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E1 Organisational


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1. An Introduction to Organisations 3

2. Organisational Structure 11

3. Boundaries and Systems 19

4. Ethics and Corporate Governance 23

5. The Finance Function 27

6. Technology and Information 33

7. Implementing New IT Systems 45

8. Operations Management 53

9. The Tools and Techniques of Operation Management 61

10. Management of Relationships Within the Supply Chain 73

11. Marketing – its Nature and Purpose 79

12. Marketing Tools 93

13. Human Resource Planning – 1 103

14. Human Resource Planning – 2 109

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Chapter 1

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.

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2.1. Ownership

Broadly, organisations can be termed private sector or public sector.

Public sector organisations are owned by central or local government.

Private sector organisations are all the rest and will include both businesses and charities.

2.2. Motive

Organisations can be:

๏ 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.

Also, it is possible for public organisations to be profit-seeking. For example, nationalised

industries (industries owned by a government) will often be expected to make profits.
Similarly, some government departments are expected to make profits out of their activities
such as licensing certain activities or providing information to businesses and individuals.

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.

2.3. Legal structure

The common legal structures are:

๏ 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

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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.

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.

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3. Stakeholders
3.1. Introduction

The stakeholders of an organisation can be defined as:

“Anyone or any entity that is affected by the organisation or who has an interest in


Stakeholders usually want different things from an organisation. For example:

Stakeholder Typically what the stakeholder wants

Shareholders Profits, dividends, increases in share value

Employees Good salaries and working conditions. The

chance of promotion
Customers Good quality at low prices; dependable time

Suppliers Good prices, high order quantities, repeat

business, prompt payment

Local people Low noise and pollution; employment

Government Adherence to laws; payment of corporation
tax; provision of employment, exports.

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.

3.2. Stakeholder conflict

If you look at the list above, it will be clear to you that stakeholder requirements will often
conflict. For example:

๏ Employees want good salaries but shareholders want high profits

๏ Customers might want 24 hour telephone service but employees want to work 9 – 5
๏ Suppliers want high prices but customers want low prices

Stakeholder conflict is inevitable but management must manage it through a mixture of

negotiation and the use of management power.

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3.3. Mendelow’s matrix

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?)

Low Level of stakeholder interest High


Minimal Effort Keep Informed


Keep Satisfied Key Players


๏ Key players: powerful, motivated active stakeholders. These stakeholders

tend to get everything they want.
๏ Minimal effort: not powerful, passive. These stakeholders can almost be ignored
by management.
๏ Keep satisfied: potentially powerful but for some reason they choose not to use
that power. They will get some of what they want. If not kept
satisfied they might become key players if they are provoked into
taking action.
๏ Keep informed: these stakeholders make plenty of ‘noise’ but are relatively
powerless. They should be kept informed as a matter of
politeness and also to be provided with explanations as to what’s
going on.

3.4. Classes of stakeholder

Stakeholders can be classified as:

๏ Internal stakeholders include: employees, managers and directors

๏ Connected stakeholders include: shareholders, lenders (such as banks),

suppliers and customers

๏ External stakeholders include: government, the local population and


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These three classifications are no generally as important in stakeholder management as their

power/interest. A key player could come from any group such as a powerful militant group of
employees, a monopoly supplier or a government passing laws that have to be complied

4. Mission and vision

4.1. Introduction

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

4.2. Mission

An organisation’s mission can be defined as its reason for existence ie what its core purpose

Here are some examples:


We fulfil dreams through the experience of motorcycling, by

providing to motorcyclists and to the general public an expanding
line of motorcycles and branded products and services in selected
market segments.


To empower every person and every organisation on the planet to

achieve more.


Our mission is to help people do more, feel better, live longer.

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.

Well-constructed mission statements should contain the following:

๏ A brief description of what the company does and why it exists

๏ Which segment of the market it aims at (eg a supplier of luxury goods)
๏ Values, ethics and culture (eg offering all employees the chance to progress, complying
with laws, minimising environmental impact).

The mission statement communicates this important information to stakeholders.

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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

stating that will guide the company in making acquisitions and disposals of subsidiaries.

5. Creating value for stakeholders

5.1. Introduction

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.

Whatever a stakeholder perceives as value, it is necessary for the organisation to:

๏ Control and co-ordinate resources to achieve goals and outcomes

๏ Efficiently produce goods and services
๏ Facilitate innovation.

5.2. Control and co-ordination of resources

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
๏ 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:

๏ Are there goods in stock? IF so jump to step (4) below.

If not then:

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๏ Are components needed for manufacturing in stock? If not order them.

๏ Schedule machinery and labour to make the right number of goods at the right time.
๏ Schedule delivery.
๏ Ensure the goods are invoiced and the money received.

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


5.3. Efficient production of goods and services

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.

5.4. Facilitate innovation

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.

Nothing stands still: in a competitive environment continual improvement is essential.

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Chapter 2
1. Organisational structure

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

In this structure each function of the organisation is found in a separate, specialised


Chief executive officer

Production Human resources

Finance director Sales director IT director
director director
IT Operations Health and safety
Chief accountant Area managers Factory manager
manager Training etc.

Accountants Sales staff Programmers etc. Workforce

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:

๏ Which departments (functions) should be recognised and what are their

responsibilities? This is usually simple, but there are sometimes choices. For example,
should research and development be in a separate department or should it be part of
production? Should training be organised by human resources or should each
department decide what its employees need?
๏ How many layers should there be? For example, should there be only one managerial
layer or will it be divided into senior managers, managers and assistant managers?

The number of layers will result in an overall shape that can be described as either a tall-
narrow or wide flat structure:

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2.2. Tall narrow and wide flat structures

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.

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.

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Advantages/disadvantages of tall-narrow structures

Advantages Disadvantages

Close supervision possible because span Managers/supervisors might end up

of control is small substantially redoing the work of their few

Many opportunities for promotion Promotions might be small because there

because there are many layers are so many layers

Task specialisation because of tight job Reluctance to do more than is set out in
specifications the job specification; inflexibility

Task specialisation can be efficient in Employees reluctant to change and adapt

stable environments to new environments because of concerns
over their status.

Slow and unreliable vertical


Expensive middle-management

Advantages/disadvantages of wide-flat structures

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.

Very real promotions. Few opportunities for promotion and

when they come the change in
responsibility can be huge.

Flexible attitude to work and teams.

Fewer middle managers on the pay-roll.

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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

3.2. Typical divisional structures


Division 1 Division 2

Finance Sales Production Finance Sales Production

The divisions can be established by reference to:

๏ 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.

The main problems with divisionalisation are:

๏ 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.

The main advantages of divisionalisation are:

๏ 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.

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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

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.

4.2. A typical matrix structure

Manufacturing Accounting Quality control Purchasing

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

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5. Organisational configuration – Mintzberg

5.1. The components

Mintzberg suggested that organisations have five components:

๏ The strategic apex (top management)

๏ The middle line (middle managers)

๏ The operating core (the production workforce)

๏ Support services (eg accounting, IT, personnel)
๏ The techno-structure (the people responsible for devising and imposing standards,
procedures and methodologies such as health and safety, quality control, employee

The components will vary in size and importance depending on the nature of the

5.2. The machine bureaucracy configuration

This can be shown as:


Techno- Support
structure staff

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.

5.3. The simple structure

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.

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5.4. The professional bureaucracy

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.

5.5. The divisional structure

This shows a holding (top company) and a number of divisions or subsidiaries, each with their
own organisational components.

6. Contextual and structural dimensions

6.1. Contextual features

Contextual features depend on:

๏ The technology being used

๏ The environment
๏ The culture

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.

A very price-competitive environment could lead to a tall-narrow structure where economies

are obtained by breaking down work into simple stages and each employee repeats that task
over and over again. An organisation that relies on providing unique services to a variety of

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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.

6.2. Structural dimensions

These depend on:

๏ 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.

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Chapter 3
6.3. Definition

A system can be defined as:

“A set of things working together as parts of a mechanism or an interconnecting

network; a complex whole.”

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.

6.4. Parts of a system

A system can be shown diagrammatically as follows:

The environment
The system boundary

Inputs The system Outputs

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

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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.

6.5. Open and closed systems

An open system is one which takes input from the environment and sends output to it.
Nearly all systems are open.

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

This can be defined as:

“Transferring portions of work to outside suppliers rather than completing it


The following are examples of what could be outsourced:

๏ 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)

7.2. Advantages and disadvantages of outsourcing

Outsourcing has the following potential advantages:

๏ 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-
๏ 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

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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.

Outsourcing has the following potential disadvantages:

๏ 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
๏ Transportation time and costs. Outsourcing manufacturing, particularly abroad, will
cause delivery delays and there could be high costs transferring goods to the home

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

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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


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

10. Shared service centres

A  shared services centre  provides shared services  in an organisation. For example, a firm of
lawyers might have offices in 10 cities, but each of IT, human resources and accounting
services could be handled from shared resources.

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.

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Chapter 4
1. Ethics

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

You need to know what the following terms mean:

๏ Absolutists: believe that certain actions are always wrong – no ‘ifs’ or

๏ Relativists/pluralists: believe that that nothing is objectively right or wrong and
that ‘right’ or ‘wrong’ depend on the prevailing view of a
particular individual, culture, or historical period.
๏ Consequentialism: whether something is right or wrong depends on the
consequences, or outcome, of the act.
๏ Utilitarianism: this is a branch of consequentialism that states that the
ethically right choice in a given situation is the one that
produces the most happiness and the least unhappiness
for the largest number of people.
๏ Deontological: this is a duty-based approach to ethics and is concerned
with what people do, not with the consequences of their
actions. People have a duty to do the right thing because it
is the right thing to do.

2. The importance of ethics in business

Different stakeholders are likely to have different ethical views. For example, on a crowed
train some standard class passengers might see nothing unethical about sitting in first class
(“I’ve bought a ticket I should have a seat”); some other passengers and managers of the train
company might see this as unethical (“You can buy extra comfort if you want to”). Some
shareholders might have ethical objections to their company taking part in arms
manufacturing whilst directors and employees might have no ethical objections.

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.

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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:

Here is a short extract from the section dealing with treatment of customers, suppliers and

“Always deal fairly with customers, suppliers and consumers, treating them honestly and with

๏ Do not engage in unfair, deceptive or misleading practices.

๏ Always present Company products in an honest and forthright manner.
๏ Do not offer, promise or provide anything to a customer or supplier in exchange for an
inappropriate advantage for the Company.”

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

๏ Reduces the risk for shareholders.

๏ Lower risk means that capital can be raised more cheaply (the cost of capital and risk are
๏ Goodwill towards the company is increased – improving sales.
๏ Regulatory compliance is easier to achieve, reducing the cost of damages and fines.
๏ Good candidates are attracted to companies with good reputations
๏ Joint ventures are easier if the company has a good reputation

3. CIMA’s ethical guidelines

CIMA’s ethical guidelines are based on those of the International Ethical Board for
Accountants (IESBA), part of the International Federation of Accountants (IFAC).

The fundamental ethical principles are:

๏ Integrity: be straightforward and honest in all

professional work. Stand up for what you
believe to be right. Do not ‘turn a blind
๏ Objectivity: do not allow bias, self-interest or conflicts
of interest to influence professional
judgements and conclusions.

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๏ Professional competence and due care: carry out work to proper standards;
don’t skimp; keep up to date with changes
in legislation, methodology and
๏ Confidentiality: do not disclose information received
through professional work without
permission or if there is a legal duty or
right to disclose it.

๏ Professional behaviour: comply with laws and regulations and do

not act in a way that brings CIMA or the
wider accountancy profession into

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.

4. Corporate social responsibility (CSR)

This is the idea that businesses and other organisations occupy a significant space in society
and that a responsibilities are not owed only to shareholders.

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:

๏ Goodwill and reputational improvements

๏ Brand strengthening and protection
๏ Differentiation so as to attract particular customers, talented employees and high class
๏ Lower costs eg saving energy, less waste.

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.

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5. Corporate governance

Corporate governance is the way in which companies are directed and controlled.

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.

There are three important sub-committees consisting of NEDS:

• The remuneration committee: determine (or advises on) directors’ remuneration

• The nomination committee: responsible for the appointment of new directors.
The nomination committee recommends a candidate to be appointed by the
• The audit committee: responsible for liaising with both internal and external
๏ The board as a whole is responsible for decisions and, in particular, strategic (long term)
decisions about the future direction of the organisation.
๏ The board is also specifically charges with implementing a system of internal control
and should keep under review the need for an internal audit department.

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Chapter 5
1. Introduction

This chapter covers:

๏ The purpose of the finance function and its relationships with other parts of the
๏ How the finance function supports the organisation’s strategies and operations.

Overall the finance function is responsible for:

๏ Accounting operations
๏ Analysis
๏ Planning
๏ Decision making
๏ Control

2. The components of the finance function

2.1. Introduction

The components of the finance function are, in general:

๏ Financial accounting
๏ Management accounting
๏ Treasury
๏ Internal audit

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2.2. Financial accounting

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:

๏ Nominal or general ledger.

๏ Cash book (and perhaps petty cash book also. These are books of prime entry also).
๏ Receivable ledger (details of customers who owe money).
๏ Payables ledger (details of suppliers to whom money is owed).
๏ Non-current asset register (details of non-current assets).
๏ Sales day book (a book of prime entry in which credit sales are first recorded).
๏ Purchases day book (a book of prime entry in which credit purchases are first recorded).

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.

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2.3. Management accounting

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.

Typical management accounting functions are:

๏ 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

This department is found only in larger organisations. It is concerned with:

๏ 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.

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2.5. Internal audit

The Chartered Institute of Auditors defines internal audit as:

“ independent, objective assurance and consulting activity designed to add

value and improve an organisation's operations. It helps an organisation
accomplish its objectives by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, control, and

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

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).

There are two general classes of fraud:

๏ Theft of company assets

๏ Fraudulent financial reporting eg where profits are exaggerated to achieve a high share

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2.6. Company secretary

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.

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.

3. Potential conflicts of interest within the finance role

The finance function is responsible for:

๏ 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.

Here are some examples:

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.

Decision-making: directors, particularly directors of listed companies, usually want to produce

increasing profits or at least profits close to those forecast. It is possible to boost short-term
profits at the expense of long-term profits. For example, cutting research and development
will increase current profits. However, this will mean that in a few years profits will suffer
because there are no new products available to market.

Control: a fraud has been discovered. This can be embarrassing for the finance director, so
there is pressure to conceal it.

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4. Current developments of the finance function

Historically, the finance function and the people within it were simply expected to record
figures and to product reports for others to use. Burns and Scapens have suggested that this
restricted role is changing so that it is more focussed more on business support.

According to Burns and Scapens, there are three main reasons for the change in the
management accountant’s role:

๏ Changes in technology: the changes in information technology have improved the

amount of information available and broadened the availability of it.
๏ Changes in management structure: the responsibility for budgeting has moved from
the centre to individual managers leaving the management account to focus more on
strategies for improvement. For example, shared services makes the single finance
function much more important.
๏ Changes in the level of competition: increase in competition has led to a more
commercial orientation and more long-term focus as opposed to short-termism. A re-
orientation from bureaucracy to the market

In addition, the following will have influenced the role of the management accountant:

๏ Increasing internationalisation and globalisation requiring faster responses to change.

๏ Deregulation and privatisation of industries
๏ New business processes and business process re-engineering eg just in time inventory
๏ A need for more rapid responses
๏ The increasing importance of non-financial indicators

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Chapter 6
1. The nature of information

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

Already this Chapter has made use of two technical terms: data and information. These can
be described as:

Data = raw fact.

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.

Information = data with meaning.

The data has been processed in some way so that it becomes useful and informative. For

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.

The real challenge of information technology is not collecting data: it is displaying it in a

useful format at the right time to the right people.

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2. The qualities of good information

Good information is often said to have the following properties (mnemonic = ACCURATE)

๏ Accurate: sufficiently accurate not to be misleading. Not all

information has to be accurate to the last dollar or cent and
increasing accuracy usually introduces delays increases

๏ Complete: incomplete information is likely to be misleading.

๏ Cost-beneficial: the benefit arising from using the information should be
greater than the cost of providing it.
๏ User-targeted: ensure that the information helps the user to make
decisions and to perform his or her job well. Avoid
information overload.
๏ Relevant: relevant to the person and to the organisation.
๏ Authoritative: the provenance of the information should be stated and
should be reliable. Note that much of the information on
the Internet is not authoritative. You might be unsure
about its source, whether it is still relevant and has been
updated or whether it is deliberately distorted.
๏ Timely: the information should be provided soon enough to be of
use in decision-making. Sometime information needs to be
provided almost instantly (for example when controlling
machines). Sometimes it might not be needed for days or
weeks. Again, faster provision of information will usually
increase the cost of providing it.
๏ Easy-to-use: well laid out, well labelled, convenient menu systems and
short-cut keys.

It should be realised that people at different levels in an organisation require different types
of information

/ board

Middle management /

Operational staff

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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.

Middle managers have a mix of informational needs.

A good IT system has to be capable of supplying suitable information to every level.

3. IT Choices
3.1. Introduction

The choices available can be classed under:

๏ 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.

Soon, the concept of networks emerged:

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.

3.3. Wired or WiFi or 3G/4G?

In the early days of networked systems all the components were connected by cables.
Increasingly connections between machines are made by

๏ WiFi (radio) using WiFi hotspots; or

๏ Over mobile phone networks using 3G (third generation) or 4G (fourth generation)

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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.

3.4. Local or cloud?

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

results and files were stored locally also.

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’

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.

The advantages of this approach are:

๏ 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
๏ 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.


๏ 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.

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3.5. Centralised or decentralised?

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.

The advantages of one system tend to be the disadvantages of the other.

Advantages of centralised/disadvantages of decentralised

๏ 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.

Disadvantages of centralised/advantages of decentralised

๏ 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

4. The ‘web’, the Internet, intranets and extranets

The terms ‘Internet’ and the ‘Web’ are often used interchangeably. Strictly they are different.

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.

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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:

“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.

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

of big data

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?

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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

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”.)

๏ Social media (such as Facebook and Twitter)

Friends and contacts, postings made, your location when postings are made,
photographs (that can be scanned for identification), any other data you might choose
to reveal to the universe.

๏ Mobile phone companies

Numbers you ring, texts you send (which can be automatically scanned for key words),
every location your phone has ever been whilst switched on (to an accuracy of a few
metres), your browsing habits. Voice mails.

๏ Internet providers and browser providers

Every site and every page you visit. Information about all downloads and all emails
(again these are routinely scanned to provide insights into your interests). Search terms
you enter.

๏ Banking systems
Every receipt, payment, credit card payment information (amount, date, retailer,
location), location of ATM machines used.

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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:

๏ Browsing activities: sites, pages visited, membership of sites, downloads, searches

๏ Financial transactions
๏ Interests

๏ 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

This data can be both structured and unstructured:

๏ 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

๏ 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.

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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

have to be found to process huge quantities of non-uniform, awkward data in real-time.

6. Software for big data

Without getting too technical on this issue, a library of software known as Apache Hadoop is
specifically designed to allow for the distributed processing of large data sets (ie big data)
across clusters of computers using simple programming models. (Clusters of computers are
needed to hold the vast volume of information.) Hadoop It is designed to scale up from single
servers to thousands of machines, each offering local computation and storage.

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.

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7. Dangers of big data

Despite the examples of the use of big data in commerce, particularly for marketing and
customer relationship management, there are some potential dangers and drawbacks.

๏ Cost: It is expensive to establish the hardware and

analytical software needed, though these costs are
continually falling.

๏ Regulation: Some countries and cultures worry about the amount

of information that is being collected and have
passed laws governing its collection, storage and use.
Breaking a law can have serious reputational and
punitive consequences.
๏ Loss and theft of data: Apart from the consequences arising from regulatory
breaches as mentioned above, companies might find
themselves open to civil legal action if data were
stolen and individuals suffered as a consequence.
๏ Incorrect data (veracity): If the data held is incorrect or out of date incorrect
conclusions are likely. Even if the data is correct, some
correlations might be spurious leading to false
positive results.
๏ Employee monitoring: Data collection methods allow employees to be
monitored in detail every second of the day. Some
companies place sensors in name badges so that
employee movements and interactions at work can
be monitored. The badged monitor to whom each
employee talks and in what tone of voice. Stress
levels can be measured from voice analysis also.
Obviously, this information could be used to reduce
stress levels and to facilitate better interactions but
you will see how it could easily be used to put
employees under severe pressure.

8. Ethical and social issues; privacy and security

Around the 1990s many governments became worried about the amount of information
being held about their citizens and the potential for damage or misuse. Many countries
therefore enacted data protection legislation to govern the collection and use of data.

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

Obviously the huge amount of data now being collected and held (see Section 7 above)
mean that this problem is potential more serious.

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In addition to the obvious privacy issues, the following are ethical and social and
security dangers:

๏ Incorrect data leading to incorrect decisions. For example, incorrect information on

financial affairs can lead to individuals being refused credit.
๏ Theft of information (such as the theft of credit card information, the hacking of emails
and industrial espionage).
๏ Unauthorised alteration of information.

๏ 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.

It is therefore essential that organisations:

๏ Ensure that data is collected legally.

๏ Ensure that the data is input completely and accurately.
๏ Ensure that data is held safely and securely – including physical security.
๏ Ensure that data can be accessed only for authorised purposes by authorised
๏ Ensure that software is properly tested.
๏ Arrange regular backups of data.
๏ Use virus checkers.
๏ Use firewalls to prevent unauthorised access from outside (by hackers).
๏ Have suitable standby arrangement (disaster recovery plan) should the computer
system be severely damaged.

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9. New working practices

The ease with which information can now be recorded and accessed remotely and has led to
some changes in work practices. These include:

๏ 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

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.

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Chapter 7
1. Overview

1.1. The stages

Typically these are:

๏ Feasibility study
๏ Investigation
๏ Analysis
๏ Design
๏ Development: creating software/choosing a package
๏ Training
๏ Installation
๏ Testing software
๏ Changeover
๏ Review and maintenance

1.2. An alternative - outsourcing

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

A feasibility study is a preliminary look at a proposed IT project to judge if it is:

๏ Economically feasible: costs v benefits

๏ Technically feasible. Will it work technically?
๏ Operationally feasible. Will it produce the information and results needed by the
๏ Socially feasible. Will staff, customers and any other stakeholders involved want to use
the system?

This syllabus concentrates on economic feasibility.

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2.2. Economic feasibility: costs v benefits

If a new system is going to be implemented it should be justified on:

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.

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

3. Investigation, analysis and design

Assuming the outcome from the feasibility study is positive, the next stages are:

๏ 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.

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4. Development, training, installation and testing

New programs are written (or bought as ready-made software packages). Staff must be
adequately trained in the use of the new software otherwise its added benefits might never
be realised. New machines and software have to be installed and the whole system has to be
thoroughly tested. There is no point in trying to go live with a new system only to find that it
does not work properly. Many stakeholders are likely to be very irritated by malfunctioning

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

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6. Review and maintenance

6.1. Review

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:

๏ What improvements are needed or wanted?

๏ How happy are stakeholders who are affected by the system?

๏ How are the costs and benefits turning out? Are they as expected or was an error made
in the estimates?
๏ Was the project implemented on time?
๏ Can anything be learnt from the process?

6.2. Maintenance

Maintenance is an ongoing requirement and there are three types:

๏ 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?

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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:

๏ Fear of losing their jobs.

๏ Fear of ending up with a less interesting job.

๏ Fear of losing control.

๏ Fear that the system will be not be easy to use.
๏ Fear of being separated from colleagues.

These fears are perfectly understandable and should be expected by management.

Management should therefore take steps to try to overcome or reduce employees’ fears so
that resistance to the new system does not become a problem.

Common ways to overcome resistance to change 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.

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8. Outsourcing
8.1. Overview

Instead of running their own IT department some organisations outsource it to a specialist

firm. For example, in the UK many local councils have outsourced IT.

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

accounting. Outsourcing strategically important activities (such as design or customer

relationship management) is more problematic because you are often telling a third party
how to carry on the core activities of your business – such as maintaining good customer

8.2. Potential advantages of outsourcing

๏ Outsourcing to an expert, specialist company may produce better processing results.
๏ Outsourcing might be cheaper. The outsource company might enjoy economies of
scale and might have become very efficient in its main line of business: running IT
๏ Greater expertise and up-to-date knowledge and techniques.
๏ Transfer of risk. If data is compromised it is the responsibility of the outsource firm and
compensation should be payable.
๏ Free management to concentrate on how the business makes money rather than how it
runs its IT department.

8.3. Potential disadvantages of outsourcing

๏ The outsource company might not be very responsive to the client’s needs eg to update
the processing that is offered.
๏ Confidential data could now be held by another company.
๏ Despite what was said above, outsourcing might be more expensive.
๏ It is very difficult to reverse. So a company might be induced to outsource by a very
economical contract being offered. Machinery data and often personnel are transferred
to the outsource company. When the contract come up for renewal there is a very large
increase in price, but it is difficult to bring IT back inside: no machinery, no data, no staff
and no expertise has remained in the company.

It is certainly important when outsourcing to negotiate a comprehensive service-level

agreement which clearly sets out the duties and responsibilities of each party.

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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

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.

9.2. The 6Is of e-commerce and e-marketing

E-business has the following characteristics, known as the 6Is which differentiate this
approach from conventional commerce:

๏ Intelligence: this is collected every time a user visits a web-

๏ Individualisation: based on the intelligence collected each user
can be given a unique experience by the
supplier. For example, Amazon will make
recommendations about which other books or
films you might like.
๏ Interactivity: users are encouraged to review products etc.
They can also often customise the product they
want to buy.
๏ Integration: once an order is placed over the internet, much
of the subsequent processing and despatch of
goods is automated.
๏ Independence (of location): E-business can give even small companies a
global presence.
๏ Industry (structure changed): think how iTunes has altered the music
business. E-books are altering the conventional
publishing industry.

Social media, such as Facebook, have become very important tools in e-marketing.

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9.3. Remote working and hot-desking

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.

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.

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Chapter 8
1. What is operations management

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

1.2. The value chain

Michael Porter, a professor at Harvard Business School, introduced the concept of the value
chain, which shows many of these activities:

Firm Infrastructure

Support/ Technology Development

activities Human Resource Management


Inbound Operations Outbound Marketing Service

Logistics Logistics & Sales

Profit, or margin

Primary activities

This model represents organisations by setting out the activities they carry out.

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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

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:

๏ The organisation possesses knowhow that customers pay for.

๏ The organisation offers flexibility.
๏ The organisation offers economies of scale.
๏ The organisation take on risks.

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

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2. The supply chain

2.1. Suppliers – company - customers

A useful view of SCM is suggested by Meyer, Wagner and Rohde (2004):

Sales Procurement Production Distribution Sales Procurement

Collaboration Collaboration

Here, in contrast to Porter:

๏ 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
๏ 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.

The important additional emphasis in this presentation is on collaboration between up-

stream suppliers and the down-stream customers.

๏ 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

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2.2. Push/pull supply chain models

A push model (build-to-forecast) of the supply chain relies on manufacturers producing

according to historical demand patterns and pushing products out to distributors and
customers. Inventory is held at various points as a buffer against unexpected demand or
production delays. By contrast, in a pull model (build-to-order) demand stimulates
production and delivery. Essentially, just-in-time inventory control is a pull model as
ordering and production are triggered by customers’ orders. No orders are raised nor
production started until there is downstream demand.

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.

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2.3. Supply chain pathways and networks

Supply chain networks shows the links between organisations and how information and
materials flow between these links.  For example:

Third Party
Logistics Company

Ultimate Ultimate
Supplier ORGANISATION Customer
Supplier Supplier

Third Party Third Party

Logistics Company Logistics Company

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

Upstream Downstream

Inbound logistics Outbound logistics

Orange grower Supermarkets

Wholesalers O
Juicing plant
Retailers S
Bottler Juice marketer Logistics firms U
Label producer
Restaurants E
Plastic bottle manufacturer R
Airlines etc
Oil company

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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:

๏ The profit impact or annual expenditure relating to the supply.

๏ The supply difficulty (number of suppliers, internal constraints).

3.2. The supply portfolio matrix

Low Profit impact High

Acquisition Leverage


Critical/bottleneck Strategic


๏ Acquisition/non-critical: Low profit impact; low market difficulty. Example: stationery.

๏ Critical/bottleneck: Low profit impact; high market difficulty. Example: unique
components or components with erratic supplies.
๏ Leverage: High profit impact; low market difficulty. Example: packaging.
๏ Strategic: High profit impact; high market difficulty. Example: special software.

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

๏ 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.

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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

many suppliers who can be played off against one another.

๏ 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.

๏ Who transports the goods? The main solutions are:

• the buyer transfers them using own transport
• the seller transfers them using own transport
• a logistics company transfers them
๏ What delivery pathways are best?
๏ Who stores the goods? The organisation, the supplier, or a logistics company.
๏ Which manufacturing, packaging, labelling, kitting, or completion tasks are carried out
by the organisation and which by other parties? (Kitting relates to processes such as
adding batteries).
๏ Who is responsible for quality assurance and proper handling of the goods?
๏ How should returns be handled?
๏ How can fast and responsive deliveries by arranged?
๏ Who handles customs clearance?

4. Sustainability and operations management

4.1. What is business sustainability?

Business sustainability, also known as corporate sustainability, is the management and

coordination of:

๏ Environmental (ecological)
๏ Social and
๏ Financial

demands and concerns to ensure responsible, ethical and ongoing success.

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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.

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
๏ 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.

Note what was said about corporate social responsibility in Chapter 3

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Chapter 9

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

1.2. Process maps

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:

Order Process Payment


No Invoice

Order Check
OK? Order Stopped
Completed Credit

Production Credit &

Order Check Invoice Shipped Invoice

OK? Credit OK
Received Credit Prepared Order?

In No

Entered Stock?
Assembly & Copying

Production Disk
Scheduled copied

Packages Order Order

Assembled Picked Shipped

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Process maps can be used in both manufacturing and service industries. And they have two

๏ 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.

The alterations to processes can be of three types:

๏ Automation: doing the same as before, but now using

machines instead of people. For example,
most organisations calculate wages and
salaries of their employees using
computers rather than teams of
๏ Rationalisation: removal of bottle necks and hold-ups. For
example, many supermarket chains ask
their suppliers to monitor their inventory
in the supermarkets. Suppliers can
therefore anticipate when goods need to
be re-supplied and this allows more
efficient inventory management.
๏ Business process re-engineering: very radical changes to how a business
operates. For example, closing down all
physical shops and selling only over the

2. Product and service design

Product and service design relate to marketing which is more fully explained in the next
chapter. In brief, marketing attempts to find out what products or services customer want or
might want then designs suitable offerings.

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:

๏ Design: by changing the shape of an object, manufacturing could be

made easier and more reliable. However, the design would still
need to be sufficiently aesthetically pleasing to consumers.
๏ Materials: perhaps carbon fibres could be substituted for metal. This might
be cheaper and stronger, and whereas you might not care what
an aircraft is made of some objects are expected to be made of
metal because they simply look or feel better. For example,
๏ Processes: could some processes be omitted? For example, many
supermarkets partly dispense with check-out operators, but in a
luxury shop you expect attention from staff.

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There should be an established process for bring new products or services to market:

๏ Market research to see what customers want or need.

๏ Screening ideas: are we capable of delivering, will it be profitable, are there
difficult regulatory requirements?
๏ Design: Remember this has implications for function, style and
manufacturing cost. Designs should be tested on a panel of

๏ Test marketing: the final opportunity to get things right before a full-scale

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

3.2. Forecasting demand

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.

Demand forecasting is of two types:

๏ Demand for existing products

๏ Demand for new products

Forecasting the demand for existing products will rely on historical data adjusted for known
or expected changes in demand.

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The statistical methods include:

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

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

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.

There are four components of a time series:

๏ The trend – an underlying increase/decrease

๏ Seasonal variations – regular variations with a cycle length of less than a year.
๏ Cyclical variations – regular variations with a cycle length of more than a year
๏ Random variations – irregular and unpredictable.

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)



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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

๏ Customer surveys (market research)

๏ Asking the opinion of experts, such as marketing consultancies
๏ Test markets – make the product available in a few outlets and measure uptake there
๏ The Delphi technique. This is an iterative technique whereby experts give their opinions
which are then summarised and fed back to the experts who are encouraged to look
critically at the outcomes and where necessary to modify their opinions. This can go
through several cycles.

4. Layout and flow

4.1. Introduction

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

There are four main patterns.

๏ Fixed position layout

๏ Functional or process layout
๏ Product layout
๏ Cell layout

4.1. Fixed position layout

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

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.

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4.2. Functional or process layout

Layout that can handle varied processing requirements. Different products move to
processes as required.


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.

4.3. Product layout

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 layout can be linear or ‘U’ shaped.

Process 1 Process 2 Process 3 Process 4 Process 5

The U-shaped layout can be more compact and increases communication and team work.

Process 1 Process 2

Process 3

Process 5 Process 4

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A product layout has the following advantages:

๏ High volume
๏ Low unit cost
๏ Low labour skill needed
๏ Low material handling
๏ High efficiency and utilisation

๏ Simple routing and scheduling

๏ Simple to track and control


๏ Lacks flexibility
๏ Boring for labor
๏ Cannot accommodate partial shut downs/breakdowns

4.4. Cell layout

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:

Product 1 Process 1 Process 2 Process 5

Product 2 Process 2 Process 4

Product 3 Process 1 Process 3 Process 4

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:

๏ Increases the speed with which articles can be processed.

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๏ Increases precision.
๏ Can link to computer aided design (CAD) software so that designs can be quickly
๏ The machines can work for long hours without deterioration in performance (or the
need for overtime payments!)

5.2. Robots

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.

5.3. Automated guided vehicles (AGV)

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.

5.4. Flexible manufacturing systems (FMS)

A Flexible Manufacturing System is one that can be changed or adapted rapidly to

manufacture different products or components at different volumes of production.
Sometimes the production needed has been predicted, sometimes not.

Flexibility comes from two sources:

๏ 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.

Potential advantages from an FMS are:

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
๏ 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.

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๏ Ability to handle a variety of configurations of a part ie tailor made parts.

๏ Reduced labour costs. The number of employees needed to manage machines in FMS is
much lower than the conventional set-up.

Potential disadvantage is cost:

Cost. A widely-quoted case is that of Yamazaki Machinery Company in Japan. Which installed
an FMS system costing $18 million. The results were:

๏ Number of machines reduced from 68 to 18

๏ Manpower was brought down from 215 to 12
๏ Floor space from 103,000 square feet to 30,000 square feet

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%

5.5. Computer integrated manufacturing (CIM)

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:

๏ Engine size and type

๏ Body type
๏ Body colour
๏ Interior colour
๏ Level of trim and accessories
๏ Wheel styles
๏ Options for built-in GPS etc

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

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.

It is worth just mentioning here the new technique of additive manufacturing or 3d

printing. In this process the material is extruded to form complex shapes which harden to
produce sophisticated components that can be difficult or expensive to make in any other

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:

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๏ 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.

๏ Work measurement: application of techniques designed to measure the

time for a qualified worker to carry out defined task.

7. Capacity planning and control

Capacity planning is the process of measuring the amount of work that can be completed
within a given time and determining the necessary physical and human resources needed to
accomplish it.

Capacity is the maximum output achievable with a standard set of resources. For production
depends on:

๏ The number of machines and people available.

๏ How productive they are whilst working.
๏ How long they work for.

There are three approaches to controlling capacity to attempt to match it to demand:

๏ 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

The aims of inventory control are to:

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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:

๏ The sale might be lost

๏ Customers become irritated so that the company’s reputation and goodwill are
adversely affected.
๏ Customers might move to another supplier.

8.2. Reasons for holding inventory

๏ To service customers. In general if demand is fairly constant and predictable, less
inventory is needed. If demand is erratic, more will be needed to increase the chance of
being able to deal with periods of high demand.
๏ As a protection against the unreliable timing of supplies.
๏ As protection against the effect of poor quality items being received. If the latest
delivery has to be rejected, there will be some items in inventory to keep production
๏ To make use of bulk discounts. Buying a large quantity of supplies to win a bulk
discount from a supplier inevitably means that there will be substantial inventory.
๏ Seasonality of inventory production. For example, a jam manufacturer has to buy fruit
and make jam in certain seasons.
๏ To make use of favourable prices: stockpile if you think the price is low.
๏ Technical reasons. For example the Scottish Whisky industry has to keep its products
maturing for many years before sale.

8.3. The reorder level approach

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.

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8.4. The periodic review approach

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.

8.5. Just-in-time inventory (JIT)

This approach attempts to dispense with inventory.

In a conventional inventory system, materials are purchased in advance in anticipation of

production and sales. As explained earlier, this is known as a push system because inventory
is pushed into the system by manufacturing.

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.

For JIT to work well the following conditions are needed:

๏ 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.

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Chapter 10

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

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:

๏ inventory holding costs

๏ relatively slow throughput times
๏ possibly less flexibility to change production quickly because buffer inventories have to
be held for even longer.

2. Supply chain relational management (SRM)

SRM is concerned with the management of the supplier relationship. This:

“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”.

Within SRM there are several types of relationships observed.

These are often classified as

๏ Transactional
๏ Contractual
๏ Value Added
๏ Collaborative
๏ Partnership

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These are summarised below:

๏ A transactional relationship is based on the exchange of services or

products within an agreed timescale for an
agreed price. Some transactional relationships
are sustained over considerable periods of time,
and these demonstrate commitment. However
there is little trust between supplier and
customer. The relationship is essential

๏ 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
๏ 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.

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3. Materials resource planning (MRP)

A materials resource planning (MRP) information system is one which uses sales orders and
sales forecasts to schedule raw material orders, deliveries and quantities.

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


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.

4. Statistical process control

Statistical Process Control is a methodology for measuring and controlling quality during the
manufacturing process. Quality data (for example, measuring the sizes or weights of
components) are obtained in real-time during manufacturing. Sometimes all components will
be measured; sometimes only a sample. The data is then plotted on a graph that has pre-
determined control limits. Control limits are determined by the nature of the process and the
client's needs.

action needed
Upper control limit

Lower 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.

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5. Quality management
5.1. Definitions

Quality can be defined as: “Fitness for use” (Juran)


“ …the totality of characteristics…ability to satisfy customers’ stated or

implied needs..” (ISO 9000 handbook).

๏ 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

5.2. Costs associated with quality

Costs of conformance (i.e. of improving quality)

๏ Prevention costs
๏ Appraisal costs

Costs of non-conformance (i.e. of allowing poor quality)

๏ Internal failure costs

๏ External failure 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

Hence the claim that ‘quality is free’: better quality control at earlier point in the process will,
overall save costs.

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5.3. Total Quality Management (TQM)

TQM is defined as:

“The continuous improvement in quality, productivity and effectiveness obtained

by establishing management responsibility for processes as well as outputs. In this,
every process has an identified process owner and every person in an entity
operates within a process and contributes to its improvement”.

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

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

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5.4. Six sigma

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,

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

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.

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Chapter 11

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.

๏ The product-led approach

For this, imagine a company which was started by a couple of engineers, clever and
successful people, who are very interested in the technical qualities and the cleverness
of the products they produce. They get enormous satisfaction in well-engineered, clever
innovative products. Unfortunately, just because the product is well-engineered,
innovative and clever doesn’t mean that product will sell. No matter how much those
engineers appreciate the fine details of that product it may be a product that no one
wants, or a product which is too expensive.

๏ The sales-led approach.

This might sound okay, but what it means is that there is great emphasis on selling what
you have, even if customers don’t really want it. The sales-led company will have a very
high-powered sales team, skilled in the arts of persuasion and getting people to sign
contracts which they may later regret.

๏ The marketing-led approach.

This is quite different. What’s important about that is that it is very outward looking. It
looks to see:
• What will potential customers want?
• What do they appreciate?
• What amount of money do they think it’s worth paying for the product or service
we are providing?

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.

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2. The macro-environment (PESTEL)

How and what organisations market goods very much depends on the environment they are
in. The first way to look at the environment is to look at the macro-environment using PESTEL:
political, economic, social, technological, ecological/environment and legal). These factors
affect whole countries.

๏ Political factors: political factors such as a potential change of

government, enlargement (or reduction!) of the

European Union, the threat of war will affect buying
habits. For example, unrest in certain areas of the
world will reduce the number of holidays that can be
sold there and tour companies will have to market
different products.
๏ Economic factors: changes in, say sales tax (VAT) will affect expensive
items like cars more than cheap every-day items. If
sales tax increases car manufacturers might offer a
period where the selling price to the customer will be
held constant and the manufacturer absorbs the
๏ Social factors: these cover population changes, fashion, habits and
fads. For example, over the last 10 years or so, in the
UK more and more men grow beards. This has
affected sales of razors and firms like Gillette would
have to alter their marketing approach to try to
overcome the decrease in sales.
๏ Technology: the internet has made huge differences in how
products and companies are advertised, how
products are ordered and delivered, and the amount
of information that is known about customers.
๏ Ecology/environment: emphasising the ‘green’ credentials of products and
your company has become increasingly important in
generating favourable customer impressions.
๏ Legal: laws and regulations can affect how marketing can be
used. For example, in the UK advertising cigarettes is
almost impossible. Laws and regulations also affect
the products themselves, for example their safety.
Occasionally governments intervene to set prices.

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3. The competitive environment (Porter’s five forces)

This theory applies to whole industries such as the car industry, the newspaper industry and
so on. It looks at easy it is to make a good profit. The five forces are: competitors, customers,
suppliers, new entrants and substitutes. These can affect marketing as follows:

๏ Competitors: will affect the price you can charge and the features you have to
offer to compete. Advertising must emphasise superiority or

๏ 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.

Commonly it can be split up according to:

๏ 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.

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5. Market targeting
After investigating market segmentation, the next stage is market targeting, that is deciding
which segments of the market to attack.

๏ Undifferentiated market targeting

The first type of market targeting is known as undifferentiated market targeting. This
means that your research has shown that the market is effectively not segmented and

that one product will suit all potential buyers.

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

๏ Differentiated market targeting

By far the most common type of market targeting is known as differentiated market
targeting. Here the firm perceives that the market is segmented and designs a different
product or service to suit each segment of that market.

Market Segment 1

Products Market Segment 2

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

Product Market Segment 2

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

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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.

6. Product positioning (the 7Ps)

6.1. Introduction

‘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.

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6.2. Product

The first of the Four Ps is product, and this includes:

๏ The features of the product (what it does)

๏ Quality,
๏ Design,

๏ 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

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once you have bought that, the follow-on cost of maintaining and replenishing the supplies
is where the profit is going to be made.

6.4. Influences on prices

The prices that can be charged depend on:

๏ Costs

๏ Competitors
๏ Consumers
๏ Controls


Ultimately revenue must cover costs. Often cost plus pricing is carried out to give an
indication of the desired cost. For example:

Cost + desired mark-up = selling price

If the mark-up required is 30% then if an item costs $150 to make it will be sold for:

$150 + 30% = $195

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.


There are four competitive environments:

There are four main types of market, each giving rise to a particular type of competition:

๏ Perfect competition. Many small suppliers and customers none of which

can influence the market. There is free entry and exit
from the market and all supply identical products.
Here, suppliers must charge the market price. They
cannot charge more because, as the products are
identical, every customer would move to cheaper
suppliers; there is no point in reducing their prices
because all output can be sold at the market price. It
is worth noting that the Internet has tended to make
price and competition much more transparent and
that there are sites which specialise in comparing
suppliers’ prices.
๏ Oligopoly. A small number of suppliers supplying identical
products. An example is found in petrol companies. If
a supplier increases prices, the others simply have to
maintain theirs to gain market share. If a supplier
reduces prices, the others must follow suit to
maintain their market share. There is therefore little
incentive to reduce prices as competitors will follow.

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๏ Monopoly. One supplier of a product. The supplier can charge

whatever is wished, though demand is likely to vary
as a result. This is the great freedom a monopolist
has: choose the price to charge so that profits can be
maximised. Note that despite that statement, being a
monopolist does not guarantee that a profit is made.
You might be the sole suppliers of something no one

๏ Monopolistic competition. This is an almost self-contradictory term. It means

that there are a number of suppliers supplying similar
but not identical goods. Essentially, the products are
being differentiated in some way and therefore can
command different prices. Suppliers are competing,
but with different offerings.

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:

๏ Quality, brand and features of the goods

๏ Promotion activities
๏ Place (where the goods or services are obtained).

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.


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

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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

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.


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

There are four main types of 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

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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.

Personal selling is when a salesman or saleswomen, a sales representative in other words,

goes around spending time with customers or potential customers trying to persuade them
to buy. This is very important in business-to-business sales and, of course, it is economically
justified there because often the orders placed in business-to-business sales are quite large

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.

Promotion can be divided into two categories:

๏ 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.

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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.

7. Marketing by the public sector and not-for profit organisations

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

๏ 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.

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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

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.

Social interaction theory is therefore an economic theory explaining relationships in terms of

maximising benefits and minimising costs.

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.

A relationship between customer and supplier is maintained if profit is perceived in both

these two comparisons.

8.2. Equity Theory

Equity states that individuals as motivated to achieve fairness in relationships and to feel
dissatisfied with inequity (unfairness).

Maintenance of relationships occurs through balance and stability. Relationships where

individuals consistently put in more than they receive or receive more than they put in are
inequitable and exploitative, and this will lead to dissatisfaction and possibly the
abandonment of the relationship.

The recognition of inequity within a relationship presents a chance for a relationship to be

saved by making adjustments so that there is a return to equity. Relationships may oscillate
between periods of perceived balance and imbalance, with individuals being motivated to
return to a state of equity if they think that is feasible.

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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

Note that some Twitter campaigns have backfired on companies where consumers have

been disappointed or feel that the organisation is being unfair. Angry ‘tweets’ can be
‘retweeted’ and soon multiply potentially damaging a brand.

Social media can be used for guerrilla and viral marketing:

๏ Guerrilla marketing is designed to allow small businesses to promote their products or

services in an unconventional way with only a small budget. It involves focusing on
grabbing the attention of the public in a personal and memorable way. Some large
companies also use unconventional advertisement techniques
The main point of guerrilla marketing is that the activities are done exclusively in public
places, such as shopping centres, parks and streets. The hope is to attract a crowd which
in turn attracts other people who wonder what the fuss is about.
๏ Viral marketing is an approach which relies on information about a product being
spread by people, particularly if they post links on the internet (for example to
YouTube), send emails, post Facebook ‘Likes’ or tweet to their friends and followers.
Often the subject matter is an amusing picture or video featuring the product to
encourage propagation of the message. Hand held devices such as smart phones and
tablets are important in this marketing so that the volume of recipients and visitors to a
site grows quickly.
An example of Viral Marketing is the Cadbury Gorilla campaign. This was a 90 second
film sequence, aired in cinemas, TV and the Internet, of a gorilla passionately playing the
drums to Phil Collins’ 1981 hit “In the Air Tonight”. The sequence was uploaded the
YouTube shortly after its public release in August 2007, and received over 500,000 views
in its first week. Cadburys reported a 9% increase in sales on the year before and,

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Chapter 12
1. Marketing research

1.1. Introduction

Good marketing depends on good information, and this comes from marketing research.

Who are our customers? What do they want/need/appreciate/respond to?

Information is needed, not guess-work, on all of the marketing mix

There are three types of marketing research:

๏ Desk research
๏ Field research
๏ Test markets

1.2. Desk research

Desk research uses information that has already been collected. This approach is usually
relatively quick and cheap, but might not answer all your questions.

Sources of information are:

๏ Internal – accounting department

๏ Internal - data warehousing and data mining
๏ Government – national and local
๏ Market research consultancies

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

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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.

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.

1.3. Field research

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.

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1.4. Test markets

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

๏ 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.

2. Business to Consumer, Business to Business and Business to

Government marketing
The group to whom marketing efforts are addressed will affect the approaches taken. For

๏ Business to consumer (B2C):

Inexpert buyers so susceptible to promotional messages. Promotion often by TV,
newspapers and the Internet. Products are used domestically so often don’t need to be
as sturdy as products used in business. Styling will often be different so as to suit a
domestic environment. Small quantities bought, on-line or from retail outlets.

๏ 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

๏ 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

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3. The marketing of services and products compared

The nature of what is provided by service orientated businesses is often different to what
manufacturing businesses provide in the following respects:

๏ Heterogeneity: manufacturing often produces many identical units;

service industries often produce tailored products
eg an audit. Costing information and efficiency

measurement will be quite different. Pricing will be

very different as customer (or clients) will find it more
difficult to judge prices.
๏ Perishability: many services are perishable ie they lose their value
after a certain time. An example is airline seats: once
the aircraft departs the seats have no value. Again,
this presents interesting pricing challenges.
Performance will be improved by attracting each
extra passenger at the maximum marginal price, but
if everyone knows that prices will fall near the
departure date, passengers will be encouraged to
postpone booking until prices reduce.
๏ Intangibility: it is difficult to show potential customer what they
will get for their money. Auditing firms cannot show
clients an audit or audit file so how can potential
clients judge value for money?
๏ Simultaneity: in manufacturing, production and sale can be
separated. This allows products to be quality checked
before dispatch and allow flexibility in timing. For
example, production can be carried out steadily
throughout the year and inventory can be stored
until busy sales periods. Services cannot be stored
and are often instantly delivered. This places
additional demands on scheduling, pricing and
quality control information
๏ No transfer of ownership: Often services or the use of a service provider is for a
limited period of time. Pricing and demand
information has to reflect this. For example, the
pricing of hotel rooms will vary from week-days to
weekends. In addition because a service is being
provided for a limited period only, consumers are
likely to be very demanding during that period.

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,

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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

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

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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

Pastiche: a mix of styles, past and present.

The effect of the previous six characteristics leads to an acceptance of incongruous

phenomena typified by the anything goes’ syndrome. It welcomes and embraces diversity in
all areas.

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

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scandal associated with a brand (think of Volkswagen in 2015 with the diesel emission

9. Product life cycles

The product lifecycle is a well-known diagram which purports to show how the sales revenue
and net cash flows of a product change as it moves from the introductory phase through
growth to maturity and then decline. It is always shown as follows but not every product life

will follow this shape.


Introduction Growth Maturity Decline Senility

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:

๏ Introductory phase: if we know that a product is in the introductory phase we know

that we should want to watch sales very carefully to see
whether the product is likely to succeed or not.
๏ Growth phase: here, many competitors will start coming into the market,
encouraged by our success. We might therefore want to
keep advertising the product strongly so that we can stay
ahead of the field.
๏ Mature phase: at the mature phase there are likely to be many suppliers,
and buyers of this established product are likely to be well-
informed and demanding. Generally at this phase there is
price pressure and buyers demand more for their money as
they are more aware of the different features of the

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product. In extreme cases, there may be over-capacity in

the industry and this will cause very extreme price pressure
๏ Decline phase: businesses must be careful not to misinterpret a temporary
dip in the sales as the start of the decline phase. Relatively
cheap upgrades and facelifts can extend product life for a
few years and that is important because usually
development costs will have been already covered, as will

depreciation of machinery bought for the production of

that product. The additional years can be very profitable
despite the product being in decline. Decline phases can
last for very long times for some businesses and plenty of
money can still be made there. A strategic decision has to
be made as to whether or not to get out of the product
quickly or whether to be the last player remaining
standing, effectively becoming a monopoly player in a
declining market.

10. Boston Consulting Group Matrix (BCG)

The Boston Consulting Group Matrix is another very well-known analysis. Note that it is
sometimes known as a portfolio analysis and it really makes sense to use the BCG Matrix if
there is more than one product (or product line) in a company’s portfolio. The axes of the
matrix are relative market share and the market or industry growth rate.

Relative market share

Low High
Question mark/
problem child

Dog Cash cow


We’ll go through each quadrant in turn.

๏ 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

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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

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.

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Chapter 13
1. The importance of human resource management (HRM)

1.1. Introduction

Human resource management can be defined as:

“Human resource management is defined as a strategic and coherent approach to

the management of an organisation most valued assets the people working there
who individually and collectively contribute to the achievement of its
object.” (Armstrong)

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.

1.2. HRM difficulties

It’s worth noting the following particular difficulties with HRM:

๏ Changes in population, higher skill levels, a move from manufacturing to service

industries, more frequent job changes, and potential changes in the work-life balance.
All of these mean it is more difficult for an organisation to ensure that it has adequate
human resources to fulfil its strategic plans.
๏ An organisation’s human assets leave the premises each evening and there is no
guarantee that they will come back to that they won’t voluntarily relocate themselves
to a competitor. You do not get that sort of behaviour with computer equipment or
other assets!
๏ People are not machines and their performance varies depending on their mood and
on how they are managed and treated within an organisation.

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2. The HR cycle
2.1. Introduction

The whole human resources cycle is summarised in this diagram.


Selection: Performance
Planning Induction
• Advertising • Motivation Appraisal
• Shortlisting • Job design
• Interviewing
• Testing
• References
Rewards: fixed,

2.2. Planning stage

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

In essence, there has to be a budget:

๏ 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.

Current human resources:

Future human
adjust for leavers, retirees, Recruitment
resource needs
internal job changes

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.

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2.3. Selection

Selection covers a large number of steps:

๏ 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

๏ 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.

Sometimes employers use an assessment centre to provide an extended period of

interviews, tasks and assessment exercises. The process can last for several days. This method
of assessment is expensive and usually confined to candidates who will be expected to
progress quickly through management levels in the organisation.

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.

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3. Fair and legal employment practices

3.1. Termination of employment

Employment can be ended in three ways:

๏ Retirement
๏ Resignation

๏ Dismissal

There are three forms of dismissal:

๏ Termination by the employer (sacking)

๏ Ending a fixed term contract without renewal
๏ Constructive dismissal. This is where the employer’s behaviour entitles the employee to
presume he or she has been dismissed.

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:

๏ It is caused by redundancy (and selection of redundant employees is fair).

๏ Non-capability: the employee is incapable of doing the job despite training
๏ Legal restrictions: such as a driver losing his or her driving licence
๏ Misconduct: provided suitable warning have been given. Gross misconduct (eg hitting a
customer!) can be grounds for instant dismissal.
๏ Other substantial reasons: for example the sales director is married to the sales director
of a rival.

Dismissal is automatically unfair if it is because of:

๏ 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:

๏ Reinstatement to the original job

๏ Re-engagement to a similar job
๏ Damages.

Most often the remedy is damages because usually neither party wants to be associated with
the other after legal action.

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3.2. Equal opportunities

In the UK, the law provides for equal opportunities in the areas of:

๏ Sex discrimination
๏ Race
๏ Religion

๏ Sexual orientation
๏ Age
๏ Disability where there have to be equal opportunities and reasonable adjustments have
to be made to allow disables people to work.

In general there are three possible types of discrimination:

๏ Direct. For example, a job advert saying ‘Salesman required’ would be direct sex
๏ 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.

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Chapter 14
1. Appraisal

Employees’ performance must be monitored to identify and evaluate:

๏ Inadequate standards of work

๏ Where training or additional experience might be needed
๏ Where promotion might be in order (progression)
๏ To determine pay and bonuses

It is important that managers prepare properly for appraisal interviews by collecting

information about each employee’s performance and also looking at previous appraisal
records where the employee might have been told areas where improvement is needed.

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.

The appraisal approaches are sometimes described as:

๏ Tell. Your manager tells you how you have got on with little room for discussion or
๏ 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.

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J Lockett suggested six barriers of human performance appraisal. These are:

๏ Confrontation: angry disagreement and emotions block any useful communication

and the employee feels persecuted.
๏ Judgement: one-sided criticism by the manager with no employee input.
๏ Chat: too informal and doesn’t lead to conclusions or targets
๏ Bureaucracy: form-filling the appraisal form so that the manager can say that task is

done – but no other purpose.

๏ Event: a traditional, annual ceremony carried out every year with little thought about its
๏ Unfinished business: no proper to-do lists or follow up. Promises might have been
made in the meeting but they are then forgotten.

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

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.

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Competency frameworks serve several purposes which help organisations to improve and
develop their staff, products and services. They:

๏ Inform prospective recruits what is expected of them

๏ Inform staff of the sort of attitudes, behaviours and skills the organisation encourages
when carrying out their duties
๏ Inform staff of what they can expect from their managers

๏ 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
๏ 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

Competence definition: Evidence of employee

Skill description
Skill aims and objectives Date competency attained
Competency levels and their Trainer/assessor data
definition Assessment method

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3. Training and development

3.1. Introduction
๏ Training: very specific and dealing with current employees needs for their current job.
๏ Development: less specific and more aimed at equipping employees for future jobs.

3.2. Delivering training and development

Training and development can be delivered by:

๏ Formal, face-to-face courses, sometimes in-house and sometimes delivered by external

๏ Coaching, where a junior watches, accompanies and is helped by a more senior
employee whilst the junior is doing their job.
๏ Shadowing, whereby a trainees follows and observes a more senior person doing the
๏ Computer based training software.
๏ Self-study of manuals.
๏ Being sponsored by employers to undertake external qualifications, such as MBAs.

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:

๏ Establish analyse training and development needs for each person.

๏ Set training objectives eg what the person should be able to do afterwards that was not
possible before.
๏ Plan the training and arrange for trainees to have time in which to undertake the
๏ Deliver the training.
๏ Review the success of the training that has taken place and update training records.

3.3. Induction training

Induction training should be provided when the new employee joins.

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.

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3.4. Learning theories

There are two approaches to learning theory.

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

are doing. Only that we respond appropriately in certain circumstances.

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

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.

3.5. Honey and Mumford’s learning styles

Honey and Mumford categorised different learning styles as theorists, reflectors, activists, and

๏ A theorist likes to understand the theory before moving on to practice or practical

application. The theorist is likely to read an instruction book first before trying to work
the new computer.
๏ Reflectors observe what’s going on and carefully consider it. They like to work at their
own pace and tend to be a relatively non-participative and cautious learner.
๏ Activists are almost the reverse of theorists. If they had a new computer they would
switch it on and try and work it before ever thinking of looking at the user guide. They
are excited by pressure, by new projects. However they do tend to rush into things
without adequate preparation.
๏ Pragmatists are inspired to learn if they see a practical outcome: they will learn
something if they see it will help them make their job better or easier. They wouldn’t at
all be interested in learning for learning’s sake and they probably would find it quite
difficult if a theoretical approach was taken to instructing them.

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.

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3.6. Kolb – experiential learning

Kolb is associated with the idea of experiential learning- the idea that we go through a
number of cycles, gradually learning by our experience.


Try theory Reflect


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

A motivated employee is fired-up to try hard and to do better.

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.

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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

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:

๏ High intrinsic motivation, leading to high productivity

๏ High job performance (quality)
๏ High employee satisfaction
๏ Low absenteeism
๏ Low employee turnover

5.2. Job design in practice

The practice of deliberate improvement in a job’s characteristics is called ‘job design’ of which
there are three types:

๏ Job enlargement means allowing an employee to take on more tasks, but

still at the same level. So if you were working on a car
assembly line, instead of merely fitting the front wheels,
you are now asked to fit the front and rear wheels and the
bumpers (fenders). The job cycle time is increased (you
would spend longer on each car), there is some more
variety and therefore less boredom. Note however, that all
of these tasks are at the same level: basic, repetitive
assembly tasks.
๏ Job rotation moves employees round, perhaps on a daily basis, from
one simple task to another. So, one day the car worker
might be on wheels and bumpers, the next day the worker
might be fitting the front and rear windows. The third day
would be a different set of tasks. Again this introduces the

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employee to some additional skills (though all at the same

level) reduces boredom and is perhaps beginning to give
more insight into task identity: building a car.
๏ Job enrichment is a vertical change because it gives an employee some
responsibility, discretion and authority that would
previously been exercised by supervisors and managers. So
now the car worker might be expected to perform some
quality control checks as the car is being worked on, or

might be responsible for reporting production problems.

Not only does this increase task significance but it adds to
autonomy. Feedback can also become more

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.

Pay can be divided into three parts:

๏ Base pay: such as a monthly salary, or a rate per hour

๏ Performance pay: which relates to performance, such as a sales representative’s
๏ Indirect pay: which relates to benefits such as pension contributions and employee life

Performance pay can be:

๏ Performance-related pay: this links additional payments directly to the performance of

an individual or team.
๏ Incentive pay: offered before setting performance targets to encourage acceptance of
the targets or changes in work practice.
๏ Profit-related pay: where additional payments are made based on the organisation’s
๏ Share-based plan: where shares in the employer are given to employees. The hope is
that if employees own shares in their company they will want the company to do well.
๏ Merit pay: for exceptional past performance.
๏ Commission: a financial incentive typically based on sales performance.
๏ Team-based pay: rewards members of a team according to performance of the team.
This should encourage members of the team to cooperate and to be mutually

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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
๏ 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.

๏ Time-limited: targets should be achieved by a specific time.

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.

Therefore, careful management is needed. Often quoted approaches are:

๏ Be a coach not a boss.

๏ Tailor rewards to each individual.
๏ Keep staff informed about the bigger picture.
๏ Encourage knowledge-sharing.

8. Communication
8.1. Introduction

Communication within businesses is obviously important: in particular it’s required for

planning, coordination, and control.

Communication within the organisation can be:

๏ Vertical, such as between subordinate and superior.

๏ Horizontal, between the people of the same levels and different departments.
๏ Diagonal when a subordinate in one department has to report or give information to a
superior in another department.

And it can be formal or informal. Examples of informal communication would simply be

chatting around the coffee machine. An example of a formal communication would be
memorandum issued to all members of staff.

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8.2. Barriers to communication

It’s important to understand what can act as barriers to communication.

๏ 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

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

8.3. Principles of negotiation

Negotiation should be conducted as follows:

(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
(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

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