Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
18
Ex
OpenTuition.com am
s
Free resources for accountancy students
E1 Organisational
Operational
Level
Management
To benefit from these notes you must watch the free lectures on the
OpenTuition website in which we explain and expand on the topics covered
You must obtain a current edition of a Revision / Exam Kit - the CIMA
approved publisher is Kaplan. It contains a great number of exam standard
questions (and answers) to practice on.
You should also use the free “Online Multiple Choice Tests” which you can find
on the OpenTuition website:
http://opentuition.com/cima/
2017 Examinations Watch free CIMA E1 lectures 1
Contents
1. An Introduction to Organisations 3
2. Organisational Structure 11
8. Operations Management 53
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 2
OpenTuition.com
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 3
Chapter 1
AN INTRODUCTION TO
ORGANISATIONS
OpenTuition.com
1. Organisations
An organisation can be defined as:
“A social arrangement which pursues collective goals, which controls its own
performance, and has a boundary separating it from its environment.”
This is, perhaps, a deceptively simple definition. Probably the most important word is ‘social’.
Organisations consist of people and we are all social animals. We have to get on with our
colleagues; ideally we would like our boss, or at least respect our boss. We have to get on with
customers; we have our own ambitions; we have our own motivations. Early management
theory tended to neglect the social side of organisations and management and had a rather
cold, militaristic approach. Modern theories have changed this considerably.
Another important aspect of the definition is that of ‘collective goals’. There has to be an
assumption that people within an organisation are ultimately aiming at the same end results,
if they are not, then chaos is likely to rule. One of the functions of management is to arrange
the business and the people in it so that everyone is pulling in the same direction, and the
collective goals are ultimately established.
2. Types of organisations
Organisations can be categorised by:
๏ Ownership;
๏ Motive;
๏ Legal structure.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 4
2.1. Ownership
Private sector organisations are all the rest and will include both businesses and charities.
2.2. Motive
OpenTuition.com
๏ Profit-seeking
๏ Non-profit (or not-for profit)
The motive behind profit-seeking organisations is to make profits. The vast majority of private
organisations are profit-seeking ie they are ordinary commercial businesses. However, some
private organisations are not profit-seeking. An example is a charity. Typically charities are not
owned by governments but are private organisations which seek to raise money and
distribute cash or organise other assistance.
Non-profit organisations do not aim to make profits. They can be private (such as charities) or
public (such as a state health service). Charges might be made for some services, but their
motivation is not based on making profits.
๏ Sole traders
๏ Partnerships
๏ Limited companies (incorporated entities)
๏ Co-operatives
๏ Most businesses start life with a sole trader structure. This means that a person simply
begins to trade with very little formality. There is no legal distinction between what the
business owns or owes and what its owner owns or owes. This means that the owner
has unlimited liability for the debts of the business. If the business fails, people owed
money by it can pursue the owner’s personal assets.
๏ If two or more people trade together with a view to profit, then a partnership is
formed. Profits are shared according to whatever agreement has been made between
them. Each partner has unlimited liability for the debts of the business.
For both sole traders and partnerships, tax on their profits is paid by the business
owners through their income tax.
๏ Limited companies require more formality to establish. They have to be registered
with the relevant government organisations (in the UK, Companies House). They have a
written constitution known as the Articles and Memorandum of Association. Units of
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 5
ownership are designated by shares and they are managed by a board of directors
elected by shareholders. The shares can be bought and sold to alter the ownership of
the company.
Their great advantage is that they give their shareholders (owners) limited liability. This
means that if the company fails and cannot pay what it owes, the shareholders’
personal assets are not at risk. The liability of the shareholders is limited to losing their
shares. Note that the liability of the company is unlimited and it can be forced to sell
everything to pay its debts as best it can.
OpenTuition.com
In addition, incorporated entities have a separate legal existence in law. They can own
property, sue and be sued and pay their own tax (often known as corporation tax).
Incorporated businesses continue in existence even after a shareholder dies. That
person’s shares are simply inherited by someone.
Limited liability companies range in size from small family companies up to the largest
companies in the world. Many of the large limited companies are listed (or quoted) on
stock exchanges where their shares can be freely bought and sold by investors. A listed
companies’ shares have a share price that depends on supply and demand for those
shares. Typically these prices vary frequently and the latest prices can be seen in the
financial press or on the internet. This lets investors see immediately what their shares
are worth.
Shareholders can receive a share of the company’s profits if the company- directors
decide that the company should pay a dividend. Dividends are defined as a payment
per share owned. The shareholders will also benefit if the value of their shares increase
so that they make a profit when the shares are sold.
Usually limited companies are profit-seeking, but don’t have to be. For example, a
charity or school could use this legal structure.
๏ Co-operatives
A co-operative is owned, controlled, and run by a number of people for their own
benefit. They can be profit seeking (eg a cooperative of farmers working together to
harvest and market cereals) or they can be non-profit seeking such as a purchasing
cooperative in which the members can get better deals by working together.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 6
3. Stakeholders
3.1. Introduction
“Anyone or any entity that is affected by the organisation or who has an interest in
OpenTuition.com
it”.
Up to around 30 years ago, the term ‘stakeholder’ was not widely used; all was concentrated
on the needs and requirements of shareholders. Gradually businesses have become aware
that other entities are affected and that they might have legitimate demands. For example,
many manufacturing companies would recognise that the local population has legitimate
concerns about pollution released from the factory and that there are responsibilities to
ensure that employees are not unfairly exploited.
If you look at the list above, it will be clear to you that stakeholder requirements will often
conflict. For example:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 7
To manage stakeholder conflict management must assess two factors for each stakeholder:
๏ Stakeholder power
๏ Stakeholder interest (ie is the stakeholder interested enough to take action or will the
stakeholder be passive?)
OpenTuition.com
Low
Stakeholder
Power
High
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 8
All organisations should have a purpose that is known by their stakeholders. It is important
for stakeholders to agree on the organisation’s purpose – even if they do not necessarily
agree with that purpose. Think of the chaos that would result if shareholders thought the
purpose of the organisation was to make profits but management thought its purpose was
charitable.
4.2. Mission
An organisation’s mission can be defined as its reason for existence ie what its core purpose
is.
Harley-Davidson
Microsoft
GSK
Many writers would suggest that the last two mission statements are inadequate as they give
no clue about the companies’ activities. If you hadn’t heard of Microsoft you wouldn’t know
it’s an IT company; similarly the GSK mission statement gives no clue that it is a
pharmaceutical company.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 9
4.3. Vision
A vision, or vision statement, has a very similar content to a mission statement, but there is
more emphasis on the future of the organisation. It is a description of what the organisation
would like to achieve in the medium to long-term. This can serve as a guide when it comes to
making business decisions.
For example, a diversified company might have both consumer products and industrial
products in its portfolio. Its vision might be to concentrate on the consumer sector so a vision
OpenTuition.com
stating that will guide the company in making acquisitions and disposals of subsidiaries.
It’s easier to think of creating value for shareholders as this is generally measured by the size
of profits made. However, other stakeholders are interested in value too. For example,
employees see value through their wages, salaries and job security; customers see value
through good quality products that are up-to-date; the government sees value though taxes.
This is vital to the success of any organisation. Resources have to be controlled so that they
are used economically and not wasted; resources and operations have to be co-ordinated
both to give good service and to operate efficiently.
Good control normally requires a control system of some type so that transactions are
handled consistently and properly. Control methods include:
๏ Laid down procedures (eg how and when are materials to be ordered?)
๏ Authorisations (eg a manager authorising purchases and overtime).
๏ Segregation of duties (dividing up a transaction into stages so that several people are
involved).
๏ Reconciliations (eg comparing material usage to budget and explaining differences).
๏ Training (so that employees know what they should do).
๏ The control environment (a management attitude that insists that proper procedures
must be followed).
Co-ordination also requires a system, nowadays often an information technology system. For
example, if an order is received then the following co-ordination steps are needed:
If not then:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 10
Bad coordination wastes money and other resources, irritates many stakeholders (such as
customers) and is very bad public relations. Long-term it will often cause the organisation to
OpenTuition.com
fail.
Efficient production should emerge as a result of good control and coordination. However, it
can also depend on the machinery and methods that the organisation uses. For example, it
will be important to ensure that the appropriate amount of automation is used to speed up
processing and to reduce costs.
Size of operation can also be important. In general, large organisations will be able to
produce for lower costs per unit than small ones because they can bargain hard with
suppliers, can afford high automation and can organise 24 hour working.
Location of the business can also be critical. For example, it might be better placing it close to
the resources it uses so that transport costs are minimised. Many organisations set up
manufacturing plants abroad to exploit lower labour costs there.
An organisation could be the best co-ordinated and most efficient producer in the world, but
it should realise that competitors will be continually striving to overtake it both by designing
better products and by designing better production processes. If organisations do not
continuously innovate they will be overtaken and their value-producing ability will fall.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 11
Chapter 2
ORGANISATIONAL STRUCTURE
1. Organisational structure
OpenTuition.com
This covers both the ‘shape’ of the organisation and also how people within the organisation
are managed. For example, how do instructions and information get passed around the
organisation? Has the organisation decided to have all accounting going through one
department only, or has it decided that it would be better for each branch to have its own
accounting function.
2. Functional structure
2.1. Basic shape
The line of control from top to bottom is known as the scalar chain. Orders tend to move
down the chain from CEO though directors through managers, supervisors and eventually to
the bottom of the organisation. Information tends to move up the chain eg a manager
producing a performance report for the departmental director.
There are two main decisions to make when designing a functional structure:
The number of layers will result in an overall shape that can be described as either a tall-
narrow or wide flat structure:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 12
Tall narrow. Shown below is a structure in which each manager or supervisor has only two
people directly reporting. This means that the span of control is two. There are many layers
and a considerable distance between the top and the bottom of the organisation. These are
sometimes known as vertical organisations.
OpenTuition.com
Wide flat. Shown below is a wide flat structure in which each manager or supervisor has ten
people directly reporting. This means that the span of control is ten. There are few layers and
only a short distance between the top and the bottom of the organisation. These are
sometimes known as horizontal organisations.
Over the last 25 years or so, many organisations have restructured so as to move from tall
narrow towards wide flat. This was because:
๏ It was thought that the many of the layers of middle management in the tall narrow
structure were not carrying out useful functions – simply people checking on other
people. Wider, flatter structures allow these employees can be dispensed with and this
saves costs.
๏ Tall-narrow structures were very resistant to change. Employees in each layer had their
entitlements and grades that they were reluctant to give up. There was great structural
inflexibility and this did not suit modern environments in which technical advances and
competitive changes are very rapid. Wider, flatter structures have a more egalitarian
culture with an emphasis on being flexible so as to get the job done
๏ The many layers between top and bottom also meant that vertical communication of
ideas was very slow. In a stable environment this was not so important. Nowadays it is
likely to be a new young employee straight from university who has got valuable
messages for top management such as the importance of social media (Facebook,
Twitter etc) in marketing.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 13
Advantages Disadvantages
Task specialisation because of tight job Reluctance to do more than is set out in
specifications the job specification; inflexibility
Expensive middle-management
Advantages Disadvantages
Employees are given more responsibility Better managers and subordinates are
because their manager or supervisor now needed to ensure that delegation and
has a large number of people reporting work are carried out properly.
and cannot duplicate work.
Less task specialisation and a Potentially less efficient because the work
concentration on getting the job done is more varied. A danger that employees
rather than staying strictly with job perform tasks for which they have little
specifications. training.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 14
3. Divisional structures
3.1. Introduction
As organisations grow, they inevitably diversify ie they begin do carry out different
operations. For example, they might develop additional product lines or begin to operate in
different countries. It is then common for the organisation to set up different divisions
CEO
Division 1 Division 2
๏ Geographical area, for example the North American division and the European division.
๏ Products, for example the car division and the truck division, or component
manufacture and finished goods assembly.
๏ Customers, for example the consumer division and the business-to-business division.
๏ Duplication of some functions. For example, the finance and IT functions might be
divided so that each division has its own. This adds to costs.
๏ Coordination between divisions. This is particularly important if one division sells to
another. There is also a danger that two divisions might begin to compete. For example,
the American division might cut its prices and the European division is then hurt
financially because its prices are perceived as being too high.
๏ Specialisation. For example, managers in the North American division can concentrate
on its customers, its competitors, appropriate advertising and prices and the laws that
might govern its products. Similarly the European division. If divisionalisation hadn’t
happened then there is a danger that neither market is properly addressed.
๏ Comparison of performance. Divisionalisation will usually mean that the results of each
division are separately prepared and this allows the comparison of each division’s
performance and the possible identification of underperformance.
๏ It is easier to sell a part of the business if they are already set up as divisions.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 15
4. Matrix structures
4.1. Introduction
In all of the structures shown so far every person reports to only one superior. In classical
management theory this is known as ‘unity of command’ and it was regarded as an essential
principal of management: a person should not have to report to more than one boss.
Although this might be a fair approach (for example, how would a person resolve conflicting
OpenTuition.com
demands from two bosses) it often over-simplifies how organisations operate in practice as
often staff have responsibilities to several people and several departments. This is tackled by
the matrix management approach.
Project A
Project B
Project C
The employee shown is a member of the quality control department but has also assigned to
Project B. Therefore the employee has responsibilities to the quality control manager and to
the Project B manager.
Conflicts could arise. For example, if the project were running behind time, the project
manager could put pressure on the employee to miss out some checks. However the QC
manager would want tall checks to be performed. The wrong way for the employee to make a
decision is to comply with that the manager with the loudest voice and fiercest demeanour is.
Out of the three people involved the employee is the most junior and is not the person who
should be forced to decide on priorities.
However, the matrix structure can empower the employee who can point to it and say that
there are two managers involved in this and that they should communicate with one another
to see if a mutually satisfactory solution is available. What the organisation wants is a win-win
outcome: the project should be finished on time and the work should be to a satisfactory
standard.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 16
The components will vary in size and importance depending on the nature of the
organisation.
Strategic
apex
Techno- Support
Middle
structure staff
line
Operating core
This shape was called by Mintzberg the machine bureaucracy and is typical of large
organisations engaged in mass production. The middle line is fairly long and the techno-
structure is large because consistency and rules are very important in these types of business.
This is a small young organisation that has not developed suppose or techno-structure
activities. There might be only one person with authority (‘The Boss’) and no middle line.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 17
The professional bureaucracy is found in professional firms such as accountants and auditors.
The techno-structure is small because each client has a unique set of problems and the work
cannot be standardised as it can be in a mass-manufacturing business. The middle line is
relatively short because there has to be close communication between the strategic apex and
the operating core to ensure that each unique job is properly carried out.
This shows a holding (top company) and a number of divisions or subsidiaries, each with their
own organisational components.
These can influence the structure of the organisation and how it is managed.
For example:
The technology being used can mean that the good communication and wide-spread access
to communication and information will allow greater delegation to subordinates.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 18
clients would probably benefit from a wide-flat structure where information sharing and
team-work is encouraged.
The culture of the employees and managers also plays a part. If someone is used to being
closely managed then they might feel uncomfortable and vulnerable if they are expected to
manage more of their own work. Highly trained engineers would, however, probably rebel if
they were continually told what to do by a closely supervising manager – especially if the
manager’s skills were out0-of-date.
OpenTuition.com
๏ Size
๏ Formalisation
๏ Specialisation
๏ Organisation – sole trader, company etc.
These can also influence the structure of the organisation and how it is managed.
For example:
Larger organisations will usually have to develop more formal structures for commanding
and processing information.
Some organisations are very formal – perhaps because of legal necessity or because they are
involved with high-risk activities (such as a chemical plant) where lives might be at risk if
something goes wrong. Similarly, airlines have very formal and strict procedures for
maintenance of aircraft and training air-crew.
Specialisation can mean that the specialists gain power. High knowledge and ability implies
that these people need to be trusted to apply their skills properly.
The organisational structure can also make a difference. Sole trader organisations might
simply adopt Mintzberg’s simple structure because sole trader businesses are usually small.
Large companies, however, might find that a divisional structure works best.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 19
Chapter 3
BOUNDARIES AND SYSTEMS
6.3. Definition
OpenTuition.com
Businesses and other organisations are systems. For example, we saw in the previous
chapters that organisations frequently have a functional structure and it is essential that the
separate departments work together to achieve the organisational aims.
The environment
The system boundary
The system (for example, a business) is separated from its environment (suppliers, customers,
competitors, government etc) by the system boundary.
Most systems take input from the environment, process it in some way, and output it to the
environment. This is obvious in a manufacturing system that takes raw materials and
produces finished products. However, it is also found in other types of organisations. For
example, banks take in cash as deposits and make payments to businesses by way of loans.
News organisations take many pieces of information in and produce finished news stories.
Systems can be broken down into sub-systems. So if the system were a business the sub-
systems could be the departments within that business. The manufacturing sub-system’s
environment will contain the purchasing department that furnishes it with inputs and the
sales department to which it outputs products.
This type of analysis can be useful because managers of a system have to know what is part of
their system (or sub-system), and what is part of its environment. For example, managers
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 20
have to be clear about who is responsible for ordering goods: it is the production department
because it can predict usage from production schedules or is it the purchasing department
because they keep an eye on stock levels.
An open system is one which takes input from the environment and sends output to it.
Nearly all systems are open.
OpenTuition.com
In theory there can also be closed systems that are completely cut-off from their
environment. These are really theoretical because what is the point in a system that is
isolated? How does it obtain resources to keep functioning? How does it know what its
customers and users want and need?
7. Outsourcing
7.1. Definition
๏ Manufacturing. (Apple does not make its own iPhones. That process is outsourced to
manufactures such as Foxconn)
๏ Information technology.
๏ Human resources functions
๏ Design
๏ Distribution (logistics)
๏ It might save costs. Even though the outsource company has to make profits for itself, it
might be able to carry out the function more cheaply than the outsourcer could itself.
For example, the company doing the work could operate on a very big scale and could
therefore enjoy economies of scale. Or the company doing the work could be in a
country with lower costs. Outsourcing to a company based abroad is known as off-
shoring.
๏ It turns fixed costs into variable costs. If a company sets up its own factory then it will
have to suffer substantial fixed costs. Outsourcing and buying in goods as needed
makes those costs much more variable so that they fall if demand falls.
๏ Transfer of risk. The company doing the work bears the risk if something goes wrong.
For example, the development of new software frequently takes longer and costs more
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 21
than expected. If the development has been outsourced there is a good chance that
the software developers have to bear the costs of overrun.
๏ Access to technical expertise. The world gets more complex and so too do many
processes used by organisations. Now, for example, you expect organisations to have a
good website, but why should a furniture company be expected to have or to develop
expertise in website design and maintenance? It is probably much better to sub-
contract (outsource) to a specialist, skilled supplier.
OpenTuition.com
๏ There can be problems with quality or the level of service. For example, say that
distribution by a manufacturing is outsourced to a haulage (logistics) company. If
deliveries are late or incorrect, the customer doesn’t care who was at fault: they ordered
from the manufacturer and expect deliveries to be on time.
๏ Escape of confidential data. For example, many companies outsource their receivable
ledger processing to specialists known as factors. Obviously, these third party
companies then have a list of the company’s customers. Similarly, outsourcing
production will inevitably tell the outsource company how the product is made.
๏ Despite what was said above, outsourcing might be more expensive.
๏ Lack of responsiveness. For example, the outsource company might not update a web-
site as quickly as needed.
๏ Different objectives. For example, the outsourcing company wants a very-up-to-date
web-site but the company looking after the web-site wants to minimise development
costs.
๏ Transportation time and costs. Outsourcing manufacturing, particularly abroad, will
cause delivery delays and there could be high costs transferring goods to the home
market.
8. Alliances
Alliances are agreements between two or more organisations to cooperate.
They can be relatively loose agreements such as seen between airlines when coordinating
flights, code sharing, and cooperating on frequent flyer point, flights and airport lounges.
Alternatively, they can be more formal such as joint ventures in which the participants set up
another company that they jointly own. The joint venture company allows the sharing of
investment, expertise and profits and joint ventures are particularly popular for large high-risk
projects which any single company would be reluctant to undertake.
Airbus started life as a joint venture between four European aerospace companies. The risk,
investment and expertise needed to develop passenger planes to rival Boeing, the dominant
manufacturer, were too great for any single company so the effort was shared over four
participants
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 22
9. Boundaryless organisations
These are relatively new, unconventional and flexible structures that often dispense with the
normal chains of command. There are three types:
๏ Hollow
๏ Virtual or network
๏
OpenTuition.com
Modular
9.1. Hollow
These organisations retain their core competences and key personnel and outsource
everything else. For example, Apple’s core competences are in design and software. They
outsource their manufacturing and distribution. They have decided to open their own shops
presumable because of the strong cultural and stylistic message they give to customers.
9.2. Modular
A modular organisation extends the hollow concept by breaking down production processes
into modules. Production is outsourced, but each external organisation is responsible for only
one element of the process. For example, in producing the Dreamliner aircraft, Boeing enters
into contracts with many suppliers, each of which is responsible for one component or
assembly. The outputs of these suppliers can then be integrated
9.3. Virtual
The organisation hardly exists at all. Participants communicate electronically organising sales,
production and delivery. They remove many of the features of the working environment that
were once universal, such as bringing managers and staff together at a particular location –
office or factory. People work together remotely, with little or no dependence on physical
premises.
Local offices would send information to the single accounting centre from where invoices
could be raised and the receivables ledgers maintained.
The main advantage of such centres are an increase in expertise and economies of scale.
It is normal for the shared centre to charge users for the services provided. This gives the
service centre incentives to be efficient and also provides incentives to user departments not
to ask for more and more services. If something is free why not ask for more? If it has to be
paid for then users are more careful in their demands.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 23
Chapter 4
ETHICS AND CORPORATE GOVERNANCE
1. Ethics
OpenTuition.com
1.1. Introduction
Ethics is concerned with distinguishing between good and evil, between right and wrong
human actions, and between virtuous and non-virtuous characteristics of people and
organisations, and the rules and principles that ought to govern behaviour.
1.2. Terminology
Perhaps what is most important is that stakeholders are informed about a company’s ethical
position on a number of issues so that there is openness and that everyone understands the
company’s ethical stance. Corporate codes of ethics can help to achieve this. These are
documents issued to employees that attempt to establish ethical rules or guidelines so that
employees know how to behave if, for example, offered a bribe by a supplier or they see a
machine in a dangerous condition, or they are considering whom promote.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 24
Often these guidelines are made available to outside stakeholders to advertise the company’s
ethical stance. For example, the Coca Cola ethical guide can be found at:
http://assets.coca-colacompany.com/45/59/f85d53a84ec597f74c754003450c/COBC_English.pdf
Here is a short extract from the section dealing with treatment of customers, suppliers and
consumers:
OpenTuition.com
“Always deal fairly with customers, suppliers and consumers, treating them honestly and with
respect:
Even if stakeholder disagrees about what appropriate ethics are, the importance of an
organisation being ethical can be linked to its profitability or its financial viability.
Organisations might obtain advantages by being unethical (for example to encourage sales a
pharmaceutical company could conceal a drug’s side effects) but most ethical breaches are
discovered and then huge damage is done both financially and reputationally. Good ethics
therefore:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 25
๏ Professional competence and due care: carry out work to proper standards;
don’t skimp; keep up to date with changes
in legislation, methodology and
regulations.
๏ Confidentiality: do not disclose information received
through professional work without
permission or if there is a legal duty or
right to disclose it.
OpenTuition.com
Compliance with the ethical guidelines is continually threatened. For example, integrity and
objectivity can be threatened by personal relationships which could mean that an accountant
does not want to report errors made by colleagues. Accountants have to ensure that threats
are reduced to acceptable levels.
Obviously laws must be obeyed (for example on employee safety and welfare), but
proponents of CSR go further and say that organisations should go further than prescribed by
law so that they become good corporate citizens.
For example:
๏ Release less pollution and greenhouse gasses than permitted so that the local
population and world resources are safeguarded.
๏ Offer enhanced welfare and training opportunities to employees.
๏ Support local charities.
CSR is claimed to offer the following advantages to businesses, all of which might lead to
profit increases:
Not every commentator believes that CSR is a legitimate pursuit of companies and it can be
argued that the proper objective of a company is to maximise its profits and that, legally, it is
the duty of directors to do that on behalf of the shareholders. Of course, that should be done
within an ethical framework and CSR is fine as a marketing and public relation initiative or
where it actually saves costs, such as when energy use is reduced.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 26
5. Corporate governance
Definition
Corporate governance is the way in which companies are directed and controlled.
OpenTuition.com
Until about 20 years ago, corporate governance was really only exercised through the annual
publication of audited financial statements. This gave shareholders a once a year chance to
check up on how the directors were managing the company.
Major financial scandals, such as Enron and WorldCom, showed that annual financial
statements were insufficient for corporate governance. Directors can have over a year
between the release of financial statements to get up to all sorts of mischief and bad decision
making. It was also discovered that directors would often award themselves very large
bonuses which were far too easy to earn.
Many countries therefore released or passed into law corporate governance regulations to try
to ensure that companies were better and more safely managed. The UK Corporate
Governance Code, which applies to companies listed on the London Stock Exchange,
specifies the following (amongst other matters):
๏ The role of chief executive officers and chairman should be split. This is to prevent the
concentration of power into the hands of one person at the top. The CEO runs the
company and the Chairman runs board meetings.
๏ Boards should appoint non-executive directors (NEDs). NEDs attend board meetings
and can vote but they take no other part in the running of the company. Their purpose
is to offer advice and warnings and to bring in wider outside expertise. The NEDs are
another way of diluting the power of the CEO. Boards should have a balance of
executive directors and NEDs; in large companies this means that at least half of the
board should be NEDs.
๏ NEDs should earn a fixed fee that is not related to profits. This is to prevent them
making decisions that might be risky but which might earn them large bonuses.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 27
Chapter 5
THE FINANCE FUNCTION
1. Introduction
OpenTuition.com
๏ The purpose of the finance function and its relationships with other parts of the
organisation
๏ How the finance function supports the organisation’s strategies and operations.
๏ Accounting operations
๏ Analysis
๏ Planning
๏ Decision making
๏ Control
๏ Financial accounting
๏ Management accounting
๏ Treasury
๏ Internal audit
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 28
This function is responsible for producing the organisation’s financial statements (statement
of financial position, statement of profit or loss, cash flow statements, notes and movements
on equity).
It is also responsible for maintaining the double entry system (and memorandum items) of
the organisation:
OpenTuition.com
Transactions are recorded in these books more or less as they occur and the financial
accounting system deals with the recording of historical transactions.
The financial statements are produced from the nominal ledger as each account ends up on
either the statement of financial position or the statement of profit or loss.
In most countries, businesses have to produce annual financial statements. These are needed
for tax purposes but also they are published so that shareholders of the company can see
how it has been doing. To add credibility to the financial statements, they will often be
audited (ie checked over) by independent outside auditors.
The financial statements have to follow detailed rules and regulations about lay-out and
disclosures made.
It is generally the financial accounting department which is closely associated with the
organisation’s system of internal control. The internal control system is there to try to prevent,
detect and correct errors that might occur and also to ensure that the organisation’s assets
are safeguarded. The last function is sometimes known as ‘stewardship’. The directors,
managers and other employees have a responsibility to look after the company’s assets on
behalf of the shareholders. Examples of typical internal controls in place to do this are:
๏ Inventory should be locked in store rooms and only issued upon proper authorisation
๏ Cash should be banked soon after receipt
๏ Purchase invoices need to be checked to ensure that goods were ordered and received
๏ Payments to suppliers should be authorised only after the company is sure proper
goods have been received.
๏ Overtime should be authorised by managers not self-certified.
๏ Credit should be given to customers only after credit checks.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 29
Unlike the documents and reports produced for the financial accounting system ,
management accounting reports are not governed by regulation. Also, whereas financial
accounting deals with the recording of transactions that have happened, much of
management accounting also looks to the future, for example, by drafting budgets.
๏ Drafting budgets for profits, statement of financial position and cash flow. Budgets are
rarely for less than a year and will normally be broken down month by month. Often,
longer range budgets are also estimated, such as for three years. These are useful in the
long-range planning and funding of the business.
๏ Comparing actual results to budgets and investigating the reasons for differences. The
differences between budgets and actual result are known as variances.
๏ Working out the cost of units produced and controlling those costs.
๏ Advising on the selling prices of units produced (should be greater than cost!)
๏ Working out the effects of business decisions such as outsourcing production, setting
up an overseas operation or closing a factory.
๏ Calculating break-even points for products.
Management accounts (results so far, variance analyses and budgets) are usually prepared
and presented to the board once a month so that timely action can be taken if something is
going wrong.
2.4. Treasury
๏ Company finance. Does the company need to raise a loan or issue more shares?
๏ Where to deposit temporary surpluses of funds so that they can earn some interest.
๏ Where to arrange temporary borrowing.
๏ How to reduce the risk from currency movements when importing or exporting.
๏ How to reduce the risk from interest rate movements on borrowing or deposits.
๏ Taxation management eg one subsidiary making losses available to another.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 30
governance processes.”
Most of the work of an internal audit department is making sure that the organisation’s
system of internal control is operating as it should be. Internal auditors go round the various
departments and check that employees are following the laid down procedures. For example,
they might select a sample of employee time sheets and ensure that all had been authorised
by the appropriate manager. Or they might make a surprise visit to the factory stores to count
some items and compare their result to the amount of inventory shown in the inventory
records.
It might sometimes be discovered that the laid down internal control system is inadequate
and internal audit would then recommend improvements to accounting procedures.
Ideally, the internal audit department will have its work determined and will report findings
to the audit committee. The audit committee is composed of non-executive directors who are
independent of the day-to-day running of the company. So, if very poor internal control was
discovered, this would be reported to the audit committee who could then raise the matter at
a board meeting. If internal audit report to the finance director, the finance director could
well suppress the findings to save face.
The internal audit department is sometimes given special assignments such as trying to
establish the efficiency of a department (value for money) or perhaps they are asked to
investigate the extent of a fraud that was discovered. Fraud requires:
๏ Motivation (for example, an employee is short of money to pay his or her rent)
๏ Opportunity (for example, a poor system of internal control or poor supervision)
๏ Attitude (a willingness to undertake dishonest acts).
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 31
The company secretary is not specifically part of the finance function, but is included in the
syllabus at this point.
A company secretary is the chief administrative officer of the company, responsible along
with the directors for certain tasks under the Companies Act, particularly with regard to
ensuring compliance with statutory and regulatory requirements.
OpenTuition.com
The company secretary is not necessarily a director, though can be. The secretary will attend
board meetings and take the board minutes for later circularisation. Many of the
communications that go to shareholders, such as notification about meetings, will be sent
out by the secretary. Documents that have to be filed with the regulatory authorities will also
be sent out by the secretary.
๏ Accounting operations
๏ Analysis
๏ Planning
๏ Decision making
๏ Control
Each of these can give rise to conflicts of interest and pressure not to record or interpret
information accurately or to make incorrect decisions. Of course, the ethical principles
described in the previous Chapter (such as integrity) should prevent this.
Accounting operations: items of expense reduce profits whilst capital expenditure does not.
An accountant could come under pressure to deal with expenditure incorrectly so as to boost
profits (ie treat it as capital expenditure rather than revenue expenditure).
Analysis: conceal the reasons for underperformance in one area. For example, the treatment
of fixed overheads is often arbitrary and shifting these about can alter the apparent
performance of different departments or branches.
Planning: If the directors want to close down one part of the operations, there could be
adverse knock-on effects in another. Management accountants might be pressured do
conceal this effect.
Control: a fraud has been discovered. This can be embarrassing for the finance director, so
there is pressure to conceal it.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 32
According to Burns and Scapens, there are three main reasons for the change in the
management accountant’s role:
OpenTuition.com
In addition, the following will have influenced the role of the management accountant:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 33
Chapter 6
TECHNOLOGY AND INFORMATION
1. The nature of information
OpenTuition.com
1.1. Introduction
Good decision-making implies looking at the available data and information and trying to
respond to it rationally. Decisions made from a position of ignorance are little more than
gambling.
Already this Chapter has made use of two technical terms: data and information. These can
be described as:
For example a list of all the heights of a city’s population or a list all sales invoices still
outstanding. The data could be perfectly accurate but if it merely exists as lists it is not of
much use. A list of 1 million people’s heights is of little use; similarly a random list of all
invoices outstanding is difficult to use.
The data has been processed in some way so that it becomes useful and informative. For
example:
People’s heights: average heights of male and female, standard deviations of heights, average
height of children of different ages, bar or pie charts showing the data graphically. The data is
now much more useful and informative.
Invoices outstanding: sort and total by customer so that you know who owes what. Also sort
by date so that you know which debts are older and may need to be chased.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 34
It should be realised that people at different levels in an organisation require different types
of information
Top
management
/ board
Middle management /
supervisory
Operational staff
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 35
Information for top management is often forward-looking (for planning purposes) as well as
historical, makes use of many estimates, and needs to be sourced externally as well as
internally (eg what are our competitors doing?). It is often highly summarised and presented
in graphical formats. It is often ‘ad hoc’ meaning that very different reports and information
can be required at short notice.
Information for operational staff is almost always internal, historical and very detailed and
very accurate. It is almost always routine. It is primarily used for recording transactions and
making simple decisions.
OpenTuition.com
3. IT Choices
3.1. Introduction
๏ Configuration
๏ Wired or WiFi or 3G/4G?
๏ Local or cloud?
๏ Centralised or decentralised?
3.2. Configuration
At one time most computers were stand-alone ie they had no communication with other
computers. This was of limited use in business because there is usually a need to cooperate
on tasks, to share information and to send emails.
Local area networks (LANs): these operate over a restricted area such as an office, hospital
or university campus. Special wiring is installed to connect up the machines. There is usually a
special machine called a file server where shared information is held and there might be a
print server which allows a printer to be shared between many users.
Wide area networks (WANs): these operate over national and international distances,
linking users in different cities and countries. They rely on public networks to transmit
information from one local area network to another. This, of course, can increase the chance
of the information being intercepted or altered whilst in transit. It is vitally important that
information is encrypted before it is transmitted then decrypted by the authorised recipient.
In the early days of networked systems all the components were connected by cables.
Increasingly connections between machines are made by
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 36
These technologies are not so important for office based employees but have become vital to
employees, such as sales personnel and service engineers, who are often away from the office
at customers’ premises. Sales can now be booked remotely when orders are placed, or
technical information on the network server can be easily accessed.
By and large, until relatively recently all computers, whether stand-alone or in a network had
their own copies of every program they used and they performed their own processing. Often
OpenTuition.com
A new and increasingly important approach is for each machine simply to act as an interface
for the data and processing that are stored and executed elsewhere. This is the ‘cloud’
approach.
For example, if you are word processing using Word, instead of Word operating on your
machine, Word is operating on a large, remote server and the local machine simply acts as an
input-output interface. Local users have the impression of local processing but it is done
remotely. The Word file will also usually be stored remotely, but it could be printed locally.
๏ Cheaper software. The company pays for a licence which is costed according to use not
per machine.
๏ Access to powerful processing. If there is an application requiring intensive processing
(like graphics in a design company), then that processing can be performed on a
powerful machine in the cloud. Local machines simply have to show the finished image.
Without this approach every machine used by designers would have had to perform the
graphics processing and would have to be powerful (and expensive).
๏ Easier software updates. If an updated copy of the software becomes available only the
cloud version needs to be updated. Previously every user’s machine had to be brought
up-to-date and inevitably machines often began to run different versions of the
software.
๏ Easier maintenance. The complex processing runs centrally and that is likely to be
where problems occur. So maintenance and trouble-shooting is easier.
๏ Because the software and data are held in the cloud, it can be accessed from any
location by anyone who is authorised to do so. No longer will users be inconvenienced
because they forgot to copy a file to their lap-top as they went to visit a client.
Disadvantages:
๏ It is completely reliant on the data communication system working and users having
access to communications.
๏ Another company has custody of the software and the data and some users are uneasy
about confidentiality and security risks.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 37
In a centralised system, a large computer does all the processing and this is connected to
smaller ones which really only act as user interfaces.
In a decentralised system each computer in the system does its own processing. A
decentralised system is sometimes known as a distributed system because processing power
is distributed, or spread, over many machines.
OpenTuition.com
๏ All data and processing is centralised so is easier to control and safeguard. For example,
access and regular backups are centrally controlled. In a decentralised system you
would be relying on many users to back-up their files and to ensure that passwords
were changed as necessary.
๏ Generally cheaper than a distributed system.
๏ Data is all in one place so is easy to share.
๏ Centralisation will mean that there is less risk of incompatible hardware or software
being added.
๏ Faster and more flexible response to user needs. Each user can be given power to install
suitable software. In a centralised system budget and administration processes can slow
down the adoption of new centralised applications.
๏ More resilient to breakdown. If a centralised computer breaks down no user will be able
to work. In a decentralised system a machine breakdown will probably affect only one
user.
The Internet is a vast network of interconnecting networks spanning the globe in which any
computer can communicate with any other computer as long as they are both connected to
the Internet. Information that travels over the Internet does so via a variety of languages
known as protocols.
The World Wide Web (or Web) is a way of accessing information over the Internet. One of the
languages used to send information over the Internet is HTTP (Hypertext Transfer Protocol).
Web services, which use HTTP to allow applications to communicate in order to exchange
and share information. Email uses the internet but is not part of the Web. It uses a language
called SMTP (Simple Mail Transfer Protocol)
The Web uses browsers such as Internet Explorer or Firefox to access web-pages that are
themselves linked to each other.
Intranets are ‘internal internets’. The only data accessed and displayed is data from within the
organisation, but the distribution of the data is via HTTP and is displayed through a browser.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 38
An extranet is when one intranet is given access to another. For example a supermarket
system might be given access to a supplier’s system so that stock and orders can be more
easily managed.
5. Big data
There are many definition the term ‘big data’ but most suggest something like the following:
OpenTuition.com
“Extremely large collections of data (data sets) that may be analysed to reveal patterns,
trends, and associations, especially relating to human behaviour and interactions.”
In addition, many definitions also state that the data sets are so large that conventional
methods of storing and processing the data will not work.
In 2001 Doug Laney, an analyst with Gartner (a large US IT consultancy company) stated that
big data has the following characteristics, known as the 3Vs:
๏ Volume
๏ Variety
๏ Velocity
These characteristics, and sometimes additional ones, have been generally adopted as
essential qualities of big data.
Variety:
disparate non-uniform data of different sizes,
sources, shape, arriving irregularly, some from
internal sources and some from external sources,
some structured, but much of it is unstructured
Characteristics
of big data
(Laney)
Velocity:
Volume:
data arrives continually and
a very large amount of data. More than
often has to be processed very
can be easily handled by a single
quickly to yield useful results
computer, spreadsheet or
conventional database system
The commonest fourth ‘V’ that is sometimes added is Veracity: is the data true? Can its
accuracy be relied upon?
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 39
5.1. Volume
The volume of big data held by large companies such as Walmart (supermarkets), Apple and
EBay is measured in multiple petabytes. What’s a petabyte? It’s 1015 bytes (characters) of
information. A typical disc on a personal computer (PC) holds 109 bytes (a gigabyte), so the
big data depositories of these companies hold at least the data that could typically be held on
1 million PCs, perhaps even 10 to 20 million PCs.
These numbers probably mean little even when converted into equivalent PCs. It is more
OpenTuition.com
instructive to list some of the types of data that large companies will typically store.
๏ Retailers
Via loyalty cards being swiped at checkouts: details of all purchases you make, when,
where, how you pay, use of coupons.
Via websites: every product you have every looked at, every page you have visited,
every product you have ever bought. (To paraphrase a Sting song “Every click you make
I’ll be watching you”.)
๏ Banking systems
Every receipt, payment, credit card payment information (amount, date, retailer,
location), location of ATM machines used.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 40
5.2. Variety
Some of the variety of information can be seen from the examples listed above. In particular,
the following types of information are held:
๏ Buying habits
๏ Reaction to ads on the internet or to advertising emails
๏ Geographical information
๏ Information about social and business contacts
๏ Text
๏ Numerical information
๏ Graphical information (such as photographs)
๏ Oral information (such as voice mails)
๏ Technical information, such as jet engine vibration and temperature analysis
๏ Structured data:
This data is stored within defined fields (numerical, text, date etc) often with defined
lengths, within a defined record, in a file of similar records. Structured data requires a
model of the types and format of business data that will be recorded and how the data
will be stored, processed and accessed. This is called a data model. Designing the model
defines and limits the data that can be collected and stored, and the processing that can
be performed on it.
An example of structured data is found in banking systems, which record the receipts
and payments from your current account: date, amount, receipt/payment, short
explanations such as payee or source of the money.
Structured data is easily accessible by well-established database structured query
languages.
๏ Unstructured data:
Unstructured data refers to information that does not have a pre-defined data-model. It
comes in all shapes and sizes and this variety and irregularities make it difficult to store
it in a way that will allow it to be analysed, searched or otherwise used. An often quoted
statistic is that 80% of business data is unstructured, residing it in word processor
documents, spreadsheets, PowerPoint files, audio, video, social media interactions and
map data.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 41
5.3. Velocity
Information must be provided quickly enough to be of use in decision making. For example,
in the above store scenario, there would be little use in obtaining the price-comparison
information and texting customers once they had left the store. If facial recognition is going
to be used by shops and hotels, it has to be more-or less instant so that guests can be
welcomed by name.
You will understand that the volume and variety conspire against the third, velocity. Methods
OpenTuition.com
The processing of big data is generally known as big data analytics and includes:
๏ Data mining: analysing data to identify patterns and establish relationships such as
associations (where several events are connected), sequences (where one event leads to
another) and correlations.
๏ Predictive analytics: a type of data mining which aims to predict future events. For
example, the chance of someone being persuaded to upgrade a flight.
๏ Text analytics: scanning text such as emails and word processing documents to extract
useful information. It could simply be looking for key-words that indicate an interest in a
product or place.
๏ Voice analytics: as above with audio.
๏ Statistical analytics: used to identify trends, correlations and changes in behaviour.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 42
For example, the UK Data Protection Act imposes obligations to not hold data for longer than
needed, to allow individuals to see information about themselves and to ask for it to be
corrected.
Obviously the huge amount of data now being collected and held (see Section 7 above)
mean that this problem is potential more serious.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 43
In addition to the obvious privacy issues, the following are ethical and social and
security dangers:
๏ Fraudulent websites (eg ‘phishing’ sites can look like legitimate bank sites and can
induce people to enter their account and PIN numbers).
๏ Time-wasting by employees as they browse the internet.
๏ Downloading or sending offensive material.
๏ Violations of copyright laws.
๏ Denial of service attacks (DoS) where there are attempts to make a machine or network
unavailable to its intended users. For example, a site is bombarded with automated
requests for access and the site fails.
๏ Computer viruses which might simply be a nuisance or which are designed to cripple
machines and systems.
๏ Physical dangers, such as floods, fire or terrorist attacks can mean that organisations
cannot continue to function.
๏ Innocent harm being done. For example, there have been several recent cases of banks
updating their software and errors in the updates caused on-line banking and cash
machines to fail for several days.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 44
๏ Hot-desking: employees do not have a permanent desk, but simply log in when they
arrive at any empty desk. All calls, emails and information that they need is routed to
their location. This can allow companies to reduce the space needed for employees if
OpenTuition.com
the business is one where many employees are working out of the office at clients’
offices or other sites.
๏ Home working: many employees no longer go to work every day, but log into their
employer’s computer from home. Usually employees are required to physically attend
the office some days per week for meetings, team-building and socialising.
๏ Tele-conferencing: instead of travelling to meetings, communication equipment can
reliably relay both audio and video.
๏ VOIP (Voice over internet protocol): probably the best known example is Skype.
Audio-visual links are provided over the internet for a very low cost. This technology
facilitates tele-conferencing and home working.
๏ Virtual/boundaryless companies: these types of organisations were mentioned in an
earlier chapter. Often only a core of workers is employed and sub-contractors, such as
manufacturers, are organised to do elements of the work needed. A high level of
information flow is needed to ensure efficient organisation.
๏ Virtual teams: team members need to rarely meet physically. Communication and
collaboration over the internet and through networks allow geographically distant
team members to achieve a high degree of cooperation.
๏ Marketing: covered in Chapter 11
๏ Product delivery: increasingly music and television are being delivered over the
internet, often on demand (eg Netflix).
๏ Training on demand: many organisations establish a library of training material
available to their employees and customers. Therefore, training can be delivered on
demand rather than waiting for the next scheduled course.
๏ Customer relationship management: as this heading suggests, CRM attempts to
develop a relationship with customers so that they, ideally, would never think of going
elsewhere. The relationships can be built by collecting intelligence about the products
the customer has bought and shown an interest in. Notes can be made about telephone
conversations so that if a customer rings back whoever answers the phone can bring up
on the computer screen a large amount of information about the customer’s
preferences and problems. The customer is given the impression that the company
cares about him or her as an individual.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 45
Chapter 7
IMPLEMENTING NEW IT SYSTEMS
1. Overview
OpenTuition.com
๏ Feasibility study
๏ Investigation
๏ Analysis
๏ Design
๏ Development: creating software/choosing a package
๏ Training
๏ Installation
๏ Testing software
๏ Changeover
๏ Review and maintenance
Sometimes, instead of running a computer system in-house and organisation will decide to
outsource that part of the business – particularly if it is in a support role
2. Feasibility study
2.1. Introduction
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 46
Costs v Benefits
Obviously a profit-seeking business will require this if profits are to be increased. But even in a
not-for-profit organisation, like a state hospital, funds will be rationed and they should only
be spent if the benefit is large enough.
OpenTuition.com
In general, costs are relatively easy to estimate. They will be a mix of initial capital costs to
acquire the hardware and software followed up by on-going running costs. The initial costs
can be estimated from tenders from suppliers and the ongoing costs can be estimated from
salary rates and the cost of consumables.
However, estimating likely benefits is almost always much more difficult. These will occur in
the future (and that adds to the uncertainty), but not all of the benefits will be easy to predict
because of their nature. Here are two main types of benefit:
Tangible (quantifiable) benefits: for example, saving salaries because the new system allows
for more automation.
Intangible benefits: for example, benefits arising from greater efficiency, less waste, better
customer satisfaction and improved reputation.
So a new inventory handling system in a supermarket might mean that the supermarket
rarely runs out of goods, but turning that improvement in customer service into quantified
increases in future profits is going to be fraught with difficulty and estimates.
In addition, in most IT systems a large proportion of the costs will be incurred now, but most
benefits are likely to be enjoyed in the future. This type of project requires special investment
appraisal techniques such as discounted cash flow analyses. These techniques are not met
until paper P2
๏ Investigation: how does the organisation process and use information at the moment?
๏ Analysis: understand the organisation’s needs for better performance and information
๏ Design: create a new system that will fulfil those needs.
Large organisations might have their own team of analysts who will carry out these steps, but
many smaller ones make use of third parties.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 47
Part of the installation will be file conversion: information from the old computer system plus
new information (if there is any) have to be recorded on the new system, ready for processing
to commence. For example, on a receivables ledger details of customers and the invoices
outstanding will have to be copied from the existing ledger to the new one. In addition the
new system might be using a new credit limit field so that orders can be automatically
accepted or rejected.
5. Changeover
This is a critical step. The aim is to stop using the old system and to start using the new one.
There are four approaches:
๏ Direct: Simply make an instant switch from old to new. ‘D’ for
direct, ‘D’ for dangerous and ‘D' for disaster. Despite testing
and training there are often problems when a new system
is operated for the first time. Depending on the application
this could be very serious for the organisation. For example,
if an airline could no longer take bookings because of
malfunctioning software it would not be long before huge
costs are incurred.
๏ Parallel run: Keep the old and new systems working in parallel for a few
weeks of months. If the new system does not work, you can
fall back onto the old system. The parallel run also acts as
an extended test of the new system. Of course, the
workload in increased by this type of changeover.
๏ Pilot operation: implement the system in one branch only. Once it is
perfected there and expertise gained it can be spread
through the organisation relatively safely.
๏ Phased changeover: rather than a ‘big-bang’ approach to, say, a new accounting
system, implement the sales system this month, then add
the purchases system in the following month then the
wages and salaries operations in the third month. At least
the damage is limited if one of the systems does not work
properly.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 48
After the new system has been running for a few months so that it has settled down and
users feel confident, the system should be reviewed:
6.2. Maintenance
๏ Corrective maintenance: something did not work correctly and has to be fixed.
๏ Adaptive maintenance: the environment changes (for example different tax rules) and
the system has to be brought up-to-date.
๏ Perfective maintenance. Requests for better performance.
Organisations have little choice in relation to the first two types: they have to be carried out.
However, care is needed in relation to the third type of maintenance. Perfective maintenance
is when users ask for enhanced performance and features. The system is working
satisfactorily, but could be improved. The danger is that users ask for improvements which
are relatively minor in their impact but which might be very expensive to implement. For
example, cutting response times from 2 seconds to 1 second might lower users’ irritation a
little, but could require very expensive, faster hardware.
Strictly, for perfective maintenance a new feasibility study is needed: are the costs
outweighed by the benefits?
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 49
7. Resistance to change
New IT systems can confront employees with considerable changes to their work
environment and duties. If is not uncommon for employees (and others) to resist change.
Some of the reasons are:
๏ Education and communication: explain to employees why the change is needed and
communicate what it will involve. If possible tell employees that there will be no
compulsory redundancies and that training and support will be provided.
๏ Participation: after explaining why some sort of change is needed let employees
contribute and participate in deciding what the changes should be.
๏ Envision the future: explain that the changeover process might be difficult but after a
couple of months working will be better and jobs will be safeguarded.
๏ Explain that training and support will be available.
๏ Negotiation. For example, offer higher pay for higher productivity.
๏ Power and coercion. Sometimes if a change is particularly urgent management will
have to abandon a softly-softly approach and simply enforce the changes. This should
be a last resort as employees can appear to cooperate but in fact they adopt a passive-
aggressive approach which is an indirect expression of hostility, such as by delaying
implementation, stubbornness or the deliberate and repeated failure to accomplish
requested tasks.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 50
8. Outsourcing
8.1. Overview
It is often appropriate to do this if the activities being outsourced are not of strategic
importance and are more in the nature of support activities such as invoicing, payroll and
OpenTuition.com
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 51
9. E-business
9.1. Introduction
The terms e-business and e-marketing are often user interchangeability but strictly e-
commerce refers to the customer-facing side of the operation (web-site, sales, order delivery)
whereas e-business includes e-commerce plus internal processes such as inventory, human
resources, production and finance
OpenTuition.com
E-commerce implies marketing, buying and selling over the Internet. Most businesses now
have a web presence even if not buying and selling through their website. A simple web-site
can provide customers and potential customers with details about the company.
Furthermore, a well-designed web-site should be findable by Google and other search-
engines and this can be a valuable source of new business.
Strictly, e-commerce means entering into transactions over the Internet. For example a
company like Amazon trades exclusively in this way. Other companies, like many
supermarkets, have a mix of physical outlets plus they allow customers to buy through their
web-site for delivery by courier or post.
E-business has the following characteristics, known as the 6Is which differentiate this
approach from conventional commerce:
Social media, such as Facebook, have become very important tools in e-marketing.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 52
As mentioned in Chapter 6, fast, cheap and secure communication systems are increasingly
allowing employees to work from home for at least part of the time. Virtual private networks
allow staff to access their office system from home. Homeworking (or tele-working) save
employee commuting time, reduce the environmental impact of commuting and can reduce
the size of offices needed because employees will rarely all be there at the same time. Home-
working can also attract employees who live further away and who would not be able to
commute daily.
OpenTuition.com
Hot-desking is when employees do not have a permanent or set desk. When they arrive in the
morning they are assigned a desk and telephone calls are touted to them. Logging onto their
computer will allow them to see their own desktop and work. There are usually lockers
available in which personal belongings and papers can be stored. Hot-desking is particularly
useful when only a fraction of staff are physically present on any day in the office. Desks need
to be provided only for the normal number of people there.
New technology can also allow video-conferencing so that virtual meetings can take place
without the need for staff to undertake expensive and time-consuming travel.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 53
Chapter 8
OPERATIONS MANAGEMENT
1. What is operations management
OpenTuition.com
1.1. Introduction
Operations management refers to the activities required to make and deliver products or to
deliver services. For a manufacturing organisation these activities include
๏ Procurement/purchasing
๏ Receipt of raw material
๏ Warehousing of raw material
๏ Issuing material to the production lines
๏ Manufacturing the product
๏ Warehousing the finished goods
๏ Receiving orders
๏ Despatching goods
Michael Porter, a professor at Harvard Business School, introduced the concept of the value
chain, which shows many of these activities:
Firm Infrastructure
Procurement
Profit, or margin
Primary activities
This model represents organisations by setting out the activities they carry out.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 54
Firm infrastructure (head office activities and support activities such as accounting and IT),
technology development (research into new products and processes), human resources and
procurement (placing orders) are known as support activities and are mostly indirect-costs.
The other activities are primary activities. Inbound logistics is the physical receipt and
warehousing of raw materials, operations is the manufacturing stage, outbound logistics is
the storing of finished goods and delivery to customers, marketing and sales finding out what
customers want and advertising the goods, service is after-sales service such as maintenance
and the supply of consumables
OpenTuition.com
By carrying out these activities organisation can make profits. However, it is essential for the
organisation to know what gives the right (or ability) to make profits. Why do customers pay
enough to allow a profit to be made? It might be because:
Whatever it is that customers value is the key to an organisation’s success and its
performance there needs to be carefully managed. The organisation also has to be careful
about changing or removing activities or performance that customers value and cherish. If
these activities are removed performance will suffer. So short term performance
improvements in one area might lead to long-term performance decreases in another.
However, if an organisation is carrying out tasks that are not valued by customers,
performance could well improve if these were changed or discontinued.
For example, in the UK many financial institutions moved their call centres to other countries.
Many customers disliked this – particularly elderly customers whose less acute hearing gave
them problems with foreign accents. The operations carried on by the financial institutions
were therefore less acceptable to customers who began to move their business elsewhere.
Many institutions have begun to reverse their call centre off-shoring
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 55
Collaboration Collaboration
๏ Procurement is seen as a primary activity. It is a central part of the supply chain and not
merely a support function. Wise and skilled purchasing will be capable of creating value.
๏ Customer-facing activities (previously, sales, marketing and services) are combined into
sales.
๏ Inbound and outbound logistics activities are combined in distribution.
๏ Operations in Porter’s value chain are more precise (but perhaps more restricted) with
the term ‘production’.
Concluding, the supply chain and supply chain network concept extends Porter’s value chain
concept towards cross-company networks in order to improve efficiency and delivery service,
minimise costs and inventories.
๏ Upstream = the supply chain before materials and goods reach the manufacturer
๏ Downstream = the supply chain for products after they leave the manufacturer and are
on their way to customers.
Together, they form the value network that creates value through the appropriate operation
of the whole chain to improve efficiency, delivery accuracy and times, cost reduction and
inventory minimisation.
You will readily understand that collaboration can often be greatly facilitated by the use of
information technology, which can integrate online orders received from customers with
manufacturing inventory management and purchases of raw materials and components from
suppliers.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 56
In demand-driven systems it is a customer who activates flow by ordering from the retailer,
who in turn reorders from the wholesaler, who reorder from the manufacturer, who reorders
raw materials from the suppliers. Orders flow backward, up the chain, in this structure. Great
care is needed to ensure that delays occurring as orders flow up the supply chain do not
jeopardise the delivery of the final products.
Many companies are trying to shift from a build-to-forecast to a build-to-order discipline. The
property of being demand-driven is variable:
Being “0%” demand-driven means all production/inventory decisions are based on forecasts
and all products available for sale to the end user are there because of the forecast. This could
be the case of fashion goods, where the designer may not know how buyers will react to a
new design (yet the article will not be ordered before manufacture), or the beverage industry,
where products are produced based on a given forecast.
A “100 percent” demand-driven is one in which the order is received before production
begins. The commercial aircraft industry match to this description. In most cases, no
production occurs until the order is received.
Of course, pure push or pull models exist only in theory: demand for a product will never
cause a supply chain to start mining iron ore and producing steel. Nor will a push model
guarantee that products made will be bought. At some point, in every supply chain, demand
push will meet demand pull, and inventory will accumulate there. Note that large
geographical distances between suppliers and customers, or processes that take time (such
as growing crops) make pull systems more difficult to organise.
However, inventory can be minimised and customer service improved if all parties in the
supply chain can be better synchronised and have the ability to react quickly. For example, a
traditional model of replenishing inventory in supermarkets would rely on each supermarket
issuing an order to suppliers, probably by electronic data interchange (EDI), once inventory
falls below reorder level. However, orders then arrive ‘out-of-the-blue’ at suppliers, who either
have to have sufficient production capacity or who have to hold inventories to respond
quickly. A better way is to give suppliers access to supermarkets’ inventory records through
an extranet so that inventory levels and rates of change can be monitored. Supplies can be
dispatched even without having to wait for an order. In this way, suppliers will be much
better able to anticipate demand and produce accordingly. Better synchronisation and lower
inventory levels have been achieved.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 57
Supply chain networks shows the links between organisations and how information and
materials flow between these links. For example:
Third Party
Logistics Company
OpenTuition.com
Ultimate Ultimate
Supplier ORGANISATION Customer
Supplier Supplier
As with many other functions, outsourcing is increasingly used in supply chain management.
Logistics companies can perform many supply chain functions more efficiently and
economically than they can be done in-house.
These can be complex. For example, here is the supply chain network for an orange juice
company:
Upstream Downstream
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 58
3. Supply portfolios
3.1. Introduction
Not all supplies and raw materials are of equal importance. A supply portfolio approach
(Kraljic) allows organisations to display their supplies according to:
Low
Acquisition Leverage
Supply
difficulty
Critical/bottleneck Strategic
High
By segmenting the market in this way, it becomes possible to decide on the required
approach to suppliers and the most effective way to purchase the resources.
๏ Acquisition/non-critical quadrant.
Items in this quadrant have a profile of low market difficulty and a low profit impact
(expenditure). Buyers might be tempted to spend a lot of time in this quadrant.
However, that would not be a wise business decision as the return on the time invested
would be small.
Items in this quadrant should be bought in a standardised, simplified way to minimise
costs.
๏ Critical/bottleneck quadrant.
Items here have the profile of high market difficulty and low profit impact (expenditure).
Typically, the supply market is difficult because there is only a small number of
suppliers. These items do not have a high profit impact until they are not available.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 59
A risk analysis with respect to supply should be carried out. A cost reduction strategy
is inappropriate in the critical quadrant in case supplies dry up. One way of reducing risk
might be to over-order when supplies are good.
๏ Leverage quadrant.
The items in this quadrant have low supply market difficulty and high profit impact
(expenditure). The return on time invested in this area will result in profit maximisation.
A planned cost reduction strategy for items in this quadrant. For example, there are
OpenTuition.com
๏ Strategic Quadrant.
Items in this quadrant have the profile of high market difficulty and high profit impact
(expenditure). These items lend themselves to a strategy such as taking over a supplier
or forming very close links with one. Cost reductions in this area require a long term
strategic plan to ensure continuity of supply in these expensive items.
Suitable strategies are those that reduce risk and maximise profit. These strategies can
take two directions: a partnering strategy with a suppliers or a strategy to create
competition (eg by self-supply) and drive the item to the Leverage Quadrant.
Some of the main choices to be made in supply chain pathways are as follows.
๏ Environmental (ecological)
๏ Social and
๏ Financial
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 60
The social, environmental and financial objectives are sometimes referred to as the triple
bottom line. The concept is a departure from the traditional concept of the bottom line,
which evaluates all efforts in terms of their short-term effect on profits.
Historically social and environmental concerns have been largely ignored as they were
thought to conflict with financial goals. For example, depletion of natural resources, such as
oil and gas is obviously not a sustainable practice. However, because alternatives typically
require investments in infrastructure which are slow to show returns continuing to rely upon
fossil fuels is the least expensive short-term option.
OpenTuition.com
The goal of sustainability requires a more extended timeline for return on investment but
once initial investments are made, they can actually lead to increased profitability. One
example is free cooling and renewable energy sources for data centres. Companies like
Facebook, Google and Apple have huge data centres to hold and process the vast amount of
data they use. The machinery is very power hungry, so many intensive users have chosen to
locate these facilities in countries like Iceland and Norway to make use of hydro-electric
power and where the northern Nordic climate provides natural ways of cooling the servers.
Although the technologies involved may require initial cash outlay, the renewable resources
they rely upon are freely available and reliable, which will eventually pay off. Besides that,
there are valuable public relations reputational advantages.
Similarly, investments in socially ethical practices may initially cost a business a lot but
typically lead to enhanced recruitment, branding and public relations which all tend to lead
to increased profitability in the long run.
The following are examples of how organisations can improve their sustainability using
operations management:
๏ Location of suppliers, production facilities and customers. If the distances that goods
have to be transported can be reduced, it is likely that operations will be more
environmentally sustainable. For example, buying locally produced food rather than
imported.
๏ Efficiency improvements: less raw material waste, recycling, better use of power and
conservation of heat. Not only will these measures save money (often after initial
investment) but that will then allow goods to be provided at lower prices, thereby
improving competitive strength.
๏ Manage staff to make the best use of their skills, knowledge and experience. Recruiting
the right people for the right jobs and providing them with the necessary training,
support, safety measures and responsibility to work efficiently is important to the long
term sustainability of businesses – especially as the technical content of many jobs is
increasing and it might be more difficult to recruit suitable people
๏ Effective management of equipment and infrastructure is needed to ensure that these
resources are well maintained so as to increase their useful working life, capability and
operational efficiency and capacity. While maintenance can be expensive in the short
term, it will pay off over the life of the asset. Remember, sustainability is all about
considering the long term benefits of actions over any short term cost savings.
๏ Environmental sustainability, such as less pollution being released, is also important.
The public and governments expect businesses to operate in environmentally
responsible ways. Increasingly there is legislation to enforce environmental protection
and non-compliance can lead to large fines or removal of operating licenses.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 61
Chapter 9
THE TOOLS AND TECHNIQUES OF
OPERATION MANAGEMENT
OpenTuition.com
1. Process design
1.1. Introduction
๏ Process design refers to how a process is carried out and will generally show:
๏ Departments/people involved
๏ Movement of material
๏ Movement of information
๏ Processes carried out
Often the process is shown on a process map, also known as a swim-lane diagram. Here’s an
example showing the steps involved in receiving customers’ orders in a software company:
Customer
Payment
No Invoice
Sales
Order Check
OK? Order Stopped
Completed Credit
Yes
No
invoicing
Production Credit &
In No
Control
Order
Entered Stock?
Yes
Assembly & Copying
Production Disk
Scheduled copied
Shipping
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 62
Process maps can be used in both manufacturing and service industries. And they have two
purposes:
๏ To document the way operations should be carried out. This can be very useful for new
recruits and for training. It can also help to ensure that the proper steps are carried out
so that the quality of the product or service is consistent.
๏ To analyse the processes to see if all steps are necessary or if they could be re-arranged
and simplified to deliver a more efficient operation.
OpenTuition.com
However, whilst giving customers what they want it is important, it has to be done so
economically therefore the design, materials used and processes required must all be looked
at critically. This process is known as value analysis and customers can enjoy both a use
value and an esteem value. For example, esteem value might arise from:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 63
There should be an established process for bring new products or services to market:
๏ Test marketing: the final opportunity to get things right before a full-scale
launch.
It is increasingly important to be able to develop new products and services quickly ie the
time-to-market should be short. It is important to be quick because:
๏ Technology changes quickly and if development is too slow the product will be out of
date before launch
๏ Competitor action. Competition is fierce in many industries. If your competitor launches
three new products per year, really need to do so as well to keep your products
attractive to consumers.
3. Forecasting
3.1. Introduction
Good forecasting is essential for good operations management. Forecasts are needed for
activities such as:
๏ Ordering materials
๏ Recruitment
๏ Production
๏ Scheduling work
๏ Capacity planning eg how many machines
๏ Arranging delivery of finished goods
Most forecasts in operations management will be driven by the forecast demand for goods
and services will as this will determine how ‘busy’ the organisation is.
Forecasting the demand for existing products will rely on historical data adjusted for known
or expected changes in demand.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 64
Linear regression: this plots sales against time and then draws the best straight line possible
to join up the points. The line can be extrapolated (extended) to give estimates of what the
future demand might be. Of course there is no guarantee that the estimates will be correct as
demand could suddenly plunge (or more pleasantly, increase). Interpolation means
predicting between points used in the calculation and is more reliable.
For example, you might have a reading for costs when production was 10,000 units and
OpenTuition.com
20,000 units. Predicting costs when production id 14,000 units is interpolation. Predicting
costs when production id 30,000 units is extrapolation.
Once demand has been predicted material, labour and machine requirements can then be
calculated.
It is important to realise that before using the linear regression results the correlation of the
two variables should be estimated. Correlation measure how reliably the two variables move
together. You would expect correlation to be high between production volume and the
quantity of material used, but low between the volume of sales in a month and, say, the
number of letters in the name of a month.
Time series analysis: one of the problems with linear regression is that it only gives straight
line results, and many businesses go through seasonal patterns or variations. For example,
sales of sun tan lotion will rise in summer. Better prediction should take account of these
variations so that production and distribution can be appropriately adjusted.
A time series is one that moves with time e.g. sales each day.
Time series analysis tries to analyse the first two of these. Below, you can see that although
the sales rise and fall regularly, there is an underlying increase in sales. This is known as the
trend (dotted line)
Sales
Time
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 65
The extent and timing of the seasonal variations can then be estimated so that it would be
possible to, say, predict sales in summer two years away - taking into account the particular
characteristics of that season.
When it comes to forecasting demand for new products, organisations obviously have less
information to work on. Techniques include:
๏ Taking into account apparent demand for similar products or rivals’ products
OpenTuition.com
The layout of an operation or process means how its transformed resources are positioned
relative to each other and how its various tasks are allocated to these transforming resources.
Flow refers to how materials, documents and information move from one operation to
another.
A layout in which the product or project remains stationary, and workers, materials, and
equipment are moved as needed. For example, traditional ship-building and house
construction.
This can allow great flexibility as different staff or machines are brought in as needed. In
addition it can also give staff considerable variety in their tasks and the often see the whole
system through to completion.
However, there can be high unit costs and scheduling activities can be difficult.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 66
Layout that can handle varied processing requirements. Different products move to
processes as required.
Cutting
OpenTuition.com
Drilling Testing
Testing Plating
Functional layouts are very flexible and relatively robust in case of disruptions eg a machine
breakdown because often other processes will not be held up. They are also easy to supervise
at the process level because each process has its dedicated team.
However, because there are many different flows, managing the whole system can be
complex to ensure that there are no delays or mis-schedulings.
This layout that uses standardised processing operations to achieve smooth, rapid, high-
volume flow. Each product progresses through each process in the same way. This is the
traditional production line approach seen, for example in motor car factories (think: product
layout = production line).
The U-shaped layout can be more compact and increases communication and team work.
Process 1 Process 2
Process 3
Process 5 Process 4
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 67
๏ High volume
๏ Low unit cost
๏ Low labour skill needed
๏ Low material handling
๏ High efficiency and utilisation
OpenTuition.com
However:
๏ Lacks flexibility
๏ Boring for labor
๏ Cannot accommodate partial shut downs/breakdowns
In this layout which machines are grouped into a cell that can process items that have similar
processing requirements. A product layout is visible inside each cell:
Cell layouts have the advantages of being a good compromise, allowing fast throughputs and
high motivation. However, they can require the duplication of machinery to ensure that each
cell is properly equipped.
5. Process technology
5.1. Computer numerical control (CNC)
Instead of a worker controlling a machine, such as a lathe, drill or saw, the machines are
controlled by computer. This technology has the following advantages:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 68
๏ Increases precision.
๏ Can link to computer aided design (CAD) software so that designs can be quickly
manufactured.
๏ The machines can work for long hours without deterioration in performance (or the
need for overtime payments!)
5.2. Robots
OpenTuition.com
Robots extend the flexibility fist seen in CNC technology. Industrial robots usually consist of a
jointed arm with a gripping tool at the end that can lift move and rotate articles. They are
commonly seen in car manufacturing plants.
Automated guided vehicles are now commonly found in warehouses and factories.
AGVs safely transport all kinds of products without human intervention within production,
warehouse and distribution environments and offer ways to reduce costs and to increase
efficiency and profitability. They can lift, rotate and move goods, fetch goods from racks and
deliver them onto conveyors. They can also store goods onto shelving.
Some navigate by following wires burying the floor, some use lasers and some GPS. All have
radio connections to assign task and to continually report where they are to speed flow and
to avoid collisions with other vehicles. All have safety mechanisms which will stop the vehicle
if something is blocking its path – such as an employee.
๏ Machine flexibility: a machine can quickly be reset to perform different tasks. For
example different patterns and sized of holes being drilled.
๏ Route flexibility: the ability to send different items through different
processes. For example, if a component didn’t need holes
drilling it would miss out the drilling machine.
Reduced WIP Inventory. FMS allows units to be made as needed rather than being produced
in batches so can enable pull-systems and JIT (Just in Time) inventory management.
๏ Increased machine use. Highly automated FMS can reduce tool changeover time and
machine tool-setting times. This both increases machine utilisation and reduces
manufacturing lead-time.
๏ FMS reduces transportation times because a single machine can carry out multiple
tasks.
๏ Shorter lead times. Because transportation, scheduling and set-up times are all reduced,
there can be a significant reduction in the lead-time for production.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 69
Cost. A widely-quoted case is that of Yamazaki Machinery Company in Japan. Which installed
an FMS system costing $18 million. The results were:
OpenTuition.com
Despite these impressive figures the return on investment was only 10% even when total
savings after two years were close to $7.0 million and a projected savings of $1.5 million per
year for next 20 years was envisaged. This is why many companies have trouble justifying
investment in FMS, as the target on ROI for many is 15%
This is the use of computers to control the production process. For example, if you go to most
car company websites you will be given options as to:
To make the specified cars reliably and economically requires a high degree of IT involvement
to ensure that the correct parts come together on the production line to make the specified
vehicle
These systems can also integrate computer aided design to the manufacturing process. This
means that the technical drawings specifying the size, shape and other details of a
component can be used to control the machinery used in production.
6. Work Study
Work study is a system of assessing methods of working so as to achieve the maximum
output and efficiency.
It can involve:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 70
๏ Time and motion studies: the systematic observation, timing and measurement of
movements needed to complete a task. It can be
applied in many environments: office, factory, shop,
hospitals etc. It is hoped that such studies will allow
tasks to be streamlined and made more efficient.
๏ Method study: what is the best way of doing a job? The systematic
and critical examination of the ways of doing things
to make improvements.
OpenTuition.com
Capacity is the maximum output achievable with a standard set of resources. For production
depends on:
๏ Level capacity plan: for example, set your capacity at a reasonable level and live with it:
• A manufacturer buys machinery that can produce sufficient output for peak
periods or else decides to not to meet peak demand.
• A shopping centre provides a fixed amount of parking spaces.
๏ Chase demand plan: adjust capacity to demand. For example:
• Hire temporary workers
• Sub-contract production
• Rent additional machinery.
๏ Manage demand to match capacity. For example:
• Train companies charge premium priced fares for journeys that reach their
destinations for about 9 in the morning (business traffic).
• Heating maintenance engineers offer extended payment terms if maintenance if
performed in summer when their work force is likely to be under-employed.
8. Managing inventory
8.1. Introduction
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 71
Not hold too much inventory. This ties up capital and increases the risk that the inventory
will deteriorate, become damaged or obsolete so that the value of the inventory has to be
reduced or the inventory scrapped.
Not to hold too little inventory so that the company cannot meet demand. Not being able to
meet demand is known as a stock-out and, generally, stock-outs are very expensive because:
๏ Customers become irritated so that the company’s reputation and goodwill are
adversely affected.
๏ Customers might move to another supplier.
In this system, whenever the amount of inventory falls to a pre-set reorder level, an order is
sent to the supplier. The reorder level should be set so that there is enough inventory to last
through the inventory lead time – the gap between placing an order and receiving the goods.
Sometimes a two-bin approach is used for the reorder level approach. Inventory is taken first
from one bin and when that is empty, an order is sent out. The company should arrange for
the second bin to have enough inventory to meet demand in the lead time.
When orders are placed they should be for a quantity of goods that minimise inventory costs.
This quantity, which will vary from item to item, is known as the economic order quantity
and it takes into account two classes of cost:
๏ Inventory holding costs: the more inventory ordered, on average the more
inventory is on stock and the greater the holding
costs will be.
๏ Ordering costs: the smaller the amount of inventory on each order,
the more orders there will be and this increases costs
such as administration, inspection and accounting.
The economic order quantity is where the sum of these costs is minimised.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 72
In this system, stock levels are reviewed regularly and orders are placed for each line to bring
the inventory up to a pre-set level. Different quantities of inventory will usually be ordered
each time.
In a JIT system, no purchase orders are placed until sales orders are received. Upon receipt of
a sales order the organisation works out which components are needed to complete the
products ordered and then places orders with suppliers. This is known as a pull system
because sales orders pull inventory into and through the system.
The advantages of JIT is that the cost of holding inventory will be minimised: no cash tied up,
no storage needed, no risk of damage or obsolescence.
๏ Very good information technology. Lots of sales orders have to be examined and
‘exploded’ into lists of components that have to be bought. Attempting this manually
would be expensive, slow and unreliable.
๏ Very good cooperation with suppliers so that they can deal efficiently and reliably with
many small orders.
๏ Very good quality. If inferior suppliers are received, production has to stop as there are
no alternate supplies in inventory.
๏ Reasonably constant demand. Production takes time and JIT is difficult to deliver on if
there are huge peaks in demand – which will inevitable take some time to produce.
Sometimes additional production resources are kept on standby to attempt more
flexibility in meeting orders.
๏ Suppliers should be physically close so that there are no significant delays introduced
when goods are being transported.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 73
Chapter 10
MANAGEMENT OF RELATIONSHIPS
WITHIN THE SUPPLY CHAIN
OpenTuition.com
1. Lean synchronisation
Lean synchronisation means that products and services are always delivered to exactly match
what customers want, in exact quantities and at the required time and place for delivery. Lean
synchronisation should achieve these objectives at the lowest possible cost and it should
result in items flowing rapidly and smoothly through manufacturing processes and supply
networks.
In a traditional manufacturing approach, each stage in the process will place its production in
an output inventory that buffers that stage, helping to isolate it from the next process
downstream. The next stage of manufacturing will the take outputs from the inventory,
process them and pass the more complete items to the next buffer inventory, and so on.
The intermediate inventories insulate each stage from its neighbours, making each stage
relatively independent. The system is also more resilient if there should be a problem at one
stage as buffer inventory can be used to keep subsequent processes going. However, this
safety and flexibility has to be paid for in terms of:
“Involves managing the interfaces between organisations supplying goods and/or services to
an organisation in order to maximise their value”. It is about building relationships that work
towards supporting an “effective, financially beneficial environment”.
๏ Transactional
๏ Contractual
๏ Value Added
๏ Collaborative
๏ Partnership
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 74
adversarial.
๏ A contractual relationship is very similar to a transactional approach but it
is a relationship which is built around delivering
the terms of the contract. The supplier will
deliver no more or less than the contract and
the customer will use the contract to manage
the supplier. There is still little trust between the
two parties. Again, a rather defensive outlook.
๏ A value added relationship is usually adopted by suppliers when they move
to a strategy to retain customers and therefore
they develop customised solutions to meet the
customer’s needs. This helps to lock together
supplier and customer
๏ A collaborative relationship can be described as a close working between
the supplier and customer, which delivers value
and benefit to both organisations. There is also
a structure of shared responsibility,
accountability, resources and rewards. They
cooperate and collaborate for the good of each
party.
๏ Partnership based relationships have many similarities to collaborative SRM
styles in that both parties derive mutually
beneficial value from the relationship. The
intention with a partnership approach is that
the association will be over a long period of
time with both parties looking to develop a two
way rapport. There is a recognition of mutual
dependency, even more so than with
collaborative ventures. Partnership
relationships are seen as strategic alliances,
where skills and resources are shared to achieve
mutual benefits which cannot be achieved
working individually. They could produce joint
venture structures where the legal ownership
and management of organisations are shared.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 75
For example, if an order is received for 100 units of a product, the system expands this into
the parts needed, can check inventory and work out what orders have to be placed with
suppliers in order to fulfil the sales order. Many systems will place the purchase orders
OpenTuition.com
automatically.
Materials resource planning is sometimes known as MRPI to distinguish it from MRPII, which
means manufacturing resource planning where not only materials but also labour and
machine resources are integrated into the production plan.
Corrective
action needed
Upper control limit
Data that falls within the control limits indicates that everything is operating as expected and
that the small variations with control limits are likely due the natural variations that occur as
part of the process. If data falls outside of the control limits, this indicates that a specific cause
is likely the source of the product variation. For example, the setting on a machine might
have slipped. Something within the process should be changed to fix the problem.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 76
5. Quality management
5.1. Definitions
Or
OpenTuition.com
๏ Quality control refers to the processes (such as sampling and testing) that an
organisation employs to check on quality.
๏ Quality assurance is the sum of the management allow an organisation to dependably
achieve a stated level of quality
๏ Quality management is the overseeing of all the activities needed to achieve and
maintain the required quality. It includes establishing the required quality level, setting
quality control procedures and also considering quality improvement
๏ Prevention costs
๏ Appraisal costs
Moving effort towards the top of this list should save costs.
๏ If there is no quality at all, all failures will happen once the customer receives the goods
(external failure). That is very expensive in terms of goodwill lost and replacing goods.
๏ If goods are tested when finished but before leaving the factory some will fail (internal
failure). The faults have to be found and the faults have to be repaired, but at least
customers are not affected. This should be cheaper than external failures.
๏ If goods are inspected after every operation is completed, faults can be diagnosed
immediately and repaired (appraisal costs).
๏ Cheapest of all is to prevent any quality control problems at all. This will involve careful
design, the purchase of good quality components and staff training. However, these
costs will more than compensate the cost of finding and repairing costs later in the
process.
Hence the claim that ‘quality is free’: better quality control at earlier point in the process will,
overall save costs.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 77
Any manufacturing company will want to deliver goods to the customer that are of
sufficiently high quality to avoid goods being returned. In order to check this, the company
will have some form of quality control checks on goods leaving the factory. However, even
though good quality control will results in poor quality goods being rejected, and therefore
not reaching the customer, there remain the costs associated with waste and poor quality
work.
It is therefore important that all possible steps are taken not only to check quality at each
stage, but to design processes and educate the workforce to facilitate good quality
production. If everything is done right first time, there will be no quality control problems and
no waste of materials or time.
TQM does not apply only to the manufacturing system. It will also apply to phone answering,
provision of information, the organisation’s web-site, order processing, invoicing, recruitment
and training.
The implementation of TQM is never really complete and there is a culture within the
organization of never being satisfied and of continually achieving improvements. Often these
are small, but nevertheless will add up to be significant. The process of a continuous series of
small improvements is known as ‘Kaizen’.
The improvements can be to cost, quality, efficiency, less wastage, better service ie all aspects
of operations. Note that unlike quality control which aims to maintain quality and control
costs, kaizen aims to improve these all the time
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 78
Six sigma is an approach to quality control that was originally devised by Motorola, a high
tech electronics company that manufactures, amongst other products, microprocessor chips.
The aim of the company was to achieve very low rejection rates, < 3.4 defects/million, though
that specific objective is not as important as their methodology, known as DMAIC: define,
measure, analyse, improve, control.
๏ Define: define what is meant by quality. For example, reliability, style, fast response,
OpenTuition.com
helpful service.
๏ Measure: ways of measuring the quality factors have to be devised. For example, failure
rate for reliability, customer surveys for style. Measure both current performance and
use the measurement methods to better define what is meant by quality i.e. set targets.
๏ Analyse: investigate why current performance falls short of required performance.
๏ Improve: attempt to improve performance. Repeat the D, M, A, I cycle until the required
standards have been achieved.
๏ Control: This is continuously applied to ensure, for example, that definitions are still
relevant, that costs are within budget and that progress is being made.
DMAIC fits in with Kaizen ie a continuous series of improvements to improve quality and
reduce costs.
6. Reverse logistics
Reverse logistics refers to all operations related to the reuse of products and materials. It is:
"the process of planning, implementing, and controlling the efficient, cost effective flow of
raw materials, in-process inventory, finished goods and related information from the point of
consumption to the point of origin for the purpose of recapturing value or proper disposal. …
Remanufacturing and refurbishing activities also may be included in the definition of reverse
logistics."
The reverse logistics process also includes the management and the sale of surplus as well as
returned equipment and machines from the hardware leasing business.
A manufacturer's product normally moves through the supply chain network to eventually
reach the distributor or customer. Any process or management after the sale of the product
involves reverse logistics.
๏ If the product is defective, the customer would return the product. The manufacturing
firm would then have to organise shipping of the defective product, testing the
product, dismantling, repairing, recycling or disposing the product.
๏ At the end of the product’s life it can be returned to the manufacturer for refurbishment
or recycling. For example, photocopier toner cartridges can be sent back for refilling.
๏ At the end of the product’s life it could be sent back to the manufacturer for safe
disposal after the manufacturer arranges the salvaging of valuable material. For
example, electronic products contain valuable rare earth metals that can be recovered,
reprocessed and reused.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 79
Chapter 11
MARKETING – ITS NATURE AND
PURPOSE
OpenTuition.com
1. What is marketing?
To understand the marketing concept or the marketing approach it’s useful to contrast this
with certain other approaches that might be available.
Through market research we will establish the needs of potential customers and then
develop an appropriate product to match those needs. It will stress to those customers the
ability of the product or service to satisfy their needs and it will profit through customer
satisfaction because it fulfils the needs of its customers.
In many ways it’s a very humble approach. It’s saying that the customer knows best. There is
no point in making a product which we think is good if customers think it’s not very
satisfactory. It doesn’t mean, of course, that it’s an entirely passive process, only just taking
input from customers. You can’t always expect customers to be innovative and it will certainly
be part of the market research process to develop prototype products to show those to
customers, to see whether the customers will be interested, or to find out how those products
could be changed in some way to better match the requirements of the customers. But at the
end of the day, the marketing concept means finding out what do customers want and
developing products or services to fulfil customer’s needs.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 80
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 81
๏ Competitors: will affect the price you can charge and the features you have to
offer to compete. Advertising must emphasise superiority or
OpenTuition.com
differences.
๏ Customers: are there only a few large customers or many small ones. These
will require different approaches to advertising and selling prices
might reflect their bargaining power.
๏ Substitutes: new technology could make your products redundant. How
should that be fought?
๏ New entrants: potential new boys on the block. How can marketing make attempting
to enter the market unattractive for them? Perhaps by lowering
prices to ensure they are unprofitable.
๏ Suppliers: not a lot of marketing influence. However you can sometimes
see some companies, such as food companies emphasising that
their products are made from local, ethically-sourced ingredients.
4. Market segmentation
We have said that marketing is finding out what customers want and designing products and
services to meet customers’ needs. The first stage to find out whether all potential customers
want the same thing or can the market be broken down into different sections or segments.
Market segmentation looks in how a market can be split up.
๏ Age
๏ Sex
๏ Lifestyle
๏ Wealth
๏ Geography
For example in the fashion market, there are quite different fashions which are bought by
younger and older people. Obviously there are different fashions depending whether you are
selling to male or female. Lifestyle is important, are we addressing the leisure market or are
we addressing a more formal market? Wealth and disposable income are important, and it’s
normal for most ranges of fashions to have cheaper ‘diffusion lines’ and also the more
expensive luxury goods. Geography, for example simply whether people live in the north of
the country or the south of the country can make a difference in the type of clothing they
want to buy.
Companies might decide not to sell to all segments of the market. They may find a segment is
too small, or too unprofitable, likely to decline because of PESTEL factors or that there is too
much competition there already.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 82
5. Market targeting
After investigating market segmentation, the next stage is market targeting, that is deciding
which segments of the market to attack.
Product Market
This is extremely rare; in fact it is very difficult to think of an example. Even the sale of
basic products like water is to a segmented market. Some people are perfectly happy
with tap water, others want mineral water, but some want still, some want sparkling. It
is sold in different quantities of small bottles, large bottles, and there is whole range of
flavours.
Market Segment 1
Market Segment 3
You only have to try to buy a common consumable such as shampoo or toothpaste to
see how the manufacturers have differentiated their products. There are probably
dozens of products to choose from, and the manufacturers hope that by changing the
product and a number of other variables that they make their product particularly
suitable and attractive to one segment of the market.
๏ Concentrated market targeting
Finally there is concentrated market targeting. This may be known as niche marketing.
Market Segment 1
Market Segment 3
The company perceives the market as being segmented, but for some reason decides to
target only one, or a limited number of segments of that market. It could be that the
company is too small to have a wide range of products, so concentrates on one
segment. Or, the company may believe that it has particular expertise to fulfil the needs
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 83
of one segment or that the company perceives that segment as being the only one
that is profitable. But for whatever reason, the firm concentrates its resources in
addressing the very specific needs of one or a very limited number of segments.
A good example of concentrated market targeting can be seen in a holiday industry. In
the UK, a company known as the Crystal Holiday concentrates on skiing holidays. It has
made to that segment of the market its own and designs holidays making use of its
expertise there.
OpenTuition.com
‘Positioning’ means make a product or service address specific segments of the market.
Originally there were four variables or levers that could be used. These were known as
McCarthy’s marketing mix, or the Four Ps. Now 7 Ps are often shown:
๏ Product
๏ Price
๏ Promotion
๏ Place
๏ People
๏ Process
๏ Physical evidence
The first four (product, price, promotion, and place) were the original components of the
marketing mix and relate to the marketing of both services and products.. The three last ones
(people, process, and physical evidence) are specifically to do with positioning services. The
three additional Ps are sometimes known as the service extension to the marketing mix
When services are provided there is no physical product and so there is a growing importance
in skills and attitudes of the people who provide the service.
The process by which a service is provided, and the physical evidence that something has
actually happened are also important.
For example, if you are booking an airline flight, you may ring up the airline and you expect to
be dealt with in a helpful and friendly way by the representative. The process has to be
convenient to you, you don’t want to be waiting too long before your phone call is answered.
Finally you expect some sort of physical evidence, such as an e-mail, to show you that the
service is actually going to be provided.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 84
6.2. Product
๏ Brand,
๏ Packaging.
For example, take calculators. Some have got simple arithmetic functions whereas others
have trigonometric, scientific or statistical functions; some have rolls of paper on which
calculations can be displayed. These are all different features of the product. Some calculators
will be relatively cheap and perhaps very durable whereas others will be of high quality for
everyday office use. Design might not be very important in calculators, but some are
marketed on the basis of having a sleek futuristic looking design whereas others are more
commonplace. Brand and packaging are probably not particularly important for calculators,
but are very important when considering something like cosmetics or perfume where the
packaging might possibly be more expensive than the contents.
6.3. Pricing
The second of the Four Ps is price. This includes not only the price itself (the price level or
price point), but also discounts for bulk buying which is particularly important in business-to-
business sales. Price also includes the terms, ie how long a customer has to pay. There are also
various types of strategic pricing, described below.
Pricing can be more sophisticated than it first looks. For example if your customer had a very
seasonal business, perhaps in agriculture, you might be able to make your product attractive
to that customer if your terms of sale were arranged to match that customer’s cash flow.
Perhaps the customer could buy in the spring and not have to pay until the autumn when
crops are harvested.
Price skimming is when a very high initial price is set for a product, for example a new
electronic product. You might know that there will be a certain number of people who will be
prepared to pay, let’s say $1000. After they have all bought the product you can then lower
the price, say to $900, and there will another layer of people who will be willing to pay that,
and so gradually you work your way down. Price skimming is nearly always a temporary
phenomenon. Prices usually fall, if for no other reason because other manufacturers will join
in and bigger volumes that have to be sold.
Penetration pricing means going in with a very low initial price in a hope of getting a very
high market share. With luck the high market share will give you very high volume and
consequently a low cost per unit for production, and you may be able to sustain a very low
market price indefinitely. Indeed, this can be a strategy to protect yourself against new
entrants to the market. If you are going with a low price and win, let’s say a 70% market share,
it will be quite expensive for anyone else to come into the market and make as good profits
as you are.
Related product pricing aims to get someone ‘hooked’ by a low initial price, then follow up
prices are high. A good example of related product pricing can be seen with inkjet printers.
Typically a new inkjet printer might cost around $100, but then to renew the ink cartridges
might be costing about $70. The initial printer is almost a lost leader, the rationale being that
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 85
once you have bought that, the follow-on cost of maintaining and replenishing the supplies
is where the profit is going to be made.
๏ Costs
OpenTuition.com
๏ Competitors
๏ Consumers
๏ Controls
Costs
Ultimately revenue must cover costs. Often cost plus pricing is carried out to give an
indication of the desired cost. For example:
If the mark-up required is 30% then if an item costs $150 to make it will be sold for:
This is an easy calculation, but there is no guarantee that the goods will sell at the price that is
calculated. There might be cheaper competing goods or customers might baulk at the high
price demanded.
Competitors
There are four main types of market, each giving rise to a particular type of competition:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 86
Price competition means that consumers are motivated primarily by price and usually
suppliers will have to offer low prices to succeed. Very often organisations which use a cost
leadership strategy adopt price competition. Their products are ordinary, but because their
costs are very low (if not actually the lowest) prices can also be kept down.
Many laptop producers use price competition because, for most, their products have been
commoditised: they all do the same things, with the same operating systems, run the same
application software and have similar reliabilities.
Non-price competition means that consumers pay attention not only to the price of the
goods but are also influenced by other marketing mix variables such as the:
Essentially, organisations which follow a differentiation or focus strategy will be making use
of non-price competition. They seek to make their products different so that they are
particularly attractive to consumers, who in turn are willing to pay premium prices.
Considering again the laptop producers mentioned above, we could probably argue that
Apple uses non-price competition. Its laptops look different and unique, they have a different
operating systems and run different (but often compatible) software. This can make it
different to directly compare prices, but many people have the impression that, insofar as it’s
possible to compare like with like, Apple machines are more expensive than others.
Nevertheless, they sell well and profitably.
Consumers
Suppliers have to keep in mind both what the end consumers are willing to pay and also the
profits that will be expected by intermediaries in the supply chain. Many industries have ‘rules
of thumb’ about the mark-ups they expect to be able to apply. It is common to segment
markets according to wealth so that a company will have a ‘value’ range of goods for poorer
or thriftier customers who might respond to price competition, and a more exclusive range
for better-off customers, who might respond to non-price competition.
Even if there are not different lines of goods for different customer groups, it can still be
possible to charge different prices for the same product to different groups. This is known as
price discrimination. For example, it is often cheaper to buy electronic goods in the USA
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 87
than in Europe. Leakage of goods from the cheaper to the more expensive market must be
prevented in some way, so the groups have to be sufficiently separate (or un-informed).
The perceived value of goods is a concept which is also related to non-price competition
and, indeed, to price. We have all, no doubt, been influenced by the thought that a higher
price implies goods of a higher value even though we are often essentially ignorant about the
merit of those goods. For example, when buying a T shirt there is a very wide range of prices
for a range of garments which are very similar looking. We assume that the expensive T shirt
with the fashionable label is ‘better’ than the cheaper, more basic lines. However, often we
OpenTuition.com
really don’t know, and might even be paying for the kudos we feel an exclusive label gives us.
Whether goods are necessities or luxuries also influences consumers’ reactions to prices and
price changes. This affects the elasticity of demand of the product, which is a measure of how
a change in sales volume is caused by a change in price. Goods that have a high elasticity of
demand are very price sensitive and are likely to be luxury products that consumers are
prepared to do without if the price rises too much. Goods with a low elasticity of demand
are relatively unaffected by price changes and are likely to be necessities. As prices rise,
demand will stay high because customers need the goods.
Controls
Some industries are closely regulated by statute and regulation, and they have little power to
choose their own prices. Other industries are able to, or try to, dictate final prices charged to
consumers. For example, exclusive perfume and cosmetic producers resist price competition
by insisting in their supply contracts that their retailers do not discount their products. Note
that not all contractual arrangements are legal. Pricing cartels (competitors fixing prices) are
frowned upon by most governments.
6.5. Promotion
๏ Advertising
๏ Sales promotion
๏ Personal selling
๏ Public relations.
We are all familiar with advertising and we know that it can take place on a number of
different media. For example, television, magazines, newspapers, billboards by the side of
roads. Television addresses a mass audience and it wouldn’t be particularly sensible to
advertise a specialist product there. Those types of products would be better advertised in
specialist magazine.
Billboards by the side of roads can’t contain huge amounts of technical information. People
can’t and won’t stop to read them. They can only give a very brief impression of the product
and to spread knowledge of its existence and perhaps its brand name.
The internet is now a very important and powerful advertising medium. With television
advertising you broadcast to all viewers but only some of whom might be interested and you
are never sure who they are. Internet advertising, however, is often started when a user visits
a particular web-site or enters a search term. The user’s activities can then be tracked and
measured.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 88
Sales promotion is something which happens very close to the point-of-sale. You may have
been in supermarkets where staff offer small portions of cheese or small glasses of wine for
you to try in a hope that you will then go and purchase. Buy one get one free offers and
coupons which give you money off the next purchase are also forms of sales promotion.
and valuable. It only happens in business-to-consumer sales where the value of the product is
particularly high.
Public relations usually means good mentions in the press. Sometimes there are charitable
endeavours where a local firm has made some sort of donation or lent some sort of
equipment. Perhaps sponsoring the local amateur football team also falls into the category of
public relations. Public relations doesn’t particularly advertise a product, it tends to be rather
more orientated towards giving a good impression of your organisation.
๏ Push promotion
๏ Pull promotion
Imagine a new product is about to be launched. Push promotion is concerned with getting
the product into the shops and would use, for example, personal selling. Pull promotion is
getting the public to demand that product, to go into shops and ask to buy it. That
promotion could be done by advertising. For the whole promotional campaign to be
successful, you need both push promotion and pull promotion to match up. There is no point
in people knowing about a product if it is not available; there is no point in the product being
available if nobody wants to buy it.
6.6. Place
The last of the four Ps is ‘Place’, meaning the place you go to buy or acquire the product. It
really means distribution. Considerations to bear in mind there are:
The length of the distribution chain. The shortest distribution chain is going directly from
manufacturer to consumer and this is sometimes seen in mail order businesses. Some
computer manufacturers such as Dell operated in this way for many years. It doesn’t work
quite so well when you come to distributing something like clothing
By contrast, many consumer goods have a very long distribution chain, going from
manufacturer to wholesaler to retailer and ultimately to the consumer. Everyday products
such as sugar, milk, butter, cigarettes follow this sort of distribution chain because it gets the
goods very, very deeply and widely distributed within a community. They become available
in almost every outlet. Those types of goods are sometimes called convenience goods, goods
that you expect to be available in a convenient way and where you probably won’t bother
getting in your car to travel across the city to buy a particular brand.
Things like carpets, furniture, large electrical items. These represent significant amounts of
money, they are rare purchases, which, we hope, will last for many years. There, we would
bother to travel across the city to go to a major outlet which offers us comparisons of many
different brands of product. So those types of goods tend to be sold through a smaller
number of larger outlets.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 89
Suitability of the outlet. For example, if you are selling very, very high quality audio
equipment, you would expect the people in the shop to be able to explain the pros and cons
of different systems. Perhaps the shop should be equipped with soundproof rooms where
could try different speakers out in. You wouldn’t expect to buy very high quality audio
equipment in your local supermarket.
Marketing by the public sector and non-for profit organisations will still make use of the 7Ps,
thought there will inevitably be some differences in how they are applied. For example, a
charity is marketing to two sets of people: providers of donations and recipients of cash or
other benefits. The 7Ps might be adjusted as follows:
๏ Product:
Donors will receive the satisfaction of knowing that they have done good. They need to
be informed about how the charity is spending funds.
Recipients: will receive funds, goods, accommodation, medical aid etc.
๏ Price:
Goods and services will frequently be provided free of charge or very much reduced
prices.
๏ Place:
Depends on the charity and whether we are talking about donors or recipients. Many
charities have shops in the high street to receive goods that can then be sold. Or, they
might arrange collection days where collections are made in the street.
Sometimes recipients must visit a charity to receive help. Sometimes representatives of
the charity will visit potential clients.
๏ Promotion:
The full range of promotional methods is available.
๏ People:
The right demeanour is essential both to raise funds and to dispense them.
Persuasiveness is important.
๏ Process:
Make it easy to donate. Internet, donation by texting, stamped addressed envelopes to
encourage responses to appeals. Similarly for claimants, the process must not be so
complex as to be overwhelming. Many claimants could be vulnerable and possibly not
able to cope with complex processes
๏ Physical evidence:
Flags and stickers are frequently given to donors. Letters of thanks and information
about how the money is used can also be vital.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 90
8. Consumer theory
8.1. Social interaction theory/social exchange theory
Social exchange theory has the underlying assumption that people are selfish and that they
view relationships in a “profit” or “loss” way.
For example, people look to see how rewarding a relationship is and then how much it costs
to be in the relationship. If there is a profit left over (rewards – costs = profit) then that may
OpenTuition.com
encourage them to continue the relationship whereas if there is a loss this may motivate
them to end the relationship. Interactions are “expensive”, as they take time, energy,
commitment or money and what get out of a relationship must exceed what goes in. The
degree of attraction or liking reflects how people evaluate the rewards they receive in relative
to those given.
A person may make their assessment of their rewards by using two comparisons:
Rewards can be compared to costs to judge profits. For example, you might decide to buy
something because last time you bought the item you were happy with what you got
compared to the price.
Rewards and costs are compared against alternative rewards and how they compare. Thus in
a shop you are comparing similar items to make a choice.
Equity states that individuals as motivated to achieve fairness in relationships and to feel
dissatisfied with inequity (unfairness).
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 91
9. Social media
Social media such as Facebook and Twitter have become very important promotional tools.
Be-friending a supermarket allows you to receive up-to-date offers, recipes and news. Similar
effects are obtained through Twitter accounts where consumers can follow brands and
suppliers.
Note that some Twitter campaigns have backfired on companies where consumers have
OpenTuition.com
been disappointed or feel that the organisation is being unfair. Angry ‘tweets’ can be
‘retweeted’ and soon multiply potentially damaging a brand.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 92
OpenTuition.com
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 93
Chapter 12
MARKETING TOOLS
1. Marketing research
OpenTuition.com
1.1. Introduction
Good marketing depends on good information, and this comes from marketing research.
๏ Desk research
๏ Field research
๏ Test markets
Desk research uses information that has already been collected. This approach is usually
relatively quick and cheap, but might not answer all your questions.
Internal sources
First of all, the accounting department can supply enormous amounts of information,
provided the information with properly coded originally. For example, if instead of simply
crediting one sales account in a nominal ledger, there are various different categories of sales
account. One can easily see how the sales of different products may be increasing or
decreasing perhaps seasonally or perhaps in responds to competitor action. The process of
keeping track of sales goes in further if the company sets up a data warehousing system.
As explained in Chapter 5, ‘big data’ has become a vital marketing tool. A good example of
this is seen when supermarkets provide their customers with loyalty cards. This may
encourage customers to go back and accumulate points which can then be traded in for
some product later on, but the real benefit of the supermarket is that the shopping habits of
their customers can be carefully recorded. Every purchase made at the supermarket using the
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 94
loyalty card is recorded and this information can be kept for many years. That’s the data
warehousing part of the operation.
Data mining means that data is then examined in the hope of finding something useful or
unexpected which would help the marketing of the products or services of the supermarket.
It may uncover certain patterns or seasonality of the sales of products. It may uncover
unexpected correlations of sales of different products, so by putting these products together
near each other on the shelves overall sales are increased.
OpenTuition.com
External sources
Some companies find valuable external data from the information which is routinely
collected by governments, both national and local. For example, most countries run a census
perhaps every 10 years, so governments know very precisely how many children there are, for
example under the age of five. This could be useful to a company producing educational
equipment or educational publications, they need to know whether the school population is
going to be increasing or decreasing and by roughly how much. Local governments
frequently know how many people lie within a certain radius of the centre of the city and this
can be useful when, for example deciding where to position a supermarket. Often for detailed
government information the company may have to pay, an information can be available
more or less instantly.
Finally, there are market research consultancies which collect information routinely in the
hope of selling it to suppliers of products and services. For example in the motor industry,
research consultancies routinely collect information about the number of new cars registered
in the period, the average price of second hand cars, and probably something about the
profile of customers buying each model. If you were for example working in Ford Motor
Company, it might be very useful to you to purchase this information if they gave you some
insight in the success or otherwise of a say cars manufactured and sold by Volkswagen,
Renault, and General Motors.
Field research means going out and collecting specific information. The first and perhaps
commonest method is the use of questionnaires. In fact, you may well have been stopped by
someone who is carrying out a market research survey. It may ask you about your
consumption habits, it may ask you what adverts you remember seeing in television the
previous night, they might ask you what well-known brands of beer or cars or petrol that you
remember and they may show you sometimes examples of marketing initiatives to get your
opinion or whether or not you think they might be successful or desirable. Sometimes market
research companies get together panels of users who can then discuss between themselves
various ideas and views while it’s been monitored and recorded by the market researcher.
At some stage it may be important to actually test products before they are released. For
example new food products, new chocolate bars are often given to families to consume and
several weeks later the researcher comes back and asks what people’s opinions were of these
products. Product testing is also important to establish the safety and durability of certain
products and that type of testing is often done on research lab.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 95
The final piece of marketing research comes just before a new product is launched. The
company might decide to experiment in a test market. So, rather than a full national or
international launch, the product is tried out in a relatively small area. Test markets should be:
๏ Small
๏ Representative of the full customer population
OpenTuition.com
๏ Stable population (a university town would often be unsuitable the population varies
radically from as terms change)
๏ Suitable facilities. So, if you were aiming to sell you product through supermarkets and
advertising it on a local radio station, your test market should have these facilities also.
The company will watch carefully how the launch goes in the test market. Frequent
additional market research should be carried out and the test market gives the company its
last opportunity to get things right before it goes to the expense of launching nationally.
Remember not only is an obvious loss of money if a product launch is unsuccessful. There will
also be damage to the company’s reputation and it may mean that the company will find it
difficult to get into that segment of the market in the future had they once failed.
๏ Business-to-business (B2B)
Very expert buyers so they will bargain very hard to get discounts and lower prices.
Promotion typically by catalogue and by sales representatives visiting. Quality often
very important. Styling can be office-like.
Large orders mean that certain buyers will be very important and must be looked after
carefully.
๏ Business-to-government (B2G)
Often huge orders so prices will reflect this. Often specialised negotiation tactics and
promotion needed. Decision on purchasing often very slow so representatives need
patience.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 96
The information needed to perform well when providing a service will often be more related
to qualitative than quantitative aspects. For example, reputation, customer satisfaction,
availability of the service when required,
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 97
4. Relationship marketing
Relationship marketing is a form of marketing that emphasises customer satisfaction and
retention, rather than simply living from sales transaction to sales transaction.
Relationship marketing has been aided by software that allow tracking and analysing of each
customer's preferences, activities, conversations with the seller, tastes, likes, dislikes, and
complaints. For example, a car manufacturer that maintains a database of when and how
OpenTuition.com
customers buy their products, the options they choose, the way they finance the purchase
etc., is in a powerful position to develop one-to-one marketing offers and product benefits.
The aim is to turn a casual customer into a client (a repeat customer) and eventually to be an
advocate of the company.
Obviously when customers access the company’s web-site visit pages and perhaps eventually
make a purchase, relationship data can be built up easily.
5. Experiential marketing
Experiential marketing, sometimes called "engagement marketing," "event marketing", "on-
ground marketing", "live marketing" or "participation marketing," is a marketing approach
that directly engages consumers and invites and encourages them to participate in the
evolution of a product or brand. The objective of experiential marketing is to create a closer
bond between the consumer and the brand by involving them in a fun, exciting and
memorable experience.
For example:
Zappos (on-line clothing): on one of the busiest travel days in the USA, Zappos sprung a
surprise on one of its most loyal markets, Houston. Zappos turned one of the baggage
carousels at George Bush Intercontinental Airport into a "Wheel of Fortune"-style game that
awarded travellers the prizes upon which piece of the carousel their luggage landed on.
Coca Cola and the Fort Lauderdale Convention & Visitors Bureau created bus shelters in some
northern cities that warm shivering commuters in wintry weather while promoting brand
messages. Coke brought "happiness" and Fort Lauderdale, Florida pointed out that they
could be sun bathing elsewhere.
6. Post-modern marketing
The term ‘postmodern’ is usually taken to mean from the late 1960s onwards. It is based on a
rejection or distrust of previously adopted conventions and theories. It argues that the
characteristics of marketing have to change and adapt to new consumer outlooks. Some of
the changes claimed to have happened are:
Fragmentation: markets have fragmented into smaller and smaller market segments. This is
facilitated by the growth in consumer databases, the increasing and the concept of mass
customisation at reasonable prices.
De-differentiation: this involves the blurring of established groups. Thus a plane flying from
the UK to Florida is likely to have a huge variety of passengers from the well-off couples to
families on package holidays
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 98
Hyper-reality: dream worlds are created by advertising and promotion so that even everyday
products like soap promise much more than mere cleanliness
Chronology: instead of looking towards a future that it tends not to trust, postmodernism
adopts a nostalgic desire for the past and its comforting certainties. For example, retro
styling.
7. Internal marketing
Internal marketing is the attempt to motivate staff to change their behaviour and outlook to
achieve organisational goals. To do this, internal marketing adopts the same methods of
internal communication that companies employ to market products and services externally.
In effect, this means you must treat your employees as you would your customers and use
persuasive messages.
When an organisation wants to change it needs to align employees’ attitudes and behaviours
to correspond with the vision. This is essential for any business wishing to gain a competitive
advantage through enhanced service levels. Staff should be seen as internal customers and
their needs should be met. A company that concentrates solely on external customers and
ignores internal customer service will struggle.
Internal marketing should bring additional benefits such as high levels of employee
satisfaction, improved retention rates, reduced absenteeism and less resistance to any
change programme.
8. Brands
A brand is a unique design, sign, logo, symbol (or combination of these) used to create an
image that identifies a product and differentiates it from competitors.
Over time, successful brands become associated with desirable qualities of the product such
as quality, reliability, price, taste. This enables consumers to quickly identify and buy products
that they like and trust.
For example, supermarket shelves are crowded with competing products, but when
shopping we often simply grab the familiar (for example a packet of toothpaste like ‘Colgate’).
The packaging, colours and graphical devices allow us to quickly find and buy the product
without much thought – except we know that the brand has pleased us previously.
Brands owners often work hard to associate a particular image with their brands (for example,
up-market or down-market) and defend the image strongly. For example, some
manufacturers will allow their luxury brands to be stocked by only exclusive outlets.
Brand value (or brand equity) considers the additional income a company can make from a
product with a recognisable brand name as compared to its generic equivalent. If consumers
are willing to pay more for a generic product than for a branded one, however, the brand is
said to have negative brand equity. This might happen if a company had a major problem or
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 99
scandal associated with a brand (think of Volkswagen in 2015 with the diesel emission
scandal).
Sales
time
Introduction Growth Maturity Decline Senility
Profit
The problem with this diagram is that no product is guaranteed to follow this pattern and
even if it does the lengths of the various phases on the diagram will show tremendous
variation. For example, the mature phase of some products can last for decades, but for
others may last only a few years. What we would really like to know for product planning
purposes is when irrevocable decline sets in. This diagram doesn’t predict that. What it does
do is provide us with a set of labels which can be used as a kind of shorthand. Therefore:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 100
Low
๏ Question mark/problem child. This product has a high growth rate but a low market
share. Why is it known as a question mark or problem child? Well, the BCG analysis
suggests that there is no long-term future for this product if it has only a small market
share. Suppliers who have large market shares have much greater economies of scale
and could easily dominate the small supplier. The question therefore is: should we get
out of this product or should we try and grab a large market share? If we go for the large
market share, this will require investment. It will be a heavily negative cash flow because
money has to be spent on promotion, research and development or investing the
margin (that is reducing the selling price to win a higher market share).
๏ Star products. If the quest by the problem child for high market share is successful, the
product will become a star. This isn’t as good as it sounds. Although we now have a
high market share (and therefore would enjoy economies of scale and are well down
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 101
the experience curve), because we have one of the highest market shares, and highest
profiles, competitors will be trying to steal market share from us. We will be the target
for competitors also wanting to gain a high market share. Remember, if the market has
a high growth rate this product is perceived as a product with a future and many
companies will be anxious to get a large share of the action. Therefore, cash flow with
the star product is usually soon to be roughly zero.
๏ Cash cows. The initially high growth rate of products will always slow down, perhaps to
zero or even becoming negative (a declining market). The product then becomes a cash
OpenTuition.com
cow. It’s a cash cow because we still have a high market share but nearly all the initial
expenses will have been written off. Also because this is now perceived as an old
product, competitors will not be keen in stealing market share from us. Essentially they
leave us alone. We therefore enjoy high cash inflows without having to spend a lot on
promotion, or research and development, or defending our market share.
๏ The dog sector is on its own. Cash cow products do not turn into dogs! This is a product
which has a low growth rate and we don’t have much of a market share. Therefore, get
out of it, divest. There’s no point spending time effort and money achieving a high
market share in an old product. So, close down the production facilities or try to sell
them to another company.
Finally let’s return to the name “portfolio analysis”. If we have lots and lots of problem
children they will all require financing and where is that money going to come from? If we
have almost exclusively cash cows we have a very positive cash flow now, but a few years
down the line the market for those cash cows could have declined rapidly and what are we
going to replace those cash flows with?
A well-balanced portfolio has some cash cows and some question marks. The cash generated
from the cash cows can be used to invest in the question marks, so securing the long-term
future of the company.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 102
OpenTuition.com
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 103
Chapter 13
HUMAN RESOURCE PLANNING – 1
1. The importance of human resource management (HRM)
OpenTuition.com
1.1. Introduction
HRM views people as an important resource or asset to be used for the benefit of the
organisation and its employees with mutual benefit to the achievement of both
organisational and individual goals. HRM is as important as cash management, ensuring that
there are enough raw materials and that customers are happy with the products provided.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 104
2. The HR cycle
2.1. Introduction
Development,
training
OpenTuition.com
Selection: Performance
Planning Induction
• Advertising • Motivation Appraisal
• Shortlisting • Job design
• Interviewing
• Testing
• References
Rewards: fixed,
performance
Human resource planning should be based on the strategic plan of the organisation. If the
strategic plan suggests that the organisation is going to be opening in most countries in
Europe it will need people with the proper language skills. If the organisation is moving
organisation up market, it may need better people or at least people who are trained
differently.
๏ Assess the current position: what people are there? With what skills?
๏ Look at the future requirements. This will depend on the organisation’s strategy,
growth, the environment it is going to be trading in, and technological changes.
๏ Adjust the current position for estimated leavers, estimated number of people who will
retire, the aspirations and hopes of the people already employed, and the sort of skills
they have.
๏ Essentially, there is going to be a gap which has to be filled.
Let’s say the current position showed 100 people with adequate skills, but the future
requirements, suggested 500 people of those skills would be required. That’s a gap of 400,
but then take into account those who may leave and retire, let’s say that’s another 50 people
over the five years. Therefore, the company will have to recruit around 450 people. Of course,
that won’t be an accurate figure, it’s an estimate, but the company needs to know whether
our recruitment burden is something like 100 people, 1,000 people or only 10 people.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 105
2.3. Selection
๏ Job analysis to find out what the job entails. For example, will it involve customer
contact, supervision of a team, travel, budgeting, and IT competencies?
๏ A job description will be the result of the analysis: it sets out what the person will be
doing.
OpenTuition.com
๏ A person specification can then be prepared. This sets out the type of person, skills a
person who could carry out the job: skills, experience, intelligence, personality, physical
attributes such good eyesight.
๏ Next advertise to attract candidates. The advert must be worded so as to attract a
reasonable number of potentially suitable applicants. Sometimes a business will make
use of a recruitment agency to help with the wording. Also recruitment agencies often
have lists of people on their books who are looking for jobs and they can quickly select
candidates for interview. Applicants are shortlisted for the next stage.
๏ The interview stage is usually next. Interviewing well is a skilled process if it to be of any
use identifying good candidates. Often it is done badly and is not successful at
discovering better candidates.
Closed questions (ie can be answered with ‘Yes’ or ‘No’) should be avoided. For example
“Can you work to deadlines?” will almost certainly produce the answer ‘Yes’. Instead, ask
open questions such as ‘How do you deal with work pressure and tight deadlines”.
Increasingly frequently tests are given to candidates as part of the interviewing process:
๏ Ability: if someone claims to be able to type at 80 words per minute, it won’t take long
to prove that claim.
๏ Intelligence: might be needed for candidates who have few formal qualifications
๏ Aptitude: often used to select trainee computer programmers.
๏ Psychometric tests: used to assess candidates skills, knowledge and personality. For
example, will the person show initiative or be good at working in a group.
๏ Work sample tests replicate the work tools and environment associated with the
vacancy, to assess the level of the candidate’s current skills and knowledge as accurately
as possible. This involves looking at a sample of the skills and behaviours that can be
used to predict future performance in a similar work situation.
Appointment: the favoured candidate is offered the job. There might be some negotiation
about terms, conditions and the starting date. After the candidate accepts, it is recommended
that references are taken from their existing employer to confirm their job title there, dates
of employment and salary.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 106
๏ Retirement
๏ Resignation
OpenTuition.com
๏ Dismissal
Wrongful dismissal is when the dismissal breaches the contract of employment, for
example, not giving the employee the agreed amount of notice. A more serious problem is
unfair dismissal, a part of the law that gives the employee some protection against as it is
assumed that dismissal is unfair unless the employer can proves it to have been fair. Dismissal
is fair is:
๏ Pregnancy
๏ Membership of a trade union
๏ Carrying out health and safety procedures
๏ Insisting on employment contracts and payslips.
Disputes about dismissal can be heard by an employment tribunal (effectively a court) which
can order:
Most often the remedy is damages because usually neither party wants to be associated with
the other after legal action.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 107
In the UK, the law provides for equal opportunities in the areas of:
๏ Sex discrimination
๏ Race
๏ Religion
OpenTuition.com
๏ Sexual orientation
๏ Age
๏ Disability where there have to be equal opportunities and reasonable adjustments have
to be made to allow disables people to work.
๏ Direct. For example, a job advert saying ‘Salesman required’ would be direct sex
discrimination.
๏ Indirect. For example, a job advert saying ‘Sales representative requires: must be over
2m tall and have a large black beard’ would be indirect sex discrimination because the
requirements favour male candidates.
๏ Victimisation. This is where an employee is treated less favourably because he or she
took legal action against the employer.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 108
OpenTuition.com
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 109
Chapter 14
HUMAN RESOURCE PLANNING – 2
1. Appraisal
OpenTuition.com
3600 appraisal is becoming increasingly common where employees are appraised by their
boss, their subordinates and their colleagues.
It is also important that good two-way communication is encouraged rather than the
manager simply doing all the talking. Employees might have legitimate complaints or reasons
why their performance seemed to be inadequate. Finding out employees’ preferences is also
important for the employees’ promotion and movement through the organisation.
Most appraisal processes make use of a form listing the important aspects of performance
such as: technical ability, punctuality, ability to get on with customers etc. Scores are
allocated to these elements of performance (eg – 5 to + 5).
The most effective way of doing this is using an open appraisal process in which the form is
initially blank and the manager and employee go through it together discussing what the
mark should be. This forces the parties to communicate. Less successful is where the manager
has already filled in the form and then goes through it with the employee. Managers will
rarely change a score no matter what the employee says.
๏ Tell. Your manager tells you how you have got on with little room for discussion or
disagreement.
๏ Tells and sells. Your manager tells you how you got on and tries to persuade you that
view is correct
๏ Problem-solving where employer and employee cooperate in arriving at a fair appraisal.
A number of problems can arise from poorly-executed performance appraisals. Indeed some
writers and practitioners dislike the term ‘performance appraisal’ because of its judgemental
and critical overtones. They prefer to use the term ‘performance management’ so that
emphasis is placed on improving the performance of the employee – which should benefit
both employer and employee.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 110
2. Competency frameworks
Competency frameworks are a method of describing the values, skills and abilities that are
required to perform given roles. They also provide clear focus to support the development of
staff in order to deliver the best possible performance. They can also be used as recruitment
tools.
Typically, to define a framework for a given role, there will be a general description of the
competency followed by a list of attitudes, behaviours, skills and abilities that would indicate
competence in the relevant area.
There can also a negative statement at the end of each competency to indicate the sort of
behaviour that is actively discouraged, as it works against the principle of continual
improvement an organisation is striving for.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 111
Competency frameworks serve several purposes which help organisations to improve and
develop their staff, products and services. They:
๏ Can be used to shape and define the organisational culture based around strong
principles of acceptable and expected behaviour
๏ Supports and guides staff at all levels in their development in order maximise their
potential
๏ Should link to some of the key strategies that drive the objectives of the organisation as
these are crucial to success.
Target Actual
performance performance
Generic competences
Fire safety 80 50
First aid 0 0
Ethics 75 75
Specialist skills
Excel 100 80
Accounting package 80 80
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 112
Training and development can be expensive. Trainers have to be paid and trainees are
devoting time to being trained rather than doing their main jobs. Furthermore, if the training
is wrongly pitched, the trainees will not be more able to do their jobs after training than
before. So training has to be designed carefully and the following steps are typical:
The objectives of this are to make the employee welcome, comfortable and productive as
soon as possible.
For relatively simple jobs, induction might only take an hour or so: introduce the new
employee to colleagues, give them their IT log-on details, give instructions for evacuation of
the building in case of fire etc. More complex jobs might have induction training lasting one
or two weeks if instruction is needed in complex documentation or systems.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 113
First, the behaviourist approach. In this approach we are assumed to learn essentially
through reward and punishment. It’s based on stimulus. So if we do something right and we
get rewarded, we are likely to do that again. If we do something else and in some way get
punished, we are likely to try to avoid that. And so as time passes and we learn, and we will
tend to do more of the right things. This doesn’t mean of course that we understand what we
OpenTuition.com
The cognitive approach tries to look rather more at the mental process we might go
through to gain understanding. It argues that the mind takes sensory information and tries to
impose some sort of logic on that, some sort of rational approach. Very much more in this
approach we understand or attempt to understand what’s happening and why we are doing
it.
Probably the cognitive approach will ultimately be more flexible. If we are presented with a
new situation, we might be able to think our way through it. But if we have learnt simply on
the behaviourist approach and we don’t know why we are doing something, then a new
situation is likely to confuse us.
Honey and Mumford categorised different learning styles as theorists, reflectors, activists, and
pragmatists.
What’s the point of these four categories? Well, if you were trying to train a group of 20
people, remember, they won’t all learn in the same way. Some will be theorists, some will be
pragmatists. Perhaps the best you can do is go for a variety of activities and approaches so
that each type of learner is given something they can respond to.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 114
Kolb is associated with the idea of experiential learning- the idea that we go through a
number of cycles, gradually learning by our experience.
Experience
OpenTuition.com
Theory
Let’s take as an example a situation where we have presented to a potential new client for a
new contract, and we don’t win it. That’s the experience. So we go away and think why we
didn’t win it. It could be that our prices were too high; it could be that our presenters didn’t
do a very good job.
Anyhow, from this reflection we develop a theory, and next time we make a presentation, we
try it out. If we fail to win the next job, we need a bit more reflection but if we win the next job
then we probably conclude that we have moved in the right direction and that we have
learned better how to pitch for new work.
4. Motivation of employees
Identifying how employees can be motivated is of great importance to employers. Motivation
was once described as getting employees to run towards a target rather than amble towards
it.
There are many theories of motivation. One famous one that is easy to understand is
Herzberg’s Hygiene Theory.
Herzberg was using the word “hygiene” as an analogy with hospitals. If the hospital is going
to make you well it must be hygienic; in other words, clean. If it’s not hygienic you’ll get
worse. But hygiene itself doesn’t make you well: hygiene is just a starting point.
Herzberg argued that an organisation must get its hygiene factors correct before it can start
motivating employees. If a hygiene factor is missing then people become dissatisfied.
Examples of hygiene factors would be enough money to live on, reasonable relations with
colleagues and your superiors, reasonable physical conditions in which you’re working, a
feeling that you’re being fairly treated. If any of these is missing you are likely to be so upset
that none of the other motivating factors that the organisation tries will work.
Once the hygiene factors are in place then you can have the motivating factors such as
recognition, praise, a feeling that you are advancing and getting better skills, a feeling that
what you’re doing is worthwhile interesting work, and a feeling of having responsibility.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 115
In his first version of the theory, money was only present as a hygiene factor; later versions
had money as both a hygiene factor and a motivation factor. The Herzberg theory is
sometimes known as a two-factor theory (hygiene factors + motivation factors).
5. Job design
5.1. Introduction
OpenTuition.com
Most theories of motivation suggest that there is more to successful work environments than
simply requiring people to unthinkingly repeat simple tasks: challenge, variety, initiative,
recognition and team-work are all seen as valuable contributors to motivation and
productivity. Undoubtedly there will be some situations where traditional production lines, in
which each person does only a repetitive simple task, will minimise the marginal cost of
production. However, those calculations would not take into account:
๏ The costs of recruitment and training caused by high staff turnover that is likely to result
if employees dislike their jobs.
๏ The costs of staff shortages.
๏ Poor quality because employees do not identify with what they are producing.
๏ Disengagement of employees from trying to improve production methods.
In the 1960s and 1970s these considerations gave rise to the job design movement which
attempted to improve jobs (and employee performance) by deliberately designing ‘better’
jobs with characteristics that should produce the following outcomes:
The practice of deliberate improvement in a job’s characteristics is called ‘job design’ of which
there are three types:
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 116
6. Reward systems
Rewards can be:
๏ Extrinsic: rewards that arise outside the employee and include pay, praise by a manager
and promotion.
๏ Intrinsic: rewards that arise from psychological enjoyment and the satisfaction of
challenge and a feeling of having done well.
This section deals with extrinsic rewards arising from an employee’s pay structure.
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 117
For performance pay to be an effective motivator for employees it is essential that any
objectives given in order to qualify for additional remuneration are SMART:
๏ Specific: precise achievements and targets that are easy to
understand.
๏ Measurable: necessary to prevent pay being arbitrary
๏ Agreed/achievable: employees must believe that with effort the target can be
achieved otherwise they are liable to give up.
OpenTuition.com
7. Knowledge workers
A knowledge worker is anyone who works for a living at the tasks of developing or using
knowledge. For example, IT staff, accountants, lawyers, teachers, technical writers, architects.
It can be difficult to measure the output of these employees – they are not producing goods
that can be counted. This in turn means that managing these employees can be difficult.
Additionally, these workers are often independent-minded, ambitious, and eager to learn
new skills and to gain new experience. Often there are more jobs that there are workers, so
they feel empowered. Frequently they know more about a topic than anyone else in their
organisation – including their managers.
8. Communication
8.1. Introduction
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums
2017 Examinations Watch free CIMA E1 lectures 118
๏ First, inappropriate language. Obviously this could mean speaking a foreign language
to people who don’t understand it, but in practice it is more likely to be using
terminology which not everyone understands. So for example, if you are in a firm of
accountants and you are writing to a client and you are talking about tax computations,
terms such as “disallowable”, “capital allowances”, “adjustment of profits” and so on
OpenTuition.com
may not simply be understood by the client and if that’s the case communication has
not been successful.
๏ Status. Differences in status can interfere. This can be in two ways. First of all it could be
the person at the top of an organisation not wanting to hear what the people at the
bottom are saying, perhaps not believing that people at the bottom have anything of
value to say. It can happen the other way round where people at the bottom of the
organisation are frightened to talk to people at the top of the organisation.
๏ Emotion. If you go into an appraisal review and you are very angry or worked up about
something or even just frightened about something, the chances are that
communication will not be successful.
๏ Wrong medium. If, for example, you wanted to give your employees information about
the technicalities of their pension scheme, probably giving them a long lecture isn’t
going to be very useful. There is too much technical information in that for them to
understand. Presenting the information in written form or perhaps a mix of
communication, some lectures in outline and then the detailed material available in
written form, will be more successful.
๏ Not wanting to transmit and not wanting to receive can both occur. It could be that a
manager doesn’t want to point out shortcomings in a staff member’s performance. It
could be that the staff member is not willing to believe that there is anything wrong
with their performance.
๏ Finally a curse of the information age and emails: information overload. We are often
bombarded with so much information that we really can’t see the wood for the trees.
We spend so much time looking at information, deciding whether or not we need to
know the information or not, that there is a real danger we overlook the important
material.
(1) Preparation. Establish and clarify your main aims: what do you want and what are you
not prepared to accept?
(2) Discuss with the other party. Listen to what they want and try to understand their
position.
(3) Be prepared to give way on what is cheap for you but important for the other person.
(4) Aim for a win-win result where both parties are happy.
(5) Reach agreement and evidence this in writing.
(6) Implement the agreement
Free CIMA notes • Free CIMA lectures • Free CIMA tests • Free tutor support • StudyBuddies • CIMA forums