Marketing & Operations
CfE Higher Business Management
Class Notes
Contents
Physical Distribution Decisions...................................................................................................... 32
Factors affecting Distribution ........................................................................................................ 33
Retailers ......................................................................................................................................... 35
Wholesalers ................................................................................................................................... 37
Wholesalers ............................................................................................................................... 37
Direct Selling.................................................................................................................................. 38
Promotion...................................................................................................................................... 39
Methods of Advertising: ................................................................................................................ 42
Controls on Advertising ................................................................................................................. 45
Sales Promotion ............................................................................................................................ 45
Public Relations ............................................................................................................................. 47
The Extended Marketing Mix ........................................................................................................ 48
Ethical Practices............................................................................................................................. 48
Technology in Marketing............................................................................................................... 49
The Role and Importance of Operations in Organisations............................................................ 50
Stock Control ................................................................................................................................. 52
Deciding on the quantities of stock held ................................................................................... 52
The Kanban system .................................................................................................................... 55
Distribution and Delivery .............................................................................................................. 57
Warehousing.............................................................................................................................. 57
Transport and Delivery .................................................................................................................. 58
Scheduling.................................................................................................................................. 58
Production Systems ....................................................................................................................... 59
Production systems in manufacturing .......................................................................................... 60
Types of Operation ........................................................................................................................ 62
Labour-intensive v Capital-intensive Production .......................................................................... 65
Factors affecting Quality ............................................................................................................... 66
Quality assurance ...................................................................................................................... 66
Quality control v Quality assurance .......................................................................................... 66
Quality Standards ...................................................................................................................... 67
Quality Management (QM) ....................................................................................................... 68
Introducing and implementing quality assurance or QM systems ........................................... 70
Benchmarking ............................................................................................................................ 71
Payment Systems .......................................................................................................................... 73
Environmental Responsibility........................................................................................................ 76
Ethical Operations ......................................................................................................................... 78
Technology .................................................................................................................................... 79
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The Role of Marketing
What is a market?
A market can be defined as a meeting place for buyers (consumers) and sellers. Markets can be
set up in a shop, restaurant, over the telephone/ internet, at a car boot sale, etc.
A market consists of the individuals or organisations who are actual or potential buyers of a
product or service. Markets may be classified as consumer markets or industrial markets.
Consumer markets are made up of individuals who purchase goods or services for personal or
domestic use. They make most of their purchases from retailers and buy a combination of
consumable goods, such as food and durable goods such as cars, televisions, and clothes.
Consumable goods are bought more frequently than durable goods.
Industrial markets are made up of organisations that purchase goods or services to use in the
production of other goods and services. They buy a combination of consumable goods, such as
raw materials and longer-lasting durable goods, such as machinery and equipment.
What is marketing?
Marketing Manager Required
Here is your chance to influence the spending habits of a discerning sector of the
population and manage a world-famous cosmetics company. Reporting to Senior
Management, you will develop and implement a marketing strategy for a range of
brands. You will have responsibility for market research, promotion and
advertising, direct mail activity and preparation of publicity material. Additional
responsibility will be for new product development and branding in order to
expand our market base.
The marketing activities contained in the above job advertisement are italicised in the text.
The Chartered Institute of Marketing defines marketing as ‘the process involved in identifying,
anticipating and satisfying consumer requirements profitably’.
The role and importance of marketing in organisations
•
Identify
•
Anticipate
•
Satisfy
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1
To identify consumers’ requirements
Businesses must identify what exactly a consumer wants from a product or service. There is
little point in providing something that does not meet consumers’ requirements – they simply
will not buy it. Marketing departments aim to ensure that consumers buy products or services
and that they continue to do so (that is, make repeat purchases).
Firm’s today face a lot of competition and consumers’ expectations are increasing and
becoming more sophisticated. Requirements change frequently and the marketing department
must make sure the product or service is developed or altered to meet these requirements.
The role of marketing is, therefore, an increasingly important one in today’s business world.
Price and quality have always been important factors in whether or not a consumer will buy,
but so too have prompt delivery, attractive packaging and after-sales service. Advertising and
promotion play a big part in influencing consumers to buy.
2
To anticipate consumers’ requirements
The role of the marketing department is to find out what consumers want today and will want
in the future. Consumer trends must be considered in order to anticipate future needs. This is
especially important in markets where trends and fashions change rapidly (e.g. clothing, toys),
or where technological changes occur frequently (e.g. computers). It may be necessary to
develop new products quickly to stay ahead of competitors.
3
To satisfy consumers’ requirements
The consumer is the most important consideration for most businesses today – businesses are
often said to be ‘consumer (or customer) focused’. Without consumers the business would fail.
Good service and quality products that offer value for money are essential.
Prompt delivery and good after-sales service are also important, as are well presented and
packaged goods. It is vital that the product is available at the right price and at the right time.
These three aims, for the majority of businesses, must be achieved profitably. There is little
point in spending large amounts of money on marketing if costs are greater than revenue.
However, organisations do exist where profitability is not an objective. Schools, hospitals and
charities also use marketing techniques in order to become more effective in satisfying
consumers’ requirements.
Market Share
The share of the whole market (sales/customers) that one organisation has.
Market Growth
When the amount of sales and customers within a market increases.
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Market Segmentation
The Consumer
Why do consumers purchase one product over another similar product? For example, what
makes people purchase iPhones, Samsung or Blackberry. Organisations target different
products to different consumers, which can be referred to as market segments.
Some of these segments include:

age

gender

disposable income – how much the consumer has available to spend

marital status

taste/fashion

Social class (see table below) – particular jobs tend to have certain life-styles attached. By
dividing the market by job classification, appropriate products and services can be
targeted towards particular groups.
Socioeconomic
group
Social ‘class’
Most likely types of
occupation
Examples
A
upper or upper
middle
managerial/professional
surgeon/director/lawyers
B
middle
intermediate managerial/
professional
bank manager/
teachers/nurses
C1
lower middle
supervisory/clerical
bank clerk/shop assistants
C2
skilled working
skilled manual
joiner/cooks
D
working
semi-skilled
driver/fitters
E
poorest in
society
low paid
casual worker/state
pensioner/long-term
unemployed
This classification was updated in 1998 to reflect more accurately the employment conditions
such as job security and career prospects. The government table below differs from the ABC
classification used by market researchers, which concentrates on income differentials.
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SocioDescription
economic
group
1
Examples
Higher managerial and professional
occupations
1.1
employers and managers in
large organisations
1.1 Company director; corporate
manager
1.2
higher professionals
1.2 Doctor, lawyer
2
Lower managerial and professional
occupations
Nurse, journalist, police
3
Intermediate occupations
Clerk, secretary, computer operator
4
Small employers and own account
workers
Farmer, taxi driver, window cleaner
5
Lower supervisory, craft and related
occupations
Plumber, TV engineer, train driver
6
Semi routine occupations
Shop assistant, traffic warden, bus driver
7
Routine occupations
Waiter, road sweeper, cleaner
8
Never worked/long term unemployed
Why is market segmentation important?

Organisations can better meet the needs of the customers in a specific segment.

Better opportunities for growth – Customers may be encouraged to “trade up” after
being introduced to a product at a lower price.

Profits can be increased – By segmenting the market; organisations can sell certain
products for higher prices which will increase profits.

Customers can be retained – By marketing products to customers at different ages;
organisations may be able to retain customers who may have otherwise moved to
competitors.

Marketing activity can be specific to the market segment
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Target Marketing
What is target marketing?
This is when the market is broken down into submarkets. For example, magazine publishers
such as Conde Nast target specific magazines at different groups of customers – segments.
What segments do you think the above magazines would be marketed to?
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Why is target marketing important to a business?
A business can ensure that it:

Provides a product that meets the needs/wants of the consumers

Sells its product in the right place

Sells its product at the right price for the consumers in that segment

Provides appropriate promotions to the group of consumer
Differentiated marketing involves providing different products and services for particular
market segments.
Undifferentiated marketing involves aiming products and services at the population as a whole
without producing different products for different market segments.
Market-led or Product-led
A business can be market-led or product-led in its approach to marketing. In other words, it
might have a market orientation or product orientation.
Product-led (product orientated)
These assume that the product or service being offered is the best on the market and will be
very easy to sell. It is felt that there is no need for product change or development as there is
no real competition. The organisation conducts little or no market research as the needs and
wants of the consumer are not of importance.
This might be the case with a new invention or a highly technical unique product, or even when
a very strong advertising campaign can convince a consumer to purchase the product. There is
likely to be little or no competition. .
In today’s competitive business world, this approach may be seen as complacent. Organisations
operating like this may fail once competitors do enter the market.
Product orientation was predominant in the UK in the 1930s and 1940s when there was less
competition, and customers’ expectations were not so sophisticated. Consumers did not have
such a large disposable income and their knowledge of products was more limited. Pressure
from the media was considerably less.
Market-led
A business which is market-led constantly modifies their products or services in response to
changes in the market. They will make an effort to find out what customers want and what
influences their purchasing decisions. These organisations realise that their profits and/or
success depend on meeting the need of the customer.
These businesses find out what the customer wants through market research. If the business
identifies social factors (e.g. trends and fashions) they can be acted upon more easily and
modifications can be made to ensure the needs and wants of the consumer continue to be met.
During the 1980s and 1990s, customers became increasingly aware of what is available on the
market and the amount of competition had greatly increased. This has led to the customer
being seen as the main focus of an organisation’s activities.
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Consumers
Consumer Behaviour
Businesses are interested in the behavior of consumers as this helps them make decisions
about their products and/or services and how it will be marketed. Studying consumer behavior
allows them to attempt to answer several questions.
Question
Comments
Why do they buy what
they do?
Some products might be bought for status, e.g. designer clothing
might be bought as a result of peer pressure or as a status symbol.
What motivates them
to buy?
What factors trigger people to want to buy something? Is the
purchase necessary or is another factor responsible for making
someone want to buy?
What influences
buying decisions?
What pressures or stimuli influence where, when and how people
buy? Has advertising had an influence, or a point of sale display? Does
the store layout have an impact? Does culture have an influence?
What customer buys
the product?
Which market segment does the product appeal to?
Where do they choose
to buy? why?
Where do they choose to buy the product? Is it online or in a shop?
Why? What factors have resulted in this choice, e.g. convenience?
What do they look for
when buying?
What criteria have to be satisfied when buying something? What
questions have been asked?
Customer behavior is about trying to answer the ‘why’, ‘what’, ‘how’ and ‘where’ questions. It
is important to be able to answer these to develop a successful marketing strategy. Consumers
have different types of buying behavior depending on what they are buying.
Impulse purchases
Buying something without thinking, often in the spur of the moment.
It might be because something has influence the customer to buy
(e.g. a promotion).
Routine purchases
Buying something because it is habit, e.g. going to buy a loaf of bread.
These types of purchases will happen without much thought.
Limited decision
making purchases
Buying something that requires some thought before a decision is
made. For example, thinking about whether or not a piece of clothing
is appropriate for a certain purpose.
Extensive decision
making purchases
Buying something that requires a high degree of thought before a
decision is made. For example, buying a new car or a house. These
types of purchases might not be made very often.
Electronic point of sale (EPOS) can gather information about consumer behavior that the
organisation can attempt to analyse and then understand. When people make purchases in a
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supermarket or shop, the EPOS system is collecting data about them and their buying habits.
Promotions, offers and mail shots can then be designed specifically for them.
Market Research
Market research provides organisations with information about what consumers want and
need and reasons why they make purchases.
Market research helps to identify:

How consumers feel about products currently on the market

Why consumers purchase certain products

How consumers feel about new products

What consumers want – this will help in the development of new products

Information about the organisations competitors
Why is market research so important?

Indicates the size of the market and potential growth of the market

Provides information about where the best place would be for selling the product

Helps organisations find out why some products are more successful than others, and
how to make their product more successful

Help organizations avoid costly mistakes – for example, making products that people
don’t wish to buy

Gives organizations ideas about how to promote or advertise their products

Takes some of the risk out of launching new products or redesigning products as
organizations are making decisions based on information that they collect and can rely on

Allows organizations to decide on the target market – i.e. the particular segment of
consumers a firm wishes to sell to.
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Methods of Market Research
There are two basic types of market research:

Primary Research
This is information collected by the organization itself or by a paid market research
agency.

Secondary Research
This is information already collected for another purpose, e.g. government statistics.
Each type of market research has its own methods. When deciding on the most suitable
method of research the following must be considered:

cost

time available

Alternatives
Primary data
Primary data is gathered by field research. Field Research is:

gathered by observation or asking people questions

up-to-date

collected for the exact purpose required by the organisation

not easily available to competitors

expensive to gather
Secondary data
Secondary data is obtained by desk research i.e. by reading through documents containing data
collected for a different purpose and probably by someone else. It may therefore have to be
adapted for an organisation’s own purposes. Sometimes it may be insufficient on its own.
However, it is much cheaper to collect than primary data.
Sources of secondary information can be split into internal and external.
Secondary data (information from a published source) is used in this type of market research.
This type of data is available internally and externally to the organisation:
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Internal Information
Examples
Advantages
Sales Records
If accurate records have been kept for
several years, the amount of information is
plentiful.
Financial Information
By looking at past performance, targets can
be set.
Easy to access.
Newspapers e.g. The Financial Times
External Information
Government Statistics
There may be significant costs involved in
setting up such records, in terms of the cost
of software and training staff in using it.
New organisations may not have access to a
lot of internal information.
Records are required to be updated
regularly.
Time consuming to gather.
Trade Magazines e.g. Drapers
Can provide very useful information on
PESTEC factors.
Journals
Easy to access.
Online Databases
Cheap to obtain.
Market Research Reports e.g. Mintel
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Disadvantages
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May be out of date.
Information could potentially be biased or
unreliable.
Competitors also have access to this
information.
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Field research
Carried out “in the field” i.e. the researcher goes out and actively obtains the information. Types of field research include:
Description
Advantages
Disadvantages
Can be inexpensive - doesn’t require a
trained interviewer for phone surveys.
Many people do not like telephone surveys
– respondents can be quite hostile.
Response for telephone survey is
immediate.
Questions must be simple and easy to
answer.
A large number of people can be surveyed.
Response rate of postal surveys may be low
therefore respondents may require an
incentive i.e. entry into a prize draw for
their participation.
Launching a product in one region. The
product will be launched to the whole
country if the result of the test market is
positive.
Customers can indicate areas about the
product that they dislike.
Customers in the test area may have tastes
that are only specific to that area and are
not a representation of the whole country.
Face-to-face interviews which can be held
in the street or at the respondent’s home.
Allows for 2-way communication -the
researcher can prompt the respondent to
answer.
Surveys/Questionnaires Involves specific questions being asked to
(including telephone
respondents.
and postal surveys)
Test Marketing
Personal Interviews
If the product fails in the test area, the
expense of a national launch is saved.
Misunderstandings can be quickly cleared
up.
Focus Groups
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Customers are specially selected to take
part in discussions on products. Focus
groups are often led by a chairperson who
will put forward points for discussion.
Qualitative information can be gained.
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Researchers have to be selected and
trained which can be costly.
Home interviews can be unpopular with
respondents.
Qualitative information can be difficult to
analyse.
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Hall Test
Customers are invited to test / look at
products and give their opinions.
Qualitative information can be gained.
Qualitative information can be difficult to
analyse.
Results may be inaccurate as respondents
feel obliged to be positive about the
product.
EPOS (Electronic point
of sale)
Used by retailers when bank cards are used
for payment.
Information about the buying habits of the
customer can be recorded.
Can give an accurate customer profile.
Can be expensive to set up this system.
Retailers can offer promotions that meet
the customer’s needs.
No opportunity to gain customer opinion
Quantitative information gathered and
easier to analysis
Large quantities of factual information can
be gathered
Consumer Audit
Used by large organisations to carry out
continuous research to monitor for
example the buying habits of customers,
influence of advertising
Accurate information can be gained if
diaries kept properly.
Expensive methods to use as participants
receive payment.
Information can indicate customer trends
as they are completed over a period of
time.
High turnover of respondents as
completing diaries can be seen as a
nuisance.
Diaries may be inaccurate or incomplete.
Observations
The collection of data through non-verbal
means which can stand alone as research
on its own or compliment other relevant
research. It is the process of recognizing
and recording relevant objects and
happenings.
Provides accurate quantitative information.
Cannot ask questions that explain
customer’s actions as there is no direct
contact.
Social networking
Companies can conduct research via social
networking pages
Two way interaction can occur
Not all customers may want to join the
social networking site
Large audience can be reached
Questions can be posed quickly
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Information not usually private and can be
viewed by anyone.
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Sampling
When conducting research it is often not possible to question every potential respondent. A
sample of respondents has to be selected. They can be selected by various of means:
Random sampling
Random sampling involves producing a random list of individuals to survey. Those picked for
inclusion in the sample could be generated randomly, using a computer and the telephone
directory or the electoral register. A large sample is required if the sample is to be
representative of the whole population.
Advantages

No chance of bias being introduced when selecting individuals for the sample and it is
simple to do.
Disadvantages

It may not be focused on any particular market segment.

It assumes that all members of the group are the same, which is not always the case.

The random sample must be maintained – if someone is chosen for the sample then they
must be interviewed this can be expensive.
Stratified random sampling
This makes a random group more representative of the population as a whole. The sample is
divided up into segments based on how the population is divided up. For example, if the
researcher knows that 10% of the population are on socio-economic group AB, 50% in C and
40% in DE, he/she will ensure that 10% of the sample are selected for the AB group, 50% from
the C group and 40% of respondents form the DE group.
Quota sampling
The researcher is given instructions as to the number of people to interview and their
characteristics (e.g. age, gender, material status and income groups.)
Advantages

It is cheaper to operate than random sampling.

Statistics showing the proportions of different groups within the population are readily
available.

Interviewers can substitute someone else in the interviewee is not at home at the time of
the visit or phone call.
Disadvantages

Results from quota sampling can be less representative than using the random sampling
method.
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Desk Research methods
Desk research involves looking at different types of secondary information. Some of this
information might be available electronically though, for example, the internet. There are
different types of information that might be analysed;

Written – information that is presented as text, e.g. reports, text messages, e-mails,
written text on web pages.

Oral – information that is spoken and heard by someone else, e.g. in a meeting or on the
telephone or from a TV programme.

Pictorial – information presented through photographs or pictures in reports,
newspapers or websites.

Graphical – information presented through a graph or chart.

Numerical – information presented through numbers, e.g. sales figures on websites of
companies.
Information might be quantitative in that it is factual and can be measured or counted, or it
might be qualitative, in that it is based on the opinion of someone.
Advantages
Written
Oral
Pictorial
Graphical
Numerical
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Disadvantages

Can be kept for future reference


Facts can be passed on more
accurately compared to oral
information.
May be unable to obtain
clarification.

Requires a degree of literacy
skills.

Instant response is given.

Points might be misinterpreted.

Questions can be asked
immediately.

Requires careful listening skills.

Body language can be
monitored.

Information is presented
attractively.

Complex information cannot be
communicated.

Significant points can be
highlighted and/or emphasised.

Factual information cannot be
communicated as easily as in
written information.

Comparisons can be made
easily.

Requires numeracy skills to
create graphs.

Complex information can be
presented clearly.

The user needs to be able to
interpret graphical information.

Financial information can be
analysed.


Calculations can be carried out.
Requires numeracy skills to
handle and interpret numerical
information.
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The Marketing Mix
For marketing to be successful, an organisation has to combine all the marketing activities to
create a combination of benefits considered to be the most suitable to meet the needs of a
selected market. These factors can be split into the four Ps:
Product – the goods/service the customer is purchasing
Price – the amount paid by the customer for the good/ service
Place – Where the customer purchases the product
Promotion – the way in which a customer is made aware of a product/service and is encourage
to buy it
Each of these factors has as influence on attracting the customer to the product. Each can be
varied to suit the needs of the consumer, e.g. place needs to be considered when setting the
price of a product – expensive meals can be sold in up-market type restaurants but not in a
local cafe.
Organisations are now closely focused on their customers; the extended marketing mix is
commonly being used and is made up of 7 Ps. The extended marketing mix consists of the basic
marketing mix with an additional 3 Ps:

Process – the different processes and systems used to deliver the service being provided.

People – those involved in providing the service to customers, e.g. staff.

Physical evidence – the location of where the service is being offered and what it looks
like, e.g. store layout and design.
Product
The product must meet the needs of the customer and benefit the customer. The product may
be a good or a service and ‘product’ includes the packaging, image, guarantee and after sales
service. Several competing organisations may sell versions of the same product; however these
can vary greatly in terms of quality, style, packaging and price.
Product Research & Development (R&D)
This is the technical research that is carried out with a view to provide a new product or
improve a current product. It is not only technological organisations that put their ideas
through research and development, but also organisations providing everyday consumer goods
such as Gillete who spend a significant sum of money on a yearly basis to develop a more
effective shaver. For most organisations, around 5% of their revenue will be spent on research
and development.
Product research and development and market research are closely linked as product
researchers use the information gained from market research to help them to develop and
design products/services. In the latter stages of research and development, prototypes may be
produced which can be tested and may be launched in a small geographical area prior to being
launched nationwide.
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Core, actual and augmented product
Core
This is the basic product or service – this means by which a business provides benefits for its
customers. For example the basic function of shampoo is to clean hair.
Actual
The vast majority of products, however, are not purchased to meet a single need; the
ownership and use of a product involve a whole range of factors that make up a product
concept.
This is the actual product. As its name suggests, it is the product that the business provides for
sale. Each actual product will have a number of characteristics including design, brand name,
particular features and distinctive packaging.
Augmented
Firms realise that in order to gain a competitive edge they must add to the attractiveness of
their product. This can be done by offering additional features, improving aftersales service,
reducing delivery times, offering 0% credit terms, extending guarantees, improving style,
colour, packaging and quality. Use of a brand name quite often enhances the product image to
the consumer.
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Branding
"A method of attaching a 'persona' to a product based on
an established make."
Brands are products or ranges of products which have a unique and easily recognisable
character. It may be a word or symbol that is registered, so can only be used on products
produced by the organization. The brand can relate to the company as a whole, or individual
products. Such products are marketed so that they are instantly recognisable to the consumer,
and are made out to be of better quality than other similar products. Customers will generally
have to pay more for a branded item, which can be partly due to the high packaging and
advertising costs.
A brand name has such an influence on purchasing decisions that brand names themselves are
sold for considerable sums of money. Nestle paid £2.3 Billion for Rowntree Mackintosh when it
was valued at £1 Billion. This purchase enabled Nestle to gain the names Kit Kat, Polo and
Smarties.
Advantages of Branding
Disadvantages of Branding
Money can be saved on marketing as the
customer is already aware of the brand.
Brands (in particular clothing and accessories)
can be copied or faked, which can be difficult
for the organisation to fight.
Higher prices can be charged for brands.
In order to remain in the mind’s eye of the
customer, brands can require high levels of
research and development and advertising.
Customers can become loyal to the brand.
Poor brands can affect the whole range that is
produced by the manufacturer.
Brand Loyalty
Some consumers are faithful to one particular product. A marketing department must make
sure that consumers believe the product to be better than all of its competitors. It is difficult to
persuade brand loyal customers to switch products. A branded product may also command a
higher price, but despite this brand loyal customers are reluctant to change.
Manufacturers are able to launch new products much more easily If they use an existing brand
name. Consumers believe that the new product will meet the same standards as the products
they already know and like to buy.
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Unique Selling Point
This is a feature that allows a product to stand out from its rivals. It should offer the consumer
some unique benefit that may motivate them to switch from the brand they normally purchase.
For example, the USP of Dyson was that it was the first bagless vacuum cleaner.
Own brand
We see and interact with own brands in everyday
life. These are goods/services that are branded
under the name of the retailer. For example,
Tesco Finest, Tesco Value, George at ASDA.
Retailers do not normally manufacturer their own brands. For example, McVities manufacture
biscuits for Marks & Spencer, who specify that their biscuits be cut from the middle of the
batch to ensure they are fresher. Marks & Spencer also manufacture Sainsbury’s own brand
pizza. Own brand products are generally of a similar quality to well-known brands, with similar
packaging however can be much cheaper than branded goods.
Log on to the Tesco Direct website and compare the price of own brand goods to well-known
branded goods.
Compare the following products:
Coca Cola
Baked Beans
Shampoo
A4 Notebook
Generic goods
For example, light bulbs and matches. Very little marketing is carried out by companies who sell
generic goods as they are seen by consumers to have no differences between them.
Packaging
Packaging provides:

Protection during transport

Customer appeal

Easy access to the product.
In addition, packaging will also have legally required information printed on it such as
ingredients and weight. This is a requirement under laws such as the Trade Descriptions Act and
the European Union rules on food additives.
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The Product Life- cycle
The product life-cycle shows the different stages a product will pass through in its lifetime and
the level of sales that can be expected at each stage.
Stage
Development
Description
Costs in developing the product may be very high.
There are no sales and therefore no profit.
The product is launched onto the market.
Customers become aware of the product.
Introduction
Stockholding costs, advertising and promotion costs may be significant.
Innovative products will have little competition and can therefore charge a high price.
Sales are low and profit is also low.
Sales rise quickly and at this stage the product begins to become profitable.
Growth
More customers are aware of the product.
Competitors may launch their own versions of the product. For example, Apple launched
the iPad and Samsung and Blackberry followed soon after with their own versions.
Maturity
Product is fully established. It is the highest level of sales that the product will achieve
without the business taking action. Sales reach their peak and may fall as competitors
enter the market. Spending on advertising is much less as the product is established in
the market. At this stage development costs have been repaid and the product will be at
its most profitable. These profits can then be used in part to fund development of new
products. The business will work to keep the product at this stage for as long as possible.
Competition becomes fierce and price tumbles.
Saturation
Consumers are interested in other products – tastes, fashions and technologies have
changed.
Sales and profit start to fall.
At this point the product may be withdrawn from the market.
Decline
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Sales and profit continue to fall, and the businesses new replacement products should
be in the growth stage.
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Some products do not reach the decline stage, for example IrnBru and Mars Bars. This is due to
the organisation using Extension Strategies in order to keep consumers interested in the
product.
Extension Strategies
These are the methods employed by businesses to prolong the life of their products and stop
them going into the decline stage. The most successful extension strategies will actually lead to
periods of sales growth.
Extension strategies may include the following:

Improving the product – new improved versions

Find new uses for the product – for example firelighters now used for barbecues rather
than lighting gas heating.

Altering the packaging – to appeal to new consumers, Developing styling changes –
slightly different produce e.g. colour, size

Changing the channel of distribution – for example introducing selling on the internet

Altering the price of the product

Using different promotional activities

Altering the use that customers will have for the product -

Rebranding the product – for example a name change Opal fruits to Starburst

Producing line extensions – for example Coca cola produce Diet Coke, Cherry Coke, and
Coca Cola Vitamin C.
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Product Line/ Diversified Product Portfolio
In practice, there are very few single product organisations. Most offer a range of products or a
product line, which is a broad group of products intended for basically similar uses and with
similar characteristics.
There is no need for a direct relationship between the items in an organisation’s product mix. In
very large organisations a wide spread of product lines can be part of a deliberate strategic
plan.
Each product will be at different stages in the product life cycle. This allows the business to
reduce risk and spread it over a number of products because if they have only one product and
that fails the business will fail.
It does not make sense for a business to wait until a product reaches the decline stage before
launching a replacement product. If they did sales and profit would be lost so businesses plan
the introduction of new products to replace existing ones before they become unprofitable.
The range of products a business produces is known as its product portfolio.
Advantages

A wide range of products can allow the business to meet the needs of a variety of
customers

Increase profits and profit levels remain steady

Makes business easier to manage

Profitable products can support the development of launch and new products

Raise profile of the business

Can lead to the company becoming market leaders

Risk spread amongst products. One product may fail but others may be selling well.
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Disadvantages

Products can be spread to wide

Business can lose focus on its key objectives
Product innovation
The development of new products is essential if businesses are to replace those that go into
decline. There are a number of stages before a new product is developed:

Generation of idea from research (scientific or market) or brainstorming.

Analyse idea – will the customer buy it? Is it technically possible to produce? Is it cost
effective? Are there any legal requirements?

Produce a prototype and test it;

Test market;

Adapt product, solving any problems found when test marketing;

Launch product.
There is, however, an extremely high failure rate – for every fifty new product ideas only one
becomes successful. Organisations spend huge sums of money on product research and
development over a long period of time.
A Boston Matrix (or Boston Box) is often used to plot
the range of products that an organisation offers. It
can help the organisation to identify where products
might need to be introduced or changed.
An organisation will try to have as many ‘star’ products as possible and will focus its marketing
activities to try and achieve this.
There as some advantages of having a varied product portfolio:

Costs of promoting and advertising lots of different products could be high and could
result in less profit.
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
If one product receives a bad reputation or image this might impact on all the products
being sold by the business.

Maintaining a varied product portfolio will involve a high cost of research and
development.

Cost of purchasing and maintaining machinery for different types of products might be
high.

Staff may require training on the features of different products which could be timeconsuming and expensive.
Price
The Price is what the customer will pay the organisation in order to purchase the
product/service.
Why is price important?
The organisation must ensure that it covers its costs (for example production, advertising)
which will allow them to make a profit.
The customer will not purchase the product if they think the price is too high – particularly if a
competitor stocks a similar product at a lower price.
Pricing Strategies
The price set will depend on several factors, which may include:

Competitors’ prices

The position of the product in the product life cycle

The cost of manufacture

The time of year

The target market for the product

Government pressure
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Pricing Strategy
Description
Examples
A price lower than that of competitors is set to tempt
customers away from competitors.
Penetration Pricing
Once the product becomes popular the price will be raised in
line with competitors.
Chocolate bars, new brands of coffee/tea.
Justification: Encourages customers to buy the product. Once
customers are attracted, the price can then be increased.
Prices are lowered in order to force competitors to lower their
prices.
Destroyer Pricing
Weak competition will not be able to survive for a prolonged
period of time and may be forced to leave the market.
Prices will then return to the normal level or even increase to a
higher level.
Poundland
Justification: This forces competitors out of the market so that
the business can then charge higher prices at a later date.
Prices are reduced for a short period of time.
Promotional Pricing
Consumer interest may increase during this period and stock
levels may reduce quickly.
River Island Boxing day sale.
Justification: The product will be bought by customers because it
is on special offer and they are getting a ‘deal’.
Premium Pricing
Loss Leaders
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High prices are charged and maintained for a certain
product/service.
Justification: The high price gives the product a unique and
exclusive image. High profits can be made.
A range of products are advertised at a low, unprofitable price
which will encourage customers to enter the store over
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Louis Vuitton, Apple, Ferrari
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competitors’ stores.
Customers will often purchase other full priced products whilst in
the store, so a profit will be made on the total purchases made.
Justification: Attracts customers to buy. This then encourages
customers to buy other products that are priced normally. Profit
is made on the total amount of purchase the customer makes.
Organisations set similar prices for similar products.
This can help prevent a price war.
Competitive Pricing
Organisations will compete on non-pricing factors such as
promotions (Nectar Card), packaging and advertising instead.
Petrol, CDs, DVDs
Justification: Attracts customers and allows businesses to
compete.
Price Discrimination
Different prices are charged for the same product/service at
different times of the day, month, or year.
BT home phone tariffs
An initial high price is charged for the product.
As competition in the market increases, the price will fall to be in
line with competitors.
Market Skimming
Note: think about skimming a stone…it will not stay on the
surface (top of the water/high price) for a long time.
Video games, home entertainment
electrical products i.e. Touch Screen TV’s.
Justification: A high price can be charged because little or no
competition exists. A large profit can be made.
Low price
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A business may charge a lower price than competitors. Lower
prices result in higher sales as consumers respond to low prices.
Justification: The product will be bought by customers because it
is cheaper than competitors.
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DVD’s, CD’s, Computer games charge low
prices in different supermarkets
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High Price
Used by businesses offering high-quality premium products. Can
charge higher prices for well-known brands. If there is a lack of
competition businesses can charge higher prices.
I-phone
Justification: The product will be bought by customers because
they think it is of a higher quality than competitors.
Cost-Plus pricing
The cost of making the product is calculated before a percentage is
added on for profit.
Justification: This strategy ensures that the cost of making the
product is covered and that a profit is also made.
The price charged makes the customer think that the product is
cheaper than it actually is, e.g. charging 99p rather than £1.00.
Psychological pricing
Justification: This method tricks people into thinking the product is
cheaper than it actually is and attracts them to buy it. It attracts
customers who buy on impulse.
Look at EasyJet’s website and The City of Edinburgh Councils school term dates. Compare
the price difference on flights to Spain for term and non-term times. What pricing strategy is
being used here?
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Place
Where the product is sold and how it gets there. The nature of the product or service will
determine where a firm decides to sell this is usually referred to as distribution.
Why is this factor important?
The customer needs to be able to access the product/service in order to make a purchase.
Factors Influencing the Location of a Business Premises

How far the location is from the customer

How far the location is from infrastructure such as roads and public transport

o
Products and materials can be delivered to the organization easier
o
Easy access for customers
The price of land or premises in the area
o
The cost of land, premises and taxes in some areas may be very high whereas in
other areas the costs could be significantly lower.
Compare the cost of a shop unit on Princes Street to one on Corstorphine Road.

Whether or not there are car parking facilities for employees and customers

The proximity to raw materials for example, fishing fleets are usually located on coastal
areas where the best fish stocks can be found.

The availability of labour in the area

The cost of labour in the area

The level of competition in the area
o

An organisation wouldn’t open a shop on a high street which already has 6 similar
shops
The level of education in the area
Consider the above factors for the below organisations choosing a location for their businesses.
Decide on a suitable area in Edinburgh for these organisations to open their businesses and
justify this decision.
Tesco Express Cheynes Hairdressing Topshop
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Krispy Kreme
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How Government Incentives in an Area Influence Location
Different authorities use incentives to encourage organisations to set up businesses in certain
areas. This is done in order to increase the levels of business and enterprise, reduce
unemployment in the area and ensure that derelict land is being put to use.
Scottish Government Assistance
New Enterprise Scholarships (NECs) for new entrepreneurs in disadvantaged areas
(http://nesprogramme.org.uk/).
Regional Selective Assistance
A grant scheme which helps to create and safeguard jobs in Scotland. To qualify organisations
must fulfil certain criteria, for example they should be located in areas of high unemployment.
Local Government Assistance

Local authorities are active in providing detailed information to organisations about
applications for grants and other forms of financial aid

Providing detailed information to businesses about local available sites and premises

Providing grants for starting up businesses in their area

Providing grants for research and development
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Channel of Distribution
The channel of distribution is the route taken by a product as it passes from the producer to
the consumer.
Before the Channel of Distribution is chosen, a variety of factors must be taken into account:

The product/service that is being sold
Any products of a highly technical nature would normally be sold directly from the
manufacturer. On the other hand chocolate bars would be sold through a wholesaler initially.

How reliable the parties included in the Channel of Distribution are
Manufacturers may take distribution of the product into their own hands if the wholesaler or
retailer is unreliable.

Government restrictions on certain items
Certain medicines must, by law, be sold through pharmacies.

The image of the product
For example, Gucci bags are sold in exclusive outlets. The image of the product would be
damaged if they were sold in a wholesaler such as Makro.

The stage in the product life cycle
If the product is in the introductory stage, the product may be sold in a more exclusive outlet
where a premium price can be charged. As the product moves through the product life cycle, it
may be sold in less exclusive outlets to encourage more consumers to purchase.
The product may be sold through:
Producer
Producer
Producer
Customer
Retailer
Wholesale
r
Customer
Retailer
Customer
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For some products or services, e.g. holidays, agents may be involved in the distribution process.
Agents provide a link between the buyer and the seller in exchange for commission. Agents are
often used by organisations trying to enter a foreign market: a local agent will have knowledge
about the laws of the country and its trading practices.
Brokers to provide a link between buyers and sellers in such markets as insurance and share
dealing. They are also involved in international commodity markets such as coffee and metals.
Direct marketing (where there are no agents, brokers or middlemen) is becoming increasingly
common in the insurance market and in computers, e.g. Direct Line, Dell Computers.
The organisation must decide which channel or channels provide the most effective means of
getting the product from the factory to the consumer. The method selected may have an
important influence on public perception of the product. A company making soup intended for
a wide market would not choose to sell it through exclusive department stores, while an
expensive and exclusive perfume would not normally be distributed through a supermarket
chain. How best to distribute products is not an easy decision, and failure to choose the most
appropriate channel will damage sales of the product.
Physical Distribution Decisions
The organisation must decide on the most cost-effective method of physically moving the
product in order to match the perceived needs of its customers. In this respect, the distribution
management will need to take into account the projected level of demand for each of the
organisation’s products, and the geographical spread of that demand. Seasonal and other likely
fluctuations will need to be anticipated. The optimum methods of stock control, warehousing
and transportation will be considered and implemented.
Organisations need to consider the relative costs and speed of the different methods of
transport available to them. The nature of the product will influence this decision, e.g. if the
product is one that will deteriorate quickly, it may well be cost-effective to use air transport
instead of road.
New products present particular problems. If they are unlike anything that is on the market,
there are no immediate guides to their distribution either from past experience or from
competitors’ methods. Products in the introductory stage of their life cycle are frequently
distributed through specialist wholesalers and retailers. This helps to maintain greater control
over the advertising and promotion that may be crucial to the initial success of the product and
allow skimming pricing strategies to be implemented. During the growth and maturity stages, a
greater number of intermediaries may be used in order to increase market penetration.
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The four main methods of physical distribution are:
Method
Advantages
Disadvantages
Road Network
Cheaper method
Delivery is quick
Difficult to transport large
goods
Product delivered direct to the
customers door
Not the most environmentally
friendly method
24 hours a day
Roadwork’s can cause delays
Restricted by legislation that
states number of hours
drivers can drive
Rail (train)
Large products and quantities can
be transported
Not a train station in every
location
Not a door to door store
Requires road haulage to final
destination
Air
Can be transported across the world Not a door to door service
more quickly than by sea
Large items cannot be
Large amounts of only small
transported
products can be transported
An expensive method as
products need to be taken to
the airport to be loaded onto
the aircraft
Requires road haulage to final
destination
Sea (Boats)
Can import/export bulky goods
Products can be transported
worldwide
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Very time consuming process
to transport the products
Not a door to door service
also requires road haulage
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Factors affecting Distribution
Type
Channel
Example
Reason
Large and
dispersed
wholesalers,
agents and
retailers
CDs
to ensure wide
distribution
Small and local
direct
farmer selling
fresh eggs
dealing with
small quantities,
so not cost
effective to have
intermediaries
Segment
various
various
consider location
and image of the
targeted segment
shop, also
geographical
influence here
The following also affect distribution:

Legal restrictions
Alcohol cannot be sold in UK petrol stations or to the under-18 age group. Certain drugs cannot
be sold without a prescription.

Changes in buying habits and life style
Increased car ownership has meant people are willing to travel away from town centres to do
their shopping.
Increased ownership of freezers has led to the establishment of specialist frozen-food shops
(e.g. Iceland).

Existing buying habits
If people tend to make most purchases of car wax in specialist hardware retailers rather than
supermarkets, then the manufacturer will choose to distribute a new car shampoo primarily
through specialist retailers, such as Halfords. Market research will also indicate changes taking
place in consumer buying habits.
Larger companies often set up their own distribution networks. They can afford to invest in
their own Lorries and warehouses.
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Retailers
Retailers are organisations that distribute products to the customer on behalf of the
manufacturer for example, independent stores, supermarket, chain store, department store,
discount store.
Retailers stock a range of products from a number of manufacturers and wholesalers. The
retailer will decide on the price to be charged to the customer and how to display the product
to be sold. The manufacturer will decide which retailer to use based on where the customers
are and what extra services (e.g. credit and delivery terms) they offer the customer.
Retailers benefit from sourcing products directly from a manufacturer because they can tell
them what quantity they want and at what cost; larger retailers (e.g. supermarkets) may be
particularly powerful at being able to specify what they want. Sometimes retailers can take
advantage of economies of scale (the benefits of buying in bulk). Sometimes manufacturers will
decide not to use a retailer as part of the channel of distribution because the product will face
competition in store from other manufacturers’ products and because it adds on an extra
financial cost to the distribution channel.
Advantages:

Provide a source of market research

Often located close to customer

Provide an after sales service

Retailer may offer credit facilities

Retailer may already have an established customer base

Retailer incurs cost of store, sales staff and retail premises

Selling to a retail is more direct than through a wholesaler

Higher percentage profit for the manufacturer

Bulk buying discount
Disadvantages

May not have specialist product knowledge

Product is more expensive to buy
Most large towns now have retail parks and consumers are choosing out of town shopping
centers. This is due to convenience of all shops being under one roof and easy access to free
parking facilities, food outlets and facilities for children.
There are a number of different types of retailer:

Independent retailers
An independent retailer operates only one outlet and offers personal service, a convenient
location, and close customer contact. Almost 80% of all retailers are independents, including
many hairdressers, dry cleaners, furniture stores and corner shops. Groups of independent
retailers might join together in order to benefit from bulk purchasing of stock or joint
advertising. They are known as voluntary chains, e.g. Spar, Mace. They do so in an attempt to
compete with the larger chains.
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
Multiple chains
A retailing company that operates more than ten branches is known as a multiple chain. Some
multiples are classed as specialist stores – concentrating on a narrow range of items such as
clothing (e.g. Top Shop, Dorothy Perkins and River Island). Others are variety chains that
provide a range of goods, like Marks & Spencer, Dixons and Boots.

Supermarkets
A supermarket is defined as a store with at least 2,000 square feet of selling area and at least
three check-out points. Supermarkets have been a key feature of shopping since the 1990s.
They offer consumers a very wide range of food and other products at low prices, operating on
the principle of low mark-up and rapid turnover.
Large supermarkets are known as hypermarkets or superstores and offer an even wider range
of household goods at discount prices. In addition to food and clothing, they stock product
lines as diverse as DIY equipment, motoring accessories, cosmetics, toys and gardening
equipment. The aim of a hypermarket is to provide cheaply for all the basic shopping
requirements of an average household under one roof.

Consumer co-operatives
These stores are owned by ‘members’ rather than shareholders and profits are distributed to
customers in the form of dividends instead of being paid to shareholders.

Department stores
Department stores like Jenners in Edinburgh have a large number of different departments and
employ more than twenty-five people. They tend to have an up-market image and charge
higher prices for goods, many of which are exclusive and not intended for the mass market.
This type of store has declined substantially in recent years.

Specialist stores
A number of specialist organisations, such as Comet, concentrate on selling large quantities of
specialist products. Often these are consumer durables but they also include DIY products (e.g.
B&Q) and furniture (e.g. IKEA). Such stores are typically located on the outskirts of town where
overheads are low. The resulting economies together with their ability to buy in bulk ensure
that these stores are able to attract consumers by offering lower prices than their city centre
rivals.

Franchises
A franchise is a licence to market a product in a specified area. The person taking out the
franchise puts up a sum of money as capital and is issued with equipment by the franchise
company to sell or manufacture the product in which the company deals. Franchise
agreements are very common in the fast-food business (e.g. McDonalds and Perfect Pizza) but
there are plenty of examples in other areas of retailing (e.g. Benetton clothing shops; Dyno-Rod
plumbing services; Body Shop; British School of Motoring).

E-tailer
Shopping online and having the product delivered to you (e.g. through Amazon). This type of
retailer often has a lower overhead cost because they do not have to worry about having stores
from which to sell their products. However, they often require large warehouses to store their
products. They may rely on different logistic companies to distribute their products.
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Wholesalers
Wholesalers buy in bulk from the manufacturer and sell to retailers. For example,
Makro, Booker, Costco. Many larger retailers do not use a wholesaler as part of
their distribution channel because they have their own warehouses and transport
systems.
Advantages

Provide a source of market research

Saves the manufacturer from making small delivers to retailers, saving on transport costs

Saves the manufacturer on high storage costs due to the wholesalers purchasing in bulk

Saves the manufacturer having money tied up in stock and being left with stock if
consumer trends change

Its saves the manufacturer from labeling the product for the retailer.
Disadvantage

Control of after sales is handed over to the wholesaler

Wholesalers has limited specialist knowledge
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Direct Selling
Many businesses are now selling their products directly to their customers. Organisations can sell their goods at competitive prices. Examples of direct selling
are mail –order, direct response advertising, television selling. Increasingly, the internet is becoming a method of selling direct to the consumer.
Method
Description
Advantages
Disadvantages
Internet selling
Many organisations now sell their
product via the internet, taking payment
by credit or debit card.
Allows a business to reach a global
market
Many customers have fear using the
internet and purchasing online as some
sites are unsecure.
Customer information is easily collected
to target offers and promotions
Can order from the comfort of their own
home
Mail Order
These are goods sold to customers
through catalogues e.g. Next
Convenience of shopping from home
with credit facilities
Mail order companies save costs as few
sales staff required and tend to not
require expensive high street premises
Some mail order products are exclusive
Newspapers/ magazines
Place adverts in newspapers and
magazine describing and showing the
product
Customers respond directly to the advert
by filling in the form
Convenience
of shopping from home
Mail order companies save costs as few
sales staff required and tend to not
require expensive high street premises
Some products can be more expensive
to purchase online due to cost of
postage
Lack of personnel contact
High delivery charge
Companies may incur high advertising
and administrative costs
A high level debt is possible
Companies may occur high advertising
costs
High postage costs
Some mail order products are exclusive
Personnel selling
When products are sold door-to-door or
by telephone
Allows for the product to be
demonstrated and technical details can
be explained
Customers may not like sales people
going to their doors
Feedback can be received from the
customer
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Promotion
The way in which the organisation makes the consumer aware of the features and benefits of
the product. Promotion plays an important part in gaining new customers and retaining existing
ones.
Persuading
customers to
buy the product
Aim of
Promotion
Informing
customers
about the
product
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Reminding
customers that
the product
exists
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There are two main types of promotion:
Below the Line
Above the Line
Directly controlled by the business
Makes use of media to allow the
organisation to reach a larger audience.
Direct mail, personal selling, and trade fairs.
Television, radio, newspapers.
Allows the business to target the customer
in a more direct manner.
This method also targets those who have no
interest in the product.
The choice of promotional method depends on several factors including:

Cost of media and budget available

Audience to be reached

Advertising methods used by competitors.
Advertising
Advertisements are messages sent via the media and intended to inform or influence the
people who receive them. Advertising can be classified into two broad categories: informative
and persuasive. Typically an advertisement contains elements of both.
Informative advertising
When a product is first launched, sales are low because very few people know that it exists.
The role of advertising here may be to inform the public of the product’s existence and its
particular uses. The same applies when a product has been modified or improved. In other
cases, e.g. car advertising, the nature of the product may be such that a large amount of
technical information has to be given and advertising again may have to be informative.
Advertising that informs and educates consumers gives them greater knowledge on which to
base their choice of goods and services.
The government uses advertising to inform the public – e.g. health warnings, availability of job
training schemes, notification of the need to complete tax forms, etc.
Persuasive advertising
Persuasive advertising is used to persuade consumers to buy a particular product. It is often
based on qualitative information and may contain statements of opinion rather than fact, e.g.
‘Carlsberg – probably the best lager in the world’. Persuasive advertising is normally associated
with consumer products and is used heavily where differences between products are minor and
demand is elastic.
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Advertising decisions
An organisation has to make a number of important decisions in relation to advertising.
1.
What effect does the advertising have on sales? It can influence a product’s sales but it is
difficult to measure the effect precisely.
2.
Who is the organisation selling to? The advertiser needs to know who buys the product,
why, where and when they buy it and for what purpose.
3.
Why do consumers not buy the product or service?
4.
Which medium or combination of media will work best?
Market research is the key to providing answers to these questions and determining how best
to target consumers.
Advertising media can be categorised under three broad headings:

Print media:
Newspapers, magazines, journals

Broadcast media:
Television, radio, cinema

Outdoor media:
Fixed posters, hoardings, on transport.
The effectiveness of advertising will often depend on selecting the most appropriate media to
reach the target segment of the market.
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Methods of Advertising:
Method of Advertising
Radio / Television
Advantages
Disadvantages
Large national audiences can be reached.
Can be an expensive method of advertising.
Sound and motion can be used which is appealing to
consumers.
The product may be targeted at other market
segments.
On television the product can be demonstrated.
Message can be short-lived.
The product can maintain a high profile if adverts
are regular.
A lot of consumers channel surf when adverts are
on.
Colour adverts can have a big impact.
Magazines
Particular segments can be targeted by putting
adverts in specialist magazines e.g. Vogue.
Can be an expensive method of advertising.
Consumers may keep magazines for future
reference.
Sponsored Events
Creates good press for the organisation e.g. Virgin
sponsoring the London Marathon
Can be an expensive method of advertising
Can be relatively cheap
Internet(online advertising)
Viral marketing e.g. social networking
Emails
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If adverts are placed on correct websites, they can target
specific market segments
Adverts may be ignored
Two way interaction can occur
Not all customers may want to join the social networking
site
Large audience can be reached
Questions can be posed quickly
Information not usually private and can be viewed by
anyone
Can sign up to a mailing list so only those interested
receive the information
Some e-mails may be filtered as spam and user may
never see them
Can be sent at any time of the day
Receiving too many emails may lead to frustration
Same email can be sent to more than one person at a
time
Employees may need training
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Documents and files can be attached to an e-mail
Environmentally friendly compared to printing posters
Message received instantly and directly as mobile as
usually always carried by the customer
Text Messages
Large number of customers can be targeted
Cheaper than some other methods of advertising
Apps
Can use it on the move
Can often use free Wi-Fi to access the internet
Can only include a small amount of text
Customers may find the text messages annoying
Need to mobile phone number of the customer to use
this method
Customers need to buy a smart phone or tablet
computer to use which is expensive
Training is needed so the app can be designed for
customer easier to use
Internet connection depends on the location
Word of mouth
Positive word of mouth can result in increased sales and
customer loyalty
Technical information can be explained
Newspapers
Cinema
Through carefully choosing the newspaper, specific
market segments can be targeted
Adverts may be in black and white and no sound or
movement is used – not very appealing
May be expensive if nationwide coverage is required
There is a captive audience
The message may be short-lived
Adverts can be shown before certain films to appeal to
specific market segments
The audience is limited – particularly if the film is not
very popular
Often used in busy locations – high exposure
The advert will be seen many times by those passing
frequently
Direct mail
People tend not to carefully read daily newspapers
Readers can cut out adverts and keep for future
reference
A wide audience can be attracted
Outdoor Media (football stadiums, billboards)
Negative word of mouth can result in reduced sales and
consumers purchasing from competitors
Can target particular market segments
Weather could deteriorate the signage
May be vandalised
People may be used to the sign being there so could
ignore it
Can be an expensive method of advertising
Customers are not happy to receive junk mail
Need to target accurately or little interest will be
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generated and therefore could be a waste of finances.
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The choice of advertising method will be affected by:

Cost

The audience reached

The advertising used by competitors

The impact

The law (restrictions on tobacco advertising)

The marketing mix (may be used along with other promotions).
Controls on Advertising
Advertising Standards Authority (ASA)
This is a voluntary body set up to monitor advertising in the UK. It is responsible for making
sure advertisers conform to the British code of advertising and sales promotion practice.
Advertisements must be legal, honest, truthful and not cause offence.
Independent Television Commission (ITC)
This is a body which controls advertising on television and radio. Some of their restrictions
include current newsreaders not being allowed to endorse products, and actors not being used
in commercial breaks during programmes in which they appear.
Pressure groups
Certain pressure groups seek to influence advertising, e.g. FOREST who aims to defend the
rights of tobacco firms to advertise. Women’s groups protest against advertisements they
consider to be sexist.
Trades Descriptions Act 1968
This law states that the products must match the claims made about them in the advertising.
Sales Promotion
Advertising alone does not sell goods and services. At best it can only stimulate interest. This
interest must be converted into a buying decision by means of other marketing tools such as
merchandising, distribution channels and packaging appeal.
Special offers can be defined as short term incentives which encourage customers to purchase
products/services. Special offers can be categorised into two types, which
affect the retailer/wholesaler (Into the Pipeline) or the consumer (Out of
the Pipeline).
There are two main types of sales promotion:
Into the Pipeline Promotions
Promotions offered to retailers or wholesalers to entice them to stock the
products.
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Point of Sale Materials
This may include posters, leaflets or window displays. These are generally provided to the
retailer or wholesaler free of charge. For example, when a new film comes out, the film
company will provide cinemas with stands advertising the film.
Dealer Loaders
Used to entice the retailer or wholesaler to purchase and stock the item, for
example purchase 10 get 1 free.
Sale or Return
The retailer will be able to stock the product without fear that they will be
left with unsold stock. In this case the retailer will be able to return any
unsold stock to the manufacturer. Newspapers, bread and dressmaking
patterns are some products which can be returned should they remain unsold.
Dealer Competitions
Competitions for high sales can be offered to retailers or wholesalers. For example, car
manufacturers may offer holidays as prizes for car dealers who meet their sales targets.
Staff Training: Manufacturers may often provide staff training where a product is of a technical
nature. For example, car manufacturers may offer car dealers training to cover technical issues,
the best methods of promotion and how best to promote customer service.
Credit Facilities: The retailer will purchase goods from the manufacturer and pay for them at a
later date.
Out of the Pipeline Promotions
Promotions offered to the customer to entice them to make a purchase.
Free Samples: Perfume or beauty counters will often give free samples of new
products to encourage customers to try the product and make a purchase
possibly at a later date.
Credit Facilities: These allow customers to purchase
products on credit (paying for the product at a later date)
which they would not have been able to afford. An
example of this is the Topshop store card. Purchases
would be made in store and a bill would be sent to the
customer requesting payment.
Demonstrations: Involves demonstrating the use of the product to entice the customer to
purchase. For example, car dealers will often offer test drives so customers can try out the car
before they purchase.
Competitions: Customers will purchase a product which will then allow them to be entered into
a competition. For example, newspapers may have ‘Lucky Wallets’ in which the customer can
win money if they purchase the newspaper.
Buy One Get One Free (BOGOF): Supermarkets will often use this on selected products.
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Bonus Packs: Allows the customer to try more of the product for the same
price as the original. For example, toilet roll packs may have 4 free rolls.
Free Offers: Free toys may be included in boxes of breakfast cereal or free
CDs may be offered in newspapers or magazines.
Coupons & Vouchers: Provide customers with money off future purchases. For example,
Sainsbury’s price match coupon provides customers with money off their next shop if they
could have bought the same products cheaper at another supermarket.
In store demonstrations or tastings: Customers are encouraged to try new products, very
popular in supermarket.
Public Relations
This is when an organisation tries to communicate with customers, shareholders, employees
and the government – all of whom form the organisation’s ‘public’. The aim of public relations
is to improve the image of its products and the image of the organisation itself.
PR activities might include:

Charitable donations;

Event sponsorship of sporting and cultural events, e.g. the Lombard RAC Rally.

Product endorsement, e.g. pop stars or sports personalities;

Press conferences and press releases.
Publicity
Public relations cost time and money. Publicity, on the other hand, does not always have to be
paid for and can be generated out with the organisation as well as from within.
For example, the mention of a company’s name on a news broadcast or in a magazine article
generates publicity. While this indirectly promotes the organisation and its products, the
publicity may also present a threat: the media often find disasters (fires, scandals, product sideeffects) more newsworthy than routine statements distributed by the organisation.
In summary, PR and publicity together can

provide the public with information about the organisation;

build confidence in the organisation and awareness of its products;

develop goodwill in the community and present the organisation in a positive way;

support and enhance other areas of the promotional mix such as advertising and selling.
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The Extended Marketing Mix
People - the employees who work for the company and their skills and knowledge
Physical – is in the form of the service and the atmosphere that is created
Process – the different elements to making a product or service e.g. sourcing raw materials and
how customers are handled from the beginning to the end
People
People are an essential part of a business whether it be the customers or the employees. It is
vital that organizations have the correct service provisions in place with regards to staff of the
organisations. Organisations must recruit and hire the right employees to ensure they provide
an adequate product/service. Employees need to have specific skills and qualities as well as the
appropriate knowledge to provide the best advice and service to the customer.
Process
The process looks at how to service is provided, from the minute an order is taken to being
delivered, for example think of the process taken when in McDonalds’ and you order a Big Mac
meal and it is developed in 2 minutes or the process of self-service at any of the major
supermarkets. An efficient service well ensure customer satisfaction and loyalty and therefore
increased sales and profits. To ensure this all companies must have procedures and process in
place.
Physical
The physical element is with regards to where the service is being delivered from. With greater
emphasis with regards to retailers operating out of shops. The physical element will help
organisations set them apart from competitors. It focuses on providing clean facilities, point of
sale displays, logo, payment systems, uniform, seating areas, free wireless, a relaxing ambiance
as well as access to an organisations website. Customers will make judgments based on their
first impression when they walk into a retailer, if they are clean and friendly environment they
are likely to stay. If a restaurant is smelly and dirty they are likely to walk out before even trying
the food.
Ethical Practices
Businesses want to be seen as being socially responsible. It is about behaving in such a way that
does not harm society. It is about behaving in a way that people find acceptable. Businesses
therefore need to be seen in a positive way in order to develop positive customer relations.
Businesses must consider carbon foot print, food miles used and their corporate responsibility.
They often announce changes in their operations when promoting new products to inform their
customer, it is vital that businesses are honest when advertising so that customers can trust the
business. Businesses must focus on the behaviour and cultures of their customer. Good
customer service skills are a vital part of the service.
For advertising to be ethical it must be:

Not misleading

Do what it says on the tin

Adverts must not be offensive or obscene

Should not offend consumer beliefs
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Technology in Marketing
Technology is playing a major part in the business world and can be used for market research,
advertising and sales.
Electronic point of Sale (EPOS) can be used for market research as it allows the business to
identify what is being purchased in different parts of the country and in different stores. This
will allow the business to adapt their marketing techniques and promotions to suit a particular
country or store.
Market research is conducted online via online surveys e.g. survey monkey. This allows
businesses to gather vast amounts of information. Using online surveys makes it easier for the
business to analysis the information using online software.
The internet is now being hugely used for advertising weather it is through email, pop up’s,
social networking sites. It is a good way to reach a large audience quietly. It can allows
businesses to target specific markets and send different promotional offers to different
customers, with recommendations (see p for further information)
Business are also now using the internet to sell their products/ services. This means that they
can reach consumers in many different countries and that consumer can shop form the comfort
of their own homes. Businesses tend to sell products/services cheaper online as they are
cutting out the middleman.
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The Role and Importance of Operations in Organisations
Operating Systems
“An operating System is a configuration of resources combined for the
provision of goods and services”
Ray Wild Essentials of Production and Operations Management (2nd Edn.)
Access to raw materials, machines and workers does not guarantee that you will obtain the
outcomes you require – organisation is essential. Procedures must be established which
control and direct what is done, whom it is done by and when. This is known as an Operating
System.
All operating systems have three distinct phases:
INPUTS
PROCESS
OUTPUTS
Raw Materials
Using different amounts
The actual goods
Labour
of different resources
or services for
Machinery
in order to produce a
sale
Finance
different end product
Operations Management
‘Operations Management is concerned with the efficient conversion of an organisations
resources into the goods or services that it has been set up to provide.’
Howard Barnett, Operations Management.
This can be subdivided into three key areas:
(a) The purchase and storage of raw materials;
(b) The production and storage of finished goods;
(c) The distribution of the finished goods.
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In manufacturing industries, where large amounts of raw materials or component parts are used to produce the final goods it is very likely that
the firm will have a purchasing department and employ a team of specialists. In order to remain competitive this department is responsible for
obtaining the best quality materials, at the lowest cost and delivered in the correct quantities at the correct time. This i s known as the
purchasing mix.
Factor
Cost of raw
materials
Quality of raw
materials
Lead Time
What does it mean?
The price charged by a supplier to purchase
raw materials.
How good the raw materials are.
How long it will take to receive the raw
materials from when an order is placed.






Quantity of raw
materials

How much raw materials are required.

Location of supplier
Reliability and
reputation of
supplier
Storage space
available
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Where the supplier is located, e.g. which
town or city and how far away it is.
Reliability – will the supplier deliver when
they say they will?
Reputation – what people think of the
supplier.
How much space the business has in a
warehouse to hold the raw materials until
they are needed.






Why is it important?
Costs need to be kept as low as possible to make a profit.
Low costs will improve the cash flow of a business
Without high quality raw materials, the finished produ ct will not
be of a high quality.
Low quality raw materials will probably result in higher wastage.
Some raw materials need to be used quickly (eh fresh food) or they
might go off.
Without raw materials being delivered on time, production might
have to stop, which is costly.
There needs to be enough raw materials available to allow
production to continue, however, not too much otherwise this can
be expensive for storage.
Correct quantities of raw materials are required to satisfy
customer demand.
The further away the supplier is, the longer the raw materials will
take to be delivered.
The cost of transporting products has to be considered.
If the supplier does not deliver on time, this might cause
production to stop and customers might not get their order on
time.
Suppliers with a good reputation are likely to get more business
compared to one that has a poor reputation.
Raw materials might be wasted if they cannot be stored in the
correct place.
Storage costs (e.g. insurance) can be expensive.
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Stock Control
In any organisation the control of stock is essential. Stock is an expensive item to an
organisation – sometimes accounting for as much as 30% of the total assets held. Any
stock management system will try to balance the needs of the production department
with the costs of holding stocks. The 3 main categories of stock within an organisation
are:

raw materials and components for the product or process;

work in progress;

finished stock.
Aspects of stock control are described below.
Issuing stock
This should only be done on the production of an authorised requisition card.
Monitoring stock levels
This can be done in a variety of ways:
(a)
by recording (manually, using a bin card system);
(b)
by using a database or spreadsheet, changes in stock are recorded as they take
place, giving a running balance total which should be accurate at any point in
time and reduces the need for physical stock counting prior to re -ordering. Many
such systems now allow automatic re-ordering when re-order level is reached,
with no need for operator input.
A physical stock count (stock taking) MUST be carried out at least once per year in
order to provide closing stock figures for the Final Accounts.
Deciding on the quantities of stock held
Having the correct quantities of materials at any one time is essential. If stock levels
are too low, production might be delayed, or even stop. If stocks are too high, the firm
has unproductive money, tying up funds that could more profitably be used e lsewhere.
One method of calculating stock levels is given below.
When manufacturing and storing goods there are different factors to consider:

The quantity of the product that is required.

The volume of products that can be manufactured at any one time.

Working practices, procedures and health and safety requirements.

The storage available in a warehouse.

Procedures for maintaining and managing quality.
Organisations need to calculate the optimum or economic stock level. This is the most
suitable quantity of stock at any one time. This ensures that costs are kept to a
minimum as well as having enough stock to meet production requirements. The
purpose of a stock management system is to:
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
Ensure stock is readily available at any one time.

Ensure production continues.

Avoid delays to customer orders.

Ensure over-stocking does not take place, which results in higher costs.

Avoid stock deteriorating (e.g. fresh food) and/or becoming obsolete.
There are consequences of holding too little or too much sto ck;
Consequences of too little stock
Consequences of too much stock



Production could stop and therefore
employees and machines sit idle.

Increased financial costs (e.g. storage,
security and insurance).

Customers might not receive their
orders on time, which could result in
complaints.

Stock could go to waste or deteriorate,
resulting in stock that needs to be
discarded.

The business could gain a poor
reputation and image.

Higher risk of stock being stolen.
Organisations need to have in place a stock management system to manage stock
levels. A stock management system has the following features:

Maximum stock level – the highest amount of stock that can be stored at one
time. At this level stock costs will be at the minimum per unit because the
organisation is at full capacity.
Example:
To ensure that production continues without interruption for a 20 -day period
where 100 units are used daily, the ESL would be:
ESL = 20 days x 100 units = 2,000 units

Minimum stock level – the lowest amount of stock that should be stored at one
time. At this level there is a danger that stock levels could fall too low and
production would stop.
Example:
(a)
Usage = 100 units per day
(b)
Orders take 5 days to be delivered
(c)
etc.
Add a reserve of 3 days’ stock to cover for unforeseen delays, weekends,
MSL = 5 + 3 days x 100 units = 800 units
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
Re-order level – the quantity at which more stock is ordered.
Example
(a)
Minimum stock level = 800 units
(b)
Lead time = 5 days
(c)
Average usage = 100 units per day
R-OL = Minimum stock + lead time = 800 units + (100 units x 5 days)
= 800 + 500 = 1,300 units

Re-order quantity – the quantity of stock that has to be ordered to bring levels
back to the maximum stock level.
Example
(a)
Economic stock level = 2,000 units
(b)
Minimum stock level = 800 units
R-OQ = Economic S L – Minimum S L = 2,000 – 800 units = 1,200 units

Lead time – the time that passes between ordering stock and it arriving.
Traditionally there are two ways of storing stocks – either in one central area
(centralised storage) or in different locations throughout the organisation depending
on where the items are to be used (decentralised storage).
A number of companies are moving away from these trad itional methods to the
Japanese production process Just-in-time which uses the Kanban system. Raw
materials intake, work in progress and goods dispatch are kept to a minimum to match
exactly the quantities demanded by customers. This stock control system uses cards to
inform operators how much is to be produced at each stage in the process and the
precise quantity of stock each process should withdraw from the previous stage. The
previous stage may be another process, a stores area or even a supplier.
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Just-in-time aims to get the highest volume of output at the lowest unit cost. As the
name suggest, stock arrives just in time for it to be used in the production process and
goods are only manufactured when a customer order is received. It is really a method
of production control. Using a ‘pull- through’ approach the advantages claimed for
this system include:

a smoothing out of production flows;

a reduction in inventory levels;

a reduction in unit costs of production;

much easier production planning for management;

ease in meeting delivery deadlines;

elimination of waste;

no over-production.
The concept is very simple. If there is no demand for the product there is no
production. It is the anticipated or planned consumer demand – often initiated by the
sales or marketing department – that triggers the production process. Finished goods
are produced just in time to be sold to the customer. Component parts are assembled
just in time to become finished goods. Materials are purchased just in time to make
component parts. Each system of stock control has both advantages and
disadvantages. And, as with all management decisions, each organisation must choose
the storage system most appropriate to its needs.
The costs of a Just in time system are:

Suppliers who are reliable are required so that stock is delivered on time.

Production can stop if stock is not delivered when required.

Less environmentally friendly as more journeys with less stock will be made.

Delivery costs might be higher due to more journeys.

Discounts for bulk buying (economies of scale) might be lost.
The Kanban system
Advantages:

stock usage exactly matches production requirements

savings are made on both purchase and storage costs of unused stocks

production delays are prevented

close ties with suppliers are established
Disadvantages:

there is a high dependency on suppliers and their ability to conform to your
requirements

suppliers must be willing to participate.

Stock can be stored in a centralised or decentralised location.
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Centralised storage – storing stock in one place.
Advantages:

improved security

supervised by specialist staff

agreed procedures for issue/receipt

agreed procedures for ordering

bulk ordering/storage may be cheaper

increased efficiency in distribution
Disadvantages:

time wasting going to and from stores

cost of specialist staff

cost of dedicated storage area
Decentralised storage – storing stock in more than one place.
Advantages:

stock always ‘on hand’ when required

orders of stock will reflect actual usage

faster turnover of smaller amounts of stock reduces likelihood of
deterioration/decay
Disadvantages:

less rigid control – theft and loss more likely

takes up space in production areas
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Distribution and Delivery
Warehousing
Despite the efforts of management to relate the production output of a product to its
forecast sales figure, under normal circumstances it is impossible to match output to
demand exactly. At different times, sales will exceed those forecast or fall below it.
However, since sales occur after the finished product is produced; any response to
changes in sales tends to be too late to influence output. Consequently, it is necessary
to store stocks of finished goods in a location that offers security and a suitable
environment (for example, dry not damp).
Most production units store finished goods in warehouses that may be centrally
situated or decentralised. A warehouse is the name given to the place where finished
products are held until they are ready to be distributed to the customer. Warehouses need to
be designed to ensure the most efficient movement and flow of stock. The exact size and
layout of a warehouse depends on the size of the organization, the product being manufactured
and the organisations policy for logistics and distribution.
The main aspects of warehouse planning and organisation are:
(a)
Design and layout
The design and layout of the warehouse is of major importance if stock is to be
handled efficiently. Ideally, the warehouse should be on ground level only as this
speeds up handling time. Those goods that are ‘moved’ most frequently should be
located in a readily accessible area, and a stock rotation system should operate to
avoid deterioration in quality.
(b)
Mechanical handling
Although specialist stock handling equipment can be very costly to purchase, benefits
from its use can be substantial in terms of use of space, time required to ‘move’
stocks, and costs.
Pallets offer benefits in that they are easily moved with the aid of a forklift truck and
help to avoid deterioration by keeping items off the floor.
(c)
Transportation
Organisations may own or hire transport or use public transport. It is essential for an
organisation to consider carefully their needs prior to determining their transportation
policy. Owning its own transport offers an organisation complete control of its vehicles
and drivers, but incurs high capital and running costs, and requires careful route
planning if under- or over-utilisation is to be avoided.
Reliance on outside transport avoids any capital outlay and offers the potential for
increasing or reducing transport requirements at short notice (hence saving costs), but
control of the system and reliability may be reduced.
Warehousing facilities, transportation and stocks of finished goods are all essen tial
elements in an organisation’s distribution practices.
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Transport and D elivery
Goods can be transported in many ways - air, sea, rail, road, pipeline.
The most common methods of transporting goods in Britain shown below in graph
form.
(Source: based on CSO Annual Abstract of Statistics, 1995)
In the UK over 80% of all goods are delivered by road. Motorways make it easy to
deliver raw materials, component parts and finished goods from door to door, even in
the most remote locations. Until recently the great majority of freight going to the
Continent also went by road transport, although the railways have increased their
levels of freight carrying since the opening of the Channel Tunnel. Improved transport
links have given organisations much more freedom in decision-making about the
location of factories, offices and retail outlets.
Organisations have to assess the costs and benefits of each method of transport. If
you have to have fresh strawberries at Wimbledon each morning, and the strawberries
are being picked in Blairgowrie, you may have to consider refrigerated airfreight –
despite its high cost. If you are transporting fish from Peterhead to the London fish
markets, the most cost-effective method is by refrigerated lorry.
Scheduling
It doesn’t matter what goods you are producing or what service you are offering your
customers, it is essential that all of the factors of production and distribution are
working in a co-ordinated fashion. The bringing together of raw materials,
components, workers, machinery, transport systems and sales outlets has to be
organised in such a way as to make sure that the work flows through the stages of
production and delays and redundant resources are avoided. This means that the
operations function of an organisation, be it in manufacturing or service industries, a
multinational corporation or a sole trader business, will have a central role to play and
will have to maintain close relationships with other departments.
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Production Systems
Although many of the examples used here are of manufacturing production, similar
principles apply to the production of services, for instance the provision of insurance .
An example of manufacturing production
Before looking at each of the stages in more detail, let us consider the fol lowing
example that describes the production process of a large biscuit manufacturing
company.
The product: Chocolate-covered crunch biscuits
Stage 1
Input issues
Raw materials
The purchasing mix considerations include:
flour, sugar, fat, syrup, water, raising
agents, flavours.
• best price
• dependence on suppliers (reliability, etc.)
• delivery time
• availability of quality
• usage (quantity required each day)
• storage space available
Stage 2
Process issues
Stages of production
Production considerations include:
blending, rolling, cutting, baking,
enrobing (covering with chocolate),
cooling.
• average demand per week
• production capacity available
• working procedures (health/safety/hygiene)
• storage available for finished product
• efficiency/productivity
• payment systems
• quality issues
• stock control
Stage 3
Output issues
Stages of distribution
Distribution considerations include:
boxing, wrapping, storing,
despatching.
• packaging individual items and groups of
items
• nature/size of containers
• storage space available before despatch
• organising customer orders
• transporting (to further storage or to
customers)
• customer requirements
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Throughout the operations process of an organisation decisions have to be made about
the nature of that process. An organisation will have to decide what production
system to use, how to establish and assure quality, what stock to buy, in what
quantities and from whom, what quality standards are to be met, who is responsible
for purchasing, and what methods of payment will be used.
Production systems in manufacturing
The organisation must decide on the system that most suits its needs. This decision will
then affect every other operations decision made by the organisation. Both practical
and economic implications will be considered before selecting the system that offers
the greatest benefit to the organisation.
The main factors taken into consideration in deciding which production system to use
are:
1.
The nature of the product: producing washing machines, bread, a house or an
atlas are all likely to require different production systems as the finished goods
are very different.
2.
The quantity to be produced: the production of large numbers of standardised
products will be best suited to one type of production process, whereas
producing a unique stained glass window for a church will need a different one.
3.
The resources available: the choice of production system will depend on the
availability of:
4.

materials;

people;

buildings and equipment;

finance;

time.
Labour: a labour-intensive system is one where the organisation relies more
heavily on its workforce than on machinery to complete production. Examples
include strawberry picking and clothing promotion. A labour-intensive system is
most common in organisations where:

labour is cheap relative to the cost of machinery;

production requires skilled craftsmen and women;

the use of machinery is impractical due to the working environment, lack of
mobility or lack of flexibility of use;

high quality production depends on the ability to think, reason, act on
initiative and make decisions;

production requires flexibility.
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5.
Capital: where the production system places more emphasis on machinery and
other capital equipment than it does on labour, then it is said to be capitalintensive. Many durable consumer goods are made in this way, for example,
family cars, washing machines and televisions. A capital-intensive system is most
common where :

the supply of labour is limited;

production processes benefit from machine efficiency and consistency of
output

the use of equipment offers cost benefits;

the use of equipment offers higher quality or improved accuracy in
production;

the production process is routine and repetitive.
There are a number of other factors, all of which have to be taken into account when deciding
on the system to be used in an organisation.
These include:

Methods of production system;

Quality assurance
–
standards
–
methods of application;

Stock control;

Purchase of materials;

Payment systems;

distribution and delivery

–
warehousing
–
transport systems;
Scheduling.
Only once all of the factors affecting production have been assessed and considered
can the organisation make a decision on the best system for them at any particu lar
point in time.
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Types of Operation
Job production
Here each ‘job’ is completed in its entirety before another job is completed. Thus, a
single product is made at a time.
Examples: boat building
house building
individually designed wedding gowns, road construction, etc.
The emphasis is on individuality. Frequently found in smaller business units where
product differentiation is easily maintained.
Batch production
All stages in the production process are completed at the same time. Products will
have a marked degree of similarity, although different ingredients may be used for
different products.
Examples:
tinned foods (Baxter’s soups, Heinz spaghetti)
bakery goods (bread – white, French, wholemeal), etc.
In this case a number of products (i.e. a batch) are produced at once. Each product in
each batch is the same, but products may vary from batch to batch.
Batch production occurs most frequently in food production businesses, but it is
becoming more common in industries such as the building trade, where a row of new
houses will all have their foundations dug at the same time.
Flow production
This process uses the production line and the product passes through various stages
along the line with component parts being added at each stage. This is mos t
frequently seen in large mass production businesses where standardisation of products
is essential.
Examples: motor cars
white goods (washing machine, fridges, etc.)
newspapers.
In flow production there is continuous output of products, all of which are much the
same.
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Each of the three types of operation has advantages and disadvantages. They are summarised in the following tables:
Job Production
Advantages
Disadvantages
• organisation of production is relatively simple
• production costs may be high – there are a few, if any, economies of
scale; wages may be higher as workers may require highly developed
skills
• suitable for ‘one-off ’ orders which can be designed specifically
for the requirements of a particular customer
• production may take some time, e.g. each job will have to be set up
separately, may require individual design, etc.
• specifications can sometimes be changed during production
• workers are likely to be involved in the whole process – they
can see the results of their efforts and may be more motivate d
• producers require versatile equipment in order to produce a range of
different outputs
Batch Production
Advantages
Disadvantages
• flexibility – individual batches can be designed to meet the
requirements of particular customers
• small batches can mean higher costs of production per unit
• some scope for specialisation which can reduce costs, e.g.
workers can concentrate on one stage in the process; more
specialist machinery can be utilised
• if batches differ from each other, delays may occur in changing
machinery, etc.
• production of different batches has to be co-ordinated which may be
a difficult and time-consuming task
• stocks of partly finished good can be built up – this can help
firms respond quickly to new orders
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Flow Production
Advantages
Disadvantages
• economies of scale can be gained through specialisation of machinery,
workers, etc. which can lead to lower costs
• standardised product which may not meet requirements of all
customers
• automation becomes easier, e.g. use of robots on production line
• start-up costs are high
• costs of stockholding, etc. can be reduced through systems like just-intime, etc.
• mass production requires mass consumption – if demand falls
the whole system may be threatened
• quality systems can be built into the process and standard product
specifications can be maintained
• if part of the system fails, the whole system may not be able to
function
• work on production lines tends to be repetitive and boring
These advantages and disadvantages may not apply in any particular case and they change over time. For example, the development of
modern computer controlled machinery makes it much easier to vary output in flow production systems so that changes can be ma de in
standardised products. Computer controlled machinery is often more versatile than traditional equipment which makes it easier for firms
using job production to produce a greater range of products.
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Labour - intensive v Capital - intensive Production
Most manufacturing companies use a mix of labour-intensive and capital-intensive
(machine-intensive) production. The actual mix used determines the degree of
automation. The greater the reliance of machines, the greater the automation.
Automation means that capital has replaced the need for humans to carry out the
work required because machines, equipment and technology can do it instead.
Mechanisation means that there is some capital as well as some labour involved in
production. E.g. people working the machines.
Labour-intensive production
Some manufacturers rely more heavily on their workforce when:

Labour supply is cheap and readily available

The product requires craftsmanship or special expertise to produce

The business is small and does not have the finance to purchase expensive machinery
Being labour-intensive is not without its costs:

A skilled labour force can be expensive to pay and train

It may be limited to small scale production – cannot take advantage of economies
of scale

If staff are ill or absent then production may halt

The quality of products has to be monitored closely to ensure consistency
Capital-intensive production
Other manufacturers rely more heavily on machinery when:

A standard product is being produced with standard operations

Labour supply is scarce or expensive

Consistency of product and quality is required

Economies of scale is desirable

Continuous production is required
Being capital-intensive has a number of costs:

Set-up costs of machinery can be very high

Lost production time during breakdowns is very costly

Individual customer requirements cannot be met

Worker motivation can be low due to repetitive nature of tasks
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Factors affecting Quality

Quality assurance

Quality control

Quality standards

Total Quality management
In today’s highly competitive global market quality has become one of the key decision
areas in operations. Quality is an extremely difficult term to define as it can mean
different things to different people. Quality standards are awarded to an organisation
when it meets a particular specification or set of criteria. However, it can be a time consuming process to achieve and involves a series of checks and/or audits to be
carried out. Being awarded a quality standard (or symbol) has benefits to the
organisation and the customer.
From the consumer’s point of view quality may be:

quantity provided for the price paid;

reliability or lifetime of the product;

the extent to which the product or service satisfies a customer’s particular
requirements, for example, technical features, appearance, and how well the
product/service compares with its marketing description.
From the producer’s point of view quality may be:

meeting exact specifications;

a highly skilled workforce;

no customer complaints.
Quality assurance
Quality assurance is an attempt to make sure that quality standards are set, agreed
and met throughout the organisation. The aim is to ensure customer satisfaction and
reduce the return of faulty goods..
Quality control v Quality assurance
Often thought to mean the same thing, these terms in fact describe different
approaches to managing quality. Quality assurance methods look at the prevention of
poor quality ensuring minimal waste. Quality control inspects completed products and
therefore higher waste as poor quality items are disregarded.
Quality control is historic, reactive and based on power. Consequently it often leads
to waste, and the scrapping and re-working of products. This approach has some
significant psychological implications. It works by failure, by denying the possibility of
getting things right.
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‘Control’ assumes that there will be wastage and scrap as inevitable parts of the
production process. Up to 25% of output can be wasted in a company that practises a
system of ‘control’ in which quality is checked at the end of the manufacturing
process. This has led to the ‘Friday car syndrome’, which can result in heavy costs in
raw materials and manpower.
An example of a quality control system was found in Kellogg’s, where samples of
breakfast cereal are removed from the production line every half-hour, around fifty
samples per day, and tested for quality. The cereals are graded from 1 to 10 by a small
group of trained staff. A grade of 10 is perfect. A grade between 9.8 and 7 means that
there is no visible reduction in quality as far as the customer would notice. The cereals
all also undergo a series of other tests – looking at nutritional values, texture, taste,
colour, etc.
Quality assurance is based on prevention. Requirements are determined in advance,
thereby minimising the risk of error, or non-conformity to specifications. It aims to
create a situation in which ‘right first time, every time’ becomes a real possibility. This
system, in which quality is checked at every stage of the manufacturing process, has
been known to reduce wastage and scrap to 5% or less. As a result, in most
organisations there is less and less dependence placed on quality control and far more
placed on quality assurance systems.
In today’s highly competitive market place, the resulting increase in profits, the
reduction in costs, and, above all, the improvement in customer satisfaction are all
vital.
Factors that the organisation will consider when assessing if they can provide quality in
their operating systems include:

the time, effort and technological input into the design process;

the quality of supplies of materials and components;

the commitment and skill of the workforce;

the system of monitoring and controlling the operating process;

the ability to meet delivery deadlines;

the after-sales service provided.
Quality Standards
From much that we read about recent business organisations and their operations we
might think that the concept of quality has dominated the thoughts of all management
teams, regardless of the type or size of the organisation. From schools finding
themselves on league tables, and general practice doctors’ surgeries having to fulfil a
Patient’s Charter in their performance, to all types of consumer goods being branded
as ‘quality’ products, all producers and service providers seem to be involved with
‘Total Quality Management’.
The traditional view of quality is that there is some conformity with specifications of
standards. However, modern thinking now broadens this view to emphasise the
importance of the perspective of the customer in the setting of quality definitions. In
this way, quality is seen more as fitness for purpose or intended use. This might
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include measures of appearance, safety, availability, value for money, ease of use,
consumer after sales support, the reputation of the product and the organisation, and
even the way staff deal with customers.
In recent years the government, through the British Standards Institute, has defined
quality assurance as an all-embracing concept involving all stages and all people in the
production process. This is a significant move away from the previously held notion of
quality control, where the emphasis was on detection and the remedial treatment of
faults.
The government further pushes organisations to adopt Quality Standards such as
BS5750 by stating that they will only award contracts to those organisations that hold
the certificate.
There has to be general agreement within the organisation about the quality standards
that it is to aim for in its operations. Quality manuals have to set out policy and
procedures on quality assurance and identify the quality standards set down by the
organisation. Inspections will be made into current procedures and working practices
to ensure that what is laid down in the manual is being put into practice. If these are
of a sufficiently high standard there is a recognised quality standard award certificate
that can be made to manufacturing industries, allowing them to incorporate the
standard into their marketing literature.
British Standard 5750 is the standard that has been developed as a benchmark for
quality in the United Kingdom. Consequently BS5750 and its international equivalent,
the International Organisation for Standardisation’s ISO9000, are recognised as the
mark of quality in over ninety countries worldwide. Other award schemes also exist
whereby TQM can be recognised, for example, through the European Foundation for
Quality Management (EFQM).
Other organisations award their own quality assurance marks. The se include the
British Standards Institution Kite Mark, the Association of British Travel Agents (ABTA)
symbol, and the pure new wool symbol of the Wool Marketing Board.
Investors In People (IIP) is another recognised quality standard that can be achieved by
organisations that provide training and other development opportunities for all staff.
Quality Management (QM)
The main aim of Quality Management is to produce a perfect product or service every
time in order to meet customer requirements. In the UK the system was first seen
more than twenty years ago when the Ministry of Defence set out the specifications or
standards that their suppliers had to meet before the Ministry would buy from them.
Gradually over the years similar standards have evolved to cove r a wide range of
industries.
Quality Management uses the principles of ‘Quality Assurance’ but takes a
fundamentally different view of quality. The principle upon which this system
operates is that in order to achieve ‘quality’, the requirements, specifi cations, and
needs of the customer or client come above everything else. The culture shift must be
made from ‘we know what quality is’ to ‘You tell us what you want and that will be our
definition of quality’.
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In practical terms QM assumes that the next person with ‘ownership’ of the good, or
the next person to use the good, are customers or clients – not simply the person who
ends up purchasing the good for his/her own use.
Quality is therefore essential at each and every step in the production of a good , or,
for that matter, in the provision of a service, to which the same principles apply.
For example, on the production line in a factory, the next person down the line from
you is your customer or client. You must therefore ensure that when the partassembled car leaves you to move on to the next worker, any work you have done on it
is of the highest standard and quality – just as you will expect to receive the car parts
from the worker in front of you.
It is felt that, although it is initially costly to establish, QM can achieve savings in the
long run by reducing wastage to around 3%. This can make a considerable difference
to an organisation.
QM requires:

the understanding that this is a core corporate philosophy focusing on the needs
of the consumer;

a commitment by top management, and therefore the provision of the necessary
resources;

that every member of the organisation be consulted and involved in setting
standards (every member of the organisation means just that, from the
receptionist, office cleaner and store-man to top management);

a focus on teamwork and creative thinking to identify future improvements;

that it be viewed as a long-term concept;

a quality plan to be established which offers a structured, disciplined approach to
quality;

emphasis to be placed on the collection and analysis of information;

employee training to be treated as essential;

a constant checking of performance (quality standards) by individuals;

a constant search for improvement;

focus on the total quality of output, in which case cost savings can be
considerable.
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Introducing and implementing quality assurance or QM systems
Quality assurance requires four elements to be managed:
1.
The definition of ‘quality’ at each and every stage of the process;
2.
The commitment of all;
3.
A system in which this quality can be assured;
4.
A measure of the ability to meet quality requirements.
The definition of quality
Ultimately this lies with the customer in terms of defining a specification of the desired
product/service and may include specific reference to, for example:

intended usage,

required outcomes,

standards of safety,

efficiency,

quality of the finished product,

cost.
It is up to the supplier to clarify the customer’s definition and confirm his ability to
supply to these requirements.
Suppliers must take responsibility for helping their customers to articulate precise
requirements. Vague definitions of ideas will be impossible to implement, as these
lead to misunderstandings and errors that, by the nature of the system, mu st be
eradicated.
Only if instructions are specific at every stage of the process can quality be assured,
and for this specifications must also be precise.
The commitment of all

a clear commitment to quality in the mission statement of the organisation,

a quality manual/handbook which outlines the specific components of each job
within the organisation,

a clear definition of the responsibility of every individual within the organisation
to deliver quality on every occasion to every customer,

the drawing up and implementation of a ‘contract’ to confirm the mutual
obligation of the supplier and the customer,

the establishment of ‘standard operating procedures’ (schemes of work, checking
procedures, etc.) to help ensure consistency,

the use of quality audits to establish the integrity of provision against the set
specifications,

the use of quality circles,

the use of benchmarking.
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A system in which this quality can be assured
Effective management for quality assurance will require organisations to set up
systems and processes that will include:

systems to help in the definition and specification of products/services,

systems for checking and monitoring the process and quality at all stages in
production/provision,

using appropriate documentation to set out requirements and to record progress
and quality achieved,

keeping records,

designating individual responsibility for ensuring quality throughout the
organisation,

reviewing, monitoring and feedback from operatives,

staff appraisal,

settings of specific targets of achievement,

providing comprehensive job descriptions,

providing comprehensive and clearly understood instructions and information at
all times.
A measure of the ability to meet quality requirements
This can be carried out in a number of ways, both qualitatively and quantitatively. It
may be made on customer’s perceptions, or on objective measurements – both are
valid indicators of conformity.
Benchmarking
This is a process of quality assurance that sets performance standards against which
work can be measured. These standards are set using the achievements of the most
efficient producers in a particular market place or industry. The benefit of this is that
production managers assess the performance of their operations against that of the
market leaders in a truly competitive environment. The ‘best industry standard’
organisation can be identified by asking several sources, for example customers,
industrialists, business analysts or journalists.
One drawback is that there may be resistance from the market leaders to providing
their performance figures to be used by competitors. A second is that organisations
must continue to benchmark their processes – even when they become industry
leaders – as competitors will also be trying to produce better quality goods and
thereby increase their market share.
Benchmarking is seen as a vital element in the success of an organisation in a global
and highly competitive market.
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Quality circles
There are two principles behind the concept of quality circles in the wor k place:

no one in the production process knows more about the problems that might
arise than shop floor workers;

workers will appreciate and be motivated by the opportunity to use their
knowledge and talents alongside management in a problem-solving environment.
A quality circle is a group that meets regularly to identify and resolve problems about
quality in the production process. Their remit includes the consideration and
recommendation of suitable alternative practices that are then put to management.
The members of the quality circle will largely consist of shop -floor workers, but may
also include engineers, quality inspectors and members of the sales team who are
there to present the customer’s angle.
Like a number of successful modern management techniques, the idea of quality
circles originated in the Japanese manufacturing industries. Toyota Motor Company
was the first to establish quality circles in the 1950s.
The inclusion of quality circles in the workplace is seen as a successful way of bringi ng
both consultation and job enrichment onto the shop floor.
Mystery Shopping
Some organisations, often in retail, employ mystery shoppers to visit their store to
make a purchase. Feedback is then given to the organisation on how the shopper
found their experience and the service they received. Staff in the organisation will not
normally know in advance that a mystery shopper will be visiting, in an attempt to
provide an accurate representation of the shop and the service experienced.
Summary of factors affecting quality
‘Quality, reliability and cost are all interconnected. With enough expenditure anything
can be endowed with high quality . . . and with adequate expenditure almost anything
can be made to be very reliable. It follows, then, that a company can provide a product
or service at different quality levels, each of which necessitates a different price. There
is no simple level of quality; nor is there an absolute quality level. Nothing will be
perfect, no matter how much it costs. In general, cost s rise steeply for increasing
quality, but beyond a certain level, value to the customer increases more slowly.’
Ray Wild, Essentials of Production and Operations Management, 2nd edn.
From the above we can develop simple definitions as follows:
Quality: The quality of a product or service is the degree to which it satisfies
customers’ requirements. This is influenced by:
Design quality: The degree to which the specification of the product or service satisfies
customers’ design requirements; and
Manufactured quality: The degree to which the product or service, when made
available to the customer, conforms to specification.
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Payment Systems
The search for a way to motivate, reward and even control labour has led managers to
devise a variety of payment systems.
Time-rate payment systems
These are simple payment systems where the workforce receives a basic wage or
salary. Workers are rewarded for the amount of time they spend at work, and for
most workers in Britain this is the average working week of thirty -six hours. In
addition, holidays with pay are usually included. The system is very common in many
jobs from teachers to bank workers and shopkeepers. It provides a simple method of
calculating payment for employees, whether they are paid hourly, weekly, or monthly.
It also overcomes difficulties that might arise when trying to work out the exact value
of an employee’s work, for example a doctor. From the employee’s point of view such
a system guarantees income.
Overtime
There are instances where employers operate a time rate system, but also offer
overtime payments when individuals work for more than their normal number of hours
per week. Overtime payment systems are common in the construction industry, for
example.
Piece-rate payment systems
In manufacturing industries the most common method of payment is some form of
payment by results, or a productivity related scheme. In some instances this can
simply be payment to the worker for each item he or she makes/produces. This system
was very common in the soft fruit industry where workers would be paid by the weight
of each basket of strawberries or raspberries they picked. It is also felt to offer the
greatest incentives to employees to maximise their output – the more they produce
the more they get paid. However, a system that only offers piece-rate payments may
result in little or no income for employees, because of breakdowns in machinery or
other unplanned stoppages.
Piece rates plus a basic or fixed pay element
To avoid the problems mentioned above, some employers calculate pay using a system
made up of two elements. Firstly, they will pay a basic or fixed -rate wage calculated
on a time rate basis, and then to this they will add a variable, piece -rate element,
calculated on output.
Commission payments
When looking to establish payment systems for a sales force, it is very common to base
this too on a flat-rate wage supplemented by some form of commission based on sales
volume or value achieved. In some organisations the greatest part of the wage
received by the sales force comes in the form of commission paid. This has led to
complaints that such workers may use pressure tactics in order to achieve sales – and
maintain their own income levels.
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Fringe benefits and non-financial payments
This covers any payments other than wages and salaries that an employer might make.
They include private medical insurance, subsidised meals, company cars or loan and
mortgage facilities. Since the 1960s fringe benefits have increased in importance,
particularly in the managerial and professional sectors.
Bonuses
Another common production payment system is one that operates with a flat rate of
pay that is then supplemented by a bonus directly related to the output each worker,
or group of workers, achieves. Such bonuses might be related to setting targets for:

• volume of output,

• quality standards achieved,

• reductions of wastage,

• improved machine use,

• reduction in the loss of working days through workplace accidents. (This last
example is very common in the North Sea oil industry.)
Incentives to professionals
It is generally accepted that professional employees, for example dentists, doctors and
other health service specialists, receive a basic salary from their employing health
authority, but can enhance this by undertaking private patient work for which they
receive payment on an individual case basis. There has also been an increase in ‘no
win no fee’ legal cases in recent years. Based on a system devised in the USA, and
particularly common in civil law suits for damage claims, the client only pays the
lawyer a fee if the outcome of the case is in his favour. The percentage rate of the fee
will be set out and agreed before the legal action is started.
Contract employment
It is becoming more and more common for employers to hire staff on a contract basis.
This may be for the completion of a job or project, for example the building of a new
stretch of dual carriageway, or may be for a fixed time period of, say, one university
academic year. The employer can make substantial savings using a contract basis for
employment – it is unlikely that he will offer paid holidays, pay for days lost through
sickness, maternity pay or a company pension scheme. From the employee’s point of
view the rate of pay is often higher than for those on permanent contracts. But there
is a high degree of uncertainty and risk of loss of income when the contract ends.
Profit-sharing schemes
Although not widespread in Britain, there has been a move in recent years for
employers to use systems that include a share of pre-tax profits as part of the payment
made to the workforce. Some employers feel that this system is likely to increase the
commitment from the workforce, not only in terms of output, but also in overall terms
to the organisation itself. However, others are less enthusiastic and feel that the
relationship between daily output and annual profit-share payments is too remote to
be an effective motivator.
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Employers will have several objectives that they want to achieve when d evising
payment systems for their employees. These include:

Motivation
Many people believe that workers are motivated by money, and this is reflected
in the number of employers who use performance related payment systems.

Cost
As one of the objectives of the employer is to maximise profits he will wish to
keep the cost of labour as low as possible. The procedures for calculating,
recording and making payments to employees should also be cost effective.

Prestige
Employers may want to have the reputation of being ‘good payers’ rather than
‘poor payers’. This improves their ability to recruit and retain workers, which, in
the long term, is cost effective for the organisation.
Employees will also have a number of objectives that they want to be able to meet
from the payment they receive.

Purchasing power
The higher the wage the employee gets the more he can buy and the higher his
standard of living will be. Workers will always try to win wage increases higher
than the present (or expected) level of inflation – as this means that they will
continue to be able to raise their standard of living.

Recognition and fairness
Most employees like to have the value of their work recognised. Many see the
level of their wage or salary as the main indicator of such recognit ion. They also
want to see fairness between payments they receive and payments made to other
workers doing similar work or holding similar qualifications. For example, the pay
of nurses is often compared to that of teachers or the police.

How payments are made up
Many workers are interested in the way in which their total remuneration is made
up. For example, they might be very happy to settle for a lower annual salary
provided that the employer is making a contribution into a pension fund on their
behalf. Benefits such as a fully funded company car may be worth as much as
£4,000 or £5,000 per year to the employee, although he/she will almost certainly
have to pay more in tax.
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Environmental Responsibility
All businesses have to consider environmental and ethical issues. The government has put in
place strict policies and laws that dictate some of the ways businesses have to consider the
environment.
Businesses can:

Try to minimise wastage by ensuring employees are trained, ensuring machinery is kept
in good condition and by not overstocking. However, providing training and maintaining
machinery could be expensive. This would reduce the company’s profitability. It is
important in maintaining a good reputation that businesses do not simply ‘dump’ waste
material that could harm the environment, or send their waste to landfill. They have to
make sure that they reduce the amount of waste that is produces as well as ensuring they
dispose of it in an environmentally friendly way. Sometimes a business might call on the
services of a specialist waste disposal company to dispose of certain types of waste.

Recycle as much as possible by encouraging employees to put rubbish in appropriately
coloured bins and by re-using materials in the production process as much as possible.
Initially buying the different coloured recycling bins could be expensive, but would
hopefully encourage people to recycle as much as they can. Recycling can help reduce the
company’s energy bill by re-using materials rather than using new ones. Recycling will
also help to reduce greenhouse gases by not having to extract raw materials and by
reducing materials that need to be transported.

Try to minimise packaging by only using the amount of packaging needed to maintain the
product’s quality. Not only will this cut down on costs, it is good for the environment.
They also need to try and use as much environmentally friendly packaging that can be
reduced as possible; however, it might be more expensive than non-recyclable packaging.
Many products that previously had significant amounts of packaging (eh Easter eggs) now
contain much less.

Prevent pollution and emissions by watching the material used in production (e.g. fuel
and chemicals) and by disposing of any potentially harmful chemicals or products in the
most environmentally friendly way. Careful disposable of waste can be expensive, but
businesses that don’t consider this properly can be prosecuted. Businesses also need to
be aware of traffic congestion/pollution getting to and from the business, as well as the
noise and light that it emits from its premises.

Be sustainable by replacing raw materials that they have used with new ones. For
example, toilet paper manufactures might plant a new tree for every one that they use to
make their product. They might have a sustainable development policy that details what
the organisation will do to replace materials that it consumes.

Operate a fair trade policy This is a trading partnership that seeks greater equality in
international trade. It contributes to sustainable development by offering better trading
conditions to, and securing the rights of marginalized producers and workers. Fair Trade
Organisations support producers, help raise awareness, and campaign for changes in the
rules and practice of conventional international trade.
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Fair Trade Benefits
The 5 Fair Trade benefits are:
Product Price – The farmers receive a fair and stable price for their products. This enables them
to plan more easily and to invest back into the operation of the business.
Extra Income – More money for the farmers and estate workers which helps to improve their
lives. They can afford to buy additional items for the home, or send their children to school
which helps improve the lives of future generations.
Environment – Fair Trade encourages organic farming and the avoidance of agrochemicals. Fair
Trade farmers also have to learn to apply sustainable irrigation practices such as crop rotation
& sustainable water sourcing.
Strength in numbers – Instead of struggling on their own, small farms can join to become part
of a cooperative and therefore are stronger together than if they were all on their own.
Consumer power – Fair Trade brings closer links between consumers and producers.
Consumers know they power they have to improve the lives of the farmers when they buy Fair
Trade products.
The Fair Trade costs are:
The minimum price is only guaranteed to the co-operative, and not the small scale farmer or
the workers at the end of the chain.
The prices are fixed without adapting to the context of the various countries involved.
There are certain rules the farmers have to follow to become Fair Trade certified, and this can
be expensive. An example is the move away from using agrochemicals, to organic farming.
With coffee, a major Fair Trade product, the roasters can end up bearing the cost of marketing
the Fair Trade brand, through the payment of a licence fee to the Fairtrade foundation as a
percentage of sales.
Benefits to an organisation of environmental responsibility

Awards – Businesses may be given awards in recognition of their environmental friendly actions.
These can be awarded by councils or various other bodies.

Customer Loyalty – A lot of consumers nowadays are becoming more aware of environmental
issues and are willing to spend their money with businesses who try to minimise any negative
impact on the earth.

Recruiting employees – As well as consumers, job applicants may also think about the impact
businesses have on the environment. If a business is known to be good to nature through
recycling or using renewable energies, then they may attract more applicants than those that
don’t show as much regard for the earth. This could help them employee the highest quality
workers.

Extra investment – Investors are becoming more aware of the importance of businesses acting
sustainably and are increasingly investing in those businesses that demonstrate environmental
responsibility. This enables the businesses to use this investment to generate higher profits and
strengthen their position in the market.
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Costs to an organisation of environmental responsibility

Conversion costs – It can be expensive for businesses to install equipment such as waste
management systems, solar panels or wind turbines. The energy savings made
can take a long time to recoup.

Costlier products – Due to the conversion costs, and the sourcing of
environmentally friendly materials, the end product can become more expensive.
This results in a higher price having to be charged to consumers with a resultant
lowering of sales and profits.

Paperless office – Businesses may try to reduce the amount of paper they use in
the office. This could result in a greater reliance on technology to store information,
which may cause problems if it breaks down.

Legislation changes – as environmental laws change, ensuring that you comply with them could
involve spending
Ethical Operations
Ethical operations are about the behaviour of organisations when dealing with various
stakeholders such as staff, suppliers and customers. This may mean paying staff more than the
minimum wage requirements, or paying the suppliers a fair price for the goods they have
supplied.
Benefits

Customer Loyalty – More and more consumers take an interest in how businesses act
towards their stakeholders, and are willing to withdraw their custom if they don’t
like what they are doing.

Recruiting employees – Job applicants may also think about the ethical behaviour
of businesses. If a business is known to be treating its employees and suppliers
well, then potential workers may be keen to work for them. This could help them
employee the highest quality workers.

Motivation – Staff morale will be higher if they are treated well, and so they are likely to be
more motivated. This should lead to higher productivity/better customer service/higher quality
etc.
Costs

Costlier products – Due to the costs of paying more to suppliers, or awarding staff with above
minimum wages, the end product can become more expensive.

Less competitive – Applying ethical principles can result in a higher cost base for
the business. This could result in having to charge customers more for their products than
their competitors, and therefore their market share could fall.
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Technology
Technology can be used in a number of different ways in the operations function.
Computer-aided design (CAD)
CAD refers to any use of computer software that supports the design process. CAD is commonly
used for circuit design, as well as the design of products using 3D modelling. It is very useful for
architects, designers and engineers in their working lives.
The advantage of CAD is that designs can be created and adapted much more easily than if
being done by hand.
The disadvantages are that CAD can be expensive to purchase initially, and staff need to be
trained how to use it properly.
Computer-aided manufacturing (CAM)
CAM is the use of computers to control machinery. The machinery has a program in it which
controls the movement very precisely.
Advantages of CAM over regular machines are that they operate faster, more accurately and
consistently, and can create more intricate products.
Disadvantages of CAM are they can be more expensive than manual machines. Also due to their
complicated nature, they can be more difficult to fix if they breakdown.
CAD and CAM used together can assist in lowering production costs due to:
Packaging – Can design and manufacture packaging which uses less materials
Products – Can design a product which can be made using less materials. Another example
would be using them to cut more templates out of sheet material than if done by hand.
Waste - This is reduced as CAM makes less mistakes/no mistakes so not as many materials need
to be ordered to cover for production errors.
Electronic Point of Sale (EPOS)
This software is used by retailers to track what items are sold, and then updates the stock levels
automatically. It helps manage stock control more easily as you don’t always need to do manual
stock counts.
This can link up with software which automatically places orders from the suppliers when the
stocks fall to a certain level.
Internet
The internet has had many effects on business including:
Sales – By creating an internet site with e-commerce capabilities, a business can potentially sell
to a global audience, rather than the traditional local geographical area.
Purchasing – Businesses can order from the suppliers online, saving them the time it would
normally take to visit the supplier, or having to phone during working hours.
Advertising – Due to the increasing use of the internet, there is a large audience to advertise
products to. This can be through a company’s own website, or in ads on blogs, search engines
or other websites.
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Research – There are vast amounts of information on the internet, which the business can
make use of. This includes government statistics, news, competitor websites, even social
networking.
Laptops/Smartphones
Laptops and smartphones are vital to modern day businesses as they help them to:

offer homeworking which keeps staff motivated as they can have a good work-life
balance

take work to clients due the portability of the technology

Make phone calls and send/receive e-mails when travelling

Saves money on office space as not all staff need a permanent desk
In addition;

E-Mail can be used to confirm an order has been received and to let the customer
know about the progress and status of the order (e.g. when it has been
dispatched).

Websites can be used to compare the prices of different suppliers before
deciding which one to purchase.

Deliveries can be tracked and traced via the websites or logistical companies.

Computer programs (e.g. database or spreadsheet) can be used to store stock
levels.

Social networking e.g. Facebook/Twitter to attract a wider audience and keep in
touch with customers .
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