knowledgeable
1.
Analyse
the
2.
Examine
importance
the
introducing
most
a
of
branding
appropriate
new
product
to
for
pricing
the
a
start-up
strategies
business.
needed
when
market.
Pomoo
products
is
to
customers
concerned
consumers.
or
to
communicated
enable
Some
●
them
creating
of
●
or
its
reminding
existing
of
Promotion
and
a
or
of
information
promotion
Promotional
and
provide
is
to
about
obtain
activities
useful
a
rm’s
new
should
be
information
to
product.
include:
informing
consumers
of
a
new
or
improved
market
persuading
consumers
the
can
ones.
rm’s
consumers
competitors’
the
aim
consumers
objectives
customers
enhancing
image
to
purchase
the
communicating
main
existing
awareness
in
convincing
instead
●
to
promotional
product
●
retain
clearly
with
The
or
brand
of
to
purchase
a
rm’s
products
products
the
gain
existence
new
image
of
of
a
customers
the
product
for
product
as
a
in
order
to
retain
product
well
as
the
gnitekraM 4
Promotion
corporate
business.
be
categorized
below-the-line
into
two
forms:
above-the-line
promotion
promotion.
Above-the-line promotion
This
is
a
media
paid
to
television,
In
this
radio,
case
another
form
promote
the
of
a
or
communication
rm’s
products.
newspapers
control
or
so
that
It
as
uses
includes
to
responsibility
reach
of
independent
advertising
a
wide
target
advertising
is
mass
through
the
audience.
passed
on
to
organization.
Adver tising
Advertising
about
a
media
for
to
a
It
as
is
the
to
It
is
market.
be
to
–
the
price,
focus
or
of
want
a
information
the
successful
right
promotional
follows:
here
is
to
provide
specications
of
decisions
introduce
informative
on
Choosing
awareness
to
and
as
other
rational
newspapers
passing
ensuring
consumers’
make
businesses
in
in
in
audience.
categorized
features,
Examples
advertisements
discourage
can
them
when
globally
target
important
increases
enable
useful
role
advertising
product’s
consumers.
so
central
particular
Advertising
Informative
about
a
a
advertising
campaign.
●
plays
product
a
advertising
government
a
rm’s
about
new
information
to
product
what
to
product
include
buy.
to
classied
campaigns
to
drink-driving.
307
4
M A R K E T I N G
●
Persuasive
advertising
–
this
aims
at
convincing
customers
to
buy
TOK discussion
one
rm’s
product
consumers
to
instead
think
that
of
a
they
competitor’s
really
need
product.
the
It
product
persuades
and
should
buy
Many adver tisements use
it.
It
makes
consumers
make
unplanned
purchases
for
a
product
–
an
scientic knowledge. Why
act
known
as
impulse
buying.
It
helps
in
enhancing
a
product’s
do they do this and what
brand
image.
For
example,
when
advertising
a
slimming
product,
does this tell us about the
rms
may
use
pictures
of
how
people
looked
before
they
took
the
hierarchy of dierent areas of
product
and
how
they
look
after
they
consumed
the
product
–
in
this
knowledge?
●
case
they
that
most
show
people
Reassuring
remind
they
chose
examples
main
would
that
to
of
they
buy
it.
the
of
of
–
very
to
the
made
rm’s
t
look
like
focus
the
is
right
product
individual
based
on
and
on
the
idea
that.
existing
purchasing
promotional
that
customers,
decisions
they
campaigns
should
are
to
when
continue
well-known
strategy.
advertising
cinema,
a
want
Coca-Cola’s
this
forms
magazines,
picture
advertising
them
purchasing
The
the
radio,
media
posters,
include
television,
billboards,
and
the
newspapers,
Internet.
Below-the-line promotion
This
is
over
a
its
form
not
depend
can
focus
gnitekraM 4
those
●
of
the
activities.
use
of
interested
below-the-line
the
marketing
consumers.
therefore
of
communication
direct
can
save
activities
in
this
business
to
business
media.
on
has
direct
Below-the-line
consumers
control
promotion,
they
it
does
promotion
know
or
on
include:
ensures
refers
the
above-the-line
products.
eliminates
the
marketing,
their
promotion
–
It
where
Unlike
independent
promotional
are
Direct
at
on
the
who
Forms
of
promotional
that
the
the
use
of
money.
sending
product
is
aimed
intermediaries
Direct
mail,
information
which
about
directly
and
a
is
a
form
product
Key terms
through
the
method
post
include
developers
or
via
email.
restaurants
sending
out
Businesses
sending
their
out
that
their
catalogues.
A
commonly
use
this
menus
or
property
limitation
of
this
Above-the-line promotion
method
a paid form of communication
is
that
most
consumers
can
regard
the
information
as
junk
and
not
that uses independent mass
pay
any
particular
attention
to
it.
media to promote a rm’s
●
Personal
through
selling
personal
–
this
involves
co nta ct.
It
the
ma ke s
sale
u se
of
of
a
r m’s
s al e s
products
pr od uc t
re p re s en t a t ive s
Below-the-line promotion
and
can
be
commonly
done
used
or
technically
In
these
making
personal
this
method
whe n
face
the
the
s uch
nee d
pr od uc t s
as
to
atte ntio n .
i nvo lv ed
r ea s su r e d
Th e y
A
as
can
m aj or
it
It
is
su c h
s pe c i a li z ed
be
de cis ion .
co st
te le ph on e .
e xp e nsi ve
wi ll
p ur cha s ing
be
over
pr od ucts
indi v i d ua l ize d
may
or
se l li ng
cus to me r s
right
and
to
com p l e x
cases,
the
fa ce
as
c ar s
ma c hi n e ry.
that
th e n
be
t he y
d is a dva nt a g e
m ay
be
are
g i ve n
ex pe n si ve
of
a form of communication that
gives a business direct control
over its promotional activities
so that it is not dependent on
the use of independent media
to
Promotional mix
retain
a
sales
repr e s e nta ti ve
te a m
for
this
type
of
se l li n g,
es pe c i al ly
a balance of both aboveif
they
are
also
pa i d
by
co mmis si on.
the-line and below-the-line
●
Public
relations
–
these
are
promotional
activities
aimed
at
methods used by a rm to
enhancing
the
image
of
the
business
and
its
products.
It
includes
suppor t its marketing goals
the
308
use
of
publicity
or
sponsorships.
For
publicity
purposes
a
4 . 5
business
would
its
a
like
event.
club
in
rugby
Sales
may
gain
UK
with
the
display
sells
the
Free
or
food
to
an
the
P R O M O T I O N ,
could
showcase
Chelsea
the
it
sponsorship,
organization,
sponsoring
P L A C E )
media
project
Through
sponsoring
draw
competition.
to
“BOGOF”
can
be
excess
a
short-term
or
team
football
Kenya
national
or
incentives
boosting
its
provided
sales.
by
a
Examples
to
stock.
It
other
can
get
is
found
when
in
offered
draw
stand
a
a
to
It
is
attention
of
commonly
products
also
product,
chance
number
of
free)
used
such
as
is
the
such
samples
help
and
win
used
a
a
sales.
can
prize
during
free
as
offering
encourage
customers
to
as
such
in
the
festive
customers.
a
promotional
customers
in
free
supermarkets
can
commonly
used
business
the
customers
Giving
outside
one
to
arrangement
the
snacks.
be
is
attractive
buying.
products
new
often
life
customers
confectionary
purchasing
large
one
to
often
where
is
cellphone.
they
attract
for
impulse
method
a
used
selling
a
are
location
objective
sessions
after
This
(buy
be
the
particular
where
product’s
at
and
provided
coupons
magazines.
can
gifts
taste
–
The
when
attract
used
discounts
buying
for
Competitions
seasons
–
encourage
free
when
sachets
a
are
increasing
main
chocolates,
through
of
The
and
offers
enter
of
displays
items.
charger
free
these
products
supermarkets
sweets,
■
–
aim
leaets,
of
consumers
■
invites
business
them.
support
Samsung
it
P R I C E ,
responsibility
the
for
Airways
purchased.
Point-of-sale
■
process,
nancial
where
social
publicity
Kenya
coupons
is
newspapers,
by
a
( P R O D U C T,
following:
product
or
the
include
and
the
Money-off
■
In
conference
about
free
provide
promotions
include
a
press
launch.
and
Examples
the
a
P S
team.
business
■
hold
information
to
products
business
or
●
could
provides
F O U R
gnitekraM 4
and
T H E
or
assist
maturity
in
or
strategy
that
eliminating
saturation
stages
cycle.
The promotional mix
A
successful
the-line
using
and
an
selling,
appropriate
of
●
Cost:
a
product
certain
Legal
Does
the
●
Target
aimed
involve
advertising,
public
will
good
sales
relations
customers
factors
a
or
need
balance
methods.
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promotions,
when
supporting
to
be
of
both
could
above-
involve
personal
communicating
a
rm’s
considered
the
marketing
for
an
effective
marketing
on
budget
support
the
use
of
a
particular
method?
framework:
deciding
of
and
to
will
promotional
mix:
promotional
●
mix
marketing,
However,
promotional
mix
below-the-line
direct
advantages
goals.
promotional
the
Has
various
market:
What
the
law
been
promotional
specic
taken
into
methods
segment
of
the
to
account
when
use?
market
is
the
product
at?
309
4
M A R K E T I N G
●
Stage
be
●
in
most
Type
of
of
the
will
to
product
product:
product
Businesses
when
the
appropriate
will
to
succeed
be
in
and
cycle:
Which
the
different
Has
the
promotional
how
therefore
designing
need
and
life
at
it
would
need
to
developing
exible
and
achieving
life
cycle
method
the
necessary
marketing
sold
above
promotional
methods
to
tweak
the
nature
customers?
questions
mix.
carefully
Moreover,
the
will
stages?
considered
successfully
consider
their
where
their
be
promotional
product
they
promotional
mix
objectives.
th mpc of w choloy o pomool
ss
In
the
or
tools
marketing
context,
required
technology
has
to
sell
changed
incorporating
it
terminologies
being
media
Social
Social
gnitekraM 4
include
of
social
social
service
today
and
explored
dened
dened
as
service.
Over
marketers
strategy.
include
viral
the
the
are
information
the
last
technological
networking,
marketing.
decade,
increasingly
Important
social
technology
shared
the
is
or
The
social
impact
of
these
on
below.
as
is
sharing,
social
and
marketing
content
or
places
where
where
discovering,
networks
networking
relations
or
include
her
consists
social
of
services
Internet.
Social
media
build
a
links,
over
the
service
among
backgrounds,
network
to
rapidly
used
are
good
that
connects
individuals
social
people.
interactions
advertising
Facebook,
It
is
any
chat.
happen,
information.
Twitter,
LinkedIn,
MySpace.
activities,
or
is
technology
rm’s
(SMM),
be
where
Examples
or
their
networks
which
A
will
media
medium
and
in
marketing
promotion
a
is
people
or
a
platform
who,
real-life
are
a
variety
of
web-based
marketing
relationships,
of
repeat
each
build
provide
refers
A
user
additional
and
(SMM)
drive
to
example,
connections.
representation
and
for
to
social
(often
services.
means
the
business,
social
share
way
and
a
networks
interests,
network
prole),
Most
for
users
to
technology
attract
new
his
social
interact
is
used
Key terms
customers
Social media marketing
through
of
individuals
gaining
programs
attention
A
usually
and
corporate
because
to
website
the
it
trafc
centre
or
message
or
with
efforts
readers
spreads
to
come
company
other
attention
on
encourages
appears
brand
sharing
from
from
itself.
to
to
through
create
share
user
a
individuals.
to
it
Basically,
social
content
with
user
trusted,
SMM
media
that
their
and
is
the
process
sites.
SMM
networks.
source,
promotion
resonates
as
the use of technology to build
relationships, drive repeat
attracts
social
presumably
third-party
SMM
is
opposed
business, and attract new
customers by individuals
sharing with other individuals
through
Viral marketing
word
of
mouth
powered
by
technology.
a form of peer-to-peer
Viral
marketing
is
a
form
of
peer-to-peer
communication
where
communication where
individuals
are
encouraged
their
networks.
to
pass
on
promotional
messages
within
individuals are encouraged
social
Not
so
long
ago,
advertisements
were
mostly
seen
to pass on promotional
in
newspapers,
of
the
magazines,
or
television.
However,
with
the
advent
messages within their social
Internet
things
have
changed.
Today,
advertisements
appear
as
networks
banners,
310
pop-up
advertisements,
social
media,
and
YouTube
videos.
4 . 5
Advertisements
ads”,
is
especially
known
The
as
main
through
viral
is
Often,
more
of
or
Another
a
of
viral
the
videos
millions
marketing
is
process,
videos
in
P S
of
( P R O D U C T,
are
often
views,
and
P R I C E ,
called
are
P R O M O T I O N ,
P L A C E )
“viral
part
of
what
campaign.
promotion
comes
F O U R
YouTube
gather
viral-like
viral
like
often
form
they
marketing
objective
therefore
images,
the
replicating
computers.
which
a
in
when
T H E
are
to
spread
through
form
of
increase
like
the
through
word
of
videos,
brand
spread
of
sharing
mouth.
but
awareness
a
also
virus
by
Viral
in
in
viewers,
marketing
games,
software,
messages.
key
that
appeal
that
can
goal
to
of
their
easily
viral
marketing
target
spread
market
through
is
to
with
create
high
infectious,
social
viral
networking
messages
potential
individuals.
The benets of new technology on promotional strategies
general
marketing
●
Wide
more
advantages
are
as
reach
sites
such
social
●
a
as
media
rm
in
can
like
Brand
not
like
can
and
it
–
and
viral
buying
–
less
more
to
social
useful
the
and
out
level.
social
where
other
This
customers
rm’s
to
A
large
networking
time
a
are
than
sense
networking,
spent
in
kind
what
Engaging
of
paid
community.
SMM,
opinion,
that
and
offerings.
any
of
stakeholders
means
facing
and
measurable
public
key
also
product
valuable
valuable
feedback,
uses
and
viewers.
create
reach
email.
customers
about
to
interactive
YouTube,
on
challenges
be
–
and
passive
helps
rms
and
population
spent
cases,
than
what
viral
data
brand
on
trends,
activity,
and
habits.
using
social
expensive
recognition
due
enhanced
wide
out
total
time
most
interaction,
awareness
a
SMM,
networking,
than
using
SMM
and
traditional
viral
marketing
methods
such
as
advertising.
especially
Speed
in
rather
do
savings
television
●
–
enabled
Twitter,
exceeds
dialogue
relatively
networking,
personal
Internet’s
provide
customers’
social
has
more
information
consumer
●
far
and
marketing
Cost
a
Facebook,
research
Market
using
Internet
at
the
nd
ongoing
market
is
the
participants
they
●
of
Engagement
are
●
–
consumers
percentage
of
follows:
gnitekraM 4
The
of
to
–
the
repeat
particular
brand
brands,
and
can
spreading
increase
leading
to
of
information,
consumers’
brand
loyalty
and
an
image.
coupled
audience
sharing
exposure,
with
in
a
high
short
Internet
space
of
speed,
advertisements
can
reach
time.
The limitations of new technology on promotional strategies
Despite
have
●
their
the
benets,
following
Accessibility
areas
with
networking,
Internet
campaign
SMM,
and
viral
marketing
drawbacks:
problems
poor
promotional
social
general
–
regions
with
connectivity,
that
uses
these
no
will
computers
miss
out
on
or
Internet,
any
ongoing
tools.
311
4
M A R K E T I N G
Distraction
●
–
time-wasting
other
–
these
information.
of
social
not
Despite
not
pop-ups
by
in
advertising
customers
and
in
negative
the
individuals
lurkers,
online
helping
in
these
who
TopRank
effects
benets
attract
to
are
their
active
importantly,
business
are
users
honed
be
these
marketing,
most
of
According
media
quite
may
use
annoying
who
can
be
want
viewed
to
focus
as
on
issues.
Lurkers
●
the
and
while
social
a
of
new
tight
are
These
absorb
Blog,
34
newcomers
are
its
per
who
individuals
cent
have
who
product.
networking,
outweigh
provide
and
Marketing
promote
ways
technologies
sit
others
skills.
rm
social
many
just
Online
SMM,
the
great
and
viral
drawbacks
ways
to
and,
drive
repeat
customers.
gull m
Levinson
and
marketing
that
help
market,
uses
Lautenslager
form
which
companies
even
with
weaken
limited
unconventional
promotional
marketing
strategies
term
guerrilla
gnitekraM 4
terminology.
by
Mao-Tse
Guerrilla
highly
The
It
in
differences
summarized
in
the
where
marketing
efcient
the
“hit
you
activities
capturing
between
table
is
guerrilla
of
rivals
half
and
the
and
that
successfully
marketing
have
budget
from
run”
if
are
stay
an
spent
as
a
activities
on
the
therefore
innovative
on
and
“traditional”
objective.
coined
hit
marketing
“untraditional”
Guerrilla
strategies
at
same
marketing
adapts
Tung,
their
use
resources.
effect
for
dene
the
marketing
signicant
The
(2009)
involves
you
military
guerrilla
can
win
eye-catching
customers’
traditional
and
and
warfare-related
warfare
but
and
run
tactics
if
you
surprising
used
cannot.
and
so
attention.
guerrilla
marketing
are
4.5.3.
Table 4.5.3. Dierences between traditional and guerrilla marketing
Traditional marketing
Guerilla marketing
The primary investment is money.
The primary investments are time, eor t, and creativity.
It forms a model for big businesses.
It focuses on small businesses.
Success is measured by sales.
Success is measured by prots.
What can I take from the customer?
What can I give to the customer?
Mass media (direct mail, radio, television, newspapers) are
Marketing weapons are numerous and most are free.
used.
Adver tising works.
Types of non-traditional marketing succeed.
How much money do you have at the end?
How many relationships do you have at the end?
Source: Based on Levinson, J.C. and Lautenslager, A. (2009) Guerilla Marketing in
30 Days, second edition. Entrepreneur Press. Irvine, CA .
Key term
Principles of guerrilla marketing
Guerrilla marketing
The
following
principles
characterize
guerrilla
marketing.
They
can
be
a low-cost unconventional
remembered
using
the
acronym
“APENS”.
marketing strategy that has
●
Activity
–
rms
opportunities
should
312
seek
need
that
ways
to
exist
of
have
to
doing
an
make
this
awareness
their
when
of
products
an
the
an innovative and signicant
available
known
opportunity
and
they
presents
itself.
promotional eect
●
Presence
known
–
to
discussion
●
Energy
day
is
–
an
rms
the
boards,
businesses
Networks
and
●
focus
Smart
–
used
–
for
ways
could
be
magazine,
need
to
businesses
building
rms
the
look
F O U R
to
note
market
P S
to
( P R O D U C T,
make
through
street
that
their
their
email,
posters,
every
P R O M O T I O N ,
P L A C E )
business
forums,
grafti,
contact
company.
P R I C E ,
This
and
is
and
so
on.
every
known
as
marketing.
on
However,
T H E
This
radio,
opportunity
360-degrees
●
should
market.
4 . 5
should
some
should
ensure
businesses
controversy
be
on
the
lookout
for
new
contacts
relationships.
to
that
have
create
they
do
not
deliberately
offend
customers.
offended
customers
and
awareness.
Methods used in guerrilla marketing
Peer
marketing
together
●
Product
●
SMS
●
Roach
as
texting
and
baiting
normal
bringing
up
Intrigue
●
Live
–
as
with
the
free
similar
interests
or
ages
product
demonstrations
and
consultations
messaging
buzz
to
marketing
create
–
where
interest,
actors
are
controversy,
used
or
to
behave
curiosity
in
a
service
the
process
commercials
such
in
including
video
and
people
interest
customers
or
●
Bill
–
build
give-aways
product
●
to
clubs
stickers
and
–
an
–
of
generating
using
people
to
mystery
do
live
to
engage
customers
commercials
in
key
gnitekraM 4
●
places
pubs
approach
used
to
promote
DJs
and
club
events
The benets of guerrilla marketing
●
Low
cost
nancial
●
–
Flexibility
a
result,
the
–
the
it
Simplicity
to
●
Identied
is
–
can
of
is
be
activities
a
very
changed
can
involved
low-cost
easily
respond
to
do
way
not
of
because
require
large
marketing.
it
changing
is
small
scale.
conditions
As
and
quickly.
many
target
most
efciency
likely
guerrilla
of
the
customers.
consumers
“Speed
Nike
Mob”,
with
the
tool
For
pairs
via
–
the
marketing
activities
product
methods
provides
example,
instant
of
Nike
are
simple
progressed
In
campaign
–
2005,
to
new
it
to
were
the
can
Burger
increase
ways
In
the
and
easy
of
at
the
market
improves
the
returns.
communicating
communicate
questions
with
called
about
participant
to
new
answer
the
round.
used
in
This
competition
sent
King
sales
to
a
rst
nal
be
targeted
improves
sought
messages;
be
service.
and
messaging.
participants
can
or
campaign
it
opportunity
audience.
marketing
–
instant
correctly
Interaction
buy
marketing
through
products
questions
market
to
Communication
with
●
it
implement.
that
●
so
campaign
circumstances
●
types
outlay,
as
a
platform
implemented
Asian
a
countries.
to
interact
guerrilla
The
313
4
M A R K E T I N G
campaign,
designed
consumers
into
by
Ogilvy
Burger
RedCard,
King’s
aimed
restaurants.
For
to
attract
more
example,
the
company
™
printed
“I
BK”
McDonald,
and
it
put
it
signs
Accessibility
●
as
on
accessible
customer
ING
metropolitan
on
–
to
large
empty
most
For
and
placed
footprints
benches
guerrilla
customers
base.
solutions,
T-shirts
placed
as
Direct
said
guerrilla
San
statues
“Gone
to
activities
therefore
promote
Boston,
on
McDonald’s
marketing
to
initiated
of
that
possible,
example,
regions
them
from
its
Ronald
Burger
BK
aim
–
marketing
to
be
the
online
banking
campaigns
and
King,
Ronald”.
increasing
“Orange”
Francisco,
of
to
in
the
Washington
DC.
The negative eects of guerilla marketing
Denting
●
directed
can
is
to
evoke
a
the
marketing
Negative
gnitekraM 4
to
was
a
a
–
from
a
Despite
by
the
–
goal
such
to
of
some
as
fear
highly
are
properly,
they
advertisements
and
anger,
negative
Overuse
overall
for
places
of
a
of
attitudes
fear-related
effectiveness
example,
with
high
USA,
from
leaking
was
the
of
billboards
trafc
toilet
the
placed
congestion
in
may
from
was
the
under
it
of
threaten
children,
used
toilet
the
the
the
in
of
clear
movie.
may
It
the
that
the
Such
psychology
which
used
the
cabin.
door
became
date
marketing
public
property,
required.
bus
vandalism.
irregular
advertisement
result
of
an
in
alone.
guerrilla
on
an
outside
release
to
in
image
opened,
necessarily
problems
or
the
shocking
seen
door
not
when
of
in
giving
stickers
some
For
are
addition
action
held
not
example,
schedules
In
trespassing
and
in
to
to
in
private
permission
Singapore,
indicate
getting
public
on
getting
store
locations
permission
places
should
from
also
be
government.
drawbacks,
surprising,
most
in
blood
the
the
private
act
local
their
creative,
use
King
an
of
does
pitfalls
owners,
approved
or
theatre,
cause
owners
Burger
considered
private
to
defacing
property
main
lead
strategies
executed
image.
company.
life
movie,
sticker
may
common
placing
the
just
inability
property,
marketing
not
emotions,
example,
when
advertisement
their
the
cause
social
Bill
image
was
Other
for
Kill
image
it
on
movie
realistic
but
brand
may
whole
may
highway
However,
adult,
of
a
cabin.
an
the
or
accidents.
the
of
since
negative
or
guerrilla
people
decline.
issues
promote
restroom
is
of
–
campaigns
impact
trafc
Ethical
●
of
if
of
company’s
attitudes
brand
to
middle
cause
the
range
–
group
campaigns
promotion
the
hurt
marketing
towards
image
wrong
negative
guerilla
●
brand
the
seriously
High
●
the
to
and
innovative
the
key
characteristics
efcient
and
make
effective
of
guerrilla
being
untraditional,
marketing
promotional
methods
strategies
one
businesses
TOK discussion
can
use.
Instead
marketing
and
marketing
a
of
the
talking
traditional
only
about
method
the
that
concentrates
business,
through
on
“me”
guerrilla
What role do logic and emotion
business
encourages
customers
to
consent
willingly
interaction
to
continue
to
play in marketing? Is there
interact
with
it
and
aims
for
this
over
a
period
of
room for both?
time.
314
Gallagher
(2004)
summarizes
it
well
by
saying:
“What
matters
in
4 . 5
guerrilla
marketing
is
what
the
T H E
rm
F O U R
does
to
P S
( P R O D U C T,
differentiate
P R I C E ,
itself
P R O M O T I O N ,
from
P L A C E )
its
1
rivals
and
its
success
in
reaching
a
broader
customer
potential”.
Student workpoint 4.11
Be a thinker
1.
Distinguish
between
promotional
2.
Using
are
a
business
having
above-the-line
and
below-the-line
strategies.
an
of
your
impact
choice,
on
its
evaluate
promotional
how
new
technologies
strategies.
Plc
how
is
about
the
product
distribution
the
right
It
●
is
the
is
of
refers
any
not
of
strategies
includes
Distribution
in
only
the
to
reaches
to
make
getting
is
a
consumers.
it
the
crucial
available
right
It
is
to
product
element
in
concerned
with
consumers.
The
to
place
the
the
right
marketing
mix
at
for
size.
important
location
product
distributed
system
time.
businesses
Place
how
the
to
marketing
the
location
customers.
get
goods
mix
of
for
the
Businesses
from
their
the
following
business
should
present
but
reasons:
also
therefore
location
to
to
the
develop
the
location
of
gnitekraM 4
Place
consumers.
It
●
enables
their
The
●
businesses
products
use
of
The
●
to
come
and
intermediaries
businesses
brand
to
efciently
to
store
and
up
with
the
effectively
such
market
as
best
to
wholesalers
their
ways
to
distribute
consumers.
products
and
and
retailers
helps
enhance
their
image.
growing
reach
a
global
wide
use
range
of
of
the
Internet
consumers
is
making
directly
it
with
easier
their
for
businesses
products.
Types of distribution channel
A
distribution
product
make
use
agents,
the
from
of
and
channel
the
or
channel
producer
to
intermediaries.
retailers
consumer.
The
that
lie
common
the
of
distribution
consumer.
These
are
in
product’s
the
middle
distribution
is
Some
the
people
path
such
from
channels
path
taken
distribution
are
as
the
by
a
channels
wholesalers,
producer
described
to
below.
Zero intermediary channel
This
is
where
consumer.
method.
Other
e-commerce.
made
a
For
via
this
product
is
example,
examples
In
the
sold
directly
agricultural
include
service
the
sector,
from
the
products
use
airline
of
producer
can
mail
ticket
be
sold
order
to
the
through
catalogues
bookings
can
also
this
and
be
method.
1
Gallagher, B. (2004) Guerilla marketing and branding. CA: Marketing Turkiye Press.
Hamel, G. and Prahalad, C.K . (1996) Competing for the future. Harvard Business School Press.
315
4
M A R K E T I N G
One intermediary channel
This
to
it
involves
sell
is
the
used
products
jewellery
such
as
travel
in
use
products
where
are
of
one
from
the
such
distribution
producer
is
In
to
sell
as
Harvey
to
operating
Examples
retailers.
Nakumatt
intermediary
the
retailer
expensive.
through
agents
this
the
various
the
on
include
addition,
such
a
for
a
retailer
an
agent
In
most
large
or
where
using
scale
expensive
large
cases
and
bookings,
the
are
the
furniture
supermarket
products,
ight
or
consumer.
selling
household
World
as
use
also
or
chains
of
common
channel.
Two intermediaries channel
In
this
case
retailers,
The
two
are
intermediaries,
used
wholesalers
intermediary
particularly
by
are
producers
important
between
useful
the
when
which
to
in
sell
this
producer
selling
usually
the
channel
and
goods
the
over
producer
to
and
wholesalers
the
act
as
consumer.
long
and
consumer.
an
This
additional
channel
geographical
is
distances.
consumer
producer
gnitekraM 4
producer
producer
include
product
agent
retailer
consumer
wholesaler
retailer
consumer
wholesaler
retailer
consumer
Figure 4.5.4. Channels of distribution
Table 4.5.4. Advantages and disadvantages of dierent distribution channels
Distribution channel
Ad vantages
Zero intermediary
It is low cost.
channel
It is fast.
It is ideal for perishable products.
Disad vantages
Promotion is done by the producer, which
could be time-consuming and expensive.
The producer incurs all storage and delivery
costs.
The producer is the key decision-maker in the
distribution process.
One intermediary
Promotion and customer service are done by
As the retailer ’s prot mark-up is included
channel
the retailer.
in the selling price, the product may be
The costs of holding stock are incurred by the retailer.
The retailer assists in selling the product at
convenient places to consumers.
The producer may not be aware of the
promotional strategy used by the retailer.
Two intermediaries
The wholesaler incurs storage costs, therefore
Two prot mark-ups could lead to a more
channel
reducing these costs for the producer.
expensive product oered to consumers.
The wholesaler breaks the bulk for the retailer
by providing large quantities in smaller batches.
This is an appropriate channel when selling over
long distances.
316
expensive for consumers.
This channel fur ther reduces the producer ’s
responsibility for promoting products.
4 . 5
T H E
F O U R
P S
( P R O D U C T,
P R I C E ,
P R O M O T I O N ,
Key term
Student workpoint 4.12
Channel of distribution
Be an inquirer
Examine
for
each
which
of
P L A C E )
distribution
these
channels
are
likely
to
be
most
the path taken by a product
effective
from the producer or
industries:
manufacturer to the nal
●
clothing
●
jewellery
●
bakery.
consumer
Explain
your
answer.
rvso chcls
A
product
passes
✓
from
its
illustrates
the
six
life
introduction,
decline
market.
Extension
strategies
are
implemented
product’s
life
cycle
of
The
a
by
product
children,
BCG
the
Matrix
cows
or
in
an
by
life
(BCG)
growth
at
classifying
that
stop
a
a
product
maturity,
maturity
to
or
saturation
rm’s
sales
from
cycle.
Matrix
rate
stages
growth,
the
effort
product’s
Group
market
portfolio
cash
the
the
Consulting
measures
rm’s
in
lengthening
Boston
that
cycle
development,
and
falling
✓
cycle
saturation
stages
✓
life
and
the
is
a
growth-share
relative
products
market
as
matrix
share
stars,
of
a
gnitekraM 4
✓
problem
dogs.
strategies
include
harvesting,
holding,
building
and
divesting.
✓
Branding
from
a
✓
Packaging
Price
as
using
a
of
and
with
a
distinguishing
strong
inuence
one
on
business’s
how
product
consumers
perceive
by
marketing
and
mix
to
producing
differentiate
the
physical
one
product
container
or
the
marketing
business
or
and
mix
refers
elements
to
the
is
essential
money
in
customers
generating
give
up
for
service.
pricing
strategies
pricing,
include
price
cost
plus
skimming,
pricing,
penetration
psychological
pricing
main
aim
is
communicating
It
can
be
to
obtain
new
information
categorized
as
customers
about
either
a
or
rm’s
above
retain
existing
products
the
line
or
to
below
line.
Above
the
rm’s
or
the
discrimination.
consumers.
the
in
designing
competitive
Promotion’s
a
has
product.
a
good
price
ones
by
of
for
Appropriate
pricing,
✓
and
vital
a
one
revenue
✓
is
another
wrapper
✓
concerned
product.
from
✓
is
another
line
promotion
products
uses
including
independent
advertising
mass
through
media
the
to
promote
television,
radio
newspapers.
317
4
M A R K E T I N G
✓
Below
the
line
independent
promotional
are
✓
relations
their
and
are
marketing
strategy.
is
a
attracting
viral
on
✓
in
Marketers
which
way
new
of
has
sales
great
e.g.
they
the
use
of
control
know
or
marketing,
within
low
innovative
cost
and
technology
include
relationships,
through
messages
a
who
on
direct
direct
incorporating
strategies
peer-to-peer
is
their
on
those
who
personal
selling,
promotions.
building
uses
depend
consumers
These
marketing
a
to
not
focus
products
customers
promotional
that
does
rm’s
increasingly
marketing
Guerrilla
and
activities
interested
public
promotion
media
social
Social
driving
media
repeat
sites.
communication
their
social
their
In
marketing
business
and
addition,
where
people
pass
networks.
unconventional
signicant
in
media
marketing
promotional
strategy
effect
on
a
business.
✓
Place
to
right
✓
is
about
consumers
a
rm’s
getting
product
the
right
is
distributed
product
at
the
to
make
right
it
place
available
at
time.
Distribution
channels
intermediary
gnitekraM 4
318
how
by
channel
include
and
zero
two
intermediary
intermediaries
channel,
channel.
one
the
4 . 5
T H E
F O U R
P S
( P R O D U C T,
P R I C E ,
P R O M O T I O N ,
P L A C E )
Pcc quso
The
Q-Drum:
problem
endure
for
solution:
Hendriske.
rights)
Even
13
for
a
plastic
long
the
the
as
Q-Drum,
of
Q-Drum
daily,
represents
become
entrepreneurs.
do
pair
of
innovators
target
the
However,
has
only
those
Polak,
and
who
a)
b)
to
the
that
innovation
(ii)
distribution
the
in
c)
Analyse
two
research
planet’s
d)
Discuss
of
the
an
worldwide
heavy
water
Hans
and
Piet
(intellectual
property
only
in
a
000
the
doughnut-shaped
recent
km
in
in
billion
solar
test,
20
one
family
months,
it
10
At
be
can
market
a
and
poor
the
develop
house.
products
importance
rights)
why
for
innovation,
the
found,
price
sales
sponsored
by
development
of
issues
of
still
obtaining
the
a
Hendriske
“innovators
products
per
appropriate
Q-Drum.
need
Why
that
is
the
more
will
the
the
Q-Drum
too
high
cheaply
remain
United
for
and
low.
A
Nations
Q-Drum,
but
the
remain.
terms:
develop
10
farmers
world
cent?”.
US$50
marketing
in
that
and
target
needs
mix
to
[2
marks]
[6
marks]
[6
marks]
[9
marks]
only
of
cent”.
marketing
marks]
patent
designers
the
[2
brothers
Q-Drum.
reasons
of
providing
innovation”,
US$100
manufactured
be
(NGO)
and
and
per
life-saving
far.
can
and
helping
customers
light
research
and
so
thinking
organization
richest
channels
the
In
channels.
the
richest
patent
water
12
“A
US$10
Until
property
and
a
signicant
role
producing
of
an
added,
hundred
following
(intellectual
children
water.
runs
organization
(i)
Explain
and
Innovation”
unstable,
brothers
a
ground.
revolution
simplicity
with
by
travelling
planet’s
most.
help
know
Dene
He
distribution
offered
brothers
its
it
non-government
has
the
several
need
approprate
a
litres
the
designers
of
despite
open,
obtained
50
who
eyeglasses,
needs
sold
to
along
Dr
US$2
women
and
Q-Drum.
up
rolls
claimed
a
of
invented
transportable
Paul
Thinking
carrying
have
the
pull
it
Q-Drum
litres
Millions
labour
brothers
can
in
distances.
producing
child
000
“The
obvious.
The
drum
used
120
Revolution
backbreaking
containers
The
is
“A
gnitekraM 4
The
increase
the
sales
Source: http://ecoscraps.com/
IB,
May
2010
les/2008/09/qdrum1.jpg,
20 October 2008
319
4.6 The ex tended marketing mix of seven
Ps (HL only)
By the end of this chapter, you should be able to:
discuss the impor tance of employee–customer relationships in
➔
the marketing mix of a ser vice and the cultural variation in these
relationships
evaluate the impor tance of deli very processes in the marketing mix
➔
of a ser vice and changes in these processes
examine the impor tance of tangible physical evidence in the
➔
marketing mix of a ser vice
apply the seven Ps model in a ser vice-based market .
➔
Popl
Interestingly,
of
the
gnitekraM 4
businesses
basis.
with
A
the
who
rm’s
the
wrong
the
skills
think
in
to
and
was
off
of
are
they
recruit,
getting
rst
in
the
an
on
to
and
job,
retain
is
right
hiring
people
other
people
a
the
the
to
the
crucial
factor
right
carry
the
on
regular
people,
aspect
on
the
people
of
in
specic
any
the
bus
they
Successful
out
a
best
present
people,
bus”.
elements
in
decision-making
the
on
the
the
important
“got
seats
right
hard
hire,
do
After
right
the
to
that
bus”.
the
very
attention
involved
found
the
in
work
little
abilities
that
people
terms
pay
select,
(2001)
people
right
and
essentially
Collins
companies
“got
businesses
mix
ability
right
business.
best
many
marketing
and
then
businesses
tasks
and
1
responsibilities.
People
are
are
the
produced
customer
it.
waiters
serving
staff
can
waited
also
Behind
to
in
as
dress
they
buy
staff
assess
be
the
example,
how
brief
such
to
meet
right
to
be
an
effective
a
hosting
soccer’s
good
and
to
to
smile
feed
is.
have
on
an
Cup
when
back
if
the
they
service
important
there
are
many
Collins, J. (2001) Good to Great: Why Some Companies Make the Leap… and Others Don’t.
320
role
relationships.
1
HarperBusiness. London.
to
Examples
customers
goers
customer
World
person
businesses
encourage
service
asking
the
skills,
and
Services
specic
so
should
cinema
People
of
like,
attitude,
customer
ticket.
the
needs
they
opportunity
maintaining
business.
and
courteous,
questioning
book
service
the
people
questionnaires
or
and
as
any
moment,
restaurants
customers
served
queue
to
from
have
of
same
appropriately,
delivery
events
the
changed
For
Offering
to
to
service
key
their
providing
long
be
element
at
usually
times.
help
banks
too
experience
play
that
all
customers.
include
to
at
can
People
ensure
appearance
their
important
consumed
experience
consuming
should
most
and
people,
who
for
Another
that
the
service
and
for
a
be
order
waiter
money
between
the
who
what
Therefore,
the
business
management
(CRM),
service,
customer
relationship.
they
are
behave
others
in
in
differing
It
is
of
the
same
its
motivate
customer
treat
a
customers’
the
needs
deal
the
way
to
close
will
addition,
of
or
in
most
cases
takes
pay
the
relationship
to
deliver
good
employee–
settings
perceive
may
of
and
or
dominate
having
a
cultural
foster
a
gap.
sense
teamworking
organization’s
also
be
strengthening
need
the
relationship
improving
customers
deliver
of
then
employees
can
link
cultural
cultures
the
O N LY )
guards,
you
trained
gap
( H L
contractual
employees
this
P S
customers.
in
she
Customer
various
S E V E N
people
that
the
O F
behalf
long-term
of
marketers
dimensions
the
customer
achieve
workforce
further
he
formation
help
to
on
After
some
the
to
restaurant,
are
a
groups
to
work
motivated
In
the
with
This
to
paid
vital.
staff
with
leading
customers,
cultural
is
Undoubtedly,
employees.
a
the
developing
responsibility
relationship.
understand
to
employees
the
in
security
example,
arrival,
that
includes
opinions,
Consequently,
employees
need
get
to
M I X
transactional
completing
role
ensures
in
a
For
requested.
consumer
organization,
and
among
will
goals.
the
the
organization.
beliefs
you
go
on
consumed,
Culture
organization’s
unity
and
the
they
and
delivered
form
you
you
people’s
important
with.
i.e.
M A R K E T I N G
chefs,
customers.
When
you
organizations
faced
people
its
money,
which
customer
However,
is
that
what
the
and
engineers,
greets
you
E X T E N D E D
appropriately
and
service.
serves
for
is
is
collect
waiter
and
transaction.
factor
they
there
your
service
organization
organization
will
managers,
the
important
between
the
example
ensure
T H E
to
to
seen
the
in
how
the
employee–
learn
be
able
to
how
gnitekraM 4
4 . 6
and
to
satisfy
the
fully.
Pocsss
This
refers
to
the
procedures
and
policies
pertaining
an
Key terms
organization’s
customers
on
product
“how
is
easy
provided
it
is
to
and
do
delivered.
business”
It
with
should
a
inform
particular
People
organization.
Call
and
in
products
when
product,
are
well
the
staff
who
supermarkets
customers
functioning
centre
ready
and
more
need
to
with
pay
it
is
not
answer
barcodes
are
urgent
important
do
examples
attention.
to
that
get
the
customers’
are
of
The
not
recognized
processes
more
process
questions
that
are
intangible
the human capital in terms of
not
the
skills, attitudes, and abilities
necessary in the production
right.
of goods or the provision of
services
Process
DHL,
also
for
involves
example,
is
how
the
known
product
for
its
fast
is
delivered
and
to
efcient
the
consumer.
delivery
of
parcels
Processes
or
documents
to
facilitate
security
This
as
this.
check
also
form
and
It
on
ensures
required
throughout.
In
prides
also
itself
ensures
documents
that
by
on
the
the
that
before
product
sender,
addition,
the
having
is
the
utmost
they
care
are
receives
is
sent
delivered
maintaining
sender
right
in
systems
taken
to
its
by
doing
state
quality
tracking
processes
the procedures and policies
a
per taining to how an
recipient.
exact
optimal
a
the
or
organization’s product is
and
standards
number
they
provided and delivered
can
Physical evidence
use
for
tracking
delivery
if
the
document’s
path
and
enquiring
about
any
delay
necessary.
in
the tangible or visible touch
points that are observable to
At
the
outset,
businesses
need
to
dene
clearly
the
shape
their
customers in a business
processes
will
take
so
that
all
stakeholders
are
fully
aware
of
what
to
321
4
M A R K E T I N G
do.
For
marketing
businesses
need
requirements,
among
These
●
●
are
these
customer
some
of
measure
is
of
prime
A
business
customers
effective,
customer
are
ways
taken
to
and
a
well
a
they
ensuring
business
speed
are
number
processes
complaints,
tackled
loyalty
the
there
including
up
and
can
a
processes
long
that
customer
orders,
way
towards
customers.
improve
delivery
of
identifying
handling
go
repeat
can
the
for
of
on
its
processes:
products
to
customers
importance.
needs
such
to
as
provide
paying
easy
over
and
the
varied
payment
Internet,
paying
methods
cash,
or
for
paying
credit.
Provision
●
If
Any
on
be
consider,
handling
others.
developing
to
to
the
time
of
a
after-sales
customer
services
has
to
such
spend
as
technical
solving
support
problems
reduces
when
using
a
product.
Informing
●
a
customers
restaurant
However,
ensuring
consuming,
which
adds
may
to
that
complex,
lack
the
how
long
customer
the
and
right
their
process
expensive,
experience
meal
will
take
to
be
prepared
in
service.
and
is
in
place
especially
capital
may
for
that
be
time-
start-up
larger
businesses,
businesses
may
have.
Physcl vdc
gnitekraM 4
This
to
refers
to
customers
where
service
or
testimonials,
to
ensure
must
For
evidence
example,
their
out
The
the
staff
it
nature
difcult
for
especially
regarding
to
addition,
buy.
with
a
In
service
focusing
on
business
to
Physical
on
ensure
remain
prior
that
product
of
are
to
the
a
of
the
it
is
of
for
of
should
lead
the
the
an
in
businesses
quality
well-groomed
ambient
in
a
lighting
clean
tangible
service
pay
more
and
and
aspects
marketing.
attention
spacious
schools,
service
the
for
to
ofces
clearly
element,
service
money,
to
bringing
however,
being
before
position
intangible
service
nature.
offering
offered,
deciding
new
products
Effectively
will
enable
the
market.
enable
service
customers
to
of
evidence.
business
the
therefore
purchasing
a
their
of
in
public
value
a
area,
located
may
evaluate
difcult
aspects
in
with
and
products
purchasing
result,
include
classrooms
physical
to
a
evidence
experience,
school
quality
because
ofces
before
recommendations
As
reception
differentiator
managers
competitive
and
evidence
observable
service.
equipped
products
testimonials
good
the
trust.
are
tangible
product
customers’
on
that
offering
adequate
and
private
and
points
the
customer
with
consumers
tangible
evidence
offer,
good
element
element
the
a
than
differentiating
on
based
providing
important
well-designed
teaching
depend
restaurant
create
an
smell
good-quality
delivered
is
or
well-organized
a
managers
intangible
makes
To
in
touch
businesses
usually
are
of
a
visible
touch,
are
staff,
be
or
Unlike
usually
they
music
location.
providing
for
that
therefore
Physical
try,
Examples
pleasant
prime
can
which
well-dressed
with
tangible
business.
businesses
throughout.
and
the
a
consumers
it,
need
322
all
in
customers
offering.
pass
enhanced
on
to
image
to
“see”
Businesses
others
and
what
should
about
is
also
their
increased
sales.
4 . 6
T H E
E X T E N D E D
M A R K E T I N G
M I X
O F
S E V E N
P S
( H L
O N LY )
th sv Ps modl   svc-bsd m
Product
• design
• technology
• perceived usefulness
• convenience of use
• quality
• packaging
Price
• brand utility
People
• skimming
• accessories
• employees
• penetration
• warranties
• management
• value based
• organization culture
• cost plus
• customer ser vices
• cost leadership
• orientation
Marketing
Place
• retail
mix
• wholesale
Physical evidence
• mail order
• facilities
• Internet
• infrastructure
• direct sales
• ser vice delivery
• peer to peer
gnitekraM 4
• multi-channel
Promotion
• special offers
Process
• adver tisements
• uniformity of offering
• endorsements
• ser vice delivery
• user trials
• ser vice consumption
• campaigns
• joint ventures
TOK discussion
The four Ps and seven Ps
Figure 4.6.1. Summary of the seven Ps relevant to a business in the service sector
frameworks suggest that
providing intangible products
marketing has four or seven
aspects, all of which can
Student workpoint 4.13
be described with a word
that star ts with a “P ”. How
Be an inquirer
helpful are such analytical
Choose
a
service-based
industry
of
your
choice.
Evaluate
how
important
frameworks to you as a
people,
processes
and
physical
evidence
are
in
its
marketing
strategy.
knowledge-seeker?
323
4
M A R K E T I N G
rvso chcls
✓
People
comprise
businesses
attitude,
skills
organisation.
organization
✓
its
people
Processes
are
inform
particular
Physical
their
at
also
customers
relationship
the
element
that
appearance
customer
They
between
procedures
product
is
customers
all
the
and
any
times
form
due
of
a
to
as
their
on
the
ease
of
includes
the
visible
they
vital
business
and
business
have
and
role
the
pertaining
delivered
doing
the
are
transactional
policies
provided
service
employees
to
the
link
in
evidence
to
differentiator
customers
in
service
in
a
business
marketing.
touch
and
is
face
an
of
the
between
the
long
to
the
how
that
an
consumer.
with
are
important
a
the
term
consumer.
business
points
so
right
organization.
observable
gnitekraM 4
324
and
and
essential
ensure
These
organization’s
✓
an
should
4 . 6
T H E
E X T E N D E D
M A R K E T I N G
M I X
O F
S E V E N
P S
( H L
O N LY )
Pcc quso
Fast
Fast
Eater
Eater,
until
a
2000
fast
had
company’s
biggest
information
Date of
food
on
restaurant
always
made
market)
Fast
company
prot.
started
Eater’s
Product
a
current
to
went
From
public
2000,
decline.
in
sales
The
1975
in
and
Europe
following
(the
table
gives
portfolio:
Market information
Other information
launch
1975
burger rolls
1975
fried potatoes
1995
2002
high market share but
very protable, core
beginning to fall, very low
product but protability is
sales growth
beginning to fall
high market share but
very protable, core
beginning to fall, very low
product but protability is
sales growth
falling rapidly
toasted bacon
high market share, low
very successful product
sandwich
market growth
chicken roll
falling sales, low market
not a commercial success
share in a low growth
market
2002
cheese and
falling sales, low market
tomato pizza
share in a low growth
not a commercial success
During
year.
Fast
the
Eater
was
customers
towards
Fast
the
1990s,
However,
is
market.
rivals.
In
food
Newly
Fast
opened
restaurants
existing
proposing
competitors.
Eater
stores
worldwide
at
the
rate
of
250
a
2004
closing
into
healthier
Eater
Fast
by
gnitekraM 4
market
is
concentrating
the
of
a
health-food
caught
economic
analysts
in
a
new
downturn
in
of
its
attracting
the
are
war
major
that
to
trend
and
cater
becoming
with
more
the
chain
product
stores
marketing
on
suggest
popularity
introduction
established
is
and
Industry
affecting
the
Eater
addition,
outlets.
so
for
major
aggressive
markets
is
affecting
demand.
a)
Explain
in
b)
(i)
(ii)
c)
what
Use
the
Fast
Eater’s
meant
Ansoff
Use
the
Fast
Eater’s
Suggest
a
Nov
past
Boston
new
marketing
IB,
is
by
the
“company
went
public
1975”.
mix
Matrix
and
to
identify
current
Consulting
product
product
(7Ps)
to
and
growth
Group
Fast
Eater
support
Matrix
and
your
marks]
[4
marks]
[6
marks]
[8
marks]
explain
strategies.
to
analyse
portfolio.
for
[2
devise
chosen
a
product.
2005
325
4.7 International marketing (HL only)
By the end of this chapter, you should be able to:
➔
explain the methods of entry into international markets
➔
examine the oppor tunities and threats posed by entry into
international markets
➔
discuss the strategic and operational implications of international
marketing
➔
evaluate the role of cultural dierences in international marketing
➔
discuss the implications of globalization for international marketing.
International
across
to
another
gnitekraM 4
in
to
approach
also
international
known
to
the
marketing
products
global
market
marketing
marketing
competition,
Unlike
approach
international
their
refers
boundaries:
country.
standardized
in
marketing
national
rms
to
as
from
one
marketing,
their
have
other
goods
where
products
the
of
country
in
globalization,
rms
other
exibility
countries.
to
the
main
services
marketed
use
a
countries,
differ
Increasing
is
and
are
in
worldwide
cause
of
the
rise
marketing.
Mhods of y o ol ms
A
method
through
Firms
can
Some
are
●
The
or
of
entry
business
employ
Internet
–
businesses
to
market
costs
Internet,
this
also
exporting
own
A
the
the
are
enter
market
is
a
international
international
known
are
in
being
marketing
using
as
increasingly
because
increasingly
current
The
other
home
common
its
by
can
the
of
its
set
their
Internet
marketing
as
channel
market.
markets.
will
using
global
up
to
an
New
advantage
abroad.
additional
Trading
be
the
reach.
take
products
methods.
e-commerce ,
be
main
form
of
and
involves
to
indirect
another
home
directly
market
here
its
is
operations
hiring
market
distribution
overseas.
both
to
advantage
products
hand,
done
commits
country
existing
used
product
this
country
over
already
are
–
a
behalf.
control
in
an
channel
over
explored
the
further
in
unit.
Exporting
on
are
products
involved
their
into
to
businesses
their
businesses
enhance
international
strategies
many
Internet
low
an
entry
below:
to
the
into
gains
various
considered
Existing
326
a
Internet
of
●
mode
which
the
an
that
channels
export
is
of
indirectly.
the
abroad.
domestic
exporting
country
and
product
business
Indirect
business
on
trying
to
its
exporting,
or
product
domestic
direct
has
intermediary
rm’s
piggybacking ,
one
In
abroad
agent
abroad.
where
business
sell
a
new
4 . 7
●
Direct
investment
–
which
is
also
I N T E R N A T I O N A L
known
as
foreign
M A R K E T I N G
( H L
O N LY )
direct
Key terms
investment,
where
One
of
benet
a
business
investing
in
sets
up
production
production
plants
in
plants
a
abroad.
foreign
country
International marketing
is
that
a
business
gains
access
to
the
local
market,
making
products
the marketing of goods and
easily
available
to
customers.
It
also
becomes
well
versed
in
local
services across national
market
knowledge
and
is
able
to
adapt
its
products
accordingly
to
boundaries
suit
consumer
route,
needs
including
and
wants.
Coca-Cola,
Many
Nike,
companies
Samsung,
and
have
followed
this
Toyota.
Globalization
●
Joint
venture
–
this
is
a
business
arrangement
where
two
or
more
the increasing worldwide
parties
agree
to
invest
in
a
particular
business
project.
These
parties
competition leading to a rise
share
their
resources,
with
each
being
responsible
for
the
costs,
in international marketing
prots,
and
losses
independent
incurred.
business
venture.
For
the
venture
However,
interests
example,
in
the
the
separate
effort
to
participants
from
enter
the
have
newly
their
formed
international
joint
Piggybacking
markets,
the use of the existing
joint
Virgin
Mobile
India
Limited,
which
is
a
cellphone
distribution channels of one
service
provider
company,
was
formed
from
Tata
Tele
service
and
domestic business by another
Richard
Branson’s
Service
Group.
The
company
(joint
venture)
home country business trying
makes
use
of
Tata’s
CDMA
network
to
offer
its
services
under
the
to sell a new product overseas
●
Mobile
brand
International
franchisor
in
another
and
country)
and
–
one
this
exchange
royalty.
for
to
See
a
a
use
unit
business
grants
its
franchise
Examples
marketing
Nandos.
is
country)
permission
as
international
Wimpy
in
in
revenue
an
franchising
business
expertise
sales
as
(a
name.
of
for
brand,
fee
and
include
more
on
franchisee
a
where
(a
trademark,
businesses
strategy
1
arrangement
the
concepts,
percentage
that
have
Ocean
the
business
of
used
Basket,
the
this
gnitekraM 4
Virgin
Steers,
franchising.
Oppous of y o ol ms
International
for
●
the
A
larger
provides
base.
This
in
is
the
a
greater
enables
also
an
a
new
reduces
market
case
perceived
domestic
of
to
for
to
be
its
begin
image
more
to
its
the
means
creates
life
which
when
in
revenue
global
reach
the
than
greater
and
an
a
benets
new
the
market
customer
protability.
existing
the
for
countries.
economic
that
or
home
product
country
is
but
afresh.
opportunity
an
to
increases
sales
cycle
cycle
other
“successful”
This
products
higher
strategy
sales
such
–
gain
an
in
opportunities
following:
company’s
life
gaining
risks
the
products,
provides
on
potential
product
investing
key
a
extension
of
marketing
market.
its
business
this
by
brand
international
●
–
dependence
in
Enhanced
brand
reach
the
market
risks
many
include
introducing
stage
Diversication
their
–
offers
These
effective
saturation
spread
●
owner.
market
This
enters
●
marketing
business
from
just
brought
those
to
the
home
downturn.
businesses
brand
businesses
Diversication
that
about
by
involved
operate
prestige
that
can
only
can
be
in
the
drive
loyalty.
Gaining
economies
of
scale
–
a
operations
through
international
abroad.
a
this
As
result,
may
business
can
marketing
reduce
the
by
increase
selling
average
costs
its
scale
more
of
of
products
production
and
327
4
M A R K E T I N G
so
make
the
advantage
●
Forming
enable
such
a
as
new
raw
to
who
and
can
competitive.
prot
The
mark-up
new
may
provide
compared
therefore
protability
home
can
gaining
prices
for
in
can
stakeholders,
inputs,
the
opportunities
take
overseas
various
suppliers
then
higherprots.
marketing
with
good
to
provide
for
–
contacts
business
and
relationships
make
materials,
contacts
its
business
suppliers
efciency
more
increasing
business
example
These
business
by
for
home
for
market.
increased
businesses.
ths posd by y o ol ms
There
are
source
a
of
number
major
of
external
challenges
for
environmental
businesses
factors
engaging
in
that
can
be
a
international
marketing:
●
Economic
many
market
capita
incomes
to
and
buy
Political
gnitekraM 4
to
the
volatile
and
civil
●
unrest
example,
the
behaviour,
marketers
●
EU
must
of
an
of
reap
●
is
this
a
disparity
any
benets.
of
gender
factor
to
consider.
Technological
However,
the
to
this
countries.
operate.
in
vital
This,
the
for
exist
the
of
while
–
the
can
which
is
with
have
key
anti-competitive
protection
or
population
in
Europe
African
need
of
is
the
operate
drastic
a
a
aware
are
in
a
vital
global
a
scale.
number
on
in
social
has
infrastructure
impact
to
country
Internet
on
lacking
be
they
also
for
there
countries
to
in
present
laws
countries.
population
limited
a
that
For
consideration
many
still
and
International
other
use
of
terrorism
East
laws
if
the
for
risk
examples.
overseas.
on
threat
due
countries
Middle
accordingly
growing
coupled
systems,
a
in
global
different
Marketers
businesses
resource
of
countries
markets
of
of
demographic
be
great
political
consumer
in
a
tendency
the
the
market
immigrants
way
easy
some
policies
should
the
of
have
various
composition
the
to
exchange
markets,
threats
are
to
population.
of
The
standards.
that
population,
in
are
number
segment
communication
businesses
a
challenges
in
per-
problems
pose
foreign
awareness
strict
the
countries
number
speed
its
to
in
Somalia
they
differences
The
planning
instability
product
In
lack
Fluctuating
increases
countries
rights
younger
or
access
developing
–
and
and
if
adhere
older
growing
increased
328
also
may
increased
The
for
and
property
terms
poor
known
marketers.
increasing
there
by
therefore
arena.
also
heightened
different
different
international
is
is
challenges
structures
The
with.
abide
advertising
intellectual
Social
–
to
low
regimes
operate
political
Afghanistan
need
very
pose
political
to
regulations
also
trade
challenges
businesses
and
of
the
income
wanting
have
marketed.
also
unstable
willing
of
and
of
countries
abroad.
business.
have
should
invasions
Legal
–
change
international
businesses
the
nature
to
rates
for
countries
power
being
market
distribution
problem
developing
interest
to
businesses
governments
inequitable
major
products
challenges
domestic
the
a
purchasing
the
willing
to
doing
or
–
pose
Many
differing
businesses
●
can
overseas.
income
rates
challenges
countries
of
and
how
4 . 7
I N T E R N A T I O N A L
M A R K E T I N G
( H L
O N LY )
th sc d opol mplcos
fo ol m
well-dened
deciding
on
the
the
to
vision,
inspired
cases
to
in
changes.
there
the
between
a
operating
a
rm’s
as
in
necessary
their
in
pursue
to
These
a
and
and
so
Prahala d
get
on
play
A
clear
by
motivated
in
some
survive
and
arise.
the
major
political
For
example,
difference
senior
consider
manager
increasing
manager
operational
the
an
needed
key
to
may
be
down
them
cannot
tactic.
another
an
business
to
However,
regarding
international
extent
identify
as
in
issue,
the
home
which
would
the
marketing
aims
important
for
various
broader
strategy
expectations
role
strategy
in
and
picture
of
providing
its
the
implementation.
stakeholder
expectations
a
and
groups
evaluating
of
how
to
and
their
more
businesses.
( 1 996 )
operati o ns ,
international
given
their
their
as
laid
economic
may
a
priorities.
resources
carefully
inuence
global
a
it
stakeholders
and
operate
their
as
company
while
view
and
for
need
are
keep
stakeholders
operational
issue
staff
dream.
rigid
such
crucial
that
will
that
managers
an
large
understanding
effectively
Hamel
to
rms
and
may
This
very
internal
subsidiary
clash
support
Successful
on
a
in.
environment
issue
is
All
objectives
are
between
plan
markets.
fullling
plans
strategic
depends
stakeholders.
power
a
and
working
between
foreign
ability
effectively
focus
are
headquarters
result
values,
external
strategic
in
operational
towards
conict
share
country
clearly
be
and
international
strategic
Conict
may
market
they
work
long-term
changes
in
mission,
organization
and
A
strategic
operate
gnitekraM 4
A
sugg e s t
the y
env i r o nme nt
ha ve
a nd
tha t ,
to
for
rms
pe rc ei ve
de v e lo p
the
to
s u c c e ed
ch a ng e s
s t r at eg i es
th a t
in
wi ll
in
the
e n abl e
1
them
to
respond
identication
together
marketing
a
management
need
need
to
so
result
is
and
required
For
rms
(2000)
in
is
a nd
is
to
to
r e mai n
be
three
or
n ee d
ma r ke t s
t ac t i c s .
se r v ic e s
n ot
but
Th e
a
to
cl ea r
Fo r
h ave
l e ar nin g .
a re
as
a l so
in
as
to
a nd
m a r ke t s
I n no va t i on
o nly
Fi rm s
dyna m ic
a
c h a l le n ge
d is cip li n e
ha ve
i n du s t ri es ,
s u rvi va l .
T he r efor e ,
a nd
e a rl y
in t e rn a t io n al
o rg a ni z a t io n al
v a ri a bl e ,
the
a nd
as
terms
d ri ve r
pos e d
c on du c t
of
of
to
t h or ou g h
u n de r st a n di n g
of
wh a t
co mpe t i t ive .
successful
key
g l obal
s tr ate g ie s .
ha ve
co nti nuous l y
wanting
for
that
re s pe c t ive
b u si n e ss e s
s tr a te g ie s
g oo ds
a r g ue
e x ter n al
e va l uat i on .
compe titive
they
and
the
inte rnat i on a l
ma rk eting
to
of
emp ha si z e
ma r k e ti ng
ord e r
mar ke t s
imp or ta n t
tha t
mar k e te r s
suggested
the
addition,
a dva nta ge ,
imp r o v i ng
research
In
a na ly si s
and
impo r ta nt
internation a l
market
in
mo ni to r i ng
should
international
is
fore s i g ht
unde r s ta nd
an
developing
better
c ha ng e s
tho r o ug h
comp e ti ti ve
constant
change
a
a
enviro nme nt,
sustainable
also
of
with
a cco r di ng ly.
in
aspects
international
that
rms
markets,
should
Doole
incorporate
in
to
2
their
focus
strategies.
achieved
markets,
a
First,
they
through
strong
a
should
have
thorough
competitive
a
clear
knowledge
positioning,
and
international
of
a
the
competitive
international
strategic
perspective
1
Hamel, G and Prahalad, CK (1996)
Competing for the Future. Harvard Business School Press. Boston, MA.
2
Doole, I. (2000) ‘How SMEs Learn to Compete Eectively on International Markets’, Ph.D.
329
4
M A R K E T I N G
that
is
truly
international.
relationship
a
commitment
customer
a
strategy
to
service
well-managed
of
learning.
levels
of
effective
quality
that
are
should
and
control
to
incorporate
customer
service
and
a
and
willing
for
Last
but
to
learn
their
to
a
least,
culture
showed
markets
all
effective
not
emphasize
international
procedures
an
relations,
dedication
markets.
continuously
innovative
commitment
monitoring
and
should
strong
international
organization
and
they
through
products
throughout
Firms
energy
Second,
achieved
and
high
had
international
markets.
The
global
business
competitive
external
of
the
and
factors
environment
only
will
remain
opportunities
is
becoming
organizations
that
that
can
competitive
arise
in
more
adapt
and
and
to
continue
international
more
the
changes
taking
in
advantage
markets.
th ol of culul dcs  ol
m
Culture
that
plays
a
recognize
signicant
the
their
products
than
businesses
Language
is
meanings
of
a
gnitekraM 4
words
some
cases
audience.
Koula”
like
“Kee
Cola’s
For
model
into
it
car
against
roles
In
United
to
Arab
An
Japan
women
tastes
and
consideration.
chicken
men
more
saw
India,
Businesses
marketing
advantage
out
of
in
women
USA
it
in
women
by
back
as
are
invasion
are
another
Hindu
had
to
soap
of
to
in
use
For
“Nova”
was
go”.
also
be
models
would
their
be
but
in
bodies
showing
France
Pepsi
was
example,
France
a
failed
in
privacy.
important
change
religion
sound
because
female
this
cover
in
“Kooke
translated
“no
should
countries.
to
name
means
However,
successful
an
the
brand
society
to
Mist”
“mist”
in
the
translation.
happiness”.
“Silver
and
to
like
after
Germany
Grave.”
expected
Camay
was
and
common
conservative
sounded
however,
wear.
original
offensive
wax”
the
for
translation,
the
even
in
Spanish
is
of
priority
pronunciation
tastes
Motors’
“nova”
from
or
failed
the
understanding
major
process
candle
the
“joyful
McDonalds
because
on
Pepsi”
summer
wife’s
this
work
a
initially
of
Rolls-Royce;
the
the
Coca-Cola
to
and
and
in
and
be
meanings
confusing
General
preferences
In
burgers
his
in
competitive
globally
mouthful
Alive
by
advertisement
washing
are
with
because
Emirates
husband
Local
of
a
should
because,
means
Alive
advertise
culture
completely.
as
of
is
different
had
which
Europe
marketing.
globally
gaining
culture
China
“dung”.
Spain
of
contexts
thirsty
“Come
means
in
bikinis
the
in
later
“Come
meant
differing
wearing
“a
Keele”
of
words
manufactured
German
considered.
the
means
Company
unsuccessful
The
example,
Kou
This
totally
translated
campaign
translated
a
the
differences
chance
different
given
international
not.
component
in
in
cultural
better
do
marketers.
are
which
Coca-Cola
a
that
words
international
some
stand
key
role
varying
does
cultural
their
not
beef
allow
burgers
people
to
to
The ‘Silver Mist’ was renamed
consume
beef.
In
Kenya,
the
Maasai
are
keen
beef
consumers.
Serving
‘Silver Shadow’ to avoid an
a
Maasai
household
with
sh
would
be
considered
inappropriate
and
awkward translation!
might
330
even
be
offensive.
4 . 7
Ethics
and
banned
in
many
but
culture
in
other
banned
aged
21
anyone
also
Singapore
in
and
18
hand
is
countries.
others.
above
aged
go
and
the
years
hand.
Smoking
Alcohol
in
in
viewed
in
For
example,
unethical;
public
is
allowed
is
only
however,
above
can
in
many
consume
M A R K E T I N G
chewing
however,
consumption
USA;
and
as
I N T E R N A T I O N A L
in
it
is
African
countries
for
O N LY )
is
allowed
some
allowed
gum
( H L
adults
CULTURE
When businesses market their
products and services across
international boundaries, they need
countries
to understand each local market
alcohol.
individually.
There
are
many
other
signicant
cultural
issues
that
businesses
must
Carry out more research on how
consider,
including
symbols
and
colours
used,
that
have
a
great
impact
culture inuences international
on
how
they
penetrate
international
markets.
Awareness
of
all
these
marketing. Which cultural factors
cultural
elements
is
vital
for
success
in
international
marketing.
do you think have the strongest
inuence on international
marketing? Why?
th mplcos of loblzo fo ol
m
international
necessitated
will
need
●
trade
the
to
conducting
mostly
have
the
of
it
consider
access
had
to
larger
one
variety
the
and
●
of
other
example
they
can
wider
of
use
and
the
the
customer
accused
mostly
of
or
the
–
low
to
rms
local
of
the
values,
changing
some
labour.
money
to
However,
and
As
to
a
market
some
of
especially
of
the
inux
of
transferred
are
while
the
travelling,
available
as
to
consumer
countries
face
anti-
out
UK,
so
to
Yu,
there.
the
While
dish
are
in
many
provide
demand.
a
On
disappearing
dishes.
global
signicant
located
had
used
ideas
the
appropriate
have
clothing
have
of
an
can
Many
in
–
once
Safaricom
Orange,
have
adapt
westernized
as
businesses
in
growing
this
to
that
have
as
with
liberalization
such
and
Africa.
cultural
markets
Firms
public
how
popular
South
businesses
businesses
meet
unethically,
regard
while
compete
the
such
had
foods
or
Kenya,
therefore
choosing
cost
extra
base.
acting
with
has
Businesses
local
to
expectations
their
more
Adidas,
in
foreign
very
in
the
market,
giants
beliefs,
are
in
competition.
driven
is
see
operate
advantages.
Nike
advantage
by
decisions
produce
marketing
to
to
rms
foreign
campaigns
domestic
and
widely
have
so
members
the
curry
traditional
replaced
of
companies,
globalization
Deregulation
cases
another,
products
hand,
of
many
provider)
have
are
expect
to
subscriber
among
Indian
led
global
the
tastes
which
consumed
food
Location
to
has
some
unrest
Businesses
being
which
in
that
consumer
is
countries.
in
measures
consumers
importance
marketing.
implications
marketing
increased
to
growing
multinational
markets,
power
However,
the
marketing:
cellphone
country
burger
many
of
multinationals.
also
today.
by
international
following
domestic
exports,
operating
US
of
aggressive
causing
Changing
from
to
major
Airtel.
cultural
growth
use
telecommunications
with
country,
about
globalization
use
has
competitive
●
–
monopoly
mobile
and
the
foreign
markets
off
the
international
enjoyed
(a
and
increased
Competition
getting
brought
gnitekraM 4
Globalization,
shoe
companies,
India
result
their
these
location
and
of
in
international
China
for
to
take
their
cost
savings
products
and
reach
companies
towards
their
have
workers
a
been
and
overexploitation.
331
4
M A R K E T I N G
●
Economies
of
scale
–
in
the
process
of
overseas
expansion,
TOK discussion
businesses
increased
have
been
output.
able
This
to
has
spread
lowered
their
their
xed
costs
average
over
costs
of
an
production
To what extent does the
and
increased
the
possibility
of
gaining
higher
prots.
They
have
also
Internet provide true value to
gained
better
negotiation
power
with
suppliers
in
their
countries
of
the customer?
operation.
in
the
However,
domestic
government
Undoubtedly,
marketing.
benets,
A
will
to
some
context
set
that
policies
globalization
rms
in
the
of
foreign
they
that
has
consideration
assist
of
are
act
played
the
in
a
have
even
able
their
favour.
major
above
making
rms
role
factors,
better
to
in
grown
inuence
large
the
international
including
overseas
so
their
marketing
costs
and
decisions.
Student workpoint 4.14
Be a thinker
1.
Evaluate
2.
Discuss
the
how
benets
culture
and
has
problems
inuenced
of
overseas
current
expansion.
international
marketing.
rvso chcls
✓
International
gnitekraM 4
one
country
differ
the
✓
in
their
main
Modes
marketing
to
of
It
marketing
causal
entry
exporting,
is
another.
factor
into
direct
the
marketing
provides
approach
to
the
rise
to
in
international
investment,
of
other
and
with
and
from
exibility
to
Globalization
is
marketing.
include
ventures
services
the
countries.
international
markets
joint
goods
businesses
the
internet,
international
franchising.
✓
The
opportunities
share,
the
✓
formation
The
threats
social,
✓
Due
to
the
external
a
a
✓
of
in
adapt
will
the
their
expectations,
larger
political,
becoming
strategies
that
role
culture
products
the
that
location
in
suit
of
market
scale
and
economic,
the
in
do
will
competition,
decisions
changes
to
markets.
cultural
differences
chance
of
gaining
not.
need
changes
and
in
take
international
better
that
businesses
competitive,
international
varying
a
more
continue
plays
stand
businesses
include
to
and
arise
recognize
globalisation
marketing
include
competitive
than
a
economies
challenges.
opportunities
signicant
include
image,
relationships
marketing
their
that
marketing
brand
environment
remain
advantage
of
international
332
can
marketing
Implications
and
business
businesses
competitive
business
technological
the
of
enhanced
international
and
that
result
tastes
international
new
global
marketing,
globally
of
factors
advantage
As
of
legal
businesses
✓
of
diversication,
to
in
consider
in
consumer
economies
of
scale.
4 . 7
I N T E R N A T I O N A L
M A R K E T I N G
( H L
O N LY )
Pcc quso
In
Blue
2007,
market
the
between
tickets
were
New
respond
Air
New
as
also
only
2
to
the
of
for
11
the
same
Brett
he
Godfrey
was
before
to
also
in
offer
the
Air
could
New
route .
face
accepted
Australia
and
routes,
Zealand
Zealand
that
we
By
Blue
have
subject
to
the
money
Air
has
run
pricing:
in
the
government
at
A
quick
director
these
market .
demand
with
Auckland
New
Zealand
commented
and
uses
that
problems.
a
“we
bank
$29
Godfrey
were
Zealand
satisfy
utilization
might
$49 .
between
the
crash”.
sustain
New
could
director
penetration
to
ights
of
Brett
leaders
could
contrast,
capacity
to
on
half
executive
prices
day
Zealand
prices
Almost
market
Blue
enter
per
QANTAS
Pacic
about
to
New
low
website
cutting
company
route .
A
our
Pacic
ights
signicant
condent
more
New
popular
Chief
established
strategy
at
Wellington .
caused
by
the
tickets
hours .
whether
the
entered
000
and
the
scheduled
7planes
Blue
70
competitor
whether
most
on
almost
long-run
the
Blue
“It
doubted
questioned
planes
sell
within
QANTAS,
new
its
Pacic
to
online
Wellington,
Pacic
offer
Christchurch
and
Zealand
part
airline
surprise:
Zealand
of
She
cost
initial
booked
his
to
prices
an
Auckland,
expressed
Air
low
with
loss
to
approval
initially,
have
done
survive
and
the
but
this
and
hope
support
of
public.”
and
QANTAS
promised
to
remain
competitive.
gnitekraM 4
Pacic
[Source: adapted from The Age, 4 September 2007]
a)
b)
Dene
following
(i)
market
(ii)
penetration
Explain
could
c)
the
leader
two
have
Examine
pricing.
other
Evaluate
which
two
two
Pacic
market
IB,
May
marketing
strategies
that
Pacic
marks]
[2
marks]
[ 6marks]
problems
that
Pacic
Blue
could
face
when
pricing
potential
Blue
[2
Blue
used.
usingpenetration
d)
terms:
could
[6marks]
opportunities
face
when
and
two
entering
potential
into
a
new
threats
international
[9
marks]
2009
333
4.8 E-commerce
By the end of this chapter, you should be able to:
➔
describe the features of e-commerce
➔
analyse the eects of changing technology and e-commerce on the
marketing mix
➔
distinguish between the three types of e-commerce
➔
discuss the costs and benets of e-commerce to rms and consumers.
E-commerce
through
involves
electronic
the
buying
networks,
and
selling
commonly
via
of
goods
the
and
services
Internet.
th fus of -commc
●
Ubiquity
–
accessible
7days
gnitekraM 4
●
Customization
how
Global
●
text
–
many
Integration
and
–
they
reach
traverses
●
Internet
home,
at
is
widely
work,
or
in
available
hotels
at
for
any
24
time.
hours
It
can
each
be
day,
aweek.
decide
●
the
at
–
will
also
be
the
known
as
to
the
allows
deliver
standards
personalize
other
their
messages
individuals
worldwide
web,
or
the
and
groups.
Internet
boundaries.
Internet
to
can
delivered
national
messages
Universal
individuals
–
a
the
combined
marketing
there
is
only
use
of
audio,
video,
message.
one
set
of
Internet
standards
globally.
th cs of ch choloy d
-commc o h m mx
Technological
advancements
smartphones,
and
business
●
transactions
Product.
to
a
to
stock
With
wider
a
wide
to
higher
Dell
online
their
needs
●
of
Price.
the
base
range
sales
a
of
and
is
use
businesses
ever
products
product
increased
impact
to
to
view
This
of
on
meet
use
can
delivered
as
This
Amazon
also
demand,
to
today
which
a
greater
according
to
in
mix:
can
allows
websites
customize
lead
iPads®,
marketing
Interactive
and
of
e-commerce
the
such
before.
protability.
specications.
the
the
growing
great
than
customers
sell
them
could
such
product
as
to
customer
the
individual
consumer.
Consumers
websites
334
as
had
as
the
e-commerce,
allow
own
satisfaction
such
and
have
customer
lead
suit
laptops,
such
as
can
now
“Google
make
product
easy
price
search”
comparisons
that
can
search
using
for
price
4 . 8
information
for
competitive
has
also
led
to
manufacturer
costs
for
them.
global
the
to
They
prices
can
increased
c o n s u m e r,
producers
and
therefore
leading
to
use
of
which
made
good
a
get
direct
has
access
savings.
affordable
most
approach
reduce
products
the
E-commerce
selling
helped
to
E - C O M M E R C E
from
distribution
available
to
consumers.
Promotion.
●
businesses
E-commerce
using
supplementing
advertising.
and
of
viral
of
promote
of
audio,
their
video,
campaign
is
Feedback
bound
from
businesses
to
be
For
has
to
more
ways
images,
in
the
with
spread
promotional
the
can
use
consumer.
further
specic
need
retailer in the world
the
combined
of
Amazon is currently the largest online
businesses
a
surveys
the
banners,
a
eyes
customers’
reduced
for
for
now
online
E-commerce,
online
their
with
are
cost-effective
through
picture
denitely
methods
multiple
effective
medium
businesses
advertisements,
before.
through
products
E-commerce
or
additional
and
example,
more
consumers
faster
ever
messages,
to
tailor
a
pop-up
provides
products.
text
of
to
than
tools,
an
Many
promotional
use
led
material
technological
to
Place.
has
provided
promotion.
current
increased
marketing
promotional
help
●
their
The
has
traditional
help
needs.
for
gLOBaLiZatiOn
intermediaries
savings
for
in
the
chain
manufacturers
of
of
distribution.
various
This
products.
has
led
to
However,
cost
the
In 2013, the clothing retailer ASOS
role
launched new websites for Russia
of
these
intermediaries
in
the
marketing
process
should
not
be
and China and eBay produced
disregarded.
For
example,
the
personal
appeal
retailers
provide
to
a new mobile app especially for
is
lost
by
trading
over
the
Internet,
which
is
impersonal.
gnitekraM 4
consumers
shoppers in Brazil.
On
the
other
hand,
the
Internet
has
made
it
more
convenient
Do research on how globalization
for
consumers
to
buy
products
–
they
no
longer
have
to
visit
the
is inuencing e-commerce today
retail
outlets.
Customers
searching
for
products
from
various
and vice versa. Can you think of
global
locations
will
benet
from
the
many
language
translation
any limitations of e-commerce in
applications
available
on
websites,
which
they
can
download
to
their
fostering globalization?
technological
tools
to
aid
them
in
their
purchasing
decisions.
typs of -commc
E-commerce
can
be
categorized
Business-to-business
trades
sold
with
from
another
one
transacting
usually
used.
most
cases,
will
the
auto
main
Business
business
to
to
consumer.
to
B2B
a
volume
be
particular
These
Consumer
transactions
to
a
type
Goods
of
and
another.
or
following
This
component
and
e-commerce
services
wholesalers
transactions
are
could
with
involved
are
parts
purchased
types.
an
where
bought
involve
retailers
in
B2B
example
such
separately
as
a
producers
in
a
chain
businesses
of
how
batteries,
from
business
and
other
of
is
B2B
tyres,
is
and
dealers
by
manufacturer.
consumer
and
is
the
manufacturers
vehicle
sourced
(B2C)
end
is
user
transactions
transactions.
Priceline,
of
Automobile
windows
to
wholesalers
The
large.
In
organization
with
distribution.
(B2B)
business.
into
are
Successful
e-commerce
who
is
more
B2C
carried
usually
visible
the
to
businesses
out
from
customer
the
public
include
a
or
compared
Amazon,
eBay,
Google.
consumer
from
one
(C2C)
customer
refers
to
to
e-commerce
another.
C2C
that
businesses
allows
for
provide
335
4
M A R K E T I N G
opportunities
for
in
addition
selling
individuals
of
businesses
to
interact
and
exchange
with
one
another
Key terms
to
that
or
t
buying
well
into
products
these
to
or
criteria
from
are
each
eBay
other.
and
Examples
Craigslist.
E-commerce
the buying and selling of
The benets of e-commerce to rms
goods and services through
●
Firms
can
reach
a
wide
target
market
in
an
effort
to
market
and
sell
the internet.
their
products,
resulting
in
an
increased
customer
base.
Business to business (B2B)
●
It
is
a
more
product
cost-effective
compared
to
method
other
to
means
use
such
in
as
advertising
television
a
rm’s
a type of e-commerce where a
advertising.
business trades with another
●
Social
networking
companies
such
as
Facebook
have
beneted
from
business.
high
advertising
revenue
by
selling
their
high-valued
space.
Business to consumer (B2C)
●
Reduced
wastage
consumers
instead
of
view
on
is
noted
instructions,
waiting
newspapers.
paper
This
to
be
helps
sent
to
by
news,
or
relatively
cut
costs
rms
that
insist
information
expensive
for
that
on
the
a type of e-commerce carried
web
brochures
out from a business to a
or
par ticular end user who is
businesses.
usually the customer or
consumer.
The benets of e-commerce to consumers
●
It
is
in
convenient
the
comfort
for
of
consumers
their
because
location
they
without
can
having
trade
to
on
visit
a
the
Internet
Consumer to consumer (C2C)
shop
a type of e-commerce that
physically.
allows for transactions from
●
Increased
gnitekraM 4
easily
make
deciding
●
Good
to
make
them
deliver
online
to
is
also
a
comparisons
online
makes
that
choice
a
customer
the
service
For
documents
the
of
advantage
various
for
consumers.
products
on
They
offer
one customer or consumer to
can
another.
before
purchase.
happy.
check
key
increases
example,
provide
customers’
delivery
tracking
whereabouts
of
numbers
their
satisfaction
companies
to
such
as
and
Fedex
customers
to
use
documents.
The costs of e-commerce to rms
●
Concerns
payment
●
by
process
Businesses
online
consumers
may
spend
fraud
by
about
lower
the
signicant
Internet
Internet
sales
security
and
regarding
growth
sums
trying
to
nd
criminals
trying
to
gain
the
potential
measures
access
to
for
to
rms.
curb
customers’
accounts.
●
Firms
may
product
●
Setting
for
be
vulnerable
details
up
many
high-risk
and
and
to
competitors
business
maintaining
businesses,
who
can
gain
access
to
their
information.
a
website
especially
can
start-ups,
prove
and
to
may
be
expensive
turn
out
to
be
a
venture.
The costs of e-commerce to consumers
●
Consumers
before
on
●
a
336
buying
chair
Online
major
may
not
them.
before
pop-up
have
For
buying
the
ability
example,
and
try
many
or
feel
certain
consumers
products
would
like
to
sit
it.
advertisements
distractions
to
and
advertising
time-wasters
by
spam
consumers.
are
considered
4 . 8
●
In
some
countries,
smartphones
a
●
problem
When
looking
so
consumers
access
the
experienced
sometimes
and
to
for
faced
they
to
too
lack
using
much
using
tools
Poor
consumers
information
with
resort
by
may
Internet.
in
a
some
search
information
other
such
Internet
means
of
as
computers
connectivity
E - C O M M E R C E
or
is
also
locations.
engine,
consumers
(information
getting
the
are
overload)
product.
Student workpoint 4.15
Be an inquirer
Examine
how
strategies
of
e-commerce
is
currently
inuencing
the
marketing
businesses.
rvso chcls
✓
E-commerce
is
the
buying
and
selling
of
goods
and
services
via
the
internet.
Common
global
✓
reach,
due
the
and
place
The
categories
where
(B2C)
✓
on
a
in
which
consumer
to
try
of
is
one
mix
in
ubiquity,
customisation,
standards.
technology
elements
e-commerce
trades
carried
to
or
and
security
out
universal
advancements
with
from
consumer
customer
e-commerce
effectiveness
and
include
of
has
product,
had
price,
a
great
promotion
businesses.
Consumer
internet
to
business
of
e-commerce
marketing
and
Benets
of
integration
E-commerce
impact
✓
features
include;
another
a
business
(C2C)
to
product
include
before
to
which
a
to
business
Business
customer
allows
or
to
(B2B)
consumer
consumer
transactions
from
another.
convenience
concerns,
Business
business,
gnitekraM 4
✓
a
wider
while
increased
purchasing
market
costs
of
reach,
cost
e-commerce
competition
and
a
are
lack
of
ability
it.
337
4
M A R K E T I N G
Pcc quso
Peace
Peace
that
Frogs
Frogs
are
and
product
a
branded
cycle,
with
products
other
its
the
the
In
The
PF
gnitekraM 4
A
species
“peace
are
Peace
PF
and
accessories
specializes
to
made
in
hats,
meets
multi-coloured
the
world.
because
peace
reached
the
and,
in
frog
other
items,
is
some
maturity
or
swimsuits,
organic
rigorous
using
refuses
children
of
in
the
always
frog”.
without
company
for
selling
introduced
cotton
sale
around
Frogs
shorts
sweatshirts,
The
the
from
symbol
the
shifted
and
has
its
has
had
of
among
frogs
PF
b)
Explain
c)
Analyse
PF’s
two
nancial
At
of
to
that
do
cotton
chemicals
not
stickers,
organic
purchase
PF
benets
retail
of
theme
using
parks
the
is
present,
their
and
T-shirts
to
certication
harmful
clothing
maintain
in
the
a
decline
several
to
as
11
vans
around
van
natural
which
from
rigorous
the
retail
in
the
species
habitat
several
strengthens
American
that
is
of
the
two
ethical
methods
PF’s
the
2012
importance
and
role
of
country.
Drivers
store.
number
frogs
main
of
face
threat
for
committed
[2
marks]
[6
marks]
[5
marks]
[7
marks]
distribution
product.
Discuss
states.
to
brand.
behaviour.
of
drive
organizations
e-commerce.
practices
of
stores
multi-coloured
contributions
protection,
ways
the
own
environmentalists
features
two
and
products,
destruction
makes
Identify
May
concerts
worldwide.
The
a)
IB,
As
company
environmental
d)
338
the
centres,
extinction.
of
the
employ
PF-branded
concern
to
clothes
sign”.
with
ags
name
company
The
e-commerce
1998
sell
them.
the
T-shirts
that
of
1985
Indian)
company
line.
selling
“peace
standards.
shopping
then
the
luck.
T-shirts,
environment.
uses
Since
good
in
national
chose
image
2007
manufacturers
safety
operations
the
the
clothing.
(American
product
company
making
various
for
include
items.
branded
standards.
to
symbol
life
American
frog
Jones
American
cultures,
a
after
Catesby
Native
an
by
started
designed
Founder
PF
is
young-adult
company
shorts
a
(PF)
branded
teenage
The
(PF)
branding
for
PF
.
5
O p e r at i O n s
m a n a g e m e n t
5.1 The role of operations management
By the end of this chapter, you should be able to:
➔
dene operations and describe their relationship with other business
functions
➔
comment on operations management in organizations producing
goods and/or ser vices
➔
discuss operations management strategies and practices for
ecological, social (human resource), and economic sustainability.
Wh  “oo”?
they
do
services
of
imagine
meet
the
they
large
can
a
production
bakery,
restaurant,
a
called
The
art
of
operations
lines
and
we
with
variety
as
they
and
think
oil
are
of
of
Every
are
all
to
the
or
plants,
best
is
we
machines,
large-scale
car
the
and
processes,
organizations
get
what
goods
organization
sophisticated
reneries
also
the
production
There
production
organizations:
produce
wants.
of
lines
forms.
school
managing
activities
how
long
of
such
a
i.e.
needs
When
factory
take
intensive
product.
fundamental
deliver,
consumers’
something.
a
production
to
what
that
producer
to
refer
and
but
with
end
a
tend
but
capital-
a
small
an
end
product
tnemeganaM snoitarepO 5
Operations
is
management.
th  fcoy
In ancient China, imperial and private workshops, mills and small
manufactories had been employed since the Eastern Zhou Dynasty (771–
221 BC), as noted in the historical text of the Zhou Li. In Europe, large mills
and manufactories were established in ancient Rome. The Venice Arsenal
provides one of the rst examples of a factory in the modern sense of the
word. Founded in 1104 in Venice, Italy, several hundred years before the
Industrial Revolution, it mass-produced ships on assembly lines using
manufactured par ts. The Venice Arsenal apparently produced nearly one
ship every day and, at its height, employed 16 000 people.
Operations
sector,
with
machines;
may
the
be
easier
image
however,
●
in
the
primary
●
in
the
secondary
of
to
a
understand
large
operations
sector,
factory
are
mining
sector,
in
found
or
the
with
in
case
long
all
of
the
lines
sectors,
of
secondary
sophisticated
for
example:
harvesting
industrial
manufacturing
339
5
O p e r at i O n s
m a n a g e m e n t
●
in
the
tertiary
sector,
●
in
the
quaternary
open-heart
sector,
surgery
business
consultancy.
Student workpoint 5.1
Be a thinker
1.
List
ten
types
organizations
(e.g.
sole
quaternary),
2.
Identify
always
The
study
products
book,
in
your
your
go
model
or
your
as
a
your
cellulose
process
Figure
how
the
exported
opportunity
level.
They
extracted
are
all
a
range
primary
Are
of
and
they
A
in
your
wood
simple
result
product
imported,
investigate
around
you
and
of
can
then
for
how
–
school
manufactured,
from
the
to
Look
furniture
are
nished
or
cover
(e.g.
organizations.
transformation.
The
to
that?
the
operations
5.1.1).
maybe
car.
pulp
of
those
is
concrete
clothes,
Try
sectors
1.2.
of
Why
very
know.
and
unit
provides
a
parents’
represent
(see
transported,
sold
at
computer,
(such
can
in
operations
operations
–
you
charity)
studied
main
made
through
process
as
that
straightforward?
house,
materials
that
of
are
the
trader,
at
using
your
this
and
raw
book)
input–output
a
transformational
then
be
packaged,
commercialized
and
bought.
tcudorp dehsiniF
slairetam waR
tnemeganaM snoitarepO 5
OPERATIONS:
INPUT materials
OUTPUT
PROCESS,
materials
TRANSFORMATION
Figure 5.1.1. Input–output model
Student workpoint 5.2
Be a thinker
1.
Apply
the
studied,
2.
useful
is
Apply
the
to
“the
can
340
input–output
for
example
that
to
an
organization
organization
you
chose
that
for
you
your
have
IA.
How
model?
input–output
input”,
you
model
the
draw
“the
from
model
process”
this?
to
and
your
“the
school;
what
output”?
corresponds
What
conclusions
5 . 1
T H E
R O L E
O F
O P E R A T I O N S
M A N A G E M E N T
Oo d h oh bu fuco
Operations
can
Operations
are
closely
linked
Operations
deliver
the
●
objectives
(see
someone’s
or
and
Operations
●
Unit
are
hairdresser,
controls
described
as
the
to
“what”
1),
for
“how
the
to”
other
question
example
of
business
management.
functions:
of
an
organization’s
manufacturing
cars
or
cutting
hair.
Operations
●
be
done
by
people
indirectly
in
programmes
need
funding
(see
the
the
Unit
case
of
2),
the
directly
car
manufacturer’s
(see
Unit
3)
and
in
factory
the
case
worker
of
the
who
machines.
all
nancial
aspects
must
In the hairdressing salon,
be
carefully
budgeted
and
monitored,
for
example
to
pay
the
car
operations are carried out directly
factory
worker’s
salary
or
to
ensure
that
the
hairdresser
breaks
even.
by employees
Operations
●
Unit
so
4),
that
produce
promoted
both
the
goods
and
and
sold
at
hairdressing
services
the
that
right
salon
must
price
and
the
to
car
be
the
marketed
right
(see
audience,
manufacturer
are
successful.
is
relationship
easy
As
a
to
between
understand:
consequence,
good
position
to
the
work
recommendations.
The
●
or
oor
(Unit
operations
not
or
the
may
or
likely
help
know
of
a
business
on
large
departments
direct
scale
costs
other
depend
one
functions
another.
company
and
make
is
in
a
valuable
examples:
experience
that
may
identify
organization
necessarily
obsolescence
the
manager
other
has
of
and
functions
some
manager
1.6),
of
the
are
diseconomies
weaknesses
would
operations
business
with
Here
operations
scale
all
(Unit
about,
of
take
some
1.3)
for
of
of
the
that
in
economies
on
the
of
factory
strengths
other
example
maintenance
the
place
and
departments
machinery
the
foreseeable
tnemeganaM snoitarepO 5
The
future.
The
●
operations
rewards
not)
for
(such
the
appreciate
good
The
●
as
in
the
in
turn
however,
a
that
an
have
just
result
about
operations
integral
4.5)
manager
part
in
it
of
in
of
may
forms
may
can
HR
forms
may
of
be
non-nancial
suitable
manager
motivation
be
on
could
the
(Unit
easily
have
which
costs)
advise
important
and
the
of
know
safety
may
may
be
(or
not
very
cut
which
that
have):
3.2),
point
product
implemented
of
costs
(Unit
and
(such
which
the
3.2).
interesting
organization
production
be
break-even
on
ideas
(or
that
extension
not).
The
would,
scale.
you
delivering”
sometimes
the
2.4):
diseconomies
is
which
teamwork)
practice.
impact
may
“doing
may
or
(Unit
some
manager
(Unit
suggest
energy
an
margin
consequence,
not
not
manager
operations
marketing
is
that
but
can
rotation
semi-variable
strategies
As
fact
theory,
organization’s
The
job
organization
operations
some
would
●
manager
as
understand
(despite
the
operations
and
its
that
operations
negative
image
management
decision-making
is
process.
341
5
O p e r at i O n s
m a n a g e m e n t
Student workpoint 5.3
Be a thinker
1.
Find
an
organizational
relationships
chains
2.
On
of
that
chart
of
an
workers,
organization
with
levels
of
showing
hierarchy
the
and
command.
organizational
workers
the
between
responsible
workers
in
the
chart,
for
identify
operations.
other
business
the
How
department
are
functions?
they
and
linked
What
can
the
to
you
conclude?
Oo d h oduco of ood o vc
Production
or
have
of
is
usually
non-physical
used
this
production
some
it
may
can
between
denitions,
as
not
be
shown
be
two
in
the
between
as
either
the
as
creation
(services).
distinction
products
products
dened
products
goods
or
extreme
of
and
and
and
(such
products
as
services,
services,
types,
physical
units
fundamental
goods
Table
Earlier
1.1
but
clear-cut.
there
there
is
in
(goods)
4.1)
terms
Although
also
can
and
be
a
range
an
of
overlap
in
5.1.1.
Table 5.1.1. Range of goods and services
Goods
High physical content but
High ser vice content
with some ser vices
but with some physical
Ser vices
products
tnemeganaM snoitarepO 5
Mobile phone, smar tphone
Cosmetic surgery
Consumer gets the product
Consumer gets the “new”
Customers travel from A to
Assuming that consumers
but there may also be after-
nose, breasts or wrinkle-
B but they may have a meal
don’t buy the T-shir t or the
sales service (for example
free face but there is
and watch a lm, all par t
CD or even the sponsor ’s
in cases of malfunction or
extensive treatment before
of the experience that the
soft drink , they only pay for
when updates are needed)
and after the operation
airline oers
the pleasure of the music
This
may
Figure
also
be
represented
through
a
Airline travel
continuum,
as
shown
in
5.1.2:
Pure goods
Combination of goods and services
Pure services
Figure 5.1.2. Continuum of goods and services.
Student workpoint 5.4
Be a thinker
1.
Consider
services”.
2.
How
the
the
useful
two
continuum
Locate
do
you
extremes?
management?
342
some
And
between
examples
nd
Can
this
you
maybe
“pure
of
visual
apply
even
goods”
products
on
and
“pure
this
continuum.
representation
it
to
to
other
other
between
areas
areas
of
of
business
knowledge?
Music concer t
5 . 1
There
if
in
could
the
exactly
where
example
the
his
not
computer,
he
was
Or
what
as
he
ultimately,
essential,
to
operations
his
does
the
without
wrote
dog,
In
matter?
in
the
you
as
For
about
the
he
be
of
In
the
plane
goods
must
and
operations
of
a
of
are
of
a
easy
book
to
he
the
alike,
would
the
did
write?
And
The
best
On
when
operations
situation.
provide
for
text?
Or
troposphere?
the
even
Where
ofce?
M A N A G E M E N T
identify
author,
about
home
chapters
to
O P E R A T I O N S
operations,
thought
the
O F
reading).
services
still
R O L E
always
his
or
adapted
goods
form
not
Think
sentences?
manufacturing
examine
is
book
mind,
thinking
notion
it
place.
the
his
the
some
sector
take
of
travelling:
it
the
author
place?
he
was
but
and
which
as
business
quaternary
the
take
walking
if
a
and
the
(such
operations
sector
be
tertiary
T H E
are
secondary
contexts
in
business.
Oo  d ubly
our
about
stages
raw
the
us
typical
of
the
materials
of
the
product
than
not
just
These
●
social
●
ecological
aim
use
protable
to
Social
–
be
cut
the
taken
is
the
most
If
where
manager,
correctly
in
is
of
defective),
process
however,
other
is
reminds
nished
the
planned
several
product
5.1.1)
the
it
and
appropriate
nished
(Figure
example,
identify
take
the
is
elements
and
factors
is
an
wider
executed;
into
account.
categories:
their
Ecological
for
to
a
some
is
is
to
more
also
(or
more
local
working
to
also
that
is
(for
called
managers
have
on
and
not
that
are
in
to
their
as
all
to
costs.
their
long
This
cases
it
The
best
term
(as
from
a
one
organizations
workers,
external
and
affected
case
of
as
are
internal
stakeholders.
employees
acceptable,
the
some
operate
more
negatively
example
in
energy
the
further
sustainability
towards
communities,
social
are
fairly
that
by
the
the
decisions
expansion
or
sustainability
factors
understand
the
continue
more
ensure
“environmental”)
may
to
as
respected;
efciency.
materials
over
economic
conditions
people
raw
protability
likely
greater
such
be
possible,
example,
costs,
responsibility
seek
For
and
must
whenever
through
terms.
called
fact
factors.
budgets
and,
example
resources
the
they
that
unnecessary
towards
is
fact
ensuring
their
local
the
minimum
for
organization
This
organization
“environmental”)
monetary
This
of
and
life
the
and
in
refer
aware
relocation).
more
to
management
different
manager.
(for
operations
have
available
next).
that
by
to
made,
consequence,
of
refer
ultimately
stakeholders,
quality
to
that
model
operations
need
the
choosing
ensuring
production
called
kept
be
to
factors
treated,
from
required
the
three
organization
the
becoming
a
to
an
will
also
into
measured
advantage
year
that
(also
should
to
of
of
operations
input–output
standard
role
factors
possible
is
The
factory,
controlling
factors
must
usually
may
and
factors
Economic
savings
The
manager
fall
economic
wastage
the
managers
factors
large
equipment,
ensuring
●
As
of
occurred.
a
process,
responsibilities
is
operations
is
and
required.
operations
error
of
organizing,
production
standard
the
example
planning,
tnemeganaM snoitarepO 5
In
natural
the
refer
to
negative
the
fact
impact
environment,
that
that
especially
their
different
343
5
O p e r at i O n s
forms
of
m a n a g e m e n t
pollution,
such
as
air
pollution
(from
carbon
monoxide
and
Key terms
CFCs),
or
water
noise
pollution
pollution
(industrial
(industrial
waste
near
can
factories,
noise
that
noisy
environment
also
affect
mills,
the
and
mines),
workers
Economic sustainability
themselves,
for
example
in
a
such
as
ship
building).
the need to use available
This
is
also
called
ecological
sustainability
(or
environmental
resources and raw materials
sustainability).
to their best advantage,
Economic
sustainability,
social
sustainability
and
ecological
sustainability
ultimately ensuring
are
also
called
“the
three
pillars
of
sustainable
development”.
Their
protability and nancial
combination
is
called
the
“triple
bottom
line”.
It
is
often
represented
in
a
performance
Venn
diagram,
as
shown
in
Figure
5.1.3.
Social sustainability
the need to take human
factors into account, both
internally (e.g. workers)
and externally (e.g. local
communities), when making
business decisions
Ecological sustainability
the need to take ecological
factors into account when
making business decisions
(especially about nature and
ecosystems)
Figure 5.1.3. The triple bottom line
Triple bottom line
This
“triple
bottom
line”
stresses
the
fact
that
business
decisions
should
the need to take economic,
not
only
consider
nancial
aspects
(i.e.
breaking
even
and
making
social, and ecological factors
money
for
shareholders),
but
also
the
well-being
of
local
communities
into account when making
tnemeganaM snoitarepO 5
and
the
natural
environment.
Although
this
is
relevant
for
all
business
business decisions
functions,
it
is
particularly
activities
may
nancial
transactions.
remains
most
an
have
ideal
more
In
rather
commercial
relevant
negative
many
than
a
for
operations,
impacts
cases,
than
though,
reality,
as
as
manufacturing
marketing
the
“triple
economic
campaigns
bottom
aspects
or
line”
largely
drive
organizations.
Student workpoint 5.5
Be a thinker
1.
How
can
notions
2.
you
that
and
344
have
studied
(CSR)
Consider
organization
the
one
“triple
managers?
This
you
“sustainability”
responsibility
is
3.
link
Can
bottom
and
in
social
line”
that
in
think
of
examples
types
of
sustainability
example
practices
for
1,
“triple
such
as
bottom
line”
corporate
to
social
you
have
studied.
decisions
made
How
by
important
senior
Why?
you
an
Unit
the
enterprise?
the
different
is
and
of
one
small
economic,
of
situations
business
social,
of
(economic,
and
conict
social,
organization
ecological
between
and
and
ecological)?
its
strategies
sustainability.
5 . 1
T H E
R O L E
O F
O P E R A T I O N S
M A N A G E M E N T
yduts esaC
th C Blc eco-lod
The word “eco-
●
Luis, why did you set up this business venture?
●
Of course I realized that there was a market
lodge” is used to
describe a type of
opportunity, but I also wanted to do something
accommodation
for the local community. You see, I grew up here
(lodge) that is
before I moved to Belize City where I worked in the
environmentally
hospitality industry. I am very attached to this area
friendly (ecowhich has so much to oer. With the eco-lodge, we
friendly). Ecowant to give tourists the chance to discover the
lodges aim to
beauty of the area, yet without destroying what we
minimize their negative impacts on the environment
have. We are totally embracing the principles of ecoand they make this very clear in all their promotional
tourism and sustainable development.
materials. They often receive ocial cer ticates
Luis, can you give us some concrete examples of
●
conrming that they fulll the criteria of sustainable
what that means?
development.
For example, all our electricity is produced from
●
The Casa Blanca Eco-lodge is located in the Mayan
solar power, and all our water is supplied by a
mountains of Belize in Central America. It targets three
nearby mountain spring. We make sure that we
types of visitor: rich tourists and jet-setters who seek
stay in harmony with the natural environment.
an exotic, nature-based holiday experience; young
backpackers keen to see non-coastal par ts of Belize;
So the eco-lodge is all about integrating the
●
accommodation in its environment, is that correct?
and environmental scientists working on research or
conservation projects.
Yes, this is true, although we go fur ther than that.
●
The rainforest around the eco-lodge oers many
We are fully integrated in the local economy; for
opportunities for exploration and adventure. Visitors can go
example we only employ local people and we only
horseriding or hiking up the many canyon trails with a local
use food produced from local suppliers.
guide, or they may prefer to canoe down the nearby rivers.
Questions
The abundant bio-diversity of fauna and ora contributes
1.
Which strategies and practices for economic, social,
to the tourist appeal of the area, from its butteries to its
tnemeganaM snoitarepO 5
and ecological sustainability can you identify?
jaguars, from its iguanas to its toucans, not to mention the
rare black orchids unique to that environment.
2.
Can you suggest to Luis Morillo Medina other
strategies and practices to ensure the economic,
Luis Morillo Medina opened The Casa Blanca Eco-lodge
social, and ecological sustainability of the Casa
in 2006. Here is an extract from an interview with Luis
Blanca Eco-lodge?
that was published in the magazine Eco-tourism Today
in 2012:
TOK discussion
rvo chckl
✓
Operations
are
the
fundamental
✓
Operations
are
done
✓
Operations
need
activities
of
●
organizations.
Is operations management
an ar t or a science?
by
people
–
human
resources.
●
to
be
funded
–
accounts
and
In terms of operations
nance.
and production, is there a
✓
✓
Operations
produce
and
the
sold
at
Operations
goods
price
management
environmental
three
right
areas.
factors.
and
–
is
services
marketing
inuenced
Operations
which
and
by
should
need
to
be
dierence between goods
promoted
and services?
sales.
economic,
aim
to
be
social
●
and
sustainable
in
all
Are “good working
conditions” universally
the same all over the
world, or could they vary
by country or by culture?
345
5.2 Production methods
By the end of this chapter, you should be able to:
dene and explain the following production methods:
➔
●
job or customized production
●
batch production
●
mass production
●
ow, line, or process production
●
cellular manufacturing
recommend the most appropriate method of production for a
➔
given situation.
A
business
may
are
use
a
organization,
range
dened
large,
in
of
Table
complex
such
as
production
5.2.1,
products
which
(cars)
a
factory
methods.
also
and
manufacturing
The
main
provides
smaller,
some
simpler
cars
methods
typical
ones
or
of
cakes,
production
examples
(cakes
or
for
cookies).
Table 5.2.1. The main methods of production
Type
Denition
Example
Job
Production of a special “one-o”
Custom-made cars with
(customized)
product made to a specic order
individualized accessories.
production
(for one individual customer).
A personalized wedding
tnemeganaM snoitarepO 5
cake following the bride and
groom’s own design, favourite
colours and required size.
Batch
Production of a group of identical
Car models with diering
production
products (the word “batch” refers
features for each model.
to the fact that the items in each
A series of cookies in
group go together from one stage
dierent avours: chocolate
of production to the next).
chip, peanut, and coconut.
Mass
Production of a high volume
Cars that are made to a
production
(hence the word “mass”) of
standard design.
identical, standardized products.
Identical, undierentiated
Flow production, process
cookies produced for a
production, and line production
mass market.
are alternative terms that stress
one par ticular aspect of the
mass-production process.
Cellular
Cellular manufacturing (also
production
called “cell production”) is a form
of mass production in which the
ow is broken up by teams of
workers who are responsible for
cer tain par ts of the line.
346
5 . 2
P R O D U C T I O N
M E T H O D S
Job oduco
Job
the
production
highest
is
end
originality,
and
a
of
the
market-oriented,
should
the
Job
This
is
is
cycle.
there
The
the
same
the
time
and
“blueprint”
to
be
a
clear
longer
after
be
produce
normally
the
charge
premium
deciding
on
what
production”,
with
quality
and
Production
the
is
product
which
means
that
customer.
objectives
–
and
and
expect
product
product,
careful
phase
–
has
inappropriate
the
is
prices.
precisely
development
the
associated
emphasis
“customized
specic
would
to
can
require
even
where
client
called
a
may
format
taken
for
the
requires
may
client
process
producer
also
method
market,
with
made
production
means
the
be.
order
production
the
greater
been
there
the
which
product
life
consultation
created.
another
as
planning,
of
time.
may
It
is
This
not
be
during
likely
can
a
that
add
to
successful
use.
Advantages
●
The
●
Clients
●
This
on
●
It
mark-up
get
is
likely
exactly
production
individual
can
be
a
to
be
what
high.
they
method
is
want.
likely
to
motivate
skilled
workers
working
projects.
exible
production
method.
Disadvantages
●
This
production
non-standardized
It
likely
is
with
●
the
There
is
to
This
be
client
a
time
than
of
method
the
can
can
when
that
client.
be
be
expensive,
requiring
skilled
workers
materials.
consuming,
possibility
knowledge
●
method
and
very
using
the
as
there
other
product
This
may
labour
is
much
production
might
reect
intensive
fail
badly
more
methods.
because
on
consultation
the
and
reliant
on
the
middle
of
of
the
lack
of
tnemeganaM snoitarepO 5
●
business.
skilled
workers.
Bch oduco
Batch
production
where
the
market-oriented;
range
of
have
Market
is
as
the
be
are
options.
will
into
can
associated
quality
components
taken
research
on
customers
consultation
to
normally
standardized
planning,
Some
is
emphasis
need
for
replace
products
made
although
that
of
with
the
need
to
be
customers,
market,
are
products,
production
exact
the
Products
customized
method
the
be
with
affordability.
offered
This
to
account,
and
still
but
using
requires
a
careful
interchangeable.
as
options
their
may
needs
be
limited.
consultation.
Advantages
●
Businesses
can
manufacturer
of
●
operators
Batch
more
achieve
makes
pools
production
market
economies
savings
on
of
its
scale
budget
(for
by
example
bulk
when
buying,
or
a
a
small
group
resources).
allows
customers
more
choice
–
and
so
captures
share.
347
5
O p e r at i O n s
Batch
●
production
through
Batch
●
m a n a g e m e n t
smaller
may
be
useful
for
trialling
products,
especially
quantities.
production
may
help
deal
with
unexpected
orders.
Disadvantages
Businesses
●
and/or
may
Businesses
●
The
(or
It
sizes
of
should
production
need
of
batches
is
known
to
are
allocated
recognized,
automation
is
hold
time
as
as
machines
“down
large
are
recalibrated
time”).
stocks
of
work
(in
case
of
orders).
labour)
be
production
(this
may
unexpected
●
lose
retooled
now
dependent
to
however,
allowing
on
the
capacity
of
the
machinery
them.
that
greater
increasingly
sophisticated
customization,
even
in
a
mass-
environment.
m oduco
As
it
names
production
products,
assembly
quality
indicates,
refers
typically
line.
automization
every
For
time
the
orders
tnemeganaM snoitarepO 5
high
at
The
low
term
the
of
of
“ow
different
stages
line
(i.e.
a
and
an
long
the
end
the
is
likely
large
sometimes
the
fact
conveyor
is
are
the
of
be
The
may
one
not
on
the
need
standard
careful
large,
“sunk
recouped
is
an
of
for
production
large
be
be
requires
rely
a
do
same
the
along
argument
product
as
the
process.
reliable
cost”
by
In mass production, most process
in
selling
therefore
a
sold
a
is
stages
a
by
“mass
continuous
image
of
a
through
the
stressing
step
in
for
a
product
Likewise,
too,
created,
uses
common
the
pause).
used,
different
synonym
the
terms
the
step)
the
idea
and
particular
“line
of
of
a
order).
Advantages
●
Once
●
The
●
●
set
business
the
system
can
cater
economies
Labour
may
costs
and
with
a
The
business
has
fully
be
needs
for
considerable
process
348
up,
large
of
low
can
as
respond
been
maintenance.
orders,
thereby
achieving
scale.
automated
already
little
the
jobs
process
to
set
an
required
they
increase
up.
are
in
are
are automated. In this factory,
bottles are transpor ted from one
machine to another
business
routing
gradually
through
to
must
(this
any
role
machines
must
to
materials
good
however,
used
belts
without
product
progression
(as
mass
standardized
quantities.
that
line
production”
a
of
raw
main
is
stages
products.
in
of
produce
investment
assembly
production
“process
all
and
is
to
quantity:
volume
its
there
production
standardized
along
of
on
There
stresses
so
about
ow
production,
this
market
all
high
production
the
product.
with
and
(where
Mass
viable,
term
materials
of
relied
production”
this
factory
process
be
is
a
unskilled;
functions,
synchronize
the
of
continuous
usually
set).
be
the
of
a
method
to
to
Taylorist
a
is
method
end
production”
using
can
are
nal
this
production”;
ow
this
and
process
up
by
production
production
robotic
order
volume
the
of
they
in
for
setting
or
breaks
planning
mass
the
Labour
control
regular
to
relatively
even
orders
unskilled
replaceable.
very
quickly,
as
the
5 . 2
P R O D U C T I O N
M E T H O D S
Disadvantages
●
Set-up
costs
●
Breakdowns
●
The
The
The
is
the
system
business
●
of
is
may
high.
costly,
very
as
the
whole
dependent
on
a
assembly
steady
line
may
demand
have
from
a
to
stop.
large
market.
inexible:
well
production
robotic
be
are
business
segment
●
will
be
if
left
process
there
are
holding
can
be
sudden
large
changes
stocks
demotivating
of
for
in
demand,
unwanted
workers
the
products.
doing
activities.
Comparison of the main production methods
The
three
different
main
methods
criteria
(such
of
as
production
set-up
time),
may
as
be
compared
shown
in
Table
according
to
5.2.2.
Table 5.2.2. Comparison of the three production methods
Set-up time
Job production
Batch production
Mass production
There is a long set-up time as
As set-up is usually a
There is a very long set-
there is a new set-up for every
modication of an existing
up as it takes time to
new job.
process, set-up time can be
synchronize the whole
reasonably fast. Otherwise it
process.
is as for mass production.
High
Capital (machinery)
Labour
Production time
Medium
Low
This can be exible as it depends
A mixture of machines is
This can involve large
on specic use.
used, but this method is
numbers of general-purpose
based on general-purpose
machines designed for a
machines.
specic function.
Highly skilled workers are needed –
Workers are semi-skilled
Workers are unskilled and
and may be craft workers.
and need to be exible.
need minimum training.
This is likely to be long.
Once set up, production can
tnemeganaM snoitarepO 5
Cost per unit
Production is swift.
be swift.
Stock
This involves low quantities of
High quantities of raw
There will be high quantities
raw materials and nished stock
materials are needed
of raw materials and
but a high amount of work in
(buer stocks). There will be
nished stock and a low
progress.
medium amounts of work in
amount of work in progress.
progress and nished stock .
Cellular manufacturing
Also
called
mass
who
“cell
production”,
production
are
attempt
workers
“pods”)
them
in
which
responsible
to
to
improve
operate
with
more
for
cellular
the
ow
certain
is
parts
mass-production
as
self-contained
autonomy
and
manufacturing
broken
of
the
up
line.
techniques
units
by
This
by
(called
responsibility,
is
a
is
a
of
more
or
order
of
workers
allowing
“cells”
in
form
teams
recent
teams
of
sometimes
to
motivate
more.
349
5
O p e r at i O n s
m a n a g e m e n t
Student workpoint 5.6
Be a thinker
1.
Can
you
have
link
“cellular
studied,
such
project-based
2.
Can
you
theories
3.
Can
link
“cellular
identify
traditional
method,
as
sector.
is
It
advantage
aims
of
of
well
nature
improving
of
the
responsible
wastage
a
it
cell
can
be
each
and
their
is
repetitive
elements
to
(Unit
that
2.4)
you
or
2.2)?
some
motivation
an
with
assembly
Besides,
given
by
greater
nature
as
of
can
they
It
will
is
come
of
line,
so
working
to
a
an
and
there
is
a
costs
directly
lead
halt
to
less
production
quality
parts
with
in
problem
of
close-knit
compared
assembly
competitive
three
cooperative
being
a
this
reducing
other
of
the
the
should
to
to
quaternary
greater
from
team
part
drawn
achieve
affecting
as
cellular
production?
the
easier
if
responsibility
on
the
This
also
without
working
been
lead
can
of
of
in
productivity,
checking.
rates.
have
industries
members
quality
and
methods
businesses
newer
increasing
quickly
disadvantages
other
improvements
own
with
with
the
with
production
rejection
process.
worker
the
cell
quality,
lower
dealt
production
of
production,
compared
explain
manufacturers,
Quality
for
and
and
that
many
production.
other
(Unit
manufacturing”
compared
many
believed
for
with
empowerment
structures
manufacturing
as
and
2.4)?
manufacturing,
Many
manufacturing”
teamwork
organizational
(Unit
you
as
the
team,
the
robotic
line.
Ch oduco hod
tnemeganaM snoitarepO 5
Once
a
business
method,
may
it
can
involve
renancing
to
not
the
These
●
●
are
some
are
the
the
At
the
to
most
that
Business
method
but
the
a
so
have
least,
resources
but
also
was
a
this
and
could
completely
process,
much
production
very
business
company
re-engineering
not
would
particular
At
human
drastic,
the
production
1990s,
a
change.
redeploying
its
means
business.
in
the
implications
may
roles
would
some
choice
perception
350
this
have
resources
Production
the
of
workers
human
managers
●
system.
production
Rening
These
the
implemented
costly
machines,
changing
tool
and
and
decide
reworks
the
entire
fashionable
now.
implications
for
all
the
functions.
Some
so
by
of
management
business
new
itself:
only
organization
Changing
chosen
difcult
retooling
re-engineer
itself,
has
be
of
runs
of
of
and
redeployed,
need
careful
implications
can
reect
product
the
be
HR:
to
be
responsibilities
require
the
to
would
for
the
available
business
may
retrained,
carefully
of
or
even
let
go,
managed.
workers
and
middle
planning.
for
marketing:
orientation
to
the
be
of
a
business
consumer,
altered.
so
the
as
well
image
or
as
5 . 2
Distribution
●
channels
may
be
affected,
which
may
lead
to
P R O D U C T I O N
M E T H O D S
differing
Key terms
response
times.
Changes
●
through
in
costs
of
changes
production
in
price
could
(which
be
are
passed
likely
to
on
to
mean
the
an
consumer
increase,
Job or customized production
at
production of a special “one-o”
least
in
a
short
term,
to
pay
for
the
transition
costs).
product made to a specic order
These
are
some
Changing
●
which
of
the
implications
production
affects
method
for
(for one individual customer)
nance:
will
have
an
impact
on
stock
control,
Batch production
costs.
production of a group of
Changes
●
causing
may
take
delays
in
time
the
and
could
working
interrupt
capital
current
identical products (the word
production,
“batch” refers to the fact that
cycle.
the items in each group go
Any
●
change
will
need
nancing,
whether
it
is
short
term
or
for
together from one stage of
signicant
developments
that
may
require
major
long-term
funding.
production to the next)
Mass production
What is the most appropriate method of
production of a high volume
production for a given situation?
(hence the word “mass”)
The
is
most
no
●
one
the
appropriate
correct
target
method
method.
market
–
will
Factors
for
vary
from
affecting
example,
the
business
the
to
decision
business
may
business
–
there
include:
be
of identical, standardized
products
producing
a
Flow, line or process
high
volumes
of
a
low-cost
product
for
a
very
large
market
with
little
production
disposable
income
alternative terms that stress
●
the
state
of
existing
technology
–
this
can
limit
how
exible
one par ticular aspect of the
production
can
be
mass-production process
●
the
availability
of
resources
–
xed
capital,
working
capital,
and
Cellular manufacturing
human
capital
a form of mass production in
government
regulations–
for
example,
a
business
may
have
to
meet
tnemeganaM snoitarepO 5
●
which the ow is broken up
certain
targets
for
recycling
or
waste
emissions.
by teams of workers who are
Once
not
a
business
easy
to
However,
change
it
Combining
might
but
have
$30
scale
There
is
adopt
a
a
the
be
In
single
particular
to
have
of
a
be
of
a
able
the
For
food
make
its
editions
products,
that
method:
a
of
and
a
for
as
green
order
on
iPhones
in
the
curry,
Tom
demand.
and
gold-plated
economies
satisfying
the
need
a
of
for
products.
business
always
before
of the line
restaurant
higher-market
are
contrasted
result
example
achieve
particular
responsible for cer tain par ts
is
methods.
making
Thai
special
while
there
may
a
luxury
it
involved.
and
famous
can
place,
different
such
dish,
most
business
and
model
popular
to
suggesting
compared
combine
example,
staple
in
costs
appropriate,
customized
production
to
different
less
limited
way,
more
recipe
be
when
efcient.
supply
method
opportunity
suitable
mass-produce
this
for
the
each
mass-produced
demand
disadvantages
can
also
of
and
of
even
might
production
methods,
batches
would
could
no
possible
continuous
models.
in
because
productively
and
from
changes
be
particular
advantages
Apple
but
000
it,
produce
soup,
Likewise,
iPads,
the
more
would
Yam
may
a
production
integrating
business
has
should
advantages
and
recommendation
made.
351
5
O p e r at i O n s
m a n a g e m e n t
rvo chckl
TOK discussion
✓
Job
(or
customized)
customer
or
production
client
of
a
production
decides
special,
is
what
one-off
market-oriented,
the
product
meaning
should
be.
This
that
is
the
often
●
Is there always an ideal
production method? Or
product.
does that depend on who
✓
Batch
production
creates
a
group
of
identical
products,
which
can
be
decides?
customized.
●
✓
Mass
production
creates
a
high
volume
of
identical,
What evidence and whose
standardized
experiences should
products.
business leaders consider
✓
Flow,
line
wherein
a
or
process
business
production
has
a
is
constant
an
aspect
ow
of
of
mass
materials
when deciding on the
production,
in
the
production
process.
✓
Cellular
workers
tnemeganaM snoitarepO 5
352
manufacturing
are
responsible
is
a
for
form
of
certain
manufacturing
parts
of
the
in
which
production
teams
process.
of
production method?
5.3 Lean production and quality management (HL only)
By the end of this chapter, you should be able to:
outline the following features of lean production:
➔
●
less waste
●
greater eciency
●
continuous improvement (kaizen)
●
just-in-time (JIT)
●
kanban
●
andon
➔
explain the features of cradle-to-cradle design and manufacturing
➔
outline the features of quality control and quality assurance
➔
explain the following methods of managing quality:
●
quality circle
●
benchmarking
●
total quality management (TQM)
➔
examine the impact of lean production and TQM on an organization
➔
explain the impor tance of national and international quality standards.
tnemeganaM snoitarepO 5
distinguish between the following methods of lean production:
➔
Wh  “l oduco?”
“Lean
production”
approach
waste
in
greater
to
the
in
other
fact
are
do
in
a
the
with
studying
too,
from
some
care
was
this
but
they
use
the
was
only
in
in
not
be
on
The
world,
and
all
that
lean
other
in
applied
as
the
(if
you
elements
that
manufacturing
of
cutting
in
one
production
lean
task
and
in
production
automobile
other
construction
such
fat
popular
to
management
the
to
aim:
companies,
of
an
of
rst
refers
the
is
types
one
was
much
idea
principles
and
services
lean
in
all
became
specialized
especially
from
and
(it
Taylorist
the
“lean”)
with
“lean”
of
century
applied
adopted
and
rid
workers
just
time)
without
idea:
based
or
cutting
origin
word
gets
new
on
Toyota)
the
20th
sectors.
the
of
a
of
conceptualizing
might
be
agencies
waste
meat
process
late
distribution
principles
focuses
Japanese
lean
factory
the
other
also
as
of
already
books
around
can
to
of
is
and
writing
all
logistics
This
lines
is
Literally,
piece
approach
and
spread
government
now
value.
that
(such
production
century
started
industries,
industry;
the
manufacturing”
manufacturer
1990s.
healthy
add
It
process
the
assembly
how
now
in
“lean
production
automobile
a
20th
2.4).
researchers
have
with
directly
Unit
other
the
eater),
early
waste,
(see
as
meat
not
by
Lean
countries
that,
called
management
production
efciency.
developed
(also
operations
to
education
industries,
retail.
and
Even
health
production.
353
5
O p e r at i O n s
The
starting
desired
by
point
the
the
“waste”
of
must
time
●
(for
waiting
in
a
products
●
space
materials
energy
●
full
In
the
is
just
or
Cutting
of
waste
is
organization’s
and
●
nancial
Physical
space
tnemeganaM snoitarepO 5
●
directly
heating
of
Human
resources
holding
cannot
are
stage
a
to
the
need
of
–
can
of
stock
the
the
stages
This
word
waste
or
process
reworked
being
of:
location)
half-constructed
be
is
all
for
production,
production
to
values
include
different
movement
much
then
eliminated.
which
from
the
possibilty
or
cars
itself)
scrapped)
produced
and
a
much
and
optimally
of
linked
will
the
high
before
be
to
as
be
aspects
greater
better
storage
or
of
of
skills
and
is
such
with
very
as
efciently,
and
as
waste,
the
deployed:
of
rent,
broad:
scrap
resources,
especially
because
such
at
process.
less
human
employed,
which
knowledge).
production
resources,
itself,
raw
power)
“waste”
the
of
used)
machines,
objects
expensive,
space
are
more
efciency:
used,
more
doubly
some
workers’
meaning
physical
used
is
using
the
of
quantity
they
require
substances
other
(such
can
too
stored,
without
both
the
lighting,
and
warehouse).
and
can
not
be
ties
used
deployed
travel
more
times
can
up
be
used
working
elsewhere
in
for
venues
example
(which
is
also
friendly).
more
capital
the
efciently,
between
environmentally
resources
stock
be
next
that
life,
manufacturing
sense,
under-utilization
all
unproductive
expensive
Financial
and
value
proportionally
(which
stock
the
too
disposal
resources)
a
by
not
resources
storage
the
anything
with
not
about
unused
reducing
●
but
lean
arrive
production,
the
resources
for
to
purchased
lean
about
for
defects
example
would
of
identifying
connection),
add
broad
in
battery
“overproduction”)
example
papers,
add
when
example
context
not
metal
(for
a
example
not
not
goal
in
consists
long
service
do
waiting
called
being
(for
key
example
is
(for
that
elements
(for
may
capacity
talents
●
a
example
this
inventory
●
after-sales
is
some
(for
(for
stored;
example
interpreted
example
factory
production
(for
process
waste
be
for
●
lean
easy
transportation
●
it
or
production
elimination
for
customer
customization,
of
m a n a g e m e n t
efciently,
(which
too
means
as,
for
that
example,
this
money
organization).
Student workpoint 5.7
Be a thinker
Can
1.
you
The
link
starting
How
2.
can
What
(Unit
3.
How
4.
Lean
such
354
lean
are
production
point
this
the
of
refer
best
lean
to
a
to
several
lessons
production
marketing
methods
of
from
consists
orientation
market
in
other
identifying
that
research
parts
to
you
the
have
identify
of
the
course?
values
studied
the
values
desired
(Unit
by
the
customer.
4.1)?
desired
by
the
customer
4.4.)?
can
a
shbone
production
as
the
acid
diagram
aims
test
at
(Unit
greater
(Unit
3.5)
1.6)
help
efciency;
and
stock
identify
how
can
turnover
areas
this
ratio
of
waste
appear
(Unit
in
in
a
production
ratios
3.6)?
that
you
process?
have
studied,
5 . 3
L E A N
P R O D U C T I O N
A N D
Q U A L I T Y
M A N A G E M E N T
( H L
O N LY )
mhod of l oduco
CHange
Over
the
years,
several
methods
of
lean
production
have
been
dened
As we learnt in the section 5.2,
and
implemented.
If
the
managers
of
an
organization
decide
to
adopt
changing production methods can
lean
production,
they
will
choose
the
method
that
suits
best
their
be costly and time-consuming.
context.
The
following
four
methods
are
particularly
important:
However, that has not deterred many
●
continuous
improvement
●
just-in-time
businesses from making the change
( kaizen)
towards leaner production. Read
(JIT)
about the car manufacturer Jaguar
(http://businesscasestudies.co.uk/
●
kanban
●
andon.
jaguar/lean-production/introduction.
html#axzz2xeH59wx2)
In what ways has the company
Continuous improvement (kaizen)
benetted from making the change
to lean production?
word
Japanese
lean
The
term
In
observe
more
It
●
as
is
its
to
inclusive
group
of
There
should
Systemic
●
some
Kaizen
The
the
main
require
high
employees.
will
the
levels
The
or
the
with
of
in
not
process,
kaizen
over
is
a
the
of
style:
the
is
any
to
Toyota.
occasional
as
on
often
what
boxes
the
they
however,
fact
problem
to
make
consider
on
of
the
that
period
a
(i.e.
the
philosophy,
parts
it
of
sense
unlikely
corporate
by
like
can
be
whole
not
just
a
only).
organization
kaizen
bureaucratic
to
not
and
Japan:
suggestion
Kaizen,
hierarchy
some
long
commitment
culture
the
hesitate
and
a
principles:
order
just
just
based
oor.
management
may
to
is
from
developed
involve
ideas,
key
attached
needed
and
momentum
leadership
leadership
is
may
department
employees
on
difculty
one
was
opposed
shop
of
originates
improvements,
good
the
levels
that
as
for
certain
all
kaizen
process
very
improvement”)
method
of
areas
on
blame
process,
focuses
necessary
or
no
thinking
production
●
be
of
adopt
managers
(otherwise
have
requiring
must
idea
this
directly
this
change,
suitable
may
“continuous
as
the
form,
nd
sophisticated,
be
used,
whole,
experience
must
means
continuous
themselves
or
organization
●
a
on
simplest
competitions
workers
(which
commonly
production
emphasis
changes.
or
“kaizen”
to
raised
suggestions).
the
is
whole
product.
difcult
time.
may
issues
it.
end
of
or
tnemeganaM snoitarepO 5
The
To
loyalty
under
maintain
so
by
inuence
work
to
do
would
the
this,
an
and
so
autocratic
culture.
Just-in-time (JIT)
A
business
ensure
may
that
it
hold
can
“buffer
stock”),
Holding
stock,
also
insurance
stocks.
is
●
or
JIC,
costs
stock
which
materials
demand
to
to
and
stock
control.
means
and
(or
a
sudden,
advantage
may
incur
even
the
levels
Stock
is
very
control
in
of
payroll
products
problem
for
many
reasons,
unexpected
bulk
several
“just-in-case”:
nished
of
(inventory)
any
take
however,
Controlling
called
stock
reply
purchasing
costs:
costs
important
is
based
case
production
of
only
staff
for
on
holding
in
not
of
a
a
or
example
(this
raw
look
business:
of
the
to
called
materials.
storage
balance
sudden
in
of
who
reserves
a
for
demand
costs,
after
this
but
the
function
between:
both
raw
increase
supply
in
chain)
355
5
O p e r at i O n s
JIT:
●
avoiding
and
The
is
and
the
contributes
between
optimal
JIT
to
by
only
traditional
production,
storage
stock
produce
difference
control
JIC
to
m a n a g e m e n t
facilities)
JIT
stock
two
and
able
that
and
of
JIC
pillars
be
supplies
less
the
factors
further
control;
company
of
greater
get
and
will
stock
the
to
only
when
necessary,
ordered.
levels
method
means
the
being
when
efciency
however,
will
waste
not
(there
(not
affecting
explored
hold
is
no
having
in
in
stock
unit
terms
buffer
waste
money
5.5.
of
lean
stock,
of
which
space
tied
up
in
in
stock).
Kanban
“Kanban”
the
is
another
Japanese
supports
notes
basic
that
Imagine
may
level,
telling
next
JIT.
the
stage
this
steady
is
of
of
to
control,
that
are
of
boxes,
a
tnemeganaM snoitarepO 5
in
similar
to
other
read
used
are
increasingly
–
of
a
for
used,
some
are
a
aim
or
the
the
card
is
to
is
and
a
At
of
a
a
very
message,
to
the
operations
could
The
not
that
sticky
move
ensure
resources.
from
systems
other.
is
terms
labels
with
is
help
a
a
be
xed
regular
rate
tool
electronic
good
the
of
of
automotive
basic
sent
to
in
their
principle
the
can
to
of
on
and
demand
stock
right).
and
be
works
best
transferred
tell
expression
bars
an
process
own
industry
salespeople
kanban;
code
example
production
innovative
the
of
to
In
Kanban
This
to
be
emails
form
the
example
stock.
the
of
stickers
place
for
originates
production.
factory,
contexts,
one
kanban
computerized,
also
also
to
coloured
time
lean
from
example
available
of
A
production.
may
originates
one
next,
such
interpreted.
in
(which
do
shipments:
all
and
manufacturing
are
how
facilitate
directly
kanban
areas
products
to
from
to
idea
coloured
about.
reorder
waste
rate
cards
products
Although
any
the
tool
or
is
what
or
the
refers
with
around,
now
as
Kanban
table
kanban
workers
without
kanban
other
large
moved
consider
word,
Toyota.
production
directly
innovation
a
what
control
but
Modern
is
items,
ow,
used
be
factory
management,
groups
Japanese
company
them
that
“ekanban”
is
too.
A kanban card
Andon
Another
electric
staff,
356
Japanese
or
even
term,
electronic)
managers)
andon,
which
of
a
refers
informs
problem
to
a
signal
workers
(typically
(usually
visual
(supervisors,
a
quality
and
maintenance
problem
or
some
5 . 3
delay
in
system
When
with
a
a
of
will
same
will
Andon
has
all
levels
on
of
time
is
involved
The
●
whole
enables
Originally,
here”);
a
do
chain
not
be
of
the
kanban,
and
defect
alert
possible,
when
the
the
–
again
the
an
it
will
–
( H L
O N LY )
andon
anomaly
and
means
in
with
should
workers
or
system
This
dealing
database
kaizen
chain
to
a
the
a
that
the
spirit
of
problem.
occur
again
promptly
The
(at
the
retrieve
solution.
provided
specic
to
symbols,
including
time
notied
(workers
at
engineers).
monitoring
production:
their
solving.
all
learns
were
modern
immediately
teams
(even
the
ones
that
did
not
get
incident).
(continuous
alerts
are
spend
problem
organization
or
as
command,
need
spent
that
andon
text
a
product
immediately.
time
one)
causes
production
however,
as
another
and
M A N A G E M E N T
from
problems
and
mistakes,
which
improvement).
simple
systems
with
its
(such
can
audio
a
red
include
alarms
signal
other
meaning
forms
of
“problem
displays,
too.
tnemeganaM snoitarepO 5
such
help
in
a
triggers
quickly
of
kaizen
Q U A L I T Y
advantages:
can
in
example
and
as
Like
A N D
factories.
worker
logged
the
instead
Feedback
●
or
the
Supervisors
●
(for
the
waste
be
about
Toyota
come
less
then
other
Workers
in
resolved
workstation
information
●
be
P R O D U C T I O N
workstation).
occurs
production:
problem
a
machinery),
co-workers
problem
lean
at
developed
problem
the
team
process
was
L E A N
An andon signal
Cdl-o-cdl d d ufcu
Cradle-to-cradle
to
design
and
development,
The
term
product
the
been
products
of
“cradle”
such
as
clothes
manufacturing
At
from
ofce
a
the
to
or
to
should
based
on
refers
principles
to
of
a
recent
approach
sustainable
recycling.
refers
book
“cradle
again.
or
a
used,
products
and
especially
expression
have
design
manufacturing
the
a
production
car.
grave”:
be
it
–
but
phase,
“cradle
recycled
this
number
furniture
term
suggests
entirely
moment,
small
The
of
the
is
only
that
to
the
the
creation
cradle”
products,
create
companies,
current
i.e.
to
case
for
the
for
a
once
same
small
example
socio-cultural
of
comes
a
from
they
new
number
some
momentum
357
5
O p e r at i O n s
towards
design
environmental
and
entirely,
To
to
the
full
ofcial
several
●
the
reutilization
●
the
amount
renewable
of
the
amount
●
the
corporate
about
that
fair
topic
infancy:
Cradle
of
the
and
will
more
what
car
water
social
put
pressure
products
that
on
are
companies
partly,
if
to
not
cradle
(C2C)
example
itself
necessary
for
certication”,
products
regarding:
(recycling,
the
strictly
recycling
speaking)
process,
ideally
needed
and
it
design
of
the
(CSR)
recycling
of
the
process
company,
will
mean
“Ford
of
what
U”,
using
the
more
a
for
instance
the
21st
U
to
and
exists
as
a
cradle
could
do.
its
This
Ford
has
oil
to
means
rened
century
engine
only
in
Cradle
companies
example,
for
still
The
2012.
many
sunower-seed
Ford
cradle
For
car
in
dened
development,
is
called
launched
practice.
Model
however,
was
become
and
in
manufacturing
organization
Institute
research
could
and
non-prot
features
example
part
responsibility
eco-friendliness,
–
as
practices.
their
foam
theoretical
energy
called
and
to
for
material
Innovation
of
a
seat
the
independent
exploring
recycling
of
cradle-to-cradle
part
concept
“cradle
criteria,
labour
criteria
As
based
of
Products
the
time.
more
energy
●
The
sustainability
manufacture
recycled.
receive
need
m a n a g e m e n t
over
are
proposed
based
and
prototype
on
soy-
and
as
a
Student workpoint 5.8
Be a thinker
How
can
other
you
parts
of
link
the
cradle-to-cradle
course?
design
and
manufacturing
to
Consider:
tnemeganaM snoitarepO 5
●
Unit
5.1
about
the
three
●
Unit
1.3
about
CSR
●
Unit
1.4
about
STEEPLE
types
of
sustainability
analysis.
Quly cool d quly uc
A
key
past
component
this
quality
a
move
came
was
W
.
products
Quality
of
largely
is
still
due
increased
●
repeat
●
reduced
●
premium
has
of
quality
sprung
assurance.
to
the
inuential
for
management
matter
Deming,
important
●
a
that
quality
Edwards
are
operations
much
revolution
towards
about
theorist
very
a
work
from
This
of
whose
the
Japan
issue
man:
about
in
the
of
but,
since
change
one
ideas
is
control
1945,
quality
US
how
quality.
thanks
to
to
there
In
the
the
has
been
management
management
produce
quality
today.
producer
as
it
can
lead
to:
sales
customers
(brand
loyalty)
costs
pricing.
W. Edwards Deming
358
5 . 3
From
a
marketing
product
to
bring
perception
tables
hugely
not
is
The
term
reliable
●
safe
●
durable
●
innovative
●
value
the
a
it
British
a
product
rewards,
then
business
need
but
that
as
can
schools,
businesses,
not
is
–
suggests
going
it
is
–
not
long
often
airlines,
even
if
A N D
the
be
as
be
or
Q U A L I T Y
a
( H L
O N LY )
high-quality
the
consumer
enough.
MP3
product
M A N A G E M E N T
So
league
players
voted
can
“the
be
best”
is
that
to
be
GM
Leyland
to
the
get
from
the
Ford
never
did
is:
down
last
gained
and
product
break
way
what
showed
have
a
fail
you
benet
not
to
to
leading
revolution
may
that
going
going
money
amount
fact
is
could
car
quality,
for
not
–
quality
huge
it
is
for
range
Honda
is
–
it
these
P R O D U C T I O N
so!
●
The
of
quality
–
of
“top”
important
actually
viewpoint,
all
one
showing
L E A N
that
in
you
by
brand
only
work
just
of
functionality
or
design
for.
businesses
not
good-quality
producing
are
pay
even
producing
same
terms
image
as
a
to
the
BMW
,
good-quality,
starting
at
top
products.
there
cheaper
realize,
and
end
While
is
still
cars.
of
a
a
This
Rover
and
out.
high price
archos
beosound
iriver
apple
rio
high
low
quality
quality
sharp
tnemeganaM snoitarepO 5
creative (muvo)
oregon
ministry of sound
mpman
low price
Figure 5.3.4. A way of mapping products based on scales of quality and price
Student workpoint 5.9
Be an inquirer
An
IB
They
of
a
the
created
quality.
some
did
a
a
research
survey
magazine
product
They
of
to
all
for
nd
the
an
that
best-quality
external,
positioning
concluded
the
students,
map,
quality
reliable
with
is
then
the
not
MP3
used
player.
the
website
judgment.
two
always
axes
of
They
price
reected
in
price.
Why
The
did
professional
then
and
class
initially
not
move
try
from
summarized
between
the
the
as
same
exercise
“quality
in
two
Table
control”
5.3.1,
for
to
a
product
“quality
which
shows
of
your
choice?
assurance”
the
major
can
be
difference
systems.
359
5
O p e r at i O n s
m a n a g e m e n t
Table 5.3.1. Quality control versus quality assurance
Quality control
Concept
Quality is “controlled” by one person (the
●
Costs
Quality assurance
manager) by inspection after the production
overall control of quality; the whole business is
run has been completed
focused on ensuring quality production
A cer tain % reject rate is set, for example 2% of
●
Quality is “assured” because no one person is in
●
Zero rejects are expected – every product is
●
products are allowed to fail
Processes
expected to pass inspection
●
Wasteful production
●
Lean production
●
It is rare to halt production as it is costly to do so
●
The company expects to halt production to x
●
Associated with assembly line, ow
errors
●
production
●
Associated with cellular or modular production
Quality stops with the job; the focus is only
●
Quality includes suppliers and after-sales
on the job at hand
People
servicing
Quality is the responsibility of one person – a
●
Quality is the responsibility of the team –
●
quality inspector
In
order
to
embrace
is
for
difcult
benecial
to
“Role culture”
●
Total quality culture
●
Autocratic leadership
●
Democratic consultative leadership
●
Top-down, one-way communication
●
360-degree communication
total
and
to
manage
●
quality
a
quality circles
assurance
quality
costly
the
to
achieve
business
quality;
tnemeganaM snoitarepO 5
●
quality
●
benchmarking
●
total
the
to
work
cultural
in
the
in
the
long
following
effectively,
shift;
as
with
short
run.
three
a
term,
Several
are
the
whole
kaizen
but
it
may
methods
particularly
business
approach,
well
are
has
this
prove
possible
important:
circle
quality
management
(TQM).
Quly ccl
A
quality
circle
(employees
who
The
in
meet
meetings
market
meet
and
several
any
times,
topic
issues.
a
of
range
will
example,
the
as
staff
The
be
able
when
as
a
to
on
the
improve
and
suggest
team
of
circle,
to
discuss,
in
or
principle
of
up
they
idea
be
of
hierarchy)
the
a
understand
group
needs
they
could
on
coming
of
the
from
quality
company;
for
members
enabling
the
(such
trained
focus
working
the
thereby
quality.
be
necessarily
that,
turnover,
solutions
to
to
ways:
may
quality
of
successful,
members
views,
to
with
the
the
staff
different
be
not
different
is
overall
needs
comparable
quality
operate
levels
improving
(who
would
issue
come
is
volunteers
all
group
organization,
to
ways
leader
This
of
from
focus
the
an
group
and
company,
present
learning
turnover)
a
underlying
may
a
a
may
want
discussing
circle
by
whereas
to
formal
facilitation).
circles
they
a
and
although
perspectives
quality
company,
discuss
group
as
departments
facilitated
Quality
specic
circle
360
are
dened
to
research,
continuity.
choose
be
different
regularly
leadership
for
can
from
problem
as
of
the
(such
reducing
safety
5 . 3
hazards
and
managers
solutions
As
in
a
that
tool
Japan
from
giving
doing
of
are
about
1962.
Japan
after
in
and
more
the
the
A N D
This
Q U A L I T Y
is
focus
not
here
the
is
M A N A G E M E N T
same
on
( H L
O N LY )
as
generating
quality.
Second
countries
not
exibility).
exercise:
illustrates
countries
did
P R O D U C T I O N
enhancement,
This
some
Anglo-Saxon
spread
workers
consultation
quality
in
common
a
L E A N
prove
World
(such
and
quality
again
War.
as
the
and
Europe,
were
rst
quality
Quality
Japan
Western
that
circles
how
circles
are
China),
where
established
revolution
now
though
the
came
very
less
method
so
did
in
not
successful.
Student workpoint 5.10
Be a thinker
1.
What
their
2.
skills
may
training
Quality
circles
(such
as
could
that
facilitators
of
quality
circles
need?
What
could
require?
are
South
very
East
common
Asia)
but
in
not
some
others
regions
(such
as
of
the
world
Europe).
Why
be?
Bchk
is
about
comparing
Benchmarking
is
a
that
reference,
can
then
some
A
of
to
stars
used
standard
what
as
from
they
the
classify
a
expect
of
their
take
and
those
follow
copying
processes
several
in
in
their
specic
innovation)
the
model
done
in
to
keep
In
all
a
to
cases,
and
has
want
to
its
success
“think
not
hotel
follow
way,
of
for
those
a
the
is
to
in
their
can
company
company
competing
quality
who
industry
practices
be
done
already
have
on
and
in
existing
a
quality
they
Benchmarking
businesses
the
much
may
that
know
managers,
do.
so
communicating
emulate.
their
number
their
not
benchmarks
a
of
the
improve
wish
Benchmarking
use
is
business
leader
It
of
different
could
they
point
businesses
consumers,
understanding
another
with
they
market
about
and
is
for
practices”.
standards);
study
a
the
with
useful
how
the
may
hotel
useful
should
quality.
example
then
is
very
as
and
and
identify
can
acting
also
as
be
together
date.
the
to
organization
too,
may
collaborative
up
readiness
new
they
products
as
(for
This
or
–
competitors.
As
benchmarking
ve-star
“best
your
use.
standards
of
services,
improve
(such
and
also
players
to
established
identify
companies
issue
and
and
rivals’
to
Some
industry
is
organizations’
the
quality
it
them
best
a
hotel.
but
help
the
order
ways.
–
yourself
businesses
example
hotels:
products
Businesses
are
practices
three-star
benchmarks
quality
about
their
well-known
can
many
benchmarks
compare
competitors.
tool
tnemeganaM snoitarepO 5
Benchmarking
to
carry
may
of
benchmarking
outside
not
on
as
the
it
box”,
always
necessarily
relies
trying
has.
work
to
on
Besides,
for
the
business’s
introduce
what
another,
so
something
works
for
one
benchmarking,
limits.
361
5
O p e r at i O n s
m a n a g e m e n t
tol quly  (tQm)
Key terms
As
indicated
that
by
permeates
TQM
can
kanban,
they
its
the
include
and
may
name,
whole
quality
andon.
be
TQM
All
an
approach
to
quality
enhancement
Lean production
organization.
circles
these
combined
is
and
and
quality
benchmarking,
tools
integrated
in
are
a
not
wider
as
well
mutually
as
kaizen,
exclusive;
framework
of
TQM.
a Japanese approach to
operations management
focusing on less waste and
greater eciency
Some
other
possible
features
of
TQM
are
outlined
in
Table
5.3.2.
Kaizen
Table 5.3.2. Other features of TQM
a method of lean production
Feature
Purpose
Quality chain
As the quality of a business depends on the quality of its
based on continuous
improvement
suppliers and after-sales service, all stages of the production
JIT
process must have concern for quality. A possible way to
consider this is by imagining that the next par t of the chain
“just-in-time”: a method of
is the nal customer.
stock control which means
avoiding holding stock by
Statistical process
All stages of production are monitored and information
control (SPC)
is given to all par ties, usually in the form of easy-to-
being able to get supplies
only when necessary and to
understand diagrams, char ts, and messages.
produce just when ordered
Mobilized
All employees (at all levels of seniority and in all depar tments,
workforce
even the ones not directly in contact with products or
JIC
customers) are expected to embrace TQM. Everyone is
“just-in-case”: holding reserve
encouraged to feel pride in their work, given responsibilities
of both raw materials and
and recognition, for example through employee of the month
nished products in case of a
schemes – so everyone is included in the quality decision-
sudden increase in demand
making process.
(or of a problem in production
Market-oriented
By focusing on what the customer wants, the business can
production
make sure that it is innovating and continually reinventing its
or in the supply chain)
Kanban
tnemeganaM snoitarepO 5
products. This can lead to improved sales and brand loyalty.
a system of messages
(written or electronic) to help
Student workpoint 5.11
manage production ows and
JIT delivery
Be knowledgeable
Read
the
Mattel
Mattel
such
text
in
has
below
and
answer
the
questions
that
follow.
Andon
a system of signals and
China
recalled
recall
in
two
more
than
18
million
toys
worldwide,
the
second
aler ts informing workers
of a problem that requires
weeks.
immediate attention
Chinese-made
recalled
because
containing
Batman
Sarge
small
Magna,
die-cast
their
paint
magnets
Doggie
toys
from
contains
that
can
Daycare
the
lead.
come
and
Pixar
Mattel
loose,
One
Piece
lm
has
Cars
also
including
playsets.
have
been
recalled
Polly
toys
Pocket,
Cradle-to-cradle design and
manufacturing
Previously
a recent approach to design
the
company
had
recalled
Dora
The
Explorer
dolls’
houses.
and manufacturing based
The
Consumer
reports
of
any
Products
injuries
Safety
from
Commission
the
recalled
(CPSC)
said
it
had
no
products.
on principles of sustainable
development, especially
recycling
1.
Outline
the
2.
Explain
what
3.
To
what
this
362
type
possible
may
extent
of
costs
be
the
would
problem
a
in
to
Mattel
costs
of
system
future?
of
not
of
recalling
recalling
TQM
help
its
the
toys.
toys.
Mattel
(2
marks)
(4
marks)
overcome
(8
marks)
5 . 3
Lean
production
and
TQM
L E A N
are
P R O D U C T I O N
closely
linked.
A N D
Lean
Q U A L I T Y
M A N A G E M E N T
production
( H L
O N LY )
focuses
Key terms
on
less
and
waste
quality
and
greater
efciency,
enhancement.
For
a
TQM
focuses
company,
on
quality
implementing
assurance
lean
Quality circle
production
and
TQM
has
many
advantages:
a formal group of volunteers
It
●
can
create
closer
working
relationships
with
all
stakeholders
(employees from dierent
(including
suppliers
and
customers).
departments and from all
●
It
can
motivate
●
It
can
reduce
●
It
can
improve
●
It
can
enhance
the
levels of hierarchy) who
workers.
meet regularly to discuss and
costs
(especially
long-term
costs).
suggest ways of improving
the
design
the
and
production
reputation
of
the
of
quality
products.
quality in their organization
company.
Benchmarking
However,
implementing
disadvantages
lean
production
and
TQM
has
some
a tool for businesses to
too:
compare themselves to their
competitors in order to identify
●
It
is
costly
●
Staff
●
It
may
●
It
can
●
It
is
(especially
in
the
short
term).
how they can improve their own
may
need
signicant
training.
operations and practices
take
time
to
change
a
corporate
culture.
TQM
create
a
lot
of
stress
on
formal
relationships
in
the
business.
an approach to quality
difcult
to
maintain
over
a
long
period
of
enhancement that permeates
time.
the whole organization (as
TQM
and
lean
production
are
more
commonly
used
by
businesses
a wide framework, TQM can
that
are
new
or
looking
to
make
signicant
changes
to
retain
their
include quality circles and
competitive
advantage.
However,
many
long-established
businesses
benchmarking, as well as
now
also
understand
that
their
traditional
approaches
to
operations
kaizen, kanban, and andon)
they
need
production
to
make
and
quality