CAPE Management of Business Textbook

MANAGEMENT OF
BUSINESS
FOR CAPE® EXAMINATIONS
JEROME PITTERSON
CAPE is a registered trade mark of the

Caribbean Examinations Council (CXC®).
MANAGEMENT OF BUSINESS for CAPE®
EXAMINATIONS is an independent
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sponsored, or otherwise approved by CXC.
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3
Contents
List of figures and tables Protectionism 54

7
Other barriers to trade 55
Introduction 10
Multiple Choice Questions 56
UNIT 1 MANAGEMENT PRINCIPLES AND Extended Essay Questions 57
PROCESSES 11
MODULE 2 THE MANAGEMENT OF PEOPLE 58
MODULE 1 BUSINESS AND ITS ENVIRONMENT 12
5 The Functions and Theories of Management 58
1 Economic and Legal Structures 12 The need for and nature of organisations 58
Types of economic activity 12 The major management theories 58
Economic sectors and legal structures 14 The functions of management 64
The private sector 15 The roles of management 65
The public sector 23 Multiple Choice Questions 67
Privatisation 26 Extended Essay Questions 67
6 The Organisation and its Structure 68
Extended Essay Questions 28
Classification of organisations 68
2 Business Objectives 29 Factors influencing the classification of organisations 72
Nature, role and importance of objectives 29 Characteristics of the formal organisational structure 73
Business ethics and social responsibility 32 Centralisation and decentralisation 75
Obligations of the firm to stakeholders 34 Multiple Choice Questions 76
Good corporate governance 34 Extended Essay Questions 76
Importance of business ethics and integrity 34
7 The Theory and Application of Motivation 77
Code of ethics 34
Factors that stimulate and influence motivation 77
Government’s response to social irresponsibility 35
Theories of motivation 78
Financial and non-financial motivational strategies 80
Implications for managers 85
3 Decision Making 37 Multiple Choice Questions 87
Essential features of information 37 Extended Essay Questions 87
Significance of qualitative versus quantitative
8 Leadership 88
decision making 37
Leadership theories 88
The stages of decision making 38
Theory X and Theory Y 88
Factors affecting decision making 39
The Trait Theory 89
Leadership skills 90
Leadership styles 92
4 Caribbean Business Environment Factors influencing the choice of leadership style 94
and Globalisation 47 Leadership roles 95
The nature and structure of Caribbean Informal leadership 95
business organisations 47 Multiple Choice Questions 96
Caribbean business culture 48 Extended Essay Questions 97
The growth of multinational corporations
9 Team Management and Conflict 98
in the Caribbean 49
The nature of teams 98
The impact of trade liberalisation and globalisation 50
4 CONTENTS
Stages of team development 99 14 Accounting Information and

Types of formal group 99 Financial Statements 148
Characteristics of effective teams 99 Why do we need accounting records? 148
Team or group cohesiveness 100 Internal users of accounting information 148
Evaluation of team work 101 External users of accounting information 149
Benefits of team management to the organisation 101 Getting started with accounting 149
Conflict management 101 Components of financial statements 152
Multiple Choice Questions 106 Multiple Choice Questions 158
15 Financial Statements Analysis 159
10 Management of Change 107 Financial analysis 159
Factors that may cause change in the organisation 107 Importance of financial analysis 159
Differences between leading and managing change 108 Ratio analysis 159
Resistance to change 108 Types of ratio 160
Strategies for managing change 110 Multiple Choice Questions 166
The importance of communication in the Extended Essay Questions 166
management process 111
16 Budgetary Accounting 167
Projections 167
The budgeting process 167
11 Communication in Business 113 Categorisations of budgets 168
Types of communication 113 Operational budgets 168
The communication process 113 Types of budget 168
Channels of communication 114 Budgetary control 170
Factors influencing the choice of channel used 116 Multiple Choice Questions 172
Lines of communication 117
17 Investment Appraisal 173
Barriers to effective communication 119
Investment 173
Reducing barriers to communication 120
Investment appraisal 173
Analytical methods of appraisal 173
Limitations of investment appraisal 178
12 Human Resource Management 124 Comparison of methods of appraisal 178
The role and importance of human Multiple Choice Questions 179
resource management 124
END OF UNIT ASSESSMENT 180
The functions of human resource management 124
Labour–management relations 131 UNIT 2 APPLICATIONS IN MANAGEMENT 184
Laws affecting health and safety in the workplace 134
MODULE 1 PRODUCTION AND OPERATIONS
MANAGEMENT 185
18 The Nature of Production 185
MODULE 3 BUSINESS FINANCE AND
The production process 185
ACCOUNTING 137
Factors of production 185
13 The Need for Capital and Sources of Finance 137 What to produce? 186
The need for capital 137 Production methods 186
Sources of finance 140 Factors that influence the method of production used 190
Criteria for seeking finance 140 When to produce? 191
How to choose from these sources of funds? 143 Location of production 191
Money and capital markets and international Multiple Choice Questions 195
financial institutions 143 Extended Essay Questions 195
The money and capital markets 145
19 Forecasting Techniques 196
Forecasting techniques 196
CONTENTS 5
Qualitative forecasting techniques 196 25 Project Management 247

Quantitative forecasting techniques 199 Critical Path Analysis (CPA) 247
Multiple Choice Questions 202 Decision trees 250
Extended Essay Question 203 Multiple Choice Questions 253
20 Production Design Strategies and MODULE 2 FUNDAMENTALS OF MARKETING 254

Capacity Planning 204
26 The Concept of Marketing 254
Product design planning 204
The core marketing concepts 254
Product design strategies 204
Capacity planning 206
Extended Essay Question 260
Capacity utilisation 207
Options available to increase capacity 208 27 The Marketing Environment 261
Economies and diseconomies of scale 208 The micro-environment 261
Diseconomies of scale 210 The macro-environment 262
Business layout 210 Multiple Choice Questions 265
Multiple Choice Questions 215 Extended Essay Questions 265
28 Marketing Research 266
21 Costing 216 Importance of conducting marketing research 266
Direct costs 216 Importance of developing a research plan 266
Indirect costs 216 Stages of marketing research 266
Fixed costs 216 Limitations of market research 272
Variable costs 216 Multiple Choice Questions 274
Fixed costs per unit 217 Extended Essay Questions 275
Semi-variable cost 217
29 Principles of Segmentation 276
Approaches to costing 217
Market segmentation 276
Including stock 219
Criteria for effective segmentation 278
Application of marginal costing 220
Bases of segmentation 278
’Make or buy’ decisions 221
Consumer buying behaviour 281
The consumer decision-making process
(the buying process) 281
22 Inventory Management 224 Factors influencing buying behaviour 283
Importance of inventory 224 Multiple Choice Questions 284
Importance of inventory control 224 Extended Essay Questions 284
Inventory control management 225
30 Product Management 285
The concept of product 285
Dimensions of the product mix 286
23 Lean Production and Quality Management 230 Product line and extension 286
Importance of quality 230 The Boston Matrix 286
Dimensions of quality 230 New product development process 289
Techniques for improving quality 231 The product lifecycle 290
Multiple Choice Questions 239 Branding and packaging 292
Extended Essay Questions 240 Characteristics of services 293
24 Productivity 241
Factors that affect productivity 241
Methods of measuring productivity 243 31 Pricing Decision 298
Methods of improving productivity 243 Introduction to pricing 298
Multiple Choice Questions 246 Factors influencing pricing decisions 299
Extended Essay Questions 246 Pricing strategies 302
6 CONTENTS
Multiple Choice Questions 305 Selection of business types 345

Extended Essay Questions 306 Determining a location 345
Globalisation and trade liberalisation 345
32 Distribution Management 307
E-commerce 345
The role of distribution in the organisation 307
Intellectual property 346
Factors influencing distribution decisions 307
Types of distribution channel 308
Introduction to logistics strategy 309
Types of distribution strategy 310 38 Types and Nature of Assistance Available
Multiple Choice Questions 311 to Small Firms 349
Extended Essay Questions 311 Government agencies 349
Non-government agencies 350
33 Promotion Strategy 312
Financial institutions 350
The concept and objectives of promotion 312
Types of assistance offered to small businesses 351
Tools of promotion 312
Extended Essay Questions 319 39 Preparation of a Business Plan for
a Small Business 353
34 Internet Marketing 320
Feasibility study 353
Development of internet marketing 320
The business plan 353
Opportunities created by internet marketing 321
Elements of a business plan 354
Challenges associated with internet marketing 322
The importance of e-commerce to
business organisations 322
Challenges created by e-commerce 323 END OF UNIT ASSESSMENT 360
40 Internal Assessment 364
Choosing an appropriate topic or title for
MODULE 3 SMALL BUSINESS MANAGEMENT 326 your research 364
Introduction 365
35 The Nature and Characteristics
Literature review 366
of Entrepreneurship 326
Writing your methodology 367
Corporate entrepreneurship (‘intrapreneurship’) 326
Presentation of data 368
Social entrepreneurship 326
Analysis of data 369
Characteristics of successful entrepreneurs 327
Interpretation of results 370
Benefits of entrepreneurship 328
Conclusion and recommendation 370
Drawbacks of entrepreneurship 329
References and citations 370
Appendices 370
Note to teachers 370
36 Economic Systems and Business Growth 331
Glossary 372
The economy problem 331
Types of economic system 331 Answers to Multiple Choice Questions 384
Criteria for measuring size and growth of businesses 334
Index 386
A comparison of small firms and large firms 335
Strategies for growth 338
37 Major Challenges and Opportunities Faced

by Small Businesses 344
Identifying successful business opportunities 344
Sourcing capital (finance) 344
7
List of figures and tables
Figures Figure 17.1 NPV graph 178

Figure 1.1 An example of industry in the Figure 18.1 The production process 185
primary sector 12 Figure 18.2 An example of job production 186
Figure 1.2 An example of industry in the Figure 18.3 An example of batch production 187
secondary sector 13 Figure 18.4 An example of flow production 189
Figure 1.3 An example of industry in the
tertiary sector 14 Figure 19.1 Examples of common trends 199
Figure 1.4 Private-sector organisations 15 Figure 19.2 A scatter diagram 201
Figure 1.5 A sole-trader business 16 Figure 20.1 Diseconomies of scale 210
Figure 1.6 A public limited company 19 Figure 20.2 Process layout 211
Figure 1.7 A cooperative business 20 Figure 20.3 Product layout 212
Figure 1.8 A franchise 21 Figure 20.4 Fixed-position layout 213
Figure 1.9 Public-sector organisations 24 Figure 20.5 Cellular layout 214
Figure 2.1 The hierarchy of objectives 31 Figure 21.1 Fixed costs 217
Figure 2.2 Scotiabank 33 Figure 21.2 Variable costs 217
Figure 3.1 The stages of decision making 38 Figure 21.3 Fixed costs per unit 217
Figure 21.4 Semi-variable costs 217
Figure 4.1 Business culture factors 48 Figure 21.5 A breakeven chart 221
Figure 4.2 Digicel headquarters, Kingston 51
Figure 22.1 Stock control levels 225
Figure 5.1 A basic system 62 Figure 22.2 Simpson Lumber Yard stock control
Figure 5.2 The three levels of management 64 graph 226
Figure 6.1 Functional organisational structure 68 Figure 22.3 A typical economic order quantity graph 227
Figure 6.2 Product organisational structure 69 Figure 22.4 Economic order quantity graph
Figure 6.3 Geographical organisational structure 69 for Questions 6–8 228
Figure 6.4 Matrix organisational structure 70 Figure 25.1 The sections of a node 247
Figure 6.5 Team organisational structure 71 Figure 25.2 Lines representing activity 247
Figure 6.6 Network organisational structure 71 Figure 25.3 Network diagram 248
Figure 6.7 Virtual organisational structure 71 Figure 25.4 New network diagram 248
Figure 6.8 Narrow span of control 73 Figure 25.5 Three possible situations in CPA 249
Figure 6.9 Wide span of control 74 Figure 25.6 New diagram, using dummy activity 249
Figure 7.1 Maslow’s Hierarchy of Needs 78 Figure 25.7 Network diagram 249
Figure 25.8 A decision tree 250
Figure 10.1 Managing change 110 Figure 25.9 The revised decision tree 251
Figure 11.1 The communication process 113 Figure 25.10 A more complex decision tree 252
Figure 11.2 The flow of communication 118 Figure 25.11 Network diagram for Questions 1–3 253
Figure 12.1 The recruitment plan 125 Figure 26.1 Core marketing concepts 254
Figure 14.1 The double entry system 150 Figure 28.1 Stages in developing a research plan 267
Figure 16.1 The budgetary process 168 Figure 29.1 Market coverage strategies 277
Figure 29.2 The consumer decision-making process 282
8 LIST OF FIGURES AND TABLES
Figure 30.1 The Four Ps 285 Tables

Figure 30.2 Attributes of the product 285 Table 1.1 Benefits and problems associated
Figure 30.3 Dimensions of the product mix 286 with a change in legal structure 23
Figure 30.4 The Boston Matrix 287
Figure 30.5 New product development process 289 Table 2.1 The firm’s social responsibilities
Figure 30.6 The four-stage product lifecycle 290 to stakeholders 34
Figure 30.7 The five-stage product lifecycle 291 Table 3.1 The decision-making process 39
Figure 30.8 Extending the product lifecycle 291 Table 3.2 Possible impact of factors on a firm’s
Figure 30.9 Secondary packaging 293 decision making 44
Figure 31.1 Price ceiling 301 Table 5.1 Contributions of classical theories to
Figure 31.2 Price flooring 301 modern organisations 61
Figure 31.3 Penetration pricing and price Table 5.2 Contributions of modern theories
skimming compared 304 to modern organisations 63
Figure 32.1 Types of distribution channel 308 Table 5.3 Mintzberg’s ten roles for top management 65
Figure 32.2 One-channel intermediary 309 Table 8.1 An evaluation of different leadership styles 93
Figure 32.3 Two-channel intermediary 309
Table 9.1 An evaluation of conflict
Figure 36.1 Market share illustrated in a pie chart 335 management strategies 104
Figure 36.2 Diseconomies of scale 337
Figure 36.3 An example of conglomerate integration 339 Table 11.1 An evaluation of communication methods 117
Table 11.2 Methods of overcoming barriers
Figure 40.1 Examples of statistical tools 369 to communication 121
Table 13.1 Advantages and disadvantages of

sources of capital 141
Table 14.1 Transactions illustrating the double

entry system 151
Table 14.2 Cash inflows and outflows 156
Table 15.1 Net profit figures for analysis 159

Table 15.2 Data for calculating investment
or shareholders’ ratios 162
Table 15.3 Data for calculating efficiency and
activity ratios 163
Table 17.1 KEP Industry initial capital outlays

and annual cash inflows 174
Table 17.2 initial capital outlays and annual
cash inflows for three projects 174
Table 17.3 Initial capital outlays and annual
cash inflows for two projects 175
Table 17.4 Forecasted data for Projects A and B 175
Table 17.5 An extract of discount factors for $1 176
Table 17.6 Investment information for
DGF Company Ltd 177
Table 17.7 Information for NPV/DCF analysis 177
Table 17.8 Comparison of methods of appraisal 178
LIST OF FIGURES AND TABLES 9
Table 19.1 Data for calculating simple

moving averages 200
Table 19.2 Data for Future Sales Ltd sales forecasts 200
Table 19.3 Data for least squares
regression calculation 201
Table 19.4 Data for Questions 5 and 6 203
Table 21.1 Calculating operating profit under

marginal costing 218
Table 21.2 Calculating operating profit under
absorption costing 218
Table 21.3 Production costs for Great Juices Ltd 222
Table 25.1 Getting ready for school 248

Table 25.2 Getting ready for school (revised timings) 248
Table 25.3 Information for critical path exercise 249
Table 25.4 Information for critical path example 249
Table 25.5 Activities by A Fisher Ltd 250
Table 25.6 Expected values 251
Table 25.7 Data from James Duncan’s
market research 252
Table 26.1 Overview of business concepts 259
Table 28.1 An evaluation of marketing

research techniques 272
Table 30.1 Possible responses from marketers

to characteristics of services 295
Table 31.1 Information for calculating price

elasticity of demand 299
Table 31.2 Degrees of elasticity 300
Table 33.1 Overview of types of advertising media 314
Table 36.1 The impact of economic systems

on business decision making 333
Table 40.1 Module content related to SBA topics 365

10
Introduction
This textbook is geared towards students studying CAPE®

Management of Business Units 1 and 2, including private
candidates. The text is divided into two units and gives
comprehensive coverage of the CAPE® Management of
Business syllabus, providing students with a wide knowledge
base of business concepts. Students will be furnished with
the information needed to do well in their CAPE®
examinations and the book forms a basis for higher studies.
The text also incorporates some ‘hard to find and explain’
concepts and so it is also an excellent resource for teachers.
The text breaks down accounting information so that

students without accounting knowledge from CSEC® level
will be able to understand the concepts of Module 3, Unit 1.
However, it also offers challenging exercises for those with a
strong accounting background.
The book gives a number of definitions, examples from

different territories and practice exercises to assess students’
understanding of the concepts. Each chapter is summarised
at the end and also incorporates multiple choice questions,
case studies which help students to think critically, and
extended essay-type questions.
The text also contains photographs, artwork and diagrams

to cater for visual learners, as well as worked examples of
accounting questions and tables to break down information
for ease of understanding, studying and remembering.
11
Unit 1
MANAGEMENT PRINCIPLES
AND PROCESSES
12
Module 1 Business and its Environment
1 Economic and Legal Structures
Primary sector
LEARNING OBJECTIVES: The primary sector incorporates all the extractive industries,
At the end of this chapter students should be able to: including mining (for example, bauxite), fishing, forestry
Identify the different types of business activity and farming. In most cases, the products of the primary
Distinguish among the different types of business sector are the raw materials that are used for secondary
activity production. For example, bauxite is used for manufacturing
Distinguish between the private and public sectors aluminium and lumber is used in the building of furniture
Describe the different private- and public-sector and houses. The primary sector also includes the fishing and
businesses
agricultural industries.
Outline how each of the businesses is formed
Some Caribbean countries are heavily dependent on the
Discuss the benefits and drawbacks of each type of
primary level of activity in order to earn foreign exchange.
business
Currently, some countries export large amounts of our raw
Identify examples of each type of business
materials in their natural state instead of exploring the
products that could be produced by using those same
resources. This means that the secondary level of activity is
Types of economic activity perhaps not explored as much as it could be. Dependence on
T
he Caribbean business environment can be divided the primary sector presents the country with the following
into three types of economic or business activity. advantages and disadvantages:
These are discussed below.
Figure 1.1: An example of industry in the primary sector

CHAPTER 1 | ECONOMIC AND LEGAL STRUCTURES 13
Advantages of reliance on the primary sector construction industries. Examples of secondary business
The country is able to supply raw materials to firms for activities include the manufacture of chemicals and of baked
conversion products, and the construction of houses, roadways and
The country can gain a comparative advantage over bridges. The Caribbean has a number of businesses that take
others in producing certain goods the raw materials produced in the region and convert them
Creation of jobs to finished products – for example, Trinidad Cement Ltd and
Generation of export revenues. Grace Kennedy Jamaica.
While the trading of primary products is important,
Disadvantages of reliance on the primary sector secondary sector products are usually in higher demand. A
Depletion of natural resources, especially because of dynamic manufacturing firm can take one primary product
exploitation and create a number of secondary products which will
Potential to earn more revenue if raw materials were to generate greater revenues for itself. For example, a firm
be converted into finished products could use bananas to make banana chips, banana milk
A decrease in the demand for finished products will shakes, banana bread, banana-flavoured soft drinks, banana
decrease the demand for primary products and so porridge mix and banana fritters. The struggle for some
reduce revenue. Caribbean countries is that they are not able to make the
best use of their primary products by converting them into
Secondary sector secondary products. Involvement in secondary production
The secondary sector involves the changing of raw materials offers the following benefits and disadvantages:
into finished goods. It incorporates the manufacturing and
Advantages of involvement in the secondary sector
Reduction in the importation of goods that are produced
using the same raw materials from the Caribbean
Earn foreign exchange from the products that are
exported
One primary product can be used to create a number of
secondary products
Creation of jobs in different areas other than the
extractive industry
Possible increase in investment in the manufacturing
sector
Improvement in the country’s Gross Domestic Product
and so possibly its standard of living.
Disadvantages of involvement in the secondary sector

The profit motive of manufacturing firms could lead to
depletion of some primary products
A number of manufacturing companies are often
multinationals which repatriate their profits instead of
reinvesting in the host country
Some of the raw materials used in the secondary
sector have to be imported and this uses up the foreign
exchange earnings of the country.
Tertiary sector
The tertiary sector does not produce goods, but instead
provides services. Over the last decade the Caribbean
business environment has become more service oriented.
Some of these services include tourism, financial services,
Figure 1.2: An example of industry in the secondary sector transportation and management services. In recent
14 MODULE 1 | UNIT 1 | BUSINESS AND ITS ENVIRONMENT
Figure 1.3: An example of industry in the tertiary sector
times, the tertiary sector has become one of the main Services such as tourism can impact on a country’s
contributors to Caribbean countries’ Gross Domestic culture and values and may even lead to a change in
Product, with tourism being the most popular. We have people’s social behaviour.
seen improvements in the banking sector, transportation,
insurance, telecommunications, courier services and money
services, among others. Economic sectors and legal structures
The tertiary sector offers the following benefits and The big economic problem lies in the fact that the resources
disadvantages to Caribbean countries: of this world, though plentiful, are not sufficient to meet
humans’ unlimited wants. This condition is known as scarcity
Advantages of involvement in the tertiary sector and, as a result, businesses, government and households
Generates foreign exchange, especially from tourism have to make choices. The three main economic questions
Creation of jobs, especially because the sector is mostly that are usually asked in any economy are:
labour intensive What to produce?
The sector does not depend heavily on primary products How to produce?
and so would not deplete the countries’ natural For whom to produce?
resources Governments and firms must make the necessary
As mentioned, the sector contributes to the Gross decision on each question. In order to make these decisions,
Domestic Product of countries different business organisations have been created. Each
Less pollution generated when compared with the organisation may react in different ways to these questions.
primary and secondary sectors. The organisations can be classified into private-sector and
public-sector organisations.
Disadvantages of involvement in the tertiary sector Each of these organisations within the private or public
Services as a whole are very volatile and so may not be sector carries a particular legal structure. It is the legal
sustainable structure that determines the following:
It may require high training costs to ensure that the How profits or losses are shared
service being offered is the same regardless of location The firm’s tax obligation
CASE STUDY
Switching the economic focus

Isle J is a territory in the Caribbean region that has a rich history and cultural background. Once colonised by different devel-
oped countries, its main focus was on producing agricultural products. Its rich and fertile lands allowed crops such as bananas
and sugar to flourish for a number of years. As the population grew, farmers diversified their cultivation and are now producing
a number of agricultural products.
As the isle developed, the number of investors also increased and Isle J started to experience a growth in manufacturing
industry. A number of different manufacturing companies were established. This included companies that converted agricultural
products, such as cocoa beans, coffee, oranges and bananas, into finished goods. With the proliferation of investments both
locally and abroad, the mining sector also came to the fore, with the main products being bauxite, gypsum and limestone.
Since the latter part of the 20th century there has been an evident change in the country’s economic focus. While the previ-
ously mentioned economic activities are still present, greater focus is now being placed on the service industry. Some of the
main services being offered in Isle J include tourism, banking, insurance, transportation and telecommunications. This trend in
the service industry has dampened the once vibrant manufacturing sector to some extent. However, a number of manufacturers
have been pressing on with production.
Questions
1. With the use of examples, name the types of economic activities that take place in Isle J. (6 marks)
2. Describe three (3) benefits that Isle J could derive from its dependence on the primary sector. (6 marks)
3. A noted economist in Isle J has stated that ‘The tertiary sector is the way forward in the 21st century for the
country’. Discuss your view of this statement, stating whether such a decision would benefit or cost Isle J. (13 marks)
Total 25 marks
Ease of formation partnership. At the same time, a sole proprietorship business

Funding may not be suitable for a very large multinational firm
Who bears the legal liabilities because of its size and the geographical area it decides to
Continuity of existence. span.
Choosing the most appropriate legal structure for a
business depends heavily on the aim of the business owner.
For example, a person who wants to start a business and The private sector
keep full control will start a sole proprietorship, while The private sector consists of businesses that are owned
another person who wants financial support for start-up by individuals or groups of individuals with the main aim of
from a number of people is likely to start a company or a making profits. These businesses differ in size and structure
Private-sector
organisations
Sole Limited Joint

Partnership Franchising Cooperative
proprietor companies ventures
Producer/
Figure 1.4: Private-sector organisations Private Public Financial Retail worker
and range from sole proprietorship to large companies. Main features of a sole-trader business
The following are the different types of private-sector Simplicity of formation
organisations. The owner is in control of the business
Requires little start-up capital
Sole trader or proprietor The owner and the business are one (they are the same
This is the oldest and probably the most common form of legal entity)
business organisation. It ranges from the street-side vendor Lack of continuity.
to large businesses, for example a doctor’s private practice. The sole trader raises finance from different sources,
A sole trader refers to a business owned and operated by however, these options may be limited. A person wanting
one individual. This person manages the business, makes to start a sole-trader business may opt to use his/her own
all the decisions and enjoys all the profits or bears all the personal savings, obtain bank loans or borrow from family
losses. While there is only one owner, he/she may employ and friends. The sole trader may also find that it is difficult to
other people to carry out different functions for which those acquire a loan from lending institutions because of the risks
people would be paid. involved or the lack of collateral available. In some cases,
A sole trader is the simplest business to form as there even when such a loan is granted, it comes with very high
are few or no legal requirements. The business is generally interest rates.
unregistered. However, in Jamaica and other Caribbean
countries the sole trader is required to register the business Advantages of a sole-trader business
or trading name. In addition, depending on the product It is easy to form, as there are few or no legal
being traded, the sole trader may be required to apply for requirements
different licences. For example, a person running a bar or Decisions can be made quickly
pub is required to obtain a spirit licence; likewise, someone The owner enjoys all the profits
selling food must obtain a food handler’s permit.
Figure 1.5: A sole-trader business

With the exception of tax returns, business affairs are A limited partner shall not take part in the management
private of the partnership business, and shall not have power to
Can be most suitable where capital is scarce. bind the firm.
Sometimes a partner may invest capital in the business
Disadvantages of a sole-trader business but does not want to take any active part in how it is run.
The owner has unlimited liability, i.e. he/she stands to Such a partner is referred to as a ‘sleeping partner’.
lose personal assets if the business fails
Difficulty in sourcing finance Main features of partnership
The business dies with the owner, hence there is a lack Unlimited liability on partners (except for a limited
of continuity partner)
It may be difficult to achieve economies of scale Two or more members
There may be great demand on the owner’s time and Profits/losses are shared
attention. Few legal requirements
No separation between business and partners.
Partnership Partnerships are prevalent in, but not limited to,
A partnership is defined as a business where two to twenty accounting and law firms throughout the Caribbean. These
people work together towards a common goal of making include Price-Waterhouse-Coopers, Deloitte & Touche,
profits. The partners are often the main source of finance George Walton Payne & Co, and Fitzwilliam Stone, Furness-
even though the business can source funding from financial Smith & Morgan.
institutions. Like sole proprietorship, a partnership is not
required to be registered. However, it is required to register Advantages of partnerships
its trading name. They are easy to form, as there are few or no legal
The partnership is governed by the agreement that was requirements
drafted at its outset, known as a partnership deed. This is a Each partner contributes to the capital of the business
legal document which amounts to a binding contract among
Responsibilities may be shared among the partners
the partners. The document stipulates how profits or losses
It allows for division of labour, as partners may have
should be shared; the rights of each partner; rules for taking
specialised skills
in new partners or dissolution of the partnership; and the
There is privacy of affairs, as it is not compulsory to
capital to be contributed by each partner, among other
publish the partnership’s accounts.
things. While preparing a partnership deed is advisable, it
is not required by law and so some partnerships do exist
Disadvantages of partnerships
without one. In such case, the partnership is governed by
the Partnership Acts of 1890 and 1907. The Partnership Act Partners have unlimited liability, except for a limited
1890 stipulates that: partner
Profits and losses should be shared equally Decision making may be tedious and slow
Each partner may take part in the management of the There might be conflict among partners
business There is a lack of continuity – that is, once a partner
No partner should receive a salary for working in the leaves the partnership it has to be dissolved.
business The problem of limited liability may have led to the
No partner is entitled to any interest on his/her capital. enactment of the Limited Liability Partnership Act 2000.
While the Partnership Act 1907 did not disturb the rules This Act states that a partnership may be formed where all
set down in the previous Act, it added the new concept of a of its partners have limited liability. According to the Act:
limited partnership. This Act stipulated the following: A limited liability partnership is a body corporate (with
A limited partnership shall not consist of more than legal personality separate from that of its members)
twenty people, and must consist of one or more people, which is formed by being incorporated under this Act
called ‘general partners’, who shall be liable for all debts … The members of a limited liability partnership have
and obligations of the firm, and one or more people to such liability to contribute to its assets in the event of its
be called ‘limited partners’ being wound up as is provided for by virtue of this Act.
A limited partner shall not, during the continuance of The partnership must submit the required documents
the partnership, either directly or indirectly, draw out or to the Registrar of Companies, who will regulate the
receive any part of his contribution partnership.
upon purchase. The number of shares will determine the

ACTIVITY level of control of each shareholder. Shareholders may not
1. Identify five (5) firms within your country that are necessarily be the managers of the company, but at an annual
partnerships. general meeting (AGM) may vote for directors to carry out
2. What are three (3) benefits of organising a business that role. These directors sit on a board which is headed
as a partnership rather than a sole trader? by a chairperson. The board of directors is accountable to
the shareholders and may be dismissed or voted out if its
performance is below par. The company also has a secretary,
Limited companies who is entrusted with the responsibility of maintaining
This is a business unit that is regarded by law as an artificial a register of shareholders, notifying them of AGMs and
person, distinct and separate from its members, i.e. its preparing the company’s annual reports.
owners. There are certain legal requirements that must be
Types of company
met before a company is incorporated and starts trading.
These are stipulated in a Companies Act. Two documents There are two main types of company: private limited
must be drawn up: a memorandum of association and articles companies and public limited companies.
of association. In Jamaica, under the Companies Act 2004,
Private limited companies
the articles of incorporation include these two documents.
The Act also stipulates that ‘One or more people may form a This is an incorporated business venture which is separate
company by signing and sending articles of incorporation to and distinct from its owners. Such a company is usually
the Registrar’. In some other countries, however, individuals small in size and family owned. Its membership is limited to
who want to form a company must submit both documents 50 individuals and its shares cannot be sold publicly – that
to the Companies Office. is, on the stock exchange. Some well-known private limited
The memorandum of association should outline: companies in CARICOM include Digicel Group Ltd, Sugar
The name of the company, including the abbreviation Company of Jamaica Ltd, Barbados Shipping & Trading
‘Ltd’ or ‘plc’ Co Ltd, ADM Import & Export Distributors Ltd, Columbus
The address of the registered office of the company Communication Ltd and Advantage General Insurance Co
The objects of the company and the scope of its Ltd.
operations
Details of the company’s capital, i.e. both authorised and Main features of private limited companies
issued share capital. Usually small and owned by family members or friends
This list is not exhaustive, as other clauses may be included, The name of the company must be registered
depending on the type of company. Shares cannot be traded on the stock exchange
The articles of association outline the internal running of Shareholders cannot sell their shares without the
the company and should include: agreement of the other shareholders
The number of directors, the procedures for their Limited liability
appointment and their powers Involve two to fifty people.
The rights of the shareholders
Procedures for meetings Advantages of private limited companies
Tenure of the directors before re-election Each shareholder has limited liability
The process for transferring shares. Continuity of existence
Having submitted the above documents and having There is greater capital potential, as shares can be sold to
satisfied the requirements of the Companies Office, the family members
company will be issued with a certificate of incorporation. Lower possibility of loss of control to outsiders
This certificate gives the company the right to trade. The company has a legal identity separate from that of
its owners.
Finance and management
A company’s main source of funding is from the shares that Disadvantages of private limited companies
it issues (equity capital). However, the company may also Raising of capital may be hampered since shares cannot
be financed by debt capital (loans). The shares are issued be traded publicly
to shareholders who become the owners of the company Profits have to be shared among a larger group of people
A copy of the audited financial statement must be Shares can be bought and sold on the stock exchange
submitted to the Companies Office (so a lesser degree of This type of company usually indicates its status by
privacy than for partnerships and sole traders) including ‘plc’ in its name
Transfer of shares is limited by the approval of existing Must disclose their accounts at the end of the financial
members period.
Legal requirements may be time consuming and costly
to implement. Main features of public limited companies
Must be registered with the Companies Office
Public limited companies Separate legal identity from that of its owners
This type of limited company is usually larger than a Can raise capital through the sale of shares to the public
private limited company. The abbreviation ‘plc’ is usually Managed by a board of directors elected by shareholders
found at the end of its name. Public companies may be Limited liability for its owners.
listed on a country’s stock exchange, where they can raise Some companies are incorporated as private limited
capital. In addition, the company may advertise its shares companies but later choose to go public as they expand.
to prospective investors in a document called a prospectus. Private companies may go public for the following reasons:
Some well-known public limited companies in CARICOM To raise more capital so as to facilitate expansion
include Grace Kennedy, Cable and Wireless and Trinidad To offer shareholders greater liquidity, as shares can be
Cement Ltd. transferred on the stock market
Like private companies, public limited companies must To gain prestige or status.
be registered with the Companies Office and issued with
a certificate of incorporation indicating that trading can Advantages of public limited companies
begin. Public limited companies differ from private limited Shareholders have limited liability – each shareholder
companies in the following ways: is only liable to the amount he/she has invested in the
Shares can be advertised to the general public in order business
to raise capital Continuity of existence
Figure 1.6: A public limited company: the headquarters of telecoms company Cable and Wireless, Barbados
Easier to raise capital on a large scale Is there a difference between a holding company and a
Freedom to transfer shares via the stock exchange conglomerate?
Better credit rating, therefore it is easier to secure loans Essentially there is very little difference between these. A
Benefits from economies of scale due to size and lower holding company is not usually involved in the day-to-day
production costs. operations of the companies it controls (which are called
subsidiaries). Each subsidiary also retains legal separation
Disadvantages of public limited companies but is controlled by the holding company. It must be pointed
Many legal requirements which may be costly and time out that a holding company can become a conglomerate if
consuming to implement it expands and takes over a controlling interest in unrelated
There is a risk of takeover bids, as shares can easily be firms – that is, businesses with which it has nothing in
purchased on the stock exchange common. As a result, the company would have a diversified
Published accounts can be viewed by the public, range of business activities, which helps to minimise the risk
including competitors of failing completely if just one of its markets fails.
Can become large, impersonal and difficult to manage.
Some public limited companies also own other Associate companies
companies. This can be in the form of holding companies, An associate company is one that controls between 20 and
conglomerates and associate companies. 50 per cent of the shares in another company.
Holding companies Cooperatives

Public limited companies can also act as holding companies. A cooperative is a form of business that consists of a group
A holding company is one that purchases enough shares of people who have come together to perform a business
of other companies so that it can control the decisions that venture that is more efficient being done collectively
are made by the board of directors and the policies that are rather than individually. This form of business is common
implemented. For the most part, the holding company is throughout the Caribbean and there are several types, four
formed to take over controlling interest in other companies. of which will be discussed later in this section.
Having controlling interest in more than one company can This form of business is expected to be registered with a
minimise the risk of failure for the holding company. These Registrar of Cooperative Societies. It is owned and controlled
companies can also benefit from economies of scale brought by its members, who exercise their control by using their
about by large-scale production and increased size. votes at annual general meetings. The business is financed
Conglomerates
Some companies expand
over time and take over or
purchase controlling interests
in other unrelated companies.
By doing so, a conglomerate
uses this opportunity to
produce different products
and cater to different markets.
One such company in the
Caribbean is Grace Kennedy
Group Ltd, which consists of
a bank, a foreign exchange
business, a hardware business,
manufacturing businesses and
a supermarket, among others.
Figure 1.7: A cooperative business:

a credit union, Belize
by the members who purchase shares. The cooperative may by its members – that is, those people with accounts at the
also seek funding from banks and other lending institutions. credit union.
Main features of cooperatives Advantages of cooperatives

Democratic organisations – each member has a say Members have limited liability
Profits are distributed to their members equitably Profit is shared among members
Each member has one vote Members have equal say in the operation of the
Membership of a cooperative is voluntary. business
Economies of scale
Types of cooperatives Opportunity to earn interest on investment.
Consumer cooperative
This type of cooperative is owned by its customers, who Disadvantages of cooperatives
receive mutual benefits. It is organised to provide each Profits may be minimal or even non-existent
member with items that are needed – at reduced prices. Each There is a possibility of conflict among members
member contributes funds to purchase the items in bulk. Longer decision-making process
The items are then sold at a reduced price to the members. Capital deficiency may impede growth.
Producer cooperative Franchises

These are usually found in the agriculture sector. Farmers A franchise is a system whereby an already established and
may be assisted in areas of production, purchasing and successful business (the franchisor) enters into a contractual
marketing. The members come together and share marketing arrangement with semi-independent business owners (the
and production facilities for the benefit of all. This move will franchisee) to operate under the franchisor’s trade name.
allow them to benefit from economies of scale through bulk The franchisee may also be given permission to sell the
buying of supplies such as fertilisers, which in turn lowers franchisor’s products and use its business format and system.
their production costs. This privilege is often granted in exchange for a fee and
royalties being paid to the franchisor. There are a number
Workers’ cooperative of franchise businesses in CARICOM, including Kentucky
A workers’ cooperative is owned, controlled and operated Fried Chicken, Burger King, Subway and McDonald’s. The
by its members. The cooperative provides its members
with employment and they are able to influence the
Figure 1.8: A franchise
operation of the business. Each
member contributes through
the purchasing of shares and
also benefits from a share of the
profits.
Financial cooperative
Like any type of cooperative,
this is also controlled and
operated by its members.
The main aim of financial
cooperatives is to provide its
members with different financial
services at competitive rates.
These services may include
banking, investment and even
insurance. The most popular
form of financial cooperative is
a credit union. A credit union’s
resources can be accessed only
franchise arrangement may take different forms, including Fostering expansion by utilising another company's
those outlined below: resources
Pure franchise – this a type of franchise in which the To make use of other firms’ established distribution
franchisor sells the franchisee the complete business channels and dealership
format and system Diversification of the product line
Product distribution franchise (or dealer franchise) – To gain access to advanced technology and expertise
here, the franchisee is given a licence to sell products To share costs and risk involved with the establishment
under the franchisor’s name and trade mark through a of the venture.
selective and limited distribution network The parties involved in the joint venture should draft
Trade name franchise – this is where the franchisee a written agreement, including, but not limited to, the
purchases the right to use the franchisor’s trade name. following matters:
Objectives of the venture
Advantages of franchise Parties involved in the venture
The franchisee receives management training and Amount of funding each party will contribute
support Responsibilities of each party
Brand name appeal, since the brand is already Management of the venture.
established
Advertisement by the franchisor will also benefit the Advantages of joint ventures
franchisee Parties share assets which leads to fixed costs being
The quality of the product is maintained in order to spread over production, therefore lowering costs of
protect the reputation of the franchisor production
The products and business format are tested and proven Fosters specialisation since labour and management are
Availability of financial assistance to the franchisee. shared between parties
Easily dissolved
Disadvantages of franchise There is greater access to resources, including
The franchisee must pay a fee and royalties to the technology
franchisor Firms benefits from expansion.
There must be strict adherence to the standards outlined
by the franchisor Disadvantages of joint ventures
The franchisee may not be able to deviate from the Parties may have disagreements
product line of the franchisor Differences in culture and strategies may lead to poor
Market saturation may lead to failure of the business. integration
Decision-making process may be long and tedious
Joint ventures Loss of independence.
A joint venture is a business that is jointly owned by two
or more parties or firms in order to undertake an economic Changing the legal structure
activity. Both parties continue their original operations Even though a firm may have been established with one
separately but pool their resources to carry out the purpose type of legal structure, over time this may change. From
of the venture. There should be an agreement to contribute time to time a firm may opt to change its legal structure. This
capital to the entity, and to share revenues, expenses and is often motivated by either growth of the firm or a desire to
the control of the business. While a joint venture is similar secure more funding, among other things. So, a sole trader
to a partnership, it is usually formed for a short time, with a may convert to a partnership because the owner is in need
limited or specific purpose. of additional funds. Likewise, a partnership may decide to
For example, in 2001, PriceSmart Inc announced its joint convert to a limited company in order to minimise the risks
venture arrangement with Restaurant of Jamaica to establish from continuing with unlimited liability.
a store in Jamaica. In 2008, Production Services Network While there are benefits to be derived from changing the
(PSN) formed a joint venture with Kenson Production legal structure of a business, it can also bring about certain
Services Ltd, based in Trinidad. problems. Table 1.1 evaluates the benefits and problems
The reasons for firms entering into a joint venture associated with changing from one legal structure to another.
arrangement may include:
CASE STUDY
Tanya Taylor’s choice of business

Having received her law degree and completed her training, Tanya Taylor was recently accepted to the Bar Association. Tanya
is now optimistic, with a number of grand ideas to implement when she starts her own firm practising corporate law. She has
managed to gather some funds which she thought would be sufficient for start-up. However, as Tanya started doing the neces-
sary paperwork she realised that she would have a shortfall in start-up capital if she needs to pay the rent, buy office furniture
and pay utility bills and her secretary.
This situation is now causing Tanya to think twice about starting a business and she is beginning to think she will probably
just continue working for her current employer. While she is trying to figure out her next move, Kayan, a friend from law school,
calls her to see how she is doing after graduation. Tanya relays her situation to her and Kayan decides to pool some funds to
lend to Tanya at the end of the month.
A week later, Kayan calls to say that another friend is interested in the business and suggests that instead of lending Tanya
the money they would want to come on board and start the business together. The idea sounds good to Tanya and so she agrees.
Questions
1. What type of business was Tanya going to establish initially? (1 mark)
2. What would have been three (3) advantages and three (3) disadvantages of starting that type of business? (12 marks)
3. Based on the fact that her friends are coming on board, which type of business would be the most suitable,
bearing in mind the service that they are offering? Give three (3) reasons for your choice. (8 marks)
4. Outline one (1) benefit and one (1) drawback to Tanya if she had opted to take the loan instead of going
into business with her friends. (4 marks)
Total 25 marks
Table 1.1: Benefits and problems associated with a change in legal structure
Change in legal structure Benefits associated with the change Problems associated with the change
Sole trader to partnership Possibility of greater financing Profits will now have to be shared
Less work for each person More people make the decision-making
Greater pool of ideas process longer
One bad decision by one partner may
affect all
More legal documents required, e.g. a
partnership deed
Partnership to private limited company Limited liability Greater legal requirements
Continuity of existence even if an Longer decision-making process
owner dies or leaves The company may be required to
Possibility of greater financing submit its accounts to the Companies
The business and its owners are no Office
longer one, as it is a separate legal
entity
Private limited company to public limited Greater financing Accounts of the company must be
company Can sell shares to the public published
There is a risk of takeover bids which
will result in loss of ownership
Can become too large and suffer from
diseconomies of scale
Loss of privacy
The public sector

The public sector includes businesses that are owned and controlled by the government or local authorities of a country.
The main purpose of these businesses is to provide some form of benefit to society and not to make profits.
private-sector enterprise may be nationalised for a number

Public-sector of reasons, including the following:
organisations
To save an essential enterprise that is in danger of
closure. The closure of such an enterprise may have
lasting implications for the citizens and the economy
of the country. For example, the Guyana Sugar
Public Nationalised Statutory Government Local
corporations industries boards departments authorities Corporation and the sugar companies in Jamaica were
nationalised in the 1970s.
Figure 1.9: Public-sector organisations The government may want to provide certain goods and
services that would not otherwise be produced by the
Public corporations private sector or might be limited in their production.
This is evident in most Caribbean territories’ transport
Public corporations are owned and controlled by the
services and the provision of roadways.
government. They are usually formed by an Act of
Where consumers’ interests are in danger of being
Parliament as a separate legal entity. The capital outlay and
violated through the formation of monopolies, the
financing for these corporations come from government
government may nationalise the industry in an attempt
funds acquired mainly through taxation. Unlike private-
to prevent this from happening. There is a common
sector organisations, public corporations are not aimed at
view that public monopolies will be better able to cater
making profits but rather at providing an efficient public
for consumers’ interests than private monopolies.
service at the lowest possible price.
Nationalising certain industries may offer social benefits
to the citizens of the country. A public transportation
Main features of public corporations
sector may be able to offer subsidised fares for the
Funding comes mostly from grants disabled, elderly people, children and public-sector
Main aim is not to make profits workers. These benefits may not be possible with
Annual accounting records are sent to the Auditor private-sector ownership.
General The nationalisation of certain resources and industries
Managed by directors appointed by the state. ensures that profits remain in the country. Unlike
Public corporations are controlled by a Minister of the case of multinationals which repatriate profits,
Government who will appoint a board of directors to the profits from nationalised firms are revenue for
deal with the day-to-day operations. The business has the government and can be ploughed back into the
unlimited liability and the state has to bear its debts. State country’s funds.
corporations are often found in areas of transportation,
telecommunication, postal services and utilities companies, Advantages of state corporations and nationalised industries
e.g. electricity and water. The products and services offered are usually lower in
Some possible objectives of public corporations are: price than those of other firms
To create employment for citizens They increase employment opportunities
To provide goods or services that are needed in the Essential services that may be very expensive may be
country undertaken by the government
To keep prices affordable to all Products are standardised and uniform
Profits are usually ploughed back into the country Struggling firms can be taken over by government
through infrastructural developments and other Resources are used in ways to benefit the community.
government spending.
Disadvantages of state corporations and nationalised industries
Nationalised industries Where state-owned companies are monopolies, there is
Nationalised industries are enterprises that have little choice for consumers
been taken over by the government from private-sector Large debts may cause a burden on taxpayers
organisations. In order to nationalise an industry, the Some state-run enterprises suffer from gross
government will purchase the majority of the company’s inefficiencies
shares. The government will then appoint a board of directors Politics may interfere with the running of these
which will deal with the management of the company. A businesses.
Statutory boards Promote democracy.

These are controlled by the state but operate with a board
of directors partially appointed by central government.
Disadvantages of local authority and municipal undertakings
Each board is answerable to a particular ministry in the Some projects may be stalled or shelved when there is a
government. Each entity is given specific responsibility for change in government
some aspect of the country. These are common in CARICOM Politics may interfere with the management of certain
in areas of housing, water, scientific research, agriculture projects.
and transport. Examples of statutory boards are the Jamaica
Tourist Board and the Statistical Institute of Jamaica. Most Not-for-profit organisations
statutory boards are similar to public corporations in terms Charities
of formation, structure of management and objectives. There are a number of charity organisations in the Caribbean
and around the world. These businesses are formed for the
Government departments main purpose of helping the less fortunate or disadvantaged
These are divisions or ministries of the government that in society. While these charities are run based on business
facilitate interaction with local authorities and nationalised principles, they rely heavily on donations from the business
industries. Each department is headed by a Minister who community, governments and international organisations.
is appointed by the Prime Minister. These departments are Some of these organisations also raise finance from hosting
created to carry out various services, such as: benefit concerts or plays or may even sell memorabilia. Some
Implementation of government policies examples of such charities in the Caribbean are The Red
Monitoring operations within the country and ensuring Cross, Food for the Poor and The Jamaica Cancer Society.
that there is compliance with the law The legal requirements for the formation of charities
Performing the duties and responsibilities stipulated by may not be overbearing but these organisations must
the state. be established based on the framework outlined by the
These departments are non-profit organisations and are relevant Companies Office. In Jamaica, for example, the
funded from the tax revenue of the country – for example, charity must be registered with the Companies Office of
the Auditor General’s Department. Jamaica. It must register its name and also submit articles
of incorporation to the office. In Barbados, the charity has
Local authority and municipal undertakings to abide by the stipulations as mentioned in the country’s
This type of public-sector organisation deals with the Charities Act. Other Caribbean countries may have their
affairs of government at the local or community level. own requirements for formation of charitable organisations.
The functions, powers and duties of local authorities are These organisations are often exempt from certain statutory
determined by an Act of Parliament. Local authorities are obligations such as paying taxes or duties on imports. The
controlled and managed by councillors who are elected by exemptions may vary, depending on the territory in which
the local citizens. These councillors form the council which the charity is located.
is headed by a mayor. They make and implement policy
decisions on the management of the town or city. Some of Non-governmental organisations
their responsibilities include: These organisations are commonly referred to as ‘NGOs’
Construction and maintenance of drains and are not influenced by government. NGOs are non-profit
Cleaning of gullies making, voluntary citizens' groups which are formed at local,
Garbage disposal national or international level by individuals or institutions
Water supply with common interests. They are usually formed to:
Maintenance of parks and markets. Provide humanitarian functions
Local authorities and municipal undertakings are Lobby governments on behalf of citizens
financed by grants from central government, rents, council Offer aid and relief, especially in time of disaster
taxes, business rates and trading activities. Address issues such as education and health care.
Different NGOs may also provide a number of other
Advantages of local authority and municipal undertakings services. However, NGOs are not formed by governments;
Relevant issues at the local level can be addressed neither do they answer to the government of a country.
Citizens can be more involved in decisions that affect Some examples of NGOs are the United Nations, Jamaicans
them for Justice, Barbados Nursing Association, and Trinidad and
Tobago Association of Psychologists. Further information Contracting out services that would otherwise be
on NGOs across the Caribbean can be sourced from the rendered by the public sector, such as cleaning services.
Caribbean NGO Database. The government may privatise public corporations for
different reasons, such as:
To generate much-needed income to fund projects or
ACTIVITY take off budget shortfall
Discuss the potential problems that may arise if a To improve efficiency in these businesses which may
business changes from: benefit consumers
Sole trader to partnership It can no longer afford to finance and operate these
Partnership to limited company. entities
To share ownership of resources and encourage
competition.
Privatisation offers benefits to the country and the
Privatisation government but it also has some disadvantages.
In recent times, governments in the Caribbean and around
the world have been divesting and handing over ownership Disadvantages of privatisation
of a number of public corporations. For example, in 2001 May cause private monopolies to develop, which may
the Jamaica Public Service was sold, which is one of exploit consumers
many companies in Jamaica that have been privatised. Income generated from the sale of nationalised
Privatisation is the change of ownership of a firm from industries is a one-off receipt and cannot be repeated if
state (government) to private individuals. Privatisation may future needs arise
take different forms, including: If private firms are not regulated then there might
Direct sale of nationalised industries or public be degradation of the environment through
corporations to individuals in the private sector overproduction
Removal of barriers that prevent public corporations Private individuals’ main aim is to make profits and if
from competing. This is referred to as ‘deregulation’ and this is not realised then the privatised business might be
has happened in, for example, the telecommunications closed down.
industry
CASE STUDY
Privatisation
The Jamaica Public Service Company (JPS) was incorporated in 1923 as a privately owned company. JPS was established at a
time when several communities had their own electric companies, however, it quickly took over and bought out these companies.
It was eventually given the licence to operate as the sole supplier of electricity in Jamaica in 1966.
The ownership of JPS changed in 1970 as the government took over the controlling interest in the company. For the next
31 years, the government would have to make the necessary capital injections and take steps to improve the efficiency of the
company. With its equipment becoming old and the firm being a strain on the public purse, coupled with regular power outages,
the decision was taken by government to privatise the company in 2001. The government sold 80 per cent of ownership to Mirant
while retaining almost 20 per cent. This move was said to benefit not only the company but its customers.
Questions
1. Discuss four (4) possible reasons why a company such as JPS was nationalised in 1970. (12 marks)
2. What is meant by the term ‘privatisation’? (1 mark)
3. Outline three (3) benefits and three (3) drawbacks of privatising a publicly owned company such as JPS. (12 marks)
Total 25 marks
CHAPTER SUMMARY
The three types of business activity The private sector includes sole The public sector includes
are primary, secondary and tertiary traders, partnerships, franchises, public corporations, government
limited companies, cooperatives and departments and local authorities
Organisations are classified as joint ventures
private or public sector Privatisation is the change of
The public sector includes businesses ownership of a firm from state
The private sector consists of that are owned and controlled by the (government) to private individuals.
businesses that are owned by government or local authorities of a
individuals or group of individuals country
with the main aim of making profits
MULTIPLE CHOICE QUESTIONS 5. A company that controls other companies but is not involved
in their day-to-day operations is known as:
1. A firm offering management services to its customers would
a. Holding company
be regarded as what level of business activity?
b. Public company
a. Primary
c. Associate company
b. Tertiary
d. Conglomerate
c. Temporary
d. Secondary 6. Burger King in the Caribbean would best be described as a:
a. Sole trader
2. Which of the following would NOT be regarded as a private-
sector organisation? b. Public corporation
a. Franchise c. Franchise
b. Public limited company d. Cooperative
c. Public corporation 7. The process of government taking over enterprises that were
d. Partnership in the private sector is known as:
a. Globalisation
3. Which business organisation has as a feature separate legal
identity? b. Privatisation
a. Sole trader c. Nationalisation
b. Company d. Liberalisation
c. Partnership 8. The following are reasons for nationalisation EXCEPT which

d. Franchise one?
a. To offer social benefits
4. ALL of the following are included in the articles of
association, EXCEPT which one? b. To crowd out investors
a. The rights of the shareholders c. To protect consumers
b. Procedures for meetings d. To provide certain goods and services
c. The process for transferring shares

d. Details of the company’s capital
9. Which of the following is NOT a type of cooperative? 10. The government may privatise public corporations for the
a. Worker cooperative following reasons EXCEPT which one?
b. Owner cooperative a. To generate much-needed income
c. Producer cooperative b. To improve efficiency
d. Consumer cooperative c. To lay off workers

d. To encourage competition
Extended Essay Questions

Question one Total 25 marks
a. Explain the three (3) levels of business activities. (6 marks)
b. Briefly explain how the Caribbean’s dependence on primary products such as bauxite, oil and agricultural produce could
become troublesome in the future. (4 marks)
In recent times, a number of Caribbean businesses that were once owned by the state have been sold to private businesses and
individuals.
c. i. Discuss three (3) possible reasons for this decision by Caribbean governments. (9 marks)
ii. Outline three (3) disadvantages of privatising these firms. (6 marks)
Question two Total 25 marks
a. Identify two (2) features of a sole trader and three (3) features of a partnership. (5 marks)
b. Billy Barns has been the sole owner of his dairy farm for the last 25 years. Under his leadership the farm has grown
significantly and he has expanded his operations into making dairy products such as cheese, boxed and bottled milk, etc. Now
that his children have grown and are old enough to make business decisions, Billy is considering changing his type of business
organisation to a private limited company called Barns Dairy Ltd. Before doing so, however, he has come to you, a management
consultant, for advice.
Citing at least five (5) points, discuss how Billy would be better off setting up as a private limited company when compared
with his current legal structure. (20 marks)
29
2 Business Objectives
may vary among employees. The targets of the business

LEARNING OBJECTIVES: must be clearly stated without any ambiguity and must
At the end of this chapter students should be able to: be properly communicated to all employees of the
Explain the nature, role and importance of objectives organisation.
Differentiate between the types of objectives Measurable – managers should be able to plot the
Write meaningful and relevant objectives organisation’s progress toward its objectives. This
Outline the hierarchy of objectives requires a well-defined reference point from which to
start and a scale for measuring progress – for example,
Discuss the ethical and social responsibility of businesses
‘To increase retail sales by 15 per cent by the end of
this financial year’. With this objective, the managers
can measure the business progress over the 12-month
Nature, role and importance of objectives period until the financial year has ended. They can take
the necessary action, if needed, from early on to prevent
What are objectives? a shortfall in their sales target for the year.
N
o matter what we do in life, we ought to have an Attainable (or Achievable) – while the objectives should
idea of where we want to reach and how we plan encourage people to work harder, achieving them must
to get there. We all have objectives. For you, it may be within their reach. This is to say that the objectives
be to get at Grade One in your Management of Business should be not so extreme that they are impossible for
Unit 1 exam or to achieve all distinctions in your CAPE the firm to attain. When writing objectives, firms must
subjects. With this in mind, objectives can therefore be take into consideration their ability to achieve them
defined as specific targets of performance. They are an within the expected time frame. While being achievable,
organisation’s performance targets – that is, the results and objectives must also be challenging. This will motivate
outcomes it wants to achieve in a particular time frame. and encourage employees to work hard and propel the
An objective should contain the action to be performed, business forward. Workers may consider work boring
the condition under which it will be performed and a time if they are not challenged in their bid to reach the
frame in which it should be performed. However, there are expected targets of the business. The more challenging
times when all three components might not be present in an objectives are, the higher the performance will be.
objective. In such a case we refer to it as a ‘partial objective’. Relevant (or Realistic) – many businesses have failed
These partial objectives should contain the action to be because they set unrealistic and irrelevant objectives,
performed and a time frame in which the action should be especially in their earlier years. As a result, a large
performed. amount of money is spent irrelevantly, perhaps to
Well-written objectives should have the following take on investments or a large advertising campaign
characteristics, which form the acronym ‘SMART’: which could have been delayed until the company is
Specific – objectives should be quantifiable and established. The objectives must be relevant for the firm
precise: for example, ‘To increase retail sales by 15 per given its market share, resource base and employees’
cent’. This objective is precise and states exactly what capabilities.
management wants to accomplish. Compare it with Timely – earlier we stated that the business should
this example: ‘To achieve healthy growth in sales’ (this track the achievement of its objectives over a period
is not meaningful as ‘healthy growth’ is too wide and of time. With this in mind, objectives must specify not
can easily be misconstrued). Broad and ambiguous only what is to be achieved but also a time frame for its
objectives can lead to chaos as their interpretations achievement.
Objectives can also be used to set targets for individual

ACTIVITY departments as the firm aims to achieve its corporate
Below is a list of objectives. You are required to state objectives.
whether or not each objective is written properly,
explaining your answers. Types of objective
a. A mobile phone service provider has a target of Objectives can be broken down into short-term, medium-
‘reducing customers’ complaints from 6 per cent term and long-term objectives, based on the time frame in
to 3 per cent within the next 12 months’ which they should be achieved. These are outlined below.
b. A cricket team wants ‘to improve performance in
the future’ Short-term objectives
c. A wellness centre and spa sets an objective of These are sometimes referred to as ‘specific objectives’.
becoming ‘the best in the market’ These are outcomes that a business wants to accomplish
d. A hardware firm has the objective of ‘increasing within a short period of time – usually a year to 18 months.
sales revenue by 5 per cent this year’ The period of time set for the accomplishment of these
e. A local tinned food manufacturing business desires objectives may vary across businesses. These objectives are
to ‘increase market share from 15 per cent to 60 per the most critical for newly established businesses, and can be
cent within the next four years’. broken down, in terms of their achievement, on a monthly,
quarterly or yearly basis. An example would be ‘To earn at
least 5 per cent profit after the first year of trading or to earn
Importance of objectives revenue of $1m in year one’.
It is important that we realise that being successful will
Medium-term objectives
never mean that there may not be failures, since success can
be judged by our ability to achieve the objectives that were Medium-term objectives are usually less general than
established. long-term objectives. They form the basis on which short-
For a business to become successful, it needs to outline term objectives are written and the stepping stone for
measurable and achievable objectives. As mentioned above, the achievement of long-term objectives. Medium-term
they must be ‘SMART’. This will give the employers, employ- objectives are usually written for a period of one to four
ees and clients or customers a clear vision of where the years. An example of such an objective would be ‘To increase
business is going and how it plans to get there. The impor- the firm’s product line in two years’ time’.
tance of objectives is outlined below:
Objectives act as a guide for employees and the Long-term objectives
employer to follow in order to propel the business These are sometimes referred to as ‘general objectives’. Long-
forward and thus attain its goal term objectives are often developed from the firm’s mission
They give employees a sense of direction as to where statement and describe where the organisation wants to
the business is going be at some point in the future, usually five years or more
Objectives are also used as a tool to analyse the later. These can be more general, but should give the reader
performance of the business and its employees over a an indication of the overall direction of the business. Some
period of time business owners find it advantageous to look to the five-
They are important in the decision-making process, as to ten-year mark as well as to clearly define where they
they provide a guide and framework for management would like to steer their business. Example: ‘To become the
to make decisions. They are used to help management dominant firm in the automobile industry within six years’
to explore different courses of action or try different time.’ This dominant position is the general or overall target
business strategies which most firms would plan to achieve at some point in
Objectives function as a yardstick for tracking an their existence. The firm may also want to achieve a growth
organisation’s performance and progress. For example, target – for example, ‘To expand and set up physical business
having an objective to reach a desired profit by year end locations in at least three Caribbean countries by year ten’.
will mean that the firm can track its monthly profit to However, in order to achieve the general objective, the
ascertain whether it is still in line with the objective specific and more medium- and short-term targets must first
be achieved.
CHAPTER 2 | BUSINESS OBJECTIVES 31
Hierarchy of objectives Give a clear indication of the purpose of the

Objectives can be broken down into different categories, organisation
as seen in Figure 2.1. As we ascend on the hierarchy, the Outline the legitimacy of the organisation
objectives become broader and more general. Clearly describe the organisation’s values, objectives or
At the pinnacle of the hierarchy is the business’s aim. An targets and reason for existence
aim or vision is where the business wants to go in the future. Be customer focused or oriented and at the same
It is a statement of purpose – for example, the business aims time catering to the needs of the employees and other
to expand its market share across the Caribbean. The vision stakeholders
of the firm is often broad, with very few specifics as to when Outline the products that are being offered and its desire
it will be achieved. The vision gives an idea of the firm’s plans to maintain these
for development and is also used as a tool for marketing, State the firm’s commitment to the fulfilment and
especially for potential investors. The vision statement of satisfaction of customers’ needs
a firm must be able to motivate workers by giving them Signal how it will maintain a competitive edge over its
drive to accomplish beyond what is happening at present. rival organisations.
While the terms ‘goal’ and ‘vision’ are sometimes used
interchangeably, the vision outlines the firm’s goal which
is said to be a desired future outcome that the organisation ACTIVITIES
attempts to realise. 1. Find a copy of your school’s or a business’s mission
The overall aim of the organisation should form the statement and analyse it to see whether any of the
firm’s mission statement and objectives. above elements are present.
2. Write a brief mission statement for a business of
Mission statement your choice. The business should be given a name
This is a statement which outlines the main aim of a and mention must be made of the product being
business or company. A mission statement gives a clear sold.
outline of the business’s aspirations and values. It enables
all the stakeholders (employees, managers, customers and
suppliers) to understand the underlying reasons for the From the mission statement the organisation will
actions that are taken by the business. While the firm’s construct objectives which will clearly outline the plan of
vision outlines where it hopes to be in the future, the action that it will take in order to fulfil its overall mission.
mission statement usually says what the firm sets out to do These objectives must be stated in a form that is measurable
during its operation. and attainable – that is, that management must be able to
A good mission statement carries a number of elements ascertain whether the firm is achieving them. Failure to
which will give a clear indication of the strength and achieve the lower-level objectives usually results in failure
effectiveness of such a mission. A well-written mission to achieve the mission or vision of the firm.
statement should:
Corporate objectives
Having established its vision and mission, it is
essential for a business to develop its corporate
ion
Aims / Vis The basic purpose of the organisation
especially for the external audience objectives. These will give an understanding of how
Mission the business plans to achieve its vision and mission.
es Vision and mission statements are broad and general,
te objectiv Senior management,
Corpora the organisation as a whole therefore the corporate objectives help to narrow the
jectives
focus. Corporate objectives can therefore be defined
ic ob
Strateg Middle management, as specific, realistic and measurable aims which an
es major division, function
l objectiv organisation plans to achieve within a given period
Tactica Lower management
(departments and individuals) of time. These objectives are usually written as long-
es
o bjectiv term objectives with a time frame of five years or
tional
Opera
more.
Both corporate and strategic objectives, which
Figure 2.1: The hierarchy of objectives
will be discussed below, are often set by top or senior
management. An example would be ‘To increase profits

by 40 per cent in all divisions within the next five years’. CASE STUDY
Other corporate objectives could focus on maximising
sales revenue, growth or expansion; the expected return Lack of direction at JK Foods
on investment; or even the firm’s broader corporate social ‘To become the best processed food company in the whole
responsibility. wide world’ is the objective that is being used JK Foods. This
has been its only objective since the firm was established two
Strategic objectives years ago. The company has suffered huge losses in the past
Some firms do not have a separation of their corporate two years. The board of directors has become concerned
and strategic objectives. However, strategic objectives and has called a special meeting to identify strategies to
are usually medium to long term and relate to outcomes improve the company’s performance.
that strengthen an organisation’s overall business position The decision coming out of the special meeting is
and competitive vitality. They refer to an organisation’s formally to set some realistic targets to work with. Even
articulated aims or responses to address major change, though cash is limited, the directors decided to engage
improvement or competitiveness and outline how the firm the services of a management consultant to help in the
plans to accomplish its corporate objectives. Some examples process. Upon his arrival at the company, Tom Greaves was
of strategic objectives are: alarmed that it had been established without any proper
To be ranked in the top five of the best hotel vision, mission and achievable targets. He explained to the
accommodation in the country in terms of market share directors that the way forward would involve an overhaul
by three years’ time of the business’s vision, mission and objectives. He pointed
To concentrate on innovation as the way to satisfy our out that the current objective is not ‘SMART’ and will have
customers in order to gain 20 per cent increase in sales to be changed. Everyone is committed to the cause, and the
by two years’ time. work to turn the company around will begin soon.
Tactical objectives Questions

Strategic objectives are sometimes called tactical objectives. 1. Outline two (2) things that are wrong with the objective
They are performance targets established by middle being used by JK Foods. (4 marks)
management (department heads) for achieving specific 2. State three (3) reasons why having a proper mission
organisational outcomes. They are plans designed to help statement is important to JK Foods. (3 marks)
execute the major strategic objectives and to accomplish a
3. Tom Greaves suggested that objectives should be
specific part of the organisation’s strategy. Tactical objectives
‘SMART’. Explain the acronym as it relates to writing
are usually short- to medium-term targets which the firm
objectives. (10 marks)
is expected to achieve within a year or close to a year. An
4. List the four (4) levels of objectives that JK Foods may
example would be ‘To improve productivity by 6 per cent
want to develop and give one (1) example of each that it
this year or to increase sales revenue by 10 per cent for this
could use. (8 marks)
financial year’.
Total 25 marks
Operational objectives
Operational objectives are short-term organisational
objectives necessary to achieve longer-term tactical and
strategic objectives. They are usually managed by lower-
Business ethics and social responsibility
The Caribbean business environment is changing and
level management such as supervisory personnel who are
more Caribbean governments are becoming aware of the
concerned with immediate results. They are detailed costed
damage that is being done to our environment and society
and timed plans of what the organisation will do to meet
by some of our factories and business organisations. It is
each tactical or strategic objective. For example: an insurance
more commonplace to hear about protecting our coral
company may have an objective to introduce at least five
reefs and marine life; prevention of land slippage through
more clients to the business each month.
reforestation exercises; reducing the depletion of the ozone
layer through a reduction in emissions from our factories
and motor vehicles, among other things. Governments have
not only embarked on massive environmental protection done to the environment. At least one hotel was brought
campaigns; they have encouraged, and at times forced, before the courts for alleged breach of the environmental
organisations to do likewise. laws in Jamaica. A proposal by the bauxite companies in
This has encouraged many businesses to change their Jamaica to mine in the Cockpit Country in the parish of
strategies to include objectives of an ethical and/or social Trelawny was turned down by the government because of
nature. This can also be attributed to adverse or bad publicity environmental concerns. Consumers and other stakeholders
that is being faced by these businesses which is perceived as are reacting positively to businesses that act in a socially
damaging to stakeholders and the wider world. responsible way. There have been lobby groups encouraging
consumers to refuse to purchase products that were tested
on animals or products containing CFCs.
ACTIVITY
In addition, some businesses have dedicated a portion
Identify a business within your country that has been of their yearly budget to the minimisation of pollution and
taken to task in recent times for doing something that the improvement of their social responsibility. This is
is socially or ethically irresponsible. a practice of firms to act in a manner so that their actions
do not negatively affect society or the environment. Some
Changes in legislation at local, national and international examples of these include:
levels can also be attributed to this move by businesses. Producers who use recycled materials in the manufacture
Organisations such as the National Environmental Protection of their products. Some producers have also encouraged
Agency (NEPA) in Jamaica have filed lawsuits against consumers to recycle their packaging, for example the
companies against whom it has evidence of damage being repurchasing of plastic drinks bottles for recycling.
CASE STUDY
Scotiabank’s commitment to corporate social responsibility

The thrust of corporate social responsibility (CSR) has always been the
hallmark of Scotiabank’s business strategy. This is evident in the following
statement: ‘We have taken pride in creating value for our shareholders,
fulfilling our customers’ unique financial needs, providing employees with
rewarding careers, and supporting the well-being of our communities.’
To this end, Scotiabank established the Scotiabank Jamaica Foundation
(SJF) in 1996, with an injection of $100 million.
As part of its mandate, the Scotiabank Jamaica Foundation ‘is guided
by the principles to assist in alleviating poverty, deprivation, distress
among economically and socially disadvantaged individuals and their
dependents: and to undertake research into these problems, along with
Figure 2.2: Scotiabank
methods of addressing them’. To this end, the bank has spent large sums
of money to assist in the areas of education, health and community projects, among other things.
Another hallmark of Scotiabank’s commitment to CSR is its ‘Bright Future Program’ which was launched in 2008. As part of
this program Scotiabank seeks to create opportunities to touch the lives of children across the Caribbean.The program endeavours
to provide hope to youths through supporting education, the arts and culture, the environment and the underprivileged and abused.
It has contributed to International Women’s Day, Read Across Jamaica Day and the Bustamante Hospital for Children.
Questions
1. What is meant by the term ‘corporate social responsibility’? (2 marks)
2. What are some of the areas where Scotiabank’s CSR was evident? (4 marks)
3. Name two (2) benefits that Scotiabank could receive from its involvement in CSR. (4 marks)
Total 10 marks
Obligations of the firm to stakeholders of shareholders are catered for – it ensures that the rights of
The firm’s social responsibilities can span four stakeholders shareholders are not infringed; that they, along with other
of the business in different ways. These are summarised in stakeholders, are treated fairly and equitably; and promotes
Table 2.1. disclosure and transparency on the part of management.
Today, most firms are operating within a competitive
global environment and, as such, being a good corporate
Stakeholders The firm’s responsibilities to the stakeholder citizen is of the utmost importance. While aiming to generate
Consumers Ensure that they get value for their money a profit, the firm must also prove itself as being aware of
Fair and truthful advertisements
Ensure that products are safe and are of the environmental impact of its operations and take steps to
the highest standards lessen that impact.
Offer after-sales service A firm with poor corporate governance may find it
Employees Foster participation of employees in difficult to attract potential investors. It could also lead to
decision making
Provide proper working conditions financial collapse, failure of privatisation attempts and an
Fair treatment of all employees increase in corruption.
Maintain proper communication lines,
especially where employees will be affected
by a change or decision
Provide opportunities for social gatherings,
whether through family days, parties, etc.
Importance of business ethics and integrity
Presently, in most territories, there are some laws preventing
Shareholders Give fair returns on shareholders’
investment businesses from damaging the environment. However, some
Keep them informed of the business’s actions cannot be prevented by the enactment of laws.
performance Therefore businesses are also encouraged to act ethically in
Provide a forum through which they can
express views and give suggestions their operations.
Protect their investment Ethics defines what is right or wrong – or what is moral.
Community Ensure that waste is properly disposed of It refers to the principles or guidelines that help to inform
Reduce pollution, including that from air individuals or groups of individuals of how they should
and noise
Lessen displacement caused by the building behave. This definition is largely dependent on the norms
of factories or roadways of society and what is accepted over time. Business ethics
Give back to the community in which it
operates refers to the morals or set of standards that are used to guide
a business on how it should conduct its affairs. This usually
Table 2.1: The firm’s social responsibilities to stakeholders includes written and unwritten codes on how businesses
should behave. Some common ethical issues within
Good corporate governance CARICOM include:
Corporate governance is often defined as a set of rules, The testing of products on animals
practices and processes which guide the way a business is The use of child labour
operated. The aim of corporate governance is to balance the How employees deal with customers
interest of the stakeholders of the company – that is, the Truthful versus deceptive advertisements.
firm must cater for the needs and interest of its stakeholders
as much as is possible. For this to be achieved, though,
the board of directors should ensure that meaningful Code of ethics
and healthy relationships are created with shareholders This is a document issued by the firm, outlining the set
and other stakeholders. A firm which has good corporate of guidelines that will be used to govern the behaviour of
governance will find it easier to achieve its objectives. management and employees. This code is often based on
In many companies we find that the owners (shareholders) a set of pre-established standards or principles and usually
are not necessarily the people who are in control on a includes:
day-to-day basis. Instead, these shareholders often employ The firm’s corporate social responsibility statement
paid managers and professionals to operate the firm. The sad The relationship that the firm has with its customers
reality is that sometimes board members may not always and suppliers
act in the best interest of the shareholders. Good corporate Environment requirements and unanswered questions
governance is therefore needed to ensure that the interests Rules on relating to the maintenance of integrity.
Government’s response to social

irresponsibility CHAPTER SUMMARY
The following steps can be taken by governments to deal
with businesses that are being socially irresponsible and Objectives that are well written should be SMART –
unethical: that is: Specific, Measurable, Attainable, Realistic and
Impose taxes to offset the cost to the environment Timely
(social cost)
Pass legislation limiting noise and other forms of Long-term objectives are general and give the overall
pollution direction of the firm in the future
Refuse to give contracts to companies that are unethical
or socially irresponsible Short-term objectives are specific and outline what the
Impose stiff penalties. firm wants to achieve in a short period of time
The hierarchy of objectives outlines the firm’s vision;

CASE STUDY mission statement; and corporate, strategic, tactical and
operational objectives
A ‘toxic nightmare’
Over 100,000 people on Covory Isle woke up to what is Ethics define what is right or wrong, or what is moral
now dubbed a ‘toxic nightmare’. This happened after a
cash-rich and powerful multinational chemical producing A number of firms are becoming more aware of their
firm (Chemi-Prod Inc) dumped waste along the coast of corporate social responsibilities and some have taken
the small island. The situation infuriated the residents, who steps to become more socially responsible.
called in the relevant authority to look into the situation.
Upon investigation it was found that an entire shipment
of highly toxic waste was illegally disposed of along the
coast. Further inquiry revealed that the company was faced MULTIPLE CHOICE QUESTIONS
with a transportation cost that had quadrupled since the 1. ALL of the following EXCEPT one outline the importance of
agreement was made with the company TranSecure. Rather objectives. Which is it?
than face this cost, Chemi-Prod Inc instructed its staff to
a. They give the employees a sense of direction as to where
dump the waste in the most secretive and least costly way.
the business is going
Since the revelation, Chemi-Prod Inc has faced numer-
ous criticisms and threats of lawsuit by environmental b. They function as a yardstick for tracking an organisation’s
agencies and other pressure groups. If the lawsuits were to performance and progress
be successful, the firm could be asked to pay out billions of c. They may be limited and take a long time to be achieved
dollars to settle claims. d. They are used in the decision-making process
Questions 2. It is said that objectives should be SMART. Which one of the

following is NOT a part of this acronym?
1. Describe what made Chemi-Prod Inc’s behaviour
unethical. (5 marks) a. Timely
2. Discuss two (2) ways in which this behaviour could b. Separable

affect the performance of Chemi-Prod Inc in the long c. Measurable
run. (6 marks) d. Realistic
3. Why is it important for firms to behave
ethically? (4 marks)
Total 15 marks
3. A sixth-form student’s objective reads: ‘To achieve grade 1 in

all my CAPE examinations’. Which type of objective is this? Extended Essay Questions
a. Medium-term Question one Total 25 marks
b. Long-term a. Outline five (5) reasons why objectives are important to
c. Short-term businesses. (5 marks)
d. None of the above b. Opportunistic Joe has decided to start a small business
selling cane juice extracted from sugar cane on his farm.
4. Middle management deals with which of the following Joe possesses very little knowledge of what is required
objectives? in setting up his business and the objectives that he
a. Corporate should establish before trading starts. With the use of
possible examples, discuss four (4) categories (levels)
b. Tactical
of objectives that Joe should seek to achieve in his cane
c. Strategic juice business. (20 marks)
d. Operational Question two Total 25 marks
5. A/An __________ defines the organisation’s purpose and a. Define the term ‘business ethics’. (2 marks)
direction. b. Discuss the importance of social obligations that a firm
has to the following stakeholders:
a. Aim
i. Customers
b. Objective
ii. Shareholders
c. Goal iii. Community
d. Mission iv. Employees. (16 marks)
c. M
essy M Ltd is a manufacturing company located on
6. ‘To sign up ten more people for health insurance in each a small island with only a few rivers which supply the
quarter this year’ represents a/an __________ population with clean water. While the company has
a. Corporate objective created job opportunities, foreign exchange earnings and
b. Tactical objective a myriad of household chemicals, it is very irresponsible
in how it disposes of its waste products. Messy Ltd has
c. Operational objective
been disposing of its waste upstream in the Long River.
d. Strategic objective
It has also been confirmed that some of its products
7. A firm is responsible to its shareholders in the following ways are being tested on the local animals and employees
EXCEPT one. Which is it? are often asked to work for long hours without much
remuneration.
a. To give fair returns on shareholders’ investment
i. Discuss the ethical issues that are mentioned
b. To keep them informed of the business’s performance in the scenario above. (3 marks)
c. To sell them more shares ii. Explain two (2) steps that government could
d. To protect their investment take to deal with the issues. (4 marks)
8. Which of the following would NOT be included in a discussion

on ethical issues?
a. Testing of products on animals
b. Deceptive advertisement
c. Evading taxes
d. The use of child labour
37
3 Decision Making
Operational level – short-term decisions that deal with

LEARNING OBJECTIVES: the administration of the firm’s strategic and tactical
At the end of this chapter students should be able to: decisions. They involve few risks and can be made
Understand the nature of decision making quickly. At this level, decisions such as which credit
Discuss the essential features of the information used to limit can be offered to a customer or on the ordering of
make decisions stationery are made.
Discuss the different stages of the decision-making
process
Identify the factors that affect decision making Essential features of information
Differentiate between qualitative and quantitative In order to make effective decisions it is vital that firms
decision making gather sufficient information to aid in the decision-making
process. However, any information collected must have
four essential features which can be summarised using the
acronym ‘CART’, broken down into:
L
iving in a world with limited resources forces busi- Cost effectiveness – the cost of gathering the
nesses and individuals to make choices. We have to information should not outweigh its benefits. The
make different choices each day. Any decision that information should be gathered in the least costly way
is taken will result in some benefits or costs to the decision while maintaining its accuracy and relevance
maker. We decide which clothes to buy, or where to go for a Accuracy – information collected must be accurate so
family vacation or which subjects and career path to pursue. that it can be relied upon by the manager. Misleading
These decisions are influenced by a number of factors, information may impede the decision being made and
including preference and financial standing. results in undue cost to the firm
Businesses have to make decisions on a daily basis too. Relevance – the information collected must be
Decisions have to be made on which product to invest in, appropriate for the situation or decision being made. It
which supplier to buy from, who to employ and how to must be up to date, as outdated information is useless
raise capital, among other things. This chapter will deal with Timeliness – information must be available to managers
the process of decision making, the stages in the decision- and other decision makers on time. It should be
making process and the factors that affect decision making. obtained in a timely manner, since failure to do so may
Decision making is the act of choosing between two or more lead to bad decisions.
alternatives. Decisions are made at three basic levels in most
organisations:
Strategic level – long-term decisions that entail high Significance of qualitative versus
risks and are usually made by top management. quantitative decision making
Strategic decisions influence the direction, overall policy Since decisions are made by a firm on a daily basis, it must
and performance of the business (for example, building ensure that the decisions that are made were carefully
a new plant or entering a new market) thought about. Managers making decisions can consult
Tactical level – short- to medium-term decisions that are different resources or people to assist in the decision-making
usually made at the middle management level. They process. The sources that are consulted may influence the
carry fewer risks and would involve decisions such as decisions that are made. There are two forms of decisions
what price to charge, which supplier to purchase from that firms make which are based on the resources that are
and who to employ or make redundant consulted. These are qualitative and quantitative decision
making.
A qualitative decision is one that is made based on time and possibly cost. For example, a firm may want to
non-quantifiable information. These decisions often entail ascertain why its sales revenue has fallen over the past two
people’s value judgements and opinions. Firms embarking years. The firm could also outline the objective(s) it wants to
on qualitative decision making may make use of the achieve at the end of this process.
‘SWOT’ analysis (Strengths, Weaknesses, Opportunities and A dynamic firm is one that is able to turn its problems
Threats) and ‘PEST’ analysis (Political, Economic, Social or the problems of others into an opportunity to provide
and Technological factors). These decisions tend to be very goods or a service. Therefore this stage could also include
subjective since they are not based on statistical data. the identification of opportunities that are available.
In contrast, a quantitative decision is one based on
statistical data. Unlike qualitative decisions, quantitative Data collection
decisions rely on historical data that can be quantified and Having identified the problem, the firm must now decide
analysed to make generalisations and draw conclusions. how and from what sources the data will be collected.
Quantitative decisions could be based on information The data needed may be collected from primary and/
gathered from sources such as market research, historical or secondary sources. ‘Primary data’ refers to original
sales figures and accounting information. information collected specifically in response to the problem.
Even though the two forms of decision making are This may be collected through observation, interviews and
essentially different, a number of firms may employ both of questionnaires. Primary data must be collated and analysed
them. In so doing, decisions that are made may be based on in order to have some value based on the problem defined
a mixture of qualitative and quantitative decision making. in the first stage. ‘Secondary data’ represents information
collected from other sources, such as newspapers, textbooks,
internet sources or other work of a similar nature that was
The stages of decision making compiled for previous research. This form of data will be
The decision-making process can be broken down into reprocessed and reused in an attempt to solve the problem
various stages shown in Figure 3.1. identified or to clarify the opportunities identified.
Definition of problem or opportunity Developing alternatives

The first step of the decision-making process is to identify After collecting sufficient data, the next step is to develop
the problem to be solved or the objective to be achieved. a list of possible actions that can be taken. These options
The problem may be identified by thoroughly searching may be developed individually, by teams or through analysis
through the firm’s annual reports or financial statements of similar situations in comparable organisations. These
or from customers’ feedback, among other sources. When alternatives should be geared toward solving the problem or
the problem is identified, it is imperative that it is clearly achieving the objective outlined above. Having formulated
defined so as to prevent the business from going in the the possible alternatives, the manager can then move to the
wrong direction. Problems that are unambiguous will save other stages.
of
Definitionor
problem ity
opportun
ction
Data colle
g
Developin s
lte rn ati ve
a
Analysing
es
alternativ
and
Selecting ng
le m e nti
imp
ative
the altern
n
Evaluatio
Figure 3.1: The stages of decision making

CHAPTER 3 | DECISION MAKING 39
Analysing the alternatives options instead of one. Once selected, the option(s) should
Using the list of alternatives, management should analyse be implemented in the least costly way feasible. It is also
the practicality and appropriateness of each alternative. An possible that management may encounter unforeseen
alternative may be deemed impractical because of: problems and face resistance to change from employees.
Lack of financial resources
Lack of expertise to implement the alternative Evaluation
Legal restrictions The final stage is the evaluation of the option(s) that were
Ethical and social responsibility implications implemented above. Here, the decision maker needs to
Technological constraints evaluate the outcome of the decision taken. These results
Insufficient information. are then compared with the original objectives or problem
To assess the appropriateness of an alternative, the to ascertain whether they were achieved or solved. The
decision maker should consider its adequacy to address the results are often presented in a report. Having assessed the
problem. The decision maker should also consider the costs report, it may be necessary to modify the course of action or
or benefits of choosing each alternative. This should include to start the process of decision making over again.
the possible impact that each option will have on the defined Examine the example given in Table 3.1.
problem and the entire organisation.
Selecting and implementing the alternative Factors affecting decision making

Here, the decision maker selects the best course of action to A number of factors affect decisions that we make on
solve the problem. As we examine this stage, you will realise a daily basis. Like us, a business faces constraints on its
that many situations do not lend themselves to mathematical decision making. The downturn in the world economy
or quantitative analysis but instead are subjective. However, during the period 2007–09 has had a negative impact on
there are some situations where sufficient quantitative data many businesses worldwide. In addition to this, government
is present to aid in the selection of a particular alternative. decisions, technological advancements, socio-cultural factors
The manager may also select and use a combination of and human constraints also influence decision making in
business.
Stages of de- Solutions

Government, political and legal
cision making The government is responsible for passing various laws
Definition of Assessing the decline in sales of Company X and requirements and establishing frameworks that will
the problem for the period 2009–10 affect decision making. Since political parties have different
Data collection Primary data may be collected through philosophies and goals, a change in administration may also
market research, e.g. consumer survey or
suggestion slips pose a problem for some businesses. The macroeconomic
Secondary data may be garnered from policies that will be pursued might differ and this will have
economic surveys carried out by government some influence on businesses. The legal environment of the
agencies on macroeconomic variables, market
analysis or reports from other businesses Caribbean is becoming even more pressing, with the signing
Developing The firm can list the different steps that can of a regional treaty to form the Caribbean Single Market
alternatives be taken to improve sales, e.g. sales promo- and Economy (CSME). One clause of the agreement seeks
tion, advertisement, product modification and to harmonise laws relating to commerce. Once this clause
rebranding
becomes fully enforced, all firms within the CSME will be
Analysing Assess the options in the previous stage in
alternatives terms of effectiveness and appropriateness. subjected to the same laws. Based on what those laws are –
The cost of implementing each option should or will be – some Caribbean firms may have to change the
also be ascertained way they do business.
Selecting and The company would select the most effective In the Caribbean there are currently a number of laws
implementing and cost-efficient option from the list and
implement the decision governing the behaviour and operation of businesses. These
Evaluation The company needs to assess whether the op- include:
tion chosen has improved its sales figures. If Employment laws which govern contracts, recruitment,
not, then it may need to modify the option or termination of employment, redundancy, health and
choose another
safety in the workplace, unionisation, dispute resolution
Table 3.1: The decision-making process and minimum wage payments. Businesses must be
CASE STUDY
Decision crisis in J & K Fast Food

J & K Fast Food is a partnership between two close friends. The business was established some nine years ago and has performed
fairly well financially. For its tenth anniversary, the two partners are thinking of making a number of changes, including convert-
ing to a private limited company, offering more products and either expanding or changing its location. The two partners are
unsure of how things will work out and both have some reservations.
In a discussion about the change, the following issues were raised:
How will changing the business from a partnership to a company benefit each partner?
What are the new products that will be offered?
Should the firm expand at its current location or relocate?
What profit margin is expected after the conversion?
The issues raised in the meeting are now having an adverse effect on the two partners who are indecisive in all the areas
mentioned above. They have agreed to compromise on all of the decisions except the one on expanding or relocating. If not dealt
with quickly and effectively, this deadlock could see the death of the firm instead of a tenth anniversary celebration.
A close friend of both partners heard of the pending crisis and suggested that before they make any decisions they should
search for the necessary information that would make the decision easier. He suggested that they should also use the steps of
the decision-making process to iron out the question of expansion or relocation.
Questions
1. Define the term ‘quantitative decisions’. (1 mark)
2. What are the three (3) levels of decisions that are often made in firms? (3 marks)
3. J&K’s friend mentioned seeking information to assist with the decision. Give the four (4) characteristics that
this information should have. (8 marks)
4. Using the decision-making process, discuss how the two partners could come to a consensus on whether to
expand at their current location or to relocate. (18 marks)
Total 30 marks
aware of these laws when making decisions since they Environmental laws. With the emphasis that is being
have serious implications for them. placed on global warming in recent times, firms now
Laws to promote competition in business. Governments have to be more careful about their impact on the
have enacted laws revoking previous monopoly licences environment. Governments are also becoming more
and liberating some of these markets in order to foster vigilant in the enforcement of environmental protection
competition. These laws may also prevent mergers laws. For example, firms in the food services industry
and limit uncompetitive practices among firms. For have to be mindful of offseason fishing and other firms
example, the Jamaican telecommunications market have to limit their pollution of the air, water or land.
was liberalised in 2001 to allow other firms to enter the
industry. A number of other Caribbean territories have
also liberated their telecommunication markets. ACTIVITY
Consumer rights which protect consumers from Conduct research in your country to find other
exploitation and unfair practice in business. In Jamaica, organisations that protect you as a consumer.
consumers may obtain redress from the Consumer
Affairs Commission, the Bureau of Standards and the
Fair Trading Commission, while landlords and tenants Social and cultural
are protected and governed by the Rent Board. The As was discussed in Chapter 2, a number of firms are becoming
Sale of Goods Act is also important, as it stipulates the more socially responsible. With some governments passing
conditions under which goods are sold. environmental and animal protection laws and the impact
of global warming being felt around the world, businesses The world has become a global marketplace and firms are
must now be more aware of these factors in their decision faced with competition from all over the world. E-commerce
making. They must also be aware of the culture of the has grown considerably and firms in the Caribbean may
market in which they are entering or operating. ‘Culture’ have to compete with others in Europe or Asia. The
is defined as a combination of beliefs, values, rituals and banking sector is one such industry that has made strides in
practices that shape one’s behaviour over time. Culture incorporating and utilising improvement in technology in
plays a critical role in some markets in terms of food, dress the delivery of its services. E-banking has given customers
and music. In business, the decision maker must be aware of freedom to pay bills, transfer funds and check account
this and guide his/her decision likewise. balances, among other things. Likewise, technology has
Social and cultural factors may also be extended to improved significantly in the area of communication in the
include the structure of the population. Decision makers Caribbean region. With the liberalisation of most Caribbean
need to be conscious of the following factors in society: territories’ telecommunication industries, communication
Changing family structure – there are a number of has improved significantly. Decision makers must assess
single-parent households in many Caribbean territories how the changes in technology will affect decisions made.
and the number keeps growing. Management must The proliferation of social networks in recent times has
be mindful of this trend, in addition to the existence provided firms with a new medium to promote their products
of nuclear and extended families, and try to ascertain and gain customer feedback. This also changes the way in
how any decision made will affect each structure. The which firms do business. Today, more people are looking
decision maker must be aware of families’ range of for comfort and high-quality service. With the increase in
income, and the products that they demand. He/she the number of customers using credit cards when compared
must be mindful that the family structure can affect the with, say, five years ago, there are more online shoppers
level of poverty or give an indication of how the firm for whom firms must be able to provide. At present, many
should price its product. people are moving away from spending actual cash by
Improvement in education – Caribbean territories are paying their bills online and buying some products online
now open to a number of tertiary institutions and where they are available. At the rate at which technology is
the number of people achieving higher education has improving, Caribbean firms may have to change their way
grown remarkably. These people will question a firm’s of doing business so as to be able to cater for the needs of
decision and action before purchasing their products. their customers.
Population age and working habits – the age of the
population is influenced by the life expectancy rate, Economic
which has increased over the years as a result of Economics is a social science which deals with study of
healthier lifestyle and developments in medicine. With human behaviour and how scarce resources are allocated
investment opportunities increasing, some people are to satisfy human beings’ unlimited wants. We all make
retiring earlier and this is compounded by the fact that economic decisions on a daily basis and these decisions
they are generally living longer. Decision makers have may be influenced by different forces in the economy. The
to bear these factors in mind as they make decisions that government has to make macroeconomic decisions which will
will affect this group of people. impact on the business community. These macroeconomic
policies may aid or discourage business and decision makers
Technological must be aware of this. Macroeconomics deals with economic
We would all agree that technology has evolved rapidly aggregates – in other words, it is the study of the economy
in the past two decades. Computers have been reduced as a whole. Macroeconomics policies include such things as
in size significantly; the internet has opened up a myriad inflation, the unemployment rate, interest rates, exchange
of opportunities; there is new and improved technology rates, economic growth and the balance of payments. Now
in manufacture that has reduced wastage and improved let’s examine each of these policies in more detail.
yield; and there are a number of social networks that bring
together people from all over the world. Decision makers Inflation rate
need to be aware of the pros and cons of technology and Inflation is a continuous or sustained increase in the general
capitalise on the opportunities it brings while being mindful price level in an economy. High inflation rates may cause an
of its threats. increase in production cost for firms. It will also mean that
revenue will lose its value as inflation rates get higher. In Interest rate
addition, the purchasing power of consumers will decrease Interest rate is the amount that borrowers pay to lenders
as they will not be able to purchase the same amount of per dollar of the money borrowed. In other words, interest is
goods and services with the same income as before. Inflation the price paid for the use of money or for the use of capital.
is calculated as: The level of interest rates is very important to management.
CPI t – CPI t-1 Very high interest rates will impede growth, as the cost of
× 100
CPI t – 1 borrowing money will be too high. Firms will not be able
Where t = present year and t–1 = previous year. to borrow to invest and, without additional investment,
businesses will not grow. The government’s macroeconomic
There are two main causes of inflation: policy on interest rate may hinder or enhance the business
Demand pull inflation – this is commonly referred to environment and decision makers must be aware of this.
as ‘too much money chasing too few goods’. It occurs Interest rates may vary for a number of reasons, such as
where aggregate (total) demand is increasing while the length of the loan, the risk involved and administrative
the available output of goods or services is limited. The charges.
excess demand will cause the general price level to
increase Exchange rate
Cost push inflation – occurs when the price of inputs The main trading currency for most Caribbean countries is
into production increases and causes producers to the US dollar. However, most countries, with the exception
increase the price to consumers. This type of inflation is of the Eastern Caribbean states, have their own currency.
influenced by three main factors, including wage push This means that, in order to get the US dollar to trade, their
factor, import price push and profit push. currency must be converted. The rate at which one country’s
currency trades for another is known as the exchange rate.
Unemployment rate The exchange rate for these countries ranges from low to
The unemployment rate measures the percentage of the high, depending on the territory in question. High exchange
population between the ages of 18 and 65 that are currently rates may hurt businesses which import most of their inputs
not working but actively seeking employment. This is into production. Low exchange rates hurt exporters who
calculated as: will receive lower return on their products when revenue is
Unemployed converted in their local currency. Countries in the Caribbean
× 100 use one of the two main types of exchange rate systems. For
Labour force
Labour force consists of Employed + Unemployed people. example, Barbados has a fixed exchange rate system, while
Jamaica has a managed floating exchange rate system.
There are four main types of unemployment, namely: A fixed exchange rate system is one where the
Frictional – this type of unemployment is as a result government fixes the external value of its currency in
of the search process when people are between jobs. relation to other currencies – for example, at $2 Barbados
For the period of time that they are out of a job or to $1 United States (BD$2:US$1). The rate is maintained by
waiting to find another job, they are referred to as being the Central Bank which intervenes in the foreign exchange
‘frictional unemployed’ market by supplying US dollars when there is a shortage
Cyclical – this is caused by the recessional phase of the and purchasing excess currency when there is a surplus. The
business cycle. When total demand falls, firms tend to opposite of this is a floating exchange rate system where the
employ fewer people and the unemployment rate will value of the currency is determined freely by the interaction
increase of demand and supply of the dollar.
Structural – this is caused by changes in technology or Where a floating exchange rate system is being used by
the structure of the organisation. As a result, some skills the government, the currency may depreciate or appreciate
are no longer needed or people lack sufficient skills to in value. A depreciation of the dollar occurs when there
secure employment is fall in the demand for a country’s currency, which leads
Seasonal – unemployment that is as a result of the to a reduction in the value of the dollar in terms of other
off-season period of production. This is evident in the currencies. Conversely, an appreciation of the dollar occurs
agricultural industry in the Caribbean, as some workers where there is a decrease in the supply of the dollar, which
are laid off when the crop season ends and then re- leads to a reduction in the value of the dollar in terms of
employed when it starts again. other currencies.
Ecological factors ‘Go Green’ campaign by using eco-friendly packaging or

Ecology is the study of living organisms and their recycled materials in production.
environment. Ecological or environmental factors deal with
how businesses treat the environment in which they operate. Human and natural constraints
Businesses are being urged to be more socially responsible The human element in business may pose different
and laws have been enacted to monitor their behaviour. For challenges. The fact is that we are all different in thought,
example, there are laws prohibiting firms from dumping ability and attitude. The decision maker should be aware of
their wastes inappropriately, cutting down large numbers the following factors:
of trees and damaging coastlines. Decision makers must be The skill level of employees, which may foster or hinder
aware of the implications of making decisions that are bad the implementation of certain decisions
for our environment. As was discussed earlier, firms must The years of experience of both management and staff
become more socially responsible. People have different attitudes to risk and change. Some
As many countries grapple with the effects of global employees may not like change, while some might be
warming, they must implement environmental laws to more cautious than others in terms of risk taking
protect themselves from further degradation. What was Size and composition of the labour force is also vital
once a concept on paper has quickly become a reality and The level of motivation of the workforce. We will
is evident in the growing number of natural disasters being examine this further in Module 2.
faced within the Caribbean region. The degradation of ‘Natural factors’ refers to the natural resources that are
the environment has serious implications for the region’s used as inputs into production. These include land, labour,
agricultural industry and has the potential to create food capital and entrepreneurship. A firm experiencing a shortage
shortages whenever a major disaster hits. We have seen of these resources will find it difficult to produce its product
where many firms and individuals have bought into the in large quantities.
CASE STUDY
Turbulent times for Yummy Fast Food Ltd

Yummy Fast Food Ltd has recently converted from a partnership to a private limited company. The changeover for the most
part was smooth and things have started to return to normal. However, within the last year things within the country and the
CARICOM region have started to change rapidly.
The present struggles started with a downturn in the global economy which is now being dubbed ‘the recession of the new
millennium’. Since the recession started, the company has been losing money and profits have been falling. Unemployment rates
and inflation rates have skyrocketed and the government has implemented a high interest rate policy in an attempt to curtail
inflation. The government has also increased taxes in a bid to finance the Budget. To exacerbate the issue further, citizens are
becoming uneasy and frustrated to the point where demonstrations and riots have started as the Opposition put pressure on the
ruling party.
If this situation continues for a prolonged period, the company may have to leave not just the country but possibly the
Caribbean region. The directors are therefore keeping a close watch on the situation.
Questions
1. Identify two (2) factors from the case that may affect the decision making of Yummy Fast Food Ltd. (2 marks)
2. Discuss how the economic factors mentioned in the case could affect decisions at Yummy Fast Food Ltd. (12 marks)
3. How could the political instability of the country affect the company’s decision to expand its operations? (6 marks)
Total 20 marks
Table 3.2 summarises the possible impact of these factors on a firm’s decisions.
Factors affecting decision making Positive impact on businesses Negative impact on businesses
Governmental, legal and political Governments can provide the legal Laws such as those on minimum wage
framework within which businesses could have an adverse effect on firms’
operate, which could work in the business’s revenues
favour Political instability may result in the loss
Businesses can be protected from unfair of productive time
competition Government taxing policies could also
Government policies can create business deter firms from operating in the region
opportunities in some areas, e.g. through and could lead to reduced revenue
liberalisation of the market or industry Government monetary policy framework
Infant industries can receive protection could make it difficult to do business in the
from external competition region, e.g. high interest rate
Social and cultural Social networking can be used as a good If an age gap exists then firms could
marketing tool to reach a larger group and experience a slowdown in production as
wider cross-section of people more experienced employees retire
The age differences in the population A shift in the family structure could result
can be used as an opportunity for in more absenteeism, especially when
segmentation, i.e. creating different children become sick
products to meet the needs of each age If the product being sold by the firm is
group viewed as offensive because of some belief
Once the firm learns the culture of the in the market country’s culture then it may
country, it can produce products that are not be supported there
in tune with people’s belief system
Technological This has paved the way for doing business Technology comes with a cost to the firm
online (e-commerce) and this may be very expensive
Each firm can market and sell its product The use of internet technology has brought
globally, thus having access to the global new competition to regional firms
market Technology may cause information to
New and improved technology can increase become available to unscrupulous users
productivity and hence the output of the Employees can feel alienated by
firm technology. This could lead to low levels of
Technological advancement in and of itself motivation and productivity
creates business opportunities
Decisions made in the firm can easily
be transmitted using e-mail or video
conferencing, etc.
Economic Low interest rates can be good for firms Economic instability can reduce business
wanting to borrow for investment confidence, thus affecting investment
The business needs to know information decisions
on inflation and exchange rate in order to High inflation rate can result in increasing
forecast or plan for the future better input cost for the firm
The firm can decide to locate in a country If the economy moves into a recession, the
whose economy is growing in order to firm could see significant falls in sales and
maximise profits profits. This may lead to it closing down
A firm may decide to market its products
where it can gain high returns on
investment
Ecological Decisions that are made with the The firm must be aware of the legal
environment in mind show the firm’s implications of polluting the environment
corporate social responsibility
Table 3.2: Possible impact of factors on a firm’s decision making

CHAPTER SUMMARY
Decisions are generally made at the strategic, tactical and The stages in the decision-making process are: definition
operational levels in a business of problem, data collection, development of alternatives,
analysis of alternatives, selection and implementation, and
The four essential features of good information are: evaluation
accuracy, timeliness, relevance and cost-effectiveness
Decisions made within a firm may be affected by factors
such as: technological, governmental, social and cultural,
economic, ecological, and human and natural constraints.
MULTIPLE CHOICE QUESTIONS 5. Decisions are often made at all the following levels EXCEPT
which one?
1. Information should have four main features. Which of the
a. Shop floor
following is NOT one of them?
b. Tactical
a. Realistic
c. Operational
b. Accurate
d. Strategic
c. Cost effective
d. Relevant 6. Which stage of the decision-making process involves an
assessment of the decisions taken and the level of success by
2. A continuous or sustained increase in the general price level matching objectives to outcome?
in an economy is referred to as:
a. Definition of the problem
a. Inflation
b. Developing alternatives
b. Deflation
c. Evaluation
c. Stagflation
d. Analysing alternatives
d. Consumerism
7. Which of the following would NOT be a legal factor affecting
3. Cost push inflation is influenced by ALL of the following decision making?
EXCEPT which one?
a. Sale of Goods Act
a. Profit motive
b. Unemployment rates
b. Increased demand
c. Consumer protection agencies
c. Increased wages
d. Bureau of Standards policies
d. Import prices
8. An increase in the number of single-parent families across
4 The type of unemployment which is associated with recession the region is an example of which of the following factors
in an economy is known as: affecting decision making?
a. Frictional a. Technological
b. Seasonal b. Economical
c. Cyclical c. Social
d. Structural d. Human constraint

Mrs Doubtful has decided to expand her business and is about to purchase two delivery trucks. Since there are a number of trucks
available for sale, she has approached you to assist with the decision. Advise Mrs Doubtful on the following five (5) steps involved
in the decision-making process and how they would apply to the decision she has to make.
a. Definition of the problem
b. Data collection sources
c. Analysis and evaluation
d. Formulation of alternative strategies
e. Implementation (25 marks)
Good Food Ltd is a fairly new restaurant in your country. The management of the restaurant makes a number of decisions daily
that will impact on the firm and its main stakeholders. Discuss how the following factors may affect a firm in its decision making.
a. Economic
b. Government, legal and political
c. Technological
d. Ecological
e. Socio-cultural (25 marks)
47
4 Caribbean Business Environment

and Globalisation
make sufficient revenue as people do not have money
LEARNING OBJECTIVES: to spend. Some sociologists believe that there is a
At the end of this chapter students should be able to: correlation between high unemployment rates and
Understand the nature and structure of Caribbean social problems such as crime and violence. Where
business organisations crime escalates, investors are deterred from the country
Discuss the role of culture in organisations’ behaviour and so fewer jobs will be provided and economic growth
Assess the growth of multinational corporations in will be suppressed
Caribbean countries While some countries, such as Barbados, are doing well,
Discuss the impact of globalisation and trade others are struggling with below-average literacy rates.
liberalisation Some of these countries have poor education facilities
Discuss the pros and cons of protectionism and barriers and also suffer from overcrowding. This will impact
to trade on the future workforce who will not be employable
or marketable. Poor literacy impedes development, as
citizens might be underproductive
A large percentage of these countries depend on the
The nature and structure of Caribbean agricultural sector to earn foreign exchange. However,
business organisations some of their farmers are undercapitalised and are still
T
he Caribbean territories are characterised by mostly using old techniques which are not bringing about
small developing economies. These economies tend sufficient yields to compete on the international scene.
to be open, with little protection against more devel- Produce is at times expensive and limited. To compound
oped countries dumping unwanted goods on them. The the issue, imported produce has found its way into the
economies are mostly mixed and businesses range from market, stifling some of the small farmers who cannot
local firms to multinationals. In recent times some of these compete with the lower prices. The agricultural sector
economies have been making strides to foster economic is also susceptible to natural disasters which damage a
growth and increase foreign direct investments. If this move number of farms regularly. This has been highlighted as
is successful it may bring about improvements in standards one of the factors that caused Jamaica Producers Group
of living and the economic outlook for these countries. Ltd to abandon banana exports, resulting in the loss of
However, some of the Caribbean countries’ efforts have jobs
been hampered by the downturn in the world’s economy in Some businesses face the challenge of operating with
the latter part of the first decade of the 21st century. outdated technology. As a result, productivity is low and
Bearing in mind the above factors, businesses in these the cost of production is very high. Since at times it is
Caribbean territories are faced with many challenges. difficult to secure funding, these technologies cannot
Some have been hit so badly that they have thrown in the be replaced as soon as there is an improvement. Some
towel; others have downsized; and others have merged of these businesses have a poor capital structure and
with other firms in an attempt to survive. When we discuss depend largely on human effort, therefore limiting the
organisational charts in Module 2 we will look at the size of their operations
structures of most of these businesses. As mentioned earlier, most Caribbean economies are
The environment in which these businesses operate also characterised as small and open. As a result, businesses
poses many challenges: face competition from international companies. With
Most territories are still struggling with high rates of the popularity of the internet which provides easy
unemployment. Where a significant percentage of a access to these markets, Caribbean businesses are faced
country’s citizens is unemployed, businesses cannot with competition from both home and abroad.
Caribbean business culture Communication networks

We are all influenced in some way by our culture and the These have grown extensively over the past decade and
business place is no different. Business culture is defined this has influenced the culture of many organisations.
as the beliefs, attitudes and values of the employees in an Networking is seen in staff magazines, social gatherings,
organisation. Managers must be aware of the culture that staff involvement in decision making and informal groups.
exists in their organisations. This is very important since Networking employees are more likely to be influenced
culture will influence the pattern of behaviour, attitudes to by their colleagues and hence influence the culture of the
change, motivation, morale and performance of the staff. organisation.
Good corporate culture may also promote or demote the
business and its ability to attract qualified and experienced Leadership style
employees. The style of leadership and the personalities of the leaders
The culture of any organisation is formed over time and themselves may influence the organisation’s culture. A
is usually influenced by a number of factors shown in Figure leader who encourages participation among employees
4.1. and management will have a warm and hospitable culture
Now we will examine each factor in more detail: compared with one who does the opposite. The leader’s
personality may help to motivate the workers and influence
Environment their norms, attitudes and beliefs.
The environment in which the organisation operates
will affect its culture. Caribbean businesses operate in an Employees’ attitudes
environment that has a rich history embedded in the coloni- Employees’ norms, beliefs and attitudes will transcend
sation of the region. This past could affect the way business into the culture of the organisation itself. Most of the time,
managers and employees react to different situations. Some the employees are the ones who are in direct contact with
managers still practise a very autocratic style of leadership, the customers and, if disillusioned, may send the wrong
from the time of the plantation system, instead of the more signal. The culture of management may be infused into the
accepted democratic style. employees and the way they behave in the organisation.
Our economic environment is generally mixed and
businesses have adopted a culture of ascertaining the needs Daily procedures
and wants of their customers while aiming to maximise their The procedures that have to be followed on a daily basis may
profits. This profit motive may overshadow matters such as influence the culture of the organisation. Some businesses
environment preservation, ethical practices and the rights of are very bureaucratic, with a lot of checks and balances.
consumers. This contributes to an office which is paper dominated. With
such strict guidelines, workers in these organisations tend to
be less spontaneous and are not allowed to be autonomous
in the decisions they make.
From the above, it is clear that a positive and strong
Leaders business culture is very important. The reasons for this
are outlined below:
A strong and positive business culture helps to
s
Employee
improve the loyalty of employees and customers
ent
The firm’s culture can motivate the workers and
Environm
improve their productivity
ss
Busine When each employee understands the culture of
c u lt u re
the organisation, they are able to communicate and
understand instructions clearly, minimising
conflicts.
Daily s Business culture is good but does have a number of
re
procedu criticisms. Some of these are outlined below:
nication
Commu orks
netw There may be conflicts of culture, especially for
multinational corporations (MNCs). These
Figure 4.1: Business culture factors
CHAPTER 4 | CARIBBEAN BUSINESS ENVIRONMENT AND GLOBALISATION 49
MNCs enter the overseas market with their own To be shielded by tariff-protected markets. Since the
culture, which may conflict with the local culture inception of CARICOM, the Caribbean region has
Some businesses are very large and so it is difficult benefited from a common external tariff (CET). This
for a unique culture to be communicated. In a single means that countries within the free trade area trade
business, there may be a variety of beliefs, norms and without tariffs but all products coming into the region
attitudes. are subjected to a common tariff. Multinationals can
take advantage of this by setting up operations in any
of the member countries of CARICOM and enjoy free
The growth of multinational corporations trade within the region while being protected from
in the Caribbean competition outside the region
As we discussed earlier, the Caribbean economies are mostly Government policy. In order to foster economic growth
open and more susceptible to the impact of globalisation and investments, governments may pursue fiscal
than developed countries. These economies provide large and monetary policies that encourage the growth of
international companies with a good opportunity to expand multinationals. This move may also help to increase
into different markets. These companies are referred as industrialisation, as some technology will spill over into
multinationals. A multinational or transnational corporation existing local firms. In order to encourage investment
is one that owns and controls other business operations in the local markets, the government may offer tax
outside of the country in which it is situated. The parent holidays and provide the necessary land space or
company usually operates out of one country but operates infrastructure needed by these firms
other branches (subsidiaries) or factories in other countries. To avoid local laws. Some MNCs move some of their
The branches are subjected to the laws governing each operations out of their home country in order to avoid
particular country. Examples of multinationals in the laws affecting them – for example, countries with anti-
Caribbean would include C&W Ltd. trust laws which encourage competition by preventing
Multinationals in the Caribbean have increased steadily monopolies and mergers
over the years and, in some cases, have captured a significant Most Caribbean countries have some form of restriction
portion of the total market share. But what are the causes on imported goods. MNCs enter the local market so
of this increase? as to avoid these import restrictions. Locating within
To be close to their markets. Multinationals can cut cost the region would give them open access to the market
and gather more accurate data if they are operating without having to pay to export their products to these
near to their markets. Such a company would be able to territories. For more information on import restrictions,
understand the culture of the market and its consumers’ see the section on protectionism.
buying behaviour. A company operating out of Europe The growth of multinationals in the region has provided
might find it easier and cheaper to open a branch in the the host countries with a number of benefits. However,
Caribbean rather than trying to export its products there there are also drawbacks. In this section, we will examine
Lower production cost in those countries. Locating in and discuss some of the benefits and drawbacks of MNCs on
the Caribbean may present multinationals with lower the country in which they are located.
production costs. Some territories offer cheap labour
since the supply of labour is greater compared with its Advantages of MNCs to the host country
demand. In other words, the number of people seeking Gain foreign exchange as a result of the initial
jobs is greater than the number of vacancies available. investment and exportation of products from these
In such cases wages tend to be lower than in places companies. The Caribbean countries’ main trade
where the opposite exists. In addition, the minimum currency is the US dollar. Once these companies export
wage in most Caribbean territories is relatively lower their products the country will gain foreign exchange
than in developed countries. Multinationals may also which will help to improve the balance of payment
come to the Caribbean to make use of the natural position
resources found there. If they can manage to get raw Improvement in the country’s Gross Domestic Product
materials at source, it is likely that they will be cheaper (GDP). GDP is the value of all final goods and services
– for example, bauxite companies trading in Jamaica produced within a country over a one-year period. With
and oil companies in Trinidad and Tobago more output being produced by these MNCs, the GDP of
the country will increase, all other things being equal
The country will experience a reduction in in the atmosphere, depleting our ozone layer. Some
unemployment. Most MNCs will employ some citizens MNCs may also contribute to land and water pollution if
of the country in which they are located. When this waste is not disposed of properly
occurs, some people who are unemployed will be able Some local competing firms may be forced out
to find jobs. As more people find employment, their of business as they try to compete with these
standard of living should also improve multinationals. Local firms are at times undercapitalised
Local firms that provide auxiliary services to large and have inferior technology and equipment to these
companies will also benefit from increased business – for multinationals. As a result, they are not able to compete
example, cleaning services. The construction sector may effectively.
benefit from the construction of buildings or plants. If
the investment is in the hotel and tourism sector, the
local agricultural sector may also benefit by supplying its The impact of trade liberalisation and
produce to it globalisation
The country will receive increased revenue from Have you ever heard the statement that ‘the world is a single
taxation. This will include taxes on the company’s profit global marketplace’? Well, that is exactly what it is now.
(corporation tax); increased value added (consumption)
Our markets are no longer dominated by local products, but
tax from increased sales; and personal income tax from
have been infiltrated by products from all over the globe.
employees
Today, if you walk into a supermarket or a department
There may be an improvement in technology as the
store or even the corner shop in your community, you will
multinationals will introduce new and improved
realise that the products available are made in a number of
technology which may spill over in the economy. With
countries. We can be in the Caribbean and do business with
the introduction of new technologies, local firms may
a company in Europe and have a product couriered to the
be forced to improve their own in order to remain
competitive. As a result, there could be a general customer very quickly. All of this is made possible through
increase in output and quality of products trade liberalisation and globalisation.
Consumers benefit from increased variety as they can
Trade liberalisation
now choose from a wider range of products.
Trade liberalisation is the removal of barriers to trade and
Disadvantages of MNCs to the host country giving free access to the market. This access may be limited
Multinational corporations are known to repatriate to certain products or it may be a total lifting of the barriers
most, if not all, of their profits. If this is done the host to trade. These barriers are explained in the next section.
country will not benefit from profits being reinvested in The emphasis on trade liberalisation started in the
it. Therefore these firms would be using their resources Caribbean with the formation of the Caribbean Free Trade
to generate revenue but the country will not enjoy great Association (CARIFTA) in 1965. The association’s main aims
benefits as a result were to increase, liberalise and diversify trade among the
If stringent laws are not in place to protect employees, member states.
the local workforce can sometimes be exploited. They In 1973 CARICOM was established, with the aim of
may be asked to work long hours but receive less than improving on CARIFTA. One of its objectives was to include
equitable remuneration economic integration in the region, along with each member
Motivated by profit, multinationals may deplete local implementing a common external tariff (CET). Trade among
non-renewable resources. In an attempt to maintain the member states would be free while the region was
production and profits, MNCs may overproduce. protected by the CET.
Countries such as Jamaica and Guyana have seen Today, CARICOM has grown into the Caribbean Single
tonnes of bauxite being mined each year. This mineral Market and Economy (CSME). The CSME finally came into
can take thousands of years to form but over time the being in 2006, having been proposed and agreed upon from
supplies have dwindled considerably. Trinidad has seen 1989. The CSME is designed to represent a single economic
a reduction in its oil reserve as more and more barrels space where people, goods, services and capital can move
are extracted year after year freely within the member states. Article Six of the revised
Multinationals may cause increased pollution and little Treaty of Chaguaramas which established the CSME has
might be done to curtail it. Large plants may emit waste outlined the following objectives:
CASE STUDY
Changing the mobile service landscape

When the Jamaican Government decided to liberalise the
telecommunication industry in 2001, investor Denis O’Brien
seized the opportunity to make what is now seen as a very
successful investment. In April 2001, Digicel Jamaica was
launched with less than five per cent mobile phone penetration.
With its three-pillar business strategy of ‘best network, best
service and best value’, the company quickly gained a foothold
in the Jamaican market. To this end, its success in its first year
was above target and it has continued to grow since then.
This same strategy would see Digicel becoming one of the
larger multinational corporations in the Caribbean. From just
its Jamaican establishment, Digicel is to date operating in 31
markets worldwide, including 26 in the Caribbean and Central
Figure 4.2: Digicel headquarters, Kingston
America and five in the Pacific. The company is said to employ
over 5,000 people, with over 1,000 retail stores, and boasts a customer base of approximately 13 million.
Digicel has made huge contributions to the mobile landscape, as the monopoly of Cable and Wireless, its main rival, was
not sufficient to cover all the demand in the region. This gave the company a good platform to work from and very soon many
individuals had access to mobile services. The contribution of this multinational corporation is also seen in its corporate social
responsibility work which it does through the Digicel Foundation. The foundation is guided by its mission statement which says:
Digicel Foundation is a non-profit organisation that distributes and utilises funds on a charitable basis for the sole
purpose of building communities and community spirit in Jamaica.
Questions
1. What is a multinational corporation? (2 marks)
2. What evidence is there in the case to prove that Digicel is a MNC? (5 marks)
3. Discuss three (3) possible benefits and costs to the host country from Digicel’s operations in the Caribbean. (18 marks)
Total 25 marks
improved standards of living and work Movement of labour – this will allow skilled labour to
full employment of labour and other factors of travel and work in any of the member states. It will
production facilitate the harmonisation of social services (education
accelerated, coordinated and sustained economic and health services) and transfer of social security
development and convergence benefits (pension benefits)
expansion of trade and economic relations with third Movement of goods and services – which is achieved
states through the removal of all trade barriers among
enhanced levels of international competitiveness member states and setting regional standards for the
organisation for increased production and productivity. goods being traded
The CSME Agreement had the following key elements: Right of establishment – this element allows business
Movement of capital – which will be achieved by people from any member state to establish and own
eliminating foreign exchange controls and establishing a businesses in another member state without restrictions
common currency. This also includes the integration of A common external tariff gives each member state the
the regional capital market (for example, establishing a right to apply the same rate of tariff on all imports that
regional stock market) are not coming from a member state
A common trade policy allows for joint negotiation on transportation have increased. Businesses can make
matters relating to internal and international trade and and receive shipments within a day by using courier
a coordinated external trade policy services. Local consumers can purchase products from
Free circulation – goods that are imported from non- abroad and easily ship them to their country of origin
member states are allowed to be circulated within the Technological advancement – improvements in internet
region duty free since the relevant taxes would have technology and communication networks have also
been collected at the first point of entry contributed to the growth in globalisation. It is much
Harmonisation of laws – laws in the region are to be easier to communicate with the world and this fosters
carefully coordinated to reflect ‘oneness’. These laws the growth of businesses and business opportunities.
include intellectual property rights and company laws Communication in the Caribbean has evolved rapidly
Monetary policy measures – there should be a over the last decade or so. Most people now have access
coordination of exchange rate and interest rate policies. to cellular internet technology. Companies have laid
Fiscal policy measures include the coordination of underwater fibre-optic cables to improve efficiency
indirect taxes and budget deficits. and speed. All this has contributed to the growth of
The concept of trade liberalisation has also taken the globalisation
spotlight in the world economy. This was evident with Trade liberalisation – as discussed earlier, the
the establishment of the General Agreement on Tariffs liberalisation of trade has opened a number of markets
and Trade (GATT) in 1947. Its main objective includes the that were once heavily protected. This is evident in
regulation of trade among about 150 countries. It sought CSME where business people can locate in any member
to ‘significantly reduce tariffs and other trade barriers state without restrictions
and eliminate preferences, on a reciprocal and mutually Deregulation of business and financial markets – in
advantageous basis’. GATT was later replaced by the World
recent years, governments have removed restrictions
Trade Organization (WTO) in 1995.
and regulations in certain industries, giving them more
The essential functions of the WTO are:
leverage. A number of public-sector businesses have
Administering and implementing the multilateral trade
been privatised, increasing competition and the need
agreements that collectively make up the WTO
to expand abroad. Deregulation has led to the abolition
Acting as a forum for multilateral trade negotiations
of capital controls in many countries, making it easier
Seeking to resolve trade disputes
to acquire capital overseas. Developing countries will
Reviewing national trade policies
also benefit from increased foreign direct investment as
Cooperating with other international institutions
money flows more freely across national boundaries
involved in global economic policy making.
Change in the tastes and preferences of consumers –
The WTO embraces the two main operational principles
consumers’ interest in foreign products has increased
of the original GATT:
significantly over the years. More people are now
Reciprocity – arranging for countries to receive foreign
tariff reductions in return for tariff cuts of their own demanding international products and new market
The ‘Most Favoured Nation’ Rule – requiring that a opportunities are opening up.
country should apply its lowest tariff for any particular
The impact of globalisation
product to all its suppliers.
The impact on the economy
Globalisation Increased unemployment – unfortunately, the impact of
Globalisation entails the increased connectivity and globalisation is not always good. Increased competition
interdependence of the world economy. The growth of may cause some small vulnerable businesses to shut
globalisation is seen in the growing integration of the world’s down. When this occurs, workers will be made
market. This has been amplified in the past two decades redundant and the country’s unemployment rate will
by advancements in technology. Globalisation has opened increase. This can cause a reduction in standards of
access to markets all around the world so that it truly has living and suppress economic growth
become ‘a single marketplace’. The growth of globalisation Depletion of local resources – if international demand
is being driven by the following factors: increases significantly, local resources may be over
Reduction of transportation costs – this has led to utilised to meet such demand, increasing their
easier access to markets as the available modes of depletion. Most of these resources are non-renewable
and so a rapid depletion may be disastrous for the key role to play. The country’s business environment
nation in the future can either impede or foster the establishment of
Opportunity for economic growth – with trade multinationals or the transaction of trade by global
liberalisation and the opening up of the world market, organisations. The country’s business environment
local companies can increase trade. The increase in trade must be one that is inviting, with proper infrastructure
will earn more foreign exchange for the country and such as road networks and communication technology.
profits for the businesses. This money can be ploughed The government should also work on lowering crime
back into the local industry, causing growth. In addition, and violence which can be a deterrent for potential
the local industry can benefit from foreign direct investors. The government could also improve the
investments as international businesses seek to enter ease with which business can be conducted within the
our local markets country – that is, removing or reducing ‘red tape’
Opening up the markets of countries will also open up Developing the necessary legal framework. The
an opportunity for the underground economy. This may government also has the responsibility for developing
include the drugs trade and money laundering. Unless laws and regulations to monitor these overseas-based
local authorities are able to curtail this problem, it can companies. It has to ensure that its consumers are
spiral into an increase in criminal offences of all natures protected from unfair trading practices and that they
Earlier in the chapter we discussed that the Caribbean are not exploited. The legal requirements for formation
economies are usually small and open. This makes them must also be clearly outlined, as these can be different
vulnerable to global or external shocks and globalisation from those in other countries.
increases their vulnerability. The possible impact of
global or external shocks was made evident with the Consumer behaviour
contraction of the global economy in 2008–09. The Consumers within the domestic economy will also benefit
recession, which started in the United States, affected from globalisation. Some of these benefits are outlined
all Caribbean countries, sending their economies into below:
turmoil. Variety of choices – consumers benefit from a greater
variety of goods and services to choose from. Since the
The role of government growth of globalisation, consumers can acquire products
International policies may impede central governments’ that were not previously available to them. These can
ability to control the economy. Caribbean governments now be accessed via e-commerce. Some of these goods
may have to adhere to the policies outlined by may help to improve customers’ standard of living
institutions such as the World Bank, the World Trade Most of the time, consumers are on the receiving end
Organization and the International Monetary Fund of increased competition. They benefit from increases
(IMF), and therefore lose their power to pursue their in product quality and after-sales service as companies
own macroeconomic policies try to outdo each other. They also benefit from lower
With the negative impact of globalisation on some prices if companies are involved in price wars. Increased
Caribbean countries, governments now need to develop competition also forces businesses to become more
policies and find the necessary resources to combat efficient as they seek to create brand loyalty
these negative impacts. This may put strain on the Employment – some consumers also benefit from
already cash-strapped local economy employment in multinational corporations and other
Some governments may find that multinationals have firms that were established through Foreign Direct
grown so large that they are no longer able to control Investment (FDI)
them. These businesses may avoid taxes and contravene Changes in taste and preference – as the market opens
labour laws. to international influences, local consumers might
In order to reap the full benefits of globalisation or to gravitate towards foreign products. This could influence
ensure that multinationals operate in accordance with the what they eat and how they dress, among other things
country’s laws, the government has to play the following Quality – some MNCs have the tendency to provide
roles: a higher-quality product to their consumers in their
Facilitating or creating the right environment. Amid homeland. However, in the absence of stringent laws
the negative impact of globalisation, it can be beneficial or quality standards in the regional countries, they may
to the country and as such the government has a produce sub-standard products. To this end, consumers
must ensure that they do not settle for mediocrity but the internet through e-commerce, the business can
remain adamant that quality be maintained by these advertise, sell or purchase online
MNCs. Without valiant efforts by consumers, the firm Pricing policy – globalisation can also affect the prices
may produce and sell sub-standard products charged by domestic businesses. Where international
Responsibility – consumers have a responsibility to firms are able to sell their products at a lower price than
ensure that their rights are not infringed by MNCs. domestic firms the latter may be forced to lower their
Consumers must be aware of the fact that some MNCs prices. This could mean serious losses or reduced profits
may run away from more stringent laws in their home for local firms
countries and as such may not provide the best service Quality assurance – this is a guarantee to maintain an
to their host countries. With this in mind, consumers agreed or established set of quality standards. Regional
should hold them responsible for providing quality businesses that desire to sell their products in foreign
service. countries may have to seek certification to prove that
these products meet international standards. Two
Domestic businesses international standards by which the firm may be
The impact of globalisation is felt by businesses worldwide. certified include the British Standards Institution (BSI)
The impact might be different among these businesses, and the International Organization for Standardization
though. Below are some of the possible ways in which (ISO). Having certification from these bodies gives a
businesses might be affected by globalisation: business a stamp of quality that will make it easier for it
Competition – businesses are likely to face increased to trade on the international market. This topic is dealt
competition from foreign firms. As barriers are reduced with further in Unit 2.
and businesses are deregulated, they can enter markets
that were once difficult to get into. Globalisation also
paved the way for new and innovative firms to enter Protectionism
markets and compete with existing firms. This may As explained above, the impact of trade liberalisation and
be detrimental for some small domestic firms which globalisation is evident in different spheres of the business
are not able to compete with large multinationals. The environment. In order to protect the interests of Caribbean
Caribbean is characterised by small entities that are businesses, some governments have embarked on
sometimes undercapitalised and therefore they may not protectionism. This refers to attempts by the government
be competitive of a country to restrict the importation of goods and services.
Economies of scale – domestic firms can also expand Protections may be placed on the importation of goods and
into the global market. As they do so, large-scale services in order to:
production brings about economies of scale. Their fixed Prevent the dumping of the surplus of foreign goods
costs can be spread over a larger amount of output into the local market. These are usually low priced and
which leads to a reduction in unit cost and a lower will compete against local firms
price. These firms may also benefit from purchasing Since some firms would have to shut down if they
economies as they conduct bulk buying cannot compete with foreign firms, some workers
Technology advancement – businesses gain access to would have lost their jobs. However, with protectionism
improved technology which can be used to increase unemployment may be reduced
output and productivity. Advanced technology will also Protect infant industries by giving them a space to grow
allow the firm to reduce its costs of production as older and settle in the market with little or no competition
technology is often inefficient and causes wastage Rectify balance of payment disequilibria – that is, where
Choice of location – globalisation opens a number the value of imports exceeds the value of exports.
of markets that were previously inaccessible and as Protectionism will reduce the amount of imported goods
a result firms can now choose to locate in different and reduce or rectify the disequilibria.
countries. Doing so may provide businesses with other The following are the types of protection that are
opportunities such as labour cost saving and increased commonly used by Caribbean governments:
sales Tariff is a tax on imported goods. The tax can be a fixed
The internet is a main driver of globalisation and this amount per unit or can be calculated as a percentage
provides businesses with numerous opportunities. With of the value of the imports. Since the tax will cause
imported goods to be more expensive, the amount of
CASE STUDY
Globalisation and Caribbean sugar

The reality of a changing global environment is becoming more evident in the Caribbean as a number of firms struggle to stay
afloat. This is no different for many businesses in the agricultural sector, including sugar companies. Sugar companies in the
Caribbean have long benefited from preferential arrangements with Europe which to some extent secure a market for their
produce. However, with higher production costs, poor technology and undercapitalisation, coupled with competition from coun-
tries such as Brazil, some of these sugar companies have been adversely affected.
The Jamaican sugar industry has gone through privatisation then had to be repurchased by the government in the 1990s
when it accumulated huge losses because of high inflation rates and a revaluation of the Jamaican dollar. The industry had to
depend on capital injection from the government and the preferential agreement from Europe. After losing that preferential
treatment with the signing of the European Partnership Agreement in 2008, it became evident that the government could not
continue to carry this entity on the Budget. It was decided to privatise the industry once again.
The sugar companies in Barbados are facing similar challenges. The 1990s also saw a threat of closure of at least one of the
factories and poor economies of scale. Globalisation has further worsened the woes of the sugar companies in the Caribbean as
many have suffered from high labour costs, falling world prices and the introduction of tariffs in the European market.
Questions
1. Define the term ‘globalisation’. (1 mark)
2. Outline three (3) factors that are driving globalisation. (6 marks)
3. Amid the challenges being faced by the sugar companies in the Caribbean, discuss three (3) benefits to the following:
a. Consumers
b. Businesses
c. The economy. (18 marks)
Total 25 marks
goods that are imported should fall. Local firms will be Other barriers to trade
able to sell more products. This method is often used The government may also use other barriers to trade, such
successfully in the agricultural sector in most Caribbean as:
countries Rules and regulations
Quota is a restriction that is placed on the quantity of a Import licences
product that can be imported at a given time Voluntary export restraints (VER) which limit the
Embargo is a complete ban on trade between two amount of goods that can be exported from a country.
countries
Export subsidies – the government may grant subsidies
to local firms so that their products can be sold at a
lower price than imports
Exchange controls – this is a deliberate restriction of
the foreign currency available to citizens. Since most
Caribbean countries trade using the US dollar, if it
is unavailable or in short supply, people will tend to
consume fewer imported products.
CHAPTER SUMMARY
The Caribbean business environment the environment, employees, Globalisation entails the increased
is characterised by low literacy communication and procedures connectivity and interdependence of
rates, outdated technology, small the world economy
and open nature and high rates of A multinational or transnational
unemployment corporation is one that owns and ‘Protectionism’ refers to attempts
controls other business operations by the government of a country to
‘Business culture’ is defined as the outside the country in which it is restrict the importation of goods and
beliefs, attitudes and values of the situated services.
employees in an organisation
Trade liberalisation is the removal
The culture of any organisation of barriers to trade and giving free
is formed over time and is access to the market
usually influenced by leaders,
MULTIPLE CHOICE QUESTIONS 4. Which of the following have led to the growth of MNCs in the
Caribbean?
1. Caribbean economies are characterised by:
i. Lower production cost
a. High employment rate ii. Government policy
b. Many trade barriers iii. High profits
c. High illiteracy rates iv. Repatriation of profits
d. Advanced technology a. i and iv
b. ii, iii and iv
2. Business culture is influenced by ALL of the following
c. i and ii
EXCEPT:
d. i, ii, iii and iv
a. Consumers
b. The environment 5. Which of the following are drawbacks to having MNCs in the
c. Procedures Caribbean?
d. Management i. Exploitation of workforce

ii. Reduction in unemployment
3. The beliefs, attitudes and values of the employees form an iii. Depletion of resources
organisation’s ____ iv. Closure of local firms
a. Vision a. i and iii
b. Culture b. i, iii and iv
c. Mission c. ii and iv
d. Aim d. i, ii, iii, and iv
6. Trade liberalisation in the Caribbean started with which

organisation?
a. CARICOM
b. CSME
c. CARIFTA
d. GATT
7. Which of the following is NOT a key element of CSME? 9. A tax placed on imported goods and services is called a/an:
a. Right of establishment a. Exchange control
b. Movement of labour b. Tariff
c. Free circulation c. Quota
d. Barriers to trade d. Embargo
8. Globalisation is being driven by ALL of the following factors 10. Protectionism is used for ALL of the following reasons
EXCEPT which one? EXCEPT which one?
a. Reduced transport cost a. To prevent dumping
b. Trade liberalisation b. To protect infant industries
c. Available raw materials c. To promote inefficiency
d. Deregulation of markets d. To fix balance of payment problems

There are a number of multinational corporations (MNCs) within the Caribbean region. These firms have presented the region
with both benefits and drawbacks.
a. State what is meant by a ‘multinational corporation’ and give one (1) example of such a business within
the Caribbean. (5 marks)
b. Discuss three (3) benefits and two (2) drawbacks of MNCs to the Caribbean region. (20 marks)
Globalisation has opened many doors for the main stakeholders of the Caribbean. Its impacts are felt on a day-to-day basis. In
fact, the concept of globalisation should be of interest to all.
a. Define the term ‘globalisation’. (1 mark)
b. Discuss three (3) factors that give rise to globalisation. (9 marks)
c. Discuss three (3) impacts that globalisation may have on businesses within the Caribbean region. (9 marks)
d. Discuss two (2) impacts that globalisation may have on consumers within the Caribbean region. (6 marks)
58
Module 2 The Management of People
5 The Functions and Theories of

Management
theorists will be discussed in this section, namely Frederick
LEARNING OBJECTIVES: Taylor, Henri Fayol and Max Weber.
At the end of this chapter students should be able to:
Scientific Management: Frederick W Taylor (1856–1915)
Discuss the need for and nature of organisations
Frederick Taylor is usually regarded as the father of Scientific
Evaluate the major management theories
Management. During the time of the development of this
Outline the contribution of each theory on present-day
organisations theory most managers had little contact with the activities
Explain the functions of management of the factory. Instead, foremen were given full control to
produce the goods that were in demand. Workers would
Discuss the effect that each function has on the
organisation generally use the available tools and developed methods that
Assess the main roles of management in an organisation fitted their style of work. This had become counterproductive
and inefficient, and workers were often dissatisfied. The
existing situation sparked the interest of Taylor, who wanted
to improve productivity and reduce inefficiencies in the US
The need for and nature of organisations manufacturing sector.
S
imply put, an organisation is a group of people He started his study at Midvale Steel Company and
working together to achieve a common or collective found out that there was confusion between management
goal. Organisations work to transform inputs (people, and workers on what constituted ‘a day’s work’. He carried
raw materials, money, etc.) into outputs which are of greater out numerous experiments, called work studies, in order to
value than the inputs used. In Module 1, we discussed the determine the best way to perform a job.
different types of organisations that exist in both the private Taylor viewed man as an ‘economic animal’, meaning
and public sectors. It was pointed out that, because of scarcity that he was rational and made economic choices based on
and out of choice, humans must make decisions regarding the monetary or material reward to be gained. This view
what to produce, how to produce and for whom to produce. of the economic man led him to develop payment systems
Therefore there is a need for organisations that will convert which linked efforts with the rewards received. This was
inputs into outputs. done using a piece rate system.
Each organisation may be different in many ways. This Taylor’s study outlined ways in which managers could
difference is sometimes caused by the management theory use the principles of his theory to improve productivity. His
that is being utilised. The next section will outline the main theory suggested that work should be broken down into
tenets of these theories while discussing their impact on smaller components or tasks to enable workers to specialise
modern-day organisations. and become competent at those tasks. Taylor outlined four
principles of Scientific Management:
Develop a scientific study of management, with stated
The major management theories rules, laws and principles to replace the outdated ‘rule
of thumb’ methods
The classical theories Workers should be selected scientifically, trained and
This form of management theory dates from as far back as the developed as opposed to past practices where they were
Industrial Revolution when it was adopted to deal with the selected randomly and usually untrained
new problems that had emerged. Managers found it difficult Cooperate with workers in order to ensure that work
at the time to train employees and decrease dissatisfaction. is done in accordance with the prescribed scientific
This led to the development of classical theories as they tried principles
to find a proper solution. The work of three main classical
CHAPTER 5 | THE FUNCTIONS AND THEORIES OF MANAGEMENT 59
There should be an equal division of tasks and of administration. He concluded that business activities are
responsibilities between managers and workers. This divided into six interdependent groups which managers
will allow managers to apply Scientific Management should coordinate so as to achieve the organisation’s goals:
principles in planning the work that will be performed Technical – including manufacturing, production and
by the workers. adaptation
For the most part, these principles had some level Commercial – including buying and selling
of success. According to research done, they were Financial – sourcing and utilising capital
implemented in many factories and would often increase Security – extending to both property and individuals
overall productivity. In addition to his four principles Accounting – inventory, final accounts and statistics
of management, Taylor used the following elements of Managerial – including his five functions of
Scientific Management to manage his staff effectively: management, which are discussed below.
The separation of planning from the actual performance Fayol’s five functions of management are outlined as
of the task follows:
Carefully selecting workers to carry out a task on a Planning – involves the establishment of objectives and
scientific basis development of strategies to achieve them. Managers
Closely observing workers doing the task, and should also be able to anticipate future events and plan
documenting findings accordingly
Carrying out job analysis to ascertain the best way of Organising – this deals with the delegation of
completing a task responsibilities to subordinates in order to get the job
Standardisation of the process involved in carrying out done
the task based on the job analysis Commanding – giving clear instructions to workers and
Assigning foremen to supervise workers, based on ensuring that the business is operated effectively
specialisation of functions Coordinating – the manager should ensure that all
Fostering a suitable environment to encourage groups within the organisation are working toward a
cooperation between management and workers common goal
Providing financial incentives to motivate workers and Controlling – ensuring that activities are being
pay them based on performance. done according to plan. The manager monitors the
This theory enjoyed the following successes: performance of the staff against the prescribed rules and
Factories that implemented his approach benefited from procedures.
increased productivity Incidentally, some of the functions Fayol proposed
Some organisations benefited from increased profits became well known and accepted as the main functions of
His theory led to the development of fields such as management. These will be discussed in more detail later in
industrial engineering, personnel and quality control. the chapter.
Some drawbacks of Taylor’s theory are: In addition to the five functions of management, Fayol
Identifying the ‘best way’ to do a job often made the outlined 14 principles of management which should help
task monotonous, dampening autonomy and skill the manager to run a business smoothly. These are:
variety Division of labour – work should be divided into smaller
Some people were opposed to the use of stopwatches to tasks to promote specialisation. This should increase
assess the work done in a day efficiency, productivity and output
His view of the economic man was heavily criticised Authority and responsibility – managers should be
because humans were likened to machines and would given the authority and autonomy to carry out their
only be satisfied by money. responsibilities
Discipline – all levels of managers should be disciplined
Administrative Management: Henri Fayol (1841–1925) in order to accomplish their tasks. Discipline will help
Henri Fayol is also a classical theorist and is regarded them to develop obedience, diligence, energy and
as the ‘father of modern management’. His theory of respect for all
Administrative Management was developed around the Unity of command – in order to prevent confusion,
same time as Taylor’s but he did not focus on the workers. subordinates should take command from and report to
Instead, he focused on management from the upper level only one supervisor
60 MODULE 2 | UNIT 1 | THE MANAGEMENT OF PEOPLE
Unity of direction – activities of the same nature encompasses rules and controls that govern the organisation.
should be supervised by one manager who will guide He believed that managers were given the mandate to
subordinates to achieve the same objective enforce these rules and controls based upon the authority
Subordination of individual interest to general interest given to them by the office in which they serve.
– the interest of an individual or group should not In his study, Weber pointed out that bureaucracy had
override the interest of the enterprise as a whole become inevitable because of the growth of businesses,
Remuneration – workers should receive fair payment advancement in technology and modern legal demand.
for work done This concept of bureaucracy is evident in governments,
Centralisation – this deals with the way in which businesses, trade unions, churches and even voluntary
decisions are made. The degree of centralisation in associations.
decision making should be based on the circumstances Weber developed six characteristics of bureaucracy:
being faced by the organisation Division of labour – this will lead to an increase in
Scalar chain – there should be a clear line of authority efficiency due to specialisation. By dividing labour,
from the highest to the lowest level in the organisation. authority and responsibility will be clearly defined
In other words, there should be an organisational Authority hierarchy – the chain of command should
hierarchy with a manageable span of control be clearly outlined from the top to bottom in the
Order – all resources (people, raw material, tools, organisation. Each employee must be aware of the
equipment, etc.) in the organisation should be carefully person to whom he reports. Likewise, a manager must
and properly ordered to ensure efficiency be aware of the people for whom he is responsible
Equity – employees should be treated fairly and justly. Formal selection – employees should be hired based on
Managers should not discriminate but be kind, honest their qualifications, education and training
and impartial to every employee Career orientation – managers were seen as
Stability of tenure of personnel – labour turnover rate is professionals instead of just owners of units they
an indication of the effectiveness of management. This managed. As a result, they were expected to pursue
rate should be minimised so that each employee can ‘careers’ in their respective fields
grow and propel the organisation towards achieving its Formal rules and controls – the organisation has
goals formal rules and controls which must be adhered to by
Initiative – workers should be encouraged to employees in the performance of their duties
generate ideas and develop plans that will benefit Impersonality – rules and controls were applied
the organisation. This will also help the employees to impersonally and uniformly across the organisation.
develop their personal skills and abilities Weber’s theory of bureaucracy faced criticisms, some of
Esprit de corps – this means a ‘spirit of cooperation’. which are outlined below:
Employees and managers should develop good team The constant dependence on rules and controls may
spirit and morale. Unity and harmony should be impede the organisation’s ability to change to meet the
promoted in order to strengthen the organisation. changing environment
Fayol’s 14 principles of management are still being used The delegation of authority may lead to subdivisions
in some organisations today. They guide managers on how within the business, with people focusing on the
to supervise subordinates and organise their departments or objectives of the unit rather than the business as a
firms. whole
Rules and controls may become tedious over time and
Bureaucratic Management: Max Weber (1864–1920) lead to inefficiencies rather than the efficient running of
Bureaucratic Management was developed by Max the business.
Weber, a German sociologist. His work focused mainly Table 5.1 sets out the various contributions of
on how the organisation was structured rather than the classical management theories to the running of modern
practical problems of management proposed by Taylor and organisations.
Fayol. Having viewed and analysed the growth of large-scale
organisations, Weber developed a set of principles for what
he dubbed ‘an ideal bureaucracy’.
To Weber, ideal bureaucracy was based on legal authority
rather than tradition or charisma. This legal authority
Classical Contributions
theories
Scientific Some firms still hold money as the only motivator, instead of utilising other incentives such as recognition, etc.
Management ‘Best practices’ are promoted in different spheres to achieve objectives
(FW Taylor) The selection of workers in a number of organisations is done with stringent procedures to ensure that the best
person is employed
Staff appraisal is practised today which is very similar to Taylor’s observation and documentation of workers
Workers, especially in the manufacturing and construction sector, are still being closely supervised by foremen
Firms still place great emphasis on efficiency and profit maximisation
Administrative Fayol’s five functions of management provide a basis for managers in carrying out their roles and
Management responsibilities. These are still being practised by today’s managers
(Henri Fayol) Specialisation is widely practised in a lot of organisations
Fayol’s principle of scalar chain is seen in many firms’ organisational charts. The chain of command is still
practised today
The principle of initiative is pursued by many of today’s firms as workers are given the autonomy to develop
projects and work in teams to improve business activities and performance
Bureaucratic The theory of bureaucracy is being used in a number of large organisations
Management The hierarchical structure proposed by Weber is widely used today as managers and subordinates are clear on
(Max Weber) who is in control and to whom they should report
Organisations and institutions outline rules and regulations to monitor the activities that go on in the business
Managers are still required to acquire the necessary qualifications in order to be considered for the job
The concept of specialisation is evident in many organisations
Table 5.1: Contributions of classical theories to modern organisations
CASE STUDY
‘Old school’ management at OSM Ltd

When Mr Grumpy took over the reins at OSM Ltd the staff were optimistic that a big change would be coming and a new style
of management would emerge. However, reality set in as soon as Mr Grumpy became settled. Employees quickly realised that
while his was a new face, his management style was old. Being a steward of a deeply entrenched classical leader, Mr Grumpy
has approached this job with the same traits.
Since his arrival he has implemented hectic training programmes, workers are given guidelines on how work is expected to
be done and payment is now being made based on performance. In addition to those changes, workers feel as though they are
being closely monitored and that there are too many supervisors.
The workers are becoming restive and the other managers are now looking at ways in which they can improve the manage-
ment of the firm. Some of them are thinking of using either Henri Fayol’s or Max Weber’s approach to management in a bid
to change the way things are done.
Questions
1. Which of the classical theories is being used at OSM Ltd? Give at least two (2) pieces of evidence from the case. (5 marks)
2. Looking at the circumstances, is this the best approach to be implemented? Explain your answer. (4 marks)
3. Briefly describe the principles of the two (2) other theories that were mentioned in the case. (8 marks)
4. Discuss whether or not these approaches are the best move for the firm at this time. (8 marks)
Total 25 marks
Human Relations School of behavioural theories Their view was that management needs to focus on
By the 1920s, while the classical theories were successful, people more than science or techniques, as purported by
other scientists started to look for other solutions to the classical theorists. These theorists, led by Elton Mayo,
management problems. Together they formed the Human studied the reaction of employees to performance incentive
Relations School (Behaviour Management Theory) which schemes, job satisfaction and working conditions. They
focused specifically on the human side of management. concluded that if managers attempt to understand their
employees’ behaviour better, they can improve productivity. Job enlargement – workers are given more than
This school got its ‘kick start’ from a major study carried out one task to perform at the same level of skill and
at the Western Electric Company’s (WEC) Hawthorne plant responsibility
in Chicago between 1924 and 1932. Job enrichment – the workers’ tasks are improved
upon to make them more interesting and satisfying.
The Hawthorne Study: Elton Mayo Workers are also given more responsibility and
This study was spearheaded by Elton Mayo, a Harvard recognition
University professor. The main purpose of the research Job rotation – workers get the chance to work in
was to determine the effect of working conditions on different positions throughout the business, doing
productivity. The study started out by trying to determine the different tasks before being moved to another task
relationship between lighting in the work area and employee Group working – this involves placing workers in
productivity. The initial experiment heeded no positive result groups to complete a given task.
and so Mayo and a colleague (Fitz J Roethlisberger) were Some criticisms of this theory are:
hired to find other variables. The new experiment focused Humans are complex and so predicting behaviour may
on a Relay Assembly Test Room where they studied a group be more difficult than presented
of female employees. The women were allowed to supervise There are other factors outside of motivation that affect
themselves, enjoy less control and form groups. The theorists workers’ performance
soon found out that these privileges boosted the workers’ The Human Relations School was criticised for playing
morale. They were no longer thinking that they were a down the conflict of interest between management and
small part of the organisation and that they were not needed employees.
as much as others. This led to an improvement in output as
the women had become more motivated to do the work. The system management approach
This study changed the views of many stakeholders of The system approach is a modern form of management.
the day and improved their knowledge and understanding. It focuses on the organisation as a system that transforms
The study’s findings outlined the following views: inputs into outputs. A system is a set of interdependent parts
Workers are not motivated only by money but also by (subsystems) that relate to each other in the accomplishment
social and personal factors of a purpose or task. The system theory sees the organisation
Management should analyse employees’ attitudes when as having four components or elements:
trying to ascertain their behaviour Inputs – people, materials, money or information
Effective supervision helps to maintain employees’ Transformation – includes managerial or technological
morale and productivity processes
More emphasis should be placed on informal groups Output – the goods and services that are produced
and they may have a significant impact on employees’ Feedback – includes the possible reactions from the
performance. environment in which the firm operates, for example
The Human Relations School consisted of other theorists from consumers or clients.
who brought forward ideas such as:
Maslow (Hierarchy of
Needs) External environment
McGregor (Theory X and
Theory Y)
Herzberg (Two Factor
Theory).
These theories will be People,
further examined and discussed material, Inputs Transformation Output Goods and
money and process services
under ‘Motivation’ later in the information
module. The following methods
of motivation were proposed by
Feedback
the Human Relations School:
Figure 5.1: A basic system

A model of a basic system is shown in Figure 5.1. Based on interdependent. Management must realise that a change
this, it is clear that the process of inputs, transformation and to any of these subsystems will result in a change in
outputs is continuous. The organisation has to ensure that it the entire system. As a result, the firm must not be
produces products that can be exchanged for the resources managed as having separate parts but as one unit.
(profits) needed to obtain new inputs and to maintain its
survival in the market. Contingency theory
System theorists believe that businesses should be analysed After analysing the existing management theories, in the
in terms of the interaction of their basic components. These late 1950s Joan Woodward and other theorists developed
components could lead to an improvement in the business’s the contingency theory. These theorists believed that there
performance. However, in order to realise this, managers was no ‘one best way’ to carry out a task. Instead, its main
are required to manage the interaction of each component approach is one of ‘it all depends’. The theory stipulates
rather than their independent actions. As a result, the system that each situation is affected by different factors and
approach suggested that management integrates its major must be treated on its own merit. With this in mind, the
functions of planning, organising, staffing, leading, human contingency approach is flexible and draws on the concepts
resource management and controlling. of all previous theories in solving a problem. It integrates
The system approach stated that most organisations the findings of all theories in an attempt to deal with each
(systems) depend on other systems for their inputs and situation. The effectiveness of such action depends on the
sell their outputs to other systems (consumers). These size of the organisation, history, the environment and the
organisations are affected by market forces within their techniques used, among other factors.
environment, along with societal values, legislation, The main ideas of the contingency approach are
shareholders’ demands and so on. summarised as follows:
The system approach is concerned with some key A universal or ‘one best way’ to manage does not exist
concepts which give a clear picture of how a system works. The organisation should ensure that there is
First, a system is divided into two categories: coordination between its design and subsystems and the
Closed system – which is one that has very little or no environment in which it operates
interaction with its external environment For the organisation to be effective, its subsystems must
Open system – which is one that has interaction with its be in sync
external environment.
Another set of concepts important to the system theory
are: Modern theo- Contributions
Synergy – this occurs where the total output of the ries
system is greater than the sum of all of its inputs. Human Rela- It gave insights to businesses on
tions School motivation and group dynamics which are
However, for synergy to occur, each subsystem may still practised today
have to sacrifice its optimisation for the success of The recognition of employees as valuable
the whole system. In terms of the business, each resources has changed the view that they
are economic animals and tools
department should not aim solely at achieving its own
System theory The concepts of this theory are being
objectives but instead work together to achieve the widely used in a number of organisations
overall objectives of the firm. Therefore the production that practise teamwork. Departments
department cannot work without the input of, say, are no longer isolated but are making
their contributions to the development of
marketing or finance if the business is to be successful. certain projects
Synergy is therefore associated with an open system Organisations have placed more emphasis
on all stakeholders. As a result, firms are
Entropy – this refers to the tendency of systems, signing quality assurance deals with their
especially where they are not properly maintained, to suppliers, are becoming more aware of the
run down and die. The concept of entropy is closely needs of their customers and are becoming
increasingly socially responsible
associated with closed systems because of the lack of
Contingency In reality there is no one way of doing
interaction with the external environment. This lack of theory things, therefore this theory is synonymous
interaction results in no possibility for new inputs and with the approach that many organisations
have taken in employing aspects of the
energy and so the system will eventually die different theories in management
Subsystems – as was alluded to earlier, these are
the individual parts of the entire system and are Table 5.2: Contributions of modern theories to modern organisations
The appropriateness of the design and management others and may affect the efficiency of the business. These
style of the organisation is very important to success of functions assist with the management of the organisation.
its tasks and the nature of its work group. The main functions carried out by management are discussed
Table 5.2 (p 63) sets out the various contributions of below:
modern management theories to the running of modern
organisations. Planning
This function of management relates to setting business
objectives and establishing the necessary plans to achieve
The functions of management such objectives. This function is vital as it will outline the
The term ‘management’ may be defined as the process of direction that the business will be taking in the future. For
organising the available resources of the business to achieve example, if a business’s objective is to increase its annual
desired results. Since employees do not normally organise sales by 20 per cent, the manager has to outline the plan
themselves and resources to achieve business objectives, to achieve this goal. This plan could include increasing
managers are very important. A manager is an individual advertising or the sales force. With this plan in place the
who makes decisions about the use of limited resources and manager can work towards achieving the stated objective.
the planning, organising, directing and controlling of these
resources to achieve the organisation’s goal. Organising
There are three levels of management, especially in larger In this function the manager organises the human and other
organisations (see Figure 5.2): resources necessary to execute the plan and objectives in the
Top level – has overall responsibility for the business. preceding function. It involves the grouping of activities and
This includes positions such as Chief Executive Officer, resources in order to achieve objectives and the distributing
President, Chief Operations Officer, Principal, etc. of authority to employees. The work may be organised in
Middle level – these managers report to top managers. groups or departments or assigned to specific individuals.
They are usually responsible for departments or Lines of authority may also be established which should
divisions and make tactical plans for how to achieve the help to improve communication, improve decision making
business’s overall objectives. This level includes heads of and prevent the duplication of resources.
department, Vice Principals, heads of division, etc.
Low-level or first-line managers – these managers Directing
supervise the workers and the daily operations of Directing involves the motivation and leading of employees
the business. They have direct responsibility for in order to attain business objectives. This function is mostly
implementing the plans outlined by middle managers. carried out by lower-level managers who interact and work
This level includes supervisors, foremen and office with employees on a daily basis while they carry out their
managers. assigned tasks. Managers are also expected to motivate
A manager has a number of functions that he/she carries employees so that they can achieve the business’s objectives.
out on a daily basis. Each function is as important as the They use different strategies to motivate employees, which
may include giving incentives, recognition etc. Motivation
will be discussed further in Chapter 8.
Controlling
Top level In carrying out this function, managers are expected to
evaluate and correct activities to ensure that the business
is on track to attain its objectives. Controlling usually
Middle level follows the process of measuring performance, comparing
actual performance with the firm’s objectives, highlighting
variances and taking the necessary steps to correct any
shortfall.
Low level
Staffing
This function of management deals with the recruitment,
Figure 5.2: The three levels of management selection, development and compensation of the staff.
Managers use this function to build their organisations The roles of management
through the development of their employees. The function Managers carry out different roles in an organisation. These
is of utmost importance since the firm needs employees to are organised into three main categories:
carry out its day-to-day activities. It involves management Decisional role
filling the organisational positions, improving workers’ Informational role and
professionalism and making full use of their human Interpersonal role.
resources. Using these, Henry Mintzberg proposed ten roles for top
management (see Table 5.3).
Categories of roles Specific Explanation

Decisional role Entrepreneur The manager should use the resources of
the organisation to develop new products
and projects or identify areas for the
business to improve or develop
Disturbance handler When unexpected problems arise
the manager should deal with them
immediately. He should take corrective
action to quell conflicts or crises and
overcome changes in the external
environment
Resource allocator To allocate resources to the different de-
partments in an equitable manner. Man-
agers should also draft budgets for the
different departments
Negotiator Offers representation for the organisation
when bargaining with trade unions and
suppliers or in any other situation that
may arise
Informational role Monitor The manager must monitor the perfor-
mance of the departmental managers
while taking corrective actions where
needed. He should also be aware of any
changes that are occurring in the internal
and external environments which have the
potential to affect the organisation
Disseminator The manager should communicate the
firm’s vision and goals to the employees,
along with the possible changes that may
take place as a result of the changing busi-
ness environment
Spokesperson This involves being ‘voice’ of the organisa-
tion to the general public. He is responsi-
ble for promoting the firm’s products and
sharing any pertinent information about
the firm
Interpersonal role Figurehead The manager performs certain ceremonial
and symbolic duties including interacting
with customers and visitors and offering
representation on legal matters
Leader This includes directing, hiring, training and
motivating subordinates
Liaison The manager interacts with the different
stakeholders of the firm. He also should
coordinate the tasks of managers in differ-
ent departments
Table 5.3: Mintzberg’s ten roles for top management

CASE STUDY
A manager’s dream
Joan Phillips has taken over the position of CEO at a reputable manufacturing company in her country. This happened after the
previous manager was relieved of his duties because of a slew of issues affecting the employees, shareholders and the firm’s
profitability. Joan has been charged with the task of turning the company around. She knew from the very outset that this would
have been a difficult task but decided to take up the challenge.
Joan arrived to find a firm where things were done haphazardly, workers had little direction and knew very little about where
the firm was going, and the level of motivation was also very low. The lower-level managers were not very clear on their roles
and about what was expected of them and as a result the firm has not done very well.
As part of the recovery process, Joan decided to meet with all the department managers to improve the situation. She
decided that she would outline the functions of each manager and implement strategies from the Human Relations School of
Management to improve the morale of employees. She believed that this move would bring about a turnaround for the firm.
Questions
1. Outline how the four methods of motivation proposed by the Human Relations School can be used to improve
motivation in the firm. (8 marks)
2. State one (1) criticism of the Human Relations School. (1 mark)
3. Describe four (4) functions of management that Joan would want to discuss with the department managers. (16 marks)
Total 25 marks
CHAPTER SUMMARY
The three main classical theorists The Human Relations School The contingency theory stipulates
are FW Taylor (Scientific changed the perception of that each situation is affected by
Management); Henri Fayol management in that, unlike the different factors and must be treated
(Administrative Management); classical theorists, they focused on on its own merit
and Max Weber (Bureaucratic the human side of management.
Management) Contributors to this school include The main functions of management
Elton Mayo, Frederick Herzberg, include planning, organising,
Taylor viewed man as an ‘economic Abraham Maslow and Douglas directing and controlling
animal’, meaning that he was McGregor
rational and made economic choices Management carries out three main
based on the monetary or material The system approach stated that roles in the organisation. These
reward to be gained most organisations (systems) depend are decisional, informational and
on other systems for their inputs and interpersonal.
A work study is a combination of a sell their outputs to other systems
time and motion study. It analyses a (consumers)
specific job in an effort to ascertain
the most efficient method to use in
terms of time and effort
MULTIPLE CHOICE QUESTIONS c. Job satisfaction

d. Job rotation
1. Which of the following theorists is NOT associated with the
Classical School? 7. The system theory sees the organisation as having four
a. Max Weber components. Which of the following is NOT one of those
b. Frederick Taylor components?
c. Frederick Herzberg a. Management
d. Henri Fayol b. Transformation
c. Output
2. Which of the following theorists viewed man as an ‘economic
d. Feedback
animal’?
a. Elton Mayo 8. Which function of management involves the motivation and
b. Frederick Taylor leading of employees in order to attain business objectives?
c. Frederick Herzberg a. Planning
d. Henri Fayol b. Organising
c. Directing
3. Which of Fayol’s 14 principles of management states that
d. Controlling
‘Activities of the same nature should be supervised by one
manager who will guide subordinates to achieve the same 9. ALL of the following are decisional roles of management
objective’? EXCEPT which one?
a. Unity of command a. Negotiator
b. Unity of direction b. Entrepreneur
c. Equity c. Disturbance handler
d. Centralisation d. Leader
4. Which of the following BEST defines Fayol’s principle of 10. The informational role of management includes which of the
division of labour? following?
a. Managers should be given the authority and autonomy to a. Figurehead
carry out their responsibilities
b. Liaison
b. Workers should be encouraged to generate ideas and
c. Leader
develop plans that will benefit the organisation
d. Monitor
c. Work should be divided into smaller tasks to promote
specialisation
d. Employees should be treated fairly and justly
5. Max Weber is credited for his work on which of the following
theories? Question one Total 15 marks
a. Hawthorne Study Discuss how any five (5) of Henri Fayol’s principles of
management can be used to improve an organisation in
b. Bureaucratic Management
modern times. (15 marks)
c. Contingency theory
d. Administrative Management
a. Outline five (5) contributions that Taylor’s theory
6. ‘Workers get the chance to work in different positions of Scientific Management has made to modern-day
throughout the business doing different tasks before being management. (10 marks)
moved to another task.’ This statement BEST defines: b. Explain five (5) of Max Weber’s characteristics of
a. Job enlargement bureaucracy. (15 marks)
b. Job enrichment
68
6 The Organisation and its Structure
work of Frederick W Taylor who is seen as the ‘father’ of the

LEARNING OBJECTIVES: Scientific Management approach. Figure 6.1 shows a typical
At the end of this chapter students should be able to: functional organisational structure.
Discuss the importance of organisational structure Some of the features of a functional organisational
structure are:
Outline the different classifications of organisations
Well-defined communication channels which are
Illustrate the different classifications of organisations
diagrammatically usually downward
Discuss the characteristics of the formal organisational Clearly outlined chain of command and supervisory
structure roles
Utilises job specialisation and departments have well-
defined roles
The structure is less flexible and so it relies heavily on
B
efore we delve into the major concepts of this chapter formal procedures.
it is important that the term ‘organisation’ be revis-
ited. In Chapter 5 an ‘organisation’ was defined as Advantages of the functional organisational structure
a ‘group of people working together to achieve a common Promotes co-ordination and control among employees,
or collective goal’. Put another way, it is a well-coordinated which can improve effectiveness
social unit of two or more people with a desire to achieve Specialisation can improve the performance of
a common goal or collective goals. Based on these defini- departments
tions, we see that the organisation should have some form Operational functions can be delegated to lower-level
of structure which will facilitate coordination of the activi- management.
ties carried out by the firm. The structure also helps to guide
employees as it relates to their actions and lines of commu- Disadvantages of the functional organisational structure
nication. The organisational structure is a framework Coordination and control may become too stringent and
that outlines the lines of authority and communication in lead to low morale
the organisation. The decision-making process may be very slow,
especially for very centralised structures
The structure may become too rigid, so that it cannot
Classification of organisations adapt to the changing environment
An organisation can be classified in different ways, with each
classification being dependent on various factors such as
Figure 6.1: Functional organisational structure
functions, product and location. The different classifications
are described below. CEO
Functional organisational structure

The functional organisational structure is
where the organisational structure is designed Purchasing Production Finance Engineering Human
Resource
in terms of the functional areas of the business – Manager Manager Manager Manager Manager
for example, marketing, purchasing, accounting,
etc. This is the most widely used classification
Human
by far, and is usually inexpensive. This type of Purchasing Production Finance Engineering Resource
Department Department Department Department Department
organisational structure has been credited to the
CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 69
In the long run, specialisation can lead to a lack of focus The success of the product is highly dependent on the
on the organisation as a whole. people with direct contact with the product
There is duplication of the functional areas
Product organisational structure Competition could become negative, which is not good
In situations where businesses have different products, for the firm as a whole.
management may decide to separate the activities for each
product. Each product would have its own management Geographical organisational structure
structure which is answerable to top management. The Where organisations are operating in different countries,
management structure of the product may be extended the likely organisational structure will be geographical.
to include the major functional areas of production, sales, The geographical organisational structure organises
finance, etc. An illustration of the product organisational the enterprise in terms of regions or countries. However,
structure is shown in Figure 6.2. each region or country can then be organised in terms of
The product organisational structure has the following function or product. This type of structure is frequently used
important features: by multinational corporations which have different firms
Allows for delegation of responsibility by top in various countries. An illustration of the geographical
management organisational structure is shown in Figure 6.3.
Each product unit is accountable for profit in that The geographical organisational structure has the
division following features:
Each product is assigned the main functional Each region is a profit centre
departments of the organisation.
Figure 6.3: Geographical organisational structure
Advantages of the product organisational structure
Owner-
Focus is placed on the product’s performance and level President
of profitability
Diversification in the product offerings of the firm is
encouraged
Promotes positive competition among divisions
Country 1 Country 2
Each product division is given more autonomy to
achieve divisional and organisational objectives.
Disadvantages of the product organisational structure

Maintaining the different divisions may prove
to be expensive Marketing Operations Finance Marketing Operations Finance
Figure 6.2: Product organisational structure
General
Manager
Product Product Product

(dairy) (bun) (tinned food)
Production Marketing Finance Production Marketing Finance Production Marketing Finance

The different regions are arranged on a functional or functional areas of the firm and horizontal lines which show
product basis the lines of authority across the different divisions, regions
Regions are allowed some amount of autonomy in the or departments. A typical matrix structure is shown in
management of their operations. Figure 6.4.
Advantages of the geographical organisational structure Advantages of the matrix organisational structure
The firm can respond quickly to local environmental Often leads to better use of resources
change Flexible and adaptable to the changing environment
The organisation is presented with local opportunities Employees are more involved in the operation of the
which may not otherwise be available firm
Promotes delegation of responsibilities Improves cooperation and problem-solving techniques
Each region has responsibility for profit generation. Improves management skill.
Disadvantages of the geographical organisational structure Disadvantages of the matrix organisational structure
There is duplication of resources across regions Workers may become confused from answering to so
Poor coordination across regions can hurt the entire many authority figures
organisation Slow decision-making process
Competition for corporate resources may lead to May lead to a power struggle among managers
conflict Teams or divisional goals may override the goals of the
Lower level of control by top management could lead to organisation
inefficiency. May increase the cost to the firm in organising its
activities.
Matrix organisational structure
The matrix organisational structure offers a different Team organisational structure
tactic in organising business operations. It is usually used Later in this book we will examine the importance of
where the environment is rapidly changing and there is teamwork and its impact on the organisation. More
a need for effective coordination to combat the situation. and more organisations are embarking on a team-based
This structure combines elements of the functional, product approach to their operations. The importance of teams is
and possibly geographical organisational structures. The also evident in the school system through group work. This
matrix structure depicts two lines of authority. It shows the thrust of teamwork has led to the development of the team
lines of vertical authority which concentrate on the major organisational structure. The structure seeks to remove
departmental boundaries by establishing teams which work
to complete an overall business objective.
General
Manager These teams are usually cross-functional and
are composed of employees from different
functional departments, including production,
sales and finance. Team members are
Sales and answerable to both their functional managers
Production Purchasing R and D
Marketing and the team leader. A team organisational
structure is illustrated in Figure 6.5 (p 71).
Product X Advantages of the team organisational structure

Manager
Product Improves employees’ motivation
Team X
Removes departmental barrier while
facilitating intradepartmental relationships
Product Z Speeds up the decision-making process
Manager
Product Adaptable to change in the environment
Team Z and consumers’ taste and preference
Allows authority to be delegated as the
Figure 6.4: Matrix organisational structure hierarchy is lessened.
Advantages of the network organisational structure

ch and
Resear ment Minimises administrative costs
e lo p
Dev
Producti
on Faster decision-making process since there is a reduction
n a g e r
Ma in hierarchical structure.
ng Disadvantages of the network organisational structure

Marketi r
e
Manag Less control over what is done, since most workers are
contracted
ng Can be time consuming, especially where there are
Marketi nt
e n s u lt a regular meetings.
Financ Co
n a g e r
Sales Ma
Manag
er Virtual organisational structure
The virtual organisational structure uses networks to
Figure 6.5: Team organisational structure create linkages among people, assets and ideas. These linkages
enable the company to manufacture and distribute products
Disadvantages of the team organisational structure without the hindrances of organisational boundaries
This structure may lead to conflicts among departments or location. This gives companies the ability to draw on the
as they compete for scarce resources capabilities of others without having to be there physically.
There is always a possibility of the problem of dual The virtual organisation relies on a centralised database
loyalties which uses technology such as videoconferencing and
A lot of time is spent in meetings e-mail via the computer to communicate. To this end, the
Teams may substitute the firm’s objective for theirs as stakeholders within a virtual organisation may not meet face
decentralisation occurs. to face for a while, if ever at all. Instead, they communicate
via the internet to receive their assigned tasks and send their
Network organisational structure reports once their tasks are completed.
This organisational structure links a number of separated Since meeting in a physical location is not a usual
organisations with a desire to achieve a common goal occurrence for the stakeholders, the physical company
through their interactions. The network can be in the form can be small but retrofitted with the capabilities to operate
of a joint venture agreement or where some of the major globally. A very successful example of the capability of
functions of the firm are subcontracted to other firms. These virtual organisations is seen in Amazon.com. An illustration
firms are linked by and to a company which serves as the of the virtual organisational structure is shown in Figure 6.7.
headquarters or hub. For example, a large construction firm The virtual organisation is often characterised by the
may give subcontracts to other firms that will assist with the following features:
completion of a project. Figure 6.6 shows an example of this Minimal physical structure
type of organisational structure: Heavy reliance on communication technologies
n Manufacturing Design
Huma e
c
Training resour y company company
on agenc
instituti
cturer
Manufa
ng
Marketi Core
pany ag y
e n c company
The comhub)
e ntra l
g (c
Auditin Sales and marketing Logistics
firm company company
ounsel
Legal c )
(la rm
w fi
er
Design Finance
utor
Distrib company
Figure 6.6: Network organisational structure Figure 6.7: Virtual organisational structure
No boundaries to operation Elimination of the physical boundaries of the firm.

Work can be done from home
Very few physical assets Disadvantages of the virtual organisational structure
Heavy reliance on a network of part-time self-employed Heavy reliance on external organisations to provide
workers who are connected electronically. high-quality goods in large quantities
Lack of job security as the services of the employees
Advantages of the virtual organisational structure might be subcontracted
Access to worldwide expertise in order to provide high- Close monitoring of external suppliers is required
quality goods and services It can be difficult to build a corporate culture, as
The firm can adapt quickly to changes in the external employees and employers may be from different
environment because of its flexibility cultures across the world
Minimal overhead costs, as products are often Communication in the virtual office may be difficult,
outsourced as people are working within different time zones.
Its smaller and flatter structure gives the firm better
control
CASE STUDY
Amazon.com: a virtual difference

In hindsight, several years ago, who would have known that Amazon.com would have become one of the largest online compa-
nies? The company was established in 1994, with its headquarters in Seattle, Washington, USA. The company specialises in
the online sale of a number of items, including books, electronics, toys, tools and clothing. The company has expanded its
product offering significantly since its inception. Expansion is also seen in the company’s international retail websites, worldwide
network of fulfilment and customer service centres. There are also a number of Amazon teams across the world providing fast
and reliable shipping directly from Amazon retail websites to customers. Other services provided by Amazon teams worldwide
include customer service centres and technical support.
Driven by technological advancements, Amazon.com now employs over 88 000 people worldwide. In addition, over 2 million
third-party sellers participate in Amazon by offering new, used and collectible selections to Amazon customers worldwide. To
cement its position in the virtual environment further, Amazon.com opened its e-commerce platform to other retail brands and
individual sellers in the year 2000. This has given hundreds of thousands of retail brands and individual sellers the opportunity
to expand their market reach and increase sales drastically.
Questions
1. Explain what a ‘virtual organisation’ is, giving one (1) example other than the one used in the case study. (2 marks)
2. Give two (2) pieces of evidence from the case to show that Amazon.com is a virtual organisation. (4 marks)
3. State one (1) reason for why technology is important for the success of Amazon.com. (4 marks)
4. Discuss three (3) benefits and three (3) drawbacks of Amazon operating solely as a virtual organisation. (18 marks)
Total 28 marks
Factors influencing the classification of structure. Likewise, larger firms such as multinationals
tend to have geographical or product organisational
organisations
structures
Size of the firm – as firms increase in size it may be
The business cycle – firms may downsize or expand
necessary to upgrade or change their organisational
in relation to fluctuation in external environment.
structure. For example, an entrepreneurial business may
During periods of boom, firms may expand their
move from an entrepreneurial structure to a functional
chain of command and functional areas. However, a Span of control

recession may force them to downsize, possibly closing Span of control refers to the amount of employees that are
international branches or cutting management directly under the control of one manager or supervisor. As
Business strategy and objectives – the strategies you might imagine, the greater the number of people being
employed by the organisation to achieve its objectives supervised by one person, the less effective that supervision
may necessitate a specific type of organisational will be. Therefore most organisations have a limit on the size
structure. In other words, organisational structure of the span of control. The span of control is broken down
should coincide with business strategy. For example, into two categories, based on the number of subordinates
if the organisation’s objective is to establish entities involved. These are:
overseas, then its organisational structure must be
flexible enough to be converted into a geographical one Narrow span of control
The business environment – there are a number of This is usually the case in organisations that have a very
factors in the business environment that might affect tall organisational structure – that is, having a number
the organisation. These include technological, political, of managers or supervisors. However, it results in closer
socio-cultural and economic factors. These factors will supervision of workers and helps managers to maintain
affect the type of structure utilised by the firm. quality and reduce risks. See Figure 6.8.
Wide span of control

Characteristics of the formal This involves the supervision of a larger number of people.
organisational structure Organisations with a wide span of control tend to have a
flatter organisational structure, with fewer levels of authority.
Hierarchy A wider span of control enables managers to delegate
This shows the different levels of authority in the responsibility to subordinates. See Figure 6.9 (p 74).
organisation. The hierarchy in most organisations usually Some of the factors that may affect the span of control
consists of three levels. At the top of the hierarchy there is are outlined below:
top-level management which has responsibility for setting The nature of the work being undertaken – that is, more
long-term objectives and policies to chart the way of the complex tasks warrant greater supervision
firm to success. An example of a top-level management The ability, competence and skill level of subordinates
position is Chief Executive Officer (CEO). Below this level The leadership style employed by management
there is the middle management level, with managers The structure of the organisation.
having responsibility for the operational issues of the firm.
This would include setting the jobs to be performed and Line and staff relationship
the way in which they should be done. An example of a Line relationship – this is one that exists between
middle management position is Plant Manager. The lowest senior management and subordinates. It depicts an
level in the hierarchy is the first-line managers. They have a organisation where authority or directives flow from top
supervisory role and should ensure that the work is done by
the staff. An example of a first-line management position is
Department Manager.
Chain of command
Chain of command shows the lines of authority in the
organisation. These lines are used to transmit information
and instructions up and down the hierarchy of the
organisation. As was outlined above, the higher the level of
management, the greater the level of authority. Therefore
senior management is at the top of the chain of command
which will continue down the organisation so long as there
are people (subordinates) receiving directives from someone
higher in the chain than themselves.
Figure 6.8: Narrow span of control
Figure 6.9: Wide span of control
management down through the organisational structure. Accountability

This relationship gives management the opportunity to The concepts of responsibility and authority necessitate the
delegate authority, direct and control employees concept of accountability. Managers or people who have
Staff relationship – in the organisation, there are been given authority and responsibility should be able to
people who offer specialist advice to managers. These justify their actions and the outcome of their decisions to
specialists do not have the authority to ensure that their higher-level management. The concept of accountability
suggestions are implemented since they are not within also affects the subordinates who must be accountable for
the hierarchy of the organisation. An example of a staff any task given to them for completion.
relationship would be a legal secretary to a CEO of a
large company Delegation
Line and staff organisation – this is one that The truth is that no one person can complete all the tasks
combines the line authority with the supporting or that are necessary to bring about success of the organisation.
specialist roles within the organisation. Both sets of To this end, managers pass down some of their powers to
people work together to achieve the organisation’s subordinates to complete specified tasks. ‘Delegation’ may
overall goals and objectives. be defined as the tendency of management to entrust
subordinates with responsibility and authority to carry out
Responsibility a task. There are a number of factors that would result in
This refers to the fact that all people in the organisation are a manager delegating responsibility to subordinates. These
obliged to perform the given task to the best of their ability. include:
One’s responsibility will then give him/her authority in To facilitate specialisation
the organisation to assign tasks to subordinates and make Time constraints
decisions. To foster a succession plan for managers
To encourage flexibility and adaptability to
Authority environmental change – for example, a change in
This is defined as the right or power to give instructions customers’ needs.
and make decisions in the organisation. Authority allows
management to direct subordinates to perform duties. This Benefits of delegation
characteristic of organisation structure is based on three Helps to motivate workers
underlying principles: Firm can utilise the specialist skills of employees
Similar positions have the same level of authority and Sheds some of the workload of managers
this authority comes with the position held and not the Increases the time that management has to focus on
individual issues at the corporate and strategic levels.
Subordinates accept and comply with the authority of
management because of their legitimate power Drawbacks of delegation
The level of authority flows down the hierarchy of Some managers may be reluctant to delegate some of
the organisation – that is, top management has more their responsibility
authority than lower-level management.
There could be some reluctance by subordinates to

accept the tasks delegated This lifestyle was never sustainable in the long term.
If the task assigned is unsuitable, it may lead to While feeling as though he will be shirking the responsibility
significant losses and inefficiencies. that was given to him by his father, Mr Workwell has
decided to reorganise the firm. Some of the moves that he
is thinking of include appointing a manager for the farm,
Centralisation and decentralisation finance, production at the factory, marketing and human
In centralisation senior management of the organisation resources. He would continue being the general manager
maintains full control of decision making and there is and employees would be formally placed into the different
minimal delegation of responsibility. On the other hand, in departments. This, he believes, would lessen the burden
decentralisation the organisation is one where decision on himself and give others an opportunity to show their
making involves subordinates and there is delegation of prowess and bring in new ideas.
responsibility. A decentralised organisation is often separated
into divisions, with some amount of autonomy, however, Questions
working towards the fulfilment of the organisation’s goals. 1. How would you describe the span of control of
the business prior to the intended changes? (3 marks)
Advantages of centralisation 2. Based on the information given in the case, draw
Facilitates easy control and coordination of policies an organisation chart showing what the structure
Cost minimisation since resources are not duplicated of the business will be after the change. (12 marks)
Decision making is less time consuming 3. Using the information in the case for reference,
There are less extensive planning and reporting explain the concept of delegation. (5 marks)
procedures. 4. Outline three (3) benefits and two (2) drawbacks
to delegation in this firm. (5 marks)
Advantages of decentralisation Total 25 marks
Firms can respond to changes quickly
Decisions made can reflect the needs of the market and
customers
May improve the level of motivation of the employees
The workload of the firm is spread across departments CHAPTER SUMMARY
and to different individuals.
For an organisation structure to be effective the following
criteria must be met: flexibility; satisfying the needs
CASE STUDY of the firm; encouraging growth and development; and
incorporating organisational design
The overworked manager
Mr Workwell is the manager of a medium enterprise with Functional organisational structure is designed in terms
a total of 100 employees manufacturing grapefruit juice. of the functional areas of the business – for example,
To cut costs, the company is also involved in grapefruit marketing, purchasing, accounting, etc.
production with a 100-acre farm. The business was passed
down to Mr Workwell from his father when he retired. The geographical organisational structure is
After a few years, Mr Workwell started to realise that he predominantly utilised by multinational corporations
too needed to slow down and delegate some of his respon- which operate in different countries
sibilities. He is now giving the idea some thought.
Prior to this point Mr Workwell was the sole manager Line relationship is one that exists between senior
of both the farm and the processing plant. He had to management and subordinates
supervise all 100 employees, control the finances of the
firm, hire and dismiss workers, promote his grapefruit juice Staff relationship exists where people within
and take orders from large customers. organisations offer specialist advice to managers.
MULTIPLE CHOICE QUESTIONS 4. ALL of the following would affect the type of organisational
structure chosen by the firm EXCEPT which one?
1. A well-defined communication channel and clearly outlined
a. The firm’s suppliers
chain of command are features of which organisational
structure? b. The business cycle
a. Geographical c. Size of the firm
b. Product d. Business objective
c. Matrix 5. The number of employees who are directly under the control
d. Functional of one manager or supervisor is referred to as:
a. Span of control
2. Which of the following is a disadvantage of the product
organisational structure? b. Chain of command
a. There is duplication of the functional areas c. Hierarchy
b. Focus is placed on the product’s performance and level d. Responsibility

of profitability
6. If the Marketing Manager gives advice to the Production
c. Diversification in the product offerings of the firm is Manager about a possible product development, what type of
encouraged relationship is being displayed?
d. Promotes positive competition among divisions a. Line and staff
3. Just for You Ltd is planning on expanding its operation to the b. Line
countries within the CSME. Which of the following structures c. Staff
would be BEST suited for the business? d. Horizontal
a. Team
b. Network
c. Geographical
d. Matrix

Mr Confusion from MJ Coolers is thinking of using a product organisational structure but is seeking your advice.
a. Draw a typical product organisational structure. (5 marks)
b. Advise Mr Confusion of five (5) benefits and five (5) drawbacks of using this structure. (20 marks)
a. Explain four (4) factors that can affect the type of organisational structure used by a firm. (12 marks)
b. Differentiate between a line relationship and a staff relationship. (3 marks)
c. Define the term ‘span of control’ and, with the use of diagrams, differentiate between a ‘narrow’ and a
‘wide’ span of control. (10 marks)
77
7 The Theory and Application

of Motivation
desire to own a home may motivate a person to work hard
LEARNING OBJECTIVES: in order to gain the income or level of savings needed to
At the end of this chapter students should be able to: acquire that house. Later in the chapter we will examine the
Discuss the factors that stimulate and influence work of theorist Abraham Maslow, who shared this view in
motivation his Hierarchy of Needs.
Outline the main concepts of Maslow’s Hierarchy of
Needs Theory Self-motivation
Outline the main concepts of Herzberg’s Hygiene Theory While some people are motivated by forces in their
Compare and contrast the two main theories of environment and what is done by others, others are self-
motivation motivated. Self-motivation speaks to a situation where
Analyse the main financial and non-financial incentives someone has the drive or ability to perform a task without
that are used in businesses the influence of anyone else. People who are self-motivated
Outline the implications of motivation theories for tend to be able to complete a task even in the face of
managers adversities or without encouragement from anyone. Such
people are often optimistic, energetic and driven by their
desire to succeed in the task at hand.
W Ability to make choices

e all make choices in life and the choices we
make may be influenced by a number of factors. One of the greatest desires for humans is having the ability
As students, there are a number of factors that to make certain choices. When this is not the case, people
influence the level of work you do in each subject, including may feel confined or unhappy with their current situation
Management of Business. Some of you might be driven by a or environment. In a business operation some employees
desire to do well; a good teacher who encourages you all the desire to have the autonomy to make choices which could
time; a desire to qualify for the best university; or wanting to influence the work environment or the way the work is done.
ensure that your parents’ money is not wasted. These factors They want to participate in decision making while knowing
will influence your level of motivation. In this chapter, the that their suggestions will be treated with high regard. These
concepts of motivation, motivation theories and incentives choices may be given to employees by a democratic leader as
will be discussed. opposed to an autocratic one. It is often said that employees
who have a democratic leader are usually better motivated
than those with an autocratic leader. These different
Factors that stimulate and influence leadership styles will be discussed later in this book. The idea
motivation of allowing employees to have some level of autonomy is
Motivation is generally defined as the ‘will to achieve’. It is supported by the work of theorists Herzberg and McGregor.
the internal and external forces that arouse a person to carry Both theories are also discussed later.
out a task with enthusiasm. Your level of motivation may be
influenced or stimulated by the following factors: Environmental opportunities
The environment in which people work can be a good source
Individual needs of motivation. If the work environment offers opportunities
We are driven by our needs and the things we do are, very for personal growth or for promotion, then people may be
often, influenced by our desire to satisfy these needs. An motivated. Employees may become de-motivated if their
employee’s basic need for food, clothing and shelter will work environment offers neither of these two opportunities.
influence how he/she works or operates. For example, a Working in an environment where there is no chance of
promotion or growing will discourage people from giving

the extra effort to carry out their tasks.
Other influences on motivation include values, attitudes,
beliefs and goals. Self-
ation
ac alis
tu
needs
Esteem
Theories of motivation needs
ingness
The theories of motivation can be classified into two main Belong
categories: content theories and process theories. needs
Safety
Content theories al need

s
gic
Physiolo
These theories focus on the needs of employees and how
these needs motivate them. Theorists in this category
believe that people are driven by their needs. These needs Figure 7.1: Maslow’s Hierarchy of Needs
will be transformed into internal forces that influence their
behaviour pattern. Organisations are therefore encouraged Safety or security needs
to develop reward systems that cater to these needs and Individuals desire to be in a safe and secure physical and
employees will be motivated. Content theorists feel that emotional environment. These needs include job security,
each individual differs in their ability as well as their ‘will to stability, freedom from fear or threat, being treated fairly
do’ a task. To this end, motivation depends on the level or and avoidance of pain. Management should provide security
strength of an individual’s needs. Two of the most prominent guards, ensure that the environment is not easily accessible
content theorists include Abraham Maslow and Frederick to unscrupulous people and protect workers from harmful
Herzberg. substances such as toxic fumes.
Maslow’s Hierarchy of Needs Belongingness or social needs

The work of Abraham Maslow came about in the mid-1950s. Employees want to feel accepted by their peers, to be loved,
He proposed that: to have lasting friendships and to be a part of groups. They
An individual’s needs will influence his/her behaviour yearn to socialise with their co-workers and have good
The greater the need, the greater will be its influence on relationships with both peers and supervisors. Managers
the individual’s behaviour. should cater for this need by having social events at work,
Maslow identified a number of needs that will influence promoting group work and encouraging interaction among
human behaviour. He summarised his findings in the employees and between management and employees.
Hierarchy of Needs as shown in Figure 7.1.
According to Maslow, each level of needs must be Esteem needs
acquired or fulfilled before the individual can move on to a These needs include a desire to have a positive self-image,
higher need. Therefore lower-level needs must be fulfilled in status, recognition and appreciation by others. Workers
order for the higher-level needs to be accomplished. These want to be recognised and credited for any contribution
needs are expanded below: given to the organisation. Organisations can provide for
these needs by recognising the contributions of employees
Physiological needs through promotions, award ceremonies and bonuses, etc.
These are the basic needs in life, including food, water, An example of this is seen where they publish photographs
clothing and shelter. Employees desire the means to acquire of their outstanding employees in newspapers. In other
these basic needs by working in an organisation. A sufficient businesses, a photograph of an ‘employee of the month’ is
salary should be able to take of these needs. Therefore, if the posted at the reception area to recognise that person’s effort.
salary earned cannot sufficiently provide these needs, the
individual will not be motivated. With these needs in mind, Self-actualisation needs
some organisations provide subsidised lunches, housing This is the highest category of need. It is where employees
solutions and concessions on motor vehicle purchases, feel a sense of self-fulfilment. The employee desires to
among other rewards. reach his/her full potential while increasing the level of
CHAPTER 7 | THE THEORY AND APPLICATION OF MOTIVATION 79
competence at the task being completed. Managers can These factors will attract people to the job and help
help employees to fulfil this need by providing additional them to keep the job. The presence of these factors will not
training for employees, whether on the job or off the job. bring about satisfaction, as this is only achieved through
Some organisations provide scholarships for employees who motivators. However, their absence will mean that workers
desire to do higher studies. are indeed dissatisfied.
Herzberg’s theory has the following implications for
Implications of Maslow’s theory for management management:
Management needs to understand the needs that Managers should be aware that workers can be satisfied
motivate the employees and use them to their or dissatisfied with the job or even both. For example,
advantage a worker may love the work that he is doing but be
Motivation is sometimes tied to the leadership style of dissatisfied whenever he receives his pay cheque
the manager The notion is that unless motivators are present at
Management should provide a safe working environment work, employees will not be motivated. Managers must
Opportunities should be given for people to reach their therefore be aware that improving hygiene factors will
full potential not lead to motivation but simply prevent dissatisfaction
Managers should pay an appropriate salary to workers. In order to improve motivation, management needs to
This will allow them to afford the basic needs in life design the job to provide an opportunity for growth,
By rewarding employees, managers can build long- recognise employees for work done and assign
lasting motivated relationships. responsibility.
Two-factor theory Process theories

In the late 1950s, Frederick Herzberg developed what he Process theories essentially argue that people’s thought
called a two-factor theory of motivation. After conducting processes will influence their behaviour. They change the
interviews with a number of employees, he concluded that focus from people being driven by their needs (content
there are some factors that will lead to job satisfaction and theories) to one where they select behavioural actions
others that will cause job dissatisfaction. The factors that to meet their needs. Process theories include Vroom’s
lead to job satisfaction were called ‘motivators’ and those Expectancy Theory and Adams’ Equity Theory.
that cause job dissatisfaction ‘hygiene factors’.
Vroom’s Expectancy Theory
Motivators Victor Vroom’s Expectancy Theory suggests that employees
These factors include: will be motivated to carry out tasks in order to reach a goal
An attraction to the work itself if it is worthwhile to do so. Therefore a person's motivation
Recognition from both management and colleagues can be linked to the anticipated worth that is placed on a
Being given responsibility for tasks goal and the probability of that goal being achieved. The
A sense of achievement Expectancy Theory proposes three variables:
Opportunities for advancement and personal growth. The effort of the individual – this assess the individual’s
Herzberg suggests that where there is a presence of expectation that if enough effort is placed on a task it
motivators on the job, workers will be motivated. However, will generate the desired level of performance. The level
the lack of motivators will not lead to dissatisfaction but of expectation usually depends on the worker’s ability,
workers will be neutral towards their work. Instead, it is the experience and the available resources
hygiene factors that will prevent dissatisfaction. The performance of the individual – the expectation
here is that the desired level of performance will bring
Hygiene factors about the desired outcome. For example, an insurance
These factors include: agent who believes that selling 100 life insurance
Working conditions policies will earn him the ‘agent of the month’ award.
Interpersonal relationships Suffice it to say that the level of expectation will
Pay and job security determine the level of motivation – that is, a high level
The policy of the organisation of expectation will result in highly motivated workers
The quality of management and supervision The attractiveness of the desired outcome (valence)
Perceived differences with others. – this represents the value that is placed on the
CASE STUDY
‘Chaos at Fun Lovers’ Paradise’

These are the words of the livid union leader, Mr Folkes. He opined that the union will have to be called in to deal with the unfair
treatment and poor working conditions that workers at Fun Lovers’ Paradise amusement park have to contend with.
Workers have complained that they are expected to work under less than favourable conditions. There is poor lighting in the
factory and when it rains heavily the roof leaks. Management has blamed this on tough times for the firm, indeed, staff have
been asked to take a 15 per cent cut in pay and to forgo their Christmas bonus. Some workers also bemoaned the fact that they
have been doing the same boring tasks for the last five years and there is no more zest in them to carry on. Mr Folkes stated
that management usually just post information on the notice board at the front entrance and there is little or no opportunity to
communicate with them. He said that even if workers gave suggestions they were not even considered.
Productivity levels have plummeted and profits are dwindling as a result. If management does not make a decisive move to
improve the morale of the workers then Fun Lovers’ Paradise may be no more. Now the patrons are watching the situation with
bated breath, as the firm is one of the largest local attractions for both children and adults.
Questions
1. Give evidence from the case to show that the workers are de-motivated. (3 marks)
2. Discuss how the occurrences at Fun Lovers’ Paradise represent a deviation from Maslow’s Hierarchy of Needs. (10 marks)
3. Briefly explain Herzberg’s theory and discuss how it could be used to improve motivation at Fun Lovers’ Paradise. (12 marks)
Total 25 marks
outcome by the individual. For the employees’ level of However, in a number of organisations today, money is still
motivation to be high, the outcome must be desirable being used to motivate employees. Financial strategies can
and highly valued. be divided into payment schemes and incentive schemes.
Each of these is examined below.
Adams’ Equity Theory
John Adams’ Equity Theory suggests that inequities will Payment schemes
exist if people believe that the rewards they receive for a Time rates
completed task are unequal to those received by other This type of payment is used for workers who are paid for
people. If employees perceive that the rewards received for the amount of hours they spend at work. At the end of the
a task are the same as the rewards for other people carrying week, fortnight or month, workers will be given their total
out a similar task, they will see themselves as being treated wages or salary. The rate paid is usually a fixed amount and
fairly and equitably. Where this is not the case, however, is based on a standard working week. For example, most
then they attempt to reduce the perceived inequity by: CARICOM states have a standard work week of 40 hours.
Modifying the inputs – for example, the level of effort In some cases workers are paid for working over the
exerted to carry out the task specified amount of hours for the week. The excess hours
Changing the outcomes – for example, lobbying for work for the week is termed ‘overtime’. The payment
better wages and working conditions received for overtime work done is usually over and above
Resigning from the post the ordinary hourly rate. For example, regular hours work
Mentally distorting their perception. may be paid at $50 per hour but overtime is paid at ‘time
and a half’ per extra hour worked – that is $75 per hour. If
a worker works for 45 hours for the week, his weekly pay
Financial and non-financial motivational would be calculated as:
strategies
Regular pay: 40 hr × $50 = $2,000
Financial strategies
Overtime pay: 5 hr × $75 = $ 375
Earlier in this chapter it was discussed that theorists such
Total week’s pay = $2,375
as Herzberg believe that money is not source of motivation.
This higher rate is an incentive for people who have Compared with time rates, the level of supervision is far
made the sacrifice and worked more than the specified lower
weekly rate. Encourages efficiency, as, if products are unacceptable,
then payment would not be made.
Advantages of time rates
Simplicity in calculation and administration Disadvantages of piece rates
Gives employees some amount of certainty in the May lead to poor quality as workers may hasten
prediction of their income production to receive more pay
Offers an incentive for workers who put in extra effort May affect workers’ health negatively, as they may be
to get work done overworked
Suitable for jobs where productivity is difficult to Firms may incur huge costs in implementing quality
measure control strategies.
Workers have some security of payment even in the
‘down times’ of machinery and equipment Commission
Workers can focus on quality since they are not being Commission is a form of payment scheme often used with
paid based on output salespeople. It is a reward given to employees for making
Tends to improve punctuality and truancy. a number of sales in a given period of time. Commission
pay schemes are highly utilised in the insurance sector and
Disadvantages of time rates fashion stores. The employees are usually paid a basic salary
Does little to encourage efficiency and productivity, as and are then given a percentage of the total sales value of
output may not increase the items sold.
Requires close supervision of workers who may want to
waste valuable production time Advantages of commission
Paying for idle time may increase cost of production Workers can earn more salary by doing more work
Firms may not be able to estimate the exact payment for Used by firms to attach pay to performance
employees because of possible overtime work. Workers are motivated to work harder
The firm can ascertain the amount of its products that
Piece rates or piecework are actually sold rather than just produced as with the
Piece rates occur where a worker is paid a specific or piece rate system.
agreed rate per unit produced. This type of payment scheme
is often used in manufacturing such as in the garment Disadvantages of commission
industry. It serves as a form of motivation since workers will Workers may give misleading information in order to
be rewarded more for more work done. make numerous sales
Since payment is based on the amount of goods produced, May affect workers’ health negatively, as they may be
workers may be disadvantaged during production ‘down overworked.
times’ – for example if machinery or equipment fails or there
are shortages or delays in raw materials. With this in mind, Fringe benefits
piece rates may be reinforced by a basic pay or a guaranteed Fringe benefits are forms of compensation to employees
amount. Workers would be given a basic pay and then be apart from wages and salaries. They may include, but are not
paid using the piece rate system. limited to, health insurance, car upkeep, housing allowance,
free lunches and pension schemes. The amount of fringe
Advantages of piece rates benefits received by a worker may differ according to their
Encourages workers to work harder and thus improve position in the firm. For instance, senior managers tend to
productivity receive more fringe benefits than floor members.
Workers will earn more as a result of their putting in
more effort Advantages of fringe benefits
The firm can lower labour cost since it would not pay Workers’ human and social needs are met
for sick leave and holidays These benefits encourage loyalty to the firm
Reduces idle time as workers are paid by result Will increase employees’ morale and work ethics
Some fringe benefits are not taxable and so employees Appraisal

benefit from having a tax-free portion of their income. This is the process of reviewing employees’ performance.
The process is usually carried out annually and seeks to
Disadvantage of fringe benefits
rate employees’ skills and expertise in relation to the job
These benefits are additional costs to the firm. requirements. Management uses performance appraisal to:
Promote, redeploy or transfer employees
Fees
Identify strengths and weaknesses of employees and
Fees are paid to workers for a specific task that is performed. their training needs
Unlike salaries or wages, which are paid for a specified time Review the annual performance of employees
(week or month), a fee is a one-time payment. The amount Assess the effectiveness of the recruitment, selection and
paid to the worker may depend of the length of time it takes training processes
to finish the task and the level of difficulty in doing so. Fees Outline the requirements and responsibilities of
are paid to people such as consultants and lawyers. employees.
Appraisal may be done formally (where employees are
Incentive schemes
assessed at a specified time through one-on-one interviews
Performance-related pay or using an appraisal document) or informally (which is an
In recent times a number of firms have been taking this ongoing process carried out by supervisors).
approach in paying their workers. You will recall that in
Chapter 5 it was pointed out that FW Taylor believed that Advantages of performance appraisal
workers should be paid based on performance. Today, firms Managers are able to keep a record of performance
and governments are gravitating towards performance- throughout the year
related pay. Gives managers and employees an opportunity to
Performance-related pay occurs where workers are paid discuss their performance
based their performance on the job. They are expected to When used in conjunction with a good reward system,
meet or exceed the required standard in order to receive the it can improve workers’ motivation
full amount of their salary. In order to measure performance, Can be used as a means of providing employees with
three steps are usually followed: feedback on their performance
1. The workers’ performance is assessed against the agreed Gives employees an opportunity to clarify the
objectives or standards organisation’s expectations of them.
2. They are then categorised, based on the results of the
assessment Disadvantages of performance appraisal
3. Employees are then paid for their performance, which Can be time consuming and overwhelming for the
may take the form of bonuses, increments, or increase parties involved
in salaries. Since it can be opinionated, the result is subject to biases
and errors
Advantages of performance-related pay It may create a very negative experience for workers if
Employees receive a reward for their contribution not conducted properly.
Properly developed performance-related pay systems
will reward the best performers Job evaluation
Can be used to eliminate poor performance in an This is a process of measuring the worth of a job using
organisation prescribed factors such as qualification, knowledge,
It is an incentive to achieve the targets of the business. responsibilities and skills. It gives managers the opportunity
to compare jobs that are similar or different and ascertain a
Disadvantages of performance-related pay fair wage for them.
The workers may not be able to meet unrealistic targets, Before firms can evaluate a job, they must first decide on
which lowers motivation a suitable method of evaluation. Firms have a number of job
Disputes may arise about the measurement of evaluation methods available to them. These may include:
performance Ranking – this is where jobs are organised from top
May hamper cooperation and teamwork. to bottom, focusing on the level of managerial skills
involved and the value that is placed on each position.
For example, a Managing Director would be ranked and performance. It incorporates factors such as lighting, seating,
paid more than a clerk. This is by far the easiest and noise level and temperature, among other things.
least expensive method of job evaluation Work study is known to provide the firm with the
Classification – this involves the categorisation and following benefits:
description of jobs and the assignment of job titles. Avoidance of bottlenecks, as work flows at a good pace
Workers are then paid based on their classification. Management can maintain closer control
Public-sector workers such as nurses and teachers are Improved performance by employees
usually paid based on this type of job evaluation Can be used to implement performance-based pay
Point evaluation – this is a widely used system of job Improves the overall performance and efficiency of the
evaluation. It involves the identification of a set of firm.
factors for which workers receive compensation, such as
skills, responsibilities, effort and working conditions Profit sharing and share ownership
Market evaluation – compensation for a job in one In order to motivate workers, firms sometimes distribute
organisation is compared with the market rate for a proportion of their profits to employees. In this case the
similar jobs in comparative organisations. employees would be given the same benefits as a shareholder
would receive when the company is profitable. This practice
Work study encourages employees to improve their level of productivity,
This concept was borne out of the work of FW Taylor in since the company’s success will result in their receiving a
his Scientific Management theory. It seeks to determine the portion of the profits. An evaluation of this technique is seen
level of efficiency achieved through the use of labour when below.
compared with other factor inputs in an organisation. Work
study incorporates and uses two techniques: method study Advantages of profit sharing
and work measurement. Helps to motivate workers
The first technique, method study, analyses the way in Workers have an opportunity to earn more as the
which a job is performed and identifies ways to improve company makes more profit
performance. The process usually involves the following Workers are more willing to accept changes that will
steps: improve efficiency and performance.
1. Selecting, observing and recording the current method
of work being used Disadvantages of profit sharing
2. Examining, in detail, the method being used, placing There may be disagreements about how the profits
emphasis on quality should be divided among workers
3. Developing an improved alternative way of performing It is sometimes difficult to see the link between workers’
the job performance and the profit of the firm.
4. Implementing the new method of performing the Share ownership is where senior managers in the
task. This method should be constantly monitored and company are given shares. This may be done instead
improved to ensure that it is reaping the desired results. of paying bonuses or using profit-sharing schemes. The
The second technique, work measurement or time study, manager in receipt of a share in the company will become a
is used to measure and compare the time it takes to complete part-owner of the company and would have the same rights
a particular task or job. Work measurement may involve the as any other shareholder. The benefits of this technique
following steps: would be that managers would work harder to ensure that
1. Identification and selection of the work to be measured the company is successful and they are less likely to resign
2. Definition of the method of measurement to be used from since they have ownership in it. A drawback of this
3. Assessing the task and measuring its duration practice is that it is usually not given to the entire workforce.
4. Gathering details about the work
5. Setting a standard time in which the particular task Non-financial strategies
should be done. Initially, most firms saw financial rewards as the way to
A major feature of work study is the concept of ergonomics. motivate workers. This view was also supported by the early
Ergonomics studies the relationship between workers and management theorists. However, the workplace is quickly
machines or equipment. Machines and equipment used in changing and many firms are finding that workers are not
the organisation must be adaptable so as to achieve the best motivated just by money but also by other non-financial
factors. In this section we will examine some of these The extent to which an employee is satisfied with work may
non-financial rewards that are commonly used in the depend on the relationship with co-workers and supervisor,
organisation to motive workers. the quality of the work environment and the level of
fulfilment received from working.
Individual job needs Managers who make the link between job satisfaction
This can be linked to the work of Frederick Herzberg. On the and performance can use it to their advantage. The notion
heels of mounting dissatisfaction with financial incentive, is that the more satisfied workers are, the greater will be
Herzberg attempted to ascertain the factors that would their level of productivity and, hence, performance. To this
reduce dissatisfaction and motivate workers. In essence, end, managers should ascertain the factors that influence
he tried to identify the individual job needs of workers workers’ satisfaction and implement them in order to
by attempting to answer the question of ‘What do people improve performance. Managers may also find that job
want from their jobs?’. From this research he came up with satisfaction can reduce the level of absenteeism and labour
what he termed ‘motivators’, which were discussed earlier turnover while improving productivity. They should also be
in this chapter. In order to foster motivation, jobs should aware that there are other factors, apart from job satisfaction,
be designed to meet the individual needs of the workers. that may affect performance. Those factors should also be
These needs could include, but are not limited to: status, ascertained.
friendship, self-fulfilment, responsibility, interaction and
cooperation. If workers feel that their individual job needs Job enrichment
are being met, then their level of motivation may increase. This non-financial strategy is where employees are given
more interesting and complex tasks to complete. For job
Participation enrichment to be successful, workers should be given greater
This relates to the involvement of employees in the decision- responsibility in the work process. The workers’ tasks may
making process of the firm. It can be used to motivate be extended to include supervisory roles, planning the
employees, as they feel that they are valued by the firm. work process and quality control, among other things. The
Their involvement in the decision-making process gives a challenge provided by job enrichment can help workers to
sense of accomplishment and recognition. A manager who achieve a sense of self-fulfilment, especially when they have
desires to improve motivation can involve his subordinates successfully completed the task. Job enrichment works to
in decisions regarding the planning, design and scheduling expand the responsibility of workers ‘vertically’ and gives
of the work. them an opportunity to utilise their ‘unused’ skills. Workers
The process of employee participation helps in their who do well with job enrichment may feel a sense of
empowerment in the organisation. Participation helps to fulfilment as they note their contribution to the success of
decentralise the organisation as decisions are no longer the organisation.
skewed to top management but may involve any level of
workers. Employee participation may include quality circles, Job enlargement
consultation and suggestion schemes. Unlike job enrichment, which deals with a ‘vertical’
Some of the common benefits of employee participation expansion, job enlargement involves expanding the number
include increased motivation, increased productivity, of tasks that workers are expected to complete. For example,
improvement in product quality and improvement in the a dressmaker would be given an entire dress to sew rather
performance of employees. However, amid the benefits of than just sewing on a collar or sleeve. Job enlargement is
employee participation, it may considerably slow down particularly effective where workers feel that the job that
the decision-making process in some organisations. Also, they are completing is oversimplified. Using this strategy
there may be certain sensitive information that cannot be gives workers a variety of tasks to complete and more
communicated to the wider organisation. challenge on the job. The increase in tasks can work as a
motivator for workers who have successfully completed the
Job satisfaction tasks given amid the challenges.
An important way to improve performance on the job is
to ensure that workers are satisfied. Job satisfaction occurs Job rotation
where an employee regards his/her work with a positive This strategy has helped a number of employees to develop
attitude. It is where the work being done coincides with their skills and working ability. Job rotation involves
interests and needs and the remuneration is satisfactory. the moving of workers in a systematic way from one job
responsibility to another. For example, a cashier may discuss quality problems, recommend solutions and take the
be transferred to complete the task of a receptionist then necessary actions to solve the problem. Quality circles, to a
customer service representative while the others workers large extent, consist of shop-floor workers who can use the
are also reshuffled. This can be motivating for workers who opportunity to become self-motivated. This concept will be
would rather learn new tasks than do the same repetitive discussed further in Unit 2, Module 1.
tasks on a daily basis.
Opportunities for promotion Implications for managers

According to Maslow, people strive to reach a state of self- The implications of motivation for managers can be examined
actualisation, which is the highest level in his hierarchy of in terms of getting the best out of individuals, appreciation
needs. Workers want to feel that they have an opportunity of work and appropriate reward systems.
to move up the hierarchy. The lack of such assurance can Management has to realise that in order to get the
lead to a state of boredom on the job, dissatisfaction and low maximum output from its subordinates they should be
productivity. Employees need to know that if they put in the satisfied with their jobs – and satisfied employees means
effort at work for a number of years they have a chance of that they will put in more effort in carrying out their
becoming supervisor or manager. Senior managers should jobs. Herzberg outlined the factors that will bring about
ensure that there is a succession plan in place which includes satisfaction. Think about this: when a teacher is able to
lower-level managers and employees. People should be motivate you in class, it is more likely that you will try to do
trained to succeed senior managers upon retirement. Giving your best in that particular subject. It is no different in the
employees an opportunity for advancement and growth can work environment: people who are motivated tend to exert
lead to increased satisfaction and motivation. more effort in carrying out a job. This can help to improve
the quality of work done, appreciation for the job, labour
Group or team work productivity and the overall output of the firm.
A group or team can be defined as the interaction of two Choosing an appropriate reward system can be a
or more people, in an interdependent way, to achieve a challenge for some managers. Managers should be aware of
common goal or objective. This concept will be explored the fact that people are motivated in different ways. Some
further in a subsequent chapter. However, working in teams people may be motivated by financial rewards, while others
can be beneficial to both employees and management. are motivated by non-financial rewards. Management, in
Some of the common benefits would include an increase in particular the Human Resource Manager, needs to assess
productivity, improvement in motivation and improvement the workforce to ascertain the best reward system to use.
in the morale of employees. Often, it is advisable to use a combination of financial and
non-financial rewards.
Quality control circles
Quality control circles are groups of employees who have
been given the responsibility for holding regular meetings to
CASE STUDY
Bounce back: a success story

Just over a year ago, Fun Lovers’ Paradise was on the verge of failure as productivity had fallen because of a myriad of labour
relations problems and poor motivation. After the malaise had set in and workers had voiced their opinion openly, management
decided to meet, with the intention of quelling the impasse that had emerged between themselves and the workers. With the
help of a management consultant, they were able to organise a programme that now seems to be working. The benefits of this
programme are being realised through an increase in sales, as more customers patronise the amusement park, the workers are
more upbeat and productivity levels have risen.
In an interview with Mr Stone from ‘Everything News’ on the local TV station, the Human Resource Manager, Mr Destiny,
said that management owes the success now being enjoyed to the new motivational strategies that were implemented. He
mentioned that the company had taken steps to offer its sales team commission; employees agreed to performance-based pay;
they now receive health insurance; some employees were given more tasks to complete; and they can now participate in the
decision making of the firm to some extent. ‘We have become one big happy family’, stated Mr Destiny.
With the improvements at Fun Lovers’ Paradise, management is now looking to propel the firm forward so that it can win
the hearts of customers and potential customers as the best amusement park in the country. From the look of things, this aim
is quite achievable.
Questions
1. What evidence is provided in the case to show that an improvement in motivation benefited the firm? (3 marks)
2. Identify three (3) financial motivational strategies that were used by Fun Lovers’ Paradise. (3 marks)
3. Outline three (3) benefits of each of the financial motivational strategies identified in Question 2 above. (18 marks)
4. Describe two (2) non-financial motivational strategies that were implemented by the management of
Fun Lovers’ Paradise. (6 marks)
Total 30 marks
CHAPTER SUMMARY
The theory of motivation may be must be acquired or fulfilled before It is important for firms to know
divided into content and process the individual can move on to a that employees are motivated in
theories higher need different ways. Some are motivated
by financial rewards and others by
Content theories focus on the needs People strive to reach the highest non-financial rewards
of employees and how these needs level of need, which is self-
motivate them actualisation For best results, firms should use a
combination of financial and non-
Process theories essentially argue According to Herzberg, in order to financial strategies for motivation.
that people’s thought processes will improve motivation, management
influence their behaviour needs to design the job to provide
an opportunity for growth, recognise
Maslow proposed the Hierarchy employees for work done and assign
of Needs Theory. Essentially, he responsibility
proposed that each level of needs
MULTIPLE CHOICE QUESTIONS b. Work study

c. Fringe benefits
1. The term ‘motivation’ is BEST defined as:
d. Profit sharing
a. The will to achieve
b. Getting rewards 8. Which of the following is NOT one of Herzberg’s motivating
c. Absence of dissatisfaction factors?
d. Dedication to work a. Recognition for work done
b. Rules and regulations
2. The level of motivation may be influenced by ALL of the
c. Promotion prospects
following factors EXCEPT which one?
a. Ability to make choices d. Sense of achievement
b. Individual needs 9. Which of the following is defined as ‘the process of giving

c. Attitudes workers a number of tasks to perform instead of one simple
d. Satisfaction task’?
a. Group working
3. Which of the following is NOT a content theory?
b. Job enrichment
a. Herzberg’s Two-Factor Theory
c. Job rotation
b. Maslow’s Hierarchy of Needs
d. Job enlargement
c. Vroom’s Expectancy Theory
d. Adams’ Equity Theory 10. According to the Equity Theory, inequities will exist if people
believe that the rewards they receive for a completed task
4. Which of the following is an example of a financial reward? are unequal to those received by other people. People can
a. Participation reduce the perceived inequity by doing ALL of the following,
b. Job enlargement EXCEPT which one?
c. Piece rates a. Changing the outcome
d. Job satisfaction b. Modifying the input
c. Working harder on the job
5. Using time rates, calculate the weekly pay for an employee
d. Resigning from the post.
using the following information:
An employee works a regular 40-hour week at a rate of $100
per hour and overtime at ‘time and a half’. If he works for
50 hours in a particular week, what would be his total pay for
the week? a. Differentiate between financial and
a. $5,000 non-financial motivational strategies. (5 marks)
b. $4,000 b. Describe two (2) financial and two (2)

non-financial motivational strategies and
c. $7,500
explain how they can be used to improve
d. $5,500 motivation. (20 marks)
6. Which of the following would NOT be regarded as a fringe Question two Total 25 marks
benefit? a. Define the term ‘motivation’. (1 mark)
a. Overtime pay b. Describe two (2) factors that may stimulate
b. Health insurance or influence motivation. (4 marks)
c. Car upkeep c. Discuss how management can use Maslow’s
Hierarchy of Needs to improve motivation
d. Pension scheme
in the workplace. (20 marks)
7. An example of a non-financial reward is:
a. Job enrichment
88
8 Leadership
Coercive power – this is where the leader exercises

LEARNING OBJECTIVES: control over employees and the activities that take place
At the end of this chapter students should be able to: in the organisation. As the leader is in control, he/she
Define the term ‘leadership’ has the ability to mete out whatever punishment or
sanction is necessary to correct the mishap
Outline the sources of power
Legitimate power – power here comes from the
Discuss the different leadership theories
belief that the leader has the right, by virtue of his/her
Evaluate the different leadership skills
position, to give orders and instructions. For example,
Explain each leadership style
in the classroom, the students are expected to adhere to
Compare and contrast the different leadership styles
the teacher’s instruction by virtue of his/her position
Outline the factors influencing the choice of leadership Expert power – this stems from the ability and
style
knowledge of the leader. Employees believe that the
Outline the influences of informal leadership on
individual has significant knowledge and skills in the
organisations
area involved and so power is accorded to him
Referent power – this source of power is largely based
on the qualities of the leader. These characteristics help
M
ost, if not all, of us have been a leader at some point the leader to earn the respect of the subordinates who
in time in our lives. The question then is: who is a also emulate his/her behaviour.
leader? A leader is anyone who influences others.
If you examine your life at school you will realise that you
may have influenced many people in your daily activities. Leadership theories
Having established who is a leader, we must now define the A number of theorists focus on leadership in the organisation.
term ‘leadership’. While the definition of leadership varies, Some of their views are similar, while others are very
the term is commonly defined as the process of influencing different. In this section we will focus on McGregor’s Theory
people towards a specific or common goal. Now let us look X and Theory Y, and the Trait Theory.
more closely at our definition:
Leadership is interpersonal – it involves people or a
group of people Theory X and Theory Y
People are influenced – this is the use of power to affect In the 1960s, Douglas McGregor made his mark on research
others. We will examine the sources of power below into leadership and motivation. He proposed two theories
Specific or common goal – this is the desired end result on how employees’ level of motivation may be affected by
that one hopes to achieve. the leadership style of management. He called these theories
In order for leadership to be effective, the leader has to ‘Theory X’ and ‘Theory Y’. He suggested that managers
have some form of influence or power over the people being will adopt one of the two styles, depending on their beliefs
led. ‘Power’ is defined as having the potential or capability and views of the employees. Managers who still hold the
to influence the actions of others. Leaders get their power traditional view of management were referred to as Theory
from a number of sources including: X while those who held a more humanistic view were
Reward power – this is associated with the distribution referred to as Theory Y managers
of rewards to employees. As was discussed in Chapter
7, these rewards can be monetary or non-monetary and Theory X managers
can be used to alter or influence employees’ behaviour McGregor states that the Theory X manager assumes that:
CHAPTER 8 | LEADERSHIP 89
There is an inherit dislike for work in the average great leaders. In its early days after inception this theory
human and they will seek to avoid work if possible was sometimes referred to as the ‘great man’ theory. It
As a result of the first assumption, workers must be suggests that individuals are different in terms of their traits.
coerced, controlled, directed or threatened in order to A ‘trait’ is defined as a distinguishing feature in character,
get them to work appearance or habit from which an individual’s personality
People possess little ambition and will avoid is formed and can be identified. These traits are often used
responsibility and so they prefer to be directed to distinguish leaders from non-leaders. The traits identified
Being self-centred, the average person will not be may range from different categories, including:
concerned about the goals of the organisation. Physiological (appearance, height and weight)
Demographic (age, education and socio-economic
Theory Y managers background)
McGregor states that the Theory Y manager assumes that: Social (sociability and cooperativeness)
People do not inherently dislike work but instead work Personality (self-confidence and aggressiveness)
is as natural as play or rest Intellectual (intelligence, decisiveness, judgement and
Employees will exercise self-direction and self-control as knowledge).
they seek to fulfil the firm’s objectives Some of the core traits that a good leader should possess
People will seek responsibility under the proper working were also highlighted:
conditions A drive to achieve – there should be a high level of
People possess the skills, imagination, ingenuity and effort, ambition, energy and initiative
creativity needed to solve the organisation’s problems Motivated leader – possessing an intense desire to
The intellectual potential of humans is only partially influence others to reach common goals
being utilised. Honesty and integrity – the leader should be
The above two sets of assumptions will influence trustworthy and reliable
the manager’s behaviour. Managers who hold Theory High level of self-confidence
X assumptions about their employees are likely to have Strong cognitive ability – should be able to exercise good
autocratic traits. They usually believe that the organisation’s judgement and possess strong analytical abilities and
objectives will be achieved through coercion, discipline and conceptual skills
penalties. Theory X managers are of the view that money Knowledgeable – must be conversant with the industry
and security are people’s main motivation to work. As a and the technicality of the type of business
result, firms under such management will depend largely on Possess good social skills and flexibility
money and benefits to satisfy employees’ needs. McGregor Display emotional maturity.
proposed that this view is not effective in motivating While the above list of core traits is not exhaustive, the
employees. more traits a leader possesses, the more effective he/she will
Conversely, managers who hold Theory Y assumptions be. Trait theorists tend to suggest that:
about their employees are likely to be democratic. They Good leaders are born and not made, since the traits of a
usually believe that the organisation’s objectives will leader are innate
be achieved through the involvement of employees in Some traits are more suited for leadership than others
decision making. Employees should also be encouraged The right combination of traits is necessary in order for
to seek responsibility and participate in self-management. a person to be an outstanding leader.
Organisations holding the assumptions of Theory Y are more Now we will examine some of the more popular trait
likely to have motivated employees than those supporting theorists.
Theory X.
Ralph Stogdill
Stogdill was among the first people to challenge the findings
The Trait Theory of the early and traditional views of trait theorists. In his
The trait approach to leadership seeks to identify the research he found out that some of the traits identified by
characteristics of leaders and how these characteristics his forerunners were not in sync with effective leadership –
affect their effectiveness. Its main assumption is that for example, age, weight, height and physique. Instead, he
effective leaders are born and not made. These leaders have proposed ten traits which give a clearer picture of who an
outstanding leadership qualities that assist them in becoming effective leader is. These include:
Honesty Extraversion–introversion
Intelligence Emotional stability
Having a great sense of humour Agreeableness – this is where people tend to be friendly
Using initiative and accommodating
Competence Conscientiousness – these people tend to be orderly, get
Integrity and conviction their work done and be punctual
Responsibility Openness – these people tend to be open minded and
Insight creative.
Self-confidence and Though the final two theories speak to one’s personality,
Inspirational. we see where the personality trait of the leader can have
significant effect on how he/she leads.
Richard D Mann
In his research Mann summarised the traits that were Advantages of the Trait Theory
identified by previous theorists and identified the following It is used as a yardstick to assess an individual’s
traits as those that separate leaders from followers: leadership traits
Intelligence It outlines, in a detailed way, the leader (individual)
Masculinity element in the process of leadership
Dominance and The basis of the theory has been validated by a number
Extraversion. of other pieces of research.
Hans Eysenck Disadvantages of the Trait Theory

This theorist was the first to put a statistical twist on the It lends itself to subjectivity
research on traits. His research was characterised by a list The traits of successful leaders tend to run to a very long
of adjectives that were issued to hundreds of thousands of list
people. He then used statistics to figure out the factors that Equating physical traits, such as height and weight, may
carry the most weight. Once these were identified, Eysenck not be the best tool for measuring effective leadership
developed a test that is referred to as the ‘Eysenck Personality Based on the theorists’ work, it is evident that there
Questionnaire’ (EPQ). are disagreements in terms of which traits are most
His research findings suggested that there are three important for effective leadership
dimensions of personality: The traits that are needed for one organisation may be
Introversion/extraversion – introversion involves very different from those needed for another
directing attention on one’s own experiences, while In a number of cases, the trait needed depends on the
extraversion is where attention is placed on other situation in which the leader is leading. Therefore there
people and the environment is no uniformity.
Neuroticism/stability – neuroticism refers to the
tendency of an individual to become upset or emotional,
while stability refers to the tendency of the individual to Leadership skills
remain emotionally sound The desire of any leader is to be successful and to guide his/
Psychoticism – this dimension was added after further her followers in the right direction to achieve the desired
research was carried out on mentally ill people. goals. However, this may not be possible unless the leader
Individuals with this trait are said to have difficulty possesses the right skills. The skills needed by a leader
dealing with reality and are often anti-social, hostile, may vary, depending on the situation or task requirement.
non-empathetic and manipulative. They sometimes However, some common ones are:
even suffer from hallucinations.
Communication
The Five Factor Theory It is often said that great leaders are great communicators.
With the development of technology and knowledge, other For any leader to be effective it is imperative that he/she is
theorists have built on the work of Eysenck to develop able to communicate effectively. The leader must be able to
what is called the Five Factor Theory. This identifies five give unambiguous instructions and be able to communicate
personality traits: the objectives and goals of the firm to their subordinates.
CASE STUDY
Do it my way
Everything Styrofoam Ltd is a large manufacturer of Styrofoam. It supplies a number of appliance manufacturers, both for use
inside some products and to act as packaging material in other cases. Everything Styrofoam Ltd is led by Dr Exymus, who is a
very stern leader who likes to see things done his way. If workers fall out of line he will unilaterally suspend them or dock their
pay, depending on the offence. Though he is of this temperament he is highly rated by the employees because of his knowledge
and expertise in a number of areas of the business.
Dr Exymus believes that workers will not ordinarily carry out the tasks that are given and so must be intimidated into doing
so. He is also of the view that his workers will shirk their responsibility and so they have to be closely supervised. The business
is enjoying some success but the workers feel that they could be treated more fairly.
Questions
1. Describe two (2) sources from which Dr Exymus gets his power. (8 marks)
2. Briefly describe McGregor’s Theory X and Theory Y and, with reasons, state the kind of leader that Dr Exymus is. (12 marks)
Total 20 marks
Effective communication can help the leader to develop Problem-solving skill speaks to the leader’s ability to work
a good business relationship with employees which may through the details or aspects of a problem and to reach an
bring forth success. Poor communication can lead to low appropriate solution.
worker morale and confusion regarding the expectations of
employees. Planning
The ability to listen is also a vital part of communication Planning, as defined earlier, is the setting of business
and to any leader. In order to communicate effectively, the objectives and establishing the necessary plan to achieve
leader must also learn to listen actively. Subordinates will such objectives. An effective leader needs to be a very good
be motivated by a leader who takes the time to listen to planner. Having stated goals is not enough unless there is
their concerns and suggestions. Good listening skills can also a clearly outlined step-by-step plan to achieve these goals.
generate respect, trust and belief in the leader. The leader needs to identify opportunities and develop the
courses of action to take while making the best use of the
Critical thinking limited available resources. A good planner will be aware
An effective leader is one who practises higher-order thinking of the foreseeable future and develop strategies to deal with
by making responsible judgements and decisions. A critical the possible problems that he/she may encounter.
thinker is an individual who asks the appropriate questions
in order to ascertain relevant information and then uses the Consideration
information to draw logical conclusions. The leader needs to A leader who needs to gain the trust and support of
think critically in order to deal with the day-to-day running subordinates must learn how to be considerate. Employees
of the firm and to make strategic decisions on how to move come to work with a lot of ‘baggage’ and may respond
forward. to a situation in a particular way depending on what is
happening in their own environment. The leader needs
Problem solving to be sympathetic to employees as they go through their
To be an effective problem solver, the leader needs to be a different challenges. The effective leader is one who will
critical thinker, as was discussed above. It is inevitable that be considerate of a decision affecting his/her subordinates.
the leader will be faced with different problems or decisions When a leader gives consideration in response to good
within the organisation. Therefore, having the skill of performance it increases the likelihood of the level of
problem solving is vital to the effective running of the firm. performance being repeated.
Leadership styles Therefore, there is little, if any, room for workers to use
their intuitive ability and to be flexible. The activities of the
Autocratic or directive firm are undertaken based on the prescribed policies and
This is probably the oldest leadership style and was featured procedures. This style of leadership is particularly important
in the work of Frederick Taylor in his Scientific Management when the employees must follow certain procedures to
theory. An autocratic leader makes all the major decisions in maintain a certain level of quality.
the firm, gives orders and closely monitors the activities of the The leader gains his/her authority based on the office
employees. Employees are not involved in decision making or position as stated by rules governing that position –
and do not act independently of the leader. Communication that is, legitimate power. Employees are expected to act
usually flows from the top down in this form of leadership, professionally in the workplace and among each other. This
as workers’ suggestions are not given much regard. This leadership style is entrenched in the work of Max Weber
can cause frustration and low morale as workers’ intuitive and his Bureaucratic Management theory.
abilities are being stifled by management.
Amid the challenges that workers may face with this
Laissez-faire
leadership style, it may be the most suitable style to use in This is the most liberal of all the leadership styles. The leader
certain industries or situations. It is suitable for the army and is seen as the representative of the group of people being
for large companies. led and acts on their behalf. The leader is mostly responsible
for setting the business objectives, which should be
Democratic or participative unambiguous. The subordinates are given autonomy to carry
The democratic leadership style is one where the leader out their own activities and make decisions as far as possible
allows employees to share their ideas and suggestions and in order to achieve the objectives. The success of this style
participate in the decision-making process. This leader of leadership often depends on the level of competence, skill
delegates authority to subordinates but retains ultimate and reliability of the employees. Since workers are given the
responsibility. Unlike the autocratic leadership style, the chance to carry out their own work, this type of leadership
democratic leader facilitates two-way communication and often leads to a high level of motivation.
the employees’ input is highly regarded. The leader may
seek employees’ views prior to a decision being made or Transformational
may share the decision and then try to convince workers A leader using the transformational leadership style seeks
that it was the correct one. to inspire his/her subordinates to achieve a shared goal
This style of leadership is entrenched in the work of some or objective. The transformational leader is well involved
of the major motivational theorists who were discussed in the day-to-day activities of the firm and communicates
earlier. Among these are Maslow (in his higher level of well with subordinates. This style of leadership involves
needs), Herzberg (motivators) and McGregor’s Theory Y the delegation of responsibility to subordinates rather than
leader. ‘leading from the front’. The transformational leadership
style is highlighted by the following:
Paternalistic Stimulation of subordinates to be creative and to
The paternalistic leader is a ‘father figure’ who gives develop innovative ways to solve problems
attention to the social needs and opinions of the employees. The transformational leader gives individualised
This style of leadership is similar to the autocratic one, in attention to subordinates and allows for one-on-one
that workers do not participate in the decision-making conversation
process. Instead, the leader makes all the decisions, which, Transformational leaders are motivators as they are able
in their view, is in the best interests of the workers. While to influence subordinates to reach their full potential
there might be consultation with the workers and noting of This type of leader is able to garner trust and respect
their opinions or feedback, the final decision rests with the from subordinates
leader. Promotes intelligence and rationality.
The transformational leadership style often leads to
Constitutional or bureaucratic positive changes in the lives and attitudes of subordinates. In
Bureaucratic leadership is very stringent as the leader addition to being involved in the process, transformational
leads in accordance with the stated rules of the firm. leaders are filled with energy, enthusiasm and passion. These
characteristics help the leader to encourage the members of becoming obsolete in a short span of time. These turbulent
the organisation to succeed in their different endeavours. times force firms to be flexible and to forecast and meet new
The transformational leadership style is also particularly and changing demands.
suitable for a marketplace where a product’s lifecycle is Table 8.1 evaluates the different leadership styles we
short. This could be as a result of the current technology have just considered.
Leadership styles Main features Advantages Disadvantages

Autocratic/directive Employees have little or no say Quick decisions can be made Lack of consultation can be
Decisions are made solely by Suitable for businesses with an de-motivating
the leader unskilled labour force Stifles intuitiveness
The leader stipulates the work
process and methods Helps to maintain quality and Staff do not partake in
standards in large businesses decision making
One-way communication
Close supervision
Democratic/ Two-way communication Helps to motivate staff Decision making tends to be
participative Workers participate in decision Suitable for complex decisions slow
making that require specialist skills May not be best for some
Workers are kept informed Employees are allowed to be types of decisions that need a
about the business intuitive quick response
Manager delegates Encourages team building Requires a skilled labour force
responsibility for informative decisions
Paternalistic Managers make decisions Workers are consulted on Slow decision-making process
based on what they believe is decisions Still dictatorial to some extent
best for workers The social needs of workers are
The final decision rests with the met
leader even if there have been Consultations may improve
consultations workers’ motivation
Caters for employees’ welfare
Two-way communication
Bureaucratic/ Clearly defined rules and Suitable for some government Lack of self-fulfilment
constitutional guidelines bodies and hazardous Extensive red tape which
Authority is attached to the workplaces slows decision making
leader’s positions Helps to maintain quality, Stifles creativity
Poor communication especially in large
Decision making is usually organisations
centralised
Laissez-faire Little direction and control Workers are allowed to be Lack of direction may lead to
Decision making rests with creative waste of resources
subordinates Can improve motivation Possibility of poor work
relations
If the workforce is not skilled
and responsible it may lead to
poor performance
Transformational Individualised consideration Helps to stimulate people to Leaders may have to invest
Intellectual stimulation think differently a lot of time in making this
Encourages people to reach Helps to improve worker work
full potential motivation Only works well when
Employees often exert extra employees have the requisite
effort for the transformational skills and experience
leader
Table 8.1: An evaluation of different leadership styles

CASE STUDY
Leadership concern at Digital Innovative Inc

Digital Innovative Inc is a manufacturer of cellular phone brands such as Craze and Raspberry. The company is a fairly large
one and it has been doing well in the cellular phone market, competing with the big-name and more established brands. Most of
the local phone companies on the Isle of Lucia are now carrying the company’s Craze and Raspberry brands of cellular phones.
The company’s market share is growing as there continues to be an upsurge in sales.
The company owes its success to a good management team and motivated workers who ensure that high quality is main-
tained at all times. The workers believe that their leader, Mr Walters, takes a keen interest in their wellbeing and is a very good
listener. To substantiate their view, they say that he has an ‘open door’ policy and communication often flows in both directions.
Mr Walters is willing to stop as he walks through the factory, to listen to the concerns of the staff. Staff members are also
recognised for their efforts on a monthly basis.
As the years have passed by, Mr Walters has grown in the position and, especially with the success of the firm, he has the
employees’ best interests at heart. In his monthly meetings he usually encourages his subordinates to strive to achieve their full
potential. The workers are given opportunities to improve their expertise through regular training programmes that are held and
are sponsored by the firm. Amazingly, for someone who is so busy and focused, he can remember the entire staff and will greet
them by first name more often than not. ‘Digital Innovative Inc is blessed to have a leader such as this’ was the sentiment shared
by one employee at a recently held awards dinner.
Questions
1. How can an effective leadership style contribute to the success of a business? (5 marks)
2. What are the two (2) possible leadership styles that Mr Walters is practising? Give evidence for your answer. (10 marks)
3. List five (5) factors that may have influenced Mr Walters’ choice of leadership style. (5 marks)
Total 20 marks
Factors influencing the choice of management may have to make decisions itself. For
example, fast food giants may have to stipulate how
leadership style
their operations should be carried out in order to
Different leaders practise different leadership styles.
maintain the quality of their food and the service
However, the extent to which a particular style of leadership
offered
is utilised may depend on a number of factors, among them
being: Attitude of subordinates – some employees prefer to be
Time pressures – the length of time available for the led rather than sharing in decision making. This could
completion of a project will determine the style of be as a result of low self-esteem, past experiences or
leadership that is employed by the leader. Where there their personality types. A leader in such an organisation
is challenge in terms of the time available, the leader may find that it is more effective to utilise an autocratic,
tends to make all the decisions instead of consulting paternalistic or bureaucratic leadership style as opposed
with the employees to a democratic or laissez-faire one
Organisational culture – over time, the employees of the Skill level of the labour force – the leader should be
organisation will develop a certain lifestyle and culture. aware of the ability and skill level of the labour force.
An organisation with a warm culture tends to have a A highly skilled labour force can be trusted to share
more participative leadership style where employees ideas and make suggestions which, if implemented,
and management trust each other and consultation is may lead to success. These employees are more likely to
the norm work on their own to accomplish the objectives of the
Staff size (span of control) – leaders in very large firms firm. Leaders may find that a democratic or laissez-faire
may find it difficult to consult employees on every leadership style is viable in such a situation
decision. In order to maintain underlying standards,
Personality of the leader – this is perhaps one of the Coaching

most difficult factors to correct. It is based on the innate ‘Coaching’ is defined as the process of training and providing
or learned traits of the leader. Some leaders have employees with the necessary knowledge and tools to carry
autocratic tendencies and hence will not utilise any out their job responsibilities effectively. In the organisation,
other leadership style the leader has to play the role of coach as he/she is expected
The nature of the task – in practice, not all decisions that to train and equip employees for the task at hand. The
are made can go through consultation. The leader may leader can use this role as coach to direct employees towards
have to make a drastic decision based on its urgency. the attainment of the firm’s goals. The role of coaching is
There are also times when a leader has to make a particularly important in the coordination of teams in the
unilateral decision because of its nature and the impact organisation. Each member has to be aware of the purpose
it is expected to have on the organisation. and objective of the team and the leader has to guide them
likewise.
Leadership roles Inspiration of others

Guidance It is very interesting how some people influence others to do
wrong, knowing the consequences of their actions. However,
A leader is often seen as a guide and subordinates look to
a leader plays an integral role in the lives of his/her followers
the leader to provide guidance on how to complete a task.
– that is, the role of inspiration. The leader should be able
While employees are not necessarily seeking someone to
to inspire subordinates to work assiduously to complete the
make their task easier, the leader must be able to guide
given task. In carrying out this role, the leader will transfer
them to success and the achievement of goals. The leader is
his/her passion about the vision and mission of the firm to
often perceived to have a wealth of knowledge regarding an
employees. This will inspire them to go beyond the call of
area and so is expected to use this knowledge to guide his duty to attain the goals of the firm.
subordinates. Do you remember, in your early years, when
you were learning to write the letters of the alphabet? You
would be given dots to trace out each letter. In the same Informal leadership
way, a leader should provide an outline for how the work It is a common phenomenon for the formal leader in the
can be carried out to attain the business’s objectives. organisation to be credited for the achievements of the
organisation, with no mention of some of the ‘unsung
Direction
heroes’ who are the informal leaders within the business.
A leader should be able to provide his/her subordinates with An informal leader is a person who does not have formal
a sense of direction. There must be a clear view of where the authority in the firm but who has been able to inspire and
organisation is going and how it plans to get there. The leader motivate his/her peers to achieve a desire or set of goals.
has the role of being a visionary and must communicate These leaders are often charismatic and influential and often
this vision with subordinates. Directing employees is an get others to follow them. Look around in your classroom.
important part of leadership and is paramount when the Who is that student who attracts followers without exerting
leader has an inexperienced staff. much effort? Which student commands respect, motivates
and inspires the rest of the class to carry out a task without
Counselling
having a formal leadership position? That person is an
It is almost inevitable for employees of an organisation to informal leader.
have conflicts and concerns that they need to offload. With Such leaders are particularly important to firms
this in mind, the leader has to play the role of counsellor. even though their contribution is often unrecognised
This is especially important for leaders who practise an by management. However, in recent times, the formal
‘open door’ policy and have a good relationship with leadership of the firm has started to realise the integral role
subordinates. To be an effective counsellor, the leader must that informal leaders play in the organisation. The role of
be a good listener and should be able to help employees the informal leader may include, but is not limited to, the
through difficult situations. The leader has to be trusted by following:
subordinates and must maintain his/her integrity. This role Motivating and inspiring peers and team members to
is especially important and many firms are now employing achieve the stated objectives
qualified counsellors in their Human Resource Department.
Being the driver of a business concept ‘on the ground’ Tends to improve the employees’ social relationships,
to achieve positive results thus building self-esteem
Bridging the communication gap between management Suggestions from informal leaders could be
and employees implemented by management since they are the ones
Offering mentorship and support for others. ‘on the ground’
The role of the informal leader should be of the utmost Informal leaders often know how to get the work
importance to formal leadership. Management must realise out and so can be used to communicate directly with
that there may a divergence between their views and those employees.
of the employees. A prudent formal leader is expected to
coach, to some extent, the informal leader to ensure that Disadvantages of informal leadership
there is uniformity of direction. The informal leader could use his/her influence to resist
changes in the firm
Evaluation of informal leadership Could result in employees being ill informed about
matters within the organisation.
Advantages of informal leadership
Can motivate the workforce, which could eventually
improve productivity
CHAPTER SUMMARY
A leader is anyone who influences Leadership styles can be seen as Informal leaders are particularly
others having two extremes: autocratic and important to firms even though their
laissez-faire. If we put these styles contribution is often unrecognised by
The power or authority of a leader on a continuum, the others would management.
can come from one of five sources. fall somewhere in between them. For
These sources include legitimate example, bureaucratic style would be
power; coercive power; reward power; near to autocratic and democratic
referent power; and expert power near laissez-faire
A successful leader will need to have The style of leadership utilised in an

at least three very important skills. organisation depends on a number
These are: communication; critical of factors, including time pressure;
thinking; and listening size; organisational culture; and
personality of the leader
MULTIPLE CHOICE QUESTIONS 2. Which leadership power comes from the belief that the leader
has the right, by virtue of his/her position, to give orders and
1. Leadership may be defined in terms of ALL of the following instructions?
EXCEPT which one?
a. Legitimate power
a. Involves people or a group of people
b. Referent power
b. Use of power to influence others
c. Coercive power
c. Working towards a specific or common goal
d. Expert power
d. Using one’s position to belittle others
3. A leader should possess ALL the following skills EXCEPT

which one? Extended Essay Questions
a. Communication Question one Total 25 marks
b. Possessive The type of leadership style used in an organisation may be
c. Listening influenced by a number of factors.
a. Discuss how any three (3) of these factors affect
d. Critical thinking
leadership style. (9 marks)
4. Mr Bigstick does not allow anyone to participate in decision b. Outline three (3) sources of power for a leader
making, only gives directives and hardly listens to his staff. in an organisation. (6 marks)
What is his leadership style? c. Discuss the importance of the following leadership
a. Paternalistic skills in an organisation:
b. Bureaucratic i. Communication
ii. Critical thinking
c. Democratic
iii. Listening. (10 marks)
d. Autocratic
5. Which leader is often seen as a ‘father figure’? A number of leadership styles are practised in organisations
a. Charismatic today. Two (2) of these leadership styles are:
i. Directive (autocratic)
b. Democratic
ii. Participative (democratic)
c. Paternalistic
a. Discuss the differences between the two (2)
d. Laissez-faire leadership styles mentioned above. (15 marks)
6. This leadership role is defined as ‘the process of training and b. Mr K Young is the CEO of a major company.
providing employees with the necessary knowledge and tools He sees himself as a ‘father figure’. He consults
to carry out their job responsibilities effectively’: with the workers but he makes the final decisions
and caters for their social needs. Identify the type
a. Counselling
of leadership style that Mr Young is using and
b. Coaching state the three (3) advantages and disadvantages
c. Inspiration of using such a style. (10 marks)
d. Guidance
98
9 Team Management and Conflict
groups or teams are interest groups, reference groups and

LEARNING OBJECTIVES: friendship groups.
At the end of this chapter students should be able to: The nature of formal teams can be analysed in terms of
Discuss the nature of teams in terms of their their composition, objectives and interaction.
composition, objectives and interaction
Differentiate between formal and informal teams Composition
Outline the stages of team or group development The composition of the team usually plays an integral part
Explain the characteristics of effective teams in its ability to achieve the task that was assigned to it. The
Describe the forces that influence group cohesiveness activities that should be carried out may require a variety
Outline the advantages and disadvantages of working in of skills and knowledge. Therefore its members must be
teams carefully chosen, based on the objective to be achieved.
Outline the benefits of team management to the The team must have members with the desired skills,
organisation knowledge and experience in the field in which they will
Discuss the possible causes of conflict in organisations be working. The personalities of team members must be
Evaluate the strategies used to manage conflict considered since there may be a clash, resulting in conflict.
Management should also consider the individual attributes
of each member.
The nature of teams Objectives
T
he business world is evolving and many firms are A team’s nature is embedded in the objectives that it sets out
now realising that teamwork can result in success. to achieve. Earlier, it was stated that a team must be geared
While individualism has its place in the working towards a common goal or objective. The objective of the
environment, major projects in some firms are undertak- team must be clearly defined and achievable. In some cases,
en by teams. For example, some insurance agencies have the members of a team may be chosen based on the task that
organised their workforce into units of agents instead of must be completed. For example, if the goal is to change or
individually. It should be noted, though, that while the use improve a situation at the tactical level then the team may
of teamwork is growing rapidly, this concept was endorsed include middle managers and supervisors.
by the Human Relations School as a means of improving
workers’ morale. Interaction
A team or group can be defined as the interaction of The effectiveness of any team will depend on the level and
two or more people, in an interdependent way, to achieve a quality of interaction among team members. This interaction
common goal or objective. A team can be formal or informal. may be in the form of face-to-face meetings, telephone
Formal teams are those that are created by the organisation, conversations, video conferencing, etc. Regular interaction
with a defined and designated task to accomplish. The among team members can help to build synergy within
discussions and activities of formal teams are directed the team. However, in order for this to happen, the team
towards the achievement of business objectives. In contrast, members must share a good working relationship. It must
an informal team is one that is self-created in the work be noted, though, that this level of synergy and working
environment, without any influence from management. relationship may take some time to develop. This is evident
Informal teams tend to be of a social nature and are in the stages of team development which are discussed
formed to fulfil a desire of the members, including sports, below.
socialisation, and common interests. Examples of informal
CHAPTER 9 | TEAM MANAGEMENT AND CONFLICT 99
Stages of team development you examine the groups that you have been in at school,
Forming – at this stage, members are just getting you may find that some people naturally gravitate towards
to know each other. They are often uncertain about a particular role. In some cases a natural leader will emerge,
the purpose, structure and leadership of the group. perhaps at or after the first group meeting. Some of the
Members may be timid as they seek to find out what common roles in any group would include, but are not
behaviour is acceptable or not acceptable limited to, the following:
Storming – as members start to share ideas and become Coordinator or chairman – this person presides over the
more acquainted with each other, intra-team conflict team and coordinates its activities to meet its targets or
and disagreements may develop. They express their goals
individuality and resist the pressures and influence of Initiator – this person generates new ideas, defines the
the remaining team members problem or suggests procedures for the group
Norming – as the team members get to know even Shaper – this person is usually task oriented; an
more about each other, the conflicts and disagreements extrovert who usually gets things done
start to subside. In this stage, members start developing Informer – this person gathers factual information and
good relationships and cohesion. The purpose of the makes generalisations or gives opinions and suggestions
team is now clear and each member knows the accepted Clarifier – the person in this role will interpret ideas,
behaviour define important terms and seek clarification on issues
Performing – the focus of the team is now on getting for the group
the job done and achieving its objectives. The method of Summariser or recorder – this person is responsible for
working is established and each member can now make restating information that was discussed, proposing
their contribution to the task. This is the final stage for decisions and drawing the necessary conclusions.
permanent teams
Adjourning – at this stage, teams that are temporary
wrap up their activities and prepare for disbandment. Characteristics of effective teams
The task would have been performed and the team
members now look towards separation.
Commitment
It is almost certain that many people will not feel comfortable
or perform properly if they are in a place where they do
Types of formal group not want to be. Some students may agree that they really
Groups are formed in organisations to carry out different would rather be in university or working and so they are not
functions. These functions will determine the type of group. very committed to school. The same is true for teams. If the
Below are some examples of groups or teams that are formed members are not committed to the team and the activities
in the organisation: that will be undertaken, then not much will be accomplished.
Command group – this usually consists of department In order for a team to be effective, the management of the
heads and the subordinates who work in the firm has to ensure that the people being chosen to be a
departments. Such groups derive their function as given part of the team are committed to the task. A strong level
by the organisational structure of the firm of commitment is very important if the team is expected to
Functional group – this is a group which is formed to achieve the common goal or objective.
carry out a particular goal or function of the firm. The
goal of the group is determined by the major functional Participation
areas of the business – for example, marketing and The level of participation in the team is essential to its success.
customer service It is expected that team members will be able to share their
Task group – this is created to accomplish a specific task ideas, make comments and suggestions. No member of the
or objective in a given time period. Once the task is team should be prevented from participating in its decision
completed, such groups are usually disbanded. A task making. This therefore means that the team leader has
group could be formed to work on a project or to solve a to be democratic in his/her leadership approach. In any
problem being experienced by the firm. team, each person’s idea or view should be as valid as the
In all groups or teams, people play different roles. Some other person’s. There should be no partiality or disregard.
of these roles are specified by management, while others However, the level of participation necessary for effective
may be left for the group to decide among the members. If
decisions may come only after the team has reached or after a close relationship is developed among the members.
surpassed the ‘norming’ stage. Team members will not only encourage each other, but will
also lend their support where needed. Over time, the team
Trust should be able to mould each member, bringing them to the
This characteristic is of the utmost importance, as almost point where there is personal growth. An effective team is
nothing can be accomplished if team members keep ‘looking one that supports its members and ensures that they grow
over their shoulder’. Trust is vital, as team members want from the experience they garnered while working in the
to know that whatever is said in the team will not be team.
misconstrued because of one’s position. Each member should
be genuine in their actions and should not be trying to put Synergy
down another person. Where these actions are present, the This characteristic is based on the notion that when
team will not be able to build the type of trust needed to individuals work together, their output will be greater than
carry out the assigned task. In addition to a high level of the sum of the outputs of the individual people. In other
trust among team members, the team must be trusted by words, if we should add the output for each person who
management. The team should be given the autonomy to worked on a project individually the total would be less
carry out its mandate without regular interference from than if they had worked together on the project – hence the
management. notion that working in groups produces more results.
This is a very important characteristic of effective teams.
Decision by consensus As individuals in the firm come together to achieve a
Decisions made by a team should not be one sided. Each common goal, the end result should be indicative of the
member should be given a say in the decision. The issue benefits of doing so. The individual achievement and ability
should be thoroughly discussed and the different views has to be transcended into the group effort.
should be taken into consideration before arriving at a final
decision. By doing so, team members are more likely to feel
motivated and appreciated in the team and, by extension, Team or group cohesiveness
the firm. Team cohesiveness refers to the degree to which group
members are drawn to each other and are encouraged to
Flexibility remain within the group. The general rule of thumb is that
We are living in a world that is constantly changing and groups that are highly cohesive tend to work more effectively
these changes usually affect business organisations. To this and are more likely to be successful. It is therefore vital that
end, team members must be aware of the possible changes management tries to enhance group cohesiveness in order
that might occur and be ready to adapt to the new situation. to get the best results possible.
An effective team is one that is flexible enough to reduce
considerably the time it takes to adjust to or overcome Forces that influence group cohesiveness
unforeseen circumstances and get the task done. Size
The size of the team or group can influence its cohesiveness,
Encouragement in that very large groups may find it difficult to work
As the team ‘norms’, its members usually develop a sense of together effectively. Smaller groups may find it easier to
camaraderie. This relationship is important, especially when agree on a common goal and make decisions. To this end,
a member may be losing focus on the task ahead or is just smaller groups are usually more cohesive than larger ones.
in need of encouragement. The leader of the team should While this is true, however, a group that is too small may
possess the requisite skills to motivate and inspire his/ result in members being overworked, which can in turn lead
her fellow team members to achieve the stated objectives. to conflict. It is therefore important that management find
In doing so, he/she should be able to keep the members the optimum size for each team being used – that is, not too
encouraged even in difficult and trying times. There is a big and not too small.
common saying that ‘encouragement sweetens labour’.
Group goals
Support and growth A hallmark of group cohesiveness is members having a
This characteristic is connected to the previous one, in that common goal. By definition, a group should include people
the level of support needed in the team will come only with a common interest or objective. Cohesiveness will
improve once all members of the group agree on a common be as a result of an improvement in the team members’
goal and work towards achieving it. Where the goal of level of motivation.
the group is ambiguous or disagreed upon, the level of
cohesiveness will be low. Disadvantages of working in teams
Decisions taken by teams tend to be time consuming.
Similarities Since there are more people involved in the decision-
This speaks to the similarities that exist among members making process, it may take some time before a
of the group. Members who share similar characteristics, consensus is reached
such as social background, interest, ethnicity, age, values The firm incurs additional cost to set up teams. This
and beliefs are more likely to develop cohesion. A word includes the cost to train or retrain team members for
of caution, however, is that this could also lead to conflict the task to be completed
where there is a clash of personalities. The firm may lose productive time during the
establishment of the team. The time that it will take to
Diversity organise the team could be used to produce a number of
Group cohesiveness can also be affected by the level of products
diversity of its members. This can have a negative or positive One danger of working in teams is that it is difficult to
effect on the group cohesiveness. The group should consist ascertain which member of the team is accountable for
of people with a variety of abilities but who are willing to mishaps that might happen.
work to a common goal. Where members are too diverse
in personality, ability and experience it can result in
competition and conflict. Benefits of team management to the
organisation
Attraction An effective team can bring a myriad of benefits to the
Personal attraction is also important for group cohesiveness. organisation. These include:
The more attracted group members are to each other, the The firm usually benefits from improved performance
greater will be their cohesion. as team members pool their ideas and talents to effect
growth and achieve the assigned objectives
The possibility of workers in the group producing
Evaluation of team work outputs of better quality is greater than that of
individuals
Advantages of working in teams The use of groups will help senior managers to offload
The team combines the individual strengths and some of their responsibilities while giving them the
therefore better decisions can be made. The combination opportunity to focus more on effecting change at the
of each individual ability and potential will therefore corporate level
improve the effectiveness of the team and its impact on The level of flexibility is good, as group members can
the firm adapt quickly to changing customer needs since they
Team working enhances flexibility in the organisation. are aware of the dynamics of the business and its
Since the skill and knowledge base of the team is broad, environment. This could result in the firm being able to
it may be able to adjust fairly quickly to the changing keep its current customer base
business environment Since working in teams improves motivation, there may
Team working helps to motivate employees, building be an increase in the team’s contribution to the final
character and catering for their social needs output of the firm.
Employees want to feel that they are an integral part of
the organisation in which they work. Working in teams
provides this opportunity and, in the long run, will Conflict management
improve the workers’ commitment. The feeling of being A conflict is defined as a disagreement that exists between
a part of the organisation enhances commitment to the two or more individuals. It is almost inevitable that conflict
stated goals will develop in the workplace, since there are many people
Working in teams can improve productivity, as each with varying personalities and opinions. A conflict usually
member encourages the others to do well. This may also develops because people may disagree with the goals,
perceptions and principles of the organisation. In the Competition for scarce resources
workplace, disagreements may occur between management At any given time most businesses will have a limited
and subordinates or among subordinates. There are various amount of resources for which employees are competing.
causes of such conflict, ranging from the style of leadership The resources of the business may include cash, supplies and
to a clash of personalities. These are discussed below: information. These have to be shared among the different
departments of the firm. As each department seeks to attain
Causes of conflict its objectives and surpass targets, it may need to compete for
Management style the limited resources and this may cause conflicts to arise.
In Chapter 7, we discussed the different types of leadership
or management styles in the organisation. The reaction Lack of communication
of the employees to the style of leadership being used is This concept will be discussed in Chapter 9 and is arguably a
a common cause of conflict. Where a manager is very major problem in many spheres of society. Communication
autocratic, employees may retaliate against decisions that should be clear and managers must ensure that the
are made that will affect them negatively. The employees intended message is what is communicated. However, on
may not see ‘eye to eye’ with a manager who does not show many occasions that is not the case and the message is
concern for them or listen to their suggestions. While some misunderstood. Poor communication will result in conflict.
people prefer to be led or directed, others want to share in The lack of communication is also a problem for employees
the decision-making process while knowing that their ideas who may feel alienated and unimportant. Intentionally
will not just be brushed aside. withholding information can cause distrust, animosity and
eventually conflict among the parties.
CASE STUDY
Teaming up for a better solution

Son Sunny Ltd is a manufacturing company specialising in producing and selling powdered soap. The business has been doing
well in this market and, with that success in mind, the management has decided to explore the possibility of entering the bar
soap market. The name of the firm is already well established because of the quality powdered soap that it makes. Another key
factor in this decision is that most of the production staff have been at the company for over five years and have perfected the
art of making that type of soap. Management believes that it should not be very difficult to add a new line to its current product
offering.
In order to make this change as smoothly as possible, management chose a group of seven people consisting of three employ-
ees from Production and the rest from across the other four departments. These people have started having meetings but things
are not going exactly as planned. The last meeting held ended abruptly as the representative from the Finance Department felt
as though he was not being heard. There was also a clash of personalities between the Production member and the member
from Marketing. Amid their setbacks, the group has a mandate to fulfil and time is running out because they must present their
findings and suggestions to management at the end of the upcoming month.
Questions
1. Would you classify the team in the case as formal or informal? Give reasons for your answer. (3 marks)
2. Which stage of group development would you say that the team has reached? Give reasons for your answer. (4 marks)
3. Which type of group would you describe this as? (2 marks)
4. Discuss four (4) benefits that the firm could derive from allowing the group to suggest ideas rather than
management making the decision and passing it down. (16 marks)
Total 25 marks
Clash of personalities the other party. Smoothing may not always work, as the
Since we are all different individuals, there will be times sacrificing party is still not appeased. This method is best
when our personalities, values and attitudes vary. As a suited for situations where the stakes are low or it is in the
result, some employees may have a hard time getting along firm’s best interests to do so. For example, an employee may
or seeing eye to eye. This will cause conflict in the workplace. sacrifice his goals so that someone else’s goals and opinions
The conflict may be so severe that the only solution is to can be undertaken by the firm.
separate the parties.
Compromise
Conflict of duties A compromise is where each party agrees to give up
Conflict may also arise because the responsibilities something. In this situation there will be no clear winner or
boundaries are not clearly defined. Where workers are not loser but a willingness of both parties to accept the solution.
given clear job descriptions, there might be an overlap of This method is best suited in situations where the end result
duties which will result in confusion and conflict. of a conflict might be very costly compared with the sacrifice
that each party will make. For example, a worker may agree
Strategies to manage conflict to accept half the pay increase due to him/her in order to
Since it is inevitable for conflicts to arise, managers must be ease the financial strain on the firm or institution.
prepared to deal with any eventualities. There are a number
of strategies that are available to deal with conflicts. Collaboration
Collaboration seeks to meet the needs and satisfy the
Avoidance concerns of each party. This will lead to a ‘win-win’ situation
There are times when a conflict does not have much bearing where both parties leave the conflict feeling satisfied. The
on the organisation and so the manager may choose to allow views of both parties must be heard and discussed extensively
the parties to resolve the issue on their own. Avoidance to ensure that the agreement that is arrived at is fair and
is appropriate for conflicts that are trivial and not worth mutual. Extensive discussion may render this method
intervention from higher authority. The parties may avoid time consuming. This method is particularly important
the conflict because there is no chance of any of them when the issues or concerns are paramount and cannot be
winning or coming to a compromise. The process needed compromised or ‘smoothed’.
to solve the problem may be very costly and cause undue
disruptions in work which could have been avoided. Confrontation
Confrontation happens where conflicting parties meet
Smoothing face to face and are coerced into stating their disagreements
The smoothing strategy is sometimes referred to as and stances on the issue. Using this method should lead to
‘accommodating’. It is where the manager seeks to open communication which, in the end, should solve the
emphasise the areas of agreement but downplay the areas problem.
of disagreement. The use of this method will see one party Table 9.1 (p 104) evaluates the various conflict manage-
sacrificing his/her interests or rights in order to appease ment strategies just discussed.
Strategy Features/meaning Appropriateness

Avoidance Conflicting parties are allowed to Used for conflict that management
resolve the conflict themselves sees as trivial and not having much
The conflict has no bearing on the bearing on the organisation
organisation The process to solve the conflict might
be very costly
There is no chance of any of the
parties winning or reaching a
compromise
Smoothing/accommodating One party’s concern is satisfied at the Often used when the conflict has
expense of another the potential of hurting important
Aims to protect relationship by relationships
appeasing the hurting party Used where the stakes are low and it
Areas of agreement are emphasised is in the best interests to give up one’s
while areas of disagreement are rights to appease the other party
downplayed Often used when the issue is more
Point of caution is that the wronged important to the other party
party may not be appeased
Compromise Each person gives up something of Used when it is important to save
value time by solving the conflict instead of
There is no clear winner or loser in this prolonging it
situation Suited for a situation where the end
Parties are willing to lose something in result of a conflict will be more costly
order to gain something else that what is being given up by each
party
Used when both parties are committed
to a common goal within the firm
Collaboration This is often a win-win strategy where Often used when the issue cannot be
both parties benefit smoothed or compromised
Each party can achieve their goal When a mutual agreement is
while maintaining meaningful paramount
relationships Used when there is some amount of
Often time consuming as parties work flexibility on the part of both parties
to reach the best solution that will
benefit all
Confrontation Parties meet face to face to resolve the Often used when the issue is pertinent
conflict to the firm and must be openly dealt
Often leads to open communication with
about the issue of disagreement The firm can benefit from discussion on
Usually, only one party can win the issue or problem
The loser could continue the issue if he/
she feels cheated
Table 9.1: An evaluation of conflict management strategies

CASE STUDY
Trouble brewing at Tropics Beer and Stout Ltd

‘We cannot afford it any more and so as we begin the financial year some things will have to change.’ These were the words of
Roger Wall, the General Manager of the private limited company, in a meeting with staff held two weeks before its financial year
began. He continued to point out that the company will be revoking some of the benefits that the staff have enjoyed over the
last ten years. These changes include cutting back on the amount of time given for vacation leave and protective clothing would
no longer be given by the firm so employees must now bear the cost of that. The staff were also told that, come December, what
they now know as their annual bonus will only be paid if the company surpasses its target in December by more than 5 per cent.
These utterances have angered the employees and the meeting ended abruptly after the union delegate staged a walk-out.
The decision to walk out came after management refused to have dialogue on the matter, saying that its decision was final. The
employees continue to hold that even though sales are declining, they cannot afford to lose so many benefits at the same time.
A closed-door meeting was called, with members of the hierarchy of the workers’ union, and the decision coming out of this
meeting is to take the matter to management in the coming week. While not ruling out the possibility of industrial action, the
employees would rather that the matter be dealt with amicably.
Questions
1. With the use of examples, describe two (2) factors that caused the conflict between management and the employees. (6 marks)
2. For each of the factors identified in Question 1 above, discuss one (1) way in which the situation could have been
better handled by management parties. (6 marks)
3. Discuss two (2) strategies that management and the workers’ union can use to resolve the conflict that is brewing
in the company. (8 marks)
Total 20 marks
CHAPTER SUMMARY
A team or group can be defined Composition, objective and scarce resources and unpopular
as the interaction of two or more interaction will shape the nature of management styles
people, in an interdependent way, to teams in an organisation
achieve a common goal or objective A firm usually benefits from
A group usually goes through improved performance as team
Informal teams tend to be of a social different stages of development as it members pool their ideas and talents
nature and are formed to fulfil a tries to work together effectively to to effect growth and achieve the
desire of the members, including achieve its stated objective assigned objectives
sports, socialising and other common
interests Conflicts are almost inevitable in Conflicts should be dealt with as
the organisation and can be caused soon as they arise and management
by a number of factors such as lack should find the best strategy to
of communication, competition for resolve the issue.
MULTIPLE CHOICE QUESTIONS 5. Which of the following is an advantage of working in teams?

a. Helps to motivate employees
1. Which of the following would be classified as an informal
team? b. Decisions can be time consuming
a. Quality circle c. Loss of productive time during team development
b. Task group d. Additional cost to set up teams
c. Lunch group
d. Functional group
2. During which stage of group development do members Question one Total 25 marks
express their individuality and resist the pressures and a. State four (4) characteristics of effective teams.(4 marks)
influence of the remaining team members?
b. Explain how each of the characteristics stated
a. Adjourning in (a) may affect effective teamwork. (12 marks)
b. Storming c. Explain three (3) benefits of teamwork to the
c. Forming organisation. (9 marks)
d. Norming Question two Total 25 marks
Conflict is inevitable in most organisations and, unless it
3. ALL of the following are causes of conflict EXCEPT which
is dealt with properly and carefully, it can lead to serious
one?
repercussions.
a. Clash of personalities a. Outline four (4) possible causes of conflict in the
b. Lack of communication organisation. (12 marks)
c. Management styles b. Explain four (4) strategies that a manager can use to
d. Increased overtime pay resolve conflict. (13 marks)
4. The strategy where management allow both parties to solve

their conflict themselves is known as:
a. Smoothing
b. Avoidance
c. Compromise
d. Collaboration
107
10 Management of Change
a merger or takeover results in staff cuts and addition

LEARNING OBJECTIVES: to the existing management team. In recent times the
At the end of this chapter students should be able to: Caribbean has seen mergers such as Royal Bank of
Discuss the nature of change in the organisation Trinidad and Tobago and the Royal Bank of Canada and
takeovers such as Columbus Communication (Flow
Outline the differences between leading and managing
change Jamaica Ltd) and other cable providers in Jamaica
Discuss the factors that may lead to resistance to Control systems – this will be discussed further in the
change Unit 2 section of the book. As firms seek to improve the
Discuss the strategies to manage change quality of their product and the service offered, there
Outline the importance of communication in the may have to be some changes in the way things are
management of change done
Customer service – this is very important, especially
in these times when a number of firms are becoming
customer focused in order to remain competitive. As
C
hange is probably one of the most feared activities the tastes and lifestyles of the consumers change, it
in some businesses. This is especially difficult when may spur changes in the way the firm carries out its
employees have become accustomed to doing their activities.
tasks in a particular way or have served many years in an
organisation and have developed a specific culture. In any External influences
organisation change is inevitable and so the main concerns These result from factors that are outside of the control of
should be how change will affect the business and how the the firm. External factors include:
main stakeholders (managers, employees and customers)
will respond to it. Technological
This is probably the fastest-changing external variable. We have
seen vast improvements in technology over the past decade
Factors that may cause change in the or so. There have been changes in computer technology,
organisation communication technology and the use of artificially
There are a number of factors that may cause change in an intelligent robots in factories and offices. This improvement
organisation. These can be categorised as either internal or may be used to cut labour costs or employees may have to be
external. retrained to operate the new technology or redeployed.
Internal influences Economical

Internal influences may arise as a result of management Some of the major economic variables include inflation
policies or employees’ attitudes. These factors can be rates, exchange rates, interest rates, unemployment,
controlled by the management of the firm. Internal economic growth and development. Changes in one or
influences include: more of the above variables will bring about changes either
The development of a new product – this may require in the financial viability of the business or in the lives of the
change in the staff composition or general processes that employees. The recent recession and global meltdown have
are necessary to introduce the product to the market no doubt left many people and businesses financially worse
Mergers and takeovers – inevitably, once there is off than before. This may mean that demand for the firm’s
a takeover or merger of two entities there will be product has decreased and soon people will have to be laid
changes in management and staff. On many occasions off. Some workers may even be asked to take a pay cut in
order to preserve their jobs. This can lead to a sense of job manage the process. On the other hand, managing is the
insecurity and uncertainty. act of bringing people together to achieve a common goal or
objectives. Managing the change involves actions on the
Demographic part of lower-level management to implement and oversee
This concept relates to the characteristics and structure of the change while evaluating the progress and effectiveness
a population. Demographical factors include age, size of of such change.
families, marital status, sex, income and occupation. As the The people leading the change are those who decide on
size and structure of the population change there will be what changes to make in the organisation. In leading the
changes in individuals’ consumption pattern. Eventually, change, there has to be a strategic plan which details the
firms will have to modify their activities to adapt to the timing of the change and the people who have responsibility
changes in the consumption pattern of the population. for its implementation. As the global environment changes,
Modification may include changes in the product or how senior management has to envision the necessary changes
the firm does business. that should be made to remain competitive and gain an edge
over rivals. It is important to point out, though, that the
Social success of these changes might depend on the effectiveness
These changes include modification to society, lifestyle of of the management team which implements and manages
people and the environment. Social factors may also include them. The way in which these changes are implemented
society’s attitude to work and leisure and the increasing will lead to either acceptance or resistance.
numbers of women at work. Changes in the social structure
of society will in turn affect the firm which will have to
change also. Resistance to change
Resistance to change is any action of non-conformance
Legal (political) taken by employees because of a perception that a change
The legal environment includes legislation and other will be a threat to them. The extent to which employees may
government policies that will have an impact on the way the resist change may depend on whether or not the change will
firm does business. Some pieces of legislation that should be beneficial to them. There are several factors that may lead
be of concern to the firm include health and safety laws, to a resistance to change, as seen below:
consumer protection laws, environmental protection laws
and taxation policy. A change in any of the aforementioned Fear
legal factors will impact on the firm and its employees. Uncertainty as to the possible impacts of change on the
Another issue that cannot be overlooked is the political lives of employees creates a sense of fear. The fear of the
environment in which the firm operates. Where there unknown may prevent employees from accepting change in
is political instability the firm may have to go through the organisation.
constant changes. Some firms have to make changes as
the government changes its economic policy or if there is a Disrupted habits
change in the government itself. There is a tendency for us to become ‘creatures of habit’. In
any given day there are at least a few things that we do the
same way and we have become good at doing them. It is
Differences between leading and managing no different in the workplace, as employees develop habits
change and generic responses to certain situations. For example,
You may be asking the question: is there really a difference? a telephone operator who has practised answering the
The answer can be found in the definitions of both concepts company phone in a specified way may find it difficult to
and how each relates to change in the organisation. deal with a name change.
S Robbins, Organizational Behaviour (6th edn, 1993; Prentice
Hall International Editions) defines ‘leading’ as the ‘act of Loss of control and confidence
motivating subordinates, directing others, selecting the most Trust is probably one of the hardest things to build and
effective communication channels and resolving conflicts’. usually takes time. Over time, employees may have
Leading the change involves actions on the part of senior developed confidence in the management of the firm and
management to create a plan of action to implement the such a relationship is essential, especially when a change is
change and delegating responsibility to people who will to happen. However, if employees feel that their trust has
CHAPTER 10 | MANAGEMENT OF CHANGE 109
CASE STUDY
A change is coming to HLD Ltd

It was a sombre morning for employees of HLD Ltd. This came after news broke the night before that a giant Irish multinational
company had purchased 65 per cent of its shares. The employees knew that the company was going through tough financial
times but thought that management would have ridden it out as it did once before. A takeover has come as a surprise and has
left many of the employees in a daze.
It is quite obvious that the downturn in the world’s economy affected the medium-sized Caribbean company. The country
had to implement austerity measures as stipulated by the IMF when it secured a deal for balance of payment support. Since
the recession, unemployment in the country has risen by more than 10 per cent coupled with rising inflation rates which were
triggered by a hike in oil prices. As a result, the domestic market has been shrinking and the export market has not been very
good either. The struggles of the company were worsened by the government’s taxing policy which is seeking to take more from
all stakeholders within the country.
The communiqué via the local news suggests that the takeover and full changeover will be completed in another two months
and there will be extensive changes. It is quite evident that management was fully aware of the change but did not prepare
employees for what was communicated via the media. Now everyone waits with bated breath as the events unfold.
Questions
1. Describe one (1) internal factor and two (2) external factors that caused the change in HLD Ltd. (9 marks)
2. What would be a better way to communicate the change that is about to take place at the company?
Substantiate your answer. (3 marks)
3. Differentiate between managing a change and leading the change. (3 marks)
4. Giving one (1) reason, would you say that management is managing the change or leading the change
that is coming to HLD Ltd? (3 marks)
Total 18 marks
been betrayed or they have lost confidence in management clear on the purpose of a change they will be reluctant to
then there will be resistance to change. support it. This is perpetuated by poor communication.
People who are particularly keen, in terms of having a clear
Poor training vision of where they are going and how to get there, may
Ignorance can lead to uneasiness and thus resistance to resist any change that is not properly communicated or does
a change that will require a certain level of competence not have a clear and defined purpose.
beyond one’s training. Unless people are properly trained to
deal with different situations, a change in job requirements Loss of power
and tasks may spur serious resistance.
In some situations any change that will result in people
losing autonomy or the power to make certain decisions will
Redistribution of workload
be met by resistance. The resistance might even be greater if
Over time, people will have become comfortable with their
the employee once had a supervisory role and is now being
workload and the tasks they have to complete on a daily
basis. Where the firm decides to shuffle staff members or asked to accept a lower position or one with no authority.
redistribute the workload, it may lead to severe resistance.
Some people may feel that they are being unfairly treated as Lack of communication
their workload is greater than that of others, even though Ignorance is probably one of the most contributing factors
they are equally qualified. to resistance to change. People are more willing to accept
something about which they have sufficient information.
Lack of purpose Lack of or poor communication on an upcoming change
Employees need to know what the purpose of any change may result in serious resistance. This is magnified especially
that occurs in the organisation is. Once employees are not where management has an autocratic leadership style.
Strategies for managing change firm must be cautioned, though, that such a move may be
Prudent managers can help their subordinates to overcome time consuming and has the potential to result in a poor
their resistance to change. It is in the best interests of the solution to the problem that warrants the change in the first
firm and management to decrease the level of resistance to place.
change. Prolonged periods of resistance may lead to conflict
between management and subordinates. The following are
Negotiate with resisters
some of the tactics available to management to overcome This tactic involves conferring and bargaining with the
resistance to change. employees until an agreement is reached regarding the
change. This tactic gives possible resisters an opportunity to
Educate employees and communicate the change influence the change process during the bargaining sessions.
It is often said that ‘knowledge is power’. Some people Negotiation is particularly effective when a change may
within the organisation resist change because they are cause a trade union to become involved – for example, a
not aware of the benefits to be derived from changing or decision to downsize the organisation. In addition, this
they lack the necessary skills and training to deal with the tactic is often used where some individuals stand to lose
change. Educating the employees about the changes that are significantly as a result of the change and have the power
necessary and how they coincide with the goals and objectives to put up resistance. In such situation negotiation may help
of the firm can nullify the resistance being experienced. to lessen the resistance. However, the act of tailoring the
Workers should not be kept in the dark since, in most change to suit some people may spill over into the rest of
situations, the resistance is as a result of misinformation and the organisation and employees may feel that they too can
poor communication. Therefore, upcoming changes should force management to modify the change. In very serious
be communicated in an effective manner depending on situations it could even lead to blackmail.
the nature of the change – for example, the use of memos,
one-on-one discussion, letters or group presentation. Play a supportive role
In order to lessen resistance from those employees who are
Allow employees to participate in the change process fearful or who lack the requisite skills to deal with change,
If we really think about it, people may find it difficult to the organisation may play a supportive role. In doing so,
resist a decision for change that they were involved in management may provide skills training or counselling
making. With this tactic, employees would be consulted sessions to deal with fear and anxiety. However, this tactic
prior to the change and meaningful discussion undertaken. tends to be very expensive and time consuming.
This gives each person a chance to voice their opposition
and work to find an amicable solution before the change Coerce employees to comply
is implemented. If this is successful, the organisation could This tactic is probably the least popular of all. It involves
benefit from reduced resistance, increased commitment management threatening employees with loss of promotion,
from staff and increased quality in the change decision. The transfers or dismissal.
Resistance to change
ess Coercion
n Supportiven
n Negotiatio
Participatio
Education
Figure 10.1: Managing change
CHAPTER 10 | MANAGEMENT OF CHANGE 111
CASE STUDY
Stonewalled
Nobody likes change, especially when they have become used to a particular pattern of doing things. This was no different at
Hack and Hill firm. In order to improve efficiency and output, the two partners decided to make some wholesale changes to the
way things are done in the firm. These changes will be implemented at the beginning of their upcoming financial year.
In their regular monthly meeting with staff, held last month, the employees were told to look out for these changes, which
will include making the system fully computerised, from order to delivery. Sales personnel are to be given handheld computers
which should be uploaded to the main system every evening. Two of the departments will be merged to cut costs and so some of
the employees will be transferred to other areas of the business. The company has committed itself to the fact that no employee
will lose his or her job in the change process.
Notice of the upcoming changes has left some employees feeling jittery as they anticipate what the new-look company will be
like. This feeling is further worsened by management’s pronouncement that the total change process has not yet been fine-tuned.
When asked for feedback on the pending changes, most employees voiced their resistance, saying that things have been working
fine so far and so should be left the way they are.
Questions
1. Discuss three (3) possible factors that could have caused resistance to change in Hack and Hill. (12 marks)
2. Discuss three (3) possible strategies that can be used, under the present circumstances, to minimise the resistance
to change. (12 marks)
3. In your estimation, was the medium used to communicate information about the pending changes appropriate?
Give one (1) reason for your answer. (3 marks)
4. If not done properly, how could the pending changes affect the employees and performance of the firm? (4 marks)
Total 31 marks
The importance of communication in the Use numerous methods of communication – there is no

management process one best way to communicate information regarding
Effective communication is one of the key components change. Management should then utilise as many
of the management of people. Communication is also methods of communication as possible that will enable
important in the change process. There is a tendency for an effective way of communicating the necessary
employees to resist change where they are not informed information
or misinformed. The onus is therefore on management Important information must be communicated – all
to ensure that the change is communicated properly and information of importance must be communicated to
effectively, and in a timely manner. The following are some employees. Nothing should be withheld, as this may add
generally accepted ‘rules of thumb’ that should be followed to speculation and the spread of falsified information
when communicating a change in organisations: which may be damning to the change process
The message should be unambiguous – since the impact Pay attention not just to quantity but to quality of
of the change may be very great, it is imperative that information – in communicating information about
the information being communicated can be understood a change, management should look not only at the
by everyone. The message about organisational change amount of information but at the quality of such
should be simple and clear to all employees information.
Information should be given in a timely manner – Give employees opportunities to share feedback – as
delaying the communication of information will just was pointed out in Chapter 9, communication really
add to the possibility of resistance to change. Therefore, is not complete unless there has been feedback. It is
information should be communicated as soon as therefore paramount that employees be given sufficient
possible and in a timely manner opportunities to voice their concerns regarding the
changes in the organisation.
CHAPTER SUMMARY
Organisation change is inevitable and External factors are those over Change may not be readily accepted
so the main concerns should be as to which management has no control, by the workforce. Some people
how change will affect the business such as technology and political may resist change because of fear,
factors disrupted habits, poor training and
Organisational change may be lack of purpose, among other things
influenced by internal or external Leading the change involves actions
factors on the part of senior management to Management needs to explore the
create a plan of action to implement ways in which it can overcome the
Internal factors are those over which the change, while managing the resistance to change
management has control, such as change involves actions on the
customer service and development of part of lower-level management to There is a tendency for employees
new products implement and oversee the change to resist change where they are
either not informed or misinformed.
Managers have to ensure that the
change is communicated clearly.
MULTIPLE CHOICE QUESTIONS c. Negotiate with resisters

d. Give monetary incentive
1. Which of the following is an internal factor that may
influence change in the organisation? 5. Which of the following involves actions on the part of senior
a. The development of a new product management to create a plan of action to implement the
b. Demographical factors change and delegating responsibility to people who will
manage the process?
c. Mergers and takeovers
a. Leading the change
d. Control systems
b. Resisting the change
2. Which of the following is NOT an external factor that may c. Managing the change
influence change in the organisation?
d. Implementing the change
a. Customer service
b. Technology
c. Economic Extended Essay Questions
d. Legal/political Question one Total 25 marks
a. Explain the difference between leading a change and
3. ALL of the following are reasons why people may resist managing the change. (4 marks)
change EXCEPT which one?
b. Discuss three (3) internal factors and four (4)
a. Monetary gain external factors that may cause change in
b. Fear an organisation. (21 marks)
c. Poor training Question two Total 25 marks
d. Disrupted habits a. Define the term ‘resistance to change’. (1 mark)
b. Explain four (4) reasons why employees might resist
4. Which of the following is LEAST LIKELY to be used to
change. (12 marks)
overcome resistance to change?
c. Discuss four (4) strategies that management can use
a. Communicate the change to minimise employees’ resistance to change. (12 marks)
b. Allow participation in the change process
113
11 Communication in Business
Communication has four distinct functions within an

LEARNING OBJECTIVES: organisation:
At the end of this chapter students should be able to: Provision of information
Define the term ‘communication’ Control
Outline the major functions of communication within the Motivation of staff
organisation Facilitation of interaction.
Outline the types of communication
Explain, with the use of diagrams, the communication
process Types of communication
Analyse the different communication channels Verbal – this is communication that uses words. Verbal
Outline the factors that influence the choice of communication may be spoken (oral) or written. This
communication channel would include telephone or face-to-face conversations,
Evaluate the different methods of communicating meetings, e-mails and letters
Explain the lines or flow of communication Non-verbal – this is communication without words
Discuss the major barriers to effective communication (speech or written). It includes body language, gestures
Analyse how the firm can reduce the barriers to effective and pictures
communication Formal – the use of the established channels of
communication in the organisation
Informal – this does not take established channels of
the firms into consideration but instead communication
W
e communicate every day – or do we? Is our is done through the channels of the employees.
communication effective? Have you ever stopped This type of communication makes good use of the
to think about what communication is? In this ‘grapevine’.
chapter we will explore the meaning and process of commu-
nication. This concept is by far one of the most important
concepts to a number of business organisations. A firm may The communication process
have remarkable goals and objectives that are achievable The communication process illustrates the successive steps
but if they are not communicated properly it may defeat the that occur between when a sender (source) sends a message
purpose. Think about this: how would you feel if a person and when it is received by the receiver. Figure 11.1 shows a
only ever gives you instructions without giving you an simple communication process and the possible barriers to
opportunity to respond or provide feedback? The truth is effective communication.
that there has not been any real communication there. So
Messa
what, then, is communication? ssage ge
Me Channel
Communication may be defined as a two-way process Messa
age g
which enables information to be disseminated between two ess Encoding Decoding
e
M
or more people. It involves the exchange of ideas, facts and

emotions by individuals. There are different definitions of Source Receiver
communication and it would good for you to refer to these

other definitions. It must be pointed out, though, that no
Feedback
matter which definition is used, communication must
involve a message which will be transmitted from the sender
to the receiver. Figure 11.1: The communication process
Source – this is the person sending the message or, in both parties rapid interchange of information and feedback
other words, the initiator of the message can be given immediately. It is a very good channel to
Encoding – this is the process by which the message use when information has to be transmitted quickly.
is converted into a symbolic form to facilitate Oral communication is by far the most used channel of
transmission. The way a message is encoded may be communication and is favoured for meetings, interviews
affected by the level of skills, attitudes, knowledge and and presentations.
the socio-cultural system of the sender. These factors
may also affect the effectiveness of the message being Advantages of oral communication
communicated It is usually quick and requires little prior preparation
Message – this is what is being communicated. This Allows for immediate feedback
may take the form of spoken or written words. An It is flexible and can be easily adjusted to meet the
artist may also communicate through his/her drawings situation
or paintings. It is very important that the sender’s The sender of the message can be more persuasive and
message is clear, as ambiguity may distort effective convincing
communication It offers direct contact between the sender and receiver
Channel – this is the medium that is used to transfer of the message.
the message from sender to receiver. The channel
used is selected by the sender and must be appropriate Disadvantages of oral communication
for the message being communicated. The improper It offers little time to think of the feedback that will be
selection of a channel may lead to poor communication given
– for example, if an employee is fired by the firm Lacks record unless the conversation was recorded on
and management simply leaves a voice message to tape
communicate the decision. This channel was not It is more susceptible to distractions (barriers)
appropriate and may lead to other problems It is influenced by non-verbal clues which may distort
Decoding – before the message can be understood the message being communicated.
by the receiver it must be decoded. This is done by
retranslating the message that was sent by the sender. Written communication
This stage is critical as it is very important that the Written communication is another widely used channel
message that was communicated will be the same one of communication. It includes the use of letters, memos,
that is received bulletins, reports and notices. Written communication is
Receiver – at this stage the decoded message is received suited for formal long-term records where details of the
by the person to whom it was sent. The receiver must communication must be kept. One of the problems with
have a clear understanding of the message that is being oral communication is the lack of record in most cases.
communicated and must possess good listening skills However, written communication eliminates this problem.
Feedback – the communication process is not complete Organisations opt for written communication especially
without this stage. The receiver should provide feedback for meetings so that checks can be done in the future and
to the sender of the message in acknowledgement assessment can be made in terms of performance.
that the message was received. If the message is not
clear enough the feedback would give the receiver the Advantages of written communication
opportunity to seek clarification. A record can be kept of the information being
communicated
Information can be sent to people who are in different
Channels of communication locations
There are a number of channels of communication that may Can be used to clarify, explain and confirm oral
be explored in the organisation. These include the following: communication
Suitable for messages that are complex, detailed and
Oral communication with far-reaching effect – for example, the dismissal of a
Oral communication is the use of spoken words when staff member
communicating. This conversation can take place face
to face or over the telephone. Oral communication offers
CHAPTER 11 | COMMUNICATION IN BUSINESS 115
Written communication often gets to the point, since intranet messages which reduce the amount of paper in
the sender has time to organise the message to be the office and the time it takes for a written message to be
communicated. communicated. There has also been an increase in the use of
satellite communication systems.
Disadvantages of written communication
Written communication tends to be time consuming, Advantages of electronic communication
especially in its preparation Usually a very quick way to transmit information
Feedback is usually delayed or very slow Other than the initial set-up cost, it offers a low-cost
Can be very impersonal way to communicate
The transmission of messages can be very expensive, Receiver can give instant feedback
especially where communicating parties are far apart Allows employees to work from home
Does not offer the opportunity for immediate Gives the sender a variety of way to communicate – for
clarification of messages that are not understood. example fax, e-mail, video conferencing.
Visual communication Disadvantages of electronic communication

Visual communication is the transmission of information Can be expensive to maintain equipment
in a form that can be read or seen. Research has shown that There is an increase in security risks, such as hacking
people remember more of what they see than what they and computer viruses
hear. Therefore, for some communications, a visual message There are privacy issues which may prevent the
is very important. Imagine a sales manager trying to present transmission of certain information
information on the business’s performance and predictions Unable to retrieve information once it is sent.
based on trends without using some form of visual aid. This
presentation would more than likely be on the failing side Non-verbal communication
since people want to see the trend being spoken of. There As was stated earlier in the chapter, non-verbal
are a number of options available to the organisation for communication is the type that takes place without words
visual communication, including films, videos, graphs and (speech or written). It is very difficult for us to transmit a
PowerPoint presentations. verbal message without non-verbal clues. As a result, it is
very important that we consider the non-verbal aspects
Advantages of visual communication of communication. The sender of the message must be
Helps to simplify both oral and written communication aware that the way he/she looks, listens and moves sends
Suitable for communication over long distances a signal to other people. This signal can be used to judge
People tend to remember visual images over audio whether or not he/she cares, is being truthful or is actively
Enables complex information, such as statistical data, to listening. Once the sender’s non-verbal signals match
be communicated effectively. with their verbal communication then it can build trust,
transparency and good relationships. The reverse could
Disadvantages of visual communication lead to a series of distrust, anxiety, misunderstandings and
Visuals may be difficult to understand if they are not creating bad relationships. As we communicate we must be
accompanied by other methods of communication mindful that the non-verbal clues that we are using could
Tends to be expensive be contradicting, repeating, complementing, substituting or
Its preparation may be time consuming. accenting our verbal communication.
Some of the popular non-verbal clues or signals that are
Electronic communication used include:
We will all agree that the world has changed drastically when Eye contact – the eyes say a lot of things that are not
it comes to how we use technology. These changes have spoken. Maintaining eye contact during communication
affected the way we communicate. The internet has opened is important as it shows interest, confidence and
up a myriad of opportunities to communicate via electronic truthfulness
means. Electronic communication involves the sending Touch – some humans tend to touch during
of written, oral or visual messages by electronic means – communication. This may include a pat on the back, a
for example, e-mails. Firms are increasingly developing handshake, a hug or a rub of the head. Touching can
and expanding their network capability. This facilitates be a distracting non-verbal communication, especially
when the person on the receiving end is uncomfortable others with whom they are comfortable or share a good
with the touch. However, it can also be reassuring or be relationship
used as encouragement Intonation – this is where emphasis is placed on certain
Body movements – the way you sit, walk or stand up words, thus changing the meaning of the message.
can send signals. We communicate through our posture
and subtle movements. Our body movements could be
saying ‘I am comfortable communicating with you’ or ‘I
Factors influencing the choice of channel
cannot wait for this to be over’
Gestures – the way we gesticulate can obstruct or
used
There are pros and cons for each communication channel
enhance our messages. Over-gesticulation is often
available to transmit information between the sender and
distracting. For some people, what is being gesticulated
receiver. The type of communication method (see Table
and what is being said are two opposites
Facial expressions – our facial expressions say a lot 11.1) used is dependent on, but not limited to, the following
about our interest in the conversation. We can therefore factors:
communicate a message that we are not aware of, The nature of the message – this may be influenced
depending on our reaction to what we hear or what we by the importance and level of confidentiality. For
say example, a caution from management to an employee
Physical distance – some people are very protective of would necessitate a medium that is confidential and
their personal space and will become uncomfortable leaves a record of the contents
once they feel that that space is being invaded. The line of communication – where communication
However, people are willing to share their space with is flowing upwards, i.e. from subordinates to
CASE STUDY
Communication or no communication
‘I went to the staff, called an impromptu meeting and told them what you told me and left.’ These were the words of the Human
Resource Manager, Mrs Sassy, as she recounts the task given to her by the General Manager of the firm, Mr Flex. The informa-
tion was of great importance and feedback would have been welcomed.
In the meantime, the members of the Human Resource Department are disgruntled about the manner in which things were
done. They have always seen Mrs Sassy as an autocratic leader and one who doesn’t listen to their concerns. They felt that for
her to just walk into the office, announce that she had some information to give them, give the information and then just walk
out without giving them a chance to respond was unprofessional, if not rude. The workers believe that such information regard-
ing a reshuffling of the department should have been done in a more formal manner. These were her words: ‘I know some of you
in here do not like me and the General Manager told me to tell you that the department will be reshuffled and some of you will
be reassigned next month.’
The decision to reshuffle the department and reassign some of the members came as a result of the firm’s thrust to imple-
ment the strategies of job rotation and enrichment. What could have been a very good gesture and a motivational strategy has
now left a bad taste in the workers’ mouths. The General Manager had met with all department heads and told them to approach
their departments sensitively about the pending changes. He had expected that they would return with some feedback so that he
could properly plan a meeting with the entire staff to discuss the changes and give the reasons for them. Now he may have to do
some damage control before proceeding.
Questions
1. Describe the type of communication used by Mrs Sassy. (3 marks)
2. With reference to the definition of ‘communication’ and the communication process, did communication take place? (9 marks)
3. State three (3) factors that may influence the channel of communication used by the firm. (3 marks)
4. Explain what would be the proper manner for such information to be communicated. (5 marks)
Total 20 marks
Methods Benefits Drawbacks

Internet Cheap and easy to use Computers are needed and they may not be
Can send a large amount of information widespread
Can be used to promote the product Possibility of information leakages
Can send pictures and videos Threat of viruses
Customers can interface with the firm
E-mail Message reaches receiver relatively quickly May not receive immediate feedback
Convenient to use Eliminates social interface
Can send information to a group of individuals at Depends on access to computers and internet
the same time Personal information might be hacked into
There is no limit on the length of the message
Allows for the attachment of files
Intranet Can share confidential information There are still some security concerns
Easy communication with employees Initial set-up cost can be high
Can lead to improvements in teamwork Needs computers and internet access
Increased collaboration between employees and
management
Facsimile Allows written information to be sent over a Needs telephone lines
telephone line Lines might be busy
It is sometimes regarded as being more official Can only send limited information
than an e-mail Information sent might not be very secure
Uses a lot of printed papers which may lead to
storage problems
Video conferencing There is no time constraint since it can be done at High initial set-up costs
any time Needs technical expertise
Saves time and money in terms of travelling Risks of the equipment breaking down
Offers face-to-face interaction
Facilitates meeting with people in different
locations
Information can be shared and received at the
same time from all participants
Table 11.1: An evaluation of communication methods
management, only some methods can be used. In Lines of communication

addition, management will decide on certain methods Lines of communication refers to the flow or direction of
when communicating to subordinates communication from the sender to the receiver. The lines
Cost – as discussed earlier, some methods of of communication can further be broken down into formal
communication tend to be expensive. Organisations will channels. A formal communication channel is one that is
weigh the pros and cons of each medium and decide clearly defined by the organisation and follows the chain
which is most cost effective of command. The responsibilities and tasks to be carried
The level of urgency – this is based on how soon the out by each individual are also clearly outlined. Formal
sender wants the message to be communicated. In the communication channels allow information to flow in a
case of an emergency the sender would want to use a vertical (downward or upward) or horizontal manner. See
method that will get the information to the receiver as Figure 11.2 (p 118).
quickly as possible
Length of message – lengthy messages tend to require
Downward channels
some form of written communication, as it is difficult This type of communication channel allows information
for the receiver to remember all the information to be passed down from top management to subordinates.
Record requirement – earlier, we discussed that The effect of such communication may depend on how the
information is transmitted. Management can communicate
oral communication lacks record unless it was
the intended information in a number of ways, including
recorded using some form of electronic device. For
the use of newsletters, speeches, e-mail, memos and bulletin
communication where a record is important (for
boards. Downward communication is often used to achieve
example, a staff meeting), then the manager would
the following:
choose a more appropriate method.
Coordinate the activities at the tactical level that

will result in the achievement of the organisation’s
objectives
Disseminate information among departments which can
Upward
help to improve the operations of the business
Resolve conflicts that may arise between departments
Horizontal Solve problems that have the potential to affect all
departments – for example, an emerging budget cut.
Downward Drawbacks of formal channels of communication

Subjected to rigidity, as communication has to be
sanctioned by those in authority and is limited to those
who are a part of the channel
Can be costly, as it requires additional human resource
Figure 11.2: The flow of communication – for example, secretaries; storage space for records; and
reproduction of the communication (such as minutes)
The fact that formal communication usually carries
Establishing the mission, goals and objectives of the firm
some form of record may act as a deterrent to some
Outlining job descriptions and responsibilities
people to be truthful
Giving instructions about the procedures that should be
Formal communication tends to be impersonal and as a
followed
result may lead to poor motivation of staff
Communicating feedback on employees’ performance
It is time consuming and prior preparation is required.
Motivating staff.
This can be compounded especially when planning
Upward channels a meeting or seminar which involves a number of
managers.
This type of channel is particularly utilised under a
democratic leadership style where employees can freely
share their suggestions and concerns. These channels allow Informal channels of communication
subordinates to communicate with top management. They Inevitably, in any organisation, communication will occur
give employees an avenue through which they can negotiate through not only the formal authorised channel outlined
salaries and pacify conflicts. Upward channels can be used to by the firm’s organisational structure. Communication that
communicate the following information: occurs outside of the formal channel is known as informal
Conflicts and disputes communication. This does not follow the established channel
Suggestions to improve the business but is able to coexist with formal communication. It must
Submit reports about the different aspects of the be pointed out, though, that this form of communication
organisation is not necessarily bad for the organisation. As a matter of
Present financial data to senior management fact, some managers support the use of informal channels
Draft reports on the current performance level of the especially where they are able to influence them implicitly.
firm. A commonly used informal channel of communication is
the grapevine. The grapevine is an informal network that
Horizontal or lateral channels exists among employees or other people that is not officially
These channels allow communication to flow among peers sanctioned by management. The grapevine usually thrives
and co-workers. Organisations may use this type of channel to when certain conditions exist. These may include, but are
deal with interdepartmental issues or projects. For example, not limited to, the following:
departmental managers may meet in order to forecast sales When there is insufficient information about an issue,
or work on a project to improve the organisation. Therefore employees may attempt to fill in the missing pieces
these channels are used to communicate information Lack of confidence in the formal channels of
between people or organisational groups having the same communication
level of authority. Lateral communication channels may be When employees feel threatened or insecure in their
used to: job
There is a strong need for socialisation which is not Employees may sacrifice productivity for socialisation
facilitated by the formal channel and sharing information
The use of the grapevine may also be used to spread Classified information may be circulated that may have
rumours or to gossip. If these rumours or pieces of gossip serious repercussions.
get out of control it can be damaging to the firm. They
can spread throughout the organisation uncontrollably,
and therefore should be of concern to management. Barriers to effective communication
Informal channels of communication have contributed The communication process is at times interrupted by
to the operation of the organisation and carry the following various barriers to communication. These barriers may
benefits and drawbacks: distort the message being sent and how it is perceived by the
receiver. Below are some of the main barriers to effective
Advantages of informal channels of communication communication:
They tend to be less intimidating and so are good
channels to use to share plans and new ideas to benefit
Selective perceptions
the firm Since we are all unique individuals, our interpretations of
May be used to motivate workers since it is personal messages will differ. Messages are sometimes misinterpreted
and can build team spirit and camaraderie because of the receiver’s own perception of what was
Usually verbal and facilitate two-way communication communicated. The preconceptions of what a person
Informal communication may be used to supplement may be saying may impede the message that is being
communication when formal channels fail. communicated. How employees perceive each other also
amounts to barriers being created. One’s perception of
Disadvantages of informal channels of communication another may be influenced by past experiences, distrust,
The organisation cannot control what is communicated social background, poor relationships with the sender and
therefore people might be misinformed other personal characteristics.
Where a rumour is spread it can be very difficult to
effect damage control
CASE STUDY
A flourishing grapevine
‘The local PA system’ – that is what she is called in some spheres. It is amazing how information quickly spreads throughout
this organisation once one person gets wind of it. The social structure of the organisation is very close knit and workers often sit
in their groups in the lunch room. This creates a grand opportunity for information to circulate within minutes. Ms Outspoken is
often the instigator of this grapevine. It is astonishing how she keeps getting access to information but she does and once this is
done everyone in the lunch room will be informed before leaving.
In recent times management has recognised that the employees are quite informed about information that would have been
communicated behind closed doors. Upon investigation, they have come to realise that there is a flourishing grapevine within
the organisation. Since it is very difficult to minimise the success of this channel of communication, they are considering using
it to their benefit.
Questions
1. In relation to communication, what is meant by the term ‘grapevine’? (2 marks)
2. Describe the two (2) potential types of damage that this flourishing grapevine can cause the organisation. (6 marks)
3. Management are exploring the option of using the grapevine in their favour. Discuss two (2) ways in which this could be
beneficial to the firm. (8 marks)
Total 16 marks
Attitudes distractions such as poor working conditions or background

The level of camaraderie in an organisation may influence noise can also prevent effective communication from taking
how a message is interpreted. It is more likely to have place.
attitudinal barriers to communication when employees
do not have good working relationships. For example,
Filtering
where there is a lack of trust between two people it may This is where the sender manipulates the information being
be very difficult for them to have confidence in what is sent so that it appears more favourable to the receiver. This
communicated between them. Attitudinal barriers may be practice is widely done in organisations – and even among
brought about by factors such as: you and your peers. Have you ever heard the term ‘telling
Poor management you what you want to hear’? Well, if you have, it is the same
thing as filtering. The sender of the message may ‘tweak’ the
Personality clashes
information so that it is not read into deeply by the receiver
Lack of consultation with employees
but taken at ‘face value’ and the desired feedback is given.
Lack of motivation
For example, in organisations with a number of hierarchical
Resistance to change.
levels, information may be filtered before it gets to senior
Noise management in order to encourage the desired decision.
Simply put, ‘noise’ is any interference that occurs between

Non-verbal signal
when a message was sent and when it is received. Noise can
Some people gesticulate a lot during communication. While
be internal or external (physical). Internal noise is affected
gestures and body language can enhance communication,
by a person’s background, experiences or perceptions. These
they sometimes become a barrier to effective communication.
influences cause a person to interpret a communicated
This is especially true when a person’s body language is
message in a particular way. In contrast, external noise contradicting what is being spoken. For example, imagine
includes physical sounds that will impede communication. sharing what should be exciting information with a straight
External noise can come from a noisy environment or and sulky face.
even a faulty telephone cable. Whatever the source of the
noise, the important thing is that noise prevents effective
communication from occurring. Reducing barriers to communication
Cultural bias Ensure clear message
Culture brings about a different set of barriers to A problem that is faced by some receivers is the lack of
communication. The culture of a country influences the understanding of what was communicated by the sender.
way people see and hear things, think and interpret the Messages that are vague often present a serious challenge
world. To this end, the same words could have an entirely and may lead to misinterpretation and misunderstanding.
different meaning in another culture. For example, ‘pants’ in In order to reduce this barrier to communication, the
Britain means ‘underpants’ but in the United States it means sender should ensure that the message is unambiguous and
‘trousers’. You can also think of the different examples in communicates what was intended. The onus is therefore
your region and even your country. Other factors that on the sender to keep the message simple and free of
may influence one’s culture and create barriers to effective jargon of which the receiver may not be aware. Sending
communication include age, social position, economic a clear message will increase the chance of the receiver
status, political views, values and rules, ethics or standards understanding the message and giving feedback.
and motives.
Choice of channel
Physical barriers Good messages can be distorted at times because of the
The nature of the environment where communication is channel that is used by the sender. In order to reduce
taking place can become a barrier. Where the staff are located the barrier to communication, the sender should analyse
in different buildings, which sometimes are not even close the message and use the most appropriate channel to
to each other, communication may be distorted. Physical communicate it. While some messages can be communicated
barriers also arise as a result of poor or outdated equipment orally, other important messages may have to be written.
which should facilitate effective communication. Other Knowing the audience is also important in choosing the
right channel to communicate the message. Some people If management is not satisfied with the feedback received,
are auditory, while others might be visual. This should be it may need to revise the communication process as there
borne in mind when communicating, since using a channel might have been barriers which prevented the message
that suits the receiver should bring about better feedback. from being properly transmitted. A keen manager will use
feedback to plan programmes and strategies to improve the
Managing feedback ability of subordinates.
There is a common notion that communication has not taken
place if there is no feedback. Unless there is feedback, there Improving physical conditions
is no guarantee that the receiver of the message has totally As discussed above, the working environment can pose
understood what was transmitted. For any organisation to serious challenges for effective communication. Poor
grow and remain competitive, all stakeholders must be aware working conditions will create both internal and external
of its goals and objectives. Management needs to ensure ‘noise’ which will impede communication. Management
that these goals and objectives are clearly communicated should create the right environment which is conducive to
and employees given sufficient feedback as evidence that work. It should ensure that the working environment is safe
they are clear on what is required of them. To this end, the and ergonomically arranged. The environment should be
management of the organisation must implement strategies free of health hazards, with proper lighting and space. The
to manage feedback to get the desired result. The feedback right environment will allow employees to feel comfortable,
received will give an indication of how well communication thus reducing the barriers such as noise or physical barriers.
has taken place. Table 11.2 summarises the ways in which barriers to
The management of the organisation can obtain feedback communication might be overcome.
from evaluation of the staff, e-mail or ‘open door’ policies.
Barriers to Possible ways to overcome barriers to communication

communication
Selective perception Communicate the message clearly and free of misleading information
Create good employer–employee relationships
Very important information should be communicated preferably when people are at their optimum, i.e.
rested and alert
Attitudes Be empathetic and analyse the possible effect of the message on the receiver’s feelings
Build good labour–management relations
Interact with staff regularly so as to build trust
Noise Minimise or eliminate ‘noise’ in the environment
Give information in fragments to prevent information overload
Assist people with their problems that may be causing internal ‘noise’
Cultural bias Speak in a clear language free of jargon that may be culture-specific
Gather information about the receiver’s culture before formulating the message
Physical barriers Use technology to communicate effectively across physical barriers
Improve or replace old equipment
Provide a good working environment
Minimise or eliminate the ‘noise’ in the environment
Filtering Be honest in the communication of the message by not withholding vital information from the receiver
Put information in writing so as to maintain its quality when it reaches the receiver
Non-verbal clues Reduce the number of gestures that are used during communication, i.e. do not over-gesticulate
Ensure that the gestures being used coincide with what is being communicated
Table 11.2: Methods of overcoming barriers to communication

CHAPTER SUMMARY
Regardless of the definition used for Communication is not always Lines or flow of communication
‘communication’, a general rule is effective as it can be interrupted by refers to the flow or direction of
that it must involve a message which barriers including ‘noise’, selective communication from the sender to
will be transmitted from a sender to perception, attitudes and cultural the receiver and can be either formal
a receiver bias or informal
Communication can be verbal There are various communication The formal communication channel
(communication spoken by channels that may be explored in the is further divided into downward,
individuals) and non-verbal organisation. Examples of these are upward and horizontal channels
(communication without words) oral, written, visual and electronic
The grapevine is a commonly used
The communication process The choice of channel used by the informal channel of communication.
illustrates the successive steps firm may be affected by cost, length
that occur between when a sender of message, line of communication,
(source) sends a message and when nature of message and urgency
it is received by the receiver
MULTIPLE CHOICE QUESTIONS 4. Mrs Feeble has had a bad experience with her previous male
boss who was very domineering. She is now employed in a
1. Which of the following is NOT a function of communication? new job but has a male manager. Which of the following is the
a. Provision of information MOST LIKELY barrier to communication that may exist?
b. Telltales a. Filtering
c. Motivation b. Selective perception
d. Facilitate interaction c. Cultural bias
d. Attitudes
2. The use of gestures would be classified as:
a. Formal communication 5. Which of the following is an advantage of oral
b. Verbal communication communication?
c. Non-verbal communication a. Offers little time to think of the feedback that will be given
d. Informal communication b. Lacks record, unless the conversation was recorded on
tape
3. In which step of the communication process is the message
c. Is more susceptible to distractions
converted into a symbolic form to facilitate transmission?
d. Allows for immediate feedback
a. Encoding
b. Decoding 6. A disadvantage of written communication is:
c. Channel a. A record can be kept of the information being
d. Feedback communicated
b. Information can be sent to people who are in different
locations
c. Can be used to clarify, explain and confirm oral
communication
d. Feedback is usually delayed or very slow
7. Which of the following is NOT an example of visual

communication? Extended Essay Questions
a. Videos Question one Total 25 marks
b. Letters a. Outline, with examples, the differences between
c. PowerPoint presentations verbal and non-verbal communication. (4 marks)
d. Films b. Using a diagram, explain the steps involved in

the communication process. (21 marks)
8. Which line of communication is particularly utilised under Question two Total 25 marks
democratic leadership styles where employees can freely
The communication process may be halted or disrupted by
share their suggestions and concerns?
barriers.
a. Upward a. Discuss four (4) common barriers to
b. Downward communication. (12 marks)
c. Horizontal b. Briefly explain one (1) way in which each of the
d. Diagonal barriers discussed in (a) can be overcome by the
organisation. (8 marks)
9. The grapevine is an example of which of the following? c. Outline five (5) factors that may influence the
a. Formal communication type of communication channel used. (5 marks)
b. Verbal communication
c. Non-verbal communication
d. Informal communication
10. Which of the following would NOT be regarded as a benefit of

informal communication?
a. Less intimidating
b. Can supplement formal communication
c. Can motivate workers
d. Classified information may be circulated
124
12 Human Resource Management
carrying out its role the HRD has to be able to attract workers
LEARNING OBJECTIVES: to the organisation. It should be aware of the organisation’s
At the end of this chapter students should be able to: needs in terms of the amount and skill level of employees.
Discuss the role and importance of human resource This is done through its function of recruitment, which
management will be discussed in a subsequent section of this chapter.
Outline the factors that may affect human resource The HRD should also help to develop the workforce over
management time through training and development programmes aimed
Assess the effectiveness of human resource management at improving their skills, productivity and work ethics.
Explain the main functions of human resource Maintaining its workforce will take a concerted effort by the
management firm to keep the workforce motivated to work. This could be
Outline the process of labour–management relations done through the use of financial or non-financial strategies,
Give an overview of the laws affecting health and safety as were discussed earlier in the module.
in the workplace A number of businesses have benefited from human
resource management. Some of these benefits are outlined
below:
Effective human relations can help to prevent industrial
The role and importance of human action
resource management Easier for the business to anticipate any changes that
T
he view of Adam Smith that ‘man is an economic may occur in the workforce requirement. It can then
animal’ has been criticised over the years and many make plans for these changes
organisations have come to realise the importance Helps to motivate workers, thus increasing their
of the human capital. We are living in a changing busi- productivity and reducing potential costs to the business
ness environment and the way firms once carried out their Good human relations can prevent problems such as
operations is quickly changing. To this end, many firms are absenteeism or a high rate of turnover
now placing greater emphasis on human relations. Some Where consumers are given high regard and have
firms have created a Human Resource Department (HRD) a good relationship with the firm, it can gain a
to ensure that staff members are motivated and well trained competitive edge over its competitors.
so that customers will be given the best care possible. The organisation must also be cautious, though, of the
Human resource management has its roots embedded in possible drawbacks of human resource management:
the Human Relations School of the early 1920s, led by Elton Poor human relations can result in serious industrial
Mayo. Human resource management is seen as the policies, disputes
practices and systems that influence employees’ behaviour, Any plan that is implemented must be constantly
attitudes and performances. The growth of human resource monitored and adjusted as the forces of the
management has been affected by: environment change.
A change in the goals and objectives of businesses
Increased representation of staff by trade unions
The passing and implementation of government The functions of human resource
legislation management
Increased business competition for both goods and staff
Increased financial resources. Workforce or manpower planning
The main role of human resource management is to This is possibly the most important function of the Human
attract, develop and maintain an effective workforce. In Resource Department. Unless this function is carefully
CHAPTER 12 | HUMAN RESOURCE MANAGEMENT 125
carried out, the department may encounter serious problems Recruitment

in carrying out the subsequent functions. Workforce In the previous section we examined how the firm will make
planning is the process whereby a firm forecasts its future plans for its workforce and the factors that will influence
demand for labour and develops a plan to meet such such plans. Having outlined a plan, the next function is to
demand. In economics the demand for resources, including find suitable people to fill the positions. According to RL Daft
labour, is termed ‘derived demand’. In essence, the concept (Management (6th edn, 2003), p.415), recruitment is the
states that the demand for the factors of production, for activities or practices that define the desired characteristics of
example labour, is determined by the demand for the firm’s applicants for specific jobs. This is a very important function
final product. Therefore, in planning for the workforce the of the Human Resource Department, as recruiting the wrong
level of demand should be taken into consideration. There people for the job can lead to low labour productivity and
are a number of other factors that may influence workforce loss of revenue for the firm. With this in mind, firms often
planning, including: draft a recruitment plan. This plan outlines the steps that
Financial resources and stability of the firm – the firm will be taken to recruit individuals for a particular job. See
has to take into consideration its expected labour cost Figure 12.1.
and its ability to cover such cost with the projected The recruitment plan contains five stages which are
revenue. If labour cost is too high, then the firm may outlined below:
need to consider labour cost-saving techniques such as 1. Job analysis – this is the examination of what the job
using machines. Poor financial prospects will reduce the entails: that is, the responsibilities, skills, training and
amount of workers employed in the organisation tasks that are required for the job. In order to ascertain
The objectives of the firm – if the firm’s long- this information, the Human Resource Department
term objective is to expand, whether locally or must conduct the necessary research about the job. The
internationally, then it means that more workers will be job analysis, when completed, is used as the standard
needed. Where the firm’s objective is to reduce costs by against which the applicant will be measured in the
becoming capital intensive it means that there will be interview
the possibility of large-scale job cuts 2. Job evaluation – here, an assessment of the worth
Technological advancement and the firm’s ability to of the job is done. The aim of this process is to assess
implement these changes – as changes in technology whether the reward being given for the job is fair when
occur there will be a reduction in the labour compared with those for other jobs in the organisation.
requirement This will enable the firm to determine the appropriate
The success of training and development programmes – salary and wage levels for the particular job
training and development is a part of many larger firms. 3. Job description – having completed the job analysis,
It is used to improve the skills of the workers. The firm’s the firm can describe the position that is available. It
ability to train employees will have an impact on the would give information about the purpose, duties, tasks
amount and skill level of the people required and responsibilities of the position. The job description
Changes in the population and its composition – the can be used to measure performance of the person
population can be affected by a number of factors such employed
as migration, war, increased birth rate, age or gender. 4. Person or job specification – in this stage, the profile
As the population changes, the firm has to change its of the person to fit the job is outlined. It states the years
workforce planning. For example, if the majority of the of experience, minimum qualification and character
population is ageing, then the firm must put a plan in of the person required for the job. Like the job
place to seek replacement of workers elsewhere description, this is also used to assist in the recruitment
Labour turnover and absenteeism rate – a firm with a of a suitable person for the job
very high turnover rate must constantly make plans to
replace workers when they leave. While this may be
an indication of poor labour management relations, the
Figure 12.1: The recruitment plan
firm has to ensure that its operation
is not seriously affected by the
sudden resignation of a number Job Job Job Person or job Job
of workers. analysis evaluation description specification advertisement
5. Job advertisement – the final stage of the Disadvantages of internal recruitment

recruitment plan is where the particular job is There may be an absence of new ideas
communicated, whether internally or externally. The The firm incurs the cost of training if the skill of the
main aim of job advertisement is to attract a cohort of internal staff is not sufficient
suitable applicants for the job in question. Narrow applicants base, as more people could be
recruited from outside
Recruiting internally versus externally Promoting internal staff will create vacancies that will
Having drafted the recruitment plan, management now has still need to be filled
to decide how applications for the post will be solicited. In People who are not chosen may create some animosity
many firms, the general rule is that the post must first be for others, which can result in conflict.
advertised internally (for example, over the intranet) and
if it is not filled then the post would be advertised to the Advantages of external recruitment
wider population. Irrespective of this, the firm will have to Offers more choice, as there is a greater variety of
decide whether to recruit internally or externally. In making applicants
this decision, there are certain factors that must be taken ‘New blood’ can be injected into the organisation. This
into consideration and the firm would have to weigh the can result in new ideas and different approaches to the
advantages and disadvantages of each option and then make job.
a decision.
Disadvantages of external recruitment
Factors that may influence the recruitment decision Advertisement costs may be high
The amount of time that is available to fill the post. If May lead to morale issues within the firm.
the post has suddenly become vacant and it demands
a quick replacement, then management may not have
enough time to go through external recruitment EXERCISE
The level of skills that are available internally is also List some of the institutions and agencies in your
another deciding factor. If there is no one in the country from which firms can attract external
organisation with the requisite skill and experience applicants.
needed for the post, then attention may have to be
turned to the external route
The type and nature of the job may also be a deciding Selection
factor. The skill required for this particular job may Job advertisement usually creates another challenge for
not be available anywhere in the firm and so must be employers – which is choosing the most suitable candidate(s)
sought from outside for the job from the myriad of applicants. This process may
The composition of the external labour market. The firm be different for some businesses but the general stages are
may need to do an assessment of the external labour outlined below:
market to decide whether or not the applicant that it is
looking for will be available Applications
The firm may also need to consider the impact that Once a job is advertised, potential workers are required
an external recruitment may have on the level of to submit an application letter accompanied by their
motivation of the existing staff. curriculum vitae or résumé. Some firms may request that
the applications be mailed or dropped off. However, with the
Advantages of internal recruitment development of technology, a number of firms are requesting
Improves employees’ morale as this is seen as a reward that applications be sent via e-mail. Some organisations have
for hard work done also created a general structured application form which
May be cheaper, since large sums of money would not should be completed by applicants. Once applications are
have to be spent on advertisement received, the firm can move to the next stage.
Employees benefit from job enlargement and rotation
and they can get full use of their potential Short listing
The entire process is less time consuming. This particular step is used when the number of applications
far outweighs the available positions in the firm. The Human
Resource Department has to sift through these applications

to select a manageable list of applicants who best fit the CASE STUDY
requirements for the job. This is not the final process but
these people will be brought in for an interview after which The search for a Production Manager
further ‘trimming’ of the list will be carried out. To cut costs, SWATER Bottling Company Ltd is a retail business
some firms will only reply to these people inviting them to established ten years ago and which bottles products for
an interview. a number of firms within the local area. This business has
been thriving and management is now thinking of expanding
Interview its product offering. This will entail making and bottling
This is where both the employer and the applicant have a fruit juice, using fruits from the country and the region
chance to interact so that a two-way exchange of information if necessary. To this end, it would have to add the juice-
can take place. The employer has the chance to clarify points processing equipment to its bottling factory. In addition,
made in the application letter and résumé. It also presents the factory will need to employ a Production Manager. The
an opportunity for the employer to assess each applicant’s good thing is that most of the rest of staff members are
deportment, articulation and persona. The main purposes of competent and can easily make the switch from bottling to
the interview for the employer and applicants are to: making and bottling juices.
Give employers an opportunity to decide the suitability The issue with the change is to secure a Production
of the applicants for the job Manager. Management is planning on advertising the post
Give applicants a chance to garner more information internally, as there are two possible candidates there. The
about the job and the firm. other option is to advertise in the local newspaper. This,
management believes, will bring in fresh ideas and the
Testing firm may find someone who is more qualified than those
In some organisations, before a final decision is made who are internal to the company. Eventually, the decision
regarding employment, applicants are tested. This is was taken to send out an internal communiqué about the
particularly important where the people being employed upcoming changes and the new position that will be created.
are expected to come to the job with prior information and The intention was that if no suitable candidate was found
knowledge or the firm wants to ascertain what its training internally then the company would look externally.
needs are.
Questions
Employment
1. Discuss how the use of a recruitment plan could
Once the most suitable applicant for the job is chosen, the
help the firm in the search for a Production
final part of the selection process is to communicate with
Manager. (15 marks)
them and give them a date for work to begin.
2. Outline two (2) factors that could have influenced
the company’s decision to recruit internally. (4 marks)
Compensation 3. Outline two (2) advantages and two (2) disadvantages
Developing a fair and attractive remuneration package is of recruiting internally as opposed to externally. (8 marks)
also an important function of human resource management. 4. If more than one employee applies for the post,
Without fair and proper remuneration, the firm is running describe one strategy that the company could
the risk of industrial action, low productivity and low use to choose only one of them. (3 marks)
performance. The preceding functions of the Human Total 30 marks
Resource Department all lead up to the type of pay structure
that best suits the job offering.
The compensation package that is chosen will depend to attract and keep highly skilled workers who could in
on the job analysis and job evaluation that were carried turn contribute significantly to the performance of the
out at an earlier stage. These two very important pieces of organisation. However, whichever of the two options is
information give the firm a very good idea of the worth of chosen, the firm should ensure that the pay package is fair.
the job and the level of compensation in the market. The The compensation package may also be influenced by
firm may choose to pay the worker based on the going the complexity of the job, working conditions, educational
rate in the market or above the market rate. While paying requirements, years of experience and the amount of
above the market rate might add to cost, it could be used responsibility that comes with the job.
Types of compensation Basic skills training – used to develop the skills of lower-
Compensation to employees may take different forms, level staff
including: Refresher training – gives long-serving employees an
Wages and salaries – this is possibly the most popular opportunity to update their skills and learn how to use
type of compensation. The terms are often used new technologies
interchangeably, with little, if any, difference at all. A Management trainee programme – used to prepare
‘salary’ is defined as a fixed payment to an employee for employees to take up management positions. This is
work done. This payment is often made on a monthly usually part of the succession plan of the firm.
basis and made to white-collar workers. ‘Wages’ are There is no one perfect way to train employees of an
often paid weekly, fortnightly or monthly and can be organisation. As a matter of fact, some firms do not have
based on an hourly rate and are usually paid to manual the capability to train employees with the requisite skills.
or unskilled workers or labourers As educational institutions and businesses themselves
Allowances – these are often paid in addition to the expand over the years, firms have more options in terms of
regular or basic salary. They are paid as part of the salary training for their staff. Organisations have two methods of
package or to settle out-of-pocket expenses incurred training available to them. Both are explored below:
in carrying out duties for the firm. This may include
travelling allowances, housing allowances or car upkeep On-the-job training
and taxi and supper allowance This is where employees learn while they are performing
Pension fund – this is a pool of contributions made by the job. On-the-job training may take several forms:
either the employer or the employee or both. This fund Job rotation – as was discussed in earlier chapters, this
will be used to pay workers after retirement in the form involves a lateral transfer of employees to enable them
of pension. Pension funds are usually managed by an to work in and learn about other job responsibilities in
external financial institution and the funds collected are the organisation
invested to earn greater returns Apprenticeship – this is where new employees
Health insurance – this is usually a part of the fringe understudy more experienced employees in an attempt
benefits offered to employees. Health insurance is a to learn about the task being performed
coverage of employees which includes the payment of Coaching – trainees are guided by a coach who will give
medical expenses. This payment is made by the firm the necessary instructions to carry out a job or use a
entirely or by both employees and employer in an machine or equipment
agreed percentage. Mentoring – a trainee is paired with an experienced
worker who acts as an adviser for the trainee while he/
Training and development she carries out the job.
Training is seen as a process of improving the knowledge and
skills of employees. Firms that want to remain competitive Advantages of on-the-job training
in a constantly changing environment have to improve Usually cost effective
the skill level of their employees. Companies such as The Employees are working while learning
Jamaica Public Service spend large sums of money to ensure Less productive time is lost than with external training.
that their staff are well trained to improve efficiency. The
aims of training may vary across organisations but general Disadvantages of on-the-job training
purposes of training may include: The quality of training might be compromised since it is
Preparation of employees for their job dependent on the person giving the instruction
Helping existing employees to hone their skills and Bad habits might be passed on
ability Production may be disrupted during training.
Fostering adaptation to new technology and innovation
Improving efficiency through increased productivity Off-the-job training
For promotion. Off-the-job training is where employees are trained away
Some of the main types of training carried out by the from their immediate workplace. This training could be done
firm are: elsewhere within the firm’s premises or in an educational
Induction – which is used to introduce new employees facility, such as a university. Some examples are:
to the firm and its processes
Lectures – these are verbal presentations on a specified that is used to identify, measure, manage and develop the
area and are conducted by a person qualified in the field performance of the employees within the firm. Employees’
Audio-visual – this can be done using videos or films to performance is also measured against the goals and objectives
conduct training. Workers may watch a presentation on of the firm. The firm uses this to measure the extent to
how to perform a particular task or set of tasks which employees’ performances fall below, meet or exceed
Simulation – this is where a real-life situation is created the targets of the organisation. Performance management
and participants may be asked how they would respond can help the firm to:
in such a situation. For example, it could be used Select people with a possibility of promotion or
to assess tellers in a bank. Simulation exercises may redeployment
incorporate case studies, sensitivity training and role play Assess the efficiency with which the previous functions
E-learning and distance learning – both of these can are being carried out
take place over the internet and so are convenient for a Determine a pay structure for employees
number of employees. People are able to upgrade their Identify possible training needs.
skills at their own pace.
Performance appraisal
Advantages of off-the-job training Performance appraisal is defined as the on-going process
A wider variety of skill and qualifications available of measuring and evaluating employees’ performance. This is
Trainers may have specialist training sometimes confused and the term even used interchangeably
Employees can be exposed to the latest information with ‘performance management’. However, the two are not
available the same, as performance management covers a broader
Usually more systematic and organised. scope of management including performance appraisal.
For any performance appraisal to be successful, there are
Disadvantages of off-the-job training a few important characteristics that the firm should take
More costly into consideration:
Loss of productive time while workers are being trained
externally Fairness
Firm may lose workers to other firms after they are Performance appraisal plays a critical role in the life of the
trained employee and the firm. Some firms even use the appraisal
Firms may still have to do supplementary training. to make critical decisions in terms of whether to promote
or demote employees. It is therefore imperative that any
Training versus development such appraisal be done in a fair and transparent manner.
The main difference between the two concepts is the For example, the same instrument should be used to
time frame. Training focuses on the present situation and measure performance for the same category of employees.
the job that the employee is currently doing. The aim of Performance appraisal should not be geared towards
training is usually to enhance specific skills and abilities of ‘weeding out’ some people but to assist the staff in improving
employees so that they can improve their performance on their expertise.
the job. Conversely, development focuses on future jobs At the end of the appraisal the employee should not
in the organisation. The organisation may seek to develop have just reason to believe that he/she was cheated out of
its employees based on its succession plans or on the fact a good or satisfactory performance. Performance appraisal
that in the future new skills and abilities will be required. can be subjective to some extent, since it is partially
Developing employees will help to prepare them for the dependent on the person conducting the appraisal. This
future when these skills and abilities are needed. subjectivity becomes greater where the instrument being
used is not clear in what is being measured. To minimise this
Performance management occurrence or feeling by employees, a common practice is
The lack of checks and balances can become detrimental for the employee to be given a chance to read through the
for any business. With this in mind, the Human Resource appraisal and sign it once they are in agreement. Discussions
Department has to measure the performance of the staff in are sometimes held on areas with which they are not
a timely manner. Performance management is seen as a comfortable.
process used by managers to measure how well employees
are executing the task given to them. It is the process
Participative nature, the aim of performance appraisal is to improve the

Management should ensure that any performance appraisal firm and as such it should be done periodically and not
that is to be done receives the full support of the employees. haphazardly. The time frame for performance appraisal is
Employees should be allowed to participate in the appraisal different for some firms while it is common for appraisals to
process. This could be done by asking them to help create be conducted quarterly or annually. Another policy for some
their performance goals and development plans. Employees firms is to do partial appraisal throughout the year and then
could also help to generate the instrument that will be used a full appraisal at the end. These partial appraisals could be
to appraise them. The notion is that employees are more focused on a particular aspect of the job requirement.
likely to buy into something the development of which they There are a number of strategies available to the firm to
participated in. Having them setting some of the performance measure the performance of its employees. These include:
measures will also mean that they will make a concerted
effort to meet those targets. Labour productivity
In some organisations employees are allowed to participate This measures the ratio of output to input. Put another
in the appraisal process by doing peer evaluation. This type way, it measures the amount of a product or service that is
of appraisal may be best suited when the supervisor is absent produced by one hour of labour input. This measure indicates
or does not have frequent contact with the employees. the efficiency with which labour is used in production. The
Co-workers are knowledgeable of the job requirements and formula for calculating labour productivity is:
so would be able to assess each other on how well it is being Total output
Labour productivity =
done. A word of caution, however, would be that this could Per hour input of labour
backfire. Again, such appraisal could be very biased and The concept of productivity is dealt with in more detail in
conflict on the job could spill over into the appraisal. Chapter 24.
Feedback Labour turnover

It is critical that feedback be provided to the employees once This measures the number of workers who leave an
the appraisal is completed. If performance appraisal is to organisation in a given time period compared with the
fulfil its role of developing the employees effectively then average number employed within that same time period.
they must be informed of their performance measure. As This is calculated as:
said earlier, performance appraisal is an ongoing process Number of workers leaving
× 100
and as such it requires ongoing feedback. Regular feedback Average number employed
ensures that the employees receive the guidance and A firm may experience high labour turnover because of the
encouragement that they desire. following factors:
Management should be mindful that performance Low salary package or fringe benefits
appraisal can only be successful when meaningful and timely Poor management style – for example, autocratic
feedback is given to the subordinates. Employees should be Poor working conditions
told what the findings were and be given guidelines on how Workers may be getting more attractive offers
to improve their performance. Therefore, the feedback given elsewhere.
should not just be ‘You need to improve your performance’. A firm having high labour turnover should be concerned
Instead, the employee must be given suggestions and with the impact this could possibly have on its operations.
guidelines on how to improve any areas of concern. There This might include:
is a common adage that says that ‘Delay is danger’. Delaying Production time loss during recruiting and shortage of
feedback can bring on feelings of anxiety and the employee workers
may feel that the performance appraisal is a waste of time. High training costs, since this has to be done regularly
Delaying feedback to an employee will simply mean that the High turnover rate could affect the morale of the
employee will continue doing his/her job in the same way workers who stayed and this could affect their
while not knowing whether things are being done properly. performance
It may be disruptive and unsettling, especially where
Periodic people work in groups. The group would have to keep
Performance appraisal is sometimes seen as an isolated building synergy and camaraderie.
occurrence that should happen only once in a while. By
Absenteeism rate time. Once employees have to resort to industrial action it is

This is the amount of the total workforce that is absent from indicative of a breakdown in labour–management relations.
work during a given time period when they should have In a number of these situations, industrial action is the end
been there. Absenteeism rate is calculated as: result of poor labour–management relations. The question
Number of absent workers then that we should ask is: what are some of the factors that
× 100
Total number of workers can cause a breakdown in these relations? The truth is that
A firm that has a high absenteeism rate is more than likely there can be many factors, however, some of the common
to experience poor performance. Employees who are ones are:
frequently absent will not contribute much to production Unfair dismissal of a worker
or the service being offered. It is important to note that Poor working conditions
a high absenteeism rate is also a sign that something is Low remuneration
wrong within the firm – for example, low morale or a poor Unfair practices
management style. Lack of job security.
An important thing to note, though, is that it is in the
best interest of both parties to attempt to resolve the dispute
Labour–management relations before it escalates. Below we will examine some of the ways
Those students who keep abreast with what is happening in in which employees and management can resolve their
the business environment will have heard about some form disputes and also the options that are available to employees
of industrial action being taken by employees from time to if the dispute cannot be settled.
CASE STUDY
Getting a hold on performance

Green Pot Ltd is a small privately owned company that specialises in the manufacturing of flower pots using both plastic and
ceramics. The firm has been doing fairly well but not excellently and management believes that it could be doing better, especially
in terms of production. Management is of the view that if production increases then it would be able to tap into other markets
and be able to keep a constant supply – but for now that is not the case. With this view in mind, management has embarked on
a thrust to improve performance.
In order to carry out such a policy, management has implemented a performance management system whereby each employ-
ee will now be appraised bi-annually. This is a step up from the existing ‘once in a while’ performance appraisal. The fact is that
much emphasis was never placed on performance appraisals and, when they were eventually done, employees would wait months
before getting feedback and sometimes they got none at all. In fact, things were so bad that sometimes the appraisals would be
done in the form of a peer review and then passed on to management.
With this new thrust, management has pumped life into the Human Resource Department by employing a younger HR
Manager, asking the previous one to take early retirement. This new manager has created an instrument that will be used to
appraise the production staff. She is also thinking of implementing a training programme for the staff to ensure that they are
acquainted with the new technology and methods of working. It has not yet been decided how this training will take place but it
is high on the agenda. The company is hoping that things will start turning around by the middle of the upcoming financial year.
Questions
1. Explain two (2) reasons why it is important that the firm has a very effective Human Resource Department. (4 marks)
2. Discuss two (2) ways in which the previous performance arrangement could have a negative impact on the firm. (6 marks)
3. Using the four principles of performance appraisal (fairness, participative, feedback and periodic), briefly discuss
how the firm could improve its performance appraisals going forward. (12 marks)
4. Given the nature of the firm’s product and the current situation there, which of the two methods of training would you
recommend that the HR Manager use in her upcoming training programme? Give at least three (3) reasons for your
answer. (8 marks)
Total 30 marks
Collective bargaining Since the union will explain the agreement reached
As the name suggests, collective bargaining is a situation to its members, employers may not have to deal with
where trade unions and employers meet to negotiate better misunderstanding of terms.
terms and conditions of employment such as salary, wages
Dispute settlements
and working conditions. The important factor in this process
Sometimes both parties involved in collective bargaining
is that both parties get a chance to present their arguments
encounter a problem and cannot reach an amicable
and iron out differences in the hope that a mutual agreement
solution. The employer may be holding out on a clause of
will be reached.
the salary claim and the unions decide that their members
A trade union is an association of workers who
should benefit from such clauses. This can result in lengthy
have joined together to accomplish a common goal of delays and an unhealthy relationship between employer
improvement in the terms and conditions of employment. and employees. Whenever this occurs the parties can turn
Since it is not always possible for the entire workforce to to the options available under what is termed a ‘grievance
meet with management, they select representatives to speak procedure’.
on their behalf. In collective bargaining, the trade union A grievance procedure is a process through which a
representative will outline the grievances or positions of dispute can be settled. This can be a short or lengthy process,
the employees and try to come to an amicable solution to depending on how soon the dispute is ratified. There are
the problem. It is usually the responsibility of the Human three main stages of grievance procedure. These are:
Resource Department to bargain on behalf of the firm. Conciliation
However, managers can also be involved in the bargaining Mediation and
process, especially in some firms that do not have a Human Arbitration.
Resource Department. It must also be noted that any The idea is that if the first stage fails then the parties would
agreement reached in the bargaining process is binding on move to the next stage and if no agreement is reached then
both parties. If this agreement is breached, the injured party the third stage will be used. Now let us look at each stage in
may get redress from the Industrial Dispute Tribunal or the detail.
courts.
There are a number of benefits to both employees and Conciliation
employer of being involved in collective bargaining: At this stage a third party will be asked to sit in on the
discussion between both parties. The conciliator will not
Benefits of collective bargaining for employees offer a solution to the dispute but instead will encourage
Workers have greater bargaining power than if the both parties to come to an agreement. In most Caribbean
process is done individually countries the conciliator could be a representative from the
Discourages management from making a unilateral Labour Ministry. In Jamaica, the Ministry of Labour offers
decision that affects employees conciliation services to both employer and employees, with
Trade union representatives are more knowledgeable specific focus on:
of issues that are discussed with management and can Negotiations between employer and employees or
explain any decision made to the employees in simple unions
terms Settlement of dispute regarding perceived unfair
Can be flexible and provides a fair settlement for dismissal
grievances Infringement of labour privileges or rights.
While some people may not agree, collective bargaining As said previously, if the conciliator is not able to assist the
provides all employees with the same benefits from any parties in reaching an agreement, then the dispute would be
agreement that is reached, whether they are a part of referred to the next stage (mediation).
the bargaining union or not.
Mediation
Benefits of collective bargaining for the employer At this stage a third party will be asked to sit in on the
It is easier and less time consuming for management to discussion but, unlike in conciliation, the mediator will give
bargain with the union instead of each individual suggestions on how to resolve the dispute. The parties will
Collective bargaining can help to allay the possibility of then deliberate on the suggestions in an attempt to reach an
industrial action agreement.
Arbitration ‘Go slow’

This is the final stage of the grievance procedure. It is where This is a deliberate effort by employees to slow down the
a third party, termed the arbitrator, is called in to come pace at which they work. The aim of this form of industrial
up with a solution to the dispute that has been going on. action is to frustrate management in an attempt to get a
Unlike the previous two stages, the arbitrator will give settlement of the dispute.
a solution to both parties. This solution is legally binding
on both parties. In some Caribbean countries, there are ‘Sit in’
specified courts or judicial boards that will deal with these This is a popular form of action to take when the firm is
disputes. These are referred to as Industrial Dispute Courts threatening employees with a close-down of operations. It is
or Labour Courts. They have been established to deal with where employees attend work but refuse to leave the work
issues relating to dismissal of staff, legality of strikes, wage site when work is done.
disputes, retrenchment and other labour dispute matters.
In Jamaica the organisation responsible for these issues is Picketing
the Industrial Dispute Tribunal. In Trinidad and Tobago, the This is used in conjunction with a strike. It is where workers
Industrial Court carries out these functions. Now, check use placards to show signs that they are disgruntled with
in your country and find the organisation responsible for management and to win over the support and sympathy of
helping to settle industrial disputes. passing members of the public.
Trends in industrial action Overtime ban

There are times when the efforts of collective bargaining For this form of industrial action, the workers would refuse to
fail and workers become militant and resolute in seeking a work overtime hours and instead just complete their regular
settlement to their dispute with management. Whenever hours of work. This may cause a slowdown of production,
this is the case, the workers may take industrial action in especially in peak seasons. The inconvenience caused by this
the hope that management will change its stance and accept action and/or the loss of revenue may force management to
their offer. There are a number of industrial actions available consider the concerns of the staff.
to the worker. These include:
Lock-out
Strikes While this practice may not be widespread, employers can
This is usually the last form of action to be taken. It is usually also find redress in industrial actions of their own. The
used when most, if not all, of the other methods have failed. employer can stage a lock-out – that is, where employees are
In strike action, workers withdraw their services from work. prevented from entering the property and hence receiving
Strikes may be classified as: wages for that period of time.
Official strike – this is called for by the union
representing the workers. It is usually called when The need for reconciliation
the union has explored all other avenues and legal Having ‘bad blood’ in an organisation can be detrimental.
requirements Unfortunately, some labour–management disputes have been
Unofficial strike – this takes place without the backing of so fierce that, even after the dispute is settled, relationship
the union. These strikes are usually done on a local basis problems still exist. With this in mind, it is very important
and for a specific reason. that both employers and employees work assiduously to
repair the relationships they once shared. A workforce
Work to rule which is continually in disagreement with management will
In this form of industrial action, employees work rigidly to not be able to achieve much, if anything at all.
every rule in the organisation. Stringently working to every Rebuilding good labour–management relations will take
rule can slow down the work process considerably. With time and effort on the part of management. It is advisable that
a work to rule, employees do not perform any role that is both parties do not create any long-term hurt in the period
outside of the stipulated job description. For example, if of the dispute. It must be pointed out that communication
teachers should take this industrial action, it may mean that is also going to be an integral part of moving forward.
no extracurricular activities will be supervised or field trips Management and staff can pursue a number of options in
that are not a part of the course may not be attended. trying to rebuild labour–management relations. In doing so,
management could implement an ‘open door’ policy where Education of employees on safety regulations
subordinates could speak with them freely at any time. Having a health and safety policy is not enough unless it is
Management could also have staff functions where both communicated to the staff. The health and safety policy of
parties can socialise in an attempt to bring back the synergy the firm should be placed where it is evident to everyone.
that once existed. Communicating its contents is especially important in the
manufacturing industry, where a mistake could easily cost
a life. Training employees on health and safety issues will
Laws affecting health and safety in the improve their knowledge, understanding and compliance.
workplace One of the requirements of the 1974 Act in the UK was
The issue of health and safety in the workplace came to that employees were to be trained on health and safety.
prominence in the mid- to latter part of the 20th century. As Employees must be trained about the dynamics of health
leadership styles and management practice changed, more and safety and what to do when different situations arise.
firms have put in place policies and regulations to promote The HR Manager should organise such training for existing
health and safety in the workplace. The central governments and new employees. All safety requirements should be
of some countries have also moved to enact laws to promote communicated. Employees and employers must also be
it. To this end, in 1974 the United Kingdom passed the Health trained about what to do when there is an emergency or
and Safety at Work Act. The issue of health and safety has a natural disaster. A trend in many organisations today is
been given even more attention internationally due to the that a safety monitor will be appointed in each group. This
fact that the International Labour Organisation (ILO), an person is responsible for training the other people in the
arm of the United Nations, has started celebrating April 28 department and reacting accordingly when there is a health
as World Day of Safety and Health at Work. or safety issue. An organisation where an effective training
Since 2003, the ILO has influenced health and safety programme is in place, regular updates are given and
in the workplace. Suffice it to say that countries such as regular emergency drills are done is more likely to respond
Trinidad and Tobago, Guyana and the Bahamas have based favourably when there is a safety or health problem.
their health and safety laws on the CARICOM Model
Law on Occupational Safety and Health and the Working Importance of the provision of safety facilities
Environment. In 2008 the Ministry of Labour in Jamaica also If you look at the possible impact that not having health
communicated its intention to introduce an Occupational and safety facilities may have on the firm, then you will be
Safety and Health Act. Any health and safety policy will seek aware of the importance of the provision of safety facilities.
to promote safety for both the employer and the worker. However, the following points will give you an idea of the
Below are some of the general responsibilities and rules that importance of providing safety facilities:
would be covered under a Health and Safety Act for the The firm can mitigate the possibility of lawsuits and
workplace: additional costs incurred from accidents
The use of dangerous machinery Protection of workers and employers from bodily harm
Wearing of protective clothing or illness
Protection against dust and dangerous fumes Minimises the possibility of high turnover rate since the
Having functional fire and emergency exits, along with working environment would be a safe one
conducting emergency drills Good working environment can improve productivity
Cleanliness and sanitary conveniences and, by extension, production
Proper disposal of waste It is a requirement of law that firms implement a health
Minimising noise and vibration and safety policy.
Proper ventilation. The above list is not exhaustive but acts as a base on
Find a copy of the Health and Safety Act for your country which you can build in your class discussions.
and discuss with your teacher the provisions that are
contained in it to protect employers and employees. Procedures for dealing with safety complaints
In this section, we will examine three main aspects of In addition to a health and safety policy, firms should have
health and safety in the workplace: a clearly outlined procedure to deal with safety complaints.
Without such a procedure in place, breaches of the health
and safety policy may go unattended and lead to greater Any safety complaints would first be lodged with the
problems in the future. For example, if a worker reports an safety monitor or committee
exposed electrical wire and nobody does anything about it, Upon receipt of the complaint, the necessary checks
a fire or electrocution of a worker may occur in the future. should be done to substantiate the complaint. This
While this may be different for some organisations, a typical may be done by the committee itself or by a trained
procedure to deal with safety complaints should, however, professional from outside the firm
include: The next step would be to address the complaint in the
The appointment of a safety monitor or committee that shortest possible time and take corrective measures to
will spearhead the health and safety policy on the ground ensure that there is no recurrence.
CHAPTER SUMMARY
As the working environment The selection process usually Where collective bargaining fails,
changes with time, human resource incorporates three steps: short the firm and employees can go
management is becoming more and listing, interview and employment through the grievance procedure,
more important including conciliation, mediation and
The compensation package may be arbitration
Workforce planning is the process influenced by the complexity of the
whereby a firm forecasts its future job, working conditions, educational Industrial action includes strikes,
demand for labour and develops a requirements, years of experience work to rule, ‘go slow’ and ‘sit in’
plan to meet such demand and the level of responsibility
involved The CARICOM Model Law on
The recruitment process is very Occupational Safety and Health and
important, as recruiting the wrong Firms usually explore two methods the Working Environment has been
people for the job can lead to low of training: on-the-job training and developed to be used as a guide for
labour productivity and loss of off-the-job training the Caribbean countries.
revenue for the firm
Collective bargaining gives both
The firm should draft a recruitment parties a chance to present their
plan that should include job analysis, arguments and iron out differences
job evaluation, job description, person in the hope that a mutual agreement
specification and job advertisement will be reached
MULTIPLE CHOICE QUESTIONS c. Marketing

d. Selection
1. The growth of human resource management may be affected
by ALL of the following EXCEPT which one? 3. Which of the following would be included in a typical
a. Lack of knowledgeable managers recruitment plan?
b. Increased representation of staff by trade unions a. Job rotation
c. The passing and implementation of government legislation b. Job analysis
d. Increased business competition for both goods and staff c. Job enlargement
d. Compensation
2. Which of the following is NOT a main function of the Human
Resource Department? 4. ALL of the following are factors influencing whether to
a. Workforce planning recruit internally or externally, EXCEPT which one?
b. Recruitment a. The amount of time that is available to fill the post
b. The type and nature of the job

c. The composition of the external labour market Extended Essay Questions
d. The biases of management Question one Total 25 marks
Human resource management is a very important function
5. A disadvantage of recruiting internally is: of any business. There are a number of functions that the
a. Improves employees’ morale Human Resource Department has to perform, including:
b. May be cheaper a. Workforce planning
b. Recruitment
c. Absence of new ideas
c. Selection
d. Less time consuming d. Compensation
e. Training and development
6. An example of on-the-job-training would be:
f. Performance management
a. Job rotation
Discuss any five (5) of the functions outlined above
b. Simulation that the Human Resource Department must
c. Lectures perform. (25 marks)
d. Audio-visual Question two Total 25 marks
Training and development is an integral part of the
7. Which of the following is LEAST LIKELY to cause labour
organisation. Training may be conducted internally or
management problems?
externally.
a. Poor working conditions a. Explain the difference between on-the-job and
b. Issuing non-financial rewards off-the-job training. (4 marks)
c. Unfair dismissal b. Briefly explain two (2) types of on-the-job techniques
and two (2) types of off-the-job techniques. (8 marks)
d. Lack of job security
c. Dealing carefully with labour–management issues
8. The process whereby a third party is called in to give a is vital to the success of any business.
solution that is binding on both parties to quell a dispute i. Define the term ‘grievance procedure’. (2 marks)
BEST defines: ii. Explain the three (3) main stages of the grievance
a. Arbitration procedure. (9 marks)
iii. Explain the concept of collective bargaining. (2 marks)
b. Collective bargaining
c. Conciliation
d. Mediation
9. Which form of industrial action is usually used as a ‘last

resort’ in labour–management relations?
a. Work to rule
b. ‘Sit in’
c. Overtime ban
d. Strike
10. Which of the following would NOT be a good health and

safety practice?
a. Using liquid near the computer
b. Removing cords from across the walkway
c. Having proper ventilation
d. Proper disposal of waste
137
Module 3 Business, Finance and Accounting
13 The Need for Capital and Sources

of Finance
Working capital
LEARNING OBJECTIVES: Investment capital.
Start-up capital and venture capital
State the main needs for funds
Start-up capital is the capital that is needed to establish a
Explain how businesses can meet those needs
business. The amount of funds needed may vary depending
Discuss the main sources of finance available to
businesses on the size, nature or type of business being pursued. A street
Explain the difference between equity and debt capital vendor will need considerably less capital than a wholesaler.
Similarly, a capital-intensive business (for example, an
Identify internal and external sources of finance
aluminium plant) may need more start-up capital than a
Outline the criteria used by businesses when seeking
finance labour-intensive one (for example, a sugar plantation). A
number of prospective businesses have not passed the stage
Discuss the roles and functions of regional and
international money and capital markets of being an idea because entrepreneurs encounter problems
in sourcing the funds for start-up. Starting a business is a
high-risk venture and not many banks and other financial
institutions will finance such a venture unless it can be
A
ll businesses, whether large or small, need funds. proven that the business is feasible and sustainable. Thus,
Sourcing finance can be a tedious process, espe- entrepreneurs may have to depend on their personal savings
cially when there are limited options available to and assets for start-up capital. As a result, if the business
the particular business. Some firms have limited options fails they may lose their houses, cars or land, among other
because of a lack of collateral or finding a financial institu- valuables.
tion that is willing to take the risk of lending them money. In order to minimise the risk of losing everything,
However, there are a number of sources from which capital entrepreneurs may choose to use venture capital for funding
can be sought. These will be discussed later in this chapter. their business. Venture capital refers to funds invested,
or that are made available for investment, in a business
which offers favourable returns. Using venture capital may
The need for capital provide businesses with more funds for start-up, as wealthy
Capital is very important in the establishment and operation individuals (venture capitalists) normally pool funds which
of a business. It is defined as the money invested in a business they use for investment in business ventures.
venture which is used to purchase assets to facilitate trade. It
also refers to goods (plant, equipment and machinery) that Working capital
are used in the production of other goods and services. For The need for funds does not end with start-up. Money is also
example, a gardener needs to purchase a weed whacker or needed to finance the day-to-day operations and expenses
lawnmower, among other tools, in order to carry out his of the business, including bills and creditors. This is known
work effectively. He will also need additional funds to take as working capital. It is calculated as:
care of other day-to-day expenses such as gasoline and Current Assets – Current Liabilities
lubricating oil. Likewise, a manufacturing company needs to Current assets include inventory, accounts receivable,
source funds to purchase large machinery and equipment. It bank and cash, while current liabilities include accounts
also needs fund for its day-to-day expenses such as electricity payable, bank overdraft and short-term loans. A business’s
bills. working capital can be either positive or negative. If its
The need for capital can be classified into three categories: current assets exceed its current liabilities then its working
Start-up capital and venture capital capital will be positive, indicating that the business can pay
138 MODULE 3 | UNIT 1 | BUSINESS FINANCE AND ACCOUNTING
for its current liabilities or it is fairly liquid. Since working spread in terms of repayment. Having too many short-term
capital deals with the day-to-day expenses and its depletion loans will drain the coffers of the business when these loans
can lead to liquidity problems, businesses must have a proper mature. Before borrowing, the ability to repay and the time
system in place to manage working capital. frame in which money has to be repaid must be taken into
consideration. The business must consider whether it will
How can businesses manage working capital? generate enough returns or revenue from this venture to
The above section outlined the components of working cover the money that was borrowed in the stipulated time.
capital. Managing these components will help businesses to Borrowing on a long-term basis to finance short-term
manage their working capital. projects or purchases may not be a good idea for businesses.
The reason for this is that the purpose for which the money
Inventory (stock) was borrowed would have passed, however, the firm would
A number of businesses have liquidity problems because still be repaying the loan.
too many resources (funds) are tied up in stock. While the
business will want to meet its demand at all times, knowing Cash management
how much inventory to keep is also vital. The firm should This relates to the monitoring of the flows of cash into
devise a strategy that will enable it to purchase the optimum and out of the business. Cash management should be of
level of stock. This means that it has to determine the cost- importance to every business as it is more susceptible to theft
effective level of stock that it should keep. To this end, the and misplacement. Having a proper and efficient system of
firm should ensure that its inventory level is neither too cash management can help to prevent the firm from having
high nor too low. It is also important that the firm minimises liquidity problems – that is, not having enough cash to deal
the time between when resources are purchased and when with daily expenses. The firm can manage its cash by:
income is generated from those resources. This will ensure Doing cash flow statements. This topic is dealt with
that the firm’s cash is not tied up in inventory that cannot be further in Chapter 14
sold quickly enough to recover it. Drafting cash budgets which give a breakdown of how it
expects or plans to spend and earn its cash
Accounts receivable (debtors) Making the best use of its excess cash. This could be
Lack of payment by debtors or extended credit periods will done by investing it.
decrease the amount of liquid funds available to the business.
Firms must find creative ways of monitoring and managing Increasing working capital
their debtors in order to managed working capital. This can A firm that has liquidity problems has a number of options
be done by: that can be used to increase working capital. However, each
Offering cash discounts which encourage debtors to must be carefully analysed before the decision is made.
pay on time. Cash discount is a reduction in the total Some of the options are outlined below:
amount owed by the buyer for credit purchases if
payment is made promptly or within a stipulated time Additional funds from owner(s)
Reducing the credit period – that is, the length of time Businesses that have a cash flow problem can increase their
that debtors have before payment is required cash base from additional funds being ploughed into the
Reducing the credit limit. If a business continues to give business by the owner. This money can represent either
credit to a debtor who is not able to pay or who has additional capital from the owner or a loan to the business.
outstanding balances, it might be setting itself up for bad In the case of a sole trader, funds may be taken from personal
debt. As a result, there has to be a limit on the amount savings, relatives or friends. In the case of a company,
of credit any one debtor will receive from the business. additional shares may be sold to families and friends or on
the stock exchange in the case of a public company.
Bank
The firm may source financing from a bank in terms of Dispose of non-productive assets
loans or overdrafts. However, being heavily indebted is Some businesses are ‘rich on their books but poor in their
never a positive sign for a business. While funds may be till’. The reason for this is that there are non-productive
sourced externally, businesses should ensure that proper fixed assets on their balance sheets that could be disposed of
debt management strategies are in place. In managing to solve liquidity problems. Fixed assets which are not being
working capital, firms may want to ensure that loans are used, but still saleable, should be disposed of to increase the
CHAPTER 13 | THE NEED FOR CAPITAL AND SOURCES OF FINANCE 139
amount of cash available to the business and thus increase loans which are putting pressure on its working capital.
working capital. For example, a business that carries out While this seems like a ‘Band-Aid’ approach, it can provide
delivery may have a number of defective vehicles in its extra cash for businesses in the short to medium term.
parking lot that could be scrapped and sold.
Factoring
Increase net profit Factoring is an agreement, between a specialist finance
By increasing its net profit, a business can also increase its company and a business that is in need of ready cash, to
working capital. Increasing profit will result in an increase purchase the amount owed by debtors. In essence, the
in the current asset cash or bank. This can be accomplished factoring company will wait for the payments from the
by either reducing the firm’s expenses or increasing the debtors while the firm will get the cash needed. The amount
revenue gained from the sale of its products, providing that paid by the factoring company to the firm will usually be
its gross profit is high enough. This is to say that, even if the less than the amount owed to the firm by the debtors. The
firm sells a lot of products but its production and trading disparity between the two figures will provide the factoring
costs are high, its gross profit may not be significant. Another company with a profit. This is because the factoring company
option for the firm would be to assess its operations in order makes money by paying out to the firm less than what is
to identify areas where resources are being wasted and to owed by the debtors. This could be seen as the payment or
tighten these areas. Cutting waste of resources helps the incentive given to the factoring company for taking on the
firm to save money that would otherwise be lost. firm’s debt. Although the firm may be giving up some of the
money that is owed to it by its debtors, the arrangement will
Debt switching provide ready cash which will increase its working capital.
Firms may want to explore the option of switching debts from
short term to long term. This can be accomplished through Increasing stock turnover
debt switching or refinancing. This is the process of raising The amount of times that stock turns over is also of interest
a new loan to pay off existing loans. The business may want to the organisation. A high rate of turnover will provide the
to acquire long-term financing to retire (repay) short-term business with more cash in hand to cover its day-to-day
CASE STUDY
Cash strapped
Windows & More Ltd has not been riding the turbulent economic waves well. In fact, management is faced with a mammoth
task in surviving on a day-to-day basis. The options for the firm are running out, as it has almost frustrated its creditors by
asking for extension on credit terms and has defaulted on a couple of payments in the last month. To make matters worse, some
of its debtors are also going through financial problems and have been late with payments themselves. The firm is now facing
possible closure.
The situation the firm finds itself in is an interesting one, as the problem is not a lack of assets. As a matter of fact, the firm
has assets that are valuable but the bulk of its cash is tied up in the numerous windows that are in its warehouse. Things were
going fine until the construction industry started shrinking and demand became anaemic. Even though there was evidence of
falling demand, the company continued to make windows and doors since it had enough raw materials to do so. In recent times
the company has halted production and now is waiting for a miracle to happen. Management now has to devise strategies to
improve the liquidity position of the firm.
Questions
1. What is meant by ‘working capital’ and how is it calculated? (4 marks)
2. List three (3) day-to-day expenses that the firm may incur. (3 marks)
3. Discuss two (2) ways in which firm could have managed its working capital better. (6 marks)
4. Bearing the present situation in mind, discuss three (3) strategies that the firm can use to increase its
working capital. (12 marks)
Total 25 marks
expenses and bills. If the need arises, the business may until it is repaid. The major sources of debt capital include
have to sell some of this stock at below list price to generate commercial banks, building societies, trade credit, credit
additional income. unions, bonds and other financial institutions. Table 13.1
(p 141) shows the advantages and disadvantages of each of
Investment capital the sources of capital we have just discussed.
As businesses become more and more established, the
need for more capital will arise. This money may be used Internal sources of finance
to purchase new and improved equipment and machinery, Sale of fixed assets – a business has the option of
for expansion of the plant or to take on a new project. disposing of non-productive assets to generate much-
Competition may also prompt existing companies to expand needed funds. Excess or obsolete assets represent
their product line, creating the need for additional capital. financial resources that could be used otherwise. The
Increased demand puts pressure on the firm’s production cash received from the disposal of these assets can be
capacity, thus capital may be needed for expansion. used to fulfil the business’s demand for funds
Retained profit (earnings) – this represents a business’s
after-tax profit that is ploughed back into the business.
Sources of finance Such profit will not be issued to owners in the form of
In sourcing finance, businesses need to assess the following dividends but is used to purchase fixed or current assets
options before making a final decision: Working capital – the management of working capital
Equity capital versus debt capital was discussed earlier in the chapter. This also serves as
Internal versus external. a source of funds for the business which can reduce its
The choice that is made will have different benefits or stock balance by selling more, collecting outstanding
costs to the business. Let us examine each option funds from debtors or increasing its creditors.
Equity capital External sources of finance

Equity capital is money or funding that is raised from the Some of the major external sources of finance include:
issuing of shares. It is also seen as a personal investment in Issue of shares
a business by its owner(s). The major risk associated with Bank loans and overdrafts
equity capital is that the owner(s) stand(s) to lose all the Debentures
money that was invested in the business should it fail. A Venture capital
business wishing to access equity capital must be willing Government assistance.
to surrender some of its ownership, as a share represents
ownership in the issuing company. However, businesses
using equity capital do not have to worry about repayment Criteria for seeking finance
since it is not a loan but an investment on the part of each
shareholder. The company will only pay dividend when it Short-term financing
has made profit and it is feasible to do so. The major sources ‘Short-term’ usually refers to a period of time of one year
of equity capital include sale on the stock exchange, personal or less. Funding that is sourced on a short-term basis is not
savings, partners, venture capitalist companies and friends normally used for long-term financing in the organisation. It
and families (that is, where the funds are not in the form of may be used for financing day-to-day activities. These funds
a loan). might come from one of three major sources: trade credit,
bank overdraft and factoring of debt.
Debt capital
Debt capital represents any money that is borrowed by Trade credit
the business which must be repaid with interest. One of the Trade credit is the deferment of payment for goods or
main advantages of using debt capital is that businesses do services supplied to the business. The supplier delivers the
not have to surrender any of their ownership in order to product but an arrangement is made to collect the payment
source capital. It is important to note, though, that, with due at a later agreed date. The amount of time given will
debt capital, the funds must be repaid along with interest, depend on the relationship between supplier and business
whether or not the company is profitable. This loan will have or the credit policy of the supplier. The longer the credit
to be carried on the business’s balance sheet as a liability period, the more money the business will have in the short
Sources of capital Advantages Disadvantages

Equity capital There is no need for collateral The company has to surrender some of its
The firm does not have to pay monthly amounts ownership to shareholders
for principal and interest The public limited company has to publish its
Since the shareholders are part owners of the accounts
company, they do not have to be repaid if the
company fails
Debt capital The lender has no equity in the firm and so the Since this is money borrowed by the firm, it must
owners do not lose any control be repaid
The lender will only be paid the agreed principal The lender often requires the firm to submit its
plus interest and so there is no interest in or claim cash flow statements and balance sheet
on the profits of the firm The company’s assets may have to be used as
The amounts for principal and interest are usually collateral for the loans received
known expenses. This means that they can be The loan has to be repaid regardless of the level of
planned for profit or loss
The company is not required to publish its
accounts on an annual basis for shareholders to
see
Table 13.1: Advantages and disadvantages of sources of capital
run. The business will now have the opportunity of making Medium-term financing
revenues from the sale of these products before payment The medium term refers to a period of between one year
becomes due. and five years. Finances that can be sourced in the medium
term include loan, hire purchase and leasing.
Bank overdrafts
It may be argued that it is not good to spend more money Loans
than you have but in the world of business this can provide These are set sums of money that are borrowed by the
firms with much-needed funds in the short run. However, business from either a bank or other financial institutions
running a bank overdraft on an account must be done as such as credit unions. The time for repayment and the
a result of an agreement between the bank and the business. interest to be charged are specified upon the agreement of
The agreement would be one where the business is allowed the loan. In addition to the payment of interest, most banks
to draw cheques in excess of its account balance at the or financial institutions may require security or collateral
bank. The limit of the overdraft would be specified in the upon the issuing of the loan. This poses a problem for
agreement. This option provides the business with short- some firms which may not be able to provide meaningful
term funds. It is now able to settle debts (pay suppliers and and substantial collateral to secure such loans. Institutions
bills) in the short term, knowing that these cheques will still lending for start-up purposes may also require a well-
be honoured by the bank. defined business plan before agreeing to lend.
Factoring of debt Hire purchase

As discussed earlier, this can provide businesses with This means of financing is usually given to customers of most
extra funds given by a ‘factor’ company in exchange for a furniture and appliance stores in Jamaica. The hire purchase
business’s debtor balances. This can be classified as short or agreement (contract) is made between the buyer and seller or
medium term, depending on the time frame given by the a provider of credit facility. Under such agreement, an initial
factoring company. amount is paid as a down payment and the balance is paid
We are now living in a competitive environment and over time in fixed instalments along with any interest accrued
banks are offering more options to business to solve their for the period. Businesses wanting to purchase assets can
cash woes, at least in the short term. One such way, which utilise this facility while using those same assets to generate
was not mentioned in the three major categories above, is revenue to pay the monthly instalments. For example,
the issuing of credit cards to businesses. Firms can now buy an entrepreneur setting up a laundrette may purchase
their supplies or pay their debts by simply ‘swiping’, while commercial washing machines on hire purchase from a
making payments to the bank at a later date. These cards reputable appliance store such as Courts Plc for a five-year
are issued by some of our major banks, including National period. The income generated on a monthly basis will then
Commercial Bank (NCB) and Bank of Nova Scotia (BNS). be used to cover the monthly instalment, including interest.
Leasing and payment will be made before ordinary shareholders

Firms that do not have sufficient funds, especially for start- receive their dividend. Preference shareholders also have
up, can lease assets rather than buy them. Leasing will help certain rights in the company:
to minimise the finance that is needed to purchase capital To receive dividend at the specified rate before ordinary
equipment. Tom the farmer could therefore lease land and a shareholders
tractor as opposed to finding millions of dollars to purchase To receive a share of the company’s assets before
both. Under a lease agreement, the asset will remain the ordinary shareholders in the case of liquidation.
property of the lessor, who grants the lessee the right to
use the asset for a specified period of time in return for a
Venture capital
specified payment. This can be beneficial for the business This was discussed earlier in this chapter. The period of time
since a large amount of capital (funds) is not tied up for a for payment would be used to categorise it as long term or
prolonged period. medium term. However, such financing is usually seen as
being long term.
Long-term financing
The long term is a period of time over five years. Long-term
Debentures (loan stock)
financing is usually used for capital projects or to purchase Debentures are fixed-interest loans that are issued to
fixed assets such as land and buildings. The business can companies and are secured against its assets. The lender of
choose from various sources of long-term financing. These the funds is issued with a debenture certificate which will
include: specify the rate of interest to be paid by the company. The
Sale of shares company must honour such interest payments whether it
Venture capital makes a profit or loss. Debentures are either redeemable or
Debentures irredeemable. Redeemable debentures will be repaid by the
Mortgage and company at or by the date specified on the certificate. This
Assistance from government. can go up to ten or more years. Conversely, irredeemable
debentures are only repaid when the company is being
The sale of shares wound up or liquidated.
The sale of shares is the major source of capital for limited
companies. A share can be defined simply as a unit of
Bonds
ownership in a company. Holders of shares are seen as part Bonds are often called ‘fixed income securities’. A bond is
owners and have the right to participate in the decision- a loan from individuals or firms at a fixed income rate and
making process. The company will issue shares in exchange for a defined period of time. Bonds are usually divided into
for money. The shares issued can be categorised as either government or corporate bonds. The entity that is indebted
ordinary or preference shares. issues the bond and the person or entity lending the money
takes it up. Put another way, the issuer of the bond owes
Ordinary shares the holder of the bond until it matures. The indebted
The owners of ordinary shares have greater risk than firm is usually the one to state the interest rate that will
preference shareholders as they will be the last to receive be paid and when the bond will be repaid. The amount of
repayment if the company fails. The ordinary shareholders money lent is known as the ‘bond principal’, the interest
have the following rights in the company: paid as the ‘coupon’ and the date of repayment is known
To vote at meetings – for example, Annual General as the ‘maturity date’. The period of time that a bond takes
Meetings (AGMs) to mature may vary but could run from 90 days to even
To receive dividends when declared 30 years.
To claim undivided assets if the company goes into
liquidation Mortgage
To subscribe for additional shares before they are offered This is a loan that is given to a person or a business and
to the public. is secured over or guaranteed by the mortgagor’s property.
The rate of interest charged can be either fixed or variable.
Preference shares The interest, along with a portion of the principal, is paid in
Holders of these shares have a lower risk than ordinary instalments over the life of the mortgage.
shareholders. Preference shares carry a fixed rate of dividend
Assistance from government undertaken before they will lend funds. A firm that is
While this is not prevalent in the private sector, some financially unstable is less likely to secure certain financing
businesses have benefited from government assistance. This and even if the loan is given the rate of interest may be very
can be in the form of grants, subsidies or loan guarantees. high.
This type of assistance is usually given to sectors that are
critical within the country but are undergoing financial Gearing of the firm
difficulties. In Jamaica, for example, fertiliser manufacturer A company’s gearing refers to the relationship of its equity
Newport Fersan benefited from a subsidy of J$70m at a time capital (ordinary shares) to loan capital (long-term loans and
when fertiliser prices were sky rocketing as a result of the preference shares). A company is said to be highly geared if
import of raw materials. Farmers were faced with this high its loan capital is significantly higher than its share capital.
cost and many could not afford to purchase this important It is low geared if its loan capital is smaller than its share
resource in the agricultural sector. The government may capital. The gearing ratio will also be used to determine the
also stand as guarantor for loans that are given to certain source of financing undertaken by the company. A highly
industries. If the firm is unable to pay back the loan, then geared company may refuse to sink itself further into debt
the government will have to stand the cost. by borrowing, therefore it may seek other sources of finance
such as issuing additional shares.
How to choose from these sources of

Money and capital markets and
funds?
In choosing among the sources of finance, a business needs
international financial institutions
While potential entrepreneurs and businesses can raise their
to consider the following factors. Careful consideration of
own finance, there are a number of agencies and institutions
each factor will assist the business in making a decision:
throughout the Caribbean that can provide meaningful
Cost to the firm information about business operations. These institutions
provide a myriad of services, including technical support,
The costs incurred by a firm sourcing finance will include
managerial advice, conducting feasibility studies, doing
administrative costs and interest payments on loans and
economic appraisals of countries and providing financing in
bank overdrafts. The business may want to use sources of
some cases. This section identifies some of these institutions
finance that charge lower fees and interest. For example,
and gives a synopsis of their roles and functions.
a firm may choose to issue shares rather than undertake
debentures.
Caribbean Development Bank (CDB)
The use of the funds The CDB was established in 1969, with its main purpose
being ‘to contribute to the harmonious economic growth and
As mentioned earlier, it is not a wise decision to use short-
development of member states and to promote economic
term funding for long-term projects. Long-term funding is
cooperation and integration’. As a regional body, members
usually more suited to projects that will take large amounts
would be exposed to a number of benefits that may have
of capital outlay or expenditure. For example, a cash register
been problematic in sourcing from international bodies. The
would be purchased on hire purchase rather than by taking
CDB has the following functions:
out a mortgage.
To assist the borrowing member countries in optimising
Size of the firm the use of their resources, developing their economies
and expanding production and trade
A larger firm is more likely to secure certain sources of finance
To promote private and public investment, encourage
than a smaller firm. A number of financial institutions would
the development of the financial upturn in the region
rather give a loan to a company than to a sole trader. On the
and facilitate business activity and expansion
other hand, larger firms are more likely to secure collateral
To mobilise financial resources from both within and
for loans than smaller firms.
outside the region for development
Financial stability To provide technical assistance to its regional borrowing
members
Banks and other financial institutions normally ascertain
To support regional and local financial institutions and a
the financial viability of the business and the project being
regional market for credit and savings
CASE STUDY
A capital dilemma
Raspberry Juice Ltd is a small private limited company in Fruitland which specialises in making raspberry juice and wine. The
company has been doing fairly well over the years and is now thinking of expansion. Due to an influx of fruits in Fruitland, the
company has decided to change its product line to include other juices and wines apart from raspberry. However, this will require
heavy investment in new equipment and machinery. The challenge is that while the idea sounds feasible and would encourage
the desired success, the firm does not currently have the kind of money required to carry this out. If it should continue with this
plan it could very well lead to a capital dilemma.
In a meeting with the directors of the company, Mr Trendsetter, the Managing Director, stated that the Finance Department
is exploring two broad options of debt versus equity capital. However, checks are still being done to find the best option. One of
the directors suggested that they should explore the option of internal or external sources.
The firm is anticipating that the expansion will result in the following initial costs:
Machinery and equipment Supply of fruits An addition to the building.
Questions
1. Distinguish between debt and equity capital. (4 marks)
2. Discuss two (2) benefits and two (2) costs of using debt capital over equity capital to fund the expansion plans
of Raspberry Juice Ltd. (12 marks)
3. Outline the best source of finance that Raspberry Juice Ltd should use for each of the initial costs listed in the case.
Give reasons for your answer. (9 marks)
Total 25 marks
To support and stimulate the development of capital In January 2009, the Prime Minister of Jamaica signed an
markets in the region. agreement with the IDB for a loan of US$329m to assist with
Since its establishment the bank has contributed financ- the country’s Competitiveness Enhancement Programme
ing to projects in agriculture, livestock, fisheries, forestry, and Reform of Public Sector Management Programme. The
tourism, export services and education, among others. Trinidad and Tobago Government also signed an agreement
in May 2009 with the IDB for a loan of US$48.75m to support
Inter-American Development Bank (IDB) an education programme to improve early childhood care
and education centres.
The IDB was established in 1959, with a mission ‘to
contribute to the acceleration of the process of individual World Bank
and collective social and economic development of member
The World Bank was established in 1944 and since then has
countries’. In carrying out its mandate the IDB provides provided financial and technical assistance to a number of
financial and technical support for its Caribbean members. developing countries around the world, including those in
This assistance can be further highlighted as follows: the Caribbean. The bank is made up of two major institutions
It provides loans, grants and guarantees to assist which, though they are different, work in collaboration in
countries in the areas of education, health and carrying out its mission. These institutions are:
environmental preservation The International Bank for Reconstruction and
It fosters social equity and policies that are geared Development (IBRD), which focuses on middle-income
towards poverty alleviation and creditworthy poor countries
It lends support to regional integration and the The International Development Association (IDA),
enhancement of free trade in the region which focuses on the poorest countries in the world.
Technical assistance is given in the planning and Both institutions work toward the achievement of the
implementing of development projects and reform following functions of the bank:
policies. It facilitates capital investment for the restoration of
economies affected by war and the development of
productive facilities and resources in less developed The capital market or stock market
countries This market involves the buying and selling of company
It provides loans for developing countries to be used in stocks and shares and government bonds. The stock market
the areas of health, education and water supply provides the link between companies that are in need of
To promote international trade and equilibrium in financing and people who have money to invest. The stock
countries’ balance of payments. market is divided into a primary market, where capital is
raised through the issue of new securities (stocks, shares and
International Monetary Fund (IMF) bonds), and the secondary market, where existing securities
The International Monetary Fund was established in 1944, are traded. The trading in the stock market is done through
with the main purpose of establishing a framework to a marketplace known as the stock exchange. The stock
prevent a recurrence of the economic policies that led to the exchange has the following basic functions:
Great Depression in the 1930s. This framework would guide To provide a channel through which people can save
the IMF to achieve its purposes of: and invest
Promoting international monetary cooperation To foster the expansion and growth of the financial
Facilitating steady growth of international trade service sector
Offering its resources to correct balance of payments To offer some level of protection to its savers from
disequilibrium inflation
Promoting stability in the exchange rates of member To help to minimise borrowing by providing companies
states. with equity financing.
The work of the IMF can be categorised in three main Now we will look briefly at the existing stock markets in
areas: the region:
Surveillance – in this area, the IMF monitors economic
and financial developments and provides policy advice Jamaica Stock Exchange (JSE)
in an effort to prevent economic and financial crisis The Jamaica Stock Exchange was incorporated in 1968 and
Lending – funding is made available to countries that started trading in 1969, with its main role of ‘promoting
are experiencing balance of payments disequilibrium. the development of a vibrant capital market and ensuring
Loans are also given to low-income countries in order to orderly trading in listed securities’. JSE is regulated by a
reduce poverty council which monitors its activities by setting guidelines,
Technical assistance – technical advice is given to its rules and standards for its operation. The council also
members on how to manage their economic policy reserves the right to suspend from trading any companies
issues and financial affairs. who violate the rules.
Shares are traded through agents called stockbrokers. A
sale is made when the broker of the buyer and the broker
The money and capital markets of the seller agree on a price for the share. The price of a
share is determined by its demand and supply and the level
The money market of confidence that investors have in its value. If more people
This is a market where financial institutions such as banks are offering to buy than sell a share, its value will increase;
lend and borrow money from each other on a short-term the opposite is also true. Confidence in a company’s shares
basis. It is a source of funds for government and institutions may be influenced by the company’s growth prospects and
that have short-term cash problems. Institutions in the capabilities.
money market will lend money by using a variety of It is important to note that government bonds are not
different securities including Treasury bills and certificates traded through the JSE but are sold by the Bank of Jamaica.
of deposit. These securities are very liquid and mature in
the short term. While larger money markets are found in The Trinidad and Tobago Stock Exchange (TTSE)
places such as London and some states in the USA, financial This was the second stock exchange to be established in
institutions in the Caribbean have given investors access the Caribbean. It was formally established in 1981, with
to such markets. One such institution in the region is the 37 listed securities. The TTSE has been opening windows
Jamaica Money Market Brokers (JMMB). In 1999, the of opportunities for investors and companies as well the
JMMB entered a joint venture to establish the Caribbean benefits that are transcended to the economy. Investors have
Money Market Brokers (CMMB) in Trinidad and Barbados. benefited from the dividends they received from companies.
It fosters entrepreneurial activities which can lead to further Introduction – where none of the company's securities
growth in the economy. is being offered to the public.
Two other stock markets that are important to us in
The Barbados Stock Exchange (BSE) the Caribbean are the New York Stock Exchange and the
This was first established in 1987 but was re-incorporated London Stock Exchange.
in 2001 in conjunction with the enactment of the Securities
Act of Barbados in 2001. Like the other two abovementioned The New York Stock Exchange (NYSE)
stock exchanges, BSE has been offering a number of benefits This stock exchange was established in the late 1700s and
to investors and the Barbados economy. Its listed companies was seen as the largest stock market in the world. It is said
cover the areas of manufacturing, distribution, utility and to be the trading hub of the world and has a large number
service. of listed companies which trade on a daily basis. The NYSE
After much deliberation and with the desire to unite the received another boost in 2007 when it merged with
Caribbean, in 1989 leaders in CARICOM proposed to have Euronext of Paris to form NYSE Euronext. The new entity
a Regional Stock Exchange which would bring together the now operates the largest and most liquid stock market in the
three stock exchanges of Jamaica; Trinidad and Tobago; and world. Its offerings are also seen as the most diverse array of
Barbados. This decision started bearing fruit in 1991 when financial products and services.
all three stock exchanges agreed to partake in cross-border
trading. This allowed securities to be listed and traded on The London Stock Exchange (LSE)
each of the three stock exchanges. This stock exchange is possibly the oldest in the world,
Companies may be listed on any of the stock exchanges dating back to over 300 years ago. The LSE consists of four
using one of the following methods: primary markets:
Prospectus issue – the offering of a security to the public Main Market – this is the principal market of the LSE for
at a fixed price listed companies
Offer for sale – the offering of a security to the public, by Alternative Investment Market – this market offers
or on behalf of a third party, at a fixed price equity to smaller growing companies
Offer by tender – the offering of a security to the public Professional Securities Market – for listed debt and
by tender by or on behalf of a company or a third party depository receipt securities
Placing – an offer made to a stockbroker to sell the Specialist Fund Market – which is dedicated to
securities of a company to the public specialised investment entities.
CHAPTER SUMMARY
Firms need capital for start-up, Equity represents money invested Caribbean countries have received
working capital and investment by the owners into the business, both financial and technical
capital while debt capital represents money assistance from a number of
borrowed that must be repaid with institutions, namely the World Bank,
Working capital can be increased interest the CDB, the IDB, the IMF and
by selling unproductive assets, debt other sources
factoring, additional cash by the When sourcing finance it is
owner, increasing net profit, debt important to examine the criteria of The three major stock exchanges
switching and increasing stock short-term financing, medium-term in the Caribbean are situated in
turnover financing and long-term financing. Jamaica, Trinidad and Barbados.
Firms may source capital from The above-mentioned criteria will

internal or external sources. This can determine whether or not the firm
be expanded to include debt capital utilises short-, medium- or long-term
and equity capital sources of finance
MULTIPLE CHOICE QUESTIONS b. Cost of acquiring the funds

c. Gearing of the firm
1. The need for capital can be categorised under three main
headings. Which of the following is NOT one of those d. The lending institution
headings?
8. Which of the following institutions is subdivided into the
a. Working capital IBRD and the IDA?
b. Loan capital a. World Bank
c. Start-up capital b. Caribbean Development Bank
d. Investment capital c. International Monetary Fund
2. Working capital is BEST defined as: d. Inter-American Development Bank
a. Money needed to start a business 9. Which of the terms below best suits the following definition:
b. Money used for investment ‘A business or person who acts as an intermediary to bring
c. Money used for daily expenses together buyers and sellers of financial securities’?
d. Money received from wealthy individuals a. Shareholder
b. Stock exchange
3. A firm has been diagnosed with working capital problems.
c. Stockbroker
Which of the following is the BEST option for it to take?
d. Capital market
a. Increase stock turnover
b. Extend the payment date for debtors 10. The price of a share is usually determined by:
c. Pay creditors promptly a. Demand and supply
d. Group the repayment schedules for loans b. The stockbroker
c. The stock exchange
4. Which of the following is an example of equity capital?
d. The business
a. Debentures
b. Bonds
c. Loans Extended Essay Questions
d. Shares Question one Total 25 marks
a. What is the difference between working capital
5. Sources of internal capital include ALL of the following
and venture capital? (4 marks)
EXCEPT which one?
b. With the use of two (2) examples of each,
a. Disposal of fixed assets
distinguish between equity capital and debt
b. Preference shares capital. (9 marks)
c. Working capital c. Discuss three (3) benefits to the firm of using
d. Retained profit equity capital over debt capital as its source
of finance. (12 marks)
6. Which of the following items is MOST LIKELY to be bought Question two Total 25 marks
using hire purchase?
a. Define the term ‘working capital’. (2 marks)
a. Land
b. Identify three (3) components of working
b. Equipment capital. (3 marks)
c. Factory c. A firm having working capital problems is facing
d. Stock the risk of bankruptcy. Discuss five (5) methods
that the firm can use to improve its working
7. When choosing among the sources of funds, the firm usually capital. (20 marks)
examines ALL of the following factors EXCEPT which one?
a. Size of the firm
148
14 Accounting Information and

Financial Statements
A business will keep records of sales, purchases,
LEARNING OBJECTIVES: payments, receipts and other day-to-day transactions.
At the end of this chapter students should be able to: The records that are kept by businesses are important to a
Identify the main users and uses of accounting number of stakeholders and other interested parties. These
information stakeholders can be divided into internal users and external
State the types of information that are needed by these users.
users
Outline the current accounting standards
Explain the different accounting concepts Internal users of accounting information
Outline basic accounting procedures as a base for Internal users are those people who are directly affiliated
financial statements with the company and have access to certain information
Draft simple financial statements including income that would not be available to external users. These internal
statements, balance sheets and cash flow statements
users include the following people:
State the importance of these financial statements to
the business organisation
Managers
Assess the relationship between statement of financial
position and statement of comprehensive income The manager’s role in the business is important and decisions
made are critical to its success. Managers need information
for the planning of future activities, controlling of the
operations of the business, for decision making and for
Why do we need accounting records? budgetary reasons. With the information given, a manager
A
ccounting is defined as the systematic recording, can assess the performance of a business in relation to its
summarising, analysing and reporting of business stated goals, objectives and targets.
and financial transactions. It is imperative that
individuals and businesses keep proper accounting records. Employees
For the most part, we all keep some form of accounting The accounting information of a company is very important
record. In our daily activities we have a mental picture or to employees. They need information on the company’s
make jottings of our spending and income. The need for ability to continue providing employment and make
accounting records is even greater for businesses which remunerations. In tough economic times employees will
have to ensure that its activities are above ground and meet need to ascertain information on whether or not there will
the stipulated standards while preventing issues such as be a restricting or downsizing of the company. Information
bankruptcy. A business cannot run efficiently if it does not about job security is also of concern to these employees who
keep proper accounting records. Businesses usually keep may need to start searching for alternative employment.
accounting records to:
Measure the performance and evaluate the progress of Internal auditors
the business These are employees of the company who are charged
Show details of each transaction between buyers and with the responsibility of carrying out internal financial
sellers monitoring of the business’s performance. They generate
Provide necessary information for management and an internal audit report which is passed on to management
owners along with any advice and recommendations that would
Provide information for taxation purposes. influence decision making at the senior management level.
CHAPTER 14 | ACCOUNTING INFORMATION AND FINANCIAL STATEMENTS 149
External users of accounting information Customers and consumer groups

External people are those who are indirectly affiliated to the Consumers need information about a company in order to
company. The information given to external users will not assess its sustainability and to decide whether or not to enter
be as detailed as that for internal users, as it may contain into long-term relations with it. They will need to know
certain sensitive material that cannot be published. These if the business is able to continue supplying their needs.
users include the following: Agencies that seek to protect consumer rights, for example
the Consumers’ Affairs Commission in Jamaica and other
Shareholders/investors such agencies across the region, may need information to
By law, a public limited company has to publish its ascertain whether consumers are being exploited or treated
accounts for its shareholders. These are often published in fairly.
its annual report or in newspapers. As stated in Chapter
13, shareholders are investors in the company and they Competitors
will need information on the performance of the business, A proactive competitor will keep abreast of the operations of
whether or not dividends will be paid and in what amounts, its competing firms. The information gathered can be used
if additional shares are being offered, the present value of to make comparisons and as a benchmark for the evaluation
their investment, the potential for growth or failure and the of its own performances. While the competitor may not be
financial viability of the business. privileged to see certain information about a firm, it would
seek to have information about matters such as price and
Lenders forms of promotion. It is a tendency of firms in a very
Banks or other financial institutions giving a loan will want competitive industry to be involved in stiff price wars as
to know whether the firm is able to meet its obligation each seeks to capture the bulk of the market share.
of repayment along with interest. If the potential risk of
non-payment is too high then these institutions may refuse Community
to give the loan or may provide the loan at a higher than Accounting information is also important to the community
normal interest rate. in which a firm operates. The community needs this in
order to assess the company’s ability to continue providing
Government and its agencies employment for its members and funding environmental
Accounting information is important to the tax authorities improvements. Based on the type of business, for example a
(Inland Revenue) who will calculate the amount of tax owed mining company, community members will be keen to see
and is used by them to measure compliance. Information information about the potential environmental impact of
is also needed on the business’s ability to create additional the business operations.
jobs, whether or not financial support should be given and
whether the business is complying with any stipulated Trade unions
regulation or legislation. The Office of Utilities Regulations These organisations will want to gather information about
is a regulating body in Jamaica that would need a business’s a firm. Since trade unions bargain for the rights of their
accounting information. members, they would want to ensure that members are
not being exploited or unfairly treated by firms. Obtaining
Company creditors information on the financial viability of firms can help trade
These are the individuals or businesses who supply goods unions to make informed decisions about wage demands.
to the firm on credit. Before credit is given, information Trade unions may also seek accounting information on a firm
is needed on the financial stability of the company and its when there are looming job cuts. This is to ensure that the firm
ability to pay within the given time frame. The creditors can isn’t simply laying off workers without just financial cause.
also use information gathered to determine the length of
credit period that should be given to the firm. If possible, the
creditors would want to know the creditworthiness of the Getting started with accounting
firm before entering into a long-term business relationship. This section is particularly geared towards those students
However, this information may be difficult to ascertain, who have never been exposed to accounting before studying
especially when there are no legal requirements to do so. Management of Business. While it’s not a comprehensive
package, it should provide the necessary information to
expose students to the basic principles on which accounting

ACTIVITY
is built.
Using a table similar to Table 14.1, record the following
The accounting equation transactions:
2009
The worth of a business can generally be calculated by
April 1: Started business with $1 million in the bank
subtracting what it owes the business from what it owns.
3: Bought van for $250 000, paying by cheque
This idea is used by many people who do not keep proper
4: Bought office furniture on credit for
financial records, but have a general idea of their profits.
$100 000 from Furniture Ltd
As simple as it may seem, the entire accounting sphere
10: Bought computers valued at $50 000, paying
adopts this simple idea. The idea is formally known as the
by cheque
‘accounting equation’, which states that:
15: T Thomas lent the business $100 000; this
Capital = Assets – Liabilities
was placed in the bank
Where there are no liabilities, the equation will now
16: Returned some of the office furniture which
read:
was the wrong colour (valued at $20 000)
Assets = Capital
18: Paid the amount owing to Furniture Ltd
We can also transpose the equation in order to calculate
25: Withdrew $10 000 from the bank and placed
the assets of the business:
it into the cash till
Assets = Capital + Liabilities
30: Repaid half of the loan from T Thomas
The double entry system
In accounting, every transaction affects two items in the Posting entries to journals
company books. As a result, each transaction has to be The journals are also known as the books of prime entry
entered twice: once on the debit side of one account and once or the day books. There are six books of prime entry, each
on the credit side of another account. The left-hand side of having a different purpose:
each account is called the debit side and the right-hand side Cash Book – used to record receipts and payments, cash
is called the credit side. The double entry system holds that and bank transactions
for every debit there is an equal and corresponding credit. Sales Day Book or Journal – used to record sales made
Figure 14.1 will help you to understand how a transaction on credit
will affect the different categories of accounts. Purchases Day Book or Journal – used to record
From the above illustration we can summarise that: purchases made on credit
to increase capital and liability accounts, a credit entry Returns Inward Day Book – used to record stock
is made; while a debit entry is made when we want to previously sold by the company but later returned by
decrease the accounts customers
to increase an asset account, a debit entry is made; Returns Outward Day Book – used to record stock
while a credit entry is made to decrease the account. previously purchased by the company but later returned
Now let us examine the transactions in Table 14.1 and to the supplier
the effects they have on the company accounts. General Journal – used to record other transactions that
are not recorded in the above journals.
Now we will look more closely at two of these day books:
Capital Liability Asset/expense Sales Day Book

accounts accounts accounts
As mentioned above, the Sales Day Book is used to record
credit sales. ‘Sales’ refers to the selling of a business’s
normally traded goods that were purchased with the
intention of reselling. Therefore the sale of a fixed asset is
not recorded as sales but the sale of stock is. The people to
whom we sell goods on credit are known as ‘debtors’. There
Decreases Increases Decreases Increases Increases Decreases
are three steps to remember when posting transactions in
Figure 14.1: The double entry system
the Sales Journal:
1. Post each entry in the Sales Journal
Date Transaction Action to take Effect on the accounts

June 1 Mr Jones opened a hardware store with Debit Bank A/c Increases the asset Bank
$1 500 000 Credit Capital A/c Increases Capital
6 Bought two cash registers on credit Debit Cash register Increases the asset Cash register
from Office Supplies Co ($20 000) Credit Office Supplies Co Increases its liability to Office Supplies
Debit Cash register Co
16 Bought motor vehicle, paying by cheque Debit Motor vehicle Increases the asset Motor vehicle
($500 000) Credit Bank Decreases the asset Bank
17 Withdrew $20 000 from the bank and Debit Cash A/c Increases the asset Cash
placed it in the cash till Credit Bank A/c Decreases the asset Bank
20 Paid by cheque the amount owing to Debit Office Supplies Co Decreases its liability to Office Supplies
Office Supplies Co Credit Bank A/c Co
Decreases the asset Bank
21 Receive loan of $200 000 from J Pang Debit Bank A/c Increases the asset Bank
Credit J Pang Increases its liability to J Pang
24 Paid electricity bill amounting to Debit Electricity Increases the expense Electricity
$5 000 Credit Bank A/c Decreases the asset Bank
31 Paid by cheque ($100 000) to J Pang Debit J Pang Decreases its liability to J Pang
as part-payment for loan Credit Bank A/c Decreases the asset Bank
Table 14.1: Transactions illustrating the double entry system
2. Post each sale separately to the individual customer K Francis p. 24

account in the Sales Ledger
2009 Folio $
3 Transfer the total of all the credit sales to the Sales a/c June 14 Sales SJ 44 14 600
in the General Ledger.
Now let us examine the example below:
J Harris p. 31
Credit sales transactions for June 2009
2009 Folio $
June 6 E Carthy $6 200 June 27 Sales SJ 44 22 000
14 S Edwards $14 600
27 K Francis $22 000
30 J Harris $11 900 General Ledger
2009 Folio $
Sales Day Book p. 44 June 30 Sales SJ 44 11 900
Sales Ledger
Date Details Invoice no Folio Amount ($) Sales A/c p. 11

June E Carthy 5432 SL 10 6 200
6 S Edwards 5433 SL 13 14 600 2009 Folio $
14 K Francis 5434 SL 24 22 000 June 30 Credit sales SJ 44 54 700
for the month
27 J Harris 5435 SL 31 11 900
30 Total GL 11 54 700
transferred Purchases Day Book
to Sales The Purchases Journal is used to record goods bought on
account
credit. ‘Purchases’ refers to those goods that are bought
with the intention of reselling. Therefore, the purchase
E Carthy p. 10 of computers to be used in the Accounts Department will
S Edwards p. 13 not be recorded as purchases. The people or businesses
from which goods are purchased on credit are known as
2009 Folio $ ‘creditors’. There are three steps to remember when posting
June 6 Sales SJ 44 6 200
transactions in the Purchases Journal:
1. Post each entry in the Purchases Journal General Ledger

2. Post each sale separately to the individual customer Purchases A/c p. 12
account in the Purchases Ledger
3. Transfer the total of all the credit sales to the Purchases 2009 Folio $
May 31 Credit purchases PJ 19 78 320
a/c in the General Ledger. for the month
Now let us examine the example below:
The following credit purchases were made in the month: Trial balance
May 2 D Reece $12 000 At the end of the accounting period, the balances in the
6 O Smith $14 670 ledger accounts are summarised into a statement known
15 K Perkins $25 000 as the trial balance. This is a statement showing the list
18 S Wilson $ 8 000 of balances of all the accounts. The main purpose of the
27 S Haynes $18 650 trial balance is to check the mathematical accuracy of the
accounts that have been prepared. Once all the account
Purchases Day Book p. 19 balances are listed in the trial balance, both the debit and
credit sides must be equal. If everything is accurate, the
Date Details Invoice no Folio Amount ($) company will then prepare an income statement and a
May 2 D Reece 2345 PL 10 12 000 balance sheet. It is important to note that the trial balance is
6 O Smith 2346 PL 13 14 670 not a final account but acts as proof that the ledger accounts
15 K Perkins 2347 PL 24 25 000 were done accurately.
18 S Wilson 2348 PL 31 8 000
27 S Haynes 2349 PL 40 18 650
31 Total GL 12 78 320 Components of financial statements
transferred According to the International Accounting Standard
to Purchases (IAS), firms need to follow a prescribed standard when
account
presenting their financial statements. The objective of this is
to provide users with vital information about the financial
Purchases Ledger
position and performance of the firm in addition to its cash
D Reece p. 10
flows. In general, the business will be required to prepare
2009 Folio $ three different financial statements, including an income
May 2 Purchases PJ 19 12 000 statement, a balance sheet and cash flow statements.
O Smith p. 13
Income statements
An income statement is sometimes referred to by the IAS
2009 Folio $ as a ‘statement of comprehensive income’. However, there
May 6 Purchases PJ 19 14 670 are slight differences between the two, especially in terms
of how profit and loss is calculated. The income statement
K Perkins p. 24 is a financial statement that assesses the firm’s financial
performance over an accounting period (usually a year).
2009 Folio $ It shows how revenues are earned and expenses incurred
May 15 Purchases PJ 19 25 000 by the business. The income statement is divided into the
following sections:
S Wilson p. 31
Trading account
2009 Folio $
May 18 Purchases PJ 19 8 000 This shows the calculation of gross profit from trading. Gross
profit is calculated as:
Sales – Cost of Sales
S Haynes p. 40
The gross profit gives an indication of the level of
2009 Folio $ efficiency with which materials and labour were used to
May 27 Purchases PJ 19 18 650 produce the goods and services. Cost of sales is calculated as:
Opening inventory + Purchases – Closing inventory Balance sheet

Now let us take a closer look at the breakdown of the cost The balance sheet is another important statement for
of sales: businesses. It is referred to as a ‘statement of financial
Sales represents the total amount of money earned from position’ by the IAS. As stated, it shows the financial position
the provision of goods and services to customers of the firm at a given point in time – that is, its assets (what
Opening inventory is the cost of the inventory at the it owns) and its liabilities (what it owes). The balance sheet
beginning of the accounting period. Please note that is organised under headings such as ‘Non-current assets’
‘inventory’ only refers to those items which are to be (Fixed assets), ‘Current assets’, ‘Current liabilities’ and
sold and form part of the firm’s regularly traded goods. ‘Share capital’. A common format is shown below:
These could include finished goods, work in progress [Company name]
and raw materials Balance sheet as at [date]
Purchases – this represents goods that are bought with
the intention of reselling Cost Depreciation NBV
Closing inventory is the cost of the inventory at the end Non-current (Fixed) assets $ $ $
of the accounting period. Premises 30 000 8000 22 000
Fixtures and fittings 12 000 1 600 10 400
Equipment 15 000 3 000 12 000
Profit and loss account Motor van, etc. 18 000 3 600 14 400
This shows the calculation of net profit, by adding any additional 75 000 16 200 58 800
Current assets
income to gross profit then subtracting all the expenses: Inventory 9 000
Revenues (receivables) – this represents income earned Accounts receivable 15 000
by the firm outside of its regular trading activities. They Less: Provision for bad debts (1 200) 13 800
Cash at bank 5 500
may include rent received, commission received and Cash in hand 3 200
discount received Prepayment 900
32 400
Expenses are also known as overheads and represent Less: Current liabilities
costs that are incurred for the purpose of earning Accounts payable 13 000
income. Some common examples of expenses include, Short-term loans 4 400
Accruals 800
but are not limited to, wages, salaries, utilities payments,
stationery, rent, rates and interest payments. Working capital (18 200) 14 200
A simple format for the trading and profit and loss 73 000
Less: Non-current liabilities
account is shown below: Long-term loans (7 000)
[Business name] Capital employed 66 000
Trading, profit and loss account for the year ended [date] Financed by: 41 100
Opening capital 20 400
Details $ $ Add: Net profit (loss) for 61 500
Sales 100 000 the year
Less: Returns inward (Sales returns) 2 000
Less: Cost of sales 98 000 Less: Drawings (4 500)
Opening inventory 5 000 Closing capital 66 000
Add: Purchases
50 000
Less: Returns outward (Purchases
returns) (1 500)
Add: Carriage inwards 1 000 49 500
54 000 Now let us take a closer look at each of the main components
Less closing stock (4 000)
(50 500) of the balance sheet:
Gross profit 47 500 Non-current assets (Fixed assets) – these include
Add: Receivables (commission received, 1 000
etc.) 48 500 assets that are durable (for example, physical properties)
and are used in the operations of the business. Their
Less: Expenses: useful life is usually longer than a year. These assets
Wages 12 000
Rent 7 500 appear on the balance sheet in order of permanency –
Lighting and heating 5 400 that is, the most permanent first, then least permanent
Carriage outward 1 200
General expenses, etc. 2 000 (28 100) Current assets – represent assets that can easily be
Net profit 20 400 converted into cash, sold or consumed within a one-year
period. These assets appear in the balance sheet in the Required: An income statement and the balance sheet as at
order of liquidity, starting with least liquid and moving 31 July 2013
to most liquid Solution:
Current liabilities – these are monies owed by the P Johnson
business that are expected to be repaid within the next Income statement for the year ended 31 July 2013
12 months
Working capital or Net current assets – this is the $ $
difference between Current assets and Current Sales 1 150 000
liabilities. It is the money that is used for the day-to-day Less: Returns inward 50 000
1 100 000
expenses of the business. Low working capital can result Less: Cost of sales
in serious liquidity problems for the firm Opening inventory 160 000
Add: Purchases 660 000
Non-current liabilities – these are monies owed by the Less: Returns outward 70 000
firm which are not expected to be paid within a one- 590 000
year period Add: Carriage inward 10 000 600 000
760 000
Capital employed or Net assets – this is the total of Less: Closing inventory 200 000
Fixed and Current assets minus Current and Long- (560 000)
Gross Profit 540 000
term liabilities. Total assets are usually financed by the Add: Revenues:
owner(s) of the business in terms of the capital they put Rent received 20 000
in the business. This figure should be equal to the final Discount received 2 000 22 000
562 000
figure in the ‘Financed by’ section Less: Expenses:
Financed by – this segment shows how the business Heating 16 000
Interest payment 10 000
acquired finance for the business. Motor vehicle expenses 30 000
Now let us look at the following worked example: Carriage outward 6 000
P Johnson Rent and rates 80 000
Salaries and wages 115 000
Trial balance as at 31 July 2013 Discount allowed 1 000
258 000
Details $ $ Net profit 304 000
Capital 450 000
Bank 44 000
Drawings 130 000 P Johnson
Accounts receivable 105 000 Balance sheet as at 31 July 2013
Loan to be repaid in 12 years’ time 100 000
Accounts payable 95 000
Heating 16 000 $ $
Motor vehicle at cost 220 000 Non-current assets:
Interest paid on bank loan 10 000 Premises 250 000
Returns outward 70 000 Motor vehicle 220 000
Motor vehicle expenses 30 000 470 000
Carriage outward 6 000 Current assets:
Carriage inward 10 000 Inventory 200 000
Rent and rates 80 000 Accounts receivable 105 000
Purchases 660 000 Bank 44 000
Rent received 20 000 349 000
Salaries and wages 115 000 Less: Current liabilities
Returns inward 50 000 Accounts payable 95 000
Sales 1 150 000 Working capital 254 000
Premises 250 000 724 000
Inventory at 1 August 2012 160 000 Less: Non-current liabilities:
Discount allowed 1 000 Loan 100 000
Discount received _________ 2 000 624 000
1 887 000 1 887 000
Financed by:
Note that Inventory at 31 July 2013 is $200 000. Opening capital 450 000
Add: Net profit 304 000
754 000
Less: Drawings 130 000
624 000
Now try the following exercises: of financial position gives a snapshot of the business’s assets
and liabilities during a particular period of time. It shows all
the assets and liabilities along with the equity of the business.
EXERCISE 1 It gives readers a clear picture of the financial health of the
Benny Jobs business. While the statements are separate, they are closely
Trial balance as at 31 March 2013 related and both must be published as part of the firm’s final
accounts. One such relation is that the total comprehensive
$ $ income at the end of the period must be transferred from
Capital 63 000 the statement of comprehensive income to the statement
Drawings 9 000
Loan to be repaid in 8 years’ time 15 000 of financial position. To this end, if a profit is made in the
Bank 16 500 statement of comprehensive income, it will increase the net
Cash 4 200 assets of the firm in the statement of financial position.
Accounts receivable 12 000
Opening inventory 7 200 Cash flow statement
Purchases 74 200
Motor vehicle 23 000 According to IAS 7, all companies should publish a cash
Sales 140 500 flow statement showing how inflows were generated
Equipment 24 500
Returns inward 1 050 and outflows spent. A cash flow statement shows the
Returns outward 900 movement of cash into and out of the business. In order to
Motor vehicle expenses 5 800 understand this statement better it is important to define
Carriage outward 3 600
Carriage inward 4 000 ‘cash’ to include cash in hand and demand deposits (a bank
Rent 18 000 deposit where withdrawal can be made freely, without prior
Utilities 6 400
Wages and salaries 12 000 notice) and ‘cash equivalents’, which are short-term, highly
Office expenses 3 250 liquid investments that are easily and readily converted into
Loan interest 2 000
Insurance 6 500 known amounts of cash.
233 200 233 200
Purposes of cash flow statement
Closing inventory was $8 400. The main reasons for preparing a cash flow statement are:
You are required to prepare the trading and profit and Sourcing finance – most financial institutions will
loss account for the year ended 31 March 2013 and a require a breakdown of the firm’s cash flow statement,
balance sheet as at that date. showing how it will repay the money borrowed
Monitoring and control – the statement will enable
EXERCISE 2 the firm to monitor its income and expenditure on a
A firm sold $160 800 worth of goods which were monthly or annual basis, matching them to the actual
purchased for $125 000 before $5,000 worth of the figures
goods was returned to the supplier upon arrival Provides timing for large expenditures – the firm can
because of poor quality. The cost of carriage was budget to purchase capital equipment in times when
$3,500. It started the year with inventory valued at large amount of funds are available.
$9,650 and at the end of the period inventory valued
at $6,200. Some customers later returned $2,550 Advantages of the cash flow statement
worth of goods. Fosters proper judgement on the amount, timing and
Calculate the firm’s gross profit for the period. degree of certainty of future cash inflows or outflows
Provides information on the firm’s liquidity and
financial viability
Relationship between statement of comprehensive income and Is not easily manipulated and so is not affected by
statement of financial position judgements or accounting policies
The statement of comprehensive income records the changes Allows for comparison of the present and future values
to the business’s net assets over a given period of time. It of fund passing through the business
shows the gains or losses that the business experienced Shows the relationship between profitability of the firm
within that time frame. On the other hand, the statement and its ability to generate cash.
Disadvantages of the cash flow statement $ $

While cash flow is necessary for short-term operations, Cash flows from financing activities
the firm needs profit in order to be viable in the long Proceeds from issue of shares 5 000
term. As a result, it may need to sacrifice cash flow for Proceeds from long-term borrowings 2 500
Less: Payment to finance lease liabilities (450)
large investments Ordinary dividends paid (1 600)
Since they are based on past data, cash flow statements Payments to redeem debentures (800)
Net cash used in financing activities 4 650
may not provide accurate information about future cash Net increase/(decrease) in cash 15 400
flow. Cash and cash equivalents at the
beginning of the period (3 500)
Cash and cash equivalents at the end of
Cash inflows and outflows period 11 900
Table 14.2 gives an idea of the items that will lead to a cash
inflow or outflow.
At the end of the cash flow statement, firms complete an
analysis of changes in cash during the year. The format for
Cash inflows Cash outflows this is shown below:
Loans to the firm Purchase of fixed assets Balance at the start of the year (3 500)
Start-up capital Purchase of stock or raw material
Sales (decrease in stock) Loan repayments Net cash inflow/(outflow) 15 400
Interest receipts Payment of expenses Balance at the end of the year 11 900
Tax rebates Tax payments
Profits Losses
Increase in creditors Decrease in creditors
Sale of fixed assets Interest and dividends payments EXERCISE
The following was extracted from the books of Jane
Table 14.2: Cash inflows and outflows
Jamieson:
Format of cash flow statements Cash flow statement for the year ended 31 August
According to IAS 7, cash flow statements should have three 2012
standard headings:
Details $ $
Cash flows from operating activities
Cash flows from investing activities Cash flows from operating activities
Net profit before taxation 74 900
Cash flows from financing activities. Add: Depreciation charges (for the 14 230
A full format is seen below, showing the breakdown of year)
Loss on sale of non-current assets 340
each section: Decrease in inventories 4 050
Decrease in debtors 2 440
Cash flow statement for the year ended [date] Decrease in creditors (11 150)
Less: Preference dividends (17 500)
Interest payment (6 500)
Details $ $ Income taxes paid (13 000)
Net cash from operating activities 47 810
Cash flows from operating activities
Net profit before taxation 9 500 Cash flows from investing activities
Add: Depreciation charges (for the year) 1 000 Receipts from the sales of tangible
Loss/(profit) on sale of non-current (350) assets 2 240
assets (500) Less: Payment to acquire tangible
(Increase)/decrease in inventories 2 400 fixed assets (28 500)
(Increase)/decrease in debtors (950) Interest received 1 950
Increase/(decrease) in creditors (1 000) Dividends received 10 250
Less: Preference dividends (650) Net cash used in investing activities (14 060)
Interest payment (1 300)
Income taxes paid 8 150 Cash flows from financing activities
Net cash from operating activities Proceeds from issue of shares 25 000
Proceeds from long-term borrowings 61 200
Cash flows from investing activities 4 000 Less: Payment to finance lease (32 000)
Receipts from the sales of tangible assets (2 150) liabilities
Less: Payment to acquire tangible fixed Ordinary dividends paid (18 500)
assets 200 Payments to redeem debentures (25 600)
Interest received 350 Net cash used in financing activities 10 100
Dividends received 2 400 Net increase in cash 43 850
Net cash used in investing activities
1. Analyse the cash flow situation of Jane Jamieson in Increase or decrease in debtors – an increase in debtors
terms of the following headings: means that the firm has sold stock for which it has
Cash flows from operating activities not yet received payment, hence an outflow of cash;
Cash flows from investing activities whereas a decrease means that the firm has received
Cash flows from financing activities. payment from its debtors
2. If the cash and cash equivalent balance at the Increase or decrease in creditors – an increase in
beginning of the year was $9 500, what would be creditors means that the firm has received inventories
the amount at the end of the year? that it won’t have to pay for now, therefore an inflow of
cash; whereas a decrease means that the firm has paid
some of it debts, resulting in an outflow of cash
An explanation of operating activities Preference dividends and interest paid are normally
Net profit before taxation – since taxes are dealt with in accounted for in the operating activities, according to
the operating activities, the profit used in this section is IAS 7
taken before taxes are paid. This will prevent the firm Income taxes paid should be disclosed separately in the
from subtracting the figure twice operating activities instead of being carried over in the
Depreciation – since this does not actually represent net profit from the trading account.
cash flowing out of the business but is just an estimated
reduction in the value of the assets, it should be added Possible solutions for a cash shortfall
back to profit A shortfall of cash may pose a number of problems for
Loss/profit on disposal – a profit or loss on disposal of businesses, especially liquidity problems. Firms may not be
an asset is dependent on the amount by which the firm able to pay for their expenses and debts and this may lead to
had depreciated the asset. As a result, a loss on disposal insolvency or bankruptcy. As a result, firms have to find the
should be added back to net profit since the firm is not most appropriate ways to solve a shortfall of cash. Below are
really losing funds. While a profit on disposal of assets is some suggestions for doing this:
subtracted, there is no real gain Raising cash from a new issue of shares
Increase or decrease in inventories – an increase in the Switch its debt from short-term to longer-term debt
stock figure suggests that new stock was purchased Reducing capital expenditure
over the period and hence money was paid out to Tightening credit to its debtors while delaying payments
acquire this; whereas a decrease in stock suggests that to its creditors (if possible)
an amount was sold hence the firm would have had Disposing of non-productive assets.
revenue from the sale
CHAPTER SUMMARY
There are two main categories of The accounting equation states that: purpose and records specific
users of accounting information. Capital = Assets – Liabilities transactions
These are internal users (managers,
employees and internal auditors) and The double entry system holds that Final accounts include the drafting of
external users (shareholders, lenders, for every debit there is an equal and a statement of comprehensive income
governments, creditors, customers, corresponding credit (income statement), statement of
competitors and the community) financial position (balance sheet) and
Capital and liabilities accounts statement of cash flow
Several concepts are used in increase on the credit or right-hand
accounting, including going concern, side of accounts, while asset accounts IAS 7 stipulates that all companies
accrual concept, realisation, historical increase on the debit or left-hand side should publish a cash flow statement
cost, etc. These concepts act as a showing how cash inflows are
guide for accountants as they draft There are six books of original or generated and outflows are spent.
the final accounts of a business prime entry and each has a specified
MULTIPLE CHOICE QUESTIONS 7. According to IAS 7, a cash flow statement must have three
standard headings. Which of the following is NOT one of
1. Businesses keep accounting records for ALL of the following those headings?
reasons EXCEPT which one?
a. Financing activities
a. Show details of each transaction between buyers and
b. Analysing activities
sellers
c. Investing activities
b. Provide information necessary for management and owners
d. Operating activities
c. It is a requirement of the business sector to do so
d. Provide information for taxation purposes 8. Which of the following would NOT solve a cash shortage
problem?
2. Which of the following would be an internal user of
a. Reducing capital expenditure
accounting information?
b. Reducing debtor payment period
a. Shareholders
c. Issuing new shares to the public
b. Government
d. Transferring money from retained profit
c. Managers
d. Customers
3. All the following are external users of accounting information

EXCEPT which one?
a. Lenders
b. Community
c. Employees
d. Creditors
4. What are the two accounts that would be affected by a

transaction in which Mr James bought ten computers on
credit from Best Computers Ltd?
a. Computers and Mr James
b. Computers and Creditors
c. Computers and Best Computers Ltd
d. Mr James and Best Computers Ltd
5. Calculate the gross profit if Sales is $300 000, Opening stock

is $20 000, Closing stock is $25 000, Purchases is $200 000
and Returns outward is $5,000.
a. $110 000
b. $100 000
c. $60 000
d. $105 000
6. Which of the following is defined as ‘a statement showing the

list of balances of all the accounts’?
a. Trading account
b. Profit and loss account
c. Trial balance
d. Balance sheet
159
15 Financial Statements Analysis
Seeing a group of figures may not be as effective as using

LEARNING OBJECTIVES: percentages and ratios to make comparisons from year to
At the end of this chapter students should be able to: year. For example, if you are given the data in Table 15.1,
Discuss the use of accounting ratios what conclusion could be drawn? Is it simply true to say that
Outline the advantages of ratio analysis Firm B is more profitable than Firm A or can we say that
Discuss the limitations or disadvantages of ratio analysis Firm A is underutilising its resources? In fact, we cannot
draw any meaningful conclusion from the data given.
Identify the different categories of ratios
Calculate the different ratios used for financial analysis
Interpret each ratio to assess the business’s financial Firms Net profit
position Firm A $20m
Firm B $40m
Table 15.1: Net profit figures for analysis

Financial analysis
A
s was discussed in Chapter 14, there are a number
If we add the following data to the table: sales for Firm
of different users of accounting information. Each
A = $40m and sales for Firm B = $120m, which firm is now
of these users may have a different purpose for
more profitable? This information can now be ascertained
seeking information on a particular company or business.
by calculating the percentage of sales that goes toward profit.
For example, a manager may need information for control
The end result would see Firm A being more profitable than
purposes or to improve profitability; creditors may need
B, with 50 per cent and 33.3 per cent respectively.
information for lending and credit purposes; and share-
As a result, ratio analysis gives senior management
holders may need information in order to make investment
and other stakeholders a better picture of the business’s
decisions. Regardless of the reason(s) behind the need for
performance over a given period of time.
accounting information, one thing is common among all
The ratios that are calculated will foster comparison of:
three user groups, which is that information is needed for
The business’s performance with that in previous years
financial analysis.
Budgeted and actual performance or targets for the
financial year
Importance of financial analysis The business and other businesses of the same nature in
Enables the firm to know whether or not it can meet its the industry.
debts when they become due While accounting ratios are good, it should not be
The necessary steps can be taken to correct any misconstrued that analysis ends with the calculation and
problems identified during the analysis comparison of these ratios. The figures and the comparison
Enables the firm to compare its performance over a thereof may just highlight trends in the final accounts of
number of years the business. However, interpretation and analysis of these
Gives a clearer view of the accounting data since it is accounts lie in the reasons given for the trends and features
broken up into ratio analysis. identified by doing ratio analysis.
Advantages of ratio analysis

Ratio analysis Provides the framework and information to compare
Just inspecting financial statements may be of limited value, a business’s performance with other businesses in the
especially when there are certain key decisions to be made. same industry or of the same nature
Can produce vital information about the performance of Efficiency ratios – these measure how efficiently
the firm resources are utilised. They also determine the efficiency
A good tool to use to assess the financial position of the of the firm in collecting its debts
business Financial ratios or gearing ratios – these ratios assess
Can be used to identify possible weaknesses within a the financial structure of the business, including the
business which would not have been detected from proportion of its financing that is obtained from debt
simply drafting final accounts capital.
Helps management to formulate future plans and In order to illustrate the ratios in each category, the
policies regarding the firm balance sheet for KJ Home Appliances is shown below:
Can be used as a guide in making investment decisions
Gives meaning, clarity and perspective to the accounting KJ Home Appliances Ltd
data presented in the final accounts. Balance sheet as at 31 December 2008
Cost Dep NBV

Limitations or disadvantages of ratio analysis
Fixed assets $ $ $
Ratio analysis is predominantly quantitative and hardly Premises 500 000 25 000 475 000
focuses on quality, customer service and the morale of Fixtures and fittings 100 000 5 000 95 000
Equipment 75 000 15 000 60 000
employees Motor van 300 000 30 000 270 000
Ratio analysis focuses on historical data, with little 975 000
_______ 75 000 900 000
emphasis on the future, though it can be used to make
Current assets
projections Inventory 150 000
Any ratio that is calculated is only as accurate and Accounts receivable 65 000
Less: Provision for bad (5 000) 60 000
reliable as the information that was used in its debts
calculation – that is, if the financial report is not Cash at bank 50 000
credible, then the ratio cannot be either Cash in hand 5 000
Prepayment 5 000
Its usefulness is dependent on the skill of the user. It 270 000
requires experience to interpret properly and place in Less: Current liabilities
context Accruals 5 000
Ratios can only be used to compare similar companies Net current asset (80 000)
and present with previous data (working capital) 190 000
Capital employed 1 090 000
If the ratios are not adjusted for inflation, they might be
misleading. Financed by (Capital and
reserves)
Capital
Add: Net profit for the 900 000
Types of ratio year
Less: Drawings
240 000
There are a number of ratios that are available to accountants. (50 000)
These are grouped into five categories: 1 090 000
Profitability ratios or performance ratios – these
measure how well the business is doing in terms Gross profit for the year was $400 000 and Sales was
of profit, turnover or sales and capital employed. $1 200 000.
They reflect the performance of the company and
management Profitability ratios
Liquidity ratios – these show whether or not the Return on Capital Employed (ROCE)
company can effectively pay its debt. They also reflect This ratio shows the amount of money that has been made
the firm’s short-term strength or solvency on the capital that was employed over the period. This is
Investors’ ratios or shareholders’ ratios – these sometimes referred to as the ‘primary efficiency ratio’
measure the returns on the capital invested by because of its importance. It is calculated in one of two ways:
shareholders or other investors. They also show the Net profit or Net profit
relationship of ordinary shares and their price to the × 100 × 100
Capital employed Average capital*
profits, dividends and assets of the company *Average capital is the sum of the Opening capital and
Closing capital balance divided by 2.
CHAPTER 15 | FINANCIAL STATEMENTS ANALYSIS 161
Using the data from the balance sheet above, the value Increasing sales revenue – this could be done by either
for the ROCE would be: selling more or increasing prices
ROCE (using Capital employed): Buying material in bulk in order to benefit from
240 000 discounts
× 100 = 22.02%
1 090 000 Sourcing a cheaper supplier without sacrificing the
quality of the materials
ROCE (based on Average capital): Reducing the cost associated with the production of the
240 000 goods.
× 100 = 24.12%
(900 000 + 1 090 000/2)
From these ratios we can say that, based on capital Net profit percentage
employed, the company earned $22.02 for every $100 This is also known as ‘net profit margin’. It shows net profit
invested. expressed as a percentage of sales or turnover. It gives a good
While the ROCE may vary, depending on the industry, idea of how the firm controls its expenses or overheads –
the general rule is that the higher it is, the better it is. that is, whether or not its overheads are too high and are
Potential investors will use this ratio to assess whether
depleting the gross profit earned. It also shows the firm’s
their investment will be feasible. The aim of investors is to
level of efficiency. It is calculated as:
have sufficient or high returns and so they will refrain from
Net profit
investing if the firm is falling below expectations. The ROCE × 100
Turnover
should be above the rate at which the company borrows
Using the data from above, KJ Appliances Ltd’s net profit
money. This will ensure that shareholders can receive some
margin would be:
form of return on their investment. Where the firm is not
240 000
making a sufficient return on its capital employed it can take × 100 = 20%
the following steps to improve it: 1 200 000
Cutting costs, as this will improve its profits A ratio of 20 per cent shows that the firm is profitable.
Reducing the amount of capital employed However, the desire should be to improve this ratio. The firm
Seeking a cheaper source of raw materials. would want to keep its net profit margin and gross profit
margin close to each other. This will show investors that
Gross profit percentage the firm is not incurring huge selling and distribution and
This is also known as ‘gross profit margin’. It shows gross administrative expenses. A net profit margin that is close to
profit expressed as a percentage of sales or turnover. It shows a gross profit margin suggests that overheads or expenses are
the percentage of the firm’s sales that goes to gross profit. low, which is desirable as the firm would be converting its
The higher the ratio, the more desirable it is. It is calculated revenue into actual profit. Where the firm may have a high
as: gross profit margin but low net profit margin it is indicating
Gross profit that the overheads are too high. This can be dangerous, as
× 100
Turnover a decline in sales could see the firm making net losses. The
Using the data above, KJ Appliances Ltd’s gross profit net profit margin can be improved in one of two main ways:
margin would be: reducing costs or increasing revenues.
400 000
× 100 = 33.33%
1 200 000 Mark-up
The business would want to improve its gross profit This ratio measures the percentage that is added to the
margin, especially where it has a number of expenses. In firm’s cost of sales in order to arrive at the selling price of its
our example above, while a gross profit of 33.3 per cent is product. The ratio will therefore be susceptible to changes in
acceptable, firms would want to push that figure closer to
costs. It is calculated as:
50 per cent. Higher gross profit suggests that management
Gross profit
has been able to use the available resources to generate high × 100
Cost of sales
profits. A firm earning higher profit could plough back some
In the above example, let’s say that Cost of sales was
of that profit into research and development, which should
$800 000 – so mark-up would be calculated as:
improve its operations.
400 000
Improving gross profit should be the desire of most, if × 100 = 50%
800 000
not all, firms but what are the options available for doing
so? Some of the steps that firms could take to improve their This ratio would be saying that a mark-up of 50 per cent
gross profit margin would include: was added to cost to arrive at the selling price for the firm’s
product. It shows the amount of profit that the firm makes Acid test ratio
on the cost of its product being sold. To improve the ratio, This ratio is also known as the ‘quick ratio’. Its assessment is
the firm could: similar to that of the current ratio, however, stock is omitted
Increase selling price from the total of the Current assets. The reason for this is that
Reduce the cost of sales. stock may take a long time to sell, therefore funds may not
be forthcoming. To include stock would mean that, though
Liquidity ratios the business has a good acid test ratio, its current assets may
There are two types of liquidity ratios that assess the solvency not be as liquid. This ratio is calculated as:
of the company. These ratios are: Current assets
– stock
Current liabilities
Current ratio This ratio is also expressed to 1.
This is also known as the ‘working capital ratio’. The current Using the data given above, the acid test ratio would be:
ratio assesses whether the firm’s current assets (if liquidated) 270 000 – 150 000
= 1.5:1
can cover its short-term obligations or current liabilities. It 80 000
compares the firm’s current assets with its current liabilities: A firm with an acid test ratio of less than 1:1 cannot
Current assets cover its current liabilities. This could be problematic for
Current ratio =
Current liabilities the firm. In most cases, a low or decreasing acid test ratio
Note that this ratio is not expressed as a percentage, signifies that the firm is over-leveraged, bills are being paid
but instead the result should be expressed to 1, depicting too quickly, there is a lengthy collection time for debtors or
the amount of times that the current assets can cover the it is struggling to maintain and increase sales. However, as
current liabilities. Using the data from the balance sheet of with the current ratio, the firm would not want to have an
KJ Appliances Ltd, the ratio would be calculated as: acid test ratio that is too high, as it could have found better
270 000 and more profitable use for the funds.
= 3.4:1
80 000 The acid test ratio shares the same suggestions for
It is normally said that a ratio of 1.5:1 is generally improving current ratio as mentioned above.
acceptable and good for the business. Also, a ratio of 1:1
might be acceptable for a business that predominantly sells Investment or shareholders’ ratios
for cash, such as wholesalers and supermarkets. Also, the There are four major ratios under this category. These are
acceptable level of the ratio may depend on the industry in calculated below.
which the business operates and also the type of business. For the purpose of illustrating how the ratios are
A ratio that is too high above the 1.5:1 is not necessarily calculated we will use the list of balances extracted from a
good. This often suggests that the business has too much of final account as shown in Table 15.2.
its money tied up in assets (for example, stock) that are not
being productive and could have otherwise been invested to
Balances $
earn more money. This is true in the example above where
KJ Appliances Ltd has a current ratio of 3.4:1, which is far Profit after interest and tax 320 000
Dividend proposed and paid 40 000
outside of the norm. At the same time, though, a ratio that
is too low or below the 1.5:1 range may mean that trouble is Table 15.2: Data for calculating investment or shareholders’ ratios
brewing for the firm. This would suggest that the firm may
not be able to meet its obligations should the creditors call
* Note that 1 000 000 $1 ordinary shares were issued and
on it. It could also suggest that the firm has too little working
the current market price for each share was $4.00.
capital or has too much debt outstanding.
To improve current ratio, the firm could: Earnings per share (EPS)
Sell unproductive assets to gain cash
This ratio is generally used to assess the financial performance
Shorten the collection time from debtors
of a company on an annual basis. It gives the shareholders
Improve current assets through equity financing rather
a good idea of the portion of the company’s profits that goes
than debt
to them. With this ratio, investors can compare the earnings
Reduce the amount of funds taken out of the business
as drawings.
from year to year with each other. It is sometimes used as a Dividend cover
stock market indicator of performance. This is calculated as: The declaration of dividends and the percentage given rests
Net profit after interest and tax and preference dividends in the hands of the board of directors of a company. At any
Number of ordinary shares issued given time the company’s earnings will be greater than
For example: 320 000 the amount of dividend that is declared for the ordinary
EPS = = $0.32
1 000 000 shareholders. This ratio measures the number of times
EPS is a good indicator of the profitability of the company that the earnings of the company cover the dividend paid
and its ability to pay out dividends to existing shareholders. to the ordinary shareholders. A higher dividend cover is
Potential investors will tend to gravitate to companies that indicative that the current level of dividend is more likely to
have increasing earnings per share. The higher the EPS, the be sustained in the future. It is calculated as:
more attractive it is for investors who may want to make an Net profit after tax and preference dividends
investment. Declared dividend on ordinary shares
For example:
Price/earnings ratio (P/E) 320 000
This ratio is sometimes referred to as the ‘stock market ratio’. Dividend cover =
40 000
It gives a good idea of the prospects of the company. If the = 8 times
P/E ratio is high then the company may experience growth
in the demand for its shares, as investors feel that they will Efficiency and activity ratios
get better returns on their investment. It is calculated as: There are four main ratios that will be dealt with in this
Market price per share section. These are calculated below.
Earnings per share Table 15.3 will be used as a guide for calculation. It
For example: 4.00 contains data from which the ratios will be calculated
P/E ratio = = 12.5 times
0.32
Dividend yield $
This ratio gives a comparison of the dividend yield to the Opening inventory 8 600
Debtors 12 500
market price of the share. This can also be used to compare Sales 62 500
one investment option with others. Shareholders that are Purchases 56 000
Creditors 30 000
looking for a steady stream of income might invest in a Closing inventory 9 800
company that has a relatively high and stable dividend yield.
However, it is often said that a company with lower dividend Table 15.3: Data for calculating efficiency and activity ratios
yields has more potential for growth in the future and is
financially secure. As a result, investors may gravitate to Debtor to sales ratio
such businesses rather than a high-yield one. How investors This ratio attempts to assess how much of the company
invest will depend on their objectives – that is, looking to money made from sales it tied up in debtors. It is normally
earn quick profits or to have a secure financial option. The advisable to collect debts as soon as possible, since money
ratio is calculated as: owed to the firm is unproductive and could be put to better
Gross dividend per share use. This ratio is measured in terms of days in order to
× 100
Market price per share ascertain the length of time that debtors are taking to clear
For example: their debts. It is calculated as:
30 000/1 000 000 Debtors
Dividend yield = × 100 × 365
4 Credit sales
= 0.75% For example:
However, it must be noted that the dividend yield is 12 500
not the only factor that may affect an investor’s decision. Debtor/Sales ratio = × 365
62 500
Also important will be the price of the share when it was = 73 days
purchased and what it is now. If the price is higher now, The higher the ratio, the longer the period of time being
then the investor could sell these shares to earn additional given to debtors to make payments. In such a case, it is more
rewards. likely that the business might run into liquidity problems.
This denotes inefficiency. It is also important for the firm For example:
to match its debtors ratio to its creditors ratio as it wouldn’t 54 800
Stock turnover =
want to give its debtors too much time to pay but is being (8 600 + 9 800)/2
given a shorter period of time to pay its creditors. This could = 5.95 or 6 times
cause cash flow problems. To improve its debtors ratio, *Cost of sales = 8 600 + 56 000 – 9 800.
the firm could offer early payment incentives such as cash The firm can seek to improve its stock turnover by:
discounts. Getting rid of obsolete or slow-moving stock
Offering discounts or conducting sales promotions to
Creditor to purchases ratio increase sales
This ratio shows the time period given by suppliers for the Improving stock-taking strategies by seeking to keep the
firm to pay its debts. Just examining the ratio may not be optimum stock level.
enough to decide whether it is good or bad, as the firm may
have been given a longer time than usual to clear its debts. Asset turnover
What is important here is to ascertain whether the firm is Asset turnover measures the effectiveness of how assets are
able to meet its deadlines for payments when they become being used to generate sales. The result of this ratio is best
due. This ratio is calculated as: compared with the ratio of similar businesses or competitors.
Creditors Where a business’s asset turnover is lower than those of its
× 365
Credit purchases competitors, there may be over-investment in assets. This is
For example: calculated as:
30 000 Sales
Creditors/Purchases ratio = × 365 Asset turnover =
56 000 Total assets – Current liabilities
= 195.5 days For the purpose of this example, Total assets is equal to
The ratio is sometimes calculated using Cost of sales $48 000
rather than Credit purchases. The firm would want to take = 62 500
Asset turnover
as long as possible to pay its creditors. However, taking (48 000 – 30 000)
longer than the agreed time frame could lead to a fall in = 3.47 times
the business’s credit ratings and possibly legal action by
suppliers. In general, firms would want to keep the payment Gearing ratio
period for creditors longer than that for debtors to ensure This is also called the ‘leverage ratio’. It shows the relationship
that it will have the funds needed to make the payments to between a company’s equity capital and its debt capital. Put
creditors. Like the debtors ratio, the ideal time for this ratio another way, it is measuring the proportion of the total assets
will depend on the industry and the relationship that exists invested in the firm that is financed by borrowing. This ratio
between the firm and its suppliers. is very essential when it comes on to the long-term financial
health and stability of the business, as investors need to
Stock turnover know that the capital structure of the company is not too
This ratio measures the number of times that stock turned dependent on borrowings. The ratio is normally interpreted
over in the financial year – that is, the amount of time in in terms of high gearing and low gearing. A highly geared
which stock was sold and replenished. It also indicates how company is one that has more of its capital being financed
efficient the business is in maintaining the best possible level by debt capital or fixed-interest securities – that is, more
of stock. A low stock turnover indicates that stock might be than 50 per cent. A low-geared company would be one
piling up and the business is not selling its stock as quickly that has most of its capital being financed by equity. The
as it should. The more quickly stock turns over, the more implication for ordinary shareholders is that they are less
quickly profits can be made and the higher sales revenue likely to be paid dividends if the company is highly geared,
will be. Stock turnover is calculated as: as the company would have to honour its interest payments
Cost of sales on debentures and preference shares before dividends can
Average stock be paid to them. This is further exacerbated by the fact that,
Note: Average stock is calculated as Opening stock plus unlike dividend payments, payment of interest and debt is
Closing stock divided by 2. not optional. There is more than one formula to calculate
the gearing ratio, however, the most popular is:
Debt × 100 Balance sheet as at 31 May 2012

Capital employed
$ $
In calculating the ratio it should be noted that ‘debt’
Non-current assets
refers to long-term debt while ‘Capital employed’ refers to Premises 12 000
Fixed assets + (Current assets – Current liabilities). Equipment 18 000
30 000
Current assets
Inventory 160 000
EXERCISE Accounts receivable 62 000
Bank 8 000
The following is accounting data taken from the books 230 000
of K Francis: Less: Current liabilities
140 000
Income statement for year ended 31 May 2012 170 000
Financed by:
$ $ Ordinary share capital (50 000 @ $2) 100 000
General reserves 7 000
Sales 300 000 Profit and loss 63 000
Less: Cost of sales: 170 000
Opening inventory 120 000
Purchases 230 000
350 000
Less: Closing inventory 160 000 Using the above data, calculate the following ratios and
(190 000) comment on your answers:
Gross profit 110 000 Stock turnover
Less: Expenses: Gross profit margin
Wages and salaries 16 000
Lighting and heating 4 000 Net profit margin
Rent and rates 10 000 Current ratio
Other expenses 5 000
(35 000) Acid test ratio
Net profit 75 000 Debtor/sales ratio
Add: Previous year’s balance 15 000 Creditor/purchases ratio
90 000
Less: Dividend (27 000) Dividend yield.
63 000
CHAPTER SUMMARY
There are four main financial • Budgeted and actual performance Ratios are compared over a two-year
statements. These are: balance sheet, or targets for the financial year period or more, so that a clear view
income statement, cash flow and • The business and other businesses can be given of the firm’s average
statement of retained earnings of the same nature in the industry performance.
The ratios that are calculated will There are five main categories
foster comparison of: of ratios: profitability, liquidity,
• The business’s performance over investment, financial and efficiency
previous years
MULTIPLE CHOICE QUESTIONS

1. If a shareholder wants to see the changes in his equity Study the following accounts carefully then answer the
position over the financial year, in which of the following questions that follow:
financial statements would he be better able to view this
information? Trading profit and loss account for year ended 31 March
a. Balance sheet 2012
b. Income statement 2012
c. Statement of retained earnings $m
d. Cash flow statement Turnover 500
Less: Cost of sales 300
Gross profit 200
2. The ratios CANNOT be used to compare: Less: Expenses 115
Profit before interest and tax 85
a. The business’s performance over previous years
Interest payable 8
b. Budgeted and actual performance or targets for the Taxation 2 (10)
Profit after interest and tax 75
financial year Dividends (50)
c. The customer base over a given period of time Retained earnings (profit) (25)
d. The business and other businesses of the same nature in Balance sheet as at [date]
the industry.
2012
3. What is the BEST explanation for a current ratio of 3.5:1? $m
a. Current liabilities covers Current assets 3.5 times Non-current assets 210
Current assets:
b. The firm’s Current assets can cover its Current liabilities Inventory 15
3.5 times Accounts receivable 10
Bank 5
c. Current assets is 3.5 times greater in value than Current 30
Less: Current liabilities 15
liabilities Working capital 15
d. The firm is very liquid 235
Less: Non-current liabilities
35
4. A company that has more of its capital being financed by 200
debt capital or fixed-interest securities than shares is said to Financed by:
Issued share capital of $2 shares 120
be: 80
Reserves
a. Highly geared 200
b. Medium geared
c. Low geared
Calculate the following ratios for 2012. Round off to two
d. Average decimal places.
a. ROCE f. Stock turnover
5. Which category of ratio is BEST suited for measuring the
b. Gross profit margin g. Debtor/sales ratio
returns on the contribution of shareholders?
c. Asset turnover h. Earnings per share
a. Profitability d. Current ratio i. Dividend yield
b. Liquidity e. Acid test ratio j. Gearing.
c. Investment Question two Total 20 marks
Comment on the following ratios by comparing them with
d. Financial
those for 2011. The figures for 2011 are in brackets beside
each ratio.
a. ROCE (10%) d. Gearing (25%)
b. Stock turnover (30 times) e. Debtor/sales ratio
c. Current ratio (2:1) (5.5 days)
167
16 Budgetary Accounting
the result of the operations of the business over a future

LEARNING OBJECTIVES: period of time. It may also show the position that the
At the end of this chapter students should be able to: business should be in at the end of the period. A projection
Explain why businesses make projections can be made over different time periods and this may be
Outline how data is collected for budgetary purposes based on the size of the business, the type of business and its
corporate goal and mission, among other things. Projections
Define the term ‘budget’
are made from the data gathered over time. The business
Describe the different types of budget
should match its actual results to its budgetary figures so that
Outline the purposes of budgets and their limitations
any necessary adjustments can be made to the budget. Firms
Prepare cash budgets
make projections and budgets for the following reasons:
Discuss budgetary control methods and reasons for
To set targets and business objectives
variances
Budgets can indicate possible future stumbling blocks
such as shortage of resources
Allows the firm to identify and assess alternative courses
W
e all practise budgeting, sometimes even of action
without knowing it. For example, some students To monitor performance of the business over time
are given lunch money at the start of the week Enables the firm to allocate resources effectively
and must ensure that it will last until the week is finished. By setting realistic targets, employees could become
Parents make a budget for how their income will be spent more committed to the business and its objectives.
over the month and governments budget how the revenue
of the country will be spent over the financial year. So,
you may ask, what is a budget? It is a financial plan or The budgeting process
statement which shows specific objectives or targets that a For an overview of the process, see Figure 16.1 (p 168).
business hopes to achieve over a given period of time. Firms
may prepare different budgets, including master budgets, Advantages of budgeting
production budgets, sales budgets and cash budgets. Acts as a guide for managers in the achievement of
In order to draft a credible and practical budget, the right business objectives
information has to be gathered and analysed. Budgets are Fosters communication and coordination within the
mostly prepared from previous years’ data along with that organisation
gathered through research. It is important that information Allows for the proper employment of capital when
gathered is accurate and reliable or the projections made matched against the planned levels of activity
from that data will be flawed. Data needed for budgetary Provides control for income and expenditure, thus
purposes can be gathered from bank accounts, previous minimising inefficiency and wastage.
financial reports, industry magazines, market research and
other departments in the business, among other sources. Drawbacks of budgeting
A stringent budget may lead to inflexibility in the
adaptation to change
Projections Since budgets are prepared on previous data, they may
It is prudent for the firm to see itself as a going concern. be inappropriate for current conditions
This means that it will continue to operate in the foreseeable A budget may lose its credibility and usefulness if the
future. As a result, managers must make a projection or actual results vary greatly from budgeted figures
forecast for future happenings. A forecast is a prediction of Budgeting can be a costly process for the firm
Establish
Flexible budget
objectives A flexible budget is adjusted when there are changes
to the business environment of the activity. It is more
representative of the current happenings in the business
Budgets and and its environment. As variable and fixed costs change, this
plans prepared
by cost centres budget would be adjusted to reflect such changes.
Zero-based budget
Coordinated by A zero-based budget is drafted based on the need of each
budget officer activity as opposed to the basis of past spending, bearing
and presented
to finance inflation in mind. The principle is that each activity must
committee first be weighed against its benefits to the business before
it is included in the budget. This will help to eradicate any
previous inaccuracies and inefficiencies of the previous year.
Final budgets
agreed and Actual
budget centres performance
informed recorded Operational budgets
An operational budget focuses on the revenues and
expenses related to the day-to-day use of resources by the
Comparisons Feedback for business. They generally include such things as labour,
made future planning
materials, overheads, administrative costs, sales and cash.
Operational budgets are usually done on an annual basis
Feedback for Variances but they can be broken down into shorter reporting periods
future control investigated such as monthly. By doing so, managers can assess the
performance of the firm to date and take the necessary steps
to make corrections or improvements.
Remedial action
where possible
Types of budget
Figure 16.1: The budgetary process There are several types of budgets that a firm may have
to draft in its financial year. These budgets serve different
Can cause conflict among the different departments as purposes and are outlined below:
they fight for scarce resources
Unrealistic targets could discourage workers. Sales budget
The sales budget is usually the first one to be made, as the
others are dependent on the forecasted sales figures. It is a
Categorisations of budgets plan showing forecasted sales for the period. The forecasted
Budgets are categorised under three main headings. Which sales are often arrived at from historical data and current
of these the organisation chooses to use depends on its needs and expected economic patterns. The sales budget should
or present situations. These categories are: include the expected number of each type of product that
will be sold and the expected price at which they will be
Fixed budget sold. A typical sales budget will resemble the following:
A fixed budget is one that remains the same even if the
activity level of the firm is different from the projected Details $
figures. For example, a firm may draft a budget on the Estimated unit 20 000
Times selling price per unit $50
premise that 1 000 000 units of its product will be sold. At Total estimated sales 1 000 000
half year it may realise that sales have slowed drastically, to
300 000. Regardless of this, the firm would not adjust the
budget to the changing conditions.
CHAPTER 16 | BUDGETARY ACCOUNTING 169
Production budget Details Periods

The production budget is often dependent upon the Jan Feb Mar April
sales budget, since production is driven by sales in most Receipts
cases. Once the budgeted sales have been determined, the [list all receipts]
company must move to forecast the number of units that
Payments
should be produced. Therefore the production budget refers [list all payments]
to the determination of the products to be produced during
Net receipts/Payments
a particular period of time. The production budget can be Balance brought forward
determined by using the following calculation: Balance carried forward
Details $
The question that may be on your mind is: what should
Budgeted sales 60 000
Plus: Budgeted closing stock of 15 000 be included in the cash budget? The answer to this question
finished goods would include:
Total units needed 75 000 Receipts and payments should be recorded in the period
Less: Budgeted opening stock of
finished goods (9 600) when the money is expected to be received or paid
Budgeted production 65 400 Depreciation should not be included since it does not
involve the movement of cash
Receipts and payments from before the budget period
Material budget
should be brought forward as opening balance of cash
Having identified the production requirement, the material
Receipts may include: cash sales, receipts from debtors,
budget is then coined from the production budget. This
interest received, sales of fixed assets, loans, issuing of
would include the quantity of raw materials that are needed.
new shares, and royalties
The firm would then work out its budgeted raw material
Payments may include: purchases, wages and salaries
purchases as follows:
paid, overheads and expenses, purchase of fixed
Details $ assets, taxation, interest and dividends paid, and loan
Budgeted raw material usage 25 000 repayments.
Plus: Budgeted closing stock of raw 12 000 Now examine the following fully worked example:
materials
37 000
Less: Budgeted opening stock of raw (15 000) Example
materials Refreshing Juice Ltd is a small family-owned company.
Budgeted raw materials purchases 22 000
The following data was taken from its books during the
financial year ended 31 December 2008:
Labour budget Sales ($) Purchases ($)
The determination of the number of units that are to be December 2007 35 000 20 000
produced has now paved the way for the firm to ascertain January 2008 30 000 17 000
the number of labour hours needed to produce the products. February 22 000 15 000
March 19 000 20 000
Once this is done, the firm can calculate its cost of labour by
applying the rate of pay for each grade of workers to the
labour hours in a labour budget. Other notes include:
Sales revenue is divided as follows: Cash sales 20 per
Cash budget cent and one month credit is given to the debtors.
The cash budget is a statement showing the estimated cash The company also receives one month’s credit on all
inflows and outflows including revenue and capital items. purchases
The following layout is normally used for cash budgets: Wages are paid on a monthly basis, amounting to
$2,500
Rent of $9,000 per annum is paid one month in
advance, on 1 January of each year
Miscellaneous expenses per month is $1,500
A machine was sold on 12 February for $3,000 and a $3,000. Miscellaneous expenses of $1,500 are to be
new one was purchased in March of the same year for paid each month. The cash balance from last year was
$4,500 $6,000.
The manager draws $1,200 every month for his Prepare a cash budget for the six months ending
personal travelling expenses June 2012.
The bank balance at 1 January 2008 was $7,000.
Prepare a three-month cash budget from January to
March 2008. Master budget
Workings: Once the firm has drafted its subsidiary budgets (sales,
Refreshing Juice Ltd production, material, labour and expenses) it can then
Cash budget for 3 months to 31 March 2008 determine its master budget. The master budget is a
summary of the firm’s plans for a particular period of time.
Receipts January February March
It normally incorporates a budgeted income statement, a
Cash sales (20% of 6 000 4 400 3 800
present month) budgeted balance sheet and a cash flow budget.
Credit sales (80% of 28 000 24 000 17 600
previous month)
Sale of machinery 3 000
Budgetary control
Total receipts 34 000 31 400 21 400
This involves the use of budgets to monitor performance of
Payments the business and make plans to combat future difficulties.
Creditors (purchases) 20 000 17 000 15 000 It is a process whereby a firm’s actual results are compared
Wages 2 500 2 500 2 500 with the budgeted figures. The budgetary control process
Rent 9 000
Miscellaneous expenses 1 500 1 500 1 500 consists of two distinct elements:
Purchase of machinery 4 500 Planning, which involves the drafting of budgets for a
specified future period and
Drawings 1 200 1 200 1 200 Control, which involves the comparison of budgeted
Total payments 34 200 22 200 24 700 figures with the actual results over the specified period.
Net receipts/ (200) 9 200 (3 300)
(payments) Variance analysis
Balance b/f 7 000 6 800 16 000
Balance c/f 6 800 16 000 12 700 An important part of budgetary control is variance analysis.
Now, when we speak of ‘variance’ in budgetary control this
refers to the fact that at times there is a difference between
EXERCISE actual results and the budgeted figures of the firm (Actual
– Budgeted). To this end, you will realise that a variance
Build Quick Construction Company Ltd is a small
analysis can only be done at the end of the budgetary period,
privately owned company. The following data is
when the firm is aware of its actual figures. The main
its plan for the first six months of its financial year
starting 1 January 2012. Turnover for the first quarter purpose for variance analysis is to provide management with
is $20 000 per month for the second quarter and practical reasons for below par performance. Management
$30 000 per month. All work done by the firm is can then use this information to improve its operations,
paid for on one month’s credit. The debtors for last reduce operating costs and improve efficiency.
December totalled $12 000. Materials are purchased A variance can be either:
on one month’s credit and the company is expected Favourable (positive), where actual figures are higher
to purchase materials totalling $8,000 per month than budgeted. This could be as a result of lower than
from January to April and $11 000 for the next three expected costs and/or higher than expected revenues
months. Outstanding payment for material purchased Unfavourable (adverse), where actual figures are below
in December of the previous year is $10 000. Wages budgeted figures. This could result from costs being
amounting to $4,000 for the first quarter and $5,000 higher than expected and/or revenue being lower than
for the second quarter are to be paid. There will be a expected.
$16 000 investment in machinery and equipment in A variance can be caused by a number of factors, some
June. Corporation tax payable in March amounted to of which are:
CHAPTER 16 | BUDGETARY ACCOUNTING 171
Poor budgeting – this is where management makes An adverse variance could be as a result of the use
impractical and ill-advised estimates, resulting in cost of more qualified or a higher grade of workers; wage
overruns increases negotiated by trade unions; unrealistic budget;
Changes in the price of inputs (for example, materials). labour shortages; and higher inflation rate causing
This could result in higher than budgeted costs higher wages. The converse of the aforementioned
Unpredictable events such as natural disaster can halt could cause a favourable variance.
production, causing variance in sales and production Labour efficiency variance
Improper recording of data, costs or revenue could This is calculated as:
misrepresent the accounts and cause variances. (Standard time for actual production – Actual time) ×
Standard wage rate
Types of variance A favourable variance could be caused by an
Sales variance improvement in the workers’ morale; the use of more
This is a measure of the amount by which actual sales are qualified workers; and a significant decrease in ‘down’
above or fall below the budgeted sales. This disparity could or idle time.
be caused by a different price being charged per unit than
Direct material variance
was budgeted; stiff competition could be affecting sales; and
This is a measure of the amount by which the actual costs
an increased advertising campaign could improve sales.
of material used differ from the budgeted amount. This
Sales variance is often subdivided into sales price
difference could be caused by disparity in the price paid for
variance and sales volume variance. For example: a
the material and the budgeted price and also a greater or
company’s budgeted selling price is $100 and quantity of
lower use of material per unit than budgeted.
800 units for the month. However, at the end of the month
For example: a manufacturing company budgeted that
the actual figures showed that the selling price was $98 and
3,000 units of a product should have been produced in the
only 750 units were sold. The variances would be:
period, at a material cost of $15 000. However, at the end
Sales price variance = (Budgeted price – Actual price)
of the period only 2,500 units were produced, at a material
× Actual units
cost of $14 000. The material variance report would be:
(100 – 98) × 750 = 1 500 adverse
Budgeted costs of 2,500 units
Sales volume variance = (Budgeted sales volume – Actual
(2,500 × 5) $12 500
sales volume) × Budgeted price
Less: Actual costs (14 000)
(800 – 750) × 100 = 500 adverse
Total material variance (1 500) adverse
Direct material variance is often caused by one of two
Labour variance
variances which could result in costs being different from
This is a measure of the amount by which the actual labour budgeted. These are:
costs differ from the budgeted labour costs. This could be Material usage variance
caused by changes in the planned wages and/or differences This is calculated as:
in the planned and actual labour hours worked. (Standard quantity for actual production – Actual
For example: A firm has a labour cost of $4,000 for every quantity used) × Standard price
5 hours’ work – that is $800 per hour. In a particular month, An adverse material usage variance could be caused
1,000 units of the product were produced, using 160 hours by an unrealistic budget; theft; inferior materials being
at a total labour cost of $120 000. Calculate the total labour purchased; poor inventory management; and outdated
cost variance. or faulty machines resulting in wastage. Note that the
Budgeted costs of direct labour for actual output converse would be the cause of a favourable variance.
(160 × 800) $128 000 This variance shows the efficiency with which materials
Actual labour cost 120 000 were converted into finished goods.
Total variance 8 000 favourable Material price variance
Labour variance could be caused by one of two other This is calculated as:
variances. These are outlined below: (Standard price – Actual price) × Actual quantity of
Labour rate variance material purchased
This is calculated as: A favourable material price variance could be caused by
(Standard rate – Actual rate) × Actual number of hours an unpredictable reduction in the price of materials; the
firm may have received discounts or a special deal; low-
quality materials were purchased instead; or the budget Purchasing Department in buying materials at relatively
was unrealistic. This variance shows the efficiency of the low cost.
CHAPTER SUMMARY
A budget is a financial plan or Budgetary control is used by firms There are three main types of
statement which shows specific to monitor performance and plan budgets: fixed budgets, flexible
objectives or targets that a business effectively for the future budgets and zero-based budgets.
hopes to achieve over a given period
of time. The budgets prepared
by firms include master budgets,
production budgets, sales budgets
and cash budgets
MULTIPLE CHOICE QUESTIONS 4. Cash equivalent includes:

a. Bank deposits
1. A financial plan or statement which shows specific objectives
or targets that a business hopes to achieve over a given period b. Cash in hand
of time is called a: c. Demand deposits
a. Cash flow statement d. Short-term liquid investments
b. Budget
5. Which of the following would lead to an outflow of cash from
c. Forecast the business?
d. Profit statement a. A reduction in the inventory figure
2. A distinct feature of budgetary control is: b. A loan given to the firm
a. Organising c. A reduction in the creditors figure
b. Managing d. Sales of fixed assets
c. Planning
d. Delegating
3. ‘This budget is drafted based on the need of each activity

as opposed to the basis of past spending bearing inflation in
mind.’ This definition best describes a:
a. Master budget
b. Zero-based budget
c. Fixed budget
d. Flexible budget
173
17 Investment Appraisal
care must be taken in making such decisions. In doing so,

LEARNING OBJECTIVES: firms will consider the initial costs, expected benefits and
At the end of this chapter students should be able to: costs, risk involved and possible alternatives. The firm may
Define ‘investments’ consider the following methods of investment appraisal:
Identify the types of investment Payback period
Average rate of return
Define ‘investment appraisal’
Net present value
State the usefulness of investment appraisal
Internal rate of return.
Discuss the four methods of investment appraisal
Calculate each method of investment appraisal
Discuss the qualitative factors that influence an
investment decision
Analytical methods of appraisal
Outline the limitations of investment appraisal Payback period
Payback period is the time that cash inflows from a capital
investment will take to be equal with the initial outflow of
Investment funds. Firms will normally invest in the project that takes
T
his is generally defined as the purchase of capital the shortest time to be repaid – that is, the shortest payback
goods – that is, goods used to produce other goods period. This is calculated as:
Amount required
and services. In other words, it includes the expen- × 12
diture by businesses or people on items which are used to Net cash flow per year
produce goods and services in the future, such as equipment For example, the initial capital outlay for Project A is
and buildings. Businesses make the decision for a number of $30 000 and it is expected that the project will earn $15 000
reasons, including: annually. The payback period would be equal to:
30,000
For expansion of productive capacity × 12 = 24 months or 2 years
Purchasing modernised equipment 15,000
Replacing obsolete assets
To foster automation of the company
ACTIVITY
For expansion of the firm itself through mergers or joint
ventures. KEP Industry is thinking of investing in a new
Regardless of the reason(s) for investment decisions, the machine, at a cost of $35 000. It is expected that the
firm needs to take into consideration the different methods machine will generate cash inflows of $10 000 and has
used in the appraisal of investment. an expected life of five years. Calculate the payback
period.
Alternatively, payback can be calculated in a tabular
Investment appraisal form, as seen below.
This a quantitative technique used by firms to assess the KEP Industry is analysing two investment options
attractiveness and viability of different capital projects. It in an attempt to make a decision on which one to
describes how businesses compare and evaluate investment invest in. Table 17.1 (p 174) shows the initial capital
projects in order to ascertain whether or not they will be outlay and the annual cash inflow that each project is
profitable. Since these projects are usually funded by large expected to return.
amounts of expenditure, which cannot easily be reversed,
Year Project A Project B Disadvantages of payback period

Initial investment 0 (15 000) (15 000) Payback is mostly a measure of liquidity and not of the
Cash flow 1 5 000 1 500 overall worth of the project
2 3 500 3 000 It does not take into account the expected life of the
3 3 000 5 000
4 2 500 6 000 project
5 1 000 6 500 It is not adjusted for the time value of money
More than one project may have the same payback
Table 17.1: KEP Industry initial capital outlays and annual cash inflows
period even though the annual inflows are different.
Answer
EXERCISE
Project A Project B Examine the data in Table 17.2 and then answer the
Years Annual Cumulative Annual Cumulative questions that follow.
cash flow cash flow cash flow cash flow
0 (15 000) (15 000) (15 000) (15 000)
1 5 000 –10 000 1 500 –13 500 Year Project A Project B Project C
2 3 500 –6 500 3 000 –10 500
3 3 000 –3 500 5 000 –5 500 Initial investment 0 (30 000) (18 000) (50 000)
4 2 500 –1 000 6 000 500 Cash flow 1 6 500 2 500 15 000
5 1 000 Nil 6 500 7 000 2 7 200 3 100 12 000
3 10 600 5 600 10 550
4 9 800 4 200 9 640
5 10 200 6 900 9 000
Evaluating our answers:
Year 0 represents the time when the investment Table 17.2: Initial capital outlays and annual cash inflows for three
would be made, while Year 1 means one year after the projects
investment
The brackets represent cash outflow 1. Calculate the payback period for each of the three
Columns 3 and 5 show the balance at the end of each projects above.
year 2. Which project should be chosen? Give one reason
Note that Project A would be paid for in Year 5, while for your answer.
Project B would be paid back within four years
To calculate the months for Project B, express the
remaining balance as a fraction of the total inflow for Average rate of return (ARR)
the year and multiply by 12. In Year 4, only $5,500 Average rate of return is also referred to as ‘accounting
remained on the initial outlay, however, inflow was rate of return’. It shows the average profit per year expressed
$6,000. The calculation is: as a percentage of the initial capital outlay. This is calculated
5 500 as:
× 12 = 11 months
6 000 Average return (profit) per annum
× 100
Therefore Project B has a payback period of 3 years 11 Initial investment
months, compared with 5 years for Project A, and so Before the calculation is done, the following steps should
will be chosen. be taken:
1. Calculate the profit from each project. This is done by
Advantages of payback period subtracting the initial capital outlay from the total cash
Projects that are paid back quickly can improve the inflows of the project
firm’s growth and liquidity 2. Calculate the average profit per annum by dividing the
Payback is easy to calculate and interpret profit, from Step 1, by the duration of the project
It is said to be more objective since its focus is on the 3. Calculate the ARR with the formula given above
project’s cash flows rather than on profitability 4. After the ARR is arrived at for each project, the project
A project which has a quick payback period minimises with the highest percentage should be chosen.
time-related risks – for example, a decrease in the value
of money.
CHAPTER 17 | INVESTMENT APPRAISAL 175
Year Project A Project B

Advantages of ARR
Capital outlay 35 000 25 000 It is easily calculated and understood
It fosters comparison between the company’s
Cash inflow 1 6 000 5 000
2 8 000 7 000 profitability and the expected profitability after the
3 8 000 8 000 project is implemented
4 10 000 10 000
5 12 000 10 000 It accounts for all the cash flows over the life of the
investment.
Total cash inflow 44 000 40 000
Table 17.3: Initial capital outlays and annual cash inflows for two Disadvantages of ARR
projects The timing of outflows and inflows of cash is ignored
There are a number of methods for calculating ARR but
For example, see Table 17.3: none are universally accepted
Step 1: Profit each year: Does not take into consideration the time value of
Project A ($44 000 – $35 000 = $9 000) money
Project B ($40 000 – $25 000 = $15 000) The average profit, used to calculate the ARR, may not
Step 2: Average profit per annum: be representative of any year
Project A ($9 000/5) = $1 800 The duration of the project is not considered in its
Project B ($15 000/5) = $3 000 calculation.
Step 3: Average rate of return: Before we discuss net present value (NPV), it is important
1 800 that you understand the concept of discounted cash flow, as
Project A × 100 = 5.14%
35 000 this is used in the calculation of the NPV.
3 000
Project B × 100 = 12%
25 000 Discounted cash flow (DCF)
Step 4: Project B should be chosen, since it has a higher ARR The discounted cash flow (DCF) is a technique that takes
than that of Project A. into account the time value of money by equating its future
value to what it is worth now. The DCF is normally used
when calculating the NPV and the internal rate of return.
EXERCISE It is evident that whatever our money is worth now will
A firm is considering producing one of two products. not be the same as it will be in the future. In other words,
Table 17.4 contains the forecasted data for both money will lose its purchasing power, especially as inflation
products. rises. The firm would rather receive money owed to it now,
as deferring payment may mean loss of revenue if its debtors
Year Project A Project B are unable to pay in the future and the firm could invest the
money now in order to generate interest.
Capital outlay 160 000 200 000
Two important features of the discounted cash flow are
Cash inflow 1 15 000 25 900
2 40 000 45 700 that:
3 46 800 66 400 Cash flows are used to calculate the return on a project
4 62 200 68 900 instead of accounting profit
5 57 500 62 500
The cash flow for each year should be discounted so
Total cash inflow 221 500 269 400
that the annual return is representative of the present
Table 17.4: Forecasted data for Projects A and B value of money.
The discount factor can be calculated using the following
1. Calculate the average rate of return for both formula:
products 1/(1 + r)n
2. State, with a reason, which of the two products where ‘r’ is the interest rate and ‘n’ is the period in
should be made. number, usually in years. However, you are not required to
calculate this, as it is usually given. Table 17.5 (p 176) shows
an extract of discount factors for $1.
Interest rates (c)%

Periods
(n) years 6% 8% 10% 12% 14% 15% 16% 18% 20%
1 0.943 0.926 0.909 0.893 0.877 0.870 0.862 0.847 0.833
2 0.890 0.857 0.826 0.797 0.769 0.756 0.743 0.718 0.694
3 0.840 0.794 0.751 0.712 0.675 0.658 0.641 0.609 0.579
4 0.792 0.735 0.683 0.636 0.592 0.572 0.552 0.516 0.482
5 0.747 0.681 0.621 0.567 0.519 0.497 0.476 0.437 0.402
6 0.705 0.630 0.564 0.507 0.456 0.432 0.410 0.370 0.335
7 0.665 0.583 0.513 0.452 0.400 0.376 0.354 0.314 0.279
8 0.627 0.540 0.467 0.404 0.351 0.327 0.305 0.266 0.233
(Source: Table A from Costing by T Lucey (5th edn), p. 552)

Table 17.5: An extract of discount factors for $1
If you examine the table carefully, you will realise that, Year Cash flows ($)
first, the higher the interest rate, the less the figure at which
0 (150 000)
the money will be valued at the present time and, second, 1 40 000
the longer the period of time (years), the less will be the 2 60 000
3 50 000
value of the money received. This is seen by observing the 4 30 000
figures by row and then by column. The discount factors are 5 15 000
used to calculate the present value of the net cash flow. This
leads us to the next investment appraisal method. The cost of capital is 10 per cent.
Calculate the NPV of the project and then assess whether
Net present value (NPV) or not it should be undertaken.
Net present value represents the value that the firm Answer
obtains when it discounts its cash inflows and outflows of a
future investment project. It is calculated by multiplying the Year Cash flow Discount factor @ Present value
annual cash flows by the discount factor for a given interest ($) 10% ($)
rate. At the end of the period (usually in years), the present 0 (150 000) 1.000 (150 000)
value of the cash is added to give the final figure or NPV. 1 40 000 0.909 36 360
2 60 000 0.826 49 560
The firm will evaluate the proposed investment by 3 50 000 0.751 37 550
analysing the NPV after the specified years for the project. 4 30 000 0.683 20 490
5 15 000 0.621 9 315
There are three main things to look for in the analysis of the
Net present value + 3 275
NPV of a project. If the NPV is:
Positive – then the cash inflows will yield higher returns
than it will cost the company to invest in it. In other Based on the calculation, the present value of cash
words, the NPV will be more than the interest rate paid inflows surpasses the present value of the cash outflow
by the firm to obtain the capital. The project would be by $3,275. This means that if the project is undertaken, it
feasible will earn discounted returns in excess of 10 per cent. The
Negative – then the returns from cash inflows are lower project should therefore be undertaken.
than the interest rate being paid or the cost to obtain the
capital. In this case the project would not be feasible
Zero – then the cash inflows will yield a return that EXERCISE
is equal to the interest rate or the cost to acquire the J & K Ltd is thinking of investing in a new plant. The
capital. The project is still feasible. This will be examined estimated cash flow is shown below:
further in the next section. Year Cash flows ($)
Now examine the following example. 0 (500 000)
Example 1 240 000
Furniture Depot is thinking of purchasing a new machine. 2 200 000
3 150 000
The estimated cash flows are shown below: 4 110 000
5 80 000
6 50 000
The cost of capital is 8 per cent. firm may compare the IRR with the interest rates. Where
Calculate the NPV of the project and then assess the interest rate is less than the IRR, the project will yield
whether or not it should be undertaken. a positive NPV and so is viable for investment. Conversely,
where the interest rate is greater than the IRR, the project
will yield a negative NPV and so should not be considered.
Advantages of net present value The calculation of the IRR can be a very tedious process,
Takes into account the size and time value of cash flow even though it can be done with a programmed calculator
Includes interest rates in the calculation of present or spreadsheet program. However, the options available to
values firms include an estimation of the IRR using an interpolation
It is seen as a direct measure of the ‘per dollar’ method. Knowing how to carry this out is not a requirement
contribution to investors for students at this level. Alternatively, firms may randomly
It is flexible in terms of changing economic conditions, choose different discount rates until one returns an NPV of
as discount rate can be adjusted to reflect the market zero. Again, this may be time consuming.
situation. Based on earlier discussions (see DCF above), it is evident
that the higher the interest rate or cost of capital, the lower
Disadvantages of net present value the NPV. This therefore suggests that there is an indirect
The results gained are largely dependent on the discount relationship between the NPV and the discounted rate.
rates used in its calculation. Therefore if the expectation This relationship can be shown graphically, by using the
of interest rates is inaccurate, the results will also be following steps:
inaccurate 1. Choose two discount rates – one that will return a
It may be difficult to calculate, as it is largely numerical positive NPV and the other a negative NPV (for example,
It ignores the qualitative factors affecting a decision. 10 per cent and 16 per cent, as seen in Table 17.7)
Year Cash 10% DCF 16% DCF

EXERCISE flows
DGF Company Ltd has three options in terms of 0 (initial (10 000) 1.000 (10 000) 1.000 (10 000)
projects to invest in. The information for the three outlay)
projects is shown in Table 17.6: 1 Net 3 000 0.909 2 727 0.862 2 586
receipts
2 3 000 0.826 2 478 0.743 2 229
3 3 000 0.751 2 253 0.641 1 923
Project L Project M Project N 4 3 000 0.683 2 049 0.552 1 656
Initial cost 60 000 48 600 52 000 5 3 000 0.621 1 863 0.476 1 428
Net present 1 370 (178)
Year 1 16 000 12 200 9 400 value
2 17 200 13 400 12 400
3 17 400 10 200 13 500 Table 17.7: Information for NPV/DCF analysis
4 18 000 9 600 14 800
5 18 650 8 750 16 800
2. Plot the two points on a graph. See Figure 17.1 (p 178)
Table 17.6: Investment information for DGF Company Ltd for an example.
From the graph, you will realise that the NPV becomes
The cost of capital is 12 per cent. zero somewhere between the discounting rates of 14
1. Calculate the NPV for each of the three projects per cent and 16 per cent. The exact figure can be found
2. Assess which of the three projects should be by using the formula in Step 3
undertaken. 3. Use the following formula to calculate the IRR:
C
IRR = X + D ×
E
Internal rate of return (IRR) where:
Like the NPV, discounted cash flow is also used to calculate X is the rate that gives a positive NPV
the internal rate of return. The IRR refers to a discounted D is the difference of the two rates used to calculate
rate of return which, when calculated, gives an NPV of zero. the NPV
When assessing the viability of an investment project, the
When assessing an investment project, it is also advisable

NPV $
to take into consideration the qualitative factors, including:
1600
How employees will react to the proposed investment
1400
project
1200
Whether or not there are any environmental
1000
NPV implications of undertaking a project
800
The social consequences of the investment decision
600
400
The sources and availability of funds
200
An assessment of the correlation of the firm’s objectives
0 and the planned investment project.
-200
-400
10% 12% 14% 16% Discounting
rate (%) Comparison of methods of appraisal
See Table 17.8 for an overview.
Figure 17.1: NPV graph

Appraisal Measurement Similarities/Differences
method
C is the positive NPV
Payback Measures liquidity of While similar to NPV
E is the sum of the positive and negative NPV the firm in terms of how in terms of considering
(ignore the negative sign). soon a project can pay the ability of the annual
Therefore: for itself cash inflows and the
ability to recover the
1 370

IRR = 10% + 6% × (1 370 + 178
) = 15.31% amount invested, it does
not take the time value
of money into considera-
4. Compare the IRR with the cost of capital. If the cost of tion. This means that,
capital is less than the IRR, then the project can be in reality, the projected
undertaken, and vice versa. inflows could be over-
stated in real terms
Advantages of IRR ARR Measures profits in Profits could be over-
terms of how profitable stated, especially since
It considers the amount and the time value of cash each investment project it does not account for
flows is expected to be changes in the present
value of money, unlike
It is more concerned with the percentage return than the NPV and IRR
cash flows, therefore can be used for meaningful NPV Measures the time value This is only as reliable
comparisons among projects with different initial of money. Shows how a as the discount rate that
outlays. project will be paid for is used to calculate it.
using the present value The wrong discount rate
of the cash inflows could distort the final
Disadvantages of IRR calculation. However,
considering the time
Its calculation can be a very tedious process value of money gives the
It sometimes gives unrealistic rates of return. firm a more realistic
view of the project and
its ability to generate
inflows to pay for itself
Limitations of investment appraisal IRR Measures the returns While the IRR considers
The result of investment appraisal is only as reliable to be received from the time value of money,
investment. This is then using it alone to make
as the data. The projections made are based on compared with the inter- a decision regarding
expectations and should not be taken as a guarantee est rates investment may not be
It only considers quantitative factors and ignores advisable, as a very high
projection for IRR may
important qualitative factors such as employee and not be realistic
community reaction to the proposal made
The techniques used depend on the skills and ability Table 17.8: Comparison of methods of appraisal
of its users in interpreting the results as it relates to an
investment project.
CHAPTER SUMMARY
Investment is more than just The main quantitative methods used Businesses evaluating investment
spending on goods and services. It by businesses to evaluate investment projects should also take qualitative
includes spending on capital goods are: payback period, average rate of methods into consideration,
which are used to generate income return, net present value and internal including: employees’ contribution,
or produce other products rate of return social consequences and environment
impact.
MULTIPLE CHOICE QUESTIONS 4. Discounted cash flow is used to calculate the:

I. Net present value
1. Which of the following is NOT a quantitative technique used
for investment appraisal? II. Payback period
a. Payback period III. Average rate of return
b. Internal rate of return IV. Internal rate of return
c. Availability of funding a. I only
d. Net present value b. I, II, III only

c. IV only
2. The IRR is found where the NPV is:
d. I and IV only
a. Greater than zero but less than one
b. Greater than one
c. Less than one
d. Equal to zero
3. A positive NPV suggests that:

a. Cash inflows will yield higher returns
b. Cash inflows will yield equal returns
c. Cash inflows will yield lower returns
d. Cash inflows will yield zero returns
180
MANAGEMENT OF BUSINESS
UNIT 1 – PAPER 2
END OF UNIT TEST
DURATION OF TEST: 2hr 30min
INSTRUCTIONS TO STUDENTS
1. This test consists of THREE sections
2. Each section has TWO questions
3. Candidates MUST answer ONE question from EACH section
MODULE 1: BUSINESS AND ITS ENVIRONMENT
Answer ONE question from this module
Question 1 Question 2
When Kerry was made redundant by her employer after 15 a. Outline two (2) ways in which a firm could behave socially
years she knew that it was time to create her own business to responsibly towards the following:
prevent a recurrence happening to her in the future. She has i. The customer
shared her idea with two friends who want to come on board ii. The environment
and form a partnership. She is also considering the option of iii. Shareholders 6 marks
inviting the other nine people who were made redundant at the b. Decision making is very important to any business
same time as her to invest their severance money. organisation. A manager making a decision could follow a
a. Outline three (3) features of EACH of the three (3) possible number of steps as outlined below:
business organisations that Kerry is considering. i. Definition of the problem
9 marks ii. Data collection sources
b. Discuss four (4) benefits that Kerry could derive from iii. Analysis and evaluation
starting a private limited company as opposed to a sole iv. Formulation of alternative strategies
trader. 16 marks v. Implementation
Total 25 marks
Discuss EACH stage in the decision-making process and
outline how they would apply to a firm that is experiencing low
profitability in the last two quarters. 15 marks
c. Explain two (2) ways in which technology could
NEGATIVELY affect the decision making of a firm.
4 marks
Total 25 marks
182 END OF UNIT ASSESSMENT
MODULE 2: THE MANAGEMENT OF PEOPLE
a. Frederick Taylor is often viewed as the ‘Father of Scientific a. Explain the following two (2) concepts:
Management’ and has made numerous contributions in i. delegation and
the early days of the study of management. Discuss three ii. span of control. 6 marks
(3) contributions that his theory has made to modern-day b. Briefly discuss how the leadership style used by a manager
management. 9 marks can negatively affect the level of motivation among workers.
b. Explain the terms ‘synergy’ and ‘entropy’ in terms of the 4 marks
System Theory. 4 marks c. Outline the five (5) stages of team or group development.
c. Discuss four (4) functions that a typical manager has to 10 marks
carry out. 12 marks d. Outline two (2) benefits and one (1) disadvantage of
Total 25 marks working in teams. 5 marks
Total 25 marks
MODULE 3: BUSINESS FINANCE AND ACCOUNTING
At the end of the financial year, 31 May 2013, Trimmer
a. Discuss three (3) ways in which a firm can manage its Enterprise had the following data in its books:
working capital. 9 marks
b. Explain three (3) ways in which a firm having working $ $
capital problems can increase its working capital. 9 marks Fixed assets 30 700
Current assets:
c. Given the following information, calculate the gross profit/ Inventory 7 320
loss for JB Smart for the year ended 30 November 2013. Accounts receivable 4 000 11 940
7 marks Cash at bank 23 260
Less: Accounts payable 10 500
12 760
43 460
Details Amount $
Financed by: 36 470
Returns inwards 5 800 Capital (1 June 2012) 10 680
Purchases 80 400 Net profit 47 150
Inventory at 1 Dec 2012 22 450 3 690
Sales 120 050 Less: Drawings 43 460
Returns outwards 6 740
Carriage inwards 8 750
Note that other important information from the profit and loss
accounts reads:
*Inventory at the end of the period was valued at $18 645
Total 25 marks
Opening inventory $9 600 and is already incorporated in the
cost of sales figure; Sales $58 900; and gross profit was $15
250.
a. Compute the following ratios:
i. Gross profit margin
ii. Net profit margin
iii. Acid test
iv. Stock turnover
v. Return on Capital Employed (using average capital)
15 marks
b. Evaluate your answers above and then explain what the
implications for the firm are in terms of the ratio calculated.
10 marks
Total 25 marks
184
Unit 2
APPLICATIONS IN
MANAGEMENT
185
Module 1 Production and Operations
18 Management
The Nature of Production
Now let us look at each stage of the process more closely:
LEARNING OBJECTIVES:
At the end of this chapter students should be able to: Input
Describe the production process This is the raw materials or components of production. It
Outline the four major decisions that are made in represents the items that a firm is going to convert to a
production finished product. It includes things such as bauxite, gold
Explain the factors that influence the decisions of what, and agricultural produce. These raw materials would come
how, when and where to produce from the factor of production – land. It is important to note
Assess the advantages and disadvantages of the methods that a finished product from one industry could be used as
of production an input in another industry. For example, flour, which is
Outline the factors that influence the method of the end result of processing wheat, could now be used in a
production used bakery as an input to bread production.
Throughput
B
This is the process that the raw materials or components go
efore we discuss the major decisions in production
through before being converted into finished products. The
it is important first to define production. The term
range of processes will differ from industry to industry but
‘production’ is seen as any activity that a firm under-
may include things such as crushing, melting, moulding,
takes to add value to the factors of production by converting
welding, cooking and baking, etc.
them into another product. For example, production takes
place when bauxite is converted into alumina. The produc-
Output
tion of any good has to go through a process which is often
This is the outcome of the conversion of inputs (raw
referred to as the ‘production process’.
materials). The output represents the finished goods that
have been generated from production. It includes such
things as bread, aluminium, banana chips or a gold knob.
The production process
The production process outlines the steps involved in
converting input to output. This process is divided into three
sections: the input, the throughput and the output. See
Factors of production
The production process would not be successful without the
Figure 18.1.
factors of production. These are land, labour, capital and
Input entrepreneurship and they represent inputs into production
for the purpose of making a profit.
However, before production can begin there are certain
Throughput decisions that must be made by the firm. These decisions
are imperative because of the economic problem known as
‘scarcity’. This is a condition where resources are limited but
human wants are unlimited. Therefore, the firm will never
Output be able to fulfil the wants of everyone. It will then have to
make decisions on what to produce, how to produce, when
to produce and where to produce. Each of these questions
will be explored in detail below.
Figure 18.1: The production process
186 MODULE 1 | UNIT 2 | PRODUCTION AND OPERATIONS MANAGEMENT
What to produce? The decision of what to produce is largely influenced

This question is particularly important to any organisation. by the level of demand for the firm’s product. ‘Demand’ is
Firms generally go into business to make profits and are defined as the willingness and ability of a person to purchase
driven by the profit motive. Therefore, they seek to produce a particular product at a particular price at a particular period
those products that will return the highest profit. The of time. Simply put, it is an individual want backed by the
revenue that will be gained from the production of any ability to pay. To this end, the product with the highest
product must be able to cover the costs that will be incurred demand will be produced. In order to ascertain the needs
in its production. and wants of consumers, the firm usually conducts market
research. This will be discussed
in Module 2. Essentially, though,
market research is used to gather
information from consumers for
the firm. The information gathered
can assist the firm in developing a
product that caters to the need of
the consumers.
Another important, yet not
very popular, influence on what to
produce is the practice of producing
what the firm can and then trying
to find a market for the product.
Some organisations will produce
the products that they have the
technology and machinery to
produce. Instead of finding out
what consumers want, the firm will
produce the product that its current
equipment and technology can
produce. This practice is linked to
the production concept that will be
explored in Module 2.
The financial viability of the
product is another factor that
would influence its production.
The producer would want to know
that the product will be able to
make enough money to cover the
investment costs and also earn a
profit in the foreseeable future.
Production methods
Having made a decision on what
should be produced, the producer
must now decide on the method of
production to use. The production
methods available to the firm are
discussed below:
Figure 18.2: An example of job production

CHAPTER 18 | THE NATURE OF PRODUCTION 187
Job production This form of production method is quite popular in the

Job production is used when a single product is produced handcraft industry, where simple tools are used and each
to meet individual specifications. Such products are usually product is made at different times. While production may
a one-time production built to the buyer’s design and not be done on a large scale, there are advantages in using
specifications – for example, a custom-built car, a wedding this method of production.
dress, ship building or bridge building. Job production
usually involves a single worker (for example, a dressmaker) Advantages of job production
or group of workers (for example, construction workers) The product is tailored to the needs of the consumer
working on the particular product. The following are some It is easier to isolate any problem that may arise
of the notable characteristics of job production: The workforce is greatly involved with the product,
The focus is on the individual customer and not the which will improve job satisfaction
entire market The product is usually of high quality.
The product is usually highly priced
The labour force is highly versatile and skilled Disadvantages of job production
Machinery and equipment are usually flexible so that Very high per unit cost
they can be used for different jobs Requires a very skilled and flexible labour force
Only one product is made at a time. High spending on machinery and equipment
Products are normally very expensive.
Batch production
With the increase in market
sizes and demand, it would
be impossible for firms
to use the job production
method to satisfy the needs
of all their customers. There
would then be a need to
produce a number of the
same products at the same
time. This is made possible
through the use of batch
production. This method
allows a group of products
to undergo a production
process at the same time.
With batch production the
work can be organised into
a number of steps, with
each batch of products going
through each step at the
same time before moving to
the next step. For example,
in the soft drinks industry,
drink would be poured into
a group of bottles, then corks
would be fitted and then
the batch of bottled drinks
Figure 18.3: An example of

batch production
would be labelled and so forth. Batch production is a popular be found in the car manufacturing industry and other large
method used in the food, chemical and pharmaceutical manufacturing plants.
industries. Items that are made using this method carry a Flow production may take different forms, depending on
batch number which makes it easy for them to be traced in the industry and the manufacturing process. These forms
case of a problem with a particular batch of products. may include:
Batch production is known to have the following Mass production – which involves the production
characteristics. of identical and standardised products. This type of
Skill level of the labour force is relatively high but lower production is done on a very large scale and requires
compared with job production the production of goods in a relatively short time. It is
Appropriate for repeated customer orders usually synonymous with high and sustained demand
Equipment cost is lower, as one piece of equipment is for the goods being produced – for example, household
used on a number of products appliances
Produces a standardised product Continuous flow production – this is where the product
Usually has a high inventory of work in progress being produced goes through a continuous series of
Machines are organised and grouped based on the processes. There is no stoppage until the product is
functions that they perform. complete. This is often used in conjunction with process
production
Advantages of batch production Process production – as the name suggests, this form
Lower machinery requirement compared with job of flow production involves the product going through
production different processes until completion. It is used to convert
Quality control can be done as the products pass raw materials into finished products, such as converting
through each process crude oil into petroleum products.
Lower labour costs, as workers are less skilled The common features or characteristics of flow production
Takes less time to complete a product, so firms can are:
respond quickly to orders Uses a greater amount of semi-skilled or unskilled
Lower per unit costs as a result of large-scale workers
production. The product price is lower due to mass production
Firms experience economies of scale
Disadvantages of batch production The process is highly automated
Cash may be tied up in work in progress Large amounts of raw materials and components
Machinery and equipment ‘down’ time as the firm A standardised product is produced
switches between batches of products Set-up cost is exorbitant.
The level of motivation may be lower for the workforce
Small batches of products may lead to an increase in Advantages of flow production
unit costs. Lower ‘per unit’ costs as a result of economies of scale
Large amounts of goods can be produced quickly
Flow production Can be used to meet the ever-growing demands of the
Where there is very high demand, flow production is the market
most suitable method to use. It involves the organisation of There is a reduced need to store large amounts of
the work process in sequential steps so that each item passes finished goods due to the speed of production.
through each stage before moving to the next. It uses a series
of repetitive processes to produce standardised products. Disadvantages of flow production
Unlike in batch production, the products are produced Very high set-up cost
continuously and do not have to wait on a batch of products. If something goes wrong, the entire assembly line can
The products pass through each stage via a conveyer belt be halted
or an assembly line. This method is used to mass-produce Quality is sometimes sacrificed for quantity
products and meet high demand. It makes use of division of Work can be repetitive and boring, which leads to low
labour and specialisation. Flow production has a very high motivation for workers
capital outlay but cost can be recovered over time due to Usually inflexible, as it is difficult to alter the production
mass production and sales. Examples of flow production can process if consumers’ tastes change.
Figure 18.4: An example of flow production
Cellular production Benefits of cellular production

Cellular production is also known as ‘cellular Quality is improved, as each cell has to ensure that
manufacturing’. It involves dividing the factory into cells quality is maintained
that will carry out specific tasks on the product. Each cell Team working normally leads to increased motivation
is equipped with the machinery needed to complete that Improvement in the skill level of employees
part of the product. Once the task is completed, the product There is a reduction in the amount of floor space used,
will then move to the next cell. For example, in making a as each cell occupies less space than if an assembly line
shirt one cell might be responsible for sewing sleeves and was being used
another collars or buttons. The shirt will pass through each The firm could see a reduction in work in progress.
cell before it is completed.
Cell production could also be used to produce a particular Disadvantages of cellular production
product or product family. In this case, each cell would be The level of output may be less than if using a flow
independent of the others and the products produced will production method
form a part of its production target. Capital and equipment costs could be very high.
Cell production promotes teamwork and each member is
responsible for maintaining quality and design of the product.
CASE STUDY
Must Stop Restaurant and Bar

George Gino operated for years as a street-side cook, providing meals for the farmers and construction workers in his little
community. The revenue received has been able to take care of his expenses at the shop and at home. For years, though, George
has been saying that one day he is going to set up shop in the parish capital so that more people can taste his trademark cooking.
A month ago, George came into some money that his grandmother left for him in her will. This receipt of this money was very
timely and George decided to fulfil his dream of operating in the parish capital. Having satisfied the necessary legal require-
ments, he established Must Stop Restaurant and Bar.
Initially the restaurant catered for walk-in customers. However, George has secured a contract to provide lunches for the
staff at a nearby school. He collects orders in the morning, prepares the lunches and then sends them to the school. In any given
day George normally offers three types of meat prepared in different ways. This is served with a choice of rice and peas, white
rice or pumpkin rice. These choices were based on a survey carried out in the area and at the school.
George is also considering implementing a ‘call to order’ policy. This would allow people to specify how they would like their
meals to be prepared. However, there are a number of hiccups with this policy so it has not yet been implemented.
Questions
1. What is the most likely production method for George Gino to use in his restaurant? (2 marks)
2. Discuss three (3) advantages and two (2) disadvantages of using this method of production. (15 marks)
3. If George should implement the ‘call to order’ policy, which production method would it represent? Give a reason
for your answer. (2 marks)
4. Outline two (2) advantages and two (2) disadvantages to George of using the method mentioned in
Question 3 above. (6 marks)
Total 25 marks
Factors that influence the method of expands its market reach or share, it also must expand
its scale of production. This might result in the firm
production used
switching from a batch production method to flow
In the above section, the different methods of production
production
were discussed. However, with options come choices and
Stage of the product lifecycle – later in the unit we
there are certain factors that will assist management in
will examine this concept. However, a product that is
choosing the method of production to employ. Below are
in its growth stage may require mass production but a
some of more popular factors:
slowing down of production as it reaches the decline
Nature of the good – the type of product to be produced
stage
may require a particular method of production. For
The level of technology – flow production requires a
example, tinned food is usually produced using batch
large amount of automation compared with the other
production, while roads or houses will be produced
two popular methods. The level of technology to which
using job production
the firm has access will definitely determine whether or
Expected sales (demand) – the expected level of sales
not it can utilise the desired production method
or demand will influence the method of production
Initial capital outlay – the final decision of the firm in
chosen. If the organisation is expecting high sales or
terms of its production method rests largely on its ability
demand, it may need to employ a flow production
to afford the cost of setting up its production facility.
method where goods can be produced quickly and in
The method of production used will be influenced by
large quantities
the firm’s ability to afford or secure funding for the
Size of the market – this factor has some connection
machinery and equipment needed to start production.
with the preceding one. Larger markets usually mean
higher demand for the firm’s products. As the firm
CASE STUDY
Do it when called
Mr Woodcarver is a furniture maker with many years of experience under his belt. He is known for his carefully made furniture
that is usually made to the customer’s specification. His little business employs four people who assist in the finishing of the
items when ordered. For years Mr Woodcarver has waited until an order was made before he purchased raw materials and
started building the piece of furniture. He keeps very little stock of wood and furniture spray because he doesn’t know the style
and specifications of the customers’ orders until they place them.
Over the years, Mr Woodcarver has recognised that furniture is affected by seasonal demand. He gets a spike in orders
around the time nearing Christmas. Therefore he would not want to build the furniture in advance and have it taking up space
for a while. Mr Woodcarver’s business is highly capitalised, with heavy-duty machinery of all kinds. This makes it possible for
him to make almost any kind of furniture as soon as he receives the order to do so.
Questions
1. What type of production method is described in the case above? (2 marks)
2. What are three (3) benefits and three (3) costs to Mr Woodcarver of using this type of production method? (12 marks)
3. Describe two (2) factors that could have influenced Mr Woodcarver in choosing this production method. (6 marks)
Total 20 marks
When to produce? may have a challenge. As it prepares for these seasons, the
While the new Management of Business syllabus removed firm has to produce sufficient amounts to meet the peak in
this area, it is worth discussing in brief. With marked demand but has to ensure that it is not left with a lot of stock
improvements in production capabilities and technology, after the season has finished. To this end, careful research
there are a number of products that you will see all year and planning have to be done so that the right amount can
round. However, there are still a number of products that be produced at the right time.
will only be produced or you will only be able to purchase
during certain times. The producer must then ask the Lifespan of the product
question ‘When to produce?’. The timing of production may A product that perishes easily and quickly cannot be
be influenced by a number of factors: produced too long before its actual sale. This is particularly
important for the food industry. A restaurant would not
Storage space and costs want to cook its meals too early, as it may have to discard
The available space for storage and the cost of storing the everything due to spoilage. Products that have a long shelf
products are two of the deciding factors of when to produce. life can be produced at varying times since spoilage may not
If the rate of sales turnover is low, then the firm might find be an immediate issue – for example, appliances.
that a lot of money will be wasted in trying to secure stock
and dealing with spoilage or outdated products. In order to
minimise the aforementioned problems firms can utilise the Location of production
principle of economic order quantity (EOQ). This principle The last of the questions that are asked in production, though
is used to calculate the optimum level of stock that should equally important as the others, is ‘Where to produce or
be held by the firm in order to reduce costs. There will be locate?’. Location is the key to the success of the business.
further discussion on EOQ in Chapter 22. Identifying the ideal place for location may mean the
difference between having a customer base or not. However,
Seasonal demand there are some businesses or industries where location is not
Products that are sold year round are less affected by this paramount, as the firm’s success is not tied to its location.
factor and the firm can produce whenever it chooses. Such industries are referred to as ‘footloose industries’.
However, for seasonal products, such as some agricultural These are industries whose location is neither influenced by
products, Christmas ornaments or Easter buns, the firm the market or sources of raw material nor tied to any area so
that it cannot relocate – for example, an e-service centre as market. The costs of transportation are often tied to the
opposed to an oil refinery. It is also important in discussing quality of the transportation system in the area. A good
location that the concept of industrial inertia be explained. system may offer quality at a lower cost than a poor and
This occurs when a firm refuses to relocate even after the expensive transportation system.
original benefits of locating in that area have gone. The firm
may not want to relocate because of the costs involved in Labour costs
relocating or it may have developed ties with the area by Human capital is an integral part of the organisation and is
being a good corporate citizen and a household name. taken into consideration when seeking where to locate. The
Before a firm chooses an area to locate in, it must take firm needs to ensure that labour is available and has the
a number of factors into consideration. These factors can be different levels of skills as needed. Some firms may desire to
broken down into two broad categories: quantitative factors have cheap unskilled labour while another may want highly
and qualitative factors. Each category will be analysed skilled or semi-skilled but no very expensive labour. If the
further below. category of labour needed by the firm is not available in the
area of location, then it may incur huge costs in sourcing
Quantitative factors affecting location the desired category. The nature of the goods to be produced
Quantitative factors refer to those that can be measured and the expected production method can be used to assist
in monetary terms. They include: the firm in making this decision.
Site costs Government incentives

These are possibly the first costs that would come to a Some governments may give firms an incentive to locate their
potential investor’s mind when making a decision to locate business in particular areas. This is particularly important
in an area. Site costs are usually fixed and so should be of where the government aims to develop or redevelop the
utmost concern to the business. This means that once the area. It could grant firms tax breaks or holidays or the firm
firm occupies the location these costs will be incurred even if could benefit from zero-rated construction materials and
it does not produce any unit of the product. Site costs usually customs-free shipment of equipment. An example of this
include the purchasing of property, payment of rent or lease would be the new Digicel headquarters building which
and modification costs or construction costs. Other costs was constructed on the waterfront in downtown Kingston,
such as payment of taxes, fees and utilities are sometimes Jamaica in a bid to encourage other investments as a part of
added to the previous list. the redevelopment project for the capital city.
The firm may want to locate in an area where the site
costs are manageable. It has to be careful, however, that it Revenue potential
does not locate in a remote area because of the low costs. When all is said and done, the firm’s main aim is to make
This could mean that sales will be low and the business may money – and lots of it. Therefore in addition to assessing
fail. At the same time, it should not locate in an area where the different costs that might be incurred in locating in a
costs are exorbitant as it might not be able to cover those particular area, the firm must also examine the revenue
costs and could go bankrupt fairly quickly. potential of locating there. If the firm is able to generate
huge revenues in a particular location it will find it easier
Transportation costs to pay the costs associated with the location. For this reason
The firm would want to ensure that the transportation some firms will locate in very expensive areas such as cities
cost is not too high, whether transporting raw materials or towns because they can generate high revenues from that
or finished goods. It should take the necessary steps to area.
minimise such costs. This could be done by, for example,
locating close the source of raw materials or close to the Qualitative factors affecting location
market. The firm would have to make a decision on which Qualitative factors are those that cannot be measured
of the transportation costs would be greater – that is, numerically or in monetary terms. They include:
transporting raw materials or finished goods to the market.
The general idea is to locate closer to the one that will cost Infrastructure
more to transport. For example, if raw materials cost more This is an important factor in determining location,
to transport then the firm may want to locate nearer to the especially in this 21st century. A firm must consider the level
raw materials and then transport the finished goods to the of infrastructural development in the area in which it wishes
to locate. It should consider factors such as communication, Available services and amenities
quality of transportation system and quality of the physical The organisation needs to ensure that the place of location
infrastructure such as roads and bridges. Firms are quite has some basic services and amenities. These include
aware that not all customers will walk into their buildings utilities (electricity and water), proper waste disposal and
to make a purchase. This means that there must be a proper education and training facilities. A major problem in most
transportation system in the area of location. A good system Caribbean countries is that of the cost of electricity. This is
is needed to bring raw materials to the firm on time so that largely because of their dependence on oil for energy. As
production is not hampered. The higher the quality of the a result, the firm has to assess carefully its location and
transportation system, the greater will be the freedom of the how it can lower its energy bill. Locating in a country with
firm in choosing a location. For example, a firm could locate high energy cost and little alternative could see the firm
on the outskirts of the city and transport its products rather incurring huge costs of production. For example, the level
than paying the high rent on lands in order to locate in the of energy consumption by giant car maker Toyota would
city. With the rapid growth in e-commerce, firms would make it virtually impossible for its plant to be located in
want to know that there is internet access in the location so CARICOM. For many years, bauxite-producing countries
that they can explore online options for sales and receipt of such as Guyana and Jamaica have had to export alumina
payment. since they are not able to generate the electricity needed for
aluminium production.
Environmental and planning consideration Locating near educational institutions may help to solve
With the realities of global warming reaching most, if not the problem of finding skilled labour. This will also provide
all, countries, environmental agencies have become more the firm with the opportunity of honing the skills of the
vigilant in their pursuit of firms that breach such laws. present labour force. Some businesses may want to locate
To this end, and with more firms displaying corporate in an area with other services such as shopping facilities,
social responsibility, the firm must take these issues into entertainment and proper housing.
consideration when deciding on a location. Firms have to be
mindful of the environmental effects of production and how Legal and political factors
locating somewhere will affect town planning activities. The firm has to think about the political stability of the area in
which it wants to locate. If the area is known to have political
Management preferences upheavals and instability then it might not be a good idea to
This is a deliberate attempt by the most senior managers of a locate there. Locating in these areas could lead to a loss of
firm to influence where it is located. The fact that managers investment. Firms must also consider the laws of the country
have certain preferences can sway the firm’s locating in which they want to locate. There are some areas where
decision. Where the firm is new, the investor may have a businesses are not allowed to locate, such as residential areas
particular preference for an area and so decide to locate the or certain parts of cities. Other laws may include the Town
business there. Some investors set up businesses in their and Building Act and the Noise Abatement Law.
childhood communities, to give something back there in
terms of job creation.
ACTIVITY
Other factors influencing location Try to identify the laws that would affect the location
Closeness to market of businesses in your country.
If the firm’s products cannot reach the market, it may run
into financial problems. Therefore the accessibility of the Geographical factors
market is very important. The firm should ensure that its
This factor is most important for businesses in the agriculture
customers can easily access its products. Where the business
industry. The climatic condition of some areas does not make
is offering a service, accessing the consumers is even more
it feasible to grow certain crops. The firm will have to assess
important as where there are no consumers there is no
the topography and chemical structure of the land before
sale. Large manufacturers of products that may need to
locating there.
be shipped will locate near to a port for ease in getting the
products to the market.
CASE STUDY
Finding the ideal location

When Ms Optimistic decided to start her boat parts business, her biggest issue was finding the ideal location. The fact is that
not many people on the island own boats but rather specialise in automobiles. This meant that she will have to locate where the
owners of boats can gain easy access to the business. Ms Optimistic did some research and realised that to locate in the major
town would be very expensive because of the high rental price for shop space. There was also a congestion problem and it would
be difficult for the trailers that deliver stock to unload. She would need to explore other options.
She heard of a house selling in her quiet residential community of Rosewell and decided to buy the property for the purpose
of the business. The house has a large enough yard space and the roads are wide enough to accommodate the trailers carrying
stock to her business. The house was purchased and the business started operating out of Rosewell. Things went on fine for the
first couple of months until the community Citizens’ Association became concerned that their uptown residential community
was being commercialised by this business and they now want it shut down by the authorities. Their argument is that the rest
of the houses in the community are going to lose their value, there is increased commuting by customers, increased noise level,
the trailers are damaging the roads and the business in general is defacing the community. The future is now looking dim for the
young optimistic entrepreneur.
Questions
1. Briefly explain why, in your estimation, location was so important to Ms Optimistic. (2 marks)
2. Describe one (1) quantitative and one (1) qualitative factor that influenced the location decision of the firm. (6 marks)
3. Based on your discussions in class about location, evaluate the decision that was made by Ms Optimistic to locate
in Rosewell. (12 marks)
Total 20 marks
CHAPTER SUMMARY
The four factors of production Batch production method allows Location is the key to the success
are: land, labour, capital and a group of products to undergo a of the business, as identifying the
entrepreneurship production process at the same time ideal place for location may be
the difference between having a
Firms are faced with four major Flow production uses a series of customer base and not.
questions when deciding on repetitive processes to produce
production (what, how, when and standardised products
where to produce)
Industrial inertia occurs when a firm
Job production is used when a refuses to relocate even after the
single product is produced to meet original benefits of locating in that
individual specifications area have gone
MULTIPLE CHOICE QUESTIONS 7. Which of the following methods of production is MOST

LIKELY to be associated with the assembly line?
1. ALL of the following are factors of production EXCEPT
a. Flow production
which one?
b. Job production
a. Land
c. Batch production
b. Capital
d. Cell production
c. Enterprise
d. Technology 8. The following are factors that influence the type of production
method that is used, EXCEPT which one?
2. What is the name given to the process of adding value to
a. Experience of the workers
resources?
b. Nature of the goods
a. Value added
c. Size of the market
b. Pricing
d. Level of technology
c. Production
d. Mark-up
3. The production method that is MOST LIKELY to benefit

from economies of scale is: Question one Total 25 marks
a. Batch Best Job Ltd is considering switching from using job
production to batch production.
b. Flow
a. Outline three (3) characteristics of each of the
c. Job two production methods mentioned above. (12 marks)
d. Product b. Briefly describe the batch production method
and explain three (3) benefits and three (3)
4. Which of the following methods of production is most likely
drawbacks of changing from job production
to be used by a sculptor?
to batch production. (13 marks)
a. Job
b. Batch
a. With the use of an example, describe the
c. Process
production process. (7 marks)
d. Flow b. Outline two (2) features of the flow production
method. (2 marks)
5. The willingness of consumers to purchase an amount of a
c. Discuss four (4) factors that would influence the
product for a particular price at a particular period of time is
location of a food processing plant. (16 marks)
BEST defined as:
a. Wants
b. Supply
c. Demand
d. Purchasing
6. Which one of the following factors is MOST LIKELY to

impact on the location decision of a restaurant?
a. Geographical factors
b. Legal and political factors
c. Closeness to market
d. Closeness to raw materials
196
19 Forecasting Techniques
Qualitative forecasting techniques

LEARNING OBJECTIVES: A qualitative forecast focuses on value judgement and the
At the end of this chapter students should be able to: individual’s opinions of the future outcomes. The predictions
Explain the importance of forecasting made by using these techniques are usually subjective and
Explain the difference between qualitative and are normally used when there are no historical data about
quantitative forecasting techniques the performance of the product – that is, in the early stage
Evaluate each of the forecasting techniques normally of the product’s lifecycle. The following are the common
used in production planning qualitative techniques that are utilised in production
Calculate moving averages and least squares regression planning.
Sales force composite
P
There is a notion that the people who interact the most
lanning for production is an integral part of any
with customers can be very good predictors of future sales
manufacturing business. Proper planning can result
levels. The sales force composite technique relies on the
in cost savings and improvement in efficiency in
sales force of the firm to make projections of the future
terms of how scarce resources are used. The focus in this
levels of demand for the firm’s product. Since the sales
section will be on the tools available to assist with produc-
force interacts regularly with customers, they are furnished
tion planning and other concepts which are pertinent to
with a repertoire of knowledge about trends in the market,
production planning. Before you examine these concepts
change in customer choice, the product and the competitors’
you should be clear on what a production plan is. Production
behaviour.
planning is the process of outlining the steps to be taken in
This method of forecasting uses the opinions of salespeople
the production of a product. The plan should include the
to formulate a prediction of sales in the future. Their inputs
material requirements, machinery and equipment that will
may be taken individually and then aggregated as the sales
be needed or used, the sequence of activities and a time
manager tries to map the trend of future sales. One point to
frame in which the product should be completed.
note, though, is that this type of forecasting is best used in
conjunction with other techniques. The main reason for this
is that the opinions of the salespeople might be limited to
Forecasting techniques that geographical area or be misguided.
Generally speaking, a forecast is a prediction of upcoming
events. In terms of the business, it is an estimate of the Advantages of sales force composite
possible future levels of costs, sales, stock or production.
Relatively inexpensive to get information
The scale of forecasting can be divided between micro-
Information is almost readily available
forecasting and macro-forecasting. Micro-forecasting deals
Salespeople have direct contact with customers
with a prediction of the future performance of a specific
They are knowledgeable about the firm’s product and
department of the firm – for example, the firm may forecast
competitors’ behaviour
sales for a particular product. Macro-forecasting deals with
Their job responsibilities can enable them to offer
making a prediction for the overall market – for example,
insight about developing marketing trends
predicting the demand for the firm’s products.
Forecasting techniques are classified under two Drawbacks of sales force composite
categories. These are qualitative forecasting and quantitative
Since estimates may be used as a benchmark for
forecasting techniques.
salespeople’s performance, they may be underestimated
CHAPTER 19 | FORECASTING TECHNIQUES 197
The information received may be limited to a particular It utilises experts from a wide geographical base, since
locale and cannot be used generally communication is done via telephone or internet.
This technique is based on opinions and not on
statistical data of previous performance Drawbacks of the Delphi Method
They may not have sufficient time to develop an The quality of the results is linked to the quality of the
accurate forecast. panel used for the forecast
A poor survey instrument may hamper the research
Delphi Method process and the information being sought
This method of forecasting, while relying on opinion, The method is usually time consuming and expensive
eliminates the possibility of each person being influenced There is still a possibility of panel members being
by others. The Delphi Method uses a group of experts indirectly influenced to side with the majority.
anonymous to each other to make a forecast of sales, among
other things. The way the method works is that when Consumer (customer) survey
the forecast is received from each member of the group it Consumer survey is a form of marketing research that is
is summarised and then sent back to the other members. used to ascertain the level of potential demand for a firm’s
The firm will note the concerns and the group will revise product. In trying to make a forecast of future sales some
their forecasts as needed until a final prediction is reached. businesses may seek to gather information from the very
This can be a long and tedious process but the results are people who will be purchasing the product – that is, the
normally more accurate than other qualitative techniques. customers. Since it is impossible to question every potential
The Delphi technique has been credited to Norman customer, a representative sample is usually selected.
Dalkey and his colleagues from RAND Corporation for the Sample selection and techniques will be discussed further in
work they did in the mid-1900s. In doing their research Chapter 28.
to generate a reasonable and feasible forecast, the group Information collected through consumer surveys is
used a series of questionnaires which was sent to qualified usually gathered through the use of research tools such as
individuals in different locations. The participants never interviews and questionnaires. The information collected
met face to face but only sent their responses back to the is then analysed and a forecast can be generated about the
corporation. Their responses were summarised and a new buying intentions of prospective customers. The marketing
questionnaire was issued, based on the summary of answers. team that is conducting the research has to ensure that
This was replicated until a group consensus was reached. the research instrument, questionnaire or interview, is
This technique is said to have been successfully used in tailored to gather the information that is needed by the
the tourism industry of Singapore and in the information firm. If these instruments are biased or questions not clearly
industry in Taiwan. stated, the final analysis might be misleading. The problem
The Delphi Method has three distinct features which of misleading information can be lessened with proper
determine how it works: planning for the research on the part of all the stakeholders
Participants are anonymous to each other, so limiting involved. Different authors have included different steps
influence in the research process. However, there are four main
Feedback is organised and managed by the firm steps to the research process or consumer survey. Below is
The final result reflects inputs from all participants. the general sequence of steps that should be taken when
conducting a consumer survey.
Advantages of the Delphi Method
There is no need to conduct face-to-face interviews, 1 Problem definition and survey objectives
which can be difficult to arrange This is probably the most difficult but important step in the
Participants opinions are not influenced by each other process. If management is not able to define the problem
or by a dominant individual clearly and to set research objectives, the firm may end up
Participants have time to think about their responses wasting a lot of money. The objectives of the consumer
carefully and thoroughly survey must be clearly defined in order to resolve the
The interpersonal issues of struggle for power, problem.
personality clashes or leadership problems are
eliminated since there is no physical meeting
2 Create a research plan for collecting information It may be difficult for some buyers to forecast their
future needs
Having established the problem and stated the research
The result may reflect the subjectivity of a bias research
objectives, the next step is to develop a plan for research. This
team.
plan will outline the information that is needed to carry out
the research and how this information will be ascertained. It
Jury of experts or executives
also outlines the sources of data and instrument to be used
This technique is based on the notion that the managers
in the process.
of the different functional areas of the firm are armed
3 Collecting and analysing data with knowledge that can be used to predict sales. How
this technique works is that the sales forecasts of the
In this stage, the researchers collect the actual data, using
executives are combined and averaged to ascertain a final
primary and secondary sources. Primary data is information
prediction. The group of executives or jury of experts may
that has been collected for the purpose of the particular
be taken from departments of the firm including Finance,
research while secondary data represents information that
Marketing, Production or Purchasing. This would mean that
already exists. The information gathered is then analysed to
the forecasting team would have diverse knowledge and
see similarities and trends.
experience and, by extension, opinions.
4 Interpreting and reporting the findings
Advantages of jury of experts
At this stage, the researcher will assess and interpret the
It utilises internal managers, which makes it less
findings and draw conclusions. The final findings have to
expensive
be reported to management which will assess whether the
problem has been solved or the objective achieved. Forecasts can be done quickly
The forecast is based on the knowledge and experience
Advantages of consumer survey of top executives in the firm
Producers can acquire first-hand information from the
Disadvantages of jury of experts
prospective users of the product
The use of a representative sample gives producers the Managers sometimes lack the necessary knowledge and
opinions of buyers from a wide cross-section. experience to predict sales accurately
There is a possibility that some managers will be
Drawbacks of consumer survey influenced by others in their judgment
The intentions of buyers may not transcend into actual It is still based on the manager’s opinion and not
purchase of the product statistical or factual data.
CASE STUDY
Planning for the future

The success of any business often rests on its ability to plan for the future effectively and to implement those plans. This has
been the hallmark of Paper All Ltd. This business operates in an environment where the demand for paper products is great and
growing. Its location is central and it has a number of offices and schools in close proximity.
The firm is now thinking of expanding its operation and wants to know whether this would be feasible. In order to do so it
would need to forecast its sales for the next three years. This will be matched against the capital investment that the expansion
will require. The company believes that such a forecast will be integral to its decision to expand. Therefore, the choice of forecast-
ing technique will be very important.
Questions
1. What is a forecast and why is it important that Paper All Ltd conduct one? (2 marks)
2. Describe two (2) factors that could influence the firm’s choice of forecasting technique. (6 marks)
3. Discuss, giving reasons, the type of forecasting technique that the firm should implement under the circumstances. (7 marks)
Total 15 marks
Quantitative forecasting techniques Sales Linear trend

Unlike qualitative techniques, which are based largely on
opinions, a quantitative forecast uses historical data
and previous experience to forecast sales. This type of
forecasting is preferred by most firms once the necessary
data is available. It is believed that the pattern of sales in the
pass will continue into the foreseeable future. Two of the
more popular quantitative techniques will be discussed in
this section.
Quarters
Moving average
This statistical technique analyses a set of data points by
creating an average of a subset at a time out of the entire
set of data. Moving averages is particularly useful when Sales Exponential trend
demand for the product is fluctuating because it removes
the effects of these random fluctuations. Since the technique
is taking an average of a subset of data, it eliminates the
fluctuation while creating a forecast. In calculating moving
averages and using them to make a forecast, there are some
important concepts to note. These are:
Fluctuations
These often include: Periods
Seasonal fluctuations – include regular repeating
patterns in the short term (within a year) which is
usually associated with the different seasons of the year
Cyclical fluctuations – include regular repeating patterns Sales S-curve trend
in the medium term (more than a year) which is usually
associated with the business cycle
Random fluctuations – include unpredictable or
irregular changes in the data which can occur at any
time throughout the year.
Trends
A trend is the underlying movement behind the collected
data. Moving averages attempt to identify a particular trend Time
Periods
in the actual data. Trend lines are usually used as the starting
point in developing a forecast. Once the trend has been
identified it can then be adjusted for seasonal fluctuations Sales Fitted line
and any other events that might affect the final forecast. Figure 19.1: Examples of common trends
However, your exam at the CAPE level does not require you
to plot and interpret these trends, as it focuses more on the
Simple moving averages (SMA)
calculation of the moving averages. Some common trends
This method of calculation simply adds all the months or
that are seen in forecasting are illustrated in Figure 19.1.
years under review and then divides the total by the number
Two distinct ways of calculating moving averages will be
of months. The method uses the following formula:
explored here.
S + St – 2 + St – n
SMA Ft = t – 1
n
The explanation of the formula is as follows:

EXERCISE
Ft is the forecast for the next period using SMA
Calculate the four-week and six-week forecast for sales
St – 1 is the actual sales figure in the previous period
for Future Sales Ltd, given the actual sales in Table 19.2.
St – 2 is the actual sales figure two periods ago
St – n is the actual sales figure for as far back as desired
n is the total number of periods to be averaged. Period Actual sales Four-week Six-week
(week) forecast forecast
Now let us examine how this method works. This will be
1 2 300
done in table form, with the necessary workings below. 2 1 500
Example 3 1 800
Using Table 19.1, calculate the three-week forecast for 4 2 600
5 3 500
demand, using the moving averages method. The actual 6 4 000
demand is given in the second column. 7 3 800
8 3 600
In Table 19.1, in order to get a three-week forecast there 9 4 400
has to be three weeks’ worth of actual data that we will
average to give us a forecasted demand for Week 4. The Table 19.2: Data for Future Sales Ltd sales forecasts
forecast of demand was calculated as follows:
Week 4:
1 800 + 2 500 + 3 800
= 2 700 The formula used to calculate weighted moving average is
3
similar to that of simple moving average, with the exception
Week 5:
of the weights placed on each actual figure. The formula is
2 500 + 3 800 + 3 000
= 3 100 as follows:
3
WMA Ft = w1St – 1 + w2St – 2 + wnSt – n
Week 6:
The explanation here is:
3 800 + 3 000 + 2 800
= 3 200 W1 is the weight given to the most recent past data. This
3
is usually the heaviest weight
W2 is the weight given to two periods ago and usually is
Period (week) Actual demand Three-week moving average the second heaviest weight
}}
1 1 800 – Wn is the weight given to other periods and the weights
2 2 500 – are assigned in a descending order.
}
3 3 800 –
4 3 000 2 700 Example
5 2 800 3 100 Given the following weights (0.40, 0.30, 0.20 and 0.10)
6 2 000 3 200 and the actual demand for the past four months (Jan 4 800,
Table 19.1: Data for calculating simple moving averages
Feb 5 000, Mar 6 000 and April 4 000), forecast demand for
the month of May. (The point to remember is that the most
recent past, April, should be given the heaviest weight.)
Note that, in Table 19.1, the first forecast for demand WMA F May = (0.40 × 4 000) + (0.30 × 6 000) +
is placed in Row 4, showing that the first three weeks are (0.20 × 5 000) + (0.10 × 4 800)
averaged to predict the demand for the fourth week. To this = 1 600 + 1 800 + 1 000 + 480
end, the first week under Column 3 remained blank. Now = 4 880
try the next exercise.
Now try this exercise.
Weighted moving averages (WMA)
In the simple moving average calculation, the actual figures
were just totalled and averaged. However, with weighted EXERCISE
moving averages a weight (per cent) is placed on each figure Using the following weights (0.50, 0.30 and 0.20),
to be averaged. The sum of the weights used must always be forecast sales for Week 4 if the previous three weeks’
equal to 1. The notion behind the weighted moving average data were as follows: Week 1 (6 000); Week 2 (9 000);
calculation is that the most recent past data will most likely and Week 3 (12 000).
have a heavier bearing on future data. To this end, the
heaviest weight should be placed on the most recent data.
An assessment of moving averages will generate the

Profits
following advantages and disadvantages. Line of best fit
Advantages of moving averages

Eliminates the problem of fluctuation in data when
forecasting
Smooths the data, thus giving a clearer picture on the
current trends – that is, it gives a clearer picture of
trends than actual sales figures
It is a fairly accurate forecasting technique
It relatively easier to calculate than regression analysis. Turnover
Example of strong positive correlation
Disadvantages of moving averages

The firm has to keep a lot of past data from which the Figure 19.2: A scatter diagram
projections will be made
Does not recognise complex relationship in the data the least squares method. In order to do this, though, we
Tends to lag trends in data must find the values of the ‘a’ and ‘b’ in the equation of the
Its calculation can become fairly complex especially line mentioned above. The formulae used to calculate the
where there is no prior knowledge. values for ‘a’ and ‘b’ are:
a = y – bx
Least squares regression ∑xy – nx ∙ y
b=
Least squares regression is a part of the broader concept of ∑x2 – nx2
linear regression analysis. The term ‘regression’ is seen as the Where:
functional relationship which exists between two or more x = the value of the x variable
correlated variables. In addition, the term ‘linear regression’ y = the value of the y variable
defines a situation where the relationship between the n = the total number of data points
variables results in a straight line. Involving a straight line, x = the average of the x values
linear regression would use the same equation you were y = the average of the y values.
exposed to in mathematics or economics: Now we will use the data in Table 19.3 to see how this
Y = a + bX or Y = mX + c works.
However, for this section we will use the former. In Average x: 21/6 = 3.5 Average y: 15 900/6 = 2 650
the equation, ‘Y’ is the value of the dependent variable; Based on the two formulae, we must calculate ‘b’ before
‘a’ is constant or Y-intercept; ‘b’ is the slope; and ‘X’ is ‘a’:
the independent variable (time). The reason behind using 56 200 – 6 (3.5 × 2 650)
b=
regression analysis for forecasting is that changes in the 91 – 6 (3.5)2
dependent variable (for example, sales) is as a result of 56 200 – 55 650
=
changes in the independent variable (such as advertisement). 91 – 73.5
If we can estimate the future value of the independent = 550/17.5
variable, we can predict the value of the dependent variable. = 31.43 rounded to 31
The least squares regression utilises the concept of linear
regression in making a forecast for future sales or demand.
Least squares regression is defined as a method that fits a Period Actual Xy x2
‘line of best fit’ through a linear pattern of scatter points. The (week) x Demand Y
line of best fit minimises the sum of the squares between 1 1 800 1 800 1
each data points. This relationship is seen in the scatter 2 2 500 5 000 4
3 3 800 11 400 9
diagram in Figure 19.2. 4 3 000 12 000 16
You will not be asked to plot the scatter diagram or the line 5 2 800 14 000 25
of best fit for this course, but the syllabus requires that you 6 2 000 12 000 36
21 15 900 56 200 91
be introduced to the concept. We will, however, examine
simple examples of how to forecast sales or demand using Table 19.3: Data for least squares regression calculation
a = 2 650 – 31(3.5) that more people will know about it and can provide
= 2 650 – 109 information that can be used for a forecast
= 2 541 The required level of accuracy – as we have discussed
Now that we have calculated the values of ‘a’ and ‘b’, we above, even though sales forces and executives are
can now move to forecasting sales using the linear equation: very accessible, they may not be totally aware of
Y = a+ bX. The forecast for the 7th to 10th weeks would be everything that is happening, especially outside of
as follows: their geographical boundary. The great degree of
Y7 = 2 541 + 31(7) = 2 758 accuracy that is needed can help to determine whether
Y8 = 2 541 + 31(8) = 2 789 quantitative or qualitative techniques should be used
Y9 = 2 541 + 31(9) = 2 820 The time span of the sales forecast – a forecast that
Y10 = 2 541 + 31(10) = 2 851 will cover a longer period of time will require greater
effort on the part of those doing the forecast. This is
because trying to forecast for an extended period, with
EXERCISE the uncertainties of the future, poses greater challenges
Now calculate the forecast for weeks 11 to 15. than forecasting for a shorter period. Management
should therefore choose a forecasting technique that
Having completed our discussions on the different will give better long-term results
techniques used for forecasting, what are some of the factors The stage of the product’s lifecycle – a product that is
that influence the technique that is chosen? These may about to be introduced to the market would not have
include any of the following. any statistical data and so quantitative techniques could
The extent to which information is available – where not be used for forecasting. However, as the product
there is limited information about the product, the firm moves through the different stages of the lifecycle, more
may want to choose a qualitative technique to generate information will be available and the firm can employ
the forecast. The older the product, the more likely it is quantitative methods of forecasting.
CHAPTER SUMMARY
Production planning is the process of Qualitative forecasting techniques Quantitative techniques use historical
outlining the steps to be taken in the focus on value judgement and the data and previous experience to
production of a product individual’s opinions of the future forecast sales
outcomes
Business forecasting involves the Quantitative forecasting techniques
creation of an estimate of the Qualitative forecasting techniques include moving averages and least
possible future levels of costs, sales, include sales force composite, Delphi squares regression.
stock or production Method, consumer survey and jury of
experts
MULTIPLE CHOICE QUESTIONS 2. ALL of the following are types of qualitative forecasting
technique EXCEPT which one?
1. The category of forecasting technique that focuses on
a. Jury of experts
value judgement and the individual’s opinions of the future
outcomes is known as: b. Sales force composite
a. Micro-forecasting technique c. Delphi Method
b. Qualitative forecasting technique d. Moving averages
c. Quantitative forecasting technique

d. Macro-forecasting technique
3. Which of the following methods of forecasting uses a group of 7. The method of forecasting used is dependent on ALL the
experts, anonymous to each other, to make a forecast of sales, following EXCEPT which one?
among other things? a. The required level of accuracy
a. Least squares regression b. The time span of the sales forecast
b. Consumer survey c. The stage of the product’s lifecycle
c. Delphi Method d. The product being produced
d. Jury of experts
4. Which of the following is an advantage of using consumer Extended Essay Question

survey to forecast sales?
a. It gives producers the opinions of buyers from a wide
a. Describe how the Delphi forecasting technique
cross-section
works. (6 marks)
b. The intentions of buyers may not transcend into actual
b. Outline two (2) advantages and two (2)
purchase of the product
disadvantages of the Delphi Method. (8 marks)
c. It may be difficult for some buyers to forecast their future
c. Mr Ignorant wants to forecast sales for his clothing
needs
business and has heard that this could be done by
d. The result may reflect the subjectivity of a bias research conducting a consumer survey. However, he has no
team knowledge of what that is. Advise Mr Ignorant on:
Use the data in Table 19.4 to answer Questions 5 and 6. i. What a consumer survey is
ii. The steps involved
iii. Two (2) benefits and two (2) drawbacks
Time period (week) Actual sales Forecast
of conducting a consumer survey. (11 marks)
1 5 400
2 3 600
3 4 000
4 2 800
5 4 200
6 6 000
Table 19.4: Data for Questions 5 and 6
5. What would be the forecasted sales for Week 5, using a four-

week moving average?
a. 4 200
b. 3 950
c. 6 000
d. 3 650
6. What would be the weighted moving average for Week 6 if the

weights were 0.40, 0.30, 0.20 and 0.10?
a. 6 000
b. 3 620
c. 3 680
d. 4 620
204
20 Production Design Strategies

and Capacity Planning
product completely and successfully. Since this is a plan
LEARNING OBJECTIVES: of what is to be done, the amount, type and quality
At the end of this chapter students should be able to: of the materials that will be used should also be stated
Describe a design brief and its elements in the design brief. This will give management time to
Discuss the different product design strategies secure the require materials to be used in producing the
product
Discuss the elements and concepts that are associated
with capacity planning Technological need – having mentioned the required
Explain the concepts of economies and diseconomies of resources, the technology that will be needed to convert
scale these resources into a finished product must be carefully
Assess the main types of layout strategies that are used analysed and documented.
by businesses The elements of the design brief are by no means limited
to those mentioned above. They could also include: current
industry trends, the level of competition, the project’s budget
and the expected time line for completion.
Product design planning
A
good final product is likely to be the result of proper
and careful planning. In planning a design for the Product design strategies
product, management must create what is known as In examining product design planning it is also imperative
a ‘design brief’. This is a document outlining how the product that we also explore the strategies that are used in the
will be produced in order to get the desired results. It also design process. These concepts are important to modern-day
outlines how technology and resources will be combined to production and include the following.
produce the product. The design brief will give everyone a
clear sense of direction even before the production of the Modularisation
product commences. Once the product is completed it can If you take a computer, whether laptop or desktop, and look
be measured against the design brief to ensure that all steps inside you will realise that it is made up of different parts,
were duly followed. including a hard drive, memory, modem and DVD drive.
In general, the design brief should include the following These parts can be safely removed from the computer and
elements or features: replaced should anything go wrong with it. Therefore if
The problem statement or the desired need to be the hard drive of your computer is damaged you can just
fulfilled – this outlines the objective of the product, the replace the hard drive and not discard the entire computer.
problem being faced and/or what is to be produced. This move is made possible through a process known as
Usually, the need for a product will arise out of a need modularisation.
or desire of people. For example, the purchasing of this Modularisation is the process whereby a product is
book may have arisen out of the need to pass the course divided into subsets known as modules, which are used to
being discussed assemble the finished product. These modules or modular
The function of the production – the design brief should products have their own distinctive functions and contribute
outline the functions of the product to be developed. to the performance and features of the final products that
What role will the product play in alleviating the they are used to manufacture. Modularisation has changed
problem mentioned above or ‘fulfilling the need’ are the scope of manufacturing so that the different components
outlined above of a product can be produced in different places and then
Required resources – the design brief should also outline assembled in yet another location. This also facilitates mass
the resources that will be needed to manufacture the production using an assembly line, as the different modules
CHAPTER 20 | PRODUCTION DESIGN STRATEGIES AND CAPACITY PLANNING 205
can be fitted in the product along the line. Let’s take a car, Advantages of miniaturisation
for example – the engine, tyres, mirrors and windscreen can Reduction in the cost of raw materials
all be made in another location or even by another company Increase in the pace of production
and then assembled to the body of car by a car manufacturer Companies can produce large amounts of output
such as Toyota or Nissan. Improvement in the portability of the product.
Benefits of modularisation Drawbacks of miniaturisation

The individual module can be developed and tested While there are cost savings on materials, those for
separately before using it to build the product research and development and the cost of technology
Since modules can be used in different products, a wide might increase
range of products can be made The production process is highly dependent on
Modules can be made in very large quantities, thus machinery and automation.
lowering costs
Makes product repair easier, since the affected module Integration
can be removed or replaced without damaging the As the global environment becomes a single marketplace
entire product through technology and firms are being faced with
Adds flexibility to production, since some modules can competition, the practice of integration has become of even
be removed from or added to products as consumers greater importance. In order to remain competitive, firms
desire have to ensure that all the departments involved with the
Can lead to a reduction in production times, since the product play a critical role in both its design and production.
product will not be ‘built from scratch’ In past times, the functional departments would essentially
Ease of updating products, as outdated modules can be work separately on the product. Each of these functional
replaced with updated ones. areas would have needed to know only about its own aspect
However, since the company assembling the product of the work without concern for the others. However, today,
may not be the one producing the module, quality control teamwork is encouraged so that marketer, designers and the
might be more difficult. production team work together to produce the best possible
product. With concepts such as TQM, each department
Miniaturisation working on the project has to contribute to the final product
Do you remember the first types of cellular phones to be and help in improving quality.
introduced to the Caribbean? They were huge and some Integration is not only seen in the interdependence of
had a very long pole that the user had to pull out when the different departments within the firm – it also involves
making or receiving a call. Now let us come back to the product integration. This involves the assembly of a product
present: with recent improvements in technology, cellular from different component parts that work together as the
phone manufacturers have been able to reduce the size final product. Integration combines a number of product
of cellular phones drastically. This is due to the concept of components into a complete product. For this to work
miniaturisation. properly, however, a detailed plan of activities should be
Miniaturisation is the development of very small developed. This plan would include how the components
products that have the same function and use as the larger would be sourced and received, assembled and activated to
products they replaced. It involves the development of smaller create the final product.
and smaller products over time, using less input of materials.
Japan is one of the main countries leading the charge for the Value analysis
development of smaller products. New technologies have Firms want to ensure that they get value for money
made it possible to make the same products but in much whenever they purchase or produce a product. Value
smaller sizes. The production process has also become faster, analysis is defined as a systematic attempt to minimise costs
precise and more technical with increasing use of robotic and/or improve performance of a product either purchased
technology. Producers carrying out product design planning or produced by the firm. In order to do this, the firm has
must be aware of advancements in technology and use the to examine everything involved in the production of the
concept to their benefit. product, including the materials, information systems and
processes. The whole aim of value analysis is to improve Design can be shared with multiple users.
efficiency and minimise production costs. This is done
by evaluating whether or not each of the materials or Drawbacks of computer-aided design
components being used has a value which is proportionate The initial costs of the software can sometimes be high
to its costs. Costs may also be reduced by using cheaper and therefore expensive, especially for a relatively small
materials, design and methods of manufacturing. Every firm
small saving will add up – especially when the firm has It requires the use of other technologies such as
undertaken large-scale production. Eventually, a good value personal computers
analysis system should result in high cost savings over time The firm may need to conduct training of the staff to
and increases in profits. use the software.
Benefits of value analysis Computer-aided manufacturing (CAM)

Reduction in material costs Computer-aided manufacturing works hand in hand
Improvement in the firm’s profit margins and returns with CAD. CAM uses computer software and hardware to
on investment convert CAD data and models into instructions to be used
Reduction in wastage within the firm in the manufacture of the product. It works as the link
Could result in improve product quality, as better between the product design and the manufacturing of the
materials and processes are identified actual product. It can take the form of anything from an
Customer satisfaction can be heightened automatic conveyor belt to a labelling machine.
Improves employees’ level of motivation.
Benefits of computer-aided manufacturing
Drawbacks of value analysis Results in consistency in production – that is, the
If used too widely, it could become time consuming and products are the same
expensive Improves the level of accuracy in production
If not properly supervised and organised, it could Is ideal for speeding up production
become counterproductive. Cuts the lead time between designing and
manufacturing the product.
Computer-aided design (CAD)
We are living in a world where technology changes regularly. Drawbacks of computer-aided manufacturing
We have seen improvements in the manufacturing process The software tend to be expensive, so the firm could
and the use of technology in businesses. To this end, firms incur high start-up costs
can also make good use of technological improvements Not economical for a ‘one-off’ production or product
in the design process. One such technology being used to The firm will have to train employees to use the
design products is computer-aided design. CAD involves software, which is an additional cost.
the use of computer systems to create, modify and analyse
a product’s design. The CAD software gives designers the
ability to generate and store design while using various Capacity planning
two-dimensional (2D) and three-dimensional (3D) designs. Capacity is very important to the organisation, as it needs to
CAD has become a vital tool in the shipbuilding, aerospace, be aware of capability of its production facilities. Capacity
automotive and architectural industries, among others. refers to the level of output that the current system is capable
of producing in a specified period of time. If the firm is not
Benefits of computer-aided design operating at full capacity or does not have the ability to
Less human error, as designs are more accurate than produce more output, demand will be greater than its ability
hand-drawn designs to supply and it may lose customers to competitors. On the
CAD offers the designer the ability to edit and save the flip side of things, if the firm is over utilising its capacity then
designs too many products are being produced and it is indicative of
Modification of designs is cheaper and less time the fact that resources are being wasted.
consuming There are two important definitions that you are expected
Products can be manufactured quickly, as designing to note once you are studying capacity. These are:
time would be reduced
CASE STUDY
From a room to the palm

Today we have all heard of tablet computers but computer technology has come a long way since the first one was developed.
The computer is said to have begun in the 1930s when the first digital electronic computer was built and given the name ‘ABC’,
after its developers. The military was also responsible for building computers and in 1946 the Electronic Numerical Integrator
and Computer (ENIAC) was built which weighed some 30 tonnes and contained some 18 000 vacuum tubes.
The second era of the computer started in 1947, with the development of transistors. Very soon afterwards, the integrated
circuit was developed and this revolutionised the industry. These parts could be taken out and replaced and they also shrank
the size of the computer considerably. The industry also saw the development of operating systems and programs that made the
computer more interactive and user friendly.
Today, we have moved from the regular use of desktop computers to laptops, to notebooks and now to tablets. We have even
seen cellular phones being used as computers, based on their capabilities.
Questions
1. Briefly describe the two (2) design strategies that can be inferred from the developments discussed in the case. (4 marks)
2. Discuss two (2) implications of each of these strategies for:
a. The producer of the product (8 marks)
b. The consumer of the product. (8 marks)
Total 20 marks
Design capacity week it was able to produce 1 800 units of the product. Its
Design capacity refers to the total achievable capacity if capacity utilisation would be:
all equipment and processes are working in perfect order. 1 800
× 100 = 72%
However, very few organisations achieve this level of output 2 500
and few firms would want to operate consistently at design The utilisation of capacity is important for the firm, as:
capacity since the depreciation of equipment and machinery It will result in lower ‘per unit’ fixed costs
could be significant. It will help the firm to cater for the volume needs of the
market
Efficiency or effective capacity Idle machinery and equipment can be put to better use
Effective capacity refers to the estimated capacity that to generate revenue.
would result in the efficient operation of the business. It There are a number of factors that may cause a firm to
measures the maximum demand that the production system produce below full capacity. Some of these are:
can manage before it becomes inefficient. Deficient demand due to a lack of income or changes in
tastes and preferences of consumers
The firm may be faced with stiff competition and losing
Capacity utilisation market share
In order to minimise the possibility of over- or underutilisation Seasonal demand may affect the industry’s capacity –
of capacity, the organisation can measure its capacity for example, in the tourism industry
utilisation. This is the measure of the percentage of the Failed marketing campaign may result in depressed
firm’s total capacity that is being used. It is calculated using sales and hence low production.
the following formula: Producing below full capacity may result in some
Present output problems for the firm, including:
× 100 Inability to cover its fixed costs, which will result in
Total potential output
For example, a manufacturing company is able, with losses
its current resources and facility, to produce 500 units of a High ‘per unit’ cost of production, which may have to
product per day in a five-day work week. In a particular be passed on to consumers through price
Lower than potential returns on its investment, since However, there are a few problems with producing at full
the machinery is not generating enough income. capacity, including:
The firm may find it difficult to meet any unexpected
increase in demand
Options available to increase capacity There will be limited time, if any, available for plant
Having established some of the possible problems that may maintenance
arise as a result of underutilising capacity, it is imperative If the factory space becomes limited or overcrowded,
that mention be made of how capacity might be increased: diseconomies of scale may set in, which will lead to
The business can increase sales through promotional increased costs
activities such as advertisements or sales promotion Pressuring staff to produce at full capacity can result in
Redeploy unused resources, such as labour, from one
high staff turnover rate, especially where employees are
production location to another to assist with improving
not receiving incentives for doing so or feel that they are
capacity
being overburdened.
Reduce ‘down’ times of machinery and equipment.
Extensive machinery ‘down’ times may result in loss of
productive time and underutilisation of capacity
Employ seasonal or part-time workers – this is often
Economies and diseconomies of scale
used when there is high seasonal demand, as it helps As firms expand and increase their scale of production they
the firm to produce more (for example, at Christmas, or benefit from a lowering of ‘per unit’ cost of production. This
in crop season in the sugar industry) is referred to as economies of scale which is the reduction
The firm may also outsource aspects of its production of costs as the business grows. For example, if a business
process in order to boost production. has a fixed cost of $10 000, the first unit it produces would
bear all of that cost plus any variable costs. If the firm
CASE STUDY
A difficult 2012 for the Jamaican bauxite industry

Having been one of the main earners of foreign exchange in the past, the bauxite industry has fallen from grace to be plagued with
very low capacity utilisation, redundancies and declining sales. The results of 2012 were less than favourable when compared
with those of the previous year. It is said that alumina production fell by more than 10 per cent, to level at 1.75 million metric
tonnes. The interesting point is that neither this figure nor the 2011 figure of 1.96 million metric tonnes is anywhere near the
real alumina capacity of Jamaica. This is so since that level of production only represents about 40 per cent of the country’s
total capacity.
Two main things have been blamed for Jamaica’s poor level of alumina production. The first is that the bauxite industry is
grossly affected by the high energy costs in the country. Second, the global recession has basically collapsed aluminium sales
worldwide and hence the demand for alumina from Jamaica. The industry is optimistic that if the global recession should ease
then the country should see an increase in alumina production. It is said that JAMALCO can produce 1.45 million metric tonnes;
WINDALCO’S Ewarton plant 670 000 metric tonnes and its Kirkvine plant 610 000 metric tonnes; and ALPART 1.7 million
metric tonnes. Nowadays, the workers who were laid off, those who benefited indirectly and the country look on, wondering
whether the industry will ever bounce back.
Questions
1. What was the approximate capacity utilisation in the aluminium industry in 2012? (2 marks)
2. What reasons were given for the low capacity utilisation in the industry? (4 marks)
3. Outline two (2) drawbacks of producing below capacity. (4 marks)
4. How would you advise these companies to:
a. deal with the continued reduction in demand? (4 marks)
b. improve their capacity utilisation? (6 marks)
Total 20 marks
expands its production and produces 1,000 units, the fixed Risk-bearing economies
cost per unit now become $10. The firm therefore benefited Going into business involves risk and all firms are subjected
from its decision to produce more, as its fixed cost per unit to such risk once they are in operation. For example,
fell drastically. Economies of scale can be subdivided into there is a risk of losing all of the investment funds if the
internal and external economies of scale. business fails or risk of the changing business environment
and factors such as demand. Factors such as the downturn
Internal economies of scale in the world’s economy may lead to the closing down of
This is the reduction in costs that a firm gains directly as many small firms. If the conditions of demand and supply
it increase the size of its operations. Internal economies of change for the major or the only product of a smaller firm
scale include: then sales may be greatly affected. Conversely, if the same
problem exists for a larger firm, it can shift its production to
Purchasing economies another product or diversify the present product or diversify
One of the benefits of being large is that the firm can afford its market. Large firms are also able to invest in research and
to buy larger quantities of raw materials. In doing so, larger development which helps to minimise the risk involved in
firms tend to receive better prices for these raw materials. the development of a new product or setting up operation
They benefit from trade discounts and will be better able at a new location.
to bargain with their suppliers who do not want to lose
their business. As the firm increases its order size, the Financial economies
administrative cost per unit ordered decreases. Since the As discussed earlier, sourcing financing poses a big problem
firm buys in bulk, it may reduce its transportation cost since for most small firms and, even when they acquire the
items would be bought regularly. funding, it might be very expensive. Large firms have the
advantage of sourcing finance. They have better bargaining
Managerial economies power, more collateral and are more likely to receive
There is a tendency for managers of small firms to multitask. financing through the issuing of shares or borrowing from
They have to play many roles, such as accountant, lending institutions.
marketing manager, public relations officer etc. These firms
cannot afford to pay different managers to perform these Marketing economies
tasks. However, as they get larger they can take advantage Marketing is very important when conducting business. A
of specialisation of labour. Instead of having one person number of firms fail because their products are not publicised
doing so many tasks, the firm can employ a specialist in the properly. Marketing involves a large amount of funds and
particular field to carry out each task. This may lead to an differs depending on the method of advertisement used. The
increase in efficiency. Larger firms are also able to contract firm needs to decide whether or not to advertise and whether
outside management services to carry out tasks that they are to lease delivery vans or purchase them. Advertising can be
not able to do within the business. They are able to afford to very expensive and as a result some small firms are not able
pay larger and more attractive salaries to attract and employ to advertise. However, as firms get larger they can implement
some of the best and most qualified people. advertisements and other promotional tools. The firm may
also be able to purchase its fleet of delivery vehicles which
Technical economies may be cost effective.
As a firm increases its size, it can take advantage of larger
and more efficient machinery. For example, a small farmer External economies of scale
may not be able to afford much, if any, machinery and so External economies of scale occur where all firms in an
will have to toil daily using simple machines. As his farm industry benefit from lower unit costs as the entire industry
increases in size he can afford to purchase a tractor to help increases in size. External economies of scale include:
with the ploughing of the soil. Larger firms are able to utilise
flow production where the production process is done on an Improvement in transport and communication links
assembly line. This allows the firm to use highly specialised The Caribbean has benefited from improvement in
machines, replacing its sometimes large labour cost and communication over the last decade or so. With the
increasing its productivity and output. liberalisation of most, if not all, telecommunications
industries, firms now have more options and access to
communication. The quality of transportation in the region

Costs $
has also improved over the years. The number of courier Optimum level of production
services has also grown rapidly. These improvements have (constant returns to scale) Average
total cost
spun off on the firms which would see a reduction in curve
transportation and communication costs. Transportation has
also been aided by the improvement of the road network in
some countries – for example, the building of Highway 2000 Economies Diseconomies
in Jamaica. of scale of scale
Output
Training and education
As the number of training institutions grows in a country,
the firms will benefit from improvement in the skill level Figure 20.1: Diseconomies of scale
of workers and the labour force in general. Universities and
colleges have developed programmes and courses to meet Poor communication
the need of the industry. The HEART Trust NTA has been Communication is key in any organisation, as managers
training and certifying workers in Jamaica. As a result, firms have to ensure that their line of communication is working.
can benefit from these improvements while reducing per However, the expansion of the business might make the
unit costs of production. communication process long and bureaucratic. Management
may no longer be able to communicate with employees, and
Development of auxiliary services vice versa. The breakdown in communication may prevent
The growth of an industry sometimes attracts other small employees from receiving clear instructions and may
businesses which perform auxiliary services for the firms in increase wastage.
the industry. The services offered may range from marketing
to waste disposal, among others. The services being offered Demotivation
can be contracted by the existing firms that would otherwise This topic will be dealt with further in Module 2. Over time,
have to perform the service themselves. Outsourcing these workers may become discouraged if they are not treated
services might be cheaper for the firms in the industry than fairly and properly. As some businesses grow, employees
performing them themselves. may feel isolated and unappreciated. This will lead to low
motivation and, by extension, a reduction in productivity.
Cooperation among businesses As productivity falls, output will also fall and the average
In Chapter 1 we discussed that cooperatives pool together to cost per unit will increase, leading to diseconomies of scale.
benefit from lower costs. When this occurs the firms benefit
from external economies of scale. Lack of control and coordination
As a business grows, the span of control widens and it is
more difficult to manage. Managers may find it difficult to
Diseconomies of scale ensure that all employees are working towards the goals
Growing is not always good for businesses, as they can become of the business and operating to their full potential. As the
too large so that instead of experiencing a reduction in ‘per business loses control and coordination, its costs of operating
unit‘ costs there is an increase. In other words, the average may rise and diseconomies of scale set in.
total cost will rise, as seen in Figure 20.1. Diseconomies of
scale therefore occur when a business becomes so large that
cost per unit increases. Business layout
Figure 20.1 shows that as a firm expands its output, it The layout of the production facility can have a great bearing
benefits from a reduction in its average total cost, i.e. total on the level of productivity and production of the firm. The
cost divided by output. As it continues to increase, it will business should be organised in such a way that the time
reach a point of optimum production. If the firm continues it takes for a product to pass from one production unit to
to expand, its average total cost will start rising and another is minimised. As a result, management should
diseconomies of scale will set in. carefully and strategically make the decision as to how
The following are some of the causes of diseconomies of organise the facility. This decision may be influenced by the
scale. following factors:
CASE STUDY
Big growth
Carib Spice Ltd has grown significantly over the years. It started out as a small family business in Spiceland and has been very
successful. The company started out supplying a few bottled spices to the local market. However, when things started picking up
the company decided to expand its operations.
It introduced a few more blends of spices and expanded its market reach to include other regional countries.Things progressed
rapidly until the company went public and also opened three other branches in three other countries. This expansion has realised
certain benefits for the company, such as better access to cheaper raw materials, and it is able to employ more qualified manage-
ment teams, among others.
In recent times, however, the company has noticed a downward trend in sales and productivity. This is of concern to the
directors and an investigation was launched to diagnose the problem. The findings of the investigation were that some members
of staff felt alienated and some were demotivated. It was also felt that the increase in size might have adversely affected the
quality of communication within the company and among the branches in the other countries. Now the directors must meet to
find a solution to the problems that were identified.
Questions
1. Define the term ‘economies of scale’ and state the two (2) types that were mentioned in the case. (5 marks)
2. Discuss two (2) other probable economies of scale from which the company could benefit. Give reasons
for your choice. (8 marks)
3. Discuss, giving evidence from the case, how the firm’s expansion led to diseconomies of scale. (7 marks)
Total 20 marks
The available space within the facility A major challenge for management in using this type
The possible level of demand that the product will have of layout is finding the optimal placement for the different
on each piece of machinery in the layout departments so as to minimise cost and time. However,
The amount of distance that must be travelled between management can explore the following steps in identifying
each piece of machinery in the layout the best placement to use.
The amount of space that each machine or equipment 1. Creating a model of the possible layout and analysing
will occupy and improving it as necessary
The sequence of operations on the product being 2. Ascertaining how much it will cost to company to
produced – that is, the stages of production that the move the product among the different departments –
product must go through. for example material handling costs
There are three basic formats of business layout:
Figure 20.2: Process layout
Process (functional) layout
In a process layout, machinery and equipment Cutting Welding Sanding
that are similar or have the same function are 1 3 4

grouped together in specified areas of the facility 2 3 5
and the product being produced is transported
to the different areas. See Figure 20.2 for a
typical layout. If you should visit a hospital, the
organisation of the facility would be another 2 5 6
example of process layout. The hospital has
different wards on which different illnesses are 1 4 6
catered for. In addition, there is the operation Planning Assembly Spraying
theatre, radiographic room, clinic, and so on. Product A Product B
3. Reviewing the layout periodically and making changes different stages. There is no going back and forth as the path
that will reduce overall production cost is along a straight line. An example is the conversion process
4. Ensuring that the distance between each department is of chemicals. Products that are produced along an assembly
minimised line are also utilising the product layout. See Figure 20.3 for
5. The arrangement should be conducive to supervision a typical layout.
and inspection. Like process layout, the grouping of machines and
The final decision on whether to use process layout is equipment is also necessary to minimise costs and time.
also likely to depend on its advantages and disadvantages. The following are some of the steps that are taken when
organising the facility under a product layout:
Advantages of process layout Machines are organised based on the sequence of
Low start-up cost in terms of investment in machinery production along the assembly line
and equipment, since machines will be reused on a The layout should prevent the crossing of different
number of products production lines, as this may be chaotic
If one machine breaks down, it does not halt the entire All the operations involved in the production of the
production process product should be included along the production line.
There can be specialised supervision – that is, having a
supervisor for each department in the layout Benefits of product layout
Relatively low overhead costs Relatively low material handling costs, since there is no
It is easier to expand the facility than is possible under backtracking
product layout. The operation usually flows uninterrupted
Reduced storage cost and space requirement as there is
Disadvantages of process layout little work in progress
The constant backtracking of unfinished products can Better use of the available floor space
increase material handling costs significantly Time lags are minimised and output can be produced at
Skilled labour is required, which also adds to the a faster pace
production costs Mass production usually results in lower ‘per unit’
Unless properly organised, process layout can result in production cost.
serious production delays
Drawbacks of product layout
There will be a greater need for storage as a result of a
The initial capital outlay is usually very high
lot of work in progress.
If one machine along the production line breaks down,
Product (flow-shop) layout the entire process is halted
There is little flexibility in terms of variations to a
Product layout is a type of layout that facilitates flow or
particular product.
mass production. It is one where the machinery and
equipment are organised according to the progressive steps Fixed-position layout
that the product will go through during its production. It
In the fixed-position layout, the product remains at
facilitates the continuous moving of the product through the a specific location while all the tools, machinery and
equipment are carried to that location to work on the
Figure 20.3: Product layout product. The underlying reason for this is that the product is
usually bulky and weighty and so
carrying it around is not practical.
For example, when a house is being
Product Blender Mixer Oven Icing
(cake) stage 1 stage 2 stage 3 stage 4 constructed all tools, equipment
and machinery have to be taken
to the location of the house since
it cannot be built in its entirety
Product Harvester Extractor Boiler Cooler Packager elsewhere and then brought to
(sugar) stage 1 stage 2 stage 3 stage 4 stage 5
that location.
As a result of the time that is
spent on each product, production
is usually low when using a fixed-position layout. Each task Cellular or group layout
that will be done on the product will have to be organised Cellular layout is based on a concept called ‘group
properly and carefully to prevent crowding and overlapping. technology’, where dissimilar machines and equipment are
Production usually follows a very rigid sequence of activities, grouped into a single work centre known as a ‘cell’. Each cell
as most of the times the product is constructed from scratch. produces parts of the product with similar shape and that use
This type of layout is use for ship building where a base similar processing requirements in manufacturing the product.
is first laid and then additions are made to the base until Machines in each cell are laid out along a mini assembly line.
completion. The different equipment and technologies that This type of layout is often used where a large variety of
are needed will be brought to the location and used or applied products are being produced in relatively small batches. The
when required. See Figure 20.4 for a typical example. cellular layout is a combination of the process and product
There is some amount of flexibility in production, since layout. This is illustrated in Figure 20.5 (p 214).
adjustment can be made to the design of the job
The firm can save on material handling costs, since the Benefits of cellular layout
product is not transported to and fro Since workers work in teams, their morale may improve
If there is a shortage of materials or workers it is easier Often leads to a reduction in inventory and material
to make adjustment than with the two preceding types handling since it combines several stages of production
of layout. Shorter production set-up time since tooling
requirement is reduced
Disadvantages of fixed-position layout
Workers’ expertise is improved due to repetitive tasks
Production is usually costly and takes a long time to be Offers better quality control.
completed
The business has to secure a very large storage space Drawbacks of cellular layout
near to the product. This can be very costly There may be a need for greater training and scheduling
If more than one product or project is being worked on
of workers
at the same time, there might be stiff competition for the
Higher costs to set up production, since more capital
limited tools or equipment. This can result in conflicts.
investment is needed
Some cells may have a higher production volume than
others and so there might be poorly balanced cells.
Figure 20.4: Fixed-position layout
Supplies
Project
site
Human
resources
Energy
Material
resources
Figure 20.5: Cellular layout
Cu Cu Ca Sa A
Key
Cell 1
Sp Sp Cu: Cutting
Ca: Carving
Store for Sa: Sanding
receiving
Cu Ca A A
A: Assembly
Cell 2
Sp: Spraying
Store for
Cell 3 shipping
Cu Ca Sa
CASE STUDY
A new era of housing solution

With the development in technology and knowledge as it relates to housing solutions, the housing market is rapidly changing.
The initial building techniques of using concrete blocks and steel are becoming less appealing in certain spheres, especially where
people want to build a home in the shortest possible time.
Houses are now being built in modular parts, such as the different rooms, and then installed at the site using heavy-duty
equipment. Once the modular parts are installed then they are joined and the joints are covered, the floor tiled and the fixtures
and fittings installed. The technology used to build these houses allows their owners to expand sideways and/or upwards.
The walls of these houses are made from prefabricated materials and the modules are made at a factory and then trans-
ported to the site. Even though they are factory made, the tools and equipment are often taken to the module as it is being built
instead of passing the modules through different departments.
1. Discuss two (2) reasons why having a proper layout strategy is important to businesses. (6 marks)
2. Which layout strategy is being used in the housing industry? (2 marks)
3. Justify the use of such strategy in the housing industry. (3 marks)
4. Indicate one (1) other industry in which this layout is used and explain why it is necessary. (4 marks)
Total 15 marks
CHAPTER SUMMARY
A design brief is a document grows. This can be broken down into and education, development of
outlining how the product will be internal and external economies of auxiliary services and cooperation
produced to get the desired results scale among businesses
The measurement of capacity Internal economies include: Diseconomies of scale occur when a
utilisation can help firms to managerial, purchasing, financial, business becomes so large that cost
minimise the possibility of over- or technical, risk bearing and marketing per unit increases
underutilisation of capacity economies of scale
Four main types of business or
‘Economies of scale’ refers to the External economies include: facility layout are product, process,
reduction of costs as the business improvement in transport, training fixed-position and cellular layout.

1. The constant change in size of cellular phones is as a result of
which of the following concepts?
Product Design Planning requires the development of a
a. Modularisation
proper design brief.
b. Miniaturisation a. Describe five (5) features of a design brief. (10 marks)
c. Integration b. Describe the ‘fixed-position layout’ and state
d. Design brief two (2) advantages of using this layout in
ship construction. (5 marks)
2. Which of the following facility layouts would be BEST suited c. Underutilisation of capacity can cause a firm
for airplane building? to lose money while having a lot of unused
a. Process resources. With this in mind, discuss three (3)
strategies that can be used to increase
b. Product
capacity utilisation. (10 marks)
c. Flow
d. Fixed position
a. Outline two (2) benefits of using value analysis
3. Which of the following is NOT an internal economy of scale? as a product design strategy. (4 marks)
a. Technical economies b. Define the term ‘economics of scale’. (2 marks)
c. Describe three (3) internal and two (2)
b. Purchasing economies
external economies of scale that a firm
c. Loss-minimising economies may experience. (15 marks)
d. Risk-bearing economies d. Outline two (2) possible causes of diseconomies
of scale. (4 marks)
4. The firm experiences _________ when its average total cost
curve is rising.
a. Constant returns to scale
b. Economies of scale
c. Increasing returns to scale
d. Diseconomies of scale
216
21 Costing
The sum of direct materials, direct labour and direct

LEARNING OBJECTIVES: expenses results in prime cost.
Outline the different costs of production
Describe the approaches to costing Indirect costs
Indirect costs include all costs that cannot be classified as
Calculate operating profit using marginal and absorption
costing direct costs. This category includes:
Analyse and calculate the concepts under breakeven
analysis Indirect materials
Plot breakeven charts These are materials that make production possible but that
Analyse the ‘make or buy’ decisions of firm are not directly related to the production of the product,
including materials such as lubricant for the machines,
cleaning material and protective apparel.
A
n important part of production and operation Indirect labour or wages
management is costing. The firm has to attach a This includes the payment for labour which is indirectly
cost to the goods that are produced and services that linked to production and cannot be traced directly to a
are rendered. This is done through a process called costing, product – for example, the factory supervisor’s salary,
which is defined as a system of computing the costs of maintenance workers’ wages and the cleaners’ wages.
producing a product or operating a business. A cost is the
amount of expenditure incurred on, or attributable to, a Indirect expenses
specified thing or activity. There are a number of costs that
These are other costs incurred by the factory but which
incurred within production. These are classified in a number
cannot be traced or allocated to a particular department
of ways, as outlined below:
or product – for example, rent and rates for the factory or
factory insurance.
Direct costs The sum of indirect materials, indirect labour and indirect
Direct costs are those costs that can be directly identified with expenses results in factory overheads.
the production of a product or the rendering of a service.
Direct costs are further broken down as follows:
Fixed costs
Direct materials
Fixed costs are costs that do not vary with the level of
Direct materials are those used in the production of a
output – that is, they remain constant regardless of the level
product and which can be apportioned to such a product.
of production or output. Examples of fixed costs may vary
Direct labour or wages (see Figure 21.1, p 217) but some of the common ones are
lease, rent and insurance.
Direct labour is the remuneration, whether in terms of
salaries or wages, that is paid to the workers who have
worked on the production of a particular product or service.
Variable costs
Direct expenses Variable costs are costs that vary with the level of output.
Direct expenses are those incurred in the production of a They normally increase when production increases. Some of
particular product, such as the rental of a machine to work these costs include material costs, delivery costs and wages.
on a particular product. See Figure 21.2 (p 217) for examples.
CHAPTER 21 | COSTING 217
Costs Costs
Variable
costs
$2000 Fixed costs
Quantity Quantity
Figure 21.1: Fixed costs Figure 21.2: Variable costs
Costs Costs
Variable
costs
Fixed costs
Fixed costs
per unit
Quantity Quantity
Figure 21.3: Fixed costs per unit Figure 21.4: Semi-variable costs
Fixed costs per unit are then incorporated when drafting the profit and loss
This is the level of fixed cost per unit of output. It is statement. These costs are written off in the period to which
calculated as fixed costs divided by output. Fixed costs per they relate. Under marginal costing principles, all production
unit decreases as output increases. It is illustrated as shown costs are valued at variable cost only.
in Figure 21.3. Before we draft an operating statement using the
marginal costing approach, there are a few concepts that
must be explored. The first of these is contribution. This
Semi-variable cost is the difference between sales and the total variable costs
Semi-variable cost is a combination of fixed and variable – that is:
cost, as seen in Figure 21.4. Contribution = Sales – Variable costs
Contribution can also be calculated in terms of per unit of
production. This is the difference between selling price and
Approaches to costing variable costs per unit – that is:
In this section we will be examining and calculating cost Contribution per unit = Selling price – Variable costs per
using two approaches: marginal costing and absorption unit
costing. The format in Table 21.1 (p 218) is used to calculate
operating profit under marginal costing.
Marginal costing
Marginal costing is a type of costing system which charges
variable costs to the production of the product. Fixed costs
Details $ $ Advantages of marginal costing

Sales xxxx It is easily understood and is useful in terms of
Variable production costs: budgetary control since the contribution that is
Direct labour x calculated can be used for comparisons
Direct materials x
Direct expenses x Managers can use the information provided in making
xx decisions in terms of pricing, ‘make or buy’ decisions or
Less closing stock (x) (xx) introducing new products, among other things
Contribution xxx
Less fixed costs and other expenses (xx) Since the calculation of contribution does include
Operating profit xx fixed costs, it eliminates the need for fixed costs to
be absorbed into production and so prevents the
Table 21.1: Calculating operating profit under marginal costing
technicality of over- and under absorption
Since closing inventory is valued at only variable cost, it
Example prevents a portion of the fixed costs from being carried
A firm manufactures and sells a single product. The details
over into the next period
of its statistics are outlined below:
The profits under marginal costing are calculated on the
Selling price $40
basis of sales volume rather than production unit.
Direct materials $12
Direct labour $6 Disadvantages of marginal costing
Variable overheads $8
There can be difficulty in separating overheads into
Fixed overheads $40 000 per month.
variable and fixed costs
The fixed overheads were absorbed on the basis of an
Since fixed costs are ignored, this approach may not be
expected production of 40 000 units for the month. If the
useful for long-term planning and decisions because
actual production and sales amounted to 40 000 units for
variable costs should not be the only basis on which
the month, calculate:
these decisions are made
1. Contribution per unit
2. Total contribution It is argued that the profit under marginal costing is
3. Total profit for the month. distorted because the closing inventory does not reflect
Solution fixed costs
1. Contribution per unit This method of costing is not recognised for external
Contribution = Selling price – Variable costs per unit reporting purposes.
= $40 – (12 + 6 + 8)
= $14 Absorption costing
2. Marginal costing Absorption costing is a type of cost accounting system that
includes both fixed and variable costs to arrive at production
Details $ $ costs. This method uses what is termed ‘full cost’ – that is,
Sales (40 000 × 40) 1 600 000 fixed and variable costs – and each unit of stock is valued
Variable production costs: at such cost.
Direct labour (40 000 × 12) 480 000
Direct materials (40 000 × 6) 240 000 The format for the calculation is shown in Table 21.2.
Direct expenses (40 000 × 8) 320 000 Now let us apply this method to the example given above.
(1 040 000)
Contribution 560 000
Less: Fixed costs (40 000)
Operating profit 520 000 Details $ $
Sales xxxx
Production costs:
Alternatively, this could be calculated as: Direct labour x
Direct materials x
Sales units × Contribution per unit less Fixed costs Direct expenses x
3. Fixed costs xx
Total profit = (40 000 × $14) – $40 000 Less: Closing stock (x) (xx)
Gross profit xxx
= $560 000 – $40 000 Less: Expenses or overheads (x)
= $520 000. Net profit xx
Note that there was no stock in this question. One such Table 21.2: Calculating operating profit under absorption costing
example will be given later.
Solution units of the 40 000 units produced were actually sold.

This will result in a new calculation for both marginal and
absorption costing.
Details $ $
Sales (40 000 × 40) 1 600 000 Marginal costing
Production costs:
Direct labour (40 000 × 12) 480 000
Direct materials (40 000 × 6) 240 000
Direct expenses (40 000 × 8) 320 000 Details $ $
Fixed costs (40 000 × 1) 40 000 Sales (36 000 × $40) 1 440 000
(1 080 000) Variable production costs:
Gross profit 520 000 Direct labour (40 000 × 12) 480 000
Direct materials (40 000 × 6) 240 000
Direct expenses (40 000 × 8) 320 000
Note that the fixed costs are treated as a part of production 1 040 000
Less: Closing stock (4 000 × 26) (104 000) (936 000)
costs. An alternative treatment would be to just total the Contribution 504 000
costs of production and multiply the total by the number of Less: Fixed costs (40 000)
units to arrive at one production cost figure: Operating profit 464 000
Per unit production costs: 12 + 6 + 8 + 1 = $27 and
production costs: $27 × 40 000 = $1 080 000
Note that closing stock is valued at the total variable costs
Note also that since we were told that fixed cost is absorbed
only – that is:
based on 40 000 units and fixed cost is $40 000, then fixed
12 + 6 + 8 = 26
cost per unit is $1 – that is:
$40 000/40 000 units
Absorption costing
Advantages of absorption costing Details $ $
A portion of fixed cost is incorporated into the value of Sales (36 000 × $40) 1 440 000
closing inventory. This allows the costs of the period to Production costs:
Direct labour (40 000 × 12) 480 000
be matched accurately with the revenues of the same Direct materials (40 000 × 6) 240 000
period Direct expenses (40 000 × 8) 320 000
Fixed costs (40 000 × $1) 40 000
It gives a more accurate cost of production, so that 1 080 000
prices can be set based on total costs and not just Less: Closing stock (4 000 × $27) (108 000) (972 000)
variable costs Gross profit 468 000
It is a more realistic method of costing, since both fixed
and variable costs are incorporated
It is accepted as a method for external reporting EXERCISE
It avoids the need to separate costs into fixed and The following data was extracted from the books of Ed
variable costs, as some costs are semi-variable and are Manufacturing Ltd.
difficult to separate. For the period, 100 000 units of Product V were
produced. The company sold 94 000 units in the
Disadvantages of absorption costing period. The costs and revenues were:
The absorption of fixed costs and determining whether Sales: $1 410 000
they were over- or under absorbed can complicate the Production costs: $1 000 000
process Administrative overheads: $250 000.
It can be complicated to calculate. Note that 75 per cent of the production costs are fixed
and all of the administrative overheads are fixed.
Required:
Including stock Prepare operating statements under marginal costing
There are times when stock is not sold during the accounting and absorption costing principles.
period. This results in the firm having closing stock. Using
the same example from above, let us say that only 36 000
Application of marginal costing Breakeven analysis formulae

Breakeven point
Breakeven analysis The breakeven point is the level of output that enables the
This is the assessment of the interrelationship that exists firm to cover its costs exactly. It is the point where neither a
among costs, volume and profits at different levels of output. profit nor a loss is being made. It can be calculated in terms
Breakeven analysis is an important tool for management, as of units or sales, as seen below:
it assists in planning and making decisions. For breakeven Fixed costs
analysis to work effectively, certain assumptions must be Breakeven point in units =
Contribution per unit
made, including: Fixed costs
Costs are classified as either variable or fixed Breakeven point in sales =
Contribution to sales ratio
Selling price remains constant The contribution to sales ratio (C/S ratio)
Volume is the only factor that affects costs and revenue = Contribution per unit
The factors of production are constant × 100
Selling price
The focus is on a particular product or product mix.
Breakeven analysis is useful to businesses as it enables Level of sales to result in target profit
them to: This can be done on a ‘per unit’ basis or sales volume:
Ascertain the profit or loss at different levels of Level of sales to result in target profit (units) =
production and sales Fixed costs + target profit
Make predictions on the effects of price changes on sales Contribution per unit
Determine the breakeven point Level of sales to result in target profit (sales)
Determine the margin of safety = Fixed costs + target profit
× selling price
Examine the relationship between fixed and variable Contribution per unit
costs Now let us look at an example:
Determine how changes in costs and efficiency will Example
affect profits. A–Z Ltd produces and sells a single product. The product is
sold for $100 and its total marginal cost is $60. The firm’s
Advantages of using breakeven analysis fixed costs amounted to $100 000 per annum. Calculate the
Its calculation is fairly simple following:
It highlights the profit or loss at different levels of 1. Breakeven point in units
output 2. Breakeven point in sales
It shows how a firm’s profit or sales will be affected by 3. The number of units that must be sold in order to earn
changes in price or cost a target profit of $40 000 per annum
Firms are aware of the level of sales that will cover their 4. The level of sales that will achieve a target profit of
fixed costs $40 000 per annum.
Firms can determine the level of sales needed to make a Solution
certain level of profit. Before we begin, let us calculate the contribution:
C = Selling price – Marginal costs
Disadvantages of using breakeven analysis Therefore, contribution equals $100 – $60 = $40.
Results can be misleading, since it assumes that all 1. Breakeven point in units = 100 000 = 2,500 units.
output is sold and so there is no closing stock 40
Like most calculations, the effectiveness of breakeven 2. Breakeven point in sales = 100 000 = $250 000.
analysis depends on the accuracy of the data 0.40
There are a number of businesses that produce multiple Note: the C/S ratio is $40/$100 = 0.40.
products at varying costs and prices 3. Number of units for targeted profit =
To construct a breakeven chart takes time. 100 000 + 40 000 = 3,500 units.
40
4. Sales for targeted profit =
3,500 units × $100 = $350 000.
Margin of safety
EXERCISE
Since firms enter into business with an aim of making profits,
Black’s Block Factory is the maker of concrete
no firm would want to produce consistently at breakeven
blocks. Each block is sold for $60 and the variable
point. Instead, it would want to produce and sell at a level of
cost associated with its making is $45. The factory
output greater than breakeven point. The amount by which
incurs rent of $120 000 per month. Use the above
sales exceed the breakeven point is known as the margin of
information to calculate:
safety. It shows the amount by which sales can fall before
1. Breakeven point in units
the firm starts making a loss. It is calculated as:
2. Breakeven point in sales
Actual sales – Breakeven point
3. Units to be sold to make a target profit of $80 000
For example, if breakeven point is 5,000 units and the
4. The level of sales that will achieve a target profit of
firm is operating at an output level of 7,500 units then the
$80 000.
margin of safety = 7,500 – 5,000, which is 2,500 units. If
sales should fall by more than 2,500 units, the firm would
Breakeven chart start making a loss.
Margin of safety can also be expressed as a percentage.
The breakeven point can also be seen graphically on a
This is done using the following formula:
breakeven chart (see Figure 21.5 for an example). This
Margin of safety
shows the level of fixed costs, variable costs and total × 100
Expected sales
revenue at all levels of output from zero to full capacity.
The example above would then be
We can now draw a few conclusions from the breakeven
2,500/5,000 × 100 = 50 per cent.
chart:
Fixed costs are constant over the levels of output
Variable costs is the area above the fixed costs line but
EXERCISE
below the total cost line and is directly proportional to
Firm A makes and sells pillows. Each pair of pillows
output, i.e. it increases as output increases
is sold for $500. The variable cost per unit of pillow is
Total revenue and sales volume are directly
$200 and it has total fixed costs of $45 000. The total
proportionate
units sold were 200.
The breakeven point is shown where the total cost line
1. Use the above information to plot a well-labelled
cuts the total revenue line. At this point, both profit and
breakeven chart
loss are equal to zero
2. Determine the margin of safety and illustrate this
Losses are made to the left of breakeven point, while
on your chart.
profits are made to the right of breakeven point.
‘Make or buy’ decisions

Revenue $
From time to time, management is faced with a
decision on whether to make or buy a product or
21 600 Profit
its components. There are a number of factors that
Breakeven could influence the firm’s decision on this:
18 000 Budget The cost involved – the firm will be mindful
of the difference between the cost to buy and
Total costs Margin the cost to make and, barring poor quality, this
of Safety
will determine the firm’s decision
6000
The firm may be the only one producing the
Loss product
Fixed cost
It may want to produce its own brand
The firm may want to ensure that the product is
1000 2000 3000 3600
always available instead of depending on an
Output/sales units
outside supplier
Figure 21.5: A breakeven chart

The reputation of the firm may be placed on the line,

EXERCISE
especially if the outsourced firm makes an inferior
product. Therefore the firm may want to protect its Great Juices Ltd is a maker of fruit juices which it
reputation. packages in boxes and plastic bottles. In an attempt to
In order to make this decision, the firm must compare the save costs, the company manufactures both packages
variable cost to manufacture the product against the price it in an adjoining part of the juice factory. In recent
would pay to buy (outsource) the product. Note that only times the factory has been considering whether it
the variable or marginal costs are being compared to price, should shut down this operation and buy the packages
since the firm would incur its fixed costs whether it makes instead. However, doing this would leave that part
or buys the product. Let us look at the following example: of the factory idle and it would still have to pay the
Example rental. The following are the costs incurred by the firm
Undecided Ltd manufactures a component to be used in the to make both products and the price each would cost
production of mind stimulators. The costs for associated with if they were purchased from an outside supplier. Table
its current production of 20 000 units are outlined below: 21.3 shows the costs based on production of 2,000
Direct materials $500 units or juice boxes and 1,000 units of bottles per
Direct labour $1,000 month:
Variable overheads $750
Fixed costs $1,000. Plastic bottles Juice boxes
The same component could be bought at a cost of $2,000. Direct materials 36 000 9 000
Solution Direct labour 50 000 26 000
Direct expenses 10 000 8 000
The marginal cost of making the component (per unit) is: Fixed cost 60 000 36 000
Direct materials $ 500 Price per unit if purchased $80 $50
Direct labour $1,000
Table 21.3: Production costs for Great Juices Ltd
Variable overheads $ 750
Marginal cost of production $2,250
Since it costs more to produce the component than buying Based on this information, should the company
it from an outside supplier, the company should purchase continue making one or both products or should one
them from the supplier and cease producing it itself. or both of them be purchased? Show your workings.
CHAPTER SUMMARY
Costs can be classified as direct and While variable costs change with the Breakeven point is the level of
indirect. Direct costs can be attached level of output, fixed costs do not output that enables the firm to cover
to the production of a specified its costs exactly
product while indirect costs cannot Under the marginal costing principle,
be attached to the production of a all production costs are valued at The amount by which sales exceed
specified product variable cost only the breakeven point is known as the
margin of safety.
The sum of direct materials, direct Absorption costing includes all costs
labour and direct expenses is called into the value of the product
‘prime cost’
Contribution per unit = Selling price
The sum of indirect costs is known – Variable costs per unit
as ‘overheads’
MULTIPLE CHOICE QUESTIONS 7. What would be the breakeven point, in units?

a. 100
1. Which of the following is NOT a direct material used in a
biscuit-making company? b. 60
a. Flour c. 75
b. Sugar d. 150
c. Vinegar 8. What is the margin of safety for the firm?

d. Biscuit packaging a. 150
2. Prime cost is made up of ALL the following EXCEPT which b. 75

one? c. 100
a. Factory overheads d. 90
b. Direct expenses
c. Direct labour
Extended Essay Question
d. Direct materials
3. Which of the following is an indirect expense? The information below has been extracted from the books of
a. Wages of factory workers Fruitalicious Ltd:
Sales $20 000
b. Rental for machine used in production
Direct material per unit $20
c. Lubricant for machines
Direct labour per unit $10
d. Property insurance for the factory Total fixed cost $8,500
100 units of the product were sold in the period.
4. A cost that changes as output changes is called a:
a. Using the information above, calculate the following:
a. Semi-variable cost i. Gross profit, using the marginal costing
b. Variable cost format (5 marks)
c. Fixed cost ii. Gross profit, using the absorption costing
d. Sunk cost
format (5 marks)
b. Determine the following:
Use the following information to answer Questions 5–8:
Sales for the period were $15 000 and 150 units were sold. Direct
i. Number of units required for breakeven (3 marks)
material was $40, direct labour was $25, direct expenses were
ii. Breakeven point in sales (3 marks)
$10 and fixed cost amounted to $1,500.
iii. Margin of safety (3 marks)
c. Use the information to plot the breakeven
5. What is the contribution per unit? chart. (8 marks)
a. $100
b. $75
c. $25
d. $2,500
6. What would be the gross profit under absorption costing?

a. $2,250
b. $3,750
c. $6,000
d. $1,1250
224
22 Inventory Management
Stock is held as a safeguard in case the supplier

LEARNING OBJECTIVES: encounters unforeseen problems and the lead time
At the end of this chapter students should be able to: becomes longer than expected.
Discuss the importance of holding inventory
Discuss the importance of inventory control systems Importance of inventory control
Analyse the different inventory control management We must be aware that once there is inventory, there is
systems going to be a need for a proper and secure control system.
Calculate the economic order quantity The firm must safeguard its inventory from events such as
Show the EOQ by means of a graph theft, spoilage or obsolescence. To this end, it is important to
Explain the ‘just in time’ inventory system have and maintain a good inventory management system.
Inventory control involves carefully assessing the material
needs of the firm, given its projected output, providing
proper and secure storage and issuing materials as required
Importance of inventory by the Production Department. Based on the fact that stock
I
nventory (or stock) is an important part of any business. occupies a lot of space and may be perishable, the main aim
‘Inventory’ refers to any item or resources owned by of inventory control is to minimise the overall time that stock
the business. Firms hold different types of inventory is held. The firm would want to convert its raw materials
including finished goods, work in progress, raw materials quickly into finished goods and then sell those goods as soon
and maintenance and operating supplies. Regardless of as possible. A good inventory control system will depend
which type of inventory a firm has and the costs involved, on factors such as available storage space, security, proper
it is important to hold inventory. Firms may do so for a staffing and the inventory management system in place.
number of reasons: In controlling stock, management has to be aware of three
Materials can be purchased in bulk to benefit from bulk important concepts: maximum stock level, reorder level
discount and also to reduce the cost of transportation for and minimum stock level. These concepts are illustrated in
regular purchases of lower quantity – for example, two Figure 22.1 (p 225).
or three months’ worth of stock could be purchased at Now let us examine the main concepts that are shown
once on the graph:
Holding stock ensures that materials are readily Maximum stock level is the maximum amount of
available when needed for production. This will prevent stock that the business can hold, based on its objective
the firm from running out of materials, especially or storage space
during critical times. Since the supplier may not be able Reorder level is the point at which a new order will be
to deliver the raw materials as fast as the firm may need placed to replenish the stock. This is done to prevent the
them, it is advisable to hold stock firm from running out of stock entirely before the new
The firm can respond to changes in demand quickly. order arrives
As stated above, the firm also holds a stock of finished Reorder quantity is the amount that is ordered once
goods. If there is a sudden increase in demand then the stock level reaches the reorder level. In Figure 22.1,
the firm would be able to meet that demand while the reorder quantity is the difference between the
producing additional units maximum stock level and the minimum stock level
For expected future surges in prices. If the firm is Minimum stock level is the lowest amount of stock
expecting that prices will increase in the near future, it the firm would want to hold at any given time. This is
will hold enough stock now in order to take advantage done to prevent production ‘down’ times due to hold-
of the increase in price ups in stock deliveries
CHAPTER 22 | INVENTORY MANAGEMENT 225
Lead time is the amount of time between placing an 2CD

EOQ =
order and receiving the order. The lead time is measured H
on the horizontal axis by calculating the difference where:
between when the order was made (at the reorder C is the cost of placing the order
level) and when it reaches the firm (the vertical line on D is the annual rate of demand or quantity
the graph). H is the cost of holding one unit of stock for a year.
In addition, the slanting lines are showing stock being For example: A firm’s annual demand for an item of
used, while the vertical lines show when stock is replenished. stock is 24 000 units. It incurs a cost of $50 to hold one unit
of the stock for the year and the delivery cost of the stock
is $2,000. Its economic order quantity would therefore be:
Inventory control management
Holding the right amount of stock is a very important part 2 × 2,000 × 20 000
EOQ =
of inventory control. Holding too much stock can lead to 50
serious repercussions for the firm, including: 80 000 000
=
Wastage as a result of spoilage 50
Increased cost of storage 1 600 000 = 1,265.
Liquidity problems, since cash is tied up in stock
Stock may become outdated. Ordering 1,265 units at a time will help to minimise total
On the other hand, holding too little stock can lead to costs in terms of both space and stock holding costs.
production hold-ups and loss of sales revenue. In order to
decide on the optimal level of stock to hold, the firm may EXERCISE
employ one of the following inventory management systems: The annual demand for an item is 12 000 units. The
order cost is $1,000 and the cost of holding one unit of
Economic order quantity
stock is $20. Calculate the EOQ.
In this system, the firm has to determine a specific point
when an order will be placed and the amount of stock that In the above section, we calculated the economic order
will be purchased so that it does not over- or under stock quantity but this level of stock can also be shown by means
the business. In order to accomplish this and minimise of a graph, as seen in Figure 22.3 (p 227).
the total costs of holding stock, the firm needs to calculate A few things to note about the graph are:
its economic order quantity. In order to calculate the The order and delivery cost is falling as more stock
quantity of stock that will minimise total costs, the following is ordered. This could be as a result of reduced
formula is used: transportation costs or discounts received by the firm
from large purchases
The stockholding cost increases with the
Units amount of stock. The more stock the
of stock
company keeps, the more will be the costs
Maximum
stock level for storage, staffing and security
The total cost curve is U-shaped and is
minimised when it is at its lowest point
The EOQ is where the stockholding cost curve
Re-order and the order and delivery cost curve cross
level each other and the total cost curve is at its
minimum.
Minimum
stock level
Fixed time period model
This inventory control system is one where
Time each unit of stock is counted at specified times
Lead time – for example, daily, weekly or monthly. When
the amount of the current stock is ascertained,
Figure 22.1: Stock control levels an order will be made to replenish the stock if
CASE STUDY
A pile of confusion
Stock
Disaster is on the horizon for Simpson Lumber levels
Yard, as its lack of proper inventory management
300
is proving chaotic and costly. Over the years, the
owner, Mr Simpson, would purchase lumber on a
random basis and ask his suppliers to give him a
mix of the different lumber they have in stock. This 200
method would work to some extent, even though
Mr Simpson would end up receiving more of one
type of lumber than others. 100
As the lumber yard expands and becomes more
popular, he is now finding it difficult to keep track
of his stock and he is frequently out of stock of Time
some types of lumber. In addition, some of the Jan Feb Mar Apr
lumber stays at the yard and becomes distorted
because of the long period of time it has been
Figure 22.2: Simpson Lumber Yard stock control graph
there. It is also evident that Mr Simpson has too
much of some types of lumber because of the huge pile in the yard.
To lessen his problem and restore some amount of organisation to his business, he has started doing some research and has
come across the concept of stock control. The graph in Figure 22.2 gives some general information in terms of the way forward
and this is expected to improve the situation at the lumber yard.
Questions
1. Briefly explain the importance of having efficient inventory management in place. (5 marks)
2. Determine the following:
a. Maximum stock
b. Minimum stock
c. Reorder level
d. Reorder quantity
e. Lead time (10 marks)
3. What other inventory control management strategy can Mr Simpson employ? Discuss the pros and cons of this
strategy for the successful management of his business. (10 marks)
Total 25 marks
necessary. This type of system is common in corner shops, made when they are needed for production just in time.
supermarkets and possibly your school’s cafeteria. At specific For this method to work effectively, the supplier of the raw
times the amount of items in stock will be counted and an materials has to be very efficient, with readily available
order is placed with the supplier, who sends a delivery truck supplies. Since there is little time between when an order is
to replenish the stock. A second option would be where the made and the delivery time for the finished product, there
delivery truck stops by the firm at specific times and the firm has to be very strong synergy among the main stakeholders
will replenish its stock as required. – that is, company, workers, suppliers and customers. The
supplier has to deliver raw materials of high quality on time
‘Just in time’ model so that production can start within a specified time.
This technique is one where very little stock, if any, will be This method will almost eliminate the costs of stock
held at the firm. An order for raw materials will then be holding, while minimising waste.
Vendor certification
Cost
Total stock In order for the firm to have a highly rated product, quality
has to be built into the product from the stage of raw
Stock materials. In addition, since raw materials are delivered just
holding when needed, there may not be sufficient time to scrutinise
and assess materials properly. With this in mind, firms using
this strategy may seek to purchase items from suppliers who
are certified. Vendor certification refers to a verification
Order and of the supplier’s processes, quality standards and delivery
delivery cycles, making him/her a legitimate seller of raw materials.
Order Raw materials that are purchased from a certified vendor
EOQ are more likely to meet the required standards.
Figure 22.3: A typical economic order quantity graph Responsibility of the workers
Workers play a significant role in the ‘just in time’ strategy.
In order for the ‘just in time’ inventory control system They must be fully aware of the firm’s quality standards and
to work, quality has to be built into the product – that is, adhere to these standards in the production of goods and
there is very little room for mistakes. The suppliers of raw services. Deviations from these quality standards may end
materials will also have to give an assurance of quality, as up delaying the delivery date of the products or not meeting
defective materials make defective products. some other pertinent deadline. Workers must be committed
For ‘just in time’ to be effective, the following elements to the maintenance of quality for the ‘just in time’ production
or features must be present: method to work.
Standardisation Benefits of using ‘just in time’

This involves the production of a variety of goods using the Fewer funds being tied up in stock
least possible variety of raw material, tools, part and processes. Space previously used for storage will be freed up
The firm would establish standards of units of measurement Stockholding costs are reduced significantly
by which quality and performance may be compared or It emphasises quality control among key stakeholders
measured. Since materials will be delivered when they are Since maintaining quality is integral, the firm can
needed for manufacturing, the firm has to ensure that the reduce the wastage of resources and defect rates while
parts used in production are standardised. The main reason improving customer satisfaction.
is that there will not be enough time to source a variety of
raw materials that are not readily available. In order for ‘just Drawbacks of using ‘just in time’
in time’ to work, the product, raw materials, parts, tools and The firm may have difficulty in meeting any sudden
processes should be standardised. increase in demand for the final product
There is almost no room for mistakes, as only minimum
High-quality raw materials stock is kept
Poor-quality raw materials can be detrimental to any form of The reliance on suppliers to maintain quality can be
production, but the risk is even greater with ‘just in time’. A risky
firm that stores finished goods may find it easier to correct a Since large amounts of raw materials might not be
defect with those goods, since they are not sold immediately. purchased, the firm is less likely to benefit from
However, in ‘just in time’, defects in the final product will purchasing discounts and economies of scale
set back delivery and the firm may lose the customer. There If machinery should break down it might be detrimental
is little time available for careful assessment of raw materials to the firm since no stock of finished goods is kept.
which may be needed for production on the same day.
Receiving high-quality materials is therefore an important
step in creating high-quality products.
CHAPTER SUMMARY
A good inventory control system Holding too little stock is also Four key elements of the ‘just in
will be dependent on factors such problematic for the firm, as it may time’ model are standardisation,
as available storage space, security, result in production hold-ups and high-quality raw materials, vendor
proper staffing and the inventory loss of sales revenue certification and responsibility of
management system in place workers.
Three main inventory management
Holding too much stock can lead to systems are: economic order
waste of resources, increased costs quantity, fixed time period model and
of storage and liquidity problems ‘just in time’
MULTIPLE CHOICE QUESTIONS 5. A firm holding too little stock may run into which of the
following problems?
1. A typical firm has FOUR main types of inventory. Identify
a. Wastage as a result of spoilage
which one of the following options is NOT a type of inventory:
b. Stock may become outdated
a. Work in progress
c. Production hold-ups
b. Finished goods
d. Increase in cost of storage
c. Machinery
Questions 6–8 refer to the graph in Figure 22.4.
d. Raw materials
2. ALL of the following are reasons firms hold inventory,

Cost A
EXCEPT which one?
a. To utilise the available storage space
b. The firm can respond to changes in demand quickly B
c. Stock is held as a safeguard in case the supplier
encounters unforeseen problems
d. Against expected future surges in prices
3. ‘Lead time’ is defined as the: C

a. Amount of time between placing an order and receiving the
Order
order D
b. Amount that is ordered once the stock level reaches the
reorder level Figure 22.4: Economic order quantity graph for Questions 6–8
c. Maximum amount of stock that the business can hold,
based on its objective or storage space 6. Which of the following letters represents the economic order
d. Lowest amount of stock the firm would want to hold at quantity?
any given time a. A
b. B
4. ALL of the following are elements of a ‘just in time’
production method, EXCEPT which one? c. C
a. High-quality raw materials d. D
b. High storage costs

c. Standardisation
d. Vendor certification
7. The order and delivery cost curve is represented by the letter:

a. A Extended Essay Questions
b. B Question one Total 25 marks
c. C a. Firms hold stock for a number of reasons. Clearly

outline five (5) reasons why they do this. (10 marks)
d. D
b. With the use of examples, describe the fixed time
8. Which of the curves represents rising storage cost as the period model of inventory control. (6 marks)
number of stock increases? c. Identify and discuss three (3) problems that
a. A firms may face as a result of holding too
b. B much inventory. (9 marks)
c. C
d. D Question two Total 25 marks
a. Briefly explain how the ‘just in time’ model
works. (3 marks)
b. Briefly describe four (4) key elements of the
‘just in time’ model. (12 marks)
c. Describe three (3) benefits and two (2)
drawbacks of the ‘just in time’ model. (10 marks)
230
23 Lean Production and Quality

Management
Features
LEARNING OBJECTIVES: This dimension includes the secondary aspects of the
At the end of this chapter students should be able to: product’s performance. The features are the characteristics of
Outline the importance of quality the product that are used to supplement its basic functioning
Apply the dimension of quality to goods and services or performance. Going back to the example of the cellular
markets phone, its features might include a camera, Wi-Fi technology
Assess the different techniques that are used to improve and voice dialling, among others. Consumers should be able
quality to use the features of the product to make judgements of
Discuss the concept of lean production quality and not just base these on their individual prejudices.
Understand the scope of Total Quality Management
Reliability
A product’s reliability is judged against the possibility of it
malfunctioning or breaking down within a specified period
Importance of quality of time. The three most common measures of reliability
Q
uality is defined by ISO 8402-94 as ‘The set of char- are the average time of the first failure; the average time
acteristics of an entity that give that entity the ability between failures; and the failure rate per unit produced. It is
to satisfy expressed and implicit needs’. Generally important to note that this measure would only be plausible
speaking, ‘quality’ measures the degree to which a product for consumer durable goods which will be used over time,
meets or exceeds the desire of the consumer. Quality is as opposed to services which are consumed instantly. As for
normally measured in terms of performance, reliability and the cellular phone in our example, the manufacturer would
durability. It should be the desire of every firm to maintain
have to measure the average time that it will take before it
quality at all times, since defective products can quickly ruin
starts malfunctioning.
a firm’s reputation. Firms that maintain quality can also gain
a competitive edge over their competitors. Customers often Conformance
become loyal to any product that they believe give them
This measures the extent to which the product’s design and
the highest quality. With these in mind, firms should ensure
operating characteristics adhere to the established standards.
that quality is always maintained within the firm.
Conformance is usually measured against the defect rates in
the factory and frequency of service calls after the product
Dimensions of quality is sold. In measuring conformance, deviations from the
This concept was developed by David A Garvin, a professor standards on matters such as labels with incorrect spelling
at Harvard Business School, in the late 1980s. He proposed or inferior construction, which do not result in service or
that there were eight distinctive dimensions of quality repair, are not considered.
which are discussed below:
Durability
Performance Durability is a measure of the expected lifespan of the
This dimension deals with the primary operating product. It measures the product’s life in terms of economic
characteristics of the product. It is what the product was and technical dimensions. Technical durability refers to the
created for. For example, the primary operating characteristic amount of use the consumer gets from the product before it
of a cellular phone is to make and receive calls. If the phone deteriorates. It may also be defined as the amount of use the
cannot make and receive calls, then it would not fulfil this consumer gets from the product before it breaks down and
dimension. Performance is assessed by using measurable has to be replaced instead of repaired. For example, when
attributes so that each brand can be ranked objectively. you purchase a pair of shoes, you may replace the tips or
CHAPTER 23 | LEAN PRODUCTION AND QUALITY MANAGEMENT 231
reinforce the soles but there comes a time when you have to Therefore, it may be difficult to please everyone in terms of
replace them. Upon purchase you would have expected that this dimension of quality. For example, what you like in a
the shoes should last for a particular period of time – that is car may not be the same as what someone else likes.
its durability.
Perceived quality
Serviceability This is the perception of the consumer at the initial contact
This measures the speed, courtesy, capability and ease of with the product – that is, what comes to mind the first
repair of the product. Most consumers are aware that the time the product is seen. At this stage the consumer usually
product will break down at some time but a greater concern has insufficient information about the product’s attributes
would be whether or not it can be repaired and the length and so quality may be inferred from its various tangible or
of time it will take. Serviceability also includes the quality intangible aspects. Consumers at times depend on images,
of the service personnel, the manner in which service advertising and brand names to judge the product’s quality.
appointments are kept and whether or not servicing corrects
the problem. The consumer wants to know that, having
spent hard-earned cash on a product, it will be able to be Techniques for improving quality
repaired or serviced should something goes wrong with it.
Quality control and quality assurance
Aesthetics Quality control is the process of ensuring that the product
This dimension is subjective in nature and relates to how meets its established quality standards. The main objective
the product looks, feels, sounds, tastes or smells. Unlike the of quality control is to ensure that products being produced
other measurable dimensions, aesthetics is based on the and sold are free of defects. The lower the defect rate, the
judgements and preferences of the individual consumer. lower will be the cost incurred in correcting the problem
CASE STUDY
The booming ‘cell’ market

A little over a decade ago, landline was the main form of telephone communication in the Caribbean, as few people were privi-
leged enough to own a cellular phone. In fact, even those who did own cellular phones found them a bit difficult to carry around
because of their size. Those phones carried a pole that the user would have to pull out before making a call. Most of these
phones did exactly what they were purchased to do – that is, make calls. Today, cell phones are effectively mini computers with
a myriad of capabilities.
The telecommunications industry within the region started changing with the passing of the millennium. In Jamaica, for
example, Cable and Wireless’s monopoly licence was revoked to allow other players to enter the market. With this change came
new technology including ‘pole-less’ phones, the introduction of SIM cards, phones having different ringtones, texting features
and even colour screens. Customers from that era would remember the Nokia 3310 model, which was quite possibly the catalyst
for the changes we now have in the cellular phone industry.
Today, we have stiff competition in the industry and some companies are still finding their way within the region. Some
of the more popular brands include BlackBerry, iPhone, Samsung Galaxy and Nokia smartphones. These companies have
changed the way people view their phones and the things that they look for before buying one. Now, consumers are assessing the
storage space, internet connectivity and speed, messaging ability, megapixels of camera and video, style, size and appearance.
Importantly, though, they still assess the durability of the instruments and the ease with which they will be able to get them
repaired if something goes wrong. With the changing technological industry one must now wonder what other addition is there
to come. We may very well be communicating through our watches or rings in the future!
Questions
1. Explain the concept of ‘quality’ and its importance to the manufacture of cellular phones. (5 marks)
2. Discuss how any five (5) of the eight dimensions of quality apply to cellular phones. (20 marks)
Total 25 marks
or destroying the product. High-quality products will help A Identify the area for improvement
the firm to gain the trust and loyalty of consumers who will
The firm must examine its operations carefully and identify
be satisfied after their usage. A good quality control system
the areas that need improvement. It will then decide which
is one that involves regular inspection of the product and
of these areas will be improved through benchmarking. In
correction of any defects found. The following concepts are
identifying the area of the business that needs improvement,
integral to quality control.
the firm may gather information from sources such
consumers and workers. It could carry out extensive market
Zero defects
research or use consumer feedback cards or suggestion
This concept involves the production of products that are
boxes.
free of faults and which adhere to the standards. It is usually
used to encourage quality in the work of employees, who B Choose the right company
would be rewarded if quality products were produced.
Once the areas for benchmarking have been identified, the
next step is to procure a company that will be studied and
Quality assurance
assessed. The company under study must be contacted and
Quality assurance is a guarantee to maintain an agreed or
the relevant parameters established. For example, sensitive
established set of quality standards. In doing this, the firm’s
information such as trade secrets and pricing policy are not
suppliers must also be involved, since poor-quality raw
normally disclosed. Instead, the focus should be on best
materials lead to poor products. Unlike quality control, which
practices in terms of maintenance of standards and quality
focuses on detecting defects once they have occurred, quality
and strategies used to improve performance.
assurance emphasises that the necessary steps be taken to
prevent the occurrence of the defects. It therefore attempts C Gather information
to build quality into the system from the very outset.
The next step is to gather information from the company to
be benchmarked. This information can be gathered through
Quality standards
the use of questionnaires, interviews or observation. The
These are standards that are established by independent
firm should ensure that the information collected is relevant
organisations to ensure that the interests of consumers are
to the areas that need improvement and is also credible.
protected – for example, the Bureau of Standards in Jamaica.
Some of these standards will be explored below. D Analyse the information gathered
The information collected is of little help unless it is carefully
Benchmarking
analysed and decisions made regarding variances between
No one company knows it all and so it is always good to
both firms. A comparison should be done between what the
learn the best practices of others. Benchmarking is another
firm is doing and what the benchmark company is doing.
method for improving quality. It is the process whereby
The analysis will help the firm to identify the areas of the
a firm identifies the best practices of another firm then
benchmark findings to implement.
implements them to improve its own product. It can be a
very good source of quality improvement, as the strategies E Implement and evaluate the findings
used by other firms in the industry or other industries have
Finally, the firm must now implement the findings of the
been tested and proven. It must be pointed out, however,
benchmarking exercise. In addition, it should reassess its
that the aim of benchmarking is not to copy other firms’
operations over time to ascertain whether or not the policies
products but rather to assess their production methods or
that were implemented as a result of benchmarking are
processes. The objectives of the firm in using benchmarking
working.
may include:
Improving delivery time and frequency Benefits of using benchmarking
Proper waste management and disposal
Brings about faster awareness of important innovations
Inventory control management
and how to implement them successfully
Improving consumer service
Usually much cheaper than some of the other methods
Cost reduction
that are used to improve quality
Eliminating waste in the production process.
Proper implementation will help to reduce waste and
The main steps involved in benchmarking are:
Can improve the competitiveness of the firm both Implementing new policies within the company could
locally and internationally be stalled by resistance to change and the necessary
Facilitates team building and employee involvement in resources.
the decision-making process
Gives the firm a better understanding of its consumers ISO quality standards
and how to keep them satisfied. The International Organization for Standardization
(ISO) was established in 1947 with a mandate to publish
Limitations of benchmarking international standards relating to businesses worldwide.
The search for a suitable firm to benchmark can be a The ISO is a network of national standards organisations
very tedious process, as not all firms will want to share around the world. A number of CARICOM member states,
information if not all, are members of the ISO.
While possible, what works for one firm may not The organisation has developed a number of ISO quality
necessarily work for the another standards that relate to a number of different things.
Needs qualified experts to make comparisons that will However, for the purposes of this course, the focus will be
be meaningful. This can be a very costly exercise. on ISO 9000, which deals with Quality Management. ISO
9000 is a group of standards that address different aspects of
quality management. For example, ISO 9001:2008 focuses
CASE STUDY on requirements of a quality management system, while
ISO 9004:2009 focuses on how to improve the efficiency
Benchmarking for a better future and effectiveness of quality management systems.
SP Supermarket is said to be the second largest supermar- ISO 9000 outlines the guidelines that firms should
ket chain in the country and has been doing well. The busi- employ to improve their levels of efficiency and customer
ness started out as being a small family retail business in satisfaction. The main goals of ISO 9000 are to increase
the rural part of the country. Over the years, the business productivity, minimise costs and improve the quality of
has grown and it has now opened over 14 branches across processes and products.
the country. It is now considering the option of opening other The ISO proposed the following principles of ISO 9000:
branches across the Caribbean. However, as with any other Focus on customers – they should be the primary
business, going into unknown territories can be dangerous if focus of the business. Organisations should attempt to
proper research and due diligence are not carried out. respond to the needs of their customers so as to improve
To this end, SP Supermarket has made the decision to customer satisfaction, resource allocation and efficiency
identify and study a successful supermarket chain in the Good leadership – firms should ensure that a good team
United Kingdom or the United States of America. The busi- of managers are employed who have the requisite skills
ness that is chosen for benchmarking should be a large and ability to motivate their subordinates and minimise
chain; have a membership system; and offer online shopping. miscommunication
SP Supermarket believes that if it can implement the online Involvement of people – leadership should employ
shopping strategy it would be a force to reckon with in the a team working strategy, as this would improve the
local market – this would be a first for the small Caribbean morale of employees and improve the quality of work
island. SP Supermarket is hoping to get ideas about how to Process approach to quality management – it is
go about spreading its wings to other countries in the region. suggested that activities and resources should be
managed together. The ISO believes that this will lower
costs as a result of better use of resources, personnel and
Questions
time
1. Explain the concept of benchmarking. (2 marks)
Continual improvement – this is closely related to
2. Discuss the steps that SP Supermarket would need
Kaizen, which is discussed further later in this chapter
to take to in order to carry out its pending
Factual approach to decision making – decisions should
benchmark strategy. (15 marks)
be based on analysis and interpretation of data. This will
3. Outline four (4) benefits that SP Supermarket
enable the firm to make informed and statistically sound
could derive from benchmarking. (8 marks)
decisions
Total 25 marks
Supplier relationships – good supplier relationships will
help to improve the quality of raw materials.
It is believed that firms that employ the ISO quality Drawbacks of outsourcing
standards should enjoy the following benefits: The firm’s financial success may be tied to that of
High level of consistency in performance another company
Reduction in costs It might be more difficult for the firm to maintain
Improvement in customer satisfaction quality, since it is not involved in the production of
Higher productivity levels and improvement in some of its products. This is especially possible where
efficiency proper quality standards are not in place
Improvement in the morale of employees. Can be a potential source of conflict, as the firm’s own
workers may be laid off with the outsourcing of aspects
Outsourcing of the business
As firms face the economic crunch and seek to reduce Loss of managerial control, since the outsource firm has
operational costs, the concept of outsourcing is becoming its own management.
more and more popular. For many businesses, labour cost
takes up a significant portion of the budget and finding
Quality circles
cheaper labour with the requisite skills is always of interest. In maintaining quality, a firm must be aware that its
The term ‘outsourcing’ refers to the process whereby firms employees are a very important part of the process. They are
the ones who manufacture and interact with the product
subcontract some of their operations to independent suppliers
on a daily basis. To this end, they should be a part of the
of services. When a firm outsources these operations it
quality process. One way in which firms ensure that their
can concentrate resources on its core product. A common
trend today is to outsource some of the firm’s services to
call centres, catering companies, cleaning firms and security
firms. The firm may also outsource some of its stages of CASE STUDY
production or the production of some of its products. As
mentioned above, a firm in its search for cheaper labour Production hold-ups at Plastic Galore Ltd
may outsource the manufacture of its products to countries Plastic Galore Ltd is a small privately owned company on
with lower labour costs, such as China. the little island of Jamrock and specialises in the produc-
A number of businesses in the United States have tion of plastic products. The business did quite well after its
been using this policy over the years. Countries such as inception, for the first five years. However, things have not
China and India have been beneficiaries of US business been the same in recent years, as the company is now faced
outsourcing. While firms can rack up significant cost savings with numerous challenges which are dampening its future.
In recent times, world oil prices have been soaring and
as a result of outsourcing, it may lead to low motivation
this has affected the energy cost in the island. It is now
and job insecurity in their own workforces. Firms should
becoming very expensive to operate and compete with other
also consider the cost of outsourcing as compared with
companies in territories where energy costs are not as high.
the present situation before embarking on this approach.
The company is also faced with a local dollar the value of
A number of Caribbean countries have been positioning
which has been sliding against the US dollar for the last ten
themselves to be beneficiaries of global outsourcing. This has
years. The company is now seriously thinking of halting its
been made possible with the development of Information
production of plastic products and becoming a distributor.
and Communications Technology (ICT). It should be The directors are now eyeing a Chinese supplier to make
pointed out, however, that outsourcing can be done within the products on their behalf and ship them to Jamrock. This
the country. A firm may choose to subcontract the services move could be beneficial to the company, while posing a few
of another firm because it is more efficient in its delivery of challenges.
the service or production of the product.
Questions
Benefits of outsourcing
The firm’s focus can be on its core products 1. What is meant by the term ‘outsourcing?’ (2 marks)
Usually results in cost savings, including labour costs 2. Evaluate how the decision by the directors of
Improvement in efficiency and quality Plastic Galore Ltd to outsource its production
Can boost productivity and competitiveness may affect the company. (18 marks)
Usually leads to greater customer satisfaction. Total 20 marks
employees are a part of the quality process is by setting up Kaizen or continuous improvement
‘quality circles’. Kaizen is a Japanese concept of continuous improvement.
These are groups of lower-level workers who meet The approach is based on the notion that the improvement
regularly to analyse and critically review the design of a product should be a never-ending process. As a result,
and production of a product. The team may also discuss improvements should be made on a small and gradual basis
production problems and develop possible solutions to these over the life of the product. A firm using this method of
problems. They are normally charged with a mandate to improving quality will seek to continually improve its
improve the quality of the firm’s product offering. In most
machinery, production method, raw material and labour,
situations, members are given some training to assist them
among other things. The concept of Kaizen was developed
in the group’s work. The group may consist of workers from
by the car manufacturer Nissan and has been used in its
a wide cross-section of the firm who work collectively to
manufacturing process to improve efficiency and quality.
improve the product’s quality where possible. Some of the
A major assumption of this approach is that the employees
main objectives of quality circles are:
play a critical role in the maintenance of quality. Since they
Promotion of employees’ involvement
interact with the product, they are able to identify areas
Fostering better communication
of the production process or the product itself that need
Engendering good leadership qualities
improvement. This approach is at times used in conjunction
Fostering effective teamwork
with quality circles or teamwork. The groups will review
Allowing workers to develop their problem-solving
and assess production regularly and make suggestions for
capabilities
improvements. The main features of Kaizen or continuous
Improving productivity.
improvements are:
Some of the main features of quality circles are given
Small improvements are made continuously, unlike
below:
a major overhaul or improvement that is done when
Decisions are made by consensus rather than a ‘majority
using research and development
rule’ approach
The workforce is regarded as being talented, skilled and
Groups are usually small in size, consisting of just a few
usually knows more about the product therefore they
employees
are able to suggest improvements to be made
Members are not chosen but opt to volunteer their
Suggestions are usually easier to implement since they
services
come from the workforce
It uses a ‘bottom-up’ approach
Small improvements are less likely to require major
Regular meetings are held to discuss issues.
capital investments
Quality circles can be very effective in maintaining
Teamwork is often used to solicit suggestions for
quality but it takes great effort on the part of all the
improvement and to maintain quality.
stakeholders. For them to be successful and reap their
The Kaizen approach can be an effective one but its
potential benefits, quality circles have to be supported by
management and the people who are a part of these teams level of success is dependent on the organisational culture
must be committed to the tasks to be done. The use of this and leadership style being used. Management and workers
type of quality improvement method will also be dependent must be committed to the culture of on-going change.
on the leadership style of management, as it needs a more The leadership style employed by management should be
participative approach. Management also needs to facilitate one that involves the workforce in the decision-making
and train both the quality circle leader and the members. process. An organisation where workers are not given
Quality circles should not be used as an avenue to deal with the opportunity to share their inputs or team work is not
grievances or personal problems. encouraged is less likely to reap success from Kaizen. The
If quality circles are utilised properly it can help to: lines of communication must be open both ways and
Improve motivation in the workplace workers should be given the autonomy to make certain
Promote continuous improvement decisions. Continuous improvement also requires that the
Develop good leadership qualities among their members necessary resources are available to make the changes that
Improve communication between management and are identified to improve quality.
subordinates
Reduce defect rates as employees become more aware Limitations of Kaizen or continuous improvements
of the maintenance of quality Some of the changes that are required cannot be done
Promote team working among employees. incrementally
The firm may incur short-term costs on a regular basis The amount of financial resources it has. R & D can
as it implements changes be very expensive and if the firm does not possess the
Its success is heavily dependent on the culture of the requisite funds, it may not be done
organisation and leadership style of management The desire for long-term competitiveness as opposed
Employees may feel pressurised into continuously to short-term success – R & D requires investments to
coming up with new ideas bring about long-term success and competitiveness.
There is little room for stability since things are always Firms must be aware that an investment made now
changing. may not pay off until some years later
The level of innovation in the industry – an industry
Research and development (R & D) where firms are very innovated will force other firms in
Large companies sometimes spend millions of dollars on the industry to be innovative
their research and development programmes. In order Objectives of the firm.
to improve quality and satisfy their consumers, firms must
endeavour to produce the best-quality products. This is Lean production
done through conducting constant research and developing This method of production is credited to the Japanese car
the products based on the findings of the research. Research manufacturer, Toyota. Lean production was developed to
and development involves steps taken by a firm to improve reduce wastage of resources by using as few resources as
either the product itself or the way in which is made. This is possible in production. To this end, the company is expected
particularly important in an industry that it very competitive, to save time, money, materials and human effort while
as firms must improve or develop new products in order to improving quality and productivity. Lean production’s overall
remain competitive. aim is to cut costs while increasing efficiency. In order for
Research is concerned with the discovering and this to be done, the firm would need to ensure that quality
uncovering of new principles and ways to do things, is maintained at all times throughout the organisation. A
while development deals with the transformation of the key aspect or feature of lean production would then be Total
research findings into the actual improvement of the Quality Management.
product or production process. Process development deals
with the improvement of machines and the layout of the Total Quality Management (TQM)
plant. On the other hand, product development involves The success of the firm is dependent on whether or not it can
the improvement or creation of different products. These provide quality goods and services to its consumers. In order
products must be tested and evaluated before the firm goes for this to be accomplished, quality has to be the concern
into their full production. of every person who has an impact on the organisation.
It is important to note that companies can either undertake Efforts by management to maintain quality can prove futile
their own research and development programmes or they if all stakeholders are not attempting to maintain quality
can purchase the ideas generated by other institutions such as themselves. The desire to achieve quality in all spheres
universities. A good research and development programme of the business has given rise to the philosophy of Total
should result in innovations and product development. Quality Management. TQM is a management philosophy
Outside of this, the firm would have underutilised and which ensures that quality is maintained in all areas of the
wasted the large sums of funds that were invested. organisation in order to meet customers’ expectations. It
Research and development provides the company with is people focused and aims to satisfy the firm’s customers
the following benefits: continually. One of the main objectives of TQM is customer
May help to boost sales satisfaction. The firm aims to satisfy its customers by building
Extends the firm’s reach into new markets quality into its products and every aspect of the business.
Can improve the firm’s reputation and brand Other objectives of TQM would include:
Improvements in quality The enhancement of performance in terms of quality,
The company can gain a competitive edge over rivals speed or response, cost and flexibility
Improvements in the product and the value received by To foster a customer-focused organisation instead of one
consumers focused on functions
Reduction in costs over time. Improvement in the business’s flexibility and ability to
The extent to which a firm invests in research and adapt to the changing environment
development may be dependent on:
To create an organisation that is people focused and The main features of Total Quality Management are
involves stakeholders in all its activities outlined below:
To empower workers to work in teams focused on
improving quality Consumer inputs
To produce a product with zero defects. TQM requires the full commitment of firms to their customers,
Once we examine TQM, we must make mention of as they are very important to quality improvement.
W Edwards Deming, who contributed a lot to the study Information must be gathered frequently about customers’
of quality improvement in the mid-1900s. In his work he needs and expectations. When this information is received
proposed 14 principles that can be used to improve total the firm must adjust its products or processes to cater for the
quality. These are summarised below: desire of its customers.
Creation of a consistency of purpose with a view to
improving quality and customer satisfaction Zero defects
Adopting a philosophy of leadership to promote change The concept of zero defects was outlined above, however,
Cease using inspection as a means to achieve quality it is also a very important feature of TQM. Since firms aim
and instead build quality into the product from the to satisfy their customers totally, they have to produce a
beginning product that is free from defects. For this to be achieved
Establishing long-term relationships with suppliers. will take tremendous effort and care on the part of every
These should be based on their performance and not stakeholder of the firm – that is, from supplier to customer.
price
Constantly improving quality, production and service Teamwork/Quality circles
provision, with the aim of reducing costs Teamwork has become the most effective method used in
Implementing on-the-job training
TQM to solve problems. Empowering workers can help
Changing the focus of leadership to one that promotes
to build trust and morale throughout the organisation.
quality as opposed to production numbers. The
Teamwork also helps to improve communication and
view here is that quality improvement will result in
cooperation between management and subordinates.
improvements in productivity
Teamwork is important to TQM since the suggestions for
Driving fear out of employees so that they can work
fixing problems with quality will come from the very people
effectively and therefore increase productivity
who produce the product and have day-to-day interaction
Breaking down barriers that exist among departments.
with it.
This will encourage teamwork and synergy while
possibly reducing conflict among the departments
Control strategies
Eliminating criticism of workers and unrealistic targets
A good and effective TQM system is one where there are
and slogans that are not supported by the relevant
proper control strategies in place to monitor quality and the
resources to accomplish them
processes that are used. Total satisfaction of customers will
Eliminating work standards such as quota for factory
only be achieved if the business has control over the factors
workers and numerical objectives for people in
management that influence the quality of the product. Such factors
Removing the barriers in the workplace which prevent may include the workforce, technology and materials. The
workers from taking pride in their work. These barriers monitoring of quality and business processes can help the
may include performance appraisal, where workers are firm to identify areas that can be improved.
assessed based on their output
Company culture and policies
Educating workers and encouraging self-improvement.
A skilled labour force is always an asset to a firm. TQM is most likely to be successful where it is infused in
Therefore to improve quality the work force must be the culture of the firm. It has to be fully supported by top
encouraged to improve their educational level and management and filtered down throughout the organisation.
knowledge There must also be a culture of accountability among every
Encouraging everyone in the organisation to work individual in the organisation.
on the transformation process. In order for the
transformation to be smooth and successful, it has to be Quality chains
the initiative of top management and filtered to other This refers to the relationship between suppliers and
workers. customers (both internal and external). Quality chains can
CASE STUDY
Total Quality Management at Auto Giant

Having made a decision to locate in Sunderland, UK in 1984, Nissan Motor Manufacturing UK Limited quickly became one of
the largest car manufacturers in that country. The cars pass through a number of processes during manufacturing and Nissan
UK recognised that quality has to be a very important part of its production. To this end, each employee is responsible not only
for the quality of their own work but also for the quality of their co-workers’ work. The firm believes that it is best to ‘build good
quality in’ the product rather than trying to ‘inspect poor quality out’. Each employee is expected to maintain a certain level of
quality and also to check the adherence of the previous worker to the prescribed standards.
Nissan UK adopts a Total Quality Management approach to the way business is done. The workers are encouraged to focus
on creating high quality by understanding their customers’ requirements, considering the processes involved in providing quality,
prioritising and standardising tasks to deliver quality and educating all employees to work in the prescribed way. The company
believes that quality should be a part of the organisation’s culture. The company has a ‘Plan, Do, Check and Action’ cycle which
is inculcated in the mind of each employee. This cycle is used to help maintain quality in the operations of the company.
Nissan is known to be closely associated with Kaizen or continuous improvement of quality. The company stated that ‘We will
not be restricted by the existing way of doing things but will instead continuously seek improvements in all our actions’. These
changes do not have to be big but should be worthwhile. The beauty about these changes is that they are sometimes initiated by
employees who at times work in groups to find new and improved ways of doing things.
Questions
1. What is meant by ‘Total Quality Management’? (2 marks)
2. Outline two (2) of W Deming’s principles of improving quality that would apply to the case. (4 marks)
3. Explain four (4) principles of TQM that were mentioned in the case. (16 marks)
4. Outline three (3) benefits that Nissan could derive from its TQM approach. (3 marks)
Total 25 marks
be broken at any point if a person or piece of equipment best judge of the effectiveness of the firm’s product. Since
fails to produce goods in line with the requirements of TQM places so much emphasis on customer satisfaction,
customers. TQM places great emphasis on this chain, as that complaints from customers should be treated with care and
is the only way quality will be maintained throughout the a desire to correct any problems. Consumer knowledge
organisation. should be integrated with the objectives of the firm so that a
Two other key features of TQM are benchmarking and quality good or service can be produced.
continuous improvement, both of which were explained The success of TQM may depend on the following factors:
earlier. Involvement of trade unions in the planning process –
this could lead to greater acceptance by workers of the
The role of the customer in TQM wholesale changes that might occur
Since one of the main objectives of TQM is to satisfy There needs to be a strong sense of job security – this
customers, their role is a very important one. The customers could make it easier for workers to buy into the quality
are the main purchasers of the products and their views initiatives proposed by the firm
should be considered in quality management. The firm Constant training of employees – workers must be
should continuously assess customers’ needs and seek to trained in the area of maintenance of quality and
satisfy these needs. Customers’ needs can be ascertained teamwork. This is particularly important for firms that
through regular market research. Customers and consumers do not have a culture of TQM
are able to make suggestions to the firm on how to improve The financial resources of the firm – TQM initiatives
quality to meet their needs. Customers tend to purchase the tend to be expensive and quality changes may come at
product that they believe has the highest quality and will a high cost. Therefore, financial stability of the firm is
give them value for money. With this in mind, they are the needed for the success of TQM
Involvement of employees in the decision-making Can improve the firm’s competitiveness

process – involving employees in the plans to Helps companies to identify areas of waste and
implement TQM may result in an easier transformation inefficiencies and to correct them.
and acceptance.
Possible limitations of TQM
Benefits of implementing TQM Implementation cost might be exorbitant
Promotes an improvement in quality and achievement To be successful, it needs the involvement of the entire
of zero defects business
Results in the continuous improvement of production Management may have unrealistic expectations for
and processes success which cannot materialise
Proper implementation can lead to greater customer If not handled properly it may lead to labour-
satisfaction management problems.
CHAPTER SUMMARY
Zero defects, quality assurance Benchmarking can be a very good One of the main objectives of Total
and quality standards are essential source of quality improvement, as Quality Management is customer
concepts of quality control the strategies used by other firms in satisfaction
the industry or other industries have
Garvin’s eight dimensions of quality been tested and proven T Edwards Deming has been credited
include performance, reliability, for the impact his 14 principles of
features, conformance, durability, The International Organization for quality have had on the development
serviceability, aesthetics and Standardization uses the acronym of TQM.
perceived quality ‘ISO’ as it comes from the Greek
word ‘isos’ meaning ‘equal’
Quality circles have to be supported
by management and the people who Lean production aims to reduce
are a part of these teams must be costs and improve efficiency
committed to the tasks to be done
MULTIPLE CHOICE QUESTIONS 3. Which of the following is a limitation of benchmarking?

a. It is usually much cheaper than some of the other methods
1. ‘The set of characteristics of an entity that give that entity the
that are used to improve quality
ability to satisfy expressed and implicit needs’ best defines:
b. Proper implementation will help to reduce waste and
a. Design
b. Inventory control
c. The process can improve the competitiveness of the firm
c. Quality both locally and internationally
d. Quality assurance d. Needs qualified experts to make comparisons that will be
meaningful. This can be a very costly exercise
2. Which of the following dimensions of quality refers to ‘The
perception of the consumer at the initial contact with the 4. Which of Deming’s 14 principles for improving quality
product’? encourages teamwork in the organisation?
a. Performance a. Drive fear out of the employees
b. Perceived quality b. Break down barriers that exist among departments
c. Conformance c. Eliminate work standards
d. Features d. Implement on the job training
5. Deming states that managers should ‘cease using inspection

as a means to achieve quality and instead’: Extended Essay Questions
a. Build quality in the product from the beginning Question one Total 25 marks
b. Base relationship with suppliers on performance and a. Discuss the following dimensions of quality, making
not price specific reference to the purchase of a cellular phone:
c. Eliminate work standards i. Performance
ii. Features
d. Educate workers and encourage self-improvement
iii. Reliability
6. Which of the following is NOT a feature of Total Quality iv. Serviceability
Management? v. Perceived quality (15 marks)
b. Define the term ‘outsourcing’ and outline two (2)
a. Consumer inputs
advantages and two (2) disadvantages of using
b. Zero defects this method to improve quality. (10 marks)
c. Pricing strategy Question two Total 25 marks
d. Quality circles a. Outline four (4) objectives of Total Quality
Management. (4 marks)
7. Which of the following is a benefit of implementing Total
b. Discuss how the following concepts can be used to improve
Quality Management in the organisation?
quality:
a. Implementation cost might be exorbitant
i. Benchmarking
b. For TQM to be successful, it needs the involvement of the ii. Outsourcing
entire business iii. Quality circles
c. Management may have unrealistic expectations for success iv. Kaizen (continuous improvement) (16 marks)
which cannot materialise c. Outline three (3) benefits and two (2) limitations
d. Results in the continuous improvement of production and of implementing Total Quality Management. (5 marks)
processes
241
24 Productivity
Production = 5,000 gifts

LEARNING OBJECTIVES: Productivity = 5,000/(25 × 2 × 20)
At the end of this chapter students should be able to: = 5 gifts per labour hour.
Explain the concept of productivity Now, suppose that for one Christmas the amount of
Outline the difference between productivity and students rose to 30 and the number of gifts packaged also
production increased by 1,000. What is production and what is the level
Discuss the importance of productivity to an of productivity now?
organisation Production = 6,000 gifts
Outline the internal and external factors that affect the Productivity = 6,000/(30 × 2 × 20)
level of productivity in a firm = 5 gifts per labour hour.
Discuss the methods of measuring productivity We can draw the conclusion that production increased by
Analyse the different methods of improving productivity 1,000 gifts but the level of productivity remained the same.
The level of productivity is very important to all
stakeholders of the firm. Some of the general reasons for
P
this are:
roductivity is becoming more and more of a Productivity is used to assess how well the firm is using
‘catchphrase’ today – especially in trying economic its inputs to produce output
times. Limited finances and, in some cases, less than
The level of productivity gives managers the opportunity
favourable output have sparked moves by many firms to
to plan, control and improve efficiency within the
implement strategies to improve productivity. However,
organisation
with all this talk about productivity, the question must be
Workers can benefit from increased productivity by
asked: what does ‘productivity’ mean?
receiving increased salary and incentives. This can
Generally speaking, it is a measure of how well a business
improve motivation
is using its resources. However, it is more appropriately
Higher levels of productivity can result in lower
defined as the amount of output that is produced per
production cost for the firm
unit of input (labour, land or capital). Productivity results
Shareholders will also benefit for high productivity as
in the enhancement of the production process. The more
the firm will generate more profits which will be shared
productive the firm is, the better able it is to transform
inputs into output at a relatively low cost. This is as a result among them.
of producing more without using more input or resources.
It is very important that we outline the distinction
between productivity and production. The case in point Factors that affect productivity
is that, there can be an increase in production without an These factors can be divided into internal and external
increase in productivity. An increase in production refers factors.
to an increase in the amount of output that is produced,
while an increase in productivity refers to an increase in the Internal factors
output per input. To further illustrate this let us examine the These factors are those over which the firm has control,
following example: including:
Example
Each Christmas, 25 students are able to package 5,000 gifts Labour–management relations
for a children’s home, working for two hours each day for This refers to the relationship that exists between
20 days. What is the production and what is the level of management and the workforce. A good relationship can
productivity? foster improvements in productivity, while the opposite
is also true. Knowing this, management has tried to prices (land, labour or capital) will lead to a reduction in
improve its relationship with the workforce by improving productivity. For example, an increase in wages means
communication and their level of motivation. Where that the firm will have to pay more in order to produce
workers become disgruntled and take industrial action, the same unit of the product. This will result in a reduction
the firm loses productive times and in most cases suffers a in productivity. Increases in the price of consumer goods
reduction in productivity. can also affect the emphasis that firms put into improving
Over the years, some unions, in protecting the interests productivity. If inflation causes prices to rise, firms may be
of their members, have diminished productivity growth content that they can reap higher prices without seeking to
through their resistance to production and productivity- improve the quality of their factor inputs. Productivity is
improving technology. The introduction of machinery usually low in these circumstances.
and equipment to improve production and productivity,
in most cases, means that some workers will lose their Regulations and laws
jobs. No union wants this and so they will seek to resist These can either enhance or impede productivity. Where
such changes. However, management has been able to get regulations and laws result in an increase in the price of
unions to ‘buy into’ improvement in productivity by having factor inputs, productivity will fall. For example, regulations
discussions outlining the long-term benefits to both the firm such as import restrictions and anti-pollution laws usually
and workers. cause an increase in input prices. In addition, barriers to
enter in an industry (such as monopoly) provide an incentive
Required investor returns for firms to be unproductive. If it were the case that there
People enter into business to make profit and if this is not was competition in the industry, the firm would be force to
happening, it is more than likely that they will leave the improve productivity to maintain competitiveness.
business. Productivity is particularly important for these On the other hand, laws and regulations that encourage
business people. As they invest in different business ventures, firms to improve working conditions can increase the firm’s
they expect to get sufficient return on their investments. A productivity. As workers’ level of motivation increases, they
required return on investment is the minimum return that tend to improve their work ethics and productivity.
the investor requires in order to purchase an asset or make
an investment. It follows that the more productive a firm is, Market demand
the more likely it is for the investors to acquire their require A product with a high demand usually generates a high level
rate of return on investment. If investors are not convinced of productivity. In trying to meet this demand, the firm will
that they will receive sufficient return on their investment seek to increase its productive capability. This could mean
then they may be reluctant to invest. Without investment that production-improving technologies are employed or
in new and improved technology, the firm may suffer from workers are encouraged to produce more with the given
inefficiency and poor productivity. resources. Management would be well aware that the
more productive the firm is, the more likely it is to meet its
External factors growing demand. Effort would then be made to increase the
output per man and, hence, productivity.
Technology
Technology is always changing and improvements are made Competition
at regular intervals. This could offer significant benefits to As stated before, lack of competition can impede improve-
firms if they are able to make use of such improvements. ment in productivity. For example, a firm operating as
One of the benefits of technology is that it enables the firm a monopoly may not be driven to improve productivity
to increase output even if it is using the same amount of levels since it is the only supplier and restricting output can
resources. Improvement in technology can also help the increase profits. Conversely, a firm operating in an industry
firm to minimise wastage of resources. New and improved where competition is fierce is forced to become more produc-
technology can also increase the level of output per unit of tive in order to survive. In order to maintain or improve
input – that is, productivity. market share, the firm must be able to produce high-quality
products that will meet the demand of its customers at
Level of pricing competitive prices. This goal will boost productivity, as
The firm’s productivity can be affected by changes in the greater output from each unit of input will both increase
price of its inputs into production. An increase in factor production and reduce costs.
CHAPTER 24 | PRODUCTIVITY 243
Quality of the labour supply Consumer feedback

You would agree that productivity can be seriously affected Consumer feedback is a vital source of information on
by the quality of the labour force. Improvement in output how well the organisation is doing in providing its goods
per man is more likely to be achieved where the workforce and services. This feedback from consumers can be used to
is highly skilled and well trained. The more educated the measure the level of productivity of the firm. Bad reviews
workforce is, the more likely it is to improve productivity. from consumers are indicative of its failure to meet or
With experience and the requisite ‘know-how’, workers will exceed consumers’ expectations. Consumer feedback can be
be able to improve their individual and collective output gathered through market research. Information about the
while reducing wastage of resources. performance of the product, the company and the quality of
When workers are new to the job and lack experience the service it offers can be ascertained. This information can
and training, it is more likely that their individual output then be used to improve quality, improve profitability and
will be low. Workers will spend time learning about correct any flaws that the product may have.
the production process and how to use machinery and Consumers are the final users of the product and firms
equipment. Without sufficient training and experience, the must capitalise on the information they provide. While this
firm’s level of productivity could be dampened. measure does not provide the firm with statistical data, the
information can give the firm feedback on how well it has
been able to supply consumer demand. The feedback can
Methods of measuring productivity give information pertaining to costs, accuracy and timeliness
In this section we will examine three main measures of of supply. If consumers complain of the unavailability of
productivity, with the first being the most commonly used products, it is an indication that products are not being made
method. quickly enough.
Labour productivity or output per labour hour Quality assurance feedback

Labour productivity is probably the simplest and most The quality assurance approach to production ensures
common method of measuring productivity. It measures the that pre-set standards and quality procedures are carefully
ratio of output to input and uses the formula: followed. It builds quality into the product from the
Total output suppliers to customers. Management will receive periodical
Total input (labour) feedback on the effectiveness of the firm system of quality
This measure indicates the efficiency with which labour feedback. This feedback can provide management with
is used in production. Now let us examine the following information on the amount of finished products that meet
example. A firm produces 15 000 unit of output while using these pre-set standards. The information can then be used as
250 labour hours. an indication of the level of productivity of the workforce.
Labour productivity = 15 000/250 The more productive the workforce, the more likely it is
= 60 units per labour hour. that the products being produced will adhere to the quality
standards of the firm.
Quality assurance also incorporates consumers and their
EXERCISE views of the product. Their level of satisfaction can be used
A Harp Company Ltd is a manufacturer of netbooks. It as an indication that the products have met or surpassed
produced 9 000 netbooks by employing 30 people at 8 their standards.
hours per day for 30 days.
a. Determine the:
i. Production Methods of improving productivity
ii. Productivity Improving productivity is of utmost importance to most
b. If the company increased its production to 12 000 firms. In general, productivity can be improved by doing
netbooks by employing 15 more workers at 8 hours one of the following:
per day for 30 days, how does this affect production Increasing output as costs remains constant, i.e.
and productivity? increasing output without employing any additional
resources, or
Reducing costs while maintaining the same level of and equipment, the firm can help to reduce waste, improve
output. This can be achieved by employing cheaper speed and quality in production and increase the amount of
labour or materials. output that is produced from the inputs.
The following are some of the popular methods that are Firms that have undertaken mass production are
used by firm to improve productivity: particularly keen to improve productivity at all times. This
being the case, they will have to keep up with the latest
Good working environment technology so that they can meet the demand for their
From the knowledge garnered from the topic on Motivation products. For example, automated or robotic technology
in Unit 1 of the course, it should be clear that workers are has significantly changed the scope of mass production.
more likely to be motivated to work in an environment that Firms are now able to produce thousands of products within
is safe and convenient. Employees usually perform better a week, as opposed to previous times. Improvement in
when they are comfortable with their surroundings and the technology has also helped to improve efficiency as quality
conditions under which they work. Management should in the manufacturing industry. Technology can reduce
strive to maintain good working relations with employees human mistakes while adhering to quality standards.
so as to lessen the risks of industrial action which can slow
productivity. Training
Management should arrange the work area so as to This can also be a vital way to improve productivity, especially
improve efficiency and reduce accidents. In other words, for organisations with large percentages of unskilled labour.
the environment should be arranged ergonomically. Training people how to carry out a given task will help to
‘Ergonomics’ refers to the process of organising the work improve speed, quality and productivity. As workers acquire
environment to improve efficiency and reduce accidents new skills or better ways of carrying out their tasks, it is likely
and work hazards. Providing the best possible environment that there will be a reduction in waste and improvement in
for workers can help to improve productivity. It will lead to work habits. Some of you may agree that, all things being
a reduction in time wasting and workers can instead focus equal, the greater the level of education of the workforce,
on producing the goods or services of the firm. Reduction the greater will be the level of productivity. As was stated
in accidents and the removal of work hazards will enable earlier in Unit 1, the firm can train workers either on the job
workers to work comfortably and productively. or off the job. However, regardless of which method is used,
it should reap the same benefits in terms of productivity.
Profit-sharing plans
Profit-sharing plans are an incentive for hard work done. Staff participation in decision making
They can also be used to encourage workers to put in extra When we discussed motivation in Unit 1, all three major
effort in carrying out their responsibilities. In a number of theorists we discussed alluded to the fact that workers rather
cases employees are promised a share of the company’s to be involved in the decision-making process of the firm.
profits if the firm does extremely well. Knowing that they When workers are motivated it is more likely that they
will get a share of the profits will help to motivate workers will work with alacrity. Workers who feel that they are
to improve productivity and their work attitude. Review not important to the firm may work slowly as they have
Chapter 8 for further information and also the advantages no drive to improve productivity and work habits. The act
and disadvantages of using this method. of involving subordinates in decision making is referred
to as ‘empowerment’. However, empowerment is more
Technological improvements appropriately defined as a management practice that gives
While this method may not be very popular with trade power to employees to make decisions, solve problems and
unions and workers, technological improvements are known uses their initiative to improve performance.
to improve productivity. With the use of modern machines
CHAPTER 24 | PRODUCTIVITY 245
CASE STUDY
Poor productivity problems at Ping’s Pizza

When the Ping family had the idea to establish a pizza business to sell their homemade pizzas, it was hoped that, by the third
year, business would be flourishing. After three years running, the firm still has not achieved this goal. This has drawn the atten-
tion of Mr Ping, the manager. What has become evident to him is that the firm cannot meet its customer orders within 30
minutes and they are losing customers to a new competitor who has promised its customers pizza within that time. There are
five employees on staff, consisting of two chefs, one cashier and two servers. There are two older-type ovens, with a maximum
capacity of 40 pizzas on average per day in only two sizes.
The pizza world is changing, but the chefs at Ping’s Pizza are from the ‘old school’ and are not familiar with some of the
new forms of pizza and toppings. This has limited the firm’s variety of offerings. In addition to these problems, Mr Ping has been
watching the rise in his input cost compared with his output. The cost of energy has risen significantly over the past three years
and this has been coupled with higher wage demands. It is becoming quite evident that something needs to be done to keep the
business afloat in these tough times.
According to the Ping family, closing down the business is the last thing on their minds. However, there need to be some
changes in the level of productivity at the firm. They have decided to take the necessary steps to turn around the business within
this financial year. However, in order to do so, they need to get the commitment of all the parties involved in the pizza produc-
tion – that is, from making to delivery.
Questions
1. Define the term ‘productivity’ and state how it is calculated. (2 marks)
2. Calculate the labour productivity if the five workers work for eight hours each day. (5 marks)
3. Discuss three (3) factors that are contributing to poor productivity at Ping’s Pizza. (12 marks)
4. Based on the situation facing Ping’s Pizza, discuss two (2) steps that can be taken to improve overall productivity. (6 marks)
Total 25 marks
CHAPTER SUMMARY
The more productive the firm is, the The more productive a firm is, the In general, productivity can be
better able it is to transform inputs more likely it is for the investors to improved by either increasing
into output at a relatively low cost acquire their required rate of return output as costs remain constant (i.e.
on investment increasing output without employing
An increase in production refers to any additional resources) or reducing
an increase in the amount of output Labour productivity indicates the costs while maintaining the same
that is produced, while an increase in efficiency with which labour is used level of output by employing
productivity refers to an increase in in production cheaper labour or materials.
the output per input

1. The amount of output that is produced per unit of input is
referred to as:
a. Discuss the importance of productivity to the following
a. Production
stakeholders of society:
b. Output i. The business
c. Productivity ii. Trade unions
d. Efficiency iii. Government (12 marks)
b. Define the term ‘productivity’ and discuss any
2. Which of the following is an internal factor which affects three (3) factors that may have an impact on
productivity? the level of productivity in an organisation. (13 marks)
a. Labour management relations Question two Total 25 marks
b. Level of prices a. Discuss how management can use consumer
c. Market demand feedback to measure productivity. (5 marks)
b. Discuss five (5) factors that firms may use
d. Competition
to improve productivity. (20 marks)
3. Which of the following is MOST LIKELY to improve
productivity?
a. Centralisation
b. Extended work day
c. Training of employees
d. Production standards
4. Calculate the labour productivity if output = 14 000; labour

hours were 40; and there were 10 workers.
a. 35 units per labour hour
b. 40 units per labour hour
c. 350 units per labour hour
d. 280 units per labour hour
5. If output in Question 4 moves to 16 000, what is the increase

in production?
a. 40 units per labour hour
b. 400 units per labour hour
c. 2,000 units
d. 1,950 units
247
25 Project Management
CPA can be used in any situation where sequencing of

LEARNING OBJECTIVES: activities is needed. It can be used to sequence anything
At the end of this chapter students should be able to: from the activities you do while getting ready for school to
State the advantages and disadvantages of decision- the activities carried out by a construction or manufacturing
making tools firm. Understanding some important concepts before you
Construct critical path networks and decision trees draw your first network diagram is vital. Let us examine
Interpret the critical path and decision tree diagrams these.
Identify float times and dummy activities A node or circle is used to show the start or end of an
activity. It is divided into three sections, as seen in Figure
25.1.
P
Earliest
roject management is vital to the firm if it is to be Node
start time (EST)
successful in business. In order to minimise loss and number
Latest
wastage of resources, it is advisable that the firm’s finish time (LFT)
projects be carefully managed on a step-by-step basis. This

chapter discusses how to manage the different projects that
a firm may be running. Figure 25.1: The sections of a node
Two main techniques are utilised in project management:
quantitative and qualitative techniques. Quantitative
EST is the earliest time (date) an activity can start
techniques involve the use of data that can be measured LFT is the latest time (date) that an activity should end
or quantified. Quantitative decisions are made based on to prevent delaying the next activity
statistical data such as market share or sale record. The Lines are used to represent each activity. Ensure that you
following tools are used to make quantitative decisions. put the name of the activity on top and the duration of the
activity beneath. These lines should not cross each other.
See Figure 25.2.
Critical Path Analysis (CPA)
Critical Path Analysis is sometimes referred to as ‘Critical Activity ‘x’
Path Method’ or ‘Network Analysis’. It is used to schedule
a complex series of related tasks. CPA is a network map of
a project or activity that traces the sequence of tasks from Duration
start to finish. The sequence of activities is very important,
Figure 25.2: Lines representing activity
as any change in an activity may affect the entire network.
Therefore the assumption is made that project activity times
Total float is the maximum increase in time that an
can be estimated accurately and they do not vary. Using CPA
activity can take without causing an increase in the overall
allows businesses to:
duration of the project. It is calculated as:
Forecast the length of time needed for the completion of
LFT – duration – EST
a project
Free float is the maximum increase in the time taken by
Monitor the progress of the project, while identifying
one activity that will not alter the floats available to other
delays
activities. This is calculated as:
Identify the resources needed for the project
EST at end – duration – EST at start
Highlight activities where timing is critical.
Critical path is the sequence of activity in the network Note that the duration of the network would be 50
diagram which takes the longest time to complete. If any of minutes.
the activity on the critical path is delayed, the entire project To calculate the LFT, start from the last node and minus the
will be delayed. Therefore there can be no float time along duration of each activity from the LFT until you reach the
this path. The critical path can be identified where the EST first node – that is, from right to left. Where there are two
and LFT are the same, meaning that there is no float along activities going to the same node, use the lower number for
that path. the LFT. The values would be:
Now let us try a simple and common sequence of activity: 50 – 5 = 45
getting ready for school in the morning. See Table 25.1. 45 – 5 = 40
Please note that the times allotted are randomly chosen and 40 – 5 = 35
you may add or subtract from the activity to fit your own 35 – 10 = 25
25 – 10 = 15
situation.
15 – 15 = 0.
In the above example, all the activities follow the same
Activity Duration (minutes) sequence. However, there are times when two or more
Bathe 15 activities can occur concurrently. For example, you could
Get dressed 10 eat breakfast and watch the morning news headlines at the
Eat breakfast 10 same time. See Table 25.2.
Watch morning news headlines 5
Pack school bag 5 Activity Duration Preceding activity
(minutes)
Leave (go to bus stop or car) 5
Bathe 15 Do first
Table 25.1: Getting ready for school Get dressed 10 Bathing
Eat breakfast 10 Get dressed
Your network diagram should be as shown in Figure 25.3. Watch morning news headlines 5 Get dressed
The chart is drawn from left to right, while noting the
Pack school bag 5 Breakfast, news
preceding activity. A node is used to start and end the
Leave (go to bus stop or car) 5 Pack bag
diagram. Node 1 represents the start of the network and has
an EST and LFT of zero. Table 25.2: Getting ready for school (revised timings)
To calculate the EST, start from the left and add the EST
at the beginning of the activity to its duration until you
Our new network diagram would look like Figure 25.4.
reach the final node. Where there are two activities going
Since you can now eat and watch the news at the same
to the same node, use the higher of the values (this will be time, you save some time on the entire network. The EST
examined in the next example). The values would be: now reads:
0 + 15 = 15 0 + 15 = 15
15 + 10 = 25 15 + 10 = 25
25 + 10 = 35 25 + 10 = 35*
35 + 5 = 40 25 + 5 = 30*
40 + 5 = 45 and 35 + 5 = 40
45 + 5 = 50. 40 + 5 = 45.
Bathe Dress Eat News Pack Leave
15 10 10 5 5 5
Figure 25.3: Network diagram

Eat
Bathe Dress 10 Pack Leave
15 10 News 5 5
5
Figure 25.4: New network diagram
CHAPTER 25 | PROJECT MANAGEMENT 249
At node 4 there are two ESTs (35 and 30), therefore we Activity Duration Predecessor/Preceding activity
use the higher value. The reason behind this is that if you (weeks)
delay eating, it will delay the time you have for the entire A 3 Do first
network. B 4 A
The LFT now reads: C 2 A
45 – 5 = 40
D 6 B
40 – 5 = 35
E 7 C
35 – 5 = 30*
35 – 10 = 25* F 4 E
B25 – 10 = 15 G 4 D, F
15 – 15 = 0.
Table 25.3: Information for critical path exercise
At node 3 there are two activities depending on you to
get dressed. Here, we choose the lower of the numbers, i.e.
25. The reason for this is that we have two activities waiting Activity Duration Preceding activities
on you to get dressed so that they can begin. If you start A 5 --
eating after 30 minutes, there will not be enough time to B 4 A
finish, even though there will be enough time to watch the C 6 A
news headlines. D 3 B
Now we turn to an earlier mentioned concept: float time.
E 4 C, D
You realise that there can be a delay in watching news for
F 7 C
up to 5 minutes? Using the formula given earlier, the total
float would be: G 5 F, E
LFT – duration – EST Table 25.4: Information for critical path example
35 – 5 – 25 = 5 minutes.
The critical path would be: B Diagram 1 shows that
Bathe – Dress – Eat – Pack – Leave A activities B and C are
dependent on A. They
15 + 10 + 10 + 5 + 5 = 45 minutes must wait for A to finish
Bathe – Dress – News – Pack – Leave C before they can start.
15 + 10 + 5 + 5 + 5 = 40 minutes. B Diagram 2 shows that

D activity D is dependent
The first option is the critical path since it takes the on both B and C. It must B D
longest time to be completed. wait for B and C to
C finish before it can start.
Try this exercise:
B Diagram 3 shows that
D
activities D and E are
dependent on both B and C E
C. They must wait for B
EXERCISE and C to finish before
C E
Look at the information in Table 25.3, then: they can start.
1. Draw the network diagram Figure 25.5: Three possible Figure 25.6:
2. Calculate the EST and LFT situations in CPA New diagram, using
dummy activity
3. Calculate the critical path
4. Calculate the total float and the free float.
Using a dummy activity
In constructing the CPA, you will come across one or more
of the three situations shown in the diagrams in Figure 25.5.
Diagrams 1 and 2 are normal and can be represented
D E on the network. However, Diagram 3 is
B 3 9 5 12
13 16
A 3 wks 4 wks G problematic, as it might be complicated
1 0
0
2 5
5
4 wks 6 18 7 23
C 18 23 to show this relationship on the network
5 wks F 5 wks
4 11
6 wks 11 diagram. To solve this problem, a
7 wks
dummy activity is used to illustrate the
Figure 25.7: Network diagram relationship and dependency of D on B
and at the same time E being dependent on B and C. The Useful for the scheduling, controlling and monitoring of
new diagram would now be as shown in Figure 25.6 (p 249). projects
The dummy activity is represented by a dotted line as it Minimises stock level and equipment costs, since items
uses no resources and carries no value, i.e. it has a duration of and equipment can be purchased or rented when
zero. The diagram in Figure 25.6 shows the same relationship needed
and dependency as Diagram 3 in Figure 25.5 (p 249) but it uses Help firms to be more efficient, since wastage is minimised
two different paths and a dummy line. Now let us examine Management can identify activities with float time.
the following example which uses the information in Table
25.4 and results in the diagram in Figure 25.7 (p 249). Disadvantages of Critical Path Analysis
Example Too many activities may make it difficult to construct a
Critical path is: A ➝ C = F – G network diagram
5 + 6 + 7 + 5 = 23 wks The estimates made may be incorrect, invalidating the
Float times are: entire project
Total float : LFT – duration – EST The scheduling of personnel and the allocation of
B = 13 – 4 -5 = 4 wks resources cannot be represented on the network
D = 16 – 3 – 9 = 4 wks CPA can be complex and complicated, especially for
E = 18 – 4 – 12 = 2 wks larger projects
Free float = EST at end – duration – EST at start Unforeseen events (for example, weather) may delay
E = 18 – 4 – 12 = 2wks the project.
Now try the following exercise on your own.
Decision trees
EXERCISE There are times when managers have to choose from
different alternatives with different outcomes. In such cases,
A Fisher Ltd is contemplating a project with the list of
CPA cannot be used to make the decision. For example,
activities shown in Table 25.5:
management may have to choose between developing a
new product and rebranding an existing product. CPA is not
Activity Duration Predecessors
(weeks) suitable for this decision.
A 2 -- A second tool available to management is the decision
B 5 A tree. It is a graphical representation of a series of interrelated
sequential decisions. The decision tree is used to trace
C 4 A
alternative outcomes of decisions and compare each result
D 8 B
before a decision is made. As the name suggests, the diagram
E 7 C and D
is drawn in the shape of a tree, using squares and circles
F 3 E and F (known as ‘nodes’) and branches. A square (‘decision node’)
G 8 D, F is used at points where a decision has to be made about which
H 10 D course of action to take – for example, whether to develop
I 5 G and H a new product or rebrand. A circle (‘chance node’) is used
when a course of action may lead to several outcomes – for
Table 25.5: Activities by A Fisher Ltd example, if the firm rebrands, sales might be at a high or a
1. Draw the network diagram showing the EST and

the LFT
High
2. What is the critical path?
3. Calculate the float times. uct
prod
New Low
1
Advantages of Critical Path Analysis Rebr High

andi
Help businesses to identify resources needed and when ng
Management can decide which activity should be Low
closely supervised in order to prevent delays Figure 25.8: A decision tree
low level. Let us look at how to represent the example above The decision tree would now be as shown in Figure 25.9:
using the decision tree. See Figure 25.8. The expected values are calculate as follows:
To aid the decision-making process, managers will also New product = (60 000 × 0.6) + (–10 000 × 0.4) = $32 000
look at the probability of each outcome happening. In Rebranding = (50 000 × 0.5) + (16 000 × 0.5) = $33 000
Figure 25.8, there is a probability that the decision taken will Based on the expected values, management should choose
result in either high or low sales. Probability is measured at the option of rebranding the product, since its expected value
between 0 and 1. If the possibility of an outcome occurring is is greater than that for developing a new product.
certain, the probability will be 1. In contrast, if the outcome Note: The decision tree is drawn from left to right but the
is impossible, the probability will be 0. We can now be more values are calculated from right to left.
specific in our example. The probability of the sales of a new
product being high could be estimated as 0.6 and low as 0.4,
while for rebranding high could be 0.5 and low 0.5. This can EXERCISE
now be added to our diagram, as shown in Figure 25.9. Finding the right location can be a challenge
for businesses and James Duncan, a prospective
Profit/loss entrepreneur, is faced with that challenge. Presently
.6 $60 000 he has two options available to him. He could locate
EV = 32 000
High=0
in either Jamaica or Guyana, depending on his market
uct research. The data from his research is summarised in
prod
New Low = 0.4
1 $(10 000) Table 25.7 (p 252).
1. Construct a decision tree from the above information
0.5
Rebr High = $50 000
2. Calculate the expected value for both locations
andi
ng
3. Advise James Duncan on what the better option
EV = 33 000 Low
=0 .5
would be.
$16 000
Here is a more complex example:
Figure 25.9: The revised decision tree
Example
In addition to the probability of each course of action, A firm is faced with the problem of declining sales and
the expected financial outcome of the decision should be is thinking of ways to rectify this. It is considering three
calculated. This is known as the expected value. It is options:
calculated using the profit (loss) of an outcome and the 1. Stay at the current location. The firm would make
probability of its occurring. The expected value of each an average sale of $0.4m if this option is chosen.
outcome is calculated as: 2. Stay and advertise, in an attempt to increase
Predicted profit (loss) × the probability of it occurring. sales. This presents two possible outcomes. If
To find the expected value of a course of action, add all the the advertisement is successful, sales will be $0.8m
expected values of the possible outcomes. The course of and the probability of this happening is 0.7. If the
action that is most profitable based on the expected value advertisement fails, sales will be $0.5, at a
should be chosen. The discarded option is usually crossed off probability of 0.3.
with two lines. Now we can expand on the diagram above, 3. Relocate to the town. If the firm relocates, it has
using the information from Table 25.6. two alternatives. It can sell the same product and
the probability of this happening is 0.6 or there is
Profit/Loss $ a 0.4 probability of it changing the product. If the
Projects Cost If sales are high If sales are low firm sells the same product, the chance of success
New Product $30 000 60 000 (10 000) is 0.8 and sales would be $1m, while, if it fails, sales
would be $0.4m.
Rebranding $20 000 50 000 16 000
Table 25.6: Expected values If the firm decides to change the product, it has to make a
decision between rebranding and developing a new product.
Information gathered through market research suggests If it rebrands the product, the probability of success is 0.6 and
that there is a 0.6 probability of sales from a new product sales are estimated at $1.2m. If it fails, sales will be $0.4m. If
being high and 0.4 of it being low. The probability for it develops a new product, the chance of success is 0.5 and
rebranding is 0.5. sales $1m, while, if it fails, sales will be $0.4m.
Jamaica Guyana
Level of sales Probability Revenue/loss $ Level of sales Probability Revenue/loss $
High 0.5 100 000 High 0.4 120 000
Medium 0.3 60 000 Medium 0.3 75 000
Low 0.2 (30 000) Low 0.3 (12 000)
Table 25.7: Data from James Duncan’s market research
Stay at current location Sales revenue $

0.4m
Success
0.8m
1 Stay and advertise p = 0.7
2 EV = 0.71m
Failure
0.5m
p = 0.3
Success
1m
Sell same product p = 0.8
4
EV = 0.96
p = 0.6 Failure
0.4m
p = 0.2
Relocate to town 3
EV = 0.93m Success
1.2m
Re brand p = 0.6
6 EV = 0.88
Failure
0.4m
Modify exchange p = 0.4
5
EV = 0.88 Success
p = 0.4
1m
New product p = 0.5
7
EV = 0.7
Failure
0.4m
Figure 25.10: A more complex decision tree p = 0.5
As can be seen from Figure 25.10 (p 252), the conclusion Help managers to consider the risks involved in making
that can now be drawn is that the firm should relocate to decisions.
the town, since its expected value of $0.93m is greater than
those for staying and advertising or staying at the current Disadvantages of decision trees
location. Upon relocating, the firm should sell the same The validity of the decision tree depends on the
product, as modifying it would result in a lower expected accuracy of the estimates made
value of $0.88m compared with $0.96m. Not all alternatives are identifiable while preparing the
diagram
Advantages of decision trees Subject to time lag, which may distort decisions in the
Managers can think about alternative courses of action future
Allow managers to use mathematical tools to highlight The diagram may become very large and complex
the best course of action where there are numerous alternatives.
Managers can quantify the effect of a decision
Suitable for decisions that involve a series of interrelated
steps
CHAPTER SUMMARY
A node or circle is used to show the The dummy activity is represented by A circle (chance node) is used when
start or end of an activity a dotted line as it uses no resources a course of action may lead to
and carries no value, i.e. it has a several outcomes (for example, if the
Total float is calculated as: LFT – duration of zero firm rebrands, sales might be at a
duration – EST high or a low level).
The decision tree is use to trace
Free float is calculated as: EST at alternative outcomes of decisions
end – duration – EST at start and compare each result before a
decision is made
Critical path is the sequence of
activity in the network diagram A square (decision node) is used at
which takes the longest time to points where a decision has to be
complete made about which course of action
to take (for example, to develop a
new product or to rebrand)

Use the diagram in Figure 25.11 to answer Questions 1–3. Figure 25.11: Network diagram for Questions 1–3
B D
3
A 3 5 G
1 0 2 6 7
0 C
2 E F 4
4 4 5
8 3
1. What is the total duration of the activity? 3. Which of the activities has a free float time?
a. 14 days a. D
b. 21 days b. E
c. 19 days c. F
d. 17 days d. G
2. Which of the following is the critical path? 4. The ‘squares’ in a decision tree are called a/an:
a. A-B-C-D-E-F-G a. Chance node
b. A-C-E-F-G b. Alternative
c. A-C-E-F-G c. Decision node
d. A-C-E-D-G d. Probability
254
Module 2 Fundamentals of Marketing
26 The Concept of Marketing
One of the most comprehensive and accepted defini-

LEARNING OBJECTIVES: tions of ‘marketing’ was given by the American Marketing
At the end of this chapter students should be able to: Association. It states that:
Define the concept of marketing Marketing is the process of planning and executing
Describe the main concepts related to marketing the conception, pricing, promotion and distribution
of ideas, goods and services to create exchanges that
Distinguish among the different marketing concepts
satisfy individual and organisational goals.
Outline the main implication of each marketing concept
The latter definition captures most of the marketing
concepts that will be discussed in this module. This definition
makes it clear that marketing is more than just advertising: it
A
business could have the best product in the market is more comprehensive and includes core concepts of pricing,
but unless information about the product is avail- distribution and exchange and, ultimately, the satisfaction of
able or communicated to the target market, the busi- customers. See Figure 26.1.
ness may not be successful. If you were to assess some of
the businesses in your country, you would realise that poor
marketing strategies have robbed them of market share and The core marketing concepts
revenue. To this end, marketing is very important to a
firm’s success. The question then is: what is marketing? Markets
There are a number of definitions for ‘marketing’. Some of The concept of a market has evolved over the years from
the commonly accepted ones are: being just a physical location to being a virtual space. Like
Marketing is a set of human activities directed at marketing, the term ‘market’ also has a number of definitions.
facilitating and consummating exchange A market is defined as ‘a place where people meet to exchange
Marketing is a social and managerial process by
(buy or sell) their goods or services’. This definition is evident
which individuals and groups obtain what they need
in the Caribbean as you walk the streets of the major towns
and want through creating and exchanging products
in different countries. It involves a physical location and the
and value with others. (Philip Kotler, Marketing
presence of both buyers and sellers as they seek to make
Management)
exchanges. The buyers have the opportunity, most times,
physically to see and inspect the good being purchased.
Examples of this type of market are the agricultural markets,
Needs, wants supermarkets and other business places.
and demands
Moving on from the definition of being a physical location,
though, a market can also be defined as an activity and in
particular ‘the process by which buyers and sellers interact
Core Products and for the purpose of exchange’. This definition does not specify
Markets marketing services
concepts a place, as anywhere the buyer and seller interact is the
market. The definition incorporates activities such as online
shopping and telemarketing. Therefore a buyer could be in
the Caribbean but doing business in China via the internet.
Exchange,
transactions
Value, satisfaction The advancement of telecommunications technology has
and quality
and relationships made the world into one big global marketplace where
buyers and sellers can interact for exchange.
Figure 26.1: Core marketing concepts
CHAPTER 26 | THE CONCEPT OF MARKETING 255
Another definition of ‘market’ is also explored from time Customer value and satisfaction
to time. This time, a market is defined as the actual and These concepts are closely related to the previous concept of
potential buyers of a product. These buyers often share value added. When we purchase a product or service, there
common characteristics and needs that the marketer aims to is an amount of value that is placed on owning the product.
fulfil through market offerings. This value is often representative of the cost we are willing
to pay to acquire the product. The value we placed on the
Human needs, wants and demands – what is the product is usually a combination of the product’s quality,
difference? price and service acquired. Customer service is an integral
Interestingly, there might still be some people who have part of any business and has the ability to improve customer
not sufficiently established the difference among these value drastically. Think about it: would you rather receive
three concepts. However, the Marketing Department must below-standard service and pay a lower price for a product
be aware of and clear on the difference. As commonly or pay more but get excellent service? Maybe most of you
defined, a ‘need’ is a state of felt deprivation. It is seen as will choose the latter, as, when we consume a product
including those innate desires such as physical, social and or service, excellence should be the order of the day. To
individual needs. Therefore, this includes the basic needs this end, marketers wishing to offer customers value will
of food, clothing and shelter. ‘Wants’ represent the ways in endeavour to:
which human needs take form or shape – that is, how these Disseminate the relevant facts about a product to the
needs are shaped by culture and individual personality. For buyers
example, there is a need for clothing but there is a want for Ensure that the product performs above expectations
skinny jeans or there is a need for food but there is a want Place performance of the product over profit
for Indian cuisine. As it relates to ‘demand’, this is the ability Avoid pricing policies that can be construed as
to pay for the things we desire or want. The truth is that we unrealistic.
can all desire to have a number of things but it is only the As marketers strive to give customers value for
ability to pay that matters. As an implication for marketers, money, they improve their chances of achieving customer
they must be aware of the difference between wants and satisfaction. The truth is that unless a product meets or
demand. In the end, it is the demands and not just wants exceeds the expectations of customers, there will not be
that will enable to firm to earn revenue. a feeling of satisfaction. Customer satisfaction is therefore
seen as an individual’s comparative judgement as a result
Value added of the perceived value that is placed on a product. Once the
Marketing should aim to add value to the products being actual value received from the consumption of the product
sold. In most cases, the marketer adds value to the product meets or exceeds expectation, the customer will be satisfied
through its performance of the marketing activities. A firm and vice versa.
can add value to its products by improving the value attached
to each component or raw material. Additionally, value can The concept of exchange transactions
be added through the delivery of excellent service, attaching This concept is embedded in the very definitions of marketing
different features and benefits to the product and offering that were discussed earlier in the chapter. It involves the
convenience such as delivery service or flexible payment transfer of something, whether tangible or intangible,
plans. By doing so, the firm will increase the value placed between two or more people to receive something in return.
on the finished product and the product will be able to meet It follows that a key element of marketing is to bring people
or exceed customer expectations. Once this is done, the firm together to create exchanges. The level of exchange created
can create a brand image that is synonymous with quality. depends on the relationships that are created between the
Adding value to a product will enable the firm to: firm and its customers. Businesses should be interested not
Charge a higher price if necessary only in attracting new customers but in retaining these
Gain a competitive edge over other players in the customers once they are attracted. One way in which
market marketers can establish such a relationship is by delivering
Benefit from customer loyalty. the best service possible to its customers. The idea here is
that customers will return to a firm if they feel that they
have received value for their money in terms of both the
product and the level of customer service.
256 MODULE 2 | UNIT 2 | FUNDAMENTALS OF MARKETING
CASE STUDY
Moving with technology

Mia McKay is a small business owner who specialises in the sale of clothing, drapes and rugs. She plies her trade from a little
retail outlet she created at the front of her property. People from the community come and buy her wares and refer her to others.
To date, business has been going well and she is thinking of expanding her market reach. However, she is limited by space as she
cannot expand on the current site. She has not been daunted, though, because her daughter, who is a final-year computer science
student at the local university, has given her a good idea – that is, selling her goods online.
However, Mia has some concerns, one of which is the fact that her customers love to see the things they are buying and being
able to touch or feel the quality and texture. There are also some customers who bring their fabrics to her and she sews them
according to their specifications. She feels that going online may dampen this part of her business. Mia now has to consider her
options as time runs out.
Questions
1. Define the term ‘marketing’. (1 mark)
2. With reference to clothing, differentiate between a ‘need’ and a ‘want’. (5 marks)
3. How did the case show the evolution of the most present definition of a ‘market’? (3 marks)
4. Discuss, citing evidence from the case, the concept and importance of ‘value added’. (6 marks)
Total 15 marks
Marketing (business) concepts The implications of this concept are:

The approach that a business takes to marketing is largely No consideration was given to marketing
influenced by the different and popular marketing or Customers’ demand was not ascertained prior to
business concepts. Each concept will influence the way in production
which the firm produces and sells its products. The focus on Only products that could be produced efficiently were
business concepts started in the late 1800s and has evolved offered, limiting the choices available to customers
throughout the years. This evolution has influenced the Since only a few options were available and demand
different marketing concepts that are employed by the firm. was high, firms didn’t spend a lot of resources on
Each of these concepts is discussed below. promotion
With the rapid increase in competition over the years,
A Production concept the use of this concept can be detrimental to firms.
This marketing concept is probably the oldest to be practised.
B Product concept
The concept was used predominantly in the late 1800s to
early 1900s. It is based on the notion that the business should This concept is said to have prevailed in the early 20th
produce those products that it can produce most efficiently. century. Its focus is on the product and it was believed that
It also postulates that if the firm can produce large quantities consumers will demand products that are of high quality,
of the product at very low cost, it will attract consumers to give excellent performance and contain innovative features.
purchase it. To this end, it is imperative that the management Once the product is perceived to offer better quality and
of the firm find ways to continuously improve the efficiency features than existing products, consumers will buy it. With
of the production and distribution of the product. this in mind, businesses using this concept focus on creating
The production concept was developed during an era products that are superior to others. In order to maintain
when demand for the available products was relatively high its competitive edge, such a firm would have to improve its
compared to their supply and the sales team only had to get products over time.
the product to the customer at the prevailing prices. As such, It is clear that aspects of the product concept are still
marketing played a minimum role, if any at all. Though the evident even today. Examine the market for cellular phones,
concept is among the oldest, it is still applicable for some for example, where quality, performance and features are
large manufacturing firms with advanced and sophisticated still among the top factors influencing customers’ decision to
technology which can produce large quantities of a product. purchase. Some of the implications of this concept include:
The product has to be carefully designed and quality time it was also marked by increase in the variety of goods
must be maintained available and also people’s income. These changes gave
The firm’s product has to be superior to those of its consumers choices and made the selling concept ineffective.
competitors There had to be a shift of focus towards ascertaining customer
Firms using this concept have to continuously make needs and the factors that lead to satisfaction.
improvements to its product in order to maintain a The marketing concept therefore holds that, in order to
competitive edge achieve its organisational goals, the firm should ascertain the
There needs to be some amount of promotion to inform needs and wants of its potential customers and fulfil their
the market about the product and its features. desired satisfaction more effectively than competitors. Firms
using this concept will be focused on delivering value to the
C Sales (selling) concept customer as the means of increasing sales and profit. To this
As the years went by, most businesses were producing on end, the marketing concept postulated that the purpose of
a large scale and mass production was the order of the day. the firm is to satisfy customer needs. However, in order for
By the early 1930s, competition had increased and the high this to be done, there have to be integrated and coordinated
demand of previous years was diminishing. It was then efforts throughout the entire organisation.
becoming more and more difficult for firm to get rid of their The implications of the marketing concept for business
products. These tough conditions led to the development of organisations include:
the sales or selling concepts, as firms realised that they now Consumers’ desires and choices must be taken into
need to convince potential customers to buy their products. consideration when developing the product. This is
The notion held by these firms was that if it was left up the done through extensive marketing research
customers, they would not buy enough of the product. Steps Consumer satisfaction must be given priority if the firm
then needed to be taken to motivate customers to buy. A wishes to be successful
number of firms then employed advertising and personal Resources must be committed to doing marketing
selling as promotional strategies. The main focus was no research and also promotion of the product
longer on whether the firm could mass-produce the product, Getting feedback from consumers can be used to
but on how well it could convince customers to buy. improve product offerings and consumer satisfaction.
One of the most vivid drawbacks of the sales concept,
though, is its very low emphasis on the desires of consumers E Societal marketing concept
and whether or not they were satisfied with the product. This This is the most recent of all the business concepts. It was
was largely because the firm’s focus was just on maintaining born out of the need for marketers to be more aware of
a competitive edge over other firms. the impact that their activities can have on society. To this
The sales concept had the following implications for the end, organisations were expected to produce goods that
firm: are environmentally friendly. Companies were therefore
Mass production led to supply becoming greater than encouraged to promote social and ethical considerations in
demand the production and the marketing of their products.
Firms using the concept had to convince consumers to Firms using the societal marketing concept will make
buy a concerted effort not to satisfy the desires and demand of
Firms would now have to spend large amounts of consumers at the expense of the society. Over the years, we
resources on advertising have seen where our environment has been degraded as a
The views and desires of consumers were still not result of large firms trying to fulfil their profit motive. Our
considered natural resources have been depleted and many Caribbean
The firm needed to employ a well-rounded and countries are at risk of being exploited by developed
convincing sales force. countries. This is further coupled with the problem of rapid
population growth and increase in poverty. It has become
D Marketing concept even more imperative that marketers stay aware of these
The genesis of the marketing concept came after World issues when they promote the firm’s products.
War II. By this time, convincing people to buy was losing The societal marketing concept also promotes and
its effectiveness and could no longer generate the level of encourages firms to contribute to sustainable development.
demand needed for the firm to remain competitive. This This concept is defined by the Brundtland Report as:
Development that meets the needs of the present The environmentally conscious consumer will support
generation without compromising the ability of future a firm that is aware of the impact of its activities on
generations to meet their own needs. society. To this end, the firm must seek to preserve and
To this end, the marketer should ensure that the firm is protect the environment
seen as a good corporate citizen. The firm should behave Firms may have to modify their products or produce
ethically and socially responsible, while improving customer new products that are environmentally friendly while
satisfaction and profitability. still maintaining quality
The implications of the societal marketing concept are This business concept encourages firms to buy into the
outlined below: thrust of sustainable development – that is, meeting
The impact of its activities on the society or the needs of the present generation without preventing
environment is considered by the firm while it tries to future generations from doing the same.
satisfy the needs of consumers
CASE STUDY
Perfect Cut Furniture Ltd – preserving the environment

Perfect Cut Furniture Ltd was established in the early 1920s by two furniture makers. The company has moved from the use of
manual tools to high-tech machinery and equipment. From its early days after inception, Perfect Cut Furniture Ltd was known
for its carefully crafted furniture. Though viewed as expensive, people would still buy furniture from the company because of the
high standard of quality. This emphasis on quality has been a hallmark of the company throughout the years.
The depressed economic conditions of the 1930s forced the company to fight hard to stay afloat. Buying new furniture was
the last thing on most people’s minds as they struggled to survive. During this time the firm implemented its B-Quality line which
offered the same designs but made from lower-quality materials. This allowed the firm to produce more as the input costs were
less for these products than its high-end line of furniture. With more furniture in stock, the company had to implement very
aggressive promotion tactics geared towards convincing customers to buy its new line of products and not those of its main
competitors.
Now, in the 21st century, the company has changed its focus to one that includes interaction among the main stakeholders.
It has instituted a vibrant marketing department which is keen on seeking the views and desires of customers. This new focus
has seen the company making furniture which has been tailored to meet the changing tastes of customers. The firm’s furniture is
being sold in a number of furniture stores across the country. This year, the firm took a very bold step by launching its ‘Go Green’
campaign. Ironic as it may seem, especially when one considers what makes up its input materials, the firm has decided to be
more environmentally friendly. To this end, it refuses to buy lumber reaped from protected forestry areas around the country.
The firm has also set out, with the help of the Forestry Department, to replant trees in areas where massive deforestation has
taken place over the years. The company has also decided to use its wood chips and saw dust from production to generate
manure for the Forestry Department. This move received high commendation from the Ministry of Environment and Business
Week magazine.
Questions
1. Describe the business concept that was used at the inception of this firm and outline three (3) implications
of such a concept. (8 marks)
2. Citing evidence from the case, discuss three (3) other business concepts that were used. (12 marks)
3. Giving two (2) reasons for your answer, discuss which business concept is best suited for Perfect Cut Furniture Ltd. (5 marks)
Total 25 marks
An overview of the business concepts discussed in this chapter is shown in Table 26.1.
Business concepts
Production Product Selling Marketing Societal marketing
Main feature High production Product is of high Persuade consumers Identification of Making products
volume, efficiency quality and is to buy the product customer needs and that meet customer
and widespread continuously making products to needs while
distribution improved meet those needs preserving the
environment
Strategy used Affordable pricing High-quality, Promotion and Using different Using different
and distribution performance sales marketing marketing strategies
and outstanding strategies, e.g. mass and environmentally
features marketing friendly products
How are profits Widespread By how well the From high sales Customer Customer
made? distribution product performs satisfaction with the satisfaction and
product being a good
corporate citizen
Examples Agricultural Automobile Election campaign, Mobile service WalMart’s ‘Go
industry, e.g. sugar industry: hybrid the selling of providers and banks Green’ campaign
cane cars, e.g. Toyota insurance
Prius
Table 26.1: Overview of business concepts
CHAPTER SUMMARY
‘Marketing is the process of planning different marketing concepts that are Steps must therefore be taken to
and executing the conception, employed by the firm. These concepts motivate customers to buy
pricing, promotion and distribution include: • Marketing concept (1950s
of ideas, goods and services to create • Production concept (late 1800s to onwards) – holds that in order to
exchanges that satisfy individual and early 1900s) – based on the achieve its organisational goals,
organisational goals’ notion that the business should the firm should ascertain the
produce those products that it can needs and wants of its potential
The view of a market is moving away produce most efficiently customers and fulfil their desired
from being simply a physical location • Product concept (early 20th satisfaction more effectively than
to more of an activity or interaction century) – proposed that competitors do
between buyers and sellers consumers will demand products • Societal marketing concept
that are of high quality, give (1970s onwards) – proposed
Customer service is an integral part excellent performance and contain that organisations were
of any business and has the ability to innovative features expected to produce goods that
improve customer value drastically • Selling concept (1920s to 1950) are environmentally friendly.
– borne of the notion that if it was
Marketing has evolved throughout left up the customers, they would
the years and this has influenced the not buy enough of the product.

1. ‘The process of planning and executing the conception,
pricing, promotion and distribution of ideas, goods and
a. Briefly describe the five (5) marketing or business
services to create exchanges that satisfy individual and
concepts. (15 marks)
organisational goals’ best defines:
b. Outline one (1) implication of each of the concepts
a. Exchange
for the firm. (10 marks)
b. Marketing
c. Market
d. Customer value
2. A marketer wishing to provide or increase value to the

customer will do ALL of the following EXCEPT which one?
a. Disseminate the relevant facts about a product to the
buyers
b. Ensure that the product performs above expectation
c. Place performance of the product over profit
d. Charge unrealistic prices in order to recoup costs quickly
3. Which of the following concepts is defined as ‘the transfer

of something, whether tangible or intangible, between two or
more people to receive something in return’?
a. Exchange
b. Customer value
c. Market
d. Customer satisfaction
4. Which of the following concepts of marketing proposed that

consumers will demand products that are of high quality, give
excellent performance and contain innovative features?
a. Production concept
b. Product concept
c. Selling concept
d. Marketing concept
5. The societal marketing concept proposed that firms should:

a. Produce high-quality products
b. Convince people to buy the product
c. Not produce products that are harmful to the environment
d. Research what society wants before producing a product
261
27 The Marketing Environment
that are used to produce the firm’s goods and services. You
LEARNING OBJECTIVES: will agree that using inferior or faulty materials will most
At the end of this chapter students should be able to: likely result in inferior products which are below the quality
Define the ‘marketing environment’ standard of the firm. If the firm desires to provide value to
Describe the composition of the marketing environment its customers then it must be getting value from its suppliers.
It must be highlighted that the firm should maintain close
Discuss the forces in the micro-environment
relations with its suppliers. This is important, as changes in
Discuss the forces in the macro-environment
the price of resources will possibly affect the price of the
Discuss the impact of the marketing environment on the
firm final product. Having a close relationship with its suppliers
can also help the firm to plan for and implement strategies
to deal with resource shortages or delivery hold-ups.
I
t is important for us to realise that there are a number of Competitors
factors that may affect the firm’s ability to implement its As firms decide what to produce, they must bear in mind the
marketing plan successfully. We are living in a dynamic products of their competitors. The Marketing Manager must
and changing world and these changes will have an impact also be mindful of the level of saturation in the target market.
on the firm. As a result, the marketing department has to be Producing a product in a market that is already saturated
aware of these factors and to develop the necessary strate- might lead to serious losses, except where the firm is able to
gies to either lessen the impact on the firm or to help it to bring out a better and more viable product than what exists
become more competitive. already. Therefore, before deciding on the product offering,
The marketing environment can be defined as the forces, the firm should conduct a feasibility study and, in particular,
whether internal or external, influencing a firm’s ability a competitor analysis. This analysis will give the firm a clear
to conduct business with its target market effectively. The view of what to expect in the market and whether or not to
marketing environment is further divided into two categories: embark on the venture.
the micro-environment and the macro-environment. These Since profitability is essential to all businesses, the firm
categories are further broken down below. has to gain a competitive edge over its main rivals. In order
to accomplish this, though, the Marketing Department has
to work assiduously to promote the product in such a way
The micro-environment that will win over consumers. This issue is rapidly becoming
The micro-environment of a firm refers to the factors even more taxing on firms since the world is quickly
within its immediate environment that impact on its becoming a single global market. As a result, firms are being
performance, decision-making process and ability to serve faced with competition both locally and internationally.
its customers. These factors are usually internal and close
to the firm. The micro-environment factors affecting the Marketing intermediaries
marketing environment are outlined below. It is almost impossible for especially large firms to reach every
single buyer of their products. As a result, firms depend on
Company’s suppliers marketing intermediaries to fill this loophole. Marketing
These people are very important to the firm and its ability intermediaries assist the firm in promoting, selling and
to produce the high-quality products that it desires. Earlier, distributing its products to the final customers. They play
when we looked at quality assurance, it was said that a vital role in the distribution process and so should be of
maintaining quality has to be a part of the supplier’s mandate. utmost importance to the Marketing Manager. There are
The suppliers of the firm provide the necessary resources four main types of marketing intermediary:
Resellers Demographic factors

These are firms that purchase the manufacturer’s products The demographic factors of a population should be very
with the intention of reselling them. They include wholesalers important to the marketer as they are the ones who demand
and retailers which are very common throughout the the firm’s product. The concept of demography refers to the
Caribbean – for example, PriceSmart or any corner shop in study of the characteristics of human populations, including
your community. size, gender, growth, age, occupation, density and race.
The marketer should continuously assess changes in these
Physical distribution firms characteristics to ensure that the firm is able to meet the
These firms help to stock and transport goods from one desires of its target market. Some of the trends that have
location to the designated destinations. An example of this been observed in our world today would include:
would be haulage contractors who transport goods on behalf
of other companies. Changing family structure
This would include trends such as female-headed
Marketing services agencies households, marriage rates and divorce rates. For the most
These agencies or firms offer their services to other firms part, all three will affect the level of income of the household
and act on their behalf. They include marketing research and their purchasing power. As more and more women head
agencies and advertising agencies, among others. Marketing households, it creates a need for businesses such as aftercare
services agencies are becoming increasingly popular in the services. Higher divorce rates may create a greater need for
Caribbean. Some of these firms are even operating as fully people to specialise in family law. Marriage rates would affect
fledged online businesses – for example, Caribbean Web wedding services such as caterers and videographers, etc.
Advertising, based in Trinidad and Tobago.
Ageing population and improved life expectancy
Financial intermediaries As populations age, there might be greater dependence on
These firms focus on offering finance to buy the firm’s government assistance and pension schemes as income
products or insuring the products that are purchased. dwindles. An ageing population creates the need for certain
Financial intermediaries would include banks, insurance goods and services as health deteriorates.
companies, credit unions and other financial institutions.
Increased educational attainment
Customers The Caribbean has seen a significant increase in the number
These are the people who purchase the firm’s products. of universities operating either physically or online in
Understanding the firm’s customers is of utmost importance the past two or three decades. Generally speaking, more
to the marketer. The Marketing Manager must be aware of students are matriculating to tertiary training institutions.
customers’ changing tastes and preferences and other factors Higher education attainment is often a signal of improved
such as income. It is important to point out, though, that economic growth and development. It could also influence
the final customer is not just the only buyer of the product. the quality of the labour force and the firm’s productivity.
Other buyers of the firm’s product would include businesses,
resellers, government and the international community. All Changing population diversity
five buyers of the product will present the firm with five While the Caribbean has always been a population of mixed
different markets that it should assess in order to ascertain ethnicity and race, further changes could affect some firms
their viability. such as restaurants. Other firms may also have to adapt their
products so as to be able to tap into certain markets,
The macro-environment Economic factors

The macro-environment of the firm refers to the external We are living in tough economic times in the Caribbean.
and uncontrollable factors which impact on its performance, The latter part of the first decade of this century has seen
decision-making process and ability to serve its customers. many Caribbean countries’ economies contracting as
These are larger societal factors that the firm cannot control. unemployment levels rise. These economic conditions have
affected a number of firms and how they do business. As a
CHAPTER 27 | THE MARKETING ENVIRONMENT 263
result, marketers have to be aware of these issues and devise Environmental preservation strategies
ways to lessen their impact on the firm. Use of renewable energy.
Economic factors may be defined as those influencing Firms are now being asked to lessen the impact their
consumer spending patterns and purchasing power. These products have on the environment. Some firms have even
would include economic growth rates, inflation rates, eliminated the use of plastic bags at their checkout counters
distribution of income and exchange rates. (For more on and instead have encouraged shoppers to buy reusable
this, you should review Chapter 3.) Changes in these factors shopping bags.
will affect the standard of living of individuals. Where
the impact on standard of living is negative, consumers’ Political factors
purchasing power will be likely to fall and their spending While most Caribbean countries have fairly stable political
reduced. These changes will more than likely also affect the systems, marketers still have to be mindful of the damaging
firm negatively, resulting in decline in revenues and profits, effect political instability can have on the firm. For example,
and some firms may even have to shut down. political protest can result in a reduction in productivity and
While creativity is often born out of adversity, it is also loss of potential output.
recognised that poor economic conditions may make it Political factors would include the laws and regulations
difficult for people to enter into business and be successful. that influence the operations of a firm in an industry.
Some people have taken the risk, however, and are The political environment can be extended to include
successful but others have met stumbling blocks such as the different pressure groups (for example, animal rights
lack of financing. Likewise, as firms’ profits dwindle, less groups) or other government agencies (such as the Office
money is retained for further investment or expansion. A of Utilities Regulation) that also have an influence on the
shrinking economy could also force some firms to become firm’s operations. It is quite evident that legislation will be
corporate entrepreneurs – that is, creating, innovating or updated and even repealed and this may have an impact on
renewing products or ideas within or outside of an existing the firm. The Caribbean has seen changes in the Companies
organisation. This move could help to save the firm’s product Acts of different countries which have affected different
or the firm itself in trying economic times. types of company. For example, one person can now start
a company, unlike in previous times where seven people
Natural factors were required. The Marketing Manager must also be aware
Increasingly, a number of people and businesses are of the laws geared towards preventing the production and
becoming more conscious of the environment. A concerted sale of certain products, especially as countries become
effort is being made to try to prevent the environment more protective of the environment. Other laws in most
from further degradation. With the rapid increase in global Caribbean countries that should be of concern to marketers
warming, countries are taking steps to preserve their natural would include health and safety laws, quality standards, fair
resources. Some consumers may even stage a boycott of trade, consumer rights, anti-pollution laws, labour laws,
products that are potentially harmful to the environment. laws preventing discrimination against people with HIV/
As a result, marketers need to be aware of the natural AIDS and those protecting consumers against misleading
environmental factors that may influence the firm. advertisements. You can do further research in your country
Natural factors refers to the natural resources that to find out which of these laws apply there.
are used as inputs into production. This includes all the
different variations of the factors of production – that is, Cultural factors
land, labour, capital and entrepreneurship. As firms become Most, if not all, Caribbean countries are known for their
more ethically and socially aware, marketers have begun to rich cultural heritage. It is always interesting to see the
employ the societal marketing concept. As was discussed in diverse cultural backgrounds of Caribbean people. ‘Culture’
Chapter 26, firms using this concept will make a concerted is defined as the attitudes, beliefs and values that influence
effort not to satisfy the desires and demand of consumers at how people think and act. The culture of a country or locale
the expense of society. They are now becoming more aware is expressed in the types of food we eat and the way we
of the impact of the following on the firm: dress, music and dance among other things. The marketer
Shortages, exploitation or depletion of raw materials is therefore expected to ascertain the culture of the firm’s
Increased levels of pollution – for example, land, air and target market and to create the right marketing mix to
water attract these customers.
Cultural factors become even more important when One thing that is also evident is the fact that globalisation
the firm is operating within different countries. While and improvement in communication technology are
most Caribbean countries would have similarities in their changing Caribbean culture to some extent. We have seen
culture because of their heritage, there is still some amount where even our food is being changed to a more American-
of diversity. Therefore, a product that may do very well in or European-style breakfast. Our supermarkets are flooded
Jamaica may not do as well, in its current form, in, say, with cereals, instant mixes and frozen foods. The fashion
Guyana. The Marketing Department will then have to industry has seen changes in the way we dress and can
promote the product differently or encourage the Production capitalise on that.
Department to adjust the product that will be sold in Guyana
to suit the Guyanese market.
CASE STUDY
A struggling business environment

AC & More Ltd has been operating on a small island for the past ten years. It has been supplying AC units to a number of
household and businesses. Being in the tropics, the country can become very warm in the summer months. These months are the
most vibrant and profitable for the company while December through to February is the slowest period for the business.
The firm imports most of its raw materials from a supplier in the USA. This supplier has helped the company to maintain its
high quality. To this end, it is known for its long-lasting products. In addition to building some of the units, AC & More Ltd also
imports some of its larger units that it does not have the capacity to build.
In recent times, the company has been faced with stiff competition as the AC market heats up with new entrants. These
competitors have also made use of new technology such as energy savers and inverter-type models. This year, another company
introduced solar AC units to the country. While this is costly, a number of customers are gravitating toward it because of the high
electricity cost involved in the traditional units. The woes of the company have also increased with the downturn in the country’s
economy which has led to higher than normal unemployment rates. Even with these challenges, however, the firm is committed
to the task and wants to continue to provide the best-quality AC units to its customers.
Questions
1. Outline the difference between micro-environmental factors and macro-environmental factors. (4 marks)
2. Describe two (2) micro-environmental factors affecting AC & More Ltd. (6 marks)
3. Identify two (2) macro-environmental factors that were mentioned in the case and discuss the impact these could
have on the operation of AC & More Ltd. (10 marks)
Total 20 marks
CHAPTER SUMMARY
The marketing environment is customers, including: on its performance, decision-making

affected by both internal and • Company’s suppliers process and ability to serve its
external factors • Competitors customers, including:
• Marketing intermediaries • Demographic
The micro-environment of a firm • Customers • Economic
refers to the factors within its • Natural
immediate environment that impact The macro-environment of a • Political
on its performance, decision-making firm refers to the external and • Cultural.
process and ability to serve its uncontrollable factors which impacts
CHAPTER 27 | THE MARKETING ENVIRONMENT 265

1. Which of the following is NOT regarded as a micro-
environment factor?
a. Define the term ‘micro-environment factors’. (1 mark)
a. Competitors
b. Discuss how four (4) micro-environmental factors
b. Market intermediaries can impact on the firm and its operations. (24 marks)
c. Demographic factors Question two Total 25 marks
d. Company’s suppliers Your neighbour, Risky Ricky, wants to start a business in
one of the CARICOM member states. He has a number of
2. Which of the following is NOT regarded as a macro-
ideas but he is not certain which ones to explore. Seeking
environment factor?
advice, Ricky consulted a friend who told him to be mindful
a. Economic of demographical, economic, political and natural factors
b. Political that might affect any business idea he decides to explore.
c. Company’s suppliers Knowing that you are a good business student, based on your
CSEC passes and study of Unit 1 Management of Business,
d. Cultural
he has asked you to shed some light on these factors.
3. ALL of the following are marketing intermediaries EXCEPT a. Identify the environment with which these factors
which one? are associated. (1 mark)
a. Retailers b. Discuss how these factors could either help or
hinder Ricky’s business prospects. (24 marks)
b. Distribution firms
c. Advertising agencies
d. Government agencies
4. Characteristics such as population size, ethnicity, race and age

all relate to which one of the following factors?
a. Cultural
b. Demographic
c. Economic
d. Natural
5. The natural environment is said to involve all the factors

of production. Which of the following is NOT one of those
factors?
a. Technology
b. Capital
c. Land
d. Enterprise
266
28 Marketing Research
The firm can gather information to assist it in pricing the

LEARNING OBJECTIVES: product
At the end of this chapter students should be able to: To assess the level of competition in the market
Explain the concept of marketing research To ascertain the features of a product that appeal to the
Discuss the role and importance of conducting target market
marketing research To monitor the firm’s performance in the market
Discuss the importance of developing a research plan Helps to prevent the firm from making uncalculated
Describe the stages of marketing research risks.
Assess the sources of data collection
Evaluate the types of sampling technique
Evaluate the different research techniques used in
Importance of developing a research plan
marketing research There is a common saying that ‘If you fail to plan, then you
plan to fail’. Planning is just as important in the research
Outline the limitations of marketing research
process. In order to reap the full benefits of conducting
marketing research, a proper research plan must be
developed. The research plan outlines the courses of action
W
hen was the last time you consumed a product that will be taken throughout the research. It outlines the
(for example, your favourite meal) or enjoyed a aims and objectives, methodology, research instrument,
service (for example, an all-inclusive hotel) and sources of data, management of data and analysis of data
were really satisfied? If you have had that experience with and publication of findings, among other things. Developing
any product or service, it was the result of good marketing the research plan will give the researcher a clear vision of
research. Even this book has been published after extensive how the research will be conducted. It could also be used
marketing research that ascertained the need for it. So, what to measure the progress of the research and identify how
is marketing research? It is the process of collecting, analysing closely the plan is being followed.
and interpreting data in order to make an informed decision
about a product, customers, target market or industry. The
key role of marketing research is to provide management Stages of marketing research
with information that is current, accurate, valid, relevant See Figure 28.1 (p 267) for an overview of the various stages
and reliable. Once this is done, management can then use in developing a research plan.
the information to make strategic decisions to improve the
product, enter into business or solve a problem being faced, Stage 1: Management problem identification
among other things. The entire research is dependent on this stage of the process.
If the problem cannot be identified or if it is not clearly
defined, it could result in valuable time and resources being
Importance of conducting marketing wasted. A broad definition of the problem can be misleading
research and hence compromise the research. This may also lead to a
Marketing research is a very important tool used by lot of unwanted information being collected. Once there is a
businesses, especially in an increasingly competitive market, disjoint between what should be and what is in the business,
for the following reasons, among others: it means that there is a problem. Another mistake that some
Helps management to make informed decisions firms make is to identify the repercussion of a problem
Marketing opportunities can be identified instead of the underlying problem. For example, falling sales
The needs of the target market can be ascertained could be the result of a problem with the product. With the
CHAPTER 28 | MARKETING RESEARCH 267
Figure 28.1: Stages in developing a research plan would be product improvement and advertisement and the
dependent variables would be level of demand and sales.
ent
Managemm
proble n
identifica
tio Stage 2: Research objectives
The research objectives outline what is to be achieved by
the research. They give a clear guide to the way forward.
Research Both management and the researcher have to ensure that
s
objective
these objectives correlate with the problem statement. As
was discussed in Chapter 2, objectives should be carefully
written and must be ‘SMART’. They should also outline the
ction
Data colle ‘what’, the ‘where’ and the ‘why’ of the research.
The objectives of marketing research are usually based on
the research designs being used. The research design refers
Sampling to the strategies or plans that are put in place to address the
problem under research and can take one of three forms:
Exploratory – this design involves the gathering of
Research s preliminary information which can be used to define
e
techniqu
the problem further and suggests what is needed to
conduct more detailed research
nd Descriptive – this design outlines the demographics
Analysis a on
p re se ntati and characteristics of the target market. It gives a clear
of data
description of the market and the potential for a new
product offering in that market
Causal – causal research aims to ascertain the cause
aforementioned issues in mind, management should ensure
and effects of an issue. It is usually done by using
that the real problem is identified and clearly defined. This
experiments to assess how changes in the independent
process can be a tedious one and it may take more than
variable will affect the dependent variable.
one department to identify the problem. It is also important
to note that market research could be commissioned not
to identify a problem but to seek an opportunity. This is
EXERCISE
especially true for new firms wanting to enter a market
Write three research topics highlighting the
or an existing firm wanting to launch a new product or
independent and dependent variables.
modifications to an existing product.
Once the problem has been identified, management
now needs to define it. This is done by drafting a problem Stage 3: Data collection
statement which gives a clear and concise description of This stage can have a serious impact on the result of the
the problem to be solved by the researcher. The problem marketing research. The researcher has to ensure that
statement can be written as a question (for example ‘How sufficient and credible information is collected, upon which
have the improvements done on the product improved a decision can be taken or a generalisation made. In Chapter
the level of demand?’) or a statement (for example ‘An 3, it was pointed out that information should have certain
assessment of the impact of the advertisement on sales’). A essential features. It must be cost effective, accurate, relevant
properly written problem statement usually has two variables and on time. The same is true for the information that will
that are being measured, namely the independent and the be collected for the marketing research. Information for the
dependent variables. The ‘independent variable’ is defined as research can be gathered from two main sources, namely
the factor that is manipulated in order to identify the effect primary and secondary sources.
on other variables, while the ‘dependent variable’ is the A primary data source is one where information is
effects or outcome of the manipulation of the independent gathered for the purpose of that particular research problem.
variable. The aim is to find out what will happen to the It follows, then, that primary data represents data collected
dependent variable if the firm changes the independent specifically for the research being conducted. While this
variable. In our examples above, the independent variable source of data can be expensive, it is current and specific
to the research. This could give a better assessment of the often select a sample of the desired population. Sampling
particular problem under review. Primary data can be is therefore the process of selecting a segment of the target
gathered through different means, including: population on whom the research will be conducted and a
Observation – this is where data is gathered by generalisation can be made. Before choosing a sample it is
observing the people or process involve in the research. advisable that the firm drafts a plan of action, often called
For example, the researcher could observe consumers the sampling plan. This plan should include information on
in the business place or a restaurant could observe the following:
a location to ascertain the number of commuting Sampling unit – it is said that population consists of a
members of the public who would be potential number of sampling units. The sampling units consist of
customers a collection of different elements that do not overlap but
Survey – this is where information is gathered from a cover the entire population. For example, if the element
sample of a relatively large group of people which is is Sixth Form students and the population is all Sixth
referred to as the ‘population’. These people are usually Form students within the country, the sampling units
asked to answer a series of questions pertaining to the could be the different parishes or geographical regions
problem being researched. A questionnaire or interview Sample size – this refers to the amount of people who
is often used to gather such data will make up the sample. Since only a segment of the
Experiment – this information can be gathered by population will be included within the sample, a larger
conducting laboratory research where both variables are sample would give a more accurate representation of
scientifically assessed. the population. One must be cautious, though, as large
A secondary data source is where previously used data samples are often very expensive and harder to work
is gathered to be used in the current research. Secondary with
data can therefore be defined as data that has been collected Sampling procedure – this indicates how the sample
for previous research. This data is not specific to the current of people will be chosen. The choice of people is often
research but can offer some guide as to how to proceed. A made using one of two techniques namely probability
rule of thumb is that secondary data should be consulted and non-probability sampling.
before the researcher collects primary data. Secondary data A few other key concepts to note include:
has the advantage of being cheaper to acquire than primary Population – this is the total target group that the
researcher wants to study or gather data from
data. It is also said to be obtained much more quickly than
Sample frame – this gives a clearer picture of those
primary data. However, one of its drawbacks is that it is not
people within the population who will be within the
always readily available or, even if it is, sometimes it cannot
sample. The sample frame would outline the strategy
be used for the problem under review. Secondary data can
that will be used to identify the elements in each
be collected from a number of sources, including but not
sampling units. Based on our example above, this would
limited to:
be the parishes or geographical regions
Company reports – these can provide information on
Sample – this is the representative segment of the
the company’s sales
population that has been drawn from the sample frame
Government publications or statistical institutions,
to be studied.
such as the Planning Institute of Jamaica, the Central
Statistical Office in Trinidad and Tobago and the The process of sampling is very important, as it can
Barbados Statistical Service, among others. These have a lasting effect on the conclusion that is drawn at the
publications would include statistics on inflation, end of the research. Therefore care must be taken when
exchange rates and unemployment choosing the sample for research. There are two major
Articles from credible local newspapers sampling procedures that are used: probability sampling and
Local libraries non-probability sampling.
Journals containing experts’ opinions.
Probability sampling
Stage 4: Sampling Probability sampling methods give each member of the
Conducting research on an entire area can pose a number population an equal and known chance of being selected in
of challenges for the researcher. Of course, some of the most the sample. No-one can be knowingly disqualified because
obvious reasons would be the lack of resources and also the selection process is based entirely on chance. Probability
time constraints. To combat these constraints, researchers sampling includes the following methods:
Simple random sample groups – for example, by income or gender. A sample will
This method allows each member of the population to be then be randomly selected from each group identified to
eligible to be chosen as part of the sample. Each person is take part in the research.
given an equal chance of becoming a part of the sample. The stratified sampling method often gives a better
While this method is not advisable for very large populations, representation of the population since the sample is drawn
it can work acceptably with a small group. The researcher from the different groups or strata that exist. As a result, the
would make a list of all the people in the population from findings of the research are more accurate than those of a
which the sample is to be taken and randomly select the simple random sample.
required amount of people. This method is probably the
most unbiased of them all, since each person has an equal Cluster sampling
chance of being chosen. However, in order to make use of it, In cluster sampling, members of the population are assigned
the researcher has to make the major assumption that each to a particular cluster or group. Each member is assigned
member of the population is fully aware of the issue to be to only one cluster. Once the cluster is identified, a sample
researched. is chosen via one of the probability sampling methods.
This method is very close to stratified but has one notable
Systematic sampling difference. In the stratified sampling method, people
This method is one where the researcher selects the ‘nth’ from each stratum across the population are included in
person to be a part of the sample. For example, the researcher the sample but in cluster sampling only the people in the
may select every tenth person. While it is systematic, the list selected cluster(s) of the population are included.
of the names of people in the population to be sampled is
chosen randomly. As a result, this is seen as a probability Multi-stage sampling
sampling method. Unlike simple random sampling, where This method draws on several sampling methods to arrive
there is no awareness of who will be chosen, this can be a decision. Therefore a researcher using this method
determined when using this method. The method is such will combine simple random, systematic and stratified
that once the first person is chosen, all subsequent people sampling methods. A combination of the methods will
can be determined since it uses every ‘nth’ person – that give the researcher a variety of results to arrive at a better
is, if we are using every tenth person, once the first person generalisation.
is chosen you will know that next will be the person at
number 20, number 30, and so on. Non-probability sampling
To ascertain the ‘nth’ term, the researcher will have to Non-probability sampling methods do not give each
use the total number of people in the population and the member of the population an equal chance of being selected
proposed sample size to determine the ratio. For example, in the sample. In other words, elements in the sample are
if there are 100 people in the population and the desired not chosen by chance. For the most part, they are chosen
sample size is 20, the ratio would be 20/100 or 1/5. It based on the researcher’s judgement, opinion or expertise.
therefore means that one in every five people would be Some popular non-probability sampling methods include:
chosen, or every fifth person. However, since the sample
is determined in this way, there is some evidence of bias, Purposive or judgemental sampling
especially if the population is organised in a systematic way The elements in this sample are selected subjectively by
– for example, male/female. If every tenth person is used, the researcher. The sample would consist of people who
the sample will be gender biased, as only females will be the researcher believes fits the purpose that he/she has in
chosen. mind. This method is particularly appropriate for a situation
where the population needed for the sample is not readily
Stratified sampling available. The elements may then have to be handpicked by
As mentioned earlier, simple random sampling makes the the researcher.
assumption that each member of the population has the same This technique has an innate bias, since the people within
characteristics. However, this assumption can be addressed the sample were not given an equal chance of selection.
by using this other method of sampling. The stratified
sampling method seeks to identify the different groups or Quota sampling
strata in the population which have the same characteristics In a quota sampling method, the people who are chosen to
within the group. The population is then divided into these be a part of the sample possess a specific set of characteristics
or traits. The researchers will therefore choose an amount Snowball sampling

of people with the desired traits. For example, a company While we do not have snow in the Caribbean, this concept
could need a sample which consists of 18 year olds or people should be well known. This sampling method works like
aged 50 and over. a snowball, as it gathers more the further it goes. The
It is quite possible that using this sampling method will snowball sampling method is one where a person is used
result in biases, as the choice of the sample rests in the hands in a piece of research and then asked to suggest others with
of the researcher. the same characteristics who would be willing to participate
in the same research. For example, if an interview is done
Convenience/accidental with a dentist, he/she could suggest other dentists that the
This sample method is often used when the researcher has researcher could also interview.
only a short time to complete the research. The people who
are selected to be a part of the sample are chosen based on Stage 5: Research techniques
their convenience. The research is normally carried out in Before discussing the different methods used to collect data,
a busy area such as a plaza, and people are simply stopped it is important to make a distinction between qualitative
and asked if they want to take part in the research. The and quantitative research. ‘Qualitative research’ refers to
sample would then consist of people who were accidentally the collection of descriptive data that is not in a numerical
chosen or who were available when the research was being form but is based on the respondents’ beliefs, attitudes and
conducted. intentions. It includes the use of interviews or open-ended
It is quite evident that no serious and real meaningful questions to gather data. Conversely, ‘quantitative research’
decision can be made based on this method of sampling. refers to the collection of data which is in a numerical form
However, it is useful for opinion polls or ‘vox pops’. which can be measured and used for further illustrations
CASE STUDY
Researching for the right fit

The fashion industry is one that is always changing and Kimmy’s Designs was well aware of this. The company wanted to intro-
duce a new line of clothing for the upcoming summer. Bearing in mind that the Caribbean really does not have very clearly
outlined seasons, getting it right was key to success. In order to capture the needed information, the firm decided to conduct
some market research. This research was conducted in two countries where the firm sells most of its products.
Having decided to carry out the research, the firm went on the look-out for information. It decided that it would send repre-
sentatives to shopping malls for the four Fridays and Saturdays of the month of January, to speak with shoppers. This was done
and the information was analysed. Once the information was received, the firm went into production in order to get the clothing
ready for the summer.
Once the target production was met, the firm was looking to cash in on the market but, instead, sales were less than favour-
able. While some of its clothing was sold, it seems as though some customers were not attracted to the fashion line. Information
received by the firm suggested that the line was out of tune with what is ‘in style’ at the moment. Some people complained about
the type of material that was used, especially when the temperature of the summer season is taken into consideration. Now
Kimmy’s Designs is left with some unsold stock and money tied up in this stock. The question now is: ‘Where did we go wrong?’.
Questions
1. Why was it important that Kimmy’s Designs carried out market research? (3 marks)
2. Assess the appropriateness of the source of data that was used by the firm. (6 marks)
3. Describe the sampling method that was used by the firm. (3 marks)
4. Was the sampling method used the most appropriate one to gather information on the issue? Give reasons
for your answer. (8 marks)
5. State, with reasons, the sampling method that you would have implemented to gather the needed information. (5 marks)
Total 25 marks
– for example, the construction of graphs or tables. This the respondent would be asked to either fill out a
would include surveys and experiments. brief questionnaire or participate in a brief interview
The market researcher has a number of research conducted by the researcher. The advantage of mall
techniques available to him/her which will result in intercepts is that the interviewer is able to read the
different advantages and disadvantages. Some of the customer’s body language and can have one-on-one
techniques used are outlined below: interaction with them.
We are living in a world where technology is changing
Focus groups rapidly and with this change firms are also changing the
This is where a group of people come together to conduct an way they conduct research. To this end, internet survey is a
in-depth discussion on a specific topic. The group is guided by growing method being used to gather information from the
a moderator who is responsible for directing the discussion target population. With the proliferation of social network
in the desired way. This group would include potential or sites such as Facebook, firms are making use of these sites
existing customers who possess integral information on via the internet to conduct surveys. This is fairly cheap and
the topic of discussion. This technique is especially suitable is more far reaching than some of the older methods.
for the launching of a new product or an advertisement
campaign. The product or advertisement could be shown to
In-depth interviews
the group before asking them to give their feedback. The An interview involves a one-on-one interaction between
firm can then use the information gathered to make certain the respondent and the researcher (interviewer). The
critical decisions such as improvements or adjustments to researcher will pose questions to the customer and record
the existing product or campaign. his/her responses. This can be done by writing the down the
answers or simply by using a tape or voice recorder. One of
Surveys the benefits of personal interview is that the interviewer can
As discussed above, a survey is where information is ask follow-up questions or ask for clarification.
gathered from a sample of a relatively large group of people
Observation
which is referred to as the ‘population’. The marketer can
gather information for the target population through the This method was discussed earlier in the chapter. As
use of different survey methods. Three of the more popular mentioned before, observation is also an effective way to
methods are: garner information for a target population. The subjects of
Telephone survey – where the researcher calls a sample the research could be observed knowingly or unknowingly.
of people within the geographical area being studied. Some firms have even used video cameras to observe
The researcher can either call a list of volunteers or consumer behaviour then used the information to make
could use the random digit dialling technique. For changes to the way they do business.
random dialling, the researcher could use the local
directory or just call a number then change one number
Test marketing
or a group of numbers in the subsequent calls This will be explored further in Chapter 30. Test marketing
Mail survey – this involves the researcher mailing a can be a good way to ascertain data. When using test
questionnaire to a representative sample via the postal marketing, the product is placed in the market while
service. The people receiving the questionnaire would observation is done to assess how customers are responding
complete it and return it to the firm. The questionnaire to it. Information can be gathered regarding whether or
is often accompanied by a cover letter that outlines not the product will be purchased, whether any changes
the purpose of the research and any other pertinent or improvements are needed and, generally, the level of
information. The instrument being used for this type interaction of consumers with the product.
of data collection method should be short, specific and An evaluation of the different research techniques is
unambiguous. It is best if the researcher uses closed- shown in Table 28.1 (p 272).
ended questions. In order for this method to work
effectively, the members of the sample should be pre- Stage 6: Analysis and presentation of data
informed of the research Analysis
Mall intercepts – this is where patrons in a busy area Gathering the data needed would be a good result for any
such as a shopping centre or shopping mall are stopped researcher. However, it is what is done with the information
and asked to participate in the research. If they agree, that is most important. Successful market research is where
Research Advantages Disadvantages

techniques
Focus group – Relatively cheap to acquire – Sample size is usually small
– Takes little time to collect – Requires a competent moderator
– Large amount of information can be collected – Members may face peer pressure
– Can gather a great deal of information – It is qualitative and is harder to analyse
Surveys: Telephone – Relatively cost effective – Greater cost for long-distance calls
– Speed of data collection – Difficulties in finding participants
– Can sample a larger group – Limited data usually collected
Mail – Can collect information from a wide area – Difficult to get clarification
– Few administrators needed – Can be time consuming
– Can ask more complex questions than over the – Limited data usually collected
phone – Difficulties in finding participants
Mall intercept – More people can be reached – Time constraints

– Fairly cheap to conduct – More workers are needed to conduct the research
– Speedy collection of data – Sample may not be representative of the population
– Can observe body language – Information may be biased
Internet – Reaches a larger group of people – There can be some bias since people decide to take part
– Fairly inexpensive in the research
– Speed of collection – Lack of information about the respondents
– Information may not be reliable
In-depth interview – Can ask for clarification – Can become expensive
– Body language can be assessed – Time consuming
– Depth of information collected – Uniformity may be sacrificed for flexibility
– Gives researcher some level of flexibility – Mostly qualitative and so harder to analyse
Observation – Overt behaviour can be captured – Expensive
– Information is gathered in a natural and – Time consuming
unstructured manner – Unable to capture opinions or attitudes that cause a
– Sensitive data can be collected particular behaviour
– Needs highly trained observers
Test marketing – Needed improvements can be identified – Can be expensive
– Can save the firm money since the product is – Usually very time consuming
tested before actual production
Table 28.1: An evaluation of marketing research techniques
the researcher is able to state findings and conclusions and response is given. However, at the CAPE level you are not
make generalisations at the end of the process. In order for required to do such an in-depth level of research for your
this to happen, though, the researcher has to comb through School-Based Assessment.
the data collected. Information about trends, similarities and
correlations should be highlighted in the analysis of data. Presentation of data
This is where the researcher organises the information in a Data can be presented in a number of ways. However,
logical manner and in relation to what is being studied. Care whichever form this may take, it must be clear and precise.
must be taken to ensure that the data is analysed in relation Some of the popular methods of data presentation are pie
to the research objectives. charts, bar graphs, histograms, line graphs, scatter diagrams
The analysis and interpretation segment should help the and tables. These are explained and illustrated in Chapter 40
researcher to determine the implications of the findings. For on Internal Assessment.
quantitative research, the researcher can assess the mean,
standard deviation and frequency distribution, among other
things. The mean of the research represents the average of Limitations of market research
the responses. Standard deviation indicates the degree of Despite all the benefits that can be garnered from conducting
consistency in the responses given. It shows the distribution market research, it is not without its problems.
of the responses given by the respondents. A frequency Market research is time consuming and so the final
distribution measures the amount of times a particular result might be out of date by the time it is published
CASE STUDY
Finding the right technique

As part of the Business Department initiative to give business students first-hand experience of the concepts being taught, the
entire class was asked to establish a business in which each student would be a shareholder. The students were elated with this
idea and committed themselves to seeing it through to the end and being successful.
Once the company was formed, it was time to decide on a product and the target market. The company then decided to
create a variety of juices from local fruits and their trademark pumpkin juice. They have received commitment from the Food
and Nutrition Department to help create and preserve these beverages. Now they have to sell the idea to potential customers.
In order to inform people about their products, the students decided to do research to find out whether the product would
perform well in the market. The group decided to walk to the school and ask random students whether they would purchase the
product. They also decided to make a few of the products and test them on the market, getting feedback from customers.
Questions
1. Would you say that walking to the school and getting information orally from random students is an effective
way to conduct this market research? Explain your answer. (4 marks)
2. State two (2) research techniques that were used by the students. (2 marks)
3. Assess the effectiveness of the two (2) techniques you mentioned in your answer to Question 2. (12 marks)
Total 18 marks
If the sample is not properly chosen, the result can be The final decision is based on value judgements and
biased probabilities and so is not 100 per cent accurate
A conclusion is drawn from the views of a small section The result of the research may also be biased in
of the entire population terms of the responses people gave and also how the
A proper marketing research campaign can be very questionnaire was organised.
costly for the firm and it may be inconclusive in the end
CHAPTER SUMMARY
Marketing research is the process of • Data collection Sampling can be divided into
collecting, analysing and interpreting • Sampling probability (every person has an
data in order to make an informed • Research techniques equal chance of being chosen) and
decision about a product, customers, • Analysis and presentation of data non-probability (not every person
target market or industry has an equal chance of being chosen)
There are two types of data
Marketing research is a process collection – primary data and The firm has a number of research
which includes: secondary data – and both are techniques available to it, including
• Problem identification equally important to the research focus groups, surveys, interviews,
• Research objectives observations and test marketing.
MULTIPLE CHOICE QUESTIONS 7. The sampling technique which takes every ‘nth’ person to be a
part of the sample is known as which of the following?
1. The process of collecting, analysing and interpreting data
a. Systematic sampling
in order to make an informed decision about a product,
customers, target market or industry best defines which of the b. Simple random sampling
following? c. Accidental/convenience sampling
a. Sampling d. Stratified sampling
b. Market research
8. Which of the following is NOT a non-probability sampling
c. Marketing technique?
d. Primary data a. Purposive sampling
2. The research design that outlines the demographics b. Cluster sampling

and characteristics of the target market is which of the c. Quota sampling
following? d. Convenience sampling
a. Expository
9. Which of the following is NOT an advantage of using focus
b. Explanatory
groups?
c. Casual
a. Relatively cheap to acquire
d. Descriptive
b. Takes little time to collect
3. Which of the following is NOT a primary source of data? c. Sample size is usually small
a. Internet article d. Large amount of information can be collected
b. Experiment
10. Which one of the following is a disadvantage of using in-depth
c. Survey interviews?
d. Observation a. Mostly qualitative and so harder to analyse
4. Which of the following would NOT be an advantage of b. Can ask for clarification
secondary data over primary data? c. Body language can be assessed
a. Usually cheaper to gather d. Depth of information collected
b. Faster access from existing sources
c. Previously collected for other research
d. Guides the researcher before primary sources are
consulted
5. The total target group that the researcher wants to study or

gather data from is referred to as which of the following?
a. Sample frame
b. Population
c. Sample
d. Respondents
6. Which of the following is NOT a probability sampling

technique?
a. Simple random
b. Stratified sampling
c. Systematic sampling
d. Snowball sampling

A few food and nutrition students at your school have developed a new drink that they have named ‘Energy Punch’. They are
excited about their product and are hoping that it will be successfully introduced in the market and also generate income to help
with their university tuition. Since you are a Management of Business student, you are asked to help them do some marketing
research on the school compound before the product launch.
a. What is marketing research? (1 mark)
b. Discuss the six stages of the marketing research process, based on the scenario given above. (24 marks)
a. Explain the difference between primary data and secondary data. (2 marks)
b. Distinguish between probability sampling and non-probability sampling. (2 marks)
c. Describe four (4) probability and three (3) non-probability sampling techniques that can be
used by an organisation. (21 marks)
276
29 Principles of Segmentation
barbequed. Therefore within your classroom you could have

LEARNING OBJECTIVES: four different segments of chicken lovers. It is no different
At the end of this chapter students should be able to: within the business world.
Define the term ‘segmentation’ Firms may divide their markets into different segments for
Discuss the importance of segmentation various reasons. Some of the common ones are:
To maintain a competitive edge by catering to the
Outline the reasons for segmentation
specific needs of each segment
Outline the benefits and drawbacks of segmentation
To capture the market of minority buyers who have
Explain the following concepts: niche, target and mass
marketing different attitudes and habits than those of the
mainstream
Explain the criteria for effective segmentation
To get a better understanding of the firm’s target market
Discuss the bases of segmentation
To facilitate product differentiation as the firm aims to
Evaluate consumer buying behaviour
reach all its potential customers
Describe business buyer behaviour
To improve profitability as firms try to sell to the
different income groups. The firm can make up for
shortfalls in the low-income market with an excess in
G
enerally speaking, the firm’s potential market the high-income market
can span a very wide geographical area. With the To broaden their customer base by including people
development of communication and internet tech- from all age groups, genders, etc.
nologies, firms are able to reach markets across the globe. While there is the potential of reaping huge success from
However, it must be pointed out that the customers within market segmentation, the firm must be aware of the fact
these markets are not the same. They have different beliefs, that there are drawbacks to this concept. Therefore, it should
buying habits and attitudes. Therefore, to treat the entire weigh the benefits against the costs before undertaking
market as one would be naive of the firm and could result market segmentation. An evaluation of the concept is given
in huge losses. In order to lessen the possibility of losses and below.
prevent a production or marketing ‘backlash’, firms often
use a segmentation approach. Benefits of market segmentation
Identifying the specific characteristics of each segment
can better enable the firm to reach all its potential
Market segmentation customers, thus increasing sales
Market segmentation is the division of the market into subsets The firm can adjust its product to meet the needs of the
or segments of potential customers who have similar buying different segments, improving customer satisfaction
behaviour and characteristics. This approach bears in mind Knowing the needs of each segment can save money
that the overall market for a product consists of segments of that would otherwise be spent on promotion campaigns
customers who respond differently to the firm’s marketing that might have failed without prior information
mix. As a result, the firm must develop its marketing mix in The firm can make better use of its limited resources
such a way that it caters for these segments of customers. and in the process reduce waste, since it would be
If you should choose a product now in class and ask your knowledgeable about each segment’s needs
classmates what they think about it, it is very likely that you A firm may choose to cater for one segment rather than
are going to get various different and some similar responses. the entire market. This could help the firm to improve
While most people might eat chicken, not everyone likes efficiency.
it when it is fried and some may like it stewed, baked or
CHAPTER 29 | PRINCIPLES OF SEGMENTATION 277
Drawbacks of market segmentation The niche might be very vulnerable to changes in the
Researching information about each segment can result market.
in very high administrative costs
The firm may forgo revenues by focusing on just one or
Target marketing
two segments Target marketing involves the division of the market into
Producing products for each segment can rapidly different segments for the firm to target. The firm may cater
increase the number of products, some of which may for one or more of these segments with the use of different
be costly to produce. This could also lead to market strategies to reach them. It can accomplish this by using one
saturation. of the following market coverage strategies (see Figure 29.1):
There are three important concepts that must be
Undifferentiated marketing
considered when discussing market segmentation:
The firm offers one product and uses the same marketing
Mass marketing mix for the entire market. For example, Dettol is used by
Mass marketing is also referred to as ‘undifferentiated different people within the same market for different reasons.
market’. It is where the firm does not practise segmentation
Concentrated marketing
but rather markets the same product to the entire customer
base. This means that the firm would create a single marketing The firm uses the same marketing mix within a segment
plan for the entire market. While this may not seem to be or different segments of the market. For example, Listerine
one of the best strategies to employ, it can help the firm to Zero caters for people who cannot manage the high level of
maximise sales. Firms using this strategy often benefit from intensity of the standard product.
economies of scale as a result of large production and sales
Differentiated marketing
volumes.
The firm creates different marketing mixes for different
Niche marketing segments within the market. For example, a dairy producer
Niche marketing is also known as ‘concentrated may produce different forms of milk (skimmed, low fat,
marketing’. This strategy is one where the firm identifies a regular) for different segments.
small segment of the market and creates a marketing plan
to satisfy that segment. The firm will then create a particular
A. Undifferentiated marketing
product that caters to the needs of that particular segment.
This type of market usually has the following characteristics: Company
Market
marketing mix
Higher ‘per unit’ costs of production
Lower sales volumes
Higher prices to offset higher costs B. Differentiated marketing
The product is tailored to the segment. Company Segment 1
Firms utilising niche marketing could reap the following marketing mix 1
benefits: Company
marketing mix 2 Segment 2
Lower competition, since the focus is on a smaller group Company
Segment 3
of customers marketing mix 3
Can recoup cost by charging a relatively high price for
the tailor-made product
C. Concentrated marketing
Small firms may benefit, especially where the niche is
overlooked by larger firms Segment 1
Since the firm focuses on a particular market, it can Company
marketing mix Segment 2
improve the efficiency with which the product is
offered. Segment 3
However, the firm may also face a number of drawbacks:
Small-scale production often nullifies economies of scale
If the single product being offered fails, the business
could also fail Figure 29.1: Market coverage strategies
CASE STUDY
An undecided marketing strategy

Mr Hickson is an entrepreneur in the chemical field. After much research and trial and error he developed bio-diesel, using the
used cooking oil from a nearby restaurant. He believes that he has a sure and cheap supply of oil as it is waste material from
the restaurant. The plan is to get other suppliers on board, such as schools’ canteens and even households who want to resell
their used oil to the firm.
The firm has not yet tested the product in motor vehicles that have diesel engines but in theory it should work. The firm
also believes that until it can obtain sufficient amounts of used oil, it wouldn’t make sense entering into that industry. For the
moment, the firm has decided to use its product to operate diesel generators. With the hurricane season coming up, Mr Hickson
is optimistic that he will be able to sell his bio-diesel on a wide scale. Even though this is the plan, he has some reservations as
he is exploring the possibility of focusing on a particular group of people. Being at a crossroads, he is now thinking of getting
advice from a marketing consultant.
Questions
1. Differentiate between mass marketing and target marketing. (4 marks)
2. Explain the concept of niche marketing and discuss whether or not it could be used by Mr Hickson in the marketing
of his bio-diesel. (6 marks)
3. Give two (2) reasons for which of the following marketing strategies (mass, niche or target marketing) would
be the most suitable for Mr Hickson’s bio-diesel firm. (5 marks)
Total 15 marks
Criteria for effective segmentation Durability – creating different marketing mixes can be
As discussed earlier, market segmentation can benefit the expensive, therefore the segments must remain clearly
firm significantly. However, in order to reap these benefits defined – at least in the foreseeable future. If the line of
the market has to be divided effectively. This must be done demarcation diminishes or disappears before the firm
with the following criteria for effective segmentation in is able to recover its investment, it could incur massive
mind: losses
Measurability – this assesses whether or not the size and Action oriented – the firm must be able to take the
purchasing power of the segment can be ascertained. necessary steps to design and implement programmes
For segmentation to make sense, the requirement data that will enable it to serve its target market well.
must be obtainable
Accessibility – this criterion looks at the firm’s ability to
reach the targeted segment effectively. The firm must Bases of segmentation
be able to implement its marketing and distributing
strategies in the targeted segments Demographic segmentation
Substantial – the targeted segment should be able As was mentioned in Chapter 27, the concept of demography
to generate enough sales or revenue for the firm refers to the study of the characteristics of human
to survive. This measures the financial viability of populations. These characteristics include size, gender,
the segments and whether the revenue gained will growth, age, occupation, density and race. However, for the
outweigh the costs associated with the segmentation basis of demographic segmentation demographics will be
Differential responsiveness – this criterion assesses the broken down into the following variables:
response of each segment that is targeted by the firm.
The notion is that, for segmentation to make sense, Age
the segments should respond differently to the firm’s It is quite obvious that our consumption pattern changes
marketing strategies. Otherwise, there wouldn’t be any with age, especially in our earlier years. Products that you
reason for segmentation would demand, for example, are unlikely to be demanded
by your parents or grandparents. The firm can therefore Lifecycle

create a marketing mix that appeals to the different age As we go through the different stages of life, our demand for
groups in the market. The generation in which a person is certain goods will eventually change. As people get older,
born also has some correlation to age. Psychologists have they will have acquired an amount of assets along the way
identified three such categories, including ‘Baby Boomers’, and therefore either create demand for different products or
‘Generation X’ and ‘Generation Y’. stop buying certain products. For example, people may take
more vacations or spend more on health care as they move
closer to retirement.
EXERCISE
In your class discussions, read more about these Religion
sub-groups and discuss why they would be of interest This often influences people’s choices of food and clothing.
to marketers. For example, trying to sell beef products to Hindus or pork
to Seventh-Day Christians would not work. Therefore firms
Gender may want to create different marketing mixes to cater for
This is where the marketers create different marketing mixes the different religious backgrounds of the target market.
for male and female consumers. It is quite evident that some
Nationality and ethnicity
things that appeal to a woman may not necessarily appeal
to a man. This base for segmentation is particularly popular The marketer can also segment the market based on
in the clothing, cosmetics and tools markets, among others. people’s countries of origin or ethnic backgrounds (Black,
Hispanic, Asian or White). The marketer must ascertain
Income how consumers’ nationalities or ethnic backgrounds will
Some firms may choose to target customers that they believe influence their buying behaviour, and create the correct
are well off. Instead of targeting everyone, the company may marketing mix accordingly.
place its focus on people within a certain income group. The
Geographic segmentation
markets for luxury motor vehicles, designer wear and real
estate are often segmented in such a way. In cases where the firm is operating in different countries
across the world, or even in different areas within a large
Social class country, geographic segmentation could be explored.
Sociologists will tell you that the population is normally The notion is that people living in the same geographical
divided into different social classes. These classes consist of area will have similar buying patterns and behaviour. This
people with similar wealth, influence and status in society. could also be used in collaboration with another base of
In many cases, the social class system will influence the segmentation – for example, behaviour or demographic.
consumer’s buying decisions. Consumers in the same class Geographic segmentation relates to the climatic condition of
often shop at the same stores, drive certain brands and the country, the size and density of the population.
makes of motor vehicle and eat only at certain restaurants.
With this information, the marketer can orchestrate the Climatic condition
correct marketing mix to ensure that the firm benefits from The weather pattern is different in different parts of the
the different classes. world and so this creates an opportunity for marketers to
offer different products. The Caribbean is said to have a
Occupation tropical climate which is basically the same all year round.
A person’s occupation will in most cases affect his/her income The climatic condition of a country affects its agricultural
level and the social class in which he/she may be considered sector, fashion industry and even the construction industry.
to belong. It is also quite evident that some occupations If you look around in your country you will realise that there
are more lucrative than others and so some people possess is no need for snow boots and the houses are not usually
more purchasing power. A person’s occupation will also built like those in, say, the USA or England. In addition,
influence the products that he/she often buys. For example, Guyana is favoured for rice cultivation because of its climate
a carpenter or mason would spend more money on tools as opposed to that in some of the other Caribbean countries.
than, say, a teacher would.
Density Since this model was developed, there has been a

This measures the number of people per square mile or noticeable reduction in the age at which these stages begin.
kilometre. It measures how populated an area is. As it Some people are having children much younger and while
relates to density, the country is normally divided into still dependent on their parents. This change in lifestyle
urban, suburban, rural and semi-rural areas. An area that should also be of importance to the marketer. It could mean
is very densely populated will offer a larger target market to that there are more extended and single-parent families
the firm. who will have lifestyles differing to those on paper.
Region (country or world) Personality

The firm may divide the target market into regions instead The fact is that, we are most motivated to do things by our
of targeting just one country. The region could be within a personality – that is, the characteristics that make you into
country or a group of countries such as the Caribbean region the person you are. People’s personalities can influence the
(CARICOM) as opposed to the western region of Jamaica. buying decisions they make. Some people may dress to match
What is important is that the target market within that their personalities and therefore the marketer will have to
region should exhibit similar buying behaviour. The firm create products that will fit those different personalities.
can then develop different marketing mixes to appeal to the
different regions or countries. Opinions, interests and attitudes
We all have opinions, interests and attitudes which we
Size (city or town) display on a daily basis. Some of these may be similar;
Size does matter, as firms try to segment their market using others may be very different. Whatever they are, though,
the geographical segmentation technique. The firm could they surely affect our buying behaviour. The marketer
measure the size of the country, city or metropolitan area. must carefully study the target market to ascertain people’s
This would give it an idea of the number of people to be interests, hobbies and their attitudes toward and opinions of
targeted. the product. The marketer can then use this information to
create the right marketing mix for the particular segment.
Psychographic segmentation
Psychology refers to the study of the human mind to ascertain Behavioural segmentation
the factors that influence people’s behaviour. Marketers can A marketer using behavioural segmentation will segment
use this information to group people with similar behaviour the market according to consumers’ behaviour and the way
patterns together. Psychographic segmentation is therefore they respond to, use or know about a product. This basis
the division of the market into groups or segments with similar takes a number of factors into consideration, including, but
psychological characteristics. These characteristics include not limited to, the following:
values, lifestyles, interests, personality traits and opinions.
Occasions
Lifestyle This identifies when a product is usually purchased or
Marketers can study people’s modes of living on a daily basis. consumed by the target market. In the food industry,
Since we all have different lifestyles, this is very important products such as chocolate may be purchased most around
to the marketer who must create and promote products that Valentine’s Day or wine and liquors at Christmas, and so
appeal to all our lifestyles. It is very likely that a person’s forth. Some marketers have managed to influence when
lifestyle will change as he/she progress through the different some consumers consume the product through persuasive
stages of life. The well-known ‘sagacity lifestyle model’ advertisements.
outlines four stages of lifestyle:
1. Dependent – here, children are still dependent on their User status
parents and are most likely living with them With this method, the marketer will divide the target market
2. Pre-family – young adults start households of their own into different usage categories. This may include non-users,
but have not yet started having children first-time users, potential users, regular users and even
3. Family – this is where these young adults start having ex-users. By doing this, the marketers can target a specific
children who now become dependent on them group of users. At all times, however, the firm should be
4. Late – parents are now close to retirement and the thinking of how it can keep its first-time users and attract
children have left to start families of their own. potential users and even non-users.
Usage rates
These measure the rate of usage of the product and CASE STUDY
categorise people into light, medium or heavy users. Once
the market is segmented according to these usage rates, the Segmenting for success at All Fresh Toothpaste
Production Department, in conjunction with the Marketing All Fresh Toothpaste started out as a small company
Department, can get the right amount of products to the producing one flavour of toothpaste and supplying it to
consumers. This information can also assist the firm in the local market. This was its All Fresh Original brand.
pricing its products, as heavier users may be charged more As time progressed, the company grew and its product
became increasingly popular. This prompted the company to
for some products such as electricity.
become innovative and to explore other flavours and types
Loyalty status of toothpaste.
With the change in taste and preference of consumers
The market can be divided according to customers’ levels of
the company has introduced other flavours into the market.
brand loyalty. The firm will try to maintain these customers
These include All Fresh Kids, All Fresh Whitening, All Fresh
while attracting others. It is important to note too that some
Sensitive, All Fresh 3 in 1 and All Fresh Minty Mist. All
customers may be loyal to a store instead of an individual
of these flavours have been tailored to meet the desires of
brand. The marketer must also be mindful of this fact and different sets of customers. The company has also varied the
use it to the firm’s advantage. sizes of the toothpaste. Each flavour, with the exception of
All Fresh Kids, is available in three sizes – small, medium
Benefit segmentation and large.
This may also be treated as part of behaviour segmentation. In research conducted last month, the company found
Firms using this method seek to divide the market base out that All Fresh 3 in 1 was its most popular brand. This is
of the benefits that consumers are seeking from the use followed by its Whitening line. The company is now explor-
of the product. The marketer must therefore be aware of ing the option of creating a baking soda line and Gel Plus
the attributes and quality that the consumers are looking line. The Gel Plus line will be a gel instead of the usual paste
for in the product and create them. Having studied the and will serve as a mouthwash and toothpaste in one.
marketing concept, you should now realise that this base
of segmentation coincides with that concept as firms try to Questions
provide satisfaction and value to consumers. This method
1. Define the term ‘segmentation’. (1 mark)
is very fitting for the market for computers or cellular
2. Outline three (3) benefits that All Fresh Toothpaste
phones. Different people want different features and also can derive from segmentation. (6 marks)
seek different benefits from the use of these products. The 3. Referring to the products of All Fresh toothpaste,
marketer can therefore employ the concept of product discuss three (3) bases of segmentation that may
differentiation to cater for as many needs as possible. have been used to segment the toothpaste market.
(18 marks)
Total 25 marks
Consumer buying behaviour
We are all consumers or customers in some way or other.
While the two words are used interchangeably at times,
their meanings are different. A ‘consumer’ is the final user by individuals in purchasing a product or service. It represents
of the product even though he/she may not be the one who the process that consumers go through to select, acquire and
made the purchase, while a ‘customer’ is the purchaser of use the product.
the product but may not be the final user. For example, your
parents purchase things that you end up using: so, they are
customers but you are a consumer. The consumer decision-making process
It is important to point out here that we are all have a (the buying process)
buying pattern. For some people, careful planning is the way See Figure 29.2 (p 282) for an overview of the process.
to go; some are influenced by advertising while others just
buy on impulse. It is therefore the marketer’s responsibility Need recognition and problem awareness
to ascertain how we go about buying a product. Consumer This stage is characterised by an awareness of a need or
buying behaviour describes the actions that are displayed problem. This need could come from an innate desire, such
Figure 29.2: The consumer decision-making process Internet sources, such as the firm’s website and social
network pages
gnition Government agencies, such as consumer associations,
Need recoblem
an d p ro
awareness bureau of standards, etc.
Evaluation of alternatives
Informati
on Once sufficient information has been gathered, the
search consumer needs to evaluate it in a bid to make an informed
decision. The consumer has to choose between the different
products and brands that are available. His/her choice may
n of
Evaluatioves depend on the perceived quality of the product, the price of
alternati
the product, his/her available income, the attributes of the
product and consumer reviews, etc. With this in mind, the
marketer must ensure that the particular product appeals
Purchase
to the consumer so that it can be chosen. The length of
the stage is normally dependent on the importance and
spending involved in buying the products. As mentioned
hase
Post-purc on earlier, buying a house is a huge investment and so more
e va lu ati
time will be spent evaluating the information gathered on
that than on buying, say, a suit of clothes.
as hunger, or could be triggered by some stimulus such as
an advertisement. Regardless of what triggers the need, Purchase
though, it is quite evident that the process cannot begin Once the product is chosen from among the alternatives, the
until the buyer has entered this stage. With this in mind, the next step is to make the purchase. The consumer must now
marketer has to be able to influence this stage in such a way think of the method of purchase – will it be a cash, debit
to create demand for the firm’s product. So the truth is that or credit card purchase and will the purchase be made at
we all need food, clothing and shelter but the marketer can the firm’s outlet or online, etc.? Deciding when to make the
influence the type of food we eat, the fashion we desire and purchase is also important. Some consumers may choose to
the type and design of house we buy. buy certain items, such as clothes, during off season, as they
are usually cheaper. The firm will need to make this stage as
Information search simple and problem free as possible in order to encourage
Having identified the need or problem, the consumer goes repeat purchases. Once the product is purchased, the
in search of information. Making an informed decision consumer moves to the final stage where the post-purchase
can help save the consumer money and time. Knowing evaluation is done.
the amount of information that is needed is imperative to
the decision. The amount of information needed may be Post-purchase evaluation
based on the level of spending, urgency of purchase and In this final stage, the consumer evaluates the purchase
the nature of the product. For example, buying a house is a to ascertain whether or not the product met his/her
huge investment and is a long-term commitment therefore expectations or if it was worthwhile buying it. If the consumer
getting information on it is vitally important, as opposed to was satisfied with the purchase, then there may be a repeat
the process of buying lunch at the school’s cafeteria. purchase. However, if the consumer feels that an alternative
The consumer can turn to a number of sources for would have been better, the item may not be purchased
information. However, the source used depends on the again. The firm often desires to have repeat consumers and
availability of the product and the decision to be made. so will have to do its best to achieve customer satisfaction in
Some of the common sources of information are: order to keep its customer base. A trend that is being taken
Personal sources, such as families, friends and other by a number of firms is to offer after-sales service so that any
close relations queries can be answered quickly and the firm can maintain
Media, including newspapers, television and radio the consumer base.
Commercial sources, such as salespeople, retailers, the
product packaging or label and advertisements
Factors influencing buying behaviour Reference groups

As consumers, we are often influenced by a number of These are the people with whom we are closely associated.
factors in making a buying decision. Some of the common They sometimes have the power to influence what we do
factors influencing this process would include: and even how it is done. Reference groups include our
peers, friends, families and mentors. Some people buy a
Culture product because of peer pressure, while others are simply
A consumer’s culture will have an influence on what is ‘bandwagon buyers’.
purchased in some cases. Our belief system often guides
our actions and it is no different when it comes to buying a Personality
product. As mentioned earlier in this module, culture often People have different personalities – some are introverts
influences our choices of food, dress and music, among and others extroverts. Introverts are those who would
other things. rather be alone and often make their decisions without
much influence from other people. However, extroverts are
Perception usually friendly and outgoing and like social situations and
Consumers perceive a product in a particular way and their as a result are more likely to be influenced by others. Our
actions toward the product often match their perception. buying behaviour tends to match our personality.
Our buying behaviour is often influenced by our perception
of the product. For example, for some people, if a product Marketing
does not carry a recognised brand name, then it is considered Our buying behaviour can be largely influenced by
inferior even before it has been tried. marketers, who can use promotion tools to appeal to our
desires. Persuasive advertisement, for example, is known to
Level of income create a desire for the product in people who have seen the
To have a desire to acquire a product is good but it will not advertisement. Think about how, sometimes after watching
be attainable unless we have sufficient funds to purchase it. an advertisement about food, you suddenly feel hungry
What we buy is very often dependent on the amount and or you might have had a desire for a product once it was
frequency of our income or our ability to acquire credit. presented to you effectively.
CHAPTER SUMMARY
Market segmentation is the division The market is usually segmented As consumers, we go through
of the market into subsets or on the basis of demographics, different stages before buying a
segments of potential customers who geographic, behavioural, product. While some of these stages
have similar buying behaviour and psychographics and benefit sought. are not very distinctive, they include:
characteristics Each factor has its own set of need recognition, information search,
characteristics evaluation of alternatives, purchase
Firms involved in market and post-purchase evaluation
segmentation should consider the A consumer is the final user of the
concepts of mass marketing, niche product even though he/she may not The consumer’s buying behaviour
marketing and target marketing be the one who made the purchase, may be influenced by culture,
while the customer is the purchaser perception, reference groups and
For segmentation to be effective, of the product but may not be the level of income, among other things.
the following criteria must final user
be present: measurability,
accessibility, substantial, differential
responsiveness, durability and action
oriented
MULTIPLE CHOICE QUESTIONS 6. At which stage of the consumer buying decision process would
the buyer assess whether or not his/her expectations have
1. Which one of the following is NOT a reason for been met?
segmentation?
a. Problem recognition
a. To maintain a competitive edge by catering to the specific
b. Information search
needs of each segment
c. Purchase
b. To serve the market as a whole with one and the same
product d. Post-purchase
c. To capture the market of minority buyers who have

different attitudes and habits than those of the mainstream
d. To get a better understanding of the firm’s target market
2. ‘This strategy is one where the firm identifies a small segment Some firms are involved in market segmentation in order
of the market and creates a marketing plan to satisfy that to maximise their profits and sales by catering for as many
segment.’ This best defines: needs as possible.
a. Niche marketing a. Outline three (3) advantages and two (2)
b. Target marketing disadvantages of market segmentation. (10 marks)
b. Discuss how any three (3) of the bases of
c. Test marketing
segmentation can be used to segment the
d. Mass marketing
market for clothing. (15 marks)
3. Which of the criteria for effective segmentation states that Question two Total 25 marks
the segment should be able to generate enough sales or You have been saving to buy a new computer for the last
revenue for the firm to survive? six months. One night, while doing your school work, your
a. Measurability present computer finally turned itself off for the last time.
b. Durability Your work is still waiting to be completed and luckily
you had managed to back up all you had done before the
c. Substantial
computer crashed. Your work must be handed in a week later
d. Accessibility and all that is standing in your way between now and then is
buying a new computer. Using the consumer buying/decision-
4. Demographic segmentation divides the market by ALL of the
making process, explain how you would go about choosing
following variables EXCEPT which one?
and purchasing a new computer with the money that you
a. Age have saved. (25 marks)
b. Gender
c. User status
d. Income
5. Which one of the following can be regarded as a geographical

variable for segmentation?
a. Density
b. Occupation
c. Lifestyle
d. Usage rate
285
30 Product Management
wants. The product can be tangible (item) (for example, rice)

LEARNING OBJECTIVES: or intangible (service) (for example, dressmaking). In order
At the end of this chapter students should be able to: to maximise profitability, the firm has to develop its product
Define the term ‘product’ carefully so as to attract consumers. This is especially important
Explain the core, formal and segmented product in a market where there are products of the same nature.
Discuss the dimensions of the product mix Something about the product must stand out in a good way.
Describe the Boston Matrix The success of any product will depend on three important
Assess the new product development process attributes. See Figure 30.2.
Illustrate and explain the product lifecycle
The core product
Evaluate the effectiveness of branding and packaging
The core product represents the actual benefit that a
Outline the characteristics of services
consumer is seeking from the purchase and use of the
product. What is the main or essential reason for purchasing
the product? For example, the main reason for buying a
T
his chapter discusses in detail what is termed the laptop might be to do your school work.
‘marketing mix’. The marketing mix is the combi-
nation of factors used by a firm to influence a The actual or formal product
customer’s buying decision. It is also seen as the set of tools The actual product focuses on the attributes or features
combined by the firm to meet the needs and wants of the of the product. More than likely, these features will be
target market. The marketing mix consists of four market- the differentiating factor between this product and other
ing tools: product, price, place (distribution) and promotion. products. The actual or formal product includes such things
These four concepts are often referred to as the ‘Four Ps’ of as quality, brand name, packaging and design. Using the
marketing. (See Figure 30.1.) above example of a laptop, the actual product would include
These concepts will be discussed further in subsequent the specs of the laptop, the brand (for example, Sony or Dell)
chapters. The first of the Four Ps that we will explore is the and the software that comes with it or is available for it.
product.
The augmented product
The augmented product focuses on the additional benefits
The concept of product and services that the consumer receives from purchasing
A product is any item or service that is offered for sale to
the market with the aim of satisfying a consumer’s needs or
(C)
(B)
(A)
Product
Marketing
Price Promotion
mix
Place
(distribution)
(C) Core product
(B) Formal product Figure 30.2: Attributes of
Figure 30.1: The Four Ps (A) Augmented product the product
and using the product. It represents the post-sale benefits as model, sizes, design, colour, flavour, etc. Using our
or features associated with the product. This may include example from above, Grace’s tinned food line would include
such things as after-sales service, warranty, delivery and mackerel, sausages, corned beef, baked beans, etc. Firms that
installation. In order to distinguish themselves from their desire to cover a number of segments usually have a very
competitors, a number of firms are now working assiduously deep product mix. However, this can be counterproductive,
to improve the augmented product. Many customers are especially where the products start competing against each
looking for more than just the core product. This is further other.
compounded by the fact that our global boundaries are
being removed and so people can buy what they want from
almost anywhere in the world. Product line and extension
A product line represents a group of products, offered by a
firm, which has similar characteristics and similar intended
Dimensions of the product mix uses. The length of the product line is often dependent on
A firm that produces or markets more than one product is the objectives of the firm or the amount of resources to
said to have a product mix. Therefore, the term ‘product which it has access. The firm should also assess whether or
mix’ can be defined as the group of products that are sold or not its product line is too short or too long. Firms that have
distributed by the company. The dimensions of the product product lines falling within any of the two extremes may
mix are measured in terms of its breadth and depth. See find that they are operating inefficiently or even at a loss. If
Figure 30.3. this is the case, then the firm may need to either shorten or
lengthen the product line, depending on the situation.
Breadth or width Where the product line might be too short the firm can
The breadth of the product mix measures the number develop new additions to its existing product line. This is
of product lines or different products that the firm has. It referred to as a ‘product line extension’. This is usually done
shows the level of diversification within the firm and its to gain more market share, profits or growth. Product line
ability to manufacture and/or sell different products. The extensions can take one of two forms: line stretching or line
more products that the firm has, the wider will be the filling. A firm can ‘stretch’ its product line by lengthening
product mix. Having a wide product mix can be beneficial, it either upwards or downwards or a combination of both,
especially in a very competitive market. If one product or beyond its current length. For example, a brewing company
marketing segment fails, the firm might be able to survive may add another beer to its alcoholic beverages line. An
on the others until its problem is sorted out. For example, upwards extension could be to offer a new product of higher
the Jamaican conglomerate Grace Kennedy Ltd, in addition quality and price to the lower end of the market, while a
to having a number of companies, has a wide product mix. downwards extension could be to offer a new product of
If we take Grace Foods for example, the product mix would lower quality and price to the higher end of the market.
include tinned foods, frozen foods, dairy and porridge etc. Conversely, the firm could simply add new products
to the existing range of the product line. This would then
Depth be referred to as ‘line filling’. These products would have
The depth of the product mix relates to the variations slightly different features from existing products. The
or features of each product line. It includes such aspects reasons for this action could include taking advantage
of unused capacity, getting rid of gaps in the market and
discouraging competition. Examples of line filling include
Milo 3 in 1, Colgate Herbal and Sunshine Snacks’ honey
Breadth of the product mix roasted peanuts.
Product line 1
Product line 2
Product line 3
Product line 4
Depth
The Boston Matrix

This is also referred to as the ‘Boston Box model’ and was
developed by the Boston Consulting Group. It is a well-
known method that is used for product portfolio analysis.
It consists of an illustration showing the total percentage
Figure 30.3: Dimensions of the product mix market share of each product and the rate of growth in the
CHAPTER 30 | PRODUCT MANAGEMENT 287
CASE STUDY
ATL Group – taking it beyond sales

Appliance Traders Ltd Group offers a number of products to the Jamaican market. These products include household items such
as appliances and air conditioning units; office items such as printers, copiers, storage systems and servers; industrial items
such as food service, laundry and industrial equipment and power generators; a parts business which sells parts for a myriad
of appliances and equipment; and its energy solutions which include products such as solar heaters, LED lighting and energy
management systems.
While offering a number of items under different product lines, ATL has prided itself on being one of the best stores in the
country. Guided by its slogan, ‘Unbeatable’, the ATL Group tries to offer the best service to its customers. The group believes that
it should not only sell products but form relationships with its customers through its after-sales services. The company stated
that these ‘Relationships begin before you pick up the phone or walk into a showroom, store or service centre and continue long
after you leave’.
Questions
1. Using the case as a guide for examples, outline the three attributes of a product. (9 marks)
2. Using examples from the case above, explain what the breadth of the product mix is. (3 marks)
3. Citing examples from the case above, explain the concept of the depth of the product mix. (3 marks)
Total 15 marks
market, ranging from high to low. The Matrix postulates market but needs heavy investment in order to continue
four categories under which a product can fall, namely: doing so. This product is one that will generate substantial
Star revenue and profits for the firm into the foreseeable future.
Cash cow In order to maintain this possibility, the firm may commit
Dog and a large portion of its resources to such a product, especially
Question mark or problem child. in the form of promotion. Eventually, this product will slow
Each category gives the firm a clear view of the product’s down and may very well become a cash cow in the future.
position. This is seen in Figure 30.4.
The proposed categories are broken down further as ‘Cash cow’: high market share and low market
follows: growth
This product is very important to the firm and most firms have
‘Star’: high market share and high market growth at least one of these products. Cash cows are known by their
A star product is one that is doing extremely well in the high market share that has been developed over the years
market. It has a high market share and is growing in the and their low growth rate due to maturity. These products
are termed this way because they generate substantial
Market share cash or revenue for the firm. This revenue is often used to
High Low finance and sustain other products such as stars. The firm
is less likely to spend a lot of its resources on promotion for
these products since they are well known in the market and
High
are generating high volumes of sales. However, they need to

Market growth
be properly managed so that their lives can be perpetuated

Stars Question marks
and more cash can be ‘milked’ by the firm.
‘Question mark’ (‘problem child’): low market share

and high market growth
Low
This product is usually still in the development stage and is

Cash cows Dogs Figure 30.4: The characterised by low market share and high growth rate. It
Boston Matrix is using up resources for promotion but is not established
enough to generate much resources at the moment. There Hold – in holding, the firm may want to maintain its
is some uncertainty about the viability and success of such a present market position. This is especially so where
product but it has potential. Careful thought must be given there is a good combination of the four categories of
by management to such products in terms of investment products
decisions. Build – taking such action will mean that the firm is
willing to invest heavily to improve its market position.
‘Dog’: low market share and low market growth This investment could be geared towards expanding the
The dog represents those products with low market share market share of a ‘star’ product or trying to establish a
and low growth rates. Such products are likely to be in ‘problem child’
the decline stage of life and are not offering many, if any, Harvest – this may involve the process of milking as
benefits to the firm. As such, they are not worth investing much from the ‘cash cow’ product in the short term. A
in since they may not be able to provide any returns on the firm using a harvesting strategy may not want to take
investment. These products will soon be discarded by the on long-term investments but may simply want to gain
firm as it concentrates on finding new investment options. short-term profits from the market
Divest – where there are products that are
Application of the Boston Matrix underperforming or bleeding resources from the firm,
In our competitive economic climate, stakeholders want with no hope of generating revenues, the best thing to
to know that their investment is being properly utilised on do is to get rid of them. In most cases, the ‘dogs’ will be
products that will generate substantial returns. Knowing divested or discarded.
what is happening with a product is therefore going to be Using the Boston Matrix provides management with the
vital to the firm and other stakeholders. Since the Boston following advantages:
Matrix divides the firm’s product into distinct categories, The entire product mix can be examined together and
management can make certain important decisions regarding closely scrutinised
these products. This includes the decision to:
CASE STUDY
Milking the <1 baby formula

Hygrade Baby Products Ltd has been one of the leading manufacturers of baby food in this side of the hemisphere. When it was
established, the firm’s main product was its <1 baby formula. This product has been doing extremely well on the market and is
said to contribute a little over 30 per cent to the firm’s annual revenue. The firm believes that this product has captured a large
percentage of the market share and is growing slowly but is reaping a lot of money.
The success of its <1 baby formula encouraged the firm to invest in and develop a number of other products. These include
its 1+ baby milk, a range of fruits and fruit cocktail and baby supplements. In recent times its baby fruit cocktail has taken off
and is experiencing rapid growth, capturing a significant portion of the market share. Consumers are said to prefer this cocktail
over others because it is made from local fruits and has a taste familiar to most infants.
Two years ago, the firm introduced its diaper line but there are some concerns about this. The product is growing fairly well
but has not yet been able to get a foothold in the market. This is largely because of consumers’ reservations over not knowing
Hygrade Baby Products Ltd as a producer of diapers – most people are comfortable buying the brand they know. The firm is
committed to capturing this diaper market but in doing so appears to be throwing caution to the wind.
Questions
1. Describe the four (4) categories of product that were proposed by the Boston Consulting Group. (12 marks)
2. Which three (3) categories of products were highlighted at Hygrade Baby Products Ltd? Give evidence from
the case to support your answer. (9 marks)
3. Under the circumstances, would you suggest that Hygrade Baby Products Ltd hold, build, harvest or divest
its diaper line? Give reasons for your answer. (4 marks)
Total 25 marks
It gives a firm an overview of all its products and the firm’s plant capacity and technological capabilities. It means,
level of success, failure or potential for each product therefore, that the ideas generated above will have to be
It assists marketers in planning the firm’s promotional screened so that the best ones are pursued by the firm. This
strategies. process will help to reduce the number of generated ideas
into a smaller and more realistic pool of potential products.
To make this process effective, the firm should use a
New product development process checklist with the factors that would make an idea worth
Whenever a firm launches a new product, it is often the pursuing. Each idea must be assessed against the checklist
end result of a sometimes long and tedious process. Most, if and a decision made concerning whether to keep or discard
not all, products go through a process with different stages. it. The checklist may be different for different firms but some
Some processes may be shorter than others but there are general issues that could be covered would be:
certain stages that must be completed. In this section, a Financial viability
seven-stage new product development process will be Estimated cost of production
examined. It must be pointed out that that some of the Benefits to the target market
stages do not necessarily occur sequentially but can happen The firm’s technical capability to produce the product.
concurrently. Figure 30.5 illustrates a seven-stage new
product development process. Concept development and testing
Having settled on a new product idea or group of ideas, it is
Generating ideas time to create a proper product concept. In this section the
This is the very first stage of the process and is a very idea is refined and shaped into something more practical.
important one. A new product begins in the mind of The product concept would include things such as the
someone and then it is created in the plant. The challenge product features, a possible design, cost of production and
at this stage is to generate ideas that will be successful and proposed pricing information. Once the concept has been
preferably ideas of a product that has not yet created. Even developed, the firm can test the idea in the target market.
though building on a competitor’s product can be successful, The product could then be presented to the market by giving
creating something different is even better. a full description, showing a picture or using simulation.
New product ideas can be generated from a number of Information can then be gathered from the potential
sources, including: consumers. This can be done by using one or more research
Studying the product offerings of competitors in a bid to techniques to gather consumers’ views on the idea of using
improve upon them such product. The information gathered can be further used
Market research to find out what consumers want to make adjustments to the product concept before initiating
Advancement in technology creates an opportunity for production.
other products
Group discussions which bring a number of creative Business analysis
minds together to formulate ideas If the product completes the above stages successfully, the
Employees’ input and ideas. firm will now do a business analysis on the product. This
The firm can generate a large number of ideas as it analysis will include the creation of a marketing plan for
prepares for the next stage in the process. the product. In addition, information regarding estimated
costs, sales and profitability must be fine-tuned and
Screening ideas carefully analysed. The marketers may also be asked to draft
It should be obvious at this point that not all the ideas that have a statement of forecasting sales for upcoming years. This
been generated can be transformed into product offerings. is important, as the firm would want to ensure that it can
This is for various reasons, including financial viability, the recoup its initial capital outlay and maintain profitability.
Concept
Generating Screening Business Develop Test Commercial-
development
ideas of ideas analysis prototype marketing isation
and testing
Figure 30.5: New product development process

The business analysis will help to decide whether the purchase and use the product. Their response to the new
product is worth investing in and should be developed. if product can then be observed and used to make changes to
this is favourable, the firm can move to the next stage of the product if necessary.
developing a prototype of the product.
Commercialisation (launch)
Developing a prototype This stage involves the roll-out of the final product to the
So far, the idea has existed on paper but now the firm market. It is the full-scale launch of the product to its target
will move to create the actual product or, in cases such as market. The Marketing Department is integral especially at
buildings or very large items, it may create a model of the this stage, as the word has to reach the customers. Having
product. This stage helps the firm to get a clearer picture of an effective product without properly informing the public
what the product will look like and also the actual cost of about it is almost as bad as making an inferior product that
developing it. Developing a prototype can be an expensive is well known.
process and so the firm will also be able to shelve some ideas
at this point. A prototype will also give the target market
customers something tangible to view or, in the case of a The product lifecycle
service, something real that they can experience. If you stop and think for a while, you may be able to identify
a product that you once knew but is not available any more.
Test marketing The truth is that no product lasts forever, especially without
This stage involves the actual testing of the product and any improvement. It follows that all products go through
marketing strategy in the target market. The aim of this different stages of life. This is known as the product
process is to ascertain how consumers will respond to the lifecycle. There are four distinct stages in the lifecycle:
product and marketing strategy. This strategy is used regularly 1. Introduction
when new drinks or cosmetics are developed, where people 2. Growth
are asked to try the product and give their feedback. The 3. Maturity and
firm can used this feedback to make improvements to the 4. Decline.
product. Since the product will more than likely be tested on The four-stage product lifecycle is shown in Figure 30.6.
a representative sample of the targeted population, if their
response is not favourable the firm could discard the idea at Stages of the product lifecycle
this stage. This would prevent it from incurring huge losses Introduction
associated with creating a product that is a failure. Review The first stage of the product lifecycle begins with the
Chapter 28 on the advantages and disadvantages of using commercialisation or launch of the product as was discussed
this strategy. earlier under the new product development process. This
It must be pointed out here, though, that the firm may not stage is characterised by low sales and low profits, if any at
necessary use the actual product but could also use simulated all. There is usually very high spending on promotion at this
test marketing. Here, the firm would create a situation that stage, as the firm tries to increase consumer awareness and
mimics the actual situation in which consumers would create brand image and loyalty. Monitoring the product is
especially important at this stage, to ensure that it become
poised for growth. If the product introduction fails, it may be
Four-stage product lifecycle advisable to withdraw the product, make adjustments and
reintroduce it.
Growth
Product sales
This stage is characterised by increasing sales and profits

as the firm’s promotion efforts take effect in the market.
Vigorous promotion will help to build customer loyalty and
brand image. As sales increase within this stage, the firm
Time may also benefit from economies of scale from large-scale
Introduction Growth Maturity Decline
production. However, increased success within the market
will foster increased competition. Therefore, competition
Figure 30.6: The four-stage product lifecycle increases at this stage which also has the ability to force
prices downwards even as growth starts to show signs of purchased it. The stage also suggests that there are other
weakening. Firms may seek to maintain their competitive competitors in the market who may have a superior and
edge by changing their marketing and promotion strategies. cheaper product. At this stage the firm would basically
decrease sales and advertising expenditure since there is no
Maturity incentive to spend on the product.
By this time the product is well known in the market and Different products go through the stages of the lifecycle
has reached or has almost reached the point of market at different paces. The pace of a product may be dependent
saturation. The product’s growth begins slowing down, sales on:
peak and start levelling out while profits are maximised. The marketing strategies of the firm
As competition becomes fierce, the firm may attempt to Rate of changes in technology, especially where the
sustain the life of the product and maintain its market share product is technologically based
through promotions, product differentiation and/or price The level and frequency of innovations in the market
competition. The firm may also implement what is called Volatility in consumers’ tastes and preferences.
‘product life extension’. This concept is dealt with separately While the product lifecycle works as a good means
below. of analysis and guide for decision making, it has some
limitations:
Decline The stages of the cycle may not be very distinctive
Eventually, a product will reach this stage at some time in its and so it may be difficult to place the product within a
life. This is where the product’s sales fall and profits decline. particular stage
In some cases the fall in sales is not limited to the firm but Not all products will go through all the stages, as some
the entire industry. At this stage the firm will withdraw products have an almost endless life
investment from the product and abandon production. It focuses only on one product rather than the firm’s
Products that reach this stage are referred to in the Boston entire product offering
Matrix as ‘dogs’. The model may be self-fulfilling, as firms can still be
It is important to note that a sometimes a five-stage successful without using the product lifecycle.
product lifecycle is used. In this version another stage called As was mentioned above, maturity or saturation of a
‘saturation’ is added between ‘maturity’ and ‘decline’. Such product does not mean automatic decline and discard. The
a product lifecycle would then be: firm can prolong the life of its product by implementing
1. Introduction extension strategies. This will lead to an extension of the
2. Growth current product lifecycle diagram, as seen in Figure 30.8.
3. Maturity Some of the possible extension strategies that can be
4. Saturation and utilised by the firm are:
5. Decline. Making modifications to the product. This could be
This is seen in Figure 30.7. done by adding a new ingredient or mix or flavour – for
The saturation stage suggests that the product is well example, Malta Refresh or Velvet
known and most people interested in it would have already
Price
Five-stage product lifecycle Product
extension
Product sales
Time Time
Introduction Growth Maturity Saturation Decline Introduction Growth Maturity Decline
Figure 30.7: The five-stage product lifecycle Figure 30.8: Extending the product lifecycle
CASE STUDY
Diet Coke extends life

Knowing when to change one’s strategy in business is the key to success. It is a fact that no product will last forever without
some form of modification being done to it. This was obviously clear to the management of Coca-Cola when it decided to
introduce its Diet Coke line.
Coca-Cola has never been a company that is averse to change and development. This attitude has been responsible for the
top position held by the company for a number of years. Development has helped to prevent the product from going into decline
as that is where most products end up after maturity. Coca-Cola is said to have overcome this hurdle by constantly developing
the brand image and reinforcing the core product benefits of taste and refreshment. This has allowed the brand to grow instead
of decline.
Over the years, Coca-Cola has evolved and has become more accessible, moving from an over-the-counter drink fountain to
bottles which are available across the world. Once bottled, the product became available in different sizes and shapes, including
its 330 ml, 500 ml and 2 litre sizes. With changing views on the health risks of carbonated beverages and people becoming more
health conscious, Coca-Cola introduced its Diet Coke line in 1982. This drink has become one of the most demanded low-calorie
soft drinks. The Coca-Cola portfolio also includes Lilt, Fanta and Sprite.
Questions
1. Outline the four (4) main stages of the product lifecycle. (8 marks)
2. What would be two (2) limitations of applying the concept of the product lifecycle to Coca-Cola? (2 marks)
3. In relation to the product lifecycle, explain what is meant by ‘extension strategy’ and give one (1) reason
why this is important to a firm. (4 marks)
4. Describe three (3) ways in which Coca-Cola extended its product lifecycle. (6 marks)
Total 20 marks
Discovering new uses for the product – this will create Brand
fresh demand for it This is a name, mark, sign or symbol or any combination
Rebranding or repackaging – this has been known to of these factors which is used to identify the product and
revitalise the product and create new demand differentiate it from competing products or firms.
Create a complementary product to increase the
demand of the existing product. Brand name
The brand name can be a combination of words, letters and
numbers which can be spoken or verbalised.
Branding and packaging
While the development of a product is very important, the Brand mark
firm should also spend some time creating an image which This is the non-verbal part of the brand which is easily
distinguishes it from its competitors. Therefore branding and recognised and is used to identify the product.
packaging are important elements of product management.
Brand equity
Branding This refers to the amount of value that a brand adds to a
Every firm needs a brand for it products. Branding occurs product. Simply placing a brand name on a product can
where a firm places its name, mark, symbol and/or design on change the perception of it in the market because of the
its product. This acts as a means of identification and helps value that is associated with that brand name.
consumers to differentiate the product from others. Before
discussing this further, though, there are some important Trade mark
concepts that must be defined. A trade mark can be a brand or part of a brand which the
firm has the legal right to use exclusively. Any infringement
of such a mark can lead to lawsuits.
Reasons for branding is being a good corporate citizen by using packaging that is
Firms may brand their products for various reasons. Some of in accordance with these requirements. Some companies
the most common reasons for branding are: have joined in this movement by using biodegradable plastic
It provides identification and differentiation of the bags instead of those used previously. The firm should also
product and firm since the brand is unique to that firm ensure that the information provided on the packaging is
It provides legal protection of the firm and its product not misleading, as this could lead to lawsuits. The correct
mix design, size and material must be carefully chosen so as to
It can give an indication of the value that a company minimise cost and at the same time provide convenience
places on a product and ease of transportation and storage.
Successful brands can be used to launch other products
within the product mix Types of packaging
A successful brand can help to build the image of the There are two distinctive types of packaging. These are
firm outlined below:
A brand helps to create brand loyalty once the product Primary packaging – this is the material that is used to
is highly rated by consumers. hold or encase the product. It is the part of the package
that is in direct contact with the product (for example, a
Types of brand carton)
Generally speaking, firms have different types of brand for Secondary packaging – this is the outer layer of
their products. Some of the most common types are: the package which is often used to group the primary
Family brand – this is where the company’s name packages together (for example, a box in which the
(Grace) or a product name is used as the brand for all cartons are placed). See Figure 30.9.
products (Ajax)
Retail brand – this is where the retailer, instead of the
manufacturer, attaches a brand name to the product – Characteristics of services
for example, PriceSmart’s ‘Member’s Selection’ brand or As was pointed out earlier in the chapter, a product can be
the WalMart brand a good or a service. It was also pointed out that a good is
Combination branding – this is where the firm a tangible item that can be seen and touched. A service,
incorporates more than one type of branding for a range however, is an intangible economic activity that cannot be
of products – for example, Microsoft Windows and stored and is received by the consumer at the point of sale.
Microsoft Office There are four notable characteristics that distinguish a good
Individual brand – this is where the firm attaches from a service. These are discussed below:
a different brand name to each product – for
example, Heinz operating as Farley’s baby foods and
WeightWatchers food.
Packaging
In a number of cases, the brand name of the product will not
be placed on the product itself but on its packaging. While
it may be seen as just a wrapper, the packaging also helps to:
Protect the product from damage
Promote the product to potential customers
Give important information about the product
Appeal to consumers.
Care must be given to designing the packaging, as this can
either attract or turn off potential customers. The product
should also be properly labelled and meet all environmental
requirements. With the emphasis recently placed on being
environmentally friendly, coupled with the on-going ‘Go
Green’ campaign, the firm may also want to ensure that it Figure 30.9: Secondary packaging
CASE STUDY
From Pan Caribbean Bank to Sagicor Bank

This is not a take-over or merger but simply a name change. In December 2012, Pan Caribbean Financial Services rebranded
to become Sagicor Investments Jamaica Limited. As a result, its commercial banking subsidiary, Pan Caribbean Bank, was
renamed Sagicor Bank Jamaica Ltd. According to the firm’s Assistant Manager, such rebranding enabled the company to stra-
tegically align both subsidiaries with the parent company, Sagicor Financial Corporation, which is located in Barbados.
The rebranding exercise is expected to strengthen the relationship with the Sagicor Group. The firm is set to benefit from
greater name (brand) recognition for its suite of products and services. The firm will also benefit from the collaborations that
will take place in terms of marketing.
The rebranding exercise also became imminent as Pan Caribbean tried to clear up any confusion between itself and the
Chinese-owned Pan Caribbean Sugar Company. The confusion started when Pan Caribbean Sugar Company was established in
Jamaica and some people felt that the two companies were associated with each other.
Questions
1. Outline four (4) reasons why branding is important to businesses. (8 marks)
2. Give three (3) reasons from the case to support the Pan Caribbean Financial Services’ rebranding exercise. (6 marks)
3. Explain one (1) possible drawback for Sagicor Bank as a result of the confused association with the
Pan Caribbean Sugar Company. (3 marks)
4. Explain one (1) possible drawback of the rebranding exercise of Pan Caribbean Financial Services. (3 marks)
Total 20 marks
Intangibility masseuse is present. This fact forces marketers to improve

A service, being intangible, means that it cannot be seen, and maintain quality levels consistently while also ensuring
touched or tasted. As a result, unlike the case with goods, that service providers are competent in their respective
consumers will not be able to interact with a service before it fields.
is purchased. There is no tangible attribute that can be used
to appeal to consumers before they purchase the product.
Variability
In most cases consumers may have to depend on customer Unlike most goods which are standardised and produced
reviews, personal references and the reputation of the person in mass quantities by a single producer then distributed to
or firm offering the service. Being aware of this, marketers consumers, a service is provided and distributed together.
often try to associate the service with something tangible To this end, a service will be more than likely different,
– for example, ‘before’ and ‘after’ pictures of the results of depending on when, where and how it is provided and who
plastic surgery. Some marketers also stress the quality of the provides it. It is for this reason that we often go to the same
service when it is being advertised. barber or hairdresser on every visit to the salon. As it is, it is
difficult to give the same quality of service on each occasion
Inseparability and, as a matter of fact, maintaining the same quality comes
The nature of the service industry is that it is highly labour with experience and training. The service provider must also
intensive. As a result, it is difficult, if not impossible, be aware of the consumer’s expectations and try to meet or
to separate the service from the provider: they are exceed those expectations.
inseparable. Therefore the provider and service being
provided are viewed as one entity. What does this mean Perishability
for the consumer? Once purchased, the service is produced Based on the discussion so far, it should have become quite
and consumed simultaneously and both the consumer and obvious by now that a service cannot be stored either. The
provider become a part of the service. For example, if you fact is that a service disappears the moment it is provided
purchase a massage, both you and the masseuse are part or received: it can be described as perishable. Once a
of the service and you cannot have the service unless the service is sold or provided it is not possible to store it for a
further date. As a result, if the service is not consumed upon of service tends to decrease. With this in mind, the firm must
provision it will go to waste. In addition, in most cases, firms be aware of its supply capacity and so monitor its service
are not able to adjust the supply of the service to meet the quality periodically and bring in more staff when necessary.
demand. Therefore the quality of the service might diminish Having identified the characteristics of services, the
as it is demanded by more and more people. Have you ever marketer now has to formulate strategies to deal with each
wondered why the service you received gets poorer during characteristic in order to achieve success. Table 30.1 gives
peak season or peak hour at, say, a restaurant or bank? The some suggested responses that marketers may make.
fact is that the people who are rendering the service tend to
become tired or stretched during these times and so quality
Characteristics Possible response from marketer

Intangibility Match the service to something tangible where possible – for example, for a hotel the service could be tied to
its physical structure, including aesthetics, room size or amenities. Focus should also be placed on quality and
referral
Inseparability Here, the marketer should focus on the service provider. The firm has to ensure that the workers are highly skilled
and properly trained to offer the service. The marketer can also capitalise on the strengths of the people providing
the service. This may involve good deployment decisions. The employees must also be highly motivated so that they
can give of their best at all times
Variability Since the service may vary, there has to be a degree of standardisation. This will mean that each person providing
the same service must be given clear guidelines and instruction as to how the service must be performed. Some
firms have also introduced technology to reduce the amount of variability
Perishability While not within the responsibility of the marketer, staffing is very important here. During peak seasons, the firm
may want to employ more workers. Where the supply of the service is greater than the demand, the firm could
offer discounts to encourage utilisation – for example, two for the price of one on movie tickets
Table 30.1: Possible responses from marketers to characteristics of services
CHAPTER SUMMARY
The marketing mix consists of four • The product mix depth speaks to There are four distinct stages in
marketing tools, namely: product, the variations or features of each the product lifecycle: introduction;
price, place and promotion (often product line growth; maturity; and decline.
termed the ‘Four Ps’ of marketing) However, sometimes a further
The Boston Matrix postulates four stage (saturation) is included after
A product can be tangible (goods) or categories under which a product ‘maturity’ and before ‘decline’
intangible (services) can fall: star; cash cow; dog; and
question mark or problem child While the development of a product
A product often has three important is very important, the firm should
attributes: the core product, the The seven-stage new product also spend some time creating an
actual or formal product and the development process consists of the image which distinguishes it from its
augmented product following steps: idea generation; idea competitors
screening; concept development and
The dimension of the product mix testing; business analysis; develop There are four notable
refers to the width and depth of the prototype; test marketing; and characteristics that distinguish a
firm’s product offering: commercialisation good from a service: intangibility;
• The breadth measures the amount inseparability; variability; and
of product lines or different perishability.
products that the firm has
MULTIPLE CHOICE QUESTIONS 6. The Boston Matrix can be used to make decisions about ALL
of the following EXCEPT which one?
1. Which of the following is NOT one of the Four Ps of the
a. Produce a new product
marketing mix?
b. Build on the existing product
a. Price
c. Harvest the product
b. Production
d. Divest the product
c. Place
d. Promotion 7. In which stage of the new product development process would
the firm check the financial viability and estimated cost of
2. Which of the following attributes of the product focuses production for the product?
on the additional benefits and services that the consumer
a. Idea generation
receives from purchasing and using the product?
b. Screening of ideas
a. Core product
c. Business analysis
b. Actual product
d. Developing prototype
c. Augmented product
d. Byproduct 8. Which of the following represents the correct order of the
stages in the product lifecycle?
3. Which of the following is NOT included in the depth of the
a. Introduction, maturity, growth, decline
product mix?
b. Introduction, decline, growth, maturity
a. Product lines
c. Introduction, growth, maturity, decline
b. Size
d. Introduction, decline, maturity, growth
c. Model
d. Design 9. A combination of words, letters and numbers which can be
spoken of or verbalised best defines which of the following?
4. Which of the following represents a product with high market
a. Brand
share and high market growth?
b. Brand mark
a. Star
c. Trade mark
b. Cash cow
d. Brand name
c. Problem child
d. Dog 10. Which one of the following characteristics of services outlines
that the service may be different from time to time?
5. Which of the following represents a product with low market
a. Intangibility
share and high market growth?
b. Variability
a. Star
c. Inseparability
b. Cash cow
d. Perishability
c. Problem child
d. Dog

a. Explain briefly what is meant by the ‘width’ and ‘depth’ of the product mix. (4 marks)
b. You are the Production Manager of a notable company in the fashion industry. The company has decided to send
out a new line of clothing for the summer. You have not yet decided on the product line, however, you need to meet
your deadline for presentation of the product at a fashion show which will be held in May of next year. Using the
new product development process, outline the steps that you will take to decide which product your firm will offer
the public. (21 marks)
a. Identify the stage of the product lifecycle that ‘cash cows’ are likely to reach. (1 mark)
b. With the use of a diagram, discuss the different stages of the product lifecycle. (16 marks)
c. Briefly explain four (4) ways in which a firm can extend its product lifecycle. (6 marks)
298
31 Pricing Decision
Revenue – Costs = Profit

LEARNING OBJECTIVES: The firm may use high prices to gain a quick profit or
At the end of this chapter students should be able to: it could use low prices to make profit through high sales
Discuss the role and importance of pricing in firms volume.
Discuss the factors that influence a firm’s pricing
decisions Volume
Evaluate the different pricing strategies A firm pursuing a volume objective will seek to maximise
its sales and grow its market share. It would want to sell as
many products as possible in the least time possible. For this
to be accomplished, though, the firm must do the necessary
I
n Chapter 30, we discussed the topic of product manage- due diligence to come up with a price that will increase its
ment and the important concepts that are associated sales volume. Sometimes firms may also use discounts and
with it. Having made the product, the firm has another sales promotion to accomplish this.
very important task to carry out which is to attach a price
to the product. This process has to be done carefully, as the Meeting competition
firm would not want to price the product too low and make Remaining competitive is another objective that firms may
losses or price too high and lose sales. As discussed earlier, use in pricing their products. A firm could either align its
price represents the second ‘P’ of the marketing mix. price to the price of the competitors in the market or it could
set the price below the going price in order to undermine a
competitor. This type of pricing is often seen in markets that
Introduction to pricing are price sensitive, such as our telecommunications industry.
A price is the value that is placed on a product. It is the These firms often get involved in what are referred to as
amount of money that the firm requires the consumer to ‘price wars’, where firms continue to reduce their prices to
pay in order to acquire the product or service. Consumers undercut competitors.
often use the price of the product as an indication of its
quality and to compare the product with other products to Social and ethical
measure whether they are getting ‘value for money’. For This is often the objective of non-for-profit organisations.
example, some of you reading this book may often think They often price their products with the aim of covering the
that ‘cheap cannot be good’. Even though there is some cost of production and any operating cost involved.
truth to that belief at times, it is not always the case. The
marketer must then price the product in order to invoke the Status quo
correct or desired response from the target market. The price Firms using this objective will price their products to meet
attached to the product is often as a result of the objective the customer’s expectations or to maintain their public
that the firm hopes to achieve. Some of the popular pricing image. The intention of the firm may also be to maintain
objectives include: price stability and avoid price wars among the competing
firms.
Profitability
The firm’s main aim will be to increase or maximise its profit Utilisation of capacity
or return on investment. The truth is that most people, Firms that want to utilise their production capacity will use
except for non-for-profit organisations, enter into business this objective. The price that is charged must be such that its
with an aim of making profits. Profit is the amount of funds product will be in demand enough so that the Manufacturing
that remain when the firm has covered all it costs – that is: Department can produce its maximum possible output.
CHAPTER 31 | PRICING DECISION 299
Survival Demand
This objective is often used when the market has declined As was defined earlier in the Unit, demand is the
or become saturated. The firm may then decide to price its willingness and ability of a person to purchase a particular
product so that it will cover its costs in order to preserve product at a particular price at a particular period of time.
its life in the market. A firm using this objective will often Simply put, it is an individual’s want backed by the ability to
see survival as being more important than profit at that pay. Demand is therefore price sensitive, meaning that the
particular period of time. However, this pricing objective is price of the product has a lot of bearing on whether or not
not always sustainable and so it is often used at a temporary it is demanded or purchased. The law of demand states that
measure. there is a negative or inverse relationship between price and
demand. Therefore, as price increases, quantity demand will
decrease. It follows that if firms want to increase demand
Factors influencing pricing decisions then they must decrease the price of the product.
Other than the pricing objectives of the firm, there are
factors that will influence the firm’s pricing decisions. Being Price elasticity of demand (PED)
aware of these factors will give the firm a better chance of Before discussing price elasticity of demand, let us define
attaching the best possible price to the product. There are ‘elasticity’. Elasticity measures the responsiveness of a
several factors that may have an impact on the firm’s pricing change in quantity demanded due to a change in another
decision, some of which will be further explored below: variable such as price, income or supply. PED measures
the responsiveness of a change in quantity demanded due
to a change in price of that product. Therefore, generally
CASE STUDY speaking, if the price of a product decreases, it is expected
that the quantity demanded will increase. The firm can
Pricing for success calculate its PED by using the formula:
Best Toys is a small retail store selling toys for both girls and Percentage change in quantity demanded
PED =
boys. The store operates in a fairly competitive and seasonal Percentage change in price
market. As might be expected, it makes most of its sales Please also note that we calculate percentage change as:
during the Christmas season. During this time the store can Present amount – Previous amount
× 100
increase its prices slightly, as toys will be in greater demand. Previous amount
The firm has been doing this for the last three years and has Consider the following example:
reaped success from doing so. This success can also be as a Example
result of the brand loyalty that is created, especially during Look at the information in Table 31.1.
off-season periods. The price elasticity of demand would then be:
However, the firm has a different strategy for out-of- 8 – 10
× 100
season times. While some of its main competitors maintain 10
their prices throughout the year, Best Toys does not follow 130 – 120
× 100
suit. Instead, it reduces its prices by 5 per cent, cutting its 120
mark-up to 15 per cent on cost. Since the firm started this
strategy it has realised a 10–15 per cent hike in off-season
sales. This has been able to offset and often outweighs the
Price of phone Quantity of phone
fall-out in profits as a result of the price cut. card cards purchased
(demanded)
Questions Initial price and $120 10
quantity
1. Outline two (2) reasons why pricing is important
New price and $130 8
to businesses. (4 marks) quantity
2. Describe two (2) pricing objectives that may
be influencing the actions taken by Best Toys. (6 marks) Table 31.1: Information for calculating price elasticity of demand
Total 10 marks
Bearing in mind that the two 100s will cancel each other, The degree of necessity – a product that is necessary is
when simplified you will end up with – 2/10 all divided by more than likely to have a low elasticity of demand as,
10/120. no matter how the price changes, people will still need
This can then be shown in decimal as: – 0.2/0.08. to buy the same amount. Therefore there will be little, if
The price elasticity of demand will then be – 2.5. any, change at all. A product that is a necessity will more
Alternatively, you could have left the percentage and than likely have an inelastic price elasticity of demand
ended up with – 20 per cent divided by 8.333 per cent. The definition of the product – this defines a product
This would have given you a result of – 2.4. Note that the in terms of how narrow or broad the definition is. A
difference in the answers is due to rounding-off issues. narrow definition of a product refers to a single product
The rule of thumb is that we ignore the negative sign such as Bigga or Busta while a broad definition speaks to
and just use the absolute figure since the sign is really there the group of products such as soft drinks. The narrower
because of the slope of the demand curve. Just having an the definition of the product, the greater the price
elasticity of 2.5 does not say much unless you understand elasticity of demand will be; the opposite is also true
what this means or know the interpretation. With this in Time available for adjustment - consumers usually
mind, Table 31.2 gives a clear understanding of the meaning do not respond immediately to a price change. It may
of the price elasticity of demand. take some time for the consumer to adjust his/her
Therefore, looking back at our earlier calculation, we can consumption pattern. An initial price increase may not
draw the conclusion that phone cards have an elastic price affect demand as greatly as when consumers have had
elasticity of demand because the PED is 2.5 which is greater time to adjust consumption to meet the price increase
than 1. Level of income spent on the product – products that
will not take out a big part of an individual’s income
usually have an inelastic price elasticity of demand,
EXERCISE as people are more likely to continue purchasing the
A street-side vendor estimates that the daily demand same amount. For example, if the price of a candy
for his bottled drink will be as follows: moves from $5 to $6, most people will still buy it even
Price($) 100 80 50 35 though the $1 increase is a 20 per cent increase in price.
Amount demanded 125 175 250 300 However, if the price of a phone moves from $50 000
a. What is the price elasticity of demand for a price to $60 000, some people will not buy the same phone
increase from $35 to $50? Interpret your result. because the $10 000 increase, which is still 20 per cent,
b. What is the price elasticity of demand for a price will take a bigger chunk out of their income
reduction from $100 to $80? Interpret your result. Number and closeness of substitutes – the availability
of substitutes gives consumers the ability to choose
The price elasticity of demand of a product depends on between alternatives. The closer and more available
different factors referred to as the ‘determinants’ of price substitutes are, the better able consumers will be to
elasticity of demand. These include: switch from buying one product to buying another.
Degrees of PED Meaning Results

Perfectly elastic Quantity demanded changes even though there is no change in price PED = infinity
Elastic The percentage change in quantity demanded is greater that the percentage change in price PED > 1
– that is, a decrease in price will lead to a greater than proportionate increase in quantity
demanded and vice versa
Unitary elastic The percentage change in quantity demanded is equal to the percentage change in price PED = 1
Inelastic The percentage change in quantity demanded is less than the percentage change in price 0 < PED < 1
– that is, an increase in price will lead to a less than proportionate decrease in quantity
demanded and vice versa
Perfectly inelastic There is no percentage change in quantity demanded even though price is changing PED = 0
Table 31.2: Degrees of elasticity

Therefore, a product which has a number of close Costs

substitutes will have a greater price elasticity of demand. Any prudent firm will definitely seek to at least cover its
costs in pricing its product, unless it is undertaking a ‘loss
Income leading strategy’. A loss leader is a product that is sold below
One of the biggest sins that a marketer or firm can commit cost in order to generate sales for other products. Without
is to price a product without ascertaining the attributes of covering its costs, the firm will not be able to sustain itself
the target market. One such attribute is the average level of into the foreseeable future. A price must then be charged so
income for most people. Consumers will make a decision to that enough revenue can be generated to cover its total cost,
buy a product based on their purchasing power – in other at least in the long run. Some firms may be comfortable with
words, the ability of their income to afford it. If the firm is breaking even in the short run but expect that they should
targeting a predominantly low-income community, then the start to generate profits as time progresses.
product’s price must be within the reach of those customers.
In order to offset the shortfall in revenue in some cases, the Government policy
firm may choose to undertake price discrimination. This is The policies of government can have a serious impact on
where a different price is charged to different customers, the pricing decisions of the firm. The price that is charged
depending on where they are. This is only possible if the by the firm is affected by the government’s taxation policy.
firm is able to segment the market while preventing people Taxation, as we know, it will increase the price that is paid
from buying in the cheaper market and underselling the by the consumer for the product. The firm must then price
firm in the more expensive market. its product, bearing in mind the level of tax to be charged, as
it would not want the tax charged to bring the price out of
Consumer preference or perception the reach of the majority of consumers.
One question that should be asked in any market research Government policy may also include that of price control.
regarding a product is the price that the consumer is willing to This involves the government setting either a maximum
pay for the product. Consumers often attach a value in their price (price ceiling) or minimum price (price flooring) that
minds to a product. This is what they think is its real worth. can be charged. A price ceiling is set by government and
As a result, in pricing its product the firm has to ensure that is set below the prevailing market price. It is illegal for firms
the price of the product is on par with the perceived value to charge a price above this one. A price ceiling is used to
of the consumer. Any significant disparity may lead to low protect consumers who would otherwise be charged a high
sales and huge losses for the firm. We should also be aware price for the product. This is sometimes used with utility
that some consumers prefer a particular product and will firms (electricity and telecommunications). This is shown in
purchase that product regardless of the price (brand loyalty). Figure 31.1. Price flooring is the minimum price that can
This could also influence the price that is charged for the be charged for a product. The price is set by government and
product. is set above the prevailing market price. Charging a price
below the price floor is illegal. This is seen in Figure 31.2.
Price Price
Supply curve Supply curve
Price flooring
Prevailing market price (equilibrium) Prevailing market price
Price ceiling
Demand curve Demand curve
Quantity Quantity
Figure 31.1: Price ceiling Figure 31.2: Price flooring

Stage of the lifecycle and fixed costs. Variable costs are those which change with
Review Chapter 30 on the different stages in the product output while fixed costs are those which remain constant
lifecycle. A different price may be charged depending on regardless of the level of output. (At this point it is advisable
where in the lifecycle the product currently is. For example, that you review Chapter 21 to refresh your knowledge of
a product that is within the growth stage is more likely to costing.) Once the total cost is ascertained, the firm will then
have a higher price than if it were in the maturity or decline add the desired percentage to it, to arrive at the product’s
stages. final price. For example, if the cost of providing a lunch is
$120 and the cafeteria wants to make a 25 per cent profit
on each lunch sold, the price of the lunch would be $120 +
Pricing strategies $30 = $150. The lunch will therefore be sold for $150, with
$120 being the cost of the lunch and $30 being the mark-up.
‘Cost plus’ pricing ‘Cost plus’ pricing is easy to use and it takes away some of
‘Cost plus’ pricing is sometimes referred to as ‘mark-up the uncertainties of whether or not the price charged will be
pricing’ and is a cost-based pricing strategy. This is where the able to cover the cost of making the product. This method
firm arrives at a price for the product by adding a percentage of pricing is quite popular in the retail industry and small
or an amount to the unit cost of the product. The firm corner shops and markets in your communities. Care must
arrives at the total cost of the product by adding its variable be taken in the use of this method, however, as some firms
CASE STUDY
A puzzling price policy

Some business analysts were puzzled when news broke on The Financial Review, a programme aired on the local television
station, that Zing Burger had hiked its prices by 5 per cent across the board. For some analysts this was a puzzling pricing policy.
While the firm is one of the leading providers of burgers within the country, it operates under very competitive conditions. Some
people are of the view that this is a bad change for the firm and it is sure to see some fall-out in sales.
In an interview, the firm’s General Manager, Mr Vidal Zing, stated that this was a strategic move at this time when the firm is
faced with a number of challenges. He said that the firm operates within a market where consumers will buy a product that they
like and these consumers like Zing Burger. Most of the stores are located near upper-income earners’ communities and these
people do not just buy the firm’s products but also come for the serene environment and the customer service that is second to
none.
Mr Zing suggests that while it may lose some customers, the fall-out may not have a significant impact on the firm since,
based on the firm’s analysis, it operates in a fairly inelastic market. As a result, the price hike may even increase revenue. To
offset the possible fall-out from burger sales, however, Zing Burger has lowered its price for side orders such as yogurts, pies
and beverages. These products, he believes, are more price sensitive and so consumers should respond positively.
Some business analysts are now saying that they are expecting other firms to increase their prices due to a new thrust being
pursued by the government. In its budget debate, the ruling party had said that legislation will be coming in to reduce the amount
of imported beef coming into the country, as this is hurting the local farmers. The main users of beef have been complaining
that this move could cause some fall-out in the sector, as the local beef is too expensive and they may not be able to absorb all
of that cost. Now everyone is waiting to see how the other firms will respond.
Questions
1. Outline two (2) negative effects that this price hike could have on Zing Burger. (4 marks)
2. Discuss why Mr Zing would suggest that there could be an increase in revenue even with the price increase. (6 marks)
3. Discuss three (3) factors that influenced the firm’s decision to change its prices. (12 marks)
4. If the government follows through with its plan to stop the importation of beef, discuss the possible impact
that this could have on burger prices. (3 marks)
Total 25 marks
might price their products too high so that they become on the product’s attributes, service quality or other benefits
uncompetitive. Another drawback of this strategy is that it to be derived but not price.
does not take customer demand into consideration, as some
firms are of the belief that profits are guaranteed since the Predatory pricing
strategy is based on costs. The aim of this strategy is to eliminate competition. The
fact is that it is illegal in some jurisdictions where there are
Competition-based pricing anti-trust laws. Predatory pricing is where a major firm sets
Competition-based pricing is a method that seeks to pricing very low and for a prolonged period of time in a
price the product based on the firm’s competitors’ prices. bid to eliminate competition. Where possible, this type of
This strategy is particularly appropriate for firms who are pricing strategy is often used in ‘price wars’.
selling similar products and are involved in price competition
or ‘price wars’. In such cases one firm may be trying to Perceived value pricing
outdo the other by consistently reducing its prices. A price A perceived value pricing strategy is one where the firm
reduction, rather than a price increase, is usually followed ascertains or estimates the price that consumers are willing
by the competitor in this case. In order for this strategy to to pay for the product and tries to sell its products at that
work well, the firm must have sufficient information about price. Every consumer will have attached a value to the
its competitors’ prices and also be able to anticipate their product that is purchased. If the product is priced too high
next move to some extent. above that value then it will not be purchased. The opposite
A firm using this strategy may choose to set its price above, is true also where, if the price of the product is too far below
below or at the same level that of the competitor. However, the perceived value, the consumer may believe that it is
in order for the firm to set its price above the prevailing inferior and so will not buy it either. The onus is therefore
market price and be successful, it has to offer some product on the firm to price its product as close as possible to the
advantage over its competitors, such as improved quality perceived value of consumers. One way in which firms can
or customer service. Likewise, a product that is priced too find out this information is through market research. While
far below the prevailing price may be perceived as being not all the respondents may give the same price, the bulk of
inferior and of poor quality. This method can be dangerous the responses may fall within a particular price range.
for the firm, especially if its costs are not as low as those The firm can increase the perceived value of its products
of the competitor. In a bid to price its product at or below through advertisement or maintaining high quality or
that of the competitor, the firm could begin to accumulate through the service that is rendered. This will help the firm
huge losses, especially if the lower prices are not bringing to distinguish itself from its competitors and possibly create
the desired success. customer loyalty.
Competition-based pricing incorporates other pricing
strategies as outlined below: Penetration pricing
This strategy is best suited to a new firm that is trying to
‘Going rate’ pricing secure a share of the market upon entrance or the launch
Firms using this strategy will price their product at the of a new product in an existing market. Penetration pricing
prevailing price or average price in the industry. Firms often occurs where a low initial price is set by the firm in order to
use this strategy when they do not want to initiate a price generate sales. If the firm is able to generate sufficient sales
war by lowering their prices or lose sales if they set a price volume it could also benefit from economies of scale which
above the going rate as consumers would be reluctant to buy will result in a reduction in ‘per unit’ cost of production.
their product. In some cases, the industry may have a price- As time progresses and the firm achieves its objective of
leading firm which basically sets a price which other firms penetration pricing, it has the option of slowly increasing
in the industry follow. The-price leading firm is a dominant the price of the product. Penetration pricing is best suited
firm in the industry and others are too small to compete where:
unless they collude. This is often seen in an oligopolistic The product being sold is highly elastic – that is, very
market where there are few interdependent firms and one responsive to a price change. A reduction in price
dominant firm. will generate a greater than proportionate change in
Firms using the going rate strategy are often involved in quantity demand
non-price competition. This is where firms compete based
The firm can benefit from economies of scale and The product is one carrying status or prestige.
become a market leader See Figure 31.3 for a comparison of penetration pricing and
The firm is operating in a market that is expanding and price skimming.
the prospect of increased competition is looming
The firm is financially sound and is able to offset any Psychological pricing
cost incurred in the short run that cannot be covered by A psychological pricing strategy is really focused on
the revenues generated. our mind-set as consumers. A firm using this technique
There is a drawback to using this strategy, however, as will ‘play’ on our perception of the price for the product
consumers may switch to other competitors as soon as the and the psychological effect that such a price will have on
firm starts increasing its price. the consumer. A firm using this technique will price its
product at, say, $19.99 rather than $20. It is often perceived
Price skimming that buying the product for $20 will be too high a price,
The price skimming strategy is somewhat opposite to even though $19.99 is just a cent away from that price.
the preceding one. It is often used for the market entry Psychological pricing is often used for customers who are
of a new product. However, unlike penetration pricing, a looking for value and so the firm will want its products to be
high initial price is charged upon entrance into the market. perceived as being cheaper.
This high price is deliberately charged in a bid to ‘skim’ the
available profit from the market in the initial stage. Products
that can be priced this high are usually highly anticipated CASE STUDY
by the market and have a high status attached to them.
Consumers will therefore be willing to pay a very high price The supermarket industry on Isle Jae is very competitive,
to acquire the product – for example, a DVD with footage of with a number of small supermarkets and a few large
the country’s success in the Olympics or other prestigious supermarket chains. Therefore, when Super T Supermarket
events. Once the possible initial profit is garnered by the decided to enter the industry, it knew it had to perform well
firm or the market becomes exhausted, the firm will slowly to make a breakthrough in the stiff competition. One of
reduce the price of the product over time. Price skimming is the challenges in the industry is that all the supermarkets
most suitable when: sell basically the same thing. This fact therefore made the
The product is relatively inelastic, so people will still buy pricing strategy very important for Super T.
it at high prices After doing its market research, Super T Supermarket
The firm is willing to sacrifice high sales volumes or decided to set its prices relatively low and once it gets
high sales are not expected to happen a foothold in the market by winning over some of the
The firm’s production capacity cannot support mass consumers then it will slowly increase them to the going
producing to reduce cost in the short run and hence rate in the market or a little below.
price This plan worked well for the first two years but was
not sustainable as the supermarket was losing revenue. The
management met and decided that there needed to be a
Price change in the pricing policy being used. The big question,
however, is: how can it move forward?
Penetration
pricing
Questions
1. Describe the pricing strategy that was used by
Super T Supermarket to enter the industry. (3 marks)
Price
skimming 2. Discuss three (3) other pricing strategies that
Time could be used by Super T Supermarket going
forward. (12 marks)
Figure 31.3: Penetration pricing and price skimming compared Total 15 marks
CHAPTER SUMMARY
A price is the value that is placed volume, meeting competition, social The firm has a number of
on a product. It is the amount of and ethical, the status quo and pricing strategies available to
money that the firm requires the utilisation of capacity it, including: ‘cost plus’ pricing,
consumer to pay in order to acquire penetration pricing, price skimming,
the product or service A firm’s pricing decision may psychological pricing, perceived value
be influenced by demand, price pricing and ‘going rate’ pricing.
The price attached to the product elasticity of demand, income, costs,
is often as a result of the objective consumer preference, stage of the
that the firm hopes to achieve. These product lifecycle and government
objectives may include: profitability, policy
MULTIPLE CHOICE QUESTIONS 5. Which of the following is NOT a determinant of price

elasticity of demand?
1. The amount of money that the firm requires the consumer
a. Degree of necessity
to pay in order to acquire the product or service best defines
which of the following? b. Amount of income spent on the product
a. Value c. Definition of the product
b. Price d. Spare production capacity
c. Cost 6. A maximum price that is set below the equilibrium or market

d. Sales price of a product is referred to as:
a. A price flooring
2. A firm wishing to maximise sales and grow its market share
would be using which of the following pricing objectives? b. A price control
a. Profitability c. A price ceiling
b. Competition d. An equilibrium price
c. Utilisation of capacity 7. The pricing strategy which sets a low initial price in order to
d. Volume generate sales is referred to as:
a. Penetration pricing
3. Which of the following pricing objectives is BEST suited for a
not-for-profit organisation? b. Price skimming
a. Social and ethical c. ‘Cost plus’ pricing
b. Profitability d. Competitive price
c. Status quo 8. An event planning firm advertises the entry fee for its next
d. Utilisation of capacity big event at $999. Which of the pricing strategies is the firm
using?
4. A price elasticity of demand that is greater than 1 is best
a. Going rate
described as being which of the following?
b. Perceived value
a. Perfectly elastic
c. Competitive
b. Unitary elastic
d. Psychological
c. Elastic
d. Inelastic

a. Describe four (4) pricing objectives that a firm may use when deciding how to price its products. (12 marks)
b. Discuss how the price elasticity of demand of a product can influence the price that is charged by
the firm selling it. (4 marks)
c. Describe three (3) determinants of price elasticity of demand. (9 marks)
a. Discuss how the policies of a government can influence the firm’s pricing decision. (5 marks)
b. Discuss four (4) pricing strategies that a firm can use in pricing its product. (20 marks)
307
32 Distribution Management
cost to be incurred in using each channel. The firm will want

LEARNING OBJECTIVES: its product to reach the market in the most effective and yet
At the end of this chapter students should be able to: cost-efficient way. A distribution channel that may require
Explain the concept of distribution the firm to pay huge storage and transportation costs may
Outline the role of distribution in an organisation not be considered.
Discuss the factors affecting distribution decisions
The size and policy of the company
Evaluate the types of distribution channel
The size of the firm can influence the distribution channel
Discuss logistics strategies
used. Small firms may find it difficult to contract out the
Outline the elements of physical distribution strategy
distribution segment of their business and in most cases are
Analyse the different types of distribution strategy
forced to distribute the product themselves and incur the cost
associated with doing so. However, large firms have more
options available to them. They could choose to outsource
that aspect of the business. This would save on costs associated
The role of distribution in the organisation
T
with storage, warehousing and transportation of the goods to
his represents the third ‘P’ (place) in the marketing
the final customer. It is also expected that larger firms may
mix that we have discussed so far, the others being
be in a better financial position and so can afford to distribute
product and price. This represents who the firm’s
their products to a wider cross-section of the market.
target customers are and how it plans to get the product to
the market. Distribution refers to the process that is used by
Type or nature of the product
the firm to make its goods available to its target market. It
This relates to the length of time for which the product can be
is the process used by the firm to move the product from its
stored and the physical attributes of the product. A product
manufacturing plant to the reach of the customer.
This process is very important, as the firm will want that perishes easily, such as some fruits, has to be distributed
to know that it can get the product to as many customers quickly and more than likely will not be allowed to go
as possible in the least possible time and at the lowest through a very lengthy distribution channel as spoilage may
possible cost. In order to do this, though, the firm must occur during the process. In terms of the physical attributes
consider a number of important aspects of the distribution of the product, some products are very large and bulky and
process, including storage, warehousing, material handling, so will more than likely have a shorter distribution channel.
processing of orders and transportation. A breakdown in this Likewise, products that are highly technical will often be
process could mean that the firm could lose customers, incur distributed directly so that the firm’s technicians can carry
higher costs or harm its public image. The firm should also out the necessary installation and deal with any problems
be aware of the market’s outlet needs and make a decision that may occur during the process.
regarding the number of outlets that it will make available
to the target market. The size of the market
It is safe to say that the larger the market is, the greater
will be the need for more distribution outlets. A firm that is
Factors influencing distribution decisions trying to reach different areas across the country is likely to
have more distributors than one that is targeting a particular
Costs niche or segment. The need for more distributors becomes
Before making a decision on how or through which channel even greater for firms that expand and start marketing their
it should distribute its product, the firm has to consider the products across geographical and international boundaries.
Government policy This channel is usually quicker to use than indirect

This mostly affects the sale of pharmaceutical products and channels and is suited for products that perish easily
certain chemicals. While some drugs can be distributed over The producer can use this opportunity to get direct
the counter, prescription drugs must be distributed by a feedback from the target market.
trained and certified pharmacist. The pharmacy must also This channel also has its fair share of disadvantages:
meet the legal requirements as laid down by government. The firm may incur relatively high costs in paying
salespeople
Direct distribution will mean that the firm has to bear all
Types of distribution channel the costs relating to storage, warehousing, maintenance
A distribution channel is the path or route that a product takes and security of the product while still being susceptible
from the producer to the final consumer. The distribution to theft
channels used can be divided into two categories: direct and Even with the use of the internet, the firm may suffer
indirect channels. See Figure 32.1. from low market coverage, especially in our developing
countries where internet access may be non-existent in
Direct distribution channel some rural communities.
This is also called the ‘zero-level’ channel because there is
no middleman between the firm and the final consumer.
Indirect distribution channel
A direct channel is one where the product is distributed or An indirect channel of distribution is one where the product
sold by the firm to the consumer without the use of any passes through an intermediary before reaching the final
intermediary or middleman. The firm will take on the role consumer. Intermediaries are organisations (wholesalers and
of getting its products into the hands of its final consumers. retailers) that operate between the producer of the product
This channel is often used where the product is perishable and the final consumer. This channel of distribution can be
or the use of an intermediary would be impractical or with further broken down into one-channel and two-channel
highly technical products that the firm prefers to install itself. intermediaries.
Direct distribution can take place via the use of personal
One-channel intermediary
selling, telephone, mail and the internet. The latter is rapidly
changing and growing as time goes by and a number of firms This is where there the product passes through only one
are developing websites and marketing their product online business or middleman before reaching the final consumer.
as they seek to capture a share of the cyber market. Using a This channel would be the shorter of the two indirect
direct distribution strategy will offer the firm the following distribution channels. In most cases, the intermediary would
benefits: be a retailer (producer to retailer to consumer), especially
It will have a closer relationship with its consumers in a consumer market. The retailer would buy the product
Consumers can receive technical support and from the producer and then become responsible for getting
salespeople may be more knowledgeable about the it to the final consumer. A one-channel intermediary could
product than an intermediary also include an agent (producer to agent to consumer) which
Direct selling via the internet widens the customer base would be facilitating the sale of the producer’s product
of the firm and spreads it across the world mostly to businesses – for example, industrial products. The
The firm can keep all the profits, since there is no agent would seek to bring the producer and buyers together
intermediary instead of buying the product itself. See Figure 32.2 (p 309).
Two-channel intermediary
This exists where the product passes through two interme-
Zero level (direct) diaries before reaching the final consumer. This channel
Cons
often takes a longer time than those mentioned before. The

ucer
One level
product would leave the producer to a wholesaler then to a
u
Retailer
Prod
mers
retailer before finally reaching the consumer (producer to

Two levels wholesaler to retailer to consumer). The wholesaler will buy
Wholesaler Retailer
the product from the producer in very large quantities then
sell it in bulk to a number of retailers who will in turn sell it
Figure 32.1: Types of distribution channel to final consumers. See Figure 32.3 (p 309).
CHAPTER 32 | DISTRIBUTION MANAGEMENT 309
Producers Producers
CASE STUDY
Wholesalers White Tech Co Ltd

Retailers
White Tech Co Ltd is a manufacturer of whiteboards and
distributor of interactive whiteboards. When the company
started in business it would manufacture whiteboards at the
Retailers
Ultimate consumers factory on site and sell them through its small outlet at the
front of the property. A few years later, the firm secured a
contract to distribute interactive whiteboards which were
Ultimate consumers manufactured by an overseas company. This prompted the
company to expand its storage facility to accommodate the
excess stock.
Figure 32.2: One-channel Figure 32.3: Two-channel In time, White Tech Co Ltd realised that it needed more
intermediary intermediary
space as its business was growing and more people were
demanding whiteboards. The spike in demand was mostly
An evaluation of the indirect channel of distribution caused by a number of schools that have been replacing
would outline the following benefits: their blackboards.
The firm’s product is distributed to a wider cross-section With the increase in demand, the company realised that
of consumers it needs to make its boards more accessible across the ten
The producer can focus more of its attention and parishes of the country. To this end, it has opened another
resources on the production and its improvement major factory on the east side of the country and has issued
There is a degree of cost sharing in terms of storage and distribution contracts to one firm from five of the other eight
transportation parishes. The aim of the firm is to have a distribution outlet
The firm would not need to employ a very large in all parishes and it is on its way there, having covered
sale force as the middlemen would be salespeople seven of the parishes already.
themselves.
There are also some drawbacks to using an indirect Questions
channel of distribution: 1. What is a distribution channel? (22 marks)
There is very little, if any, interaction between the 2. What type of distribution channel did White
producer and the consumer Tech Co Ltd use initially? (1 mark)
The producer loses control over the product 3. Discuss two (2) benefits and two (2)
A bad reputation for one of the intermediaries can affect drawbacks of the type of distribution chosen
the producer’s sales. in Question 2 above. (8 marks)
4. When the firm started expanding and demand
started to increase, it made changes to its
Introduction to logistics strategy distribution channel. Describe the channel that
This is also known as ‘physical distribution’, which involves
it is now using and outline three (3) benefits
all the activities associated with the movement of the product
to be derived from its use and two (2)
from the producer to the consumer. A logistics strategy is the
possible drawbacks. (14 marks)
science of evaluating the physical distribution process with
Total 45 marks
the aim of finding the most cost-effective way to get the
product to the customer and provide maximum satisfaction.
The activities that are included in the physical distribution of
the product are warehousing, materials handling, inventory Warehousing
control, order processing and transportation. An effective This involves the receipt, storage and shipment of products.
logistics strategy is one that coordinates all of these activities Unless the firm is utilising a ‘just in time’ method, it will need
to achieve the firm’s objectives of low cost and consumer to always have products available for sale. In some cases, the
satisfaction. Now let us take a brief look at each of these firm has the choice of using its own warehouse or a public
activities: warehouse. Use of a public warehouse, more than likely,
will have a charge attached to it. The firm must therefore Types of distribution strategy
analyse both options to see which is more cost effective. This relates to the degree of market coverage that the firm
desires to gain. The strategy assesses the amount of outlets
Material handling that the firm will used to distribute its products. There are
This part of the process involves the physical handling of the three strategies that the firm can choose from:
product. It includes receiving, identifying, sorting, storing
and retrieving the good when it is time for shipment. You will Intensive distribution
appreciate that this is a very tedious yet important process. A firm using this strategy will distribute its product on a
Products can easily be misplaced, stolen or damaged in this very large scale by making it available in as many outlets
process. With advancements in technology, however, the as possible. This strategy is often used for products that
process is becoming more organised. The firm could use bar are widely demanded on a regular basis, such as toiletries,
codes to attach tracking numbers for the products. Computer gasoline or bread. Consumers want products that they
software could easily give the location of the product in the use on a regular basis to be available at their fingertips. In
warehouse and the amount that is available. Once shipped, such cases, the firm will want its product to be available
the firm and customer can get information on the product in a number of wholesale and retail outlets in the targeted
from shipment to when it is delivered. Effective materials location.
handling will help the firm to save time and warehouse
space and reduce costs. Selective distribution
This is where the firm makes its product available in
Inventory control selected outlets – that is, using more than one but not
This was dealt with extensively in Chapter 22. It deals with all the intermediaries who would want to sell the firm’s
finding the most adequate level of stockholding that will product. This strategy is often used when the product is not
prevent the firm from holding excess stock and at the same widely demanded or its purchase needs to be followed by
time ensuring that there is enough to meet consumers’ some technical support, installation or after-sales service.
needs. The choice of outlets is usually the prerogative of the firm
and it can choose the best outlets to sell its products. This
Order processing strategy helps to minimise cost of distribution since it is not
Care must be taken here to ensure that the consumer as widespread as intensive distribution. It also provides the
receives the product that was ordered and within the time firm with fairly good market coverage.
frame that they are expecting it. A consumer will want to
know that the product itself and the process that is involved Exclusive distribution
in getting the product to him/her are satisfactory. Failure to The firm’s product will be made available at only one outlet
do so could result in the consumer being inconvenienced, in the geographical area. The sole right to sell the firm’s
which could be bad publicity for the business. product will be given to one outlet within the geographical
boundary. This strategy is best suited for products that are
Transportation not regularly or highly demanded by consumers and also for
This is concerned with the mode(s) of transportation luxury and prestige items such as cars and designer clothing.
that will be used to get the product to the consumer. The
means of transportation employed by the firm could affect
the cost of shipment and the length of time it will take.
Some of the common modes of transportation include air
freight, by sea, by land (both roadway and railway) and by
pipeline (for products such as oil or LNG). The firm may
also want to explore the option of using more than one
mode of transportation. This is referred to as ‘intermodal
transportation’.
CHAPTER 32 | DISTRIBUTION MANAGEMENT 311
CHAPTER SUMMARY
Distribution refers to the process A direct or ‘zero-level’ channel of most cost-effective way to get the
that is used by the firm to make its distribution is where there is no product to the customer and provide
goods available to its target market middleman and the firm sells directly maximum satisfaction
to its final consumer
The firm’s distribution decision is A logistics strategy includes
influenced by costs, size and policy of An indirect channel is where the warehousing, materials handling,
the firm, nature of the product, size product passes through one or more inventory control, order processing
of the market and government policy intermediaries before reaching the and transportation
final consumer
The firm has two types of A firm’s market coverage can
distribution channels available to A logistics strategy is the science of take one of three forms: intensive,
it: direct and indirect channels of evaluating the physical distribution selective and exclusive.
distribution process with the aim of finding the
MULTIPLE CHOICE QUESTIONS 5. A distribution strategy that makes the product available in as
many locations as possible is known as:
1. Distribution represents which of the ‘Four Ps’ of the
a. Intensive distribution
marketing mix?
b. Selective distribution
a. Product
c. Exclusive distribution
b. Price
d. Inclusive distribution
c. Place
d. Promotion
2. Which of the following is NOT a factor affecting the firm’s

distribution decisions? Question one Total 25 marks
a. Costs a. Describe three (3) factors that influence the firm’s
distribution decisions. (9 marks)
b. Nature of the product
b. A firm usually has the option of using either a
c. Government policy
direct or an indirect channel of distribution to
d. Intermediaries sell its product.
i. Briefly describe the direct channel of
3. A ‘zero-level’ channel of distribution represents one where
distribution. (2 marks)
there is which of the following?
ii. Outline four (4) advantages and three (3)
a. No intermediary disadvantages of using such a channel. (14 marks)
b. One intermediary Question two Total 25 marks
c. Two intermediaries a. Define the term ‘physical distribution’. (1 mark)
d. Middlemen b. Discuss the activities that are involved in an
effective logistics strategy. (20 marks)
4. A logistics strategy is also known as: c. Compare the intensive and the exclusive
a. Indirect distribution distribution strategies. (4 marks)
b. Direct distribution
c. Physical distribution
d. Zero-level distribution
312
33 Promotion Strategy
Tools of promotion
LEARNING OBJECTIVES: When talking about ‘promotion’, some people still only
At the end of this chapter students should be able to: think of advertising. In fact, the terms are even used
Explain the concept of promotion interchangeably. However, the Marketing Department has
Outline the objectives of promotion a number of promotional tools available to it, including
Evaluate the different tools of promotion advertising, sales promotion, personal selling and publicity.
Each of these tools will be outlined and evaluated in
subsequent sections.
The concept and objectives of promotion Advertising
P
romotion is the last ‘P’ of the marketing mix and is Advertising is any paid form of presentation and promotion
equally as important as the other three. Having a of ideas, goods or services by a sponsor. There are four key
very good product without anyone knowing about it elements within this definition:
is like not having the product at all. Promotion is the means Advertisements have to be paid for and so there is a cost
through which a firm informs, persuades and reminds the involved
target market about a product. It is the way in which it There is clear identification of the firm that is
communicates with its target market in a bid to influence responsible for the advertisement
consumers’ buying decisions. Advertising is a non-personal activity, without much, if
A firm undertaking promotion will want to achieve the any, interaction among humans
following objectives: An advertisement is normally created to last for a while
Informing – the firm aims to disseminate information to – that is, it is usually long term.
its target market about a product or its existence The firm will choose to use different types of advertisement
Persuading – the objective here is to convince customers depending on the objectives it wants to achieve or the
to purchase the firm’s products instead of products from market condition that exists. The types of advertisement
competing firms. The firm will spend time saying why that are often used are:
its product is a better choice
Reminding – this is where the firm aims to reinforce Informative
information that was given about a product The aim of this type of advertising is to generate interest by
Building a brand image – promotion could also be used customers in a product. This firm may also want to provide
to create a brand image. This could help the firm to gain consumers with enough information about the product
customers who are loyal to the brand so that they can make an informed purchase. This type of
Stimulating demand for the product – the firm may aim advertising is often used to give technical details about a
not just to create an interest in its product but to get product, to make the public aware of an upcoming event or
people to actually purchase it. give information about business opportunities – for example,
The firm’s promotional mix can be classified into two employment or retail estate.
broad costs categories:
Above-the-line promotion – which includes the use of Persuasive
advertising This is used to influence consumers’ buying decisions. The
Below-the-line promotion – which includes personal firm will attempt to convince the buyer that its product is
selling, sales promotion and publicity. the one to purchase. The firm will highlight those attributes
The promotional strategy that is used often depends on about the product that makes it appealing to the consumer.
its cost and effectiveness in achieving the firm’s objectives. This type of advertisement is often used by people who
CHAPTER 33 | PROMOTION STRATEGY 313
sell insurance. Think of the things you have at home and of firms are making use of the internet especially with the
really don’t use but you purchased them because you were proliferation of social network sites such as Facebook, Twitter
persuaded to do so. If you do have such items then you may and Skype. The use of these networks for advertising has
have been a victim of persuasive advertising. enable firms to reach the global market with their product
offerings. This is further magnified by the vast improvements
Competitive that have been seen over the years in transportation of cargo
There is no significant difference between competitive and to the Caribbean. This means that people within the region
persuasive advertising. In fact, most persuasive advertising can order products from anywhere around the world and
includes some aspects of competitive advertising. In theory, have them shipped to their doorstep. Now let us take a
though, competitive advertising is where the firm highlights closer look at some of these advertising media. See Table
the strong and better aspects of its product and compares 33.1 (p 314) for an overview.
them with those of its competitors. This is done in a bid to The choice of media used for advertising may depend on
show the consumer why buying its product is a ‘better buy’ the following factors:
than buying a competitor’s product. The use of a competitor’s Desired market coverage – the media used will depend
name in an advertisement is restricted in some Caribbean on the size of the market and the desired market
countries and so firms will often imply who the competitor coverage of the firm. Some media, such as flyers or
is rather than say so expressly. billboards, will not be able to reach a wide cross-section
of the targeted population as would television, radio or
Collective newspapers
This type of advertising involves firms cooperating to The level of costs involved – this is always going to be
advertise a product or service regardless of who gets the sale. a concern for the management of any firm. How much
It often used for products that are very important for society’s money are they willing to spend and what is the likely
consumption, such as antiretroviral drugs or advertisements result? Some firms may choose to use a cheaper form
encouraging people to use condoms. These advertisements of medium, especially in the initial stages, and then
will not specify a brand but instead simply communicate the migrate to more expensive and possibly more appealing
importance of the product. media as the firm starts to grow
Frequency of transmission – some media do not allow
Reminder for repeated transmission. An advertisement that will
This type of advertising involves brief messages that are run repeatedly over a specified period of time will
geared towards reminding target customers about a product need to be communicated through a medium that will
or where to buy the product. Its aim is usually to keep the facilitate such a desire. The media used in this situation
product in the minds of the consumers and maintain good could include television, radio or newspapers
relationships with them. The nature of the message – the message being
communicated could be oral, written, visual or
electronic, or a combination of any of these. The
EXERCISE media used will depend on how the message will be
Create an advertisement persuading your audience to communicated
buy a product that is sold at your school’s cafeteria. The nature of the product – a product can be classified
as a consumer or producer product. The firm may find it
easier and more effective if it advertises consumer goods
Advertising media
using media such as television, radio or newspapers,
The choice of advertising media is also very important to the
while advertising producer goods in trade or business
process. Given that a firm has a number of options available
magazines and journals. Likewise, some products, such
to it, care must be given to ensure that the most effective and
as appliances and electronics, may best be advertised
cost-efficient method is used. Simply by observing on a daily
with videos so that customers can see a demonstration
basis you will be able to identify a number of media that are
of what they are capable of doing.
used for advertising. Some of these include television, radio,
Using advertising as a promotional strategy has a number of
posters, flyers, newspapers, billboards, cinema, exhibitions
benefits for the firm:
and trade fairs and the increasingly popular internet. In
It is good source of information for consumers
the last decade or so, it has been observed that a number
If successful, it can increase sales significantly
Advertising media Advantages Disadvantages

Television Gives good coverage for mass It is usually very expensive especially
marketing during prime time
Gives a combination of sight, sound The message is sometimes short lived
and motion There may be a time lag between
Demonstrations of the product in use viewing the advertisement and visiting
can be given the firm
The message is easily reinforced by
repeated viewing
Radio Less expensive than television Consumers cannot see the product
Fairly wide market coverage being advertised
Offers the use of sounds May not always capture the attention
Consumers have more firms to choose of the audience
from (selectivity) Offers limited options for creativity
The stations may fragment the market
reducing the size of people actually
listening
Posters and billboards Can reach a fairly wide audience Costs may vary based on where the
It offers repeated viewing billboard is placed
Can influence impulse buying if Susceptible to natural disasters
strategically placed The message has to be short
Ideal for short and quick messages
Newspapers and magazines Fairly wide coverage There might be a lag between placing
Cheaper than some other media the ad and actual publication
High credibility Quality may not be as good as say
Can be passed along to other readers television
Firm can give description of the Some newspaper ads may be costly
product depending on the day of publication
Cinema Bring together sounds, video and The audience is limited to those who
movement attend
Firm can target different age groups The message may never be seen again
Can single out the target audience, e.g. Cost can be high at times
movie goers Poor recollection of advertisement
after the movie
Exhibitions and trade fairs May encourage business to business Can be time consuming
trading Transportation costs to the show can
Some product testing might be possible be expensive
Can target industry players There is the possibility of limited
Can reach a wide audience based on audience being reached
the size of the show or exhibition
Internet Cost is relatively low Requires internet connection which
Can reach a global audience might not be readily available
Has the capability for interaction Impact might not be as great as say
between firm and audience television
Ad can be seen immediately once it is Some site are expensive to advertise on
placed
The ad is easily updated
Table 33.1: Overview of types of advertising media
Mass production as a result of advertising can create The cost of advertisement is sometimes incorporated
employment into the price of the product, making it more expensive
It can be used to introduce new products to the market People are sometimes persuaded to buy products for
It can be used to reach a wide audience. which they do not have any need.
There are also some drawbacks:
It is impersonal and so cannot take account of consumer Sales promotion
feedback or queries This is usually a short-term form of promotion. It is where
Advertisements can be misleading people in the target market are given incentives by the firm
It is a more expensive way of promoting a product to encourage them to purchase its products. Sales promotion
CASE STUDY
JTB advertises to rebound

In the aftermath of the terrorist attacks in the United States in September 2001, the Jamaica Tourist Board had seen a signifi-
cant decline in tourist arrivals to the country. The fall-out was significant enough to draw the attention of the stakeholders. Some
people had attributed the decline to people’s fear of travelling in light of the hijacking of aircraft in the US.
In response to the decline in tourist arrivals, the JTB launched a very aggressive advertising campaign in the US in January
2002. The campaign sought to build on goodwill and awareness of Jamaica as the destination of choice. Once successful, the
advertising campaign should have improved trade in the sector after the decline of the previous year.
The advertisements ran for approximately two months in areas such as New York, Boston, Baltimore, Washington DC,
Philadelphia, Houston, Atlanta and Chicago. They were aired on major television stations including CNN, Fox News, BET, TNT,
TBS, USA, Food Network and Lifetime. These advertisements ran during programmes such as 20/20, Saturday Night Live,
Jeopardy, Wheel of Fortune, Entertainment Tonight, Oprah and Hollywood Squares.
The advertisements were also set to target African Americans who might want to vacation in Jamaica. As such, the JTB
seized the opportunity to advertise on sports programmes such as football and golf. The JTB didn’t just target the telecast media
but guaranteed spots in the printed media including Caribbean Travel and Life, Travel and Leisure, New York Magazine, Garden
Design, Healthquest and Black Enterprise. These efforts have been held responsible for the improvements that were seen in the
industry in the years following.
Questions
1. Define the term ‘advertising’. (1 mark)
2. Explain the five (5) types of advertisement and state which type was used by the JTB. (11 marks)
3. Evaluate two (2) media used by the JTB to advertise, ensuring that you mention two (2) advantages and
disadvantages of each. (10 marks)
4. If you were the Tourism Minister, which other medium would you have used, and why? (3 marks)
Total 25 marks
can be directed at wholesalers, retailers or consumers. Aims They can be given upon purchase of a product, sent in the
of sales promotion often include: mail or placed in a newspaper or magazine. Use of this tool
Increasing product usage is not as widespread in the Caribbean as in, say, the United
Attracting potential customers States but it is nevertheless being used here.
Generate sales revenue through the actual purchase of
the product Sweepstakes
Entering an existing market with a new product or Some people may see this as a form of gambling. It is where
creating a market for the product people are given a chance to win a prize by, say, answering
Attracting customers from competing firms and products. a question correctly. This is used from time to time by our
This method is usually used in collaboration with other mobile telephone providers or radio stations.
methods such as advertising and personal selling, as these are
more long-term tools. A firm undertaking sales promotion Samples
has a number of techniques available to it. The firm will This is particularly useful when a product is just being
choose the technique that best fit its objective at the time. introduced to the market. Firms give samples of the product
These sales promotion techniques may include, but are not in a bid to encourage people to ’ try it and then buy it’. This
limited to: is often used in the manufacturing industry, in particular the
food industry.
Coupon
This is a document given by a firm which is redeemable in Free gifts
terms of discount on a future purchase. Coupons encourage These are given upon the purchase of a product. They are
shoppers to become repeat purchasers of the firm’s products. usually little tokens of appreciation for using the firm’s
product. This type of promotion was popular with furniture 1. Prospecting – potential customers are identified by the
giant Courts. The value of the gift often reflects the amount salesperson
of money that was spent on the product. 2. Pre-approach – this is where the salesperson gathers as
much information as possible about the buyer before
Contests making the approach
These are also common in the region. This is where people 3. Approaching the prospective buyer – this step involves
compete to win prizes. Usually no fee is charged but firms the first meeting of the parties to discuss the potential
may ask that customers present, say, a certain amount of for purchase
wrappers or add a certain amount of credit to their phone or 4. Presenting – once the prospective buyer has confirmed
pay their bill on time to qualify to enter. his/her interest, the salesperson can move to this step
where the product is clearly presented to the buyer.
‘Two for one’ deals The presentation may include distinct features, benefits
These are often seen in retail outlets in promotions such as to be derived, etc.
‘buy one get one free’. Movie cinemas have also used this 5. Handling any objections – any queries, questions or
strategy to improve numbers of patrons on nights that were objections during the presentation stage must now be
usually slow – for example, two adult tickets for the price of dealt with. The salesperson must seek to iron out the
one on Monday nights. buyer’s concerns to ensure that the sale is completed
Some of the notable advantages of sales promotion are: 6. Closing the sale – at this stage the consumer is asked
Usually effective in boosting sales in the short run to make an order which will be processed by the firm.
Gives firms an idea of which products are liked or not The consumer will only place an order if he/she is
by potential customers convinced that the product will meet his/her needs and
Can help the firm to gain entry into an existing market satisfaction
Can help to build the brand image of the firm 7. Following up on the sale – some people tend to forget
Usually less expensive than advertising. this step, however, following up after the sale can
Sales promotion also has its fair share of disadvantages: make a big difference in the future. The salesperson is
The effect is usually short lived and may not attract expected to keep in touch with the buyer after the sale
long-term buyers of the product and gather any feedback that might be given.
If done incorrectly it has the potential to damage the The advantages of using personal selling as a promotional
firm’s brand image. tool are:
It is interpersonal and allows for immediate feedback
Personal selling Salespeople can tailor the message to the individual
This promotional tool is direct two-way communication buyer’s needs
between the salesperson and potential buyer of the product. It opens the way for negotiation which was not possible
This can be done via the telephone, face to face or through with advertising
internet ‘chat’. With the improvements in communications Can be less expensive than advertising
technology, firms can also add to these face-to-voice Can foster good and long-lasting relationships with
communication via cellular phone or ‘video chat’ on the customers.
internet. It follows that the salespeople do not have to Some of disadvantages of personal selling are:
travel to the exact location of the potential buyers but can Having a very large sales force can prove to be very
communicate using one of these forms of technology. costly
Personal selling has been credited as being one of the It is not suitable for situations where there are large
most flexible and interpersonal tool of promotion. This is numbers of buyers
so because during interaction the salesperson can answer The level of success often depends on the quality of the
any questions or concerns that the buyer may have. It also salesperson. A poor and untrained salesperson might
gives the salesperson the opportunity of communicating the lead to poor sales.
salient information about the product that will generate a
sale. An effective personal selling technique is usually based Publicity
on what has become known in the marketing sphere as the It is important to point out that while the terms ‘publicity’
‘personal selling steps’ (or ‘process’). This process includes and ‘public relations’ are used interchangeably in some
the following steps: circles, they are actually quite different. ‘Public relations’
CASE STUDY
The answer for a struggling team park

The Live Action Team Park had been losing revenue because of low usage by the locals. The once-booming business had found
itself in a rut as people’s economic conditions declined and they had to cut back on entertainment. The team park usually
depended on increased numbers of users at the end-of-school-year excursions and the summer and Christmas holidays. However,
even these opportunities had dried up somewhat and the firm was still incurring the costs of operation.
With present situation looking likely to escalate if serious steps weren’t taken to reverse the drought in earnings, the company
hired a marketing consultant to turn things around. The marketing consultant immediately got to work and implemented a ‘two
for one’ deal on Mondays. People coming to the park also got the opportunity to place their tickets in a box for a chance to win
three tickets for their next visit. The team park also introduced its primary school mathematics competition. The winner and
runner-up would be able to have their teams of four students attend the team park free for one day.
In addition to these strategies, the marketing consultant employed five university students to visit schools and promote the
firm’s one-off purchase discount package. This one-time offer would give the buyer a range of benefits in return for a set fee. The
‘catch’ was that it had to be purchased on the day of the initial visit.
Today, the team park is attributing its success to the strategies that were implemented. It is also advising its customers that
more good things are to come in the near future.
Questions
1. Define the term ‘sales promotion’. (2 marks)
2. What evidence of sales promotion was mentioned in the case? Explain your answers. (6 marks)
3. What are three (3) potential benefits and one (1) potential drawback of sales promotion? (8 marks)
4. Describe the other promotional strategy that was implemented by the marketing consultant. (3 marks)
5. Outline two (2) benefits and one (1) drawback of this type of promotional strategy. (6 marks)
Total 25 marks
encompasses ‘publicity’ and usually covers a wider cross- Publicity keeps the firm in the public’s eye and as such
section of the firm’s interactions with the public. ‘Public it has to be careful of its activities. The fact is that the firm
relations’ is the building of relationships between the firm could be spending a lot of resources on advertising and it
and different groups of stakeholders, such as shareholders, takes a while to garner the requisite demand but one bad
employees, media houses and customers. Some firms invest deed could cause it to lose millions of dollars. It is important
heavily in public relations since it can lay the groundwork for to point out, therefore, that publicity can be either bad or
marketing by generating awareness for a product or brand. good. A firm being a victim of bad publicity will want to
One of the tactics or strategies used by the Public Relations ‘bounce back’ as quickly as possible. In order to remain
Department to generate such awareness is publicity. ‘good’ in the public’s eye, firms often create a Public Relations
Publicity is a non-personal communication or message Department or section of another department. The Public
via the mass media but which is not paid for directly by the Relations Officer and staff will be responsible for planning
firm. This message is usually communicated in the form of a activities and making news releases that will improve the
news story. In most cases, the firm will benefit from publicity firm’s image.
because of some good deed it has done. Firms wanting
publicity can do a good deed and then communicate this or
may invite the media to view the activity. A number of firms EXERCISE
are involved in sponsoring events, community relations and In your class, think of some of the news releases about
support, giving assistance to the less fortunate and making firms that you have heard and discuss whether they
charitable donations, among other activities. From such are good or bad publicity and the impact they could
activities, the firm could improve its credibility and image in have on the firms involved.
the public sphere.
Like all the other promotional tools, publicity also has its Some disadvantages of publicity are:
advantages and disadvantages. Some of the advantages of The firm may have little to no control over what is said
publicity are: about it in the media
Often less expensive than other forms of promotion The cost of continuously sponsoring events accumulates
Can facilitate the building of brand loyalty and the firm may not recoup such costs through
Firms benefit from exposure and free advertisement increased sales
Can build the firm’s credibility, especially when it is May not be as effective as advertising which is more
done by a credible medium. explicit and directed at a target audience.
CHAPTER SUMMARY
Promotion is the means through of ideas, goods or services by an Sales promotion represents
which a firm informs, persuades and identified sponsor incentives by the firm to encourage
reminds the target market about its people to purchase its products
product There are four types of advertising:
informative, persuasive, competitive Personal selling is direct two-
Above-the-line promotion includes and collective way communication between the
the use of advertising salesperson and the potential buyer
Firms have to make their choice of the product
Below-the-line promotion includes of media carefully. The choice may
personal selling, sales promotion and be influenced by desired market Publicity is a non-personal
publicity coverage, cost, frequency of communication or message via
transmission, nature of the message the mass media but is not paid for
Advertising is any paid form of non- and the nature of the product directly by the firm.
personal presentation and promotion
MULTIPLE CHOICE QUESTIONS c. Competitive

d. Collective
1. Which one of the following is NOT an objective of promotion?
a. Informing 4. The choice of advertising media used is dependent on ALL of
b. Persuading the following factors EXCEPT which one?
c. Canvassing a. Market coverage
d. Reminding b. Costs involved
c. Nature of the product
2. Which of the following is NOT a below-the-line promotional
d. Competitors’ products
tool?
a. Advertising 5. An advantage of using advertising as a promotional tool is:
b. Sales promotion a. It is impersonal and so cannot take account of consumer
c. Personal selling feedback or queries
d. Publicity b. It can be used to reach a wide audience
c. Advertisements can be misleading
3. The type of advertisement that seeks to convince people to
d. It is a more expensive way of promoting a product
buy the product is known as which of the following?
a. Informative
b. Persuasive
6. Which of the following does NOT represent a form of sales

promotion? Extended Essay Questions
a. Coupons Question one Total 25 marks
b. Sweepstakes a. Identify four (4) objectives of promotion. (4 marks)
c. Samples b. Define the term ‘advertising’. (1 mark)
c. Discuss four (4) factors that may influence the
d. Billboards
type of media used to advertise a new cellular
7. Which of the following steps in the personal selling process phone. (16 marks)
involves gathering sufficient information on prospective d. Outline four (4) advantages of advertising as
buyers? a tool of promotion. (4 marks)
a. Prospecting Question two Total 25 marks
b. Pre-approach a. Outline four (4) advantages of sales

promotion. (4 marks)
c. Approaching
b. Outline the seven (7) steps involved in the
d. Closing the sale personal selling process. (14 marks)
c. Leaky Oil Extractor Ltd caused a massive oil
8. ALL of the following are ways that a firm can increase
spill in a river when one of its faulty pipelines
publicity EXCEPT which one?
broke under water. The incident caused a massive
a. Giving donations
fish kill and polluted the water supply of River
b. Sponsoring events Bottom District. As news surfaced, it spread
c. Community support very quickly and led to a protest in front of its
d. Advertising on TV corporate building. State the meaning of
‘bad publicity’ and discuss two (2) ways in
which this incident might impact on
Leaky Oil Extractor Ltd. (7 marks)
320
34 Internet Marketing
millions and possibly billions. As the amount of people using

LEARNING OBJECTIVES: the internet increased, marketers saw the opportunity to
At the end of this chapter students should be able to: have access to huge numbers of people across the world.
Explain the concept of internet marketing This triggered the proliferation of internet marketing that
Discuss the development of internet marketing we are seeing today. By the end of the first decade of the
21st century, internet marketing had become commonplace
Analyse the opportunities created by internet marketing
and firms that do not use the internet for marketing were
Describe the challenges that internet marketing may
create sometimes seen as being backward. Spending on online
Explain the concept of e-commerce advertisement is said to have been a little over US$300
million in 1995 but has reached billions of dollars now. The
Explain the importance of e-commerce to business
organisations World Wide Web has now brought together many buyers
Analyse the benefits and drawbacks of e-commerce and sellers all over the world. This is further magnified by
the improvements that have been made in transportation
technology over recent years.
A number of firms are now advertising and offering their
C
an you at this time imagine a world without the inter- products online. Spending on online advertising in the US
net? Probably not, since using the World Wide Web exceeded $30 billion in 2011 and that amount is expected to
has become commonplace in most, if not all, of our increase steadily over the coming years. It is also a possibility
lives. Through it, we all at some point in time use the inter- that if this trend continues, online advertising may surpass
net for various reasons. Some people may do research via traditional print or television advertising worldwide. Some
Google, some use it for communication by sending e-mails, firms even have products that are only available online,
for socialisation (for example, Facebook) and some use it for even though they also have a physical outlet. Events such
shopping (for example, Amazon). The truth is that whatever as ‘Black Friday’ and ‘Cyber Monday’ have also increased
we use the internet for, it has had a significant impact on all online shopping significantly, especially during these
our lives. In this chapter we will be exploring the use of the periods. Large companies such as Amazon and eBay have
internet for marketing and sales activities. also facilitated online marketing and shopping. If you were
‘Internet marketing’ is a term that is used to describe the to take a headcount in your classes, it’s likely that most, if
marketing of a firm’s product online or via the web. This not all, people present would have either shopped for or
shifts the focus from the traditional ways of marketing and sold items online.
more on the use of internet technology to get the information Online marketing may occur between different
about the product to the wider public. Suffice it to say that, in stakeholders. These interactions take place via different
most cases, internet marketing is used alongside traditional domains.
promotional tools. Business to consumer – this domain is used to sell or
market a firm’s goods to consumers. This is probably the
most used domain, especially with big events such as
Development of internet marketing ‘Black Friday’ and ‘Cyber Monday’. Furthermore, some
Internet marketing had its genesis in the early to mid-1990s. people would simply rather shop from the comfort of
Though the internet was established from the 1960s, public their own homes
access was restricted and only a few privileged groups such Consumer to business – consumers can interact with
as the military and educational institutions had access to businesses using this domain. They can use it to
it. Public access was said to have been granted some time ascertain information, view products, make requests,
in 1994. Since then, the numbers of users have grown to ask questions and make suggestions to the companies
CHAPTER 34 | INTERNET MARKETING 321
Business to business – firms can use this domain to view Delivery methods
products in, say, online catalogues. It can be used to A firm deciding to embark on an internet marketing and
gather or provide information on products or potential e-commerce strategy must also consider the delivery
products. This domain may also be used to create and methods that will be used. The firm may decide to use the
build relationships with each other regular postal service or the services of a courier to ship its
Consumer to consumer – this domain can be used products to buyers. The firm must also decide whether or not
to view referrals and testimonials about a product or it will pay the cost of shipment or pass it on to the buyers.
service. Consumers can also sell one another’s products
through auctions.
While marketing online creates a number of opportunities,
Opportunities created by internet
as will be discussed later in the chapter, the firm should
consider the following before making a final decision to
marketing
implement such a strategy:
Reach a wider target market
Website development Internet marketing spans geographical boundaries and, as
In order to market its products via the internet effectively, the such, firms are able to reach a worldwide audience. An
firm needs to develop a website. This will act as an interface online advertising campaign can reach more people than
between potential buyers and the firm. The website should one created for the printed media.
be user friendly, properly designed and attractive, containing
images of the products being marketed. Greater demand and sales
Marketing the firm’s product to a worldwide audience will
Payment system definitely create greater demand. Once online marketing is
Internet marketing is often incorporated with e-commerce facilitated by the means to make purchases, there is likely
which means that firms need to create a proper, effective to be increase in sales. This means that the firm will have
and secure payment system. Some firms may give customers greater earning potential too.
the opportunity to use their credit cards while others will
contract the services of payment agencies such as PayPal. Expansion of online payment
One of the pillars on which online shopping is built is the
The nature of the product ability to make payments online. What has become obvious
Here, the firm must decide whether the product is appropriate is that, as internet marketing expands, so do the online
for offering online and, if so, how will it be offered. Some payment opportunities. Since firms are marketing their
products are very large and involve heavy investment and, products across the world they must create the avenues to
as such, potential buyers would rather see the physical collect payments from around the world too. The use of
product than pictures of it on a website. Other products may credit cards, wire transfers and online payment agencies
be downloadable, such as software, and so may actually be such as PayPal has paved the way for this to be done.
easier to sell online.
Cost reduction
Integration of marketing strategies It is almost a given that a firm involved in internet
Since internet marketing is not conducted in a vacuum, and marketing needs to have an operating website. This will act
there should be some coordination between it and the other as a direct link between the internet users and the firm. The
promotional tools being used. The firm must consider how website is often used as a medium of communication and
it can use internet marketing to enhance its other marketing advertisement. While there are some costs attached, such as
strategies or vice versa, without compromising both. hosting and registration of the web address, these are often
cheaper than having to use a lot of printed media.
Size of the market being targeted
Since the internet is available worldwide, the firm needs Growth in e-commerce
to consider the range of the potential market that it is We will look further at this concept in this chapter, however,
targeting. Will its product offering target everyone using the internet marketing has also caused an increase in electronic
internet or is it restricted to a particular group of people or a commerce. More people are shopping online and so too
particular country? more firms are making their product offerings available
online. Therefore, for example, a company can operate in Differences in language and culture
one country and contract the services of a call centre in Since there are no geographical boundaries to internet
another country. marketing, differences in language and culture become a
serious challenge for the marketer. Words and expressions
Market research opportunities
commonly used in one country may be seen as offensive
Internet marketing not only provides an opportunity
in another. In addition, people may interpret the message
for the firm to promote its product: it can also be used to
being communicated in different ways, depending on their
carry out market research. The firm could conduct polls
social and cultural background. The firm should also be
online or have people filling out online questionnaires or
aware of the meaning of its slogan when it is translated into
even conduct an interview via the internet. The firm may
therefore get feedback from people across the world in a another language.
more cost-effective way.
Technological deficiencies
Receive feedback Technology changes rapidly and is closely entwined with
Internet marketing also creates the opportunity for the firm internet marketing. In some cases, the firm may have to
to receive feedback on a product or the service rendered. make very large investments in technology in order to
This feedback can be used to improve customer satisfaction have a proper and effective internet marketing strategy. In
and improve the product itself. Firms can also generate addition, the need may arise for periodical improvements
ideas from customer feedback. This helps not only the firm as advancements in technology occur. Some firms may
but also other potential buyers of the product. A curious not be able to remain up to date with their technological
customer will often read online reviews before making the requirements.
purchase, especially if it relates to a service, such as hotel
accommodation. Security breaches
Online fraud has increased significantly as the use of the
internet for business has increased. With the proliferation
Challenges associated with internet
of identity theft, credit card fraud, information breach and
marketing computer hacking, some consumers are very tentative
about doing business online. Customers want to be assured
Legal implications
that their personal information will not be tampered with
Firms that are involved in internet marketing must be
by unscrupulous people. The firm may have to spend
aware of the different legal issues that may arise from doing
considerable funds to ensure that its system is safe and
so. Online marketing firms are susceptible to a number of
secure and that a user’s important information will be held
breaches, especially if they are not aware or keep abreast of
confidentially and safely.
the laws of countries worldwide. At the very outset, the firm
has to ensure that it does not break any laws by choosing a
particular domain name. As it markets its product worldwide
it has to think about laws pertaining to intellectual property, The importance of e-commerce to business
copyright, taxation policies, advertisements and misleading organisations
information, among other things. This concept was alluded to in earlier discussion but let
us look more closely at it now. Electronic commerce, or
Inability to keep up with or meet demand e-commerce, is defined as the interaction of buyers and
Advertising online may generate an increase in orders sellers via the use of the internet for the purpose of exchange.
from around the world. If the amount of orders received is E-commerce covers the process from the purchase decision
greater than the firm’s production capacity, it may become a to receipt of the goods. It also includes placing the order for
challenge for the firm to meet all of those orders. Failure to the product and making online payment before receiving
fill an order on time can have a negative effect on the firm’s them. E-commerce and internet marketing are closely
credibility. This can further hinder the firm if it does not have connected, as the former is influenced by the latter. Most
the level of investment needed to expand its operations in firms marketing their products online try to make the
the foreseeable future. products available for online buying.
CASE STUDY
Reaping the benefits of online shopping

Can you imagine the convenience of having your groceries delivered to your doorstep? Well, residents of Grenaco Island welcomed
the idea when it was proposed to them by their leading supermarket chain, Super-X-mart. The supermarket introduced its online
shopping portal last month, in addition to its regular walk-in shopping. The online shopping is limited to its membership data-
base, however, since it will require a membership number to sign into the portal.
Once members sign in, they are able to see most of the items in stock with the exception of ground food items. They are then
able to place the items they need in their virtual ‘trolley’. Once the member is finished shopping, he/she can proceed to check
out. Once the items are paid for, the bags of groceries will be packed and shipped via motor vehicle (if the order is for 30 items
or over) or motorbike (if for fewer than 30 items).
To save on costs, the firm only allows online shopping for people buying 20 or more items. The customer buying the items
must be within the prescribed radius from the supermarket or shipment will not be allowed. Delivery is usually done within three
hours and at a cost which is a percentage of the value of the groceries purchased.
Since its inception, many customers have tried using the system and have had words of commendation for Super-X-mart.
This brilliant idea has made many of their lives easier and also saved them money in terms of gas and time spent.
Questions
1. What is internet marketing? (2 marks)
2. Outline four (4) things that Super-X-mart would have had to consider before implementing its internet
marketing strategy. (8 marks)
3. Discuss three (3) benefits and two (2) drawbacks of this decision to allow members to shop online. (10 marks)
Total 20 marks
Businesses using e-commerce may be wholly web-based face some challenges in tapping into the opportunities that
companies or ones that have physical distribution outlets. it creates. Some of the reasons for this are:
The web-based company will only sell its products online
while the company with a physical location can offer Access to computers
customers the opportunity to shop online after closing time Some developing countries still do not have widespread
of the actual stores. Some stores even allow the customer to access to computers, whether PCs or laptops. Even with the
buy the product from its online catalogue and then ship it to rapid changes in computer technology with the development
the store for pick-up. E-commerce has increased drastically of tablets and mini computers, many people within some
over the last decade or so and more firms are making an Caribbean countries still do not have access to computers and
effort to become involved in the activity. The benefits to be neither are they computer literate. This poses a challenge for
gained from e-commerce are similar to those of internet firms and customers wishing to benefit from e-commerce.
marketing that were discussed above.
High internet costs
The truth is that most Caribbean countries have seen a drastic
EXERCISE reduction in internet costs within the last decade. However,
there is still a lot of work to be done in terms of bringing
In your class discussion, identify some of the firms in
the cost down sufficiently so that the masses can afford
your country that are involved in e-commerce.
it. Even with the deregulation of most once-monopolised
telecommunication markets, internet cost is not trending
down as rapidly as it could have done. The high cost helps
Challenges created by e-commerce to limit some people’s access. Therefore a large number of
While e-commerce seems like the way forward, some customers will still have to do business by actually visiting
developing countries, including those in the Caribbean, may the firm’s location.
Lack of widespread access to internet Delivery speed and timeliness

Other than the issue of high internet costs, many Caribbean An excellent postal service and/or courier service are
countries are still behind in terms of internet coverage. This musts in the field of e-commerce. People buying products
is especially true for rural areas. A number of areas in most online will want to know that the items will be delivered
Caribbean countries are still without broadband internet. in a timely and hassle-free manner. While there is a growth
It must be noted, however, that some countries have been in courier services in the Caribbean, it is still sometimes
making strides in this direction but it will still take some time expensive to transport goods. Delivery is further hampered
before full coverage is achieved, if ever. by inefficiencies in some of our postal systems where there
are long delays and sometimes even loss of mail.
Economic conditions Before we close the chapter it is important that we make a
Most Caribbean countries would fall somewhere between distinction between e-commerce and e-business. The terms
low to lower-middle development, while others have are used interchangeably from time to time but there is a
managed to break the lower-middle barrier to upper-middle difference between them. E-commerce relates to external
development. Regardless of this, though, a number of processes in order to interact with customers, suppliers
regional countries are still grappling with the effects of the and other external activities such as sales, marketing, stock
economic recession that took place in the latter part of the taking, customer service and delivery, among other things.
first decade of this century. A number of firms have had to On the other hand, e-business is a broader concept that
close their doors, while others are struggling to stay afloat. incorporates e-commerce along with internal processes.
Not many firms have the resources to invest in the required These internal processes may include, but are not limited to,
internet and computer technology that would enable them inventory control, production, product development, risk
to partake in e-commerce. management and finance. The main aims of e-business are
to minimise costs and to improve productivity and efficiency.
CHAPTER SUMMARY
‘Internet marketing’ is a term that is such as website development, Electronic commerce or

used to describe the marketing of a payment systems, nature of the ‘e-commerce’ is defined as the
firm’s products online or via the web product, delivery methods, size of interaction of buyers and sellers via
the market and integration of other the use of internet for the purpose
The genesis of internet marketing marketing strategies of exchange. E-commerce covers the
was triggered by the granting of whole process from the purchase
public access to the internet in the Internet marketing creates a number decision to receipt of the goods.
mid-1990s of opportunities while it also poses
some challenges
A firm considering internet
marketing should consider factors

1. Internet marketing is BEST defined as:
a. Shopping online
a. Define the term ‘internet marketing’. (1 mark)
b. Marketing via the internet b. Discuss four (4) opportunities and four (4)
c. Selling online challenges associated with internet marketing. (24 marks)
d. Promoting the internet
2. Before implementing internet marketing, it is important that

the firm considers ALL of the following factors EXCEPT
which one?
a. Website development
b. Internet provider
c. Payment systems
d. Delivery methods
3. ALL of the following are challenges that the firm may face as
a result of internet marketing EXCEPT which one?
a. Legal implications
b. Differences in language and culture
c. Security breaches
d. Ease of access
326
Module 3 Small Business Management
35 The Nature and Characteristics of

Entrepreneurship
Another definition, according to businessdictionary.com,
LEARNING OBJECTIVES: is that entrepreneurship is the
At the end of this chapter students should be able to: capacity and willingness to develop, organise and
Give a clear definition of ‘entrepreneurship’ manage a business venture along with any of its risks
Explain the concept of corporate entrepreneurship in order to make a profit.
Both definitions allude to the fact that entrepreneurship
Explain what is meant by ‘social entrepreneurship’
involves innovation and a willingness to create products
Discuss the characteristics of successful entrepreneurs
based on the opportunities that arise.
Describe the benefits of entrepreneurship
Assess the impact of entrepreneurship on the economy
Corporate entrepreneurship
(‘intrapreneurship’)
A
s many countries’ economies contracted during the It is important to highlight the fact that entrepreneurship is
latter part of the first decade of the 21st century, it not just a concept that is used for individuals who have seized
became even more imperative for people to start the opportunity to start business. This is because existing
thinking ‘outside of the box’. With the loss of jobs across businesses may also establish new businesses or create new
the world, people’s financial stability was threatened. ideas within the existing business. By definition, corporate
Governments have now started to promote the development entrepreneurship refers to the creation, innovation or
of micro and small enterprise with more alacrity. More renewal of products or ideas within or outside of an existing
people are starting to realise that they cannot just depend organisation. The firm could create a new product or venture
on a job to provide the finance that they need. We have in a market by establishing a new organisation. Changes
even seen a spike in the number of universities that have within the organisation could include improvements in
started offering degrees in the field of entrepreneurship. The the product or production process or a revitalisation of the
reality is that not everyone will be able to start a business organisation’s systems and operations. It is important to
but, at the same time, not everyone may be able to find a job point out that the firm’s ability to embark upon a corporate
and so entrepreneurship can be a welcome alternative. The entrepreneurial strategy is highly dependent on its resources
questions that may come to mind at this point are ‘Who is – that is, its financial, physical, labour, intellectual and social
an entrepreneur?’ and ‘What is entrepreneurship?’. capital.
An entrepreneur is an individual who employs and Corporate entrepreneurship helps to improve the
organises the factors of production to create a business firm’s competitiveness through the application of different
venture with the aim of making profits. This person bears strategies and creation of variations to a product in the
the risks and uncertainties that are involved in operating a market. Using this strategy could also help to increase profit
business but also enjoys the success of the business. There are margins and growth. For this to work, though, the firm
different views of what ‘entrepreneurship’ means. One view must be proactive and willing to take risks that could bring
that has been put forward by well-known business author great success.
Peter Drucker in his book Innovation and Entrepreneurship is
that
it is a systematic innovation, which consists of the Social entrepreneurship
purposeful and organised search for changes, and Earlier in the text we discussed the importance of firms
it is the systematic analysis of the opportunities becoming good corporate citizens. This involves them in
such changes might offer for economic and social taking care of their surroundings and society as a whole.
innovation. This may also involve these firms and/or individuals in
CHAPTER 35 | THE NATURE AND CHARACTERISTICS OF ENTREPRENEURSHIP 327
becoming social entrepreneurs. ‘Social entrepreneurship’ High level of commitment and determination
refers to the initiation of a combination of innovations Starting a business comes with its fair share of risks and
to address a problem in society. It is also seen as the setbacks. Therefore, an entrepreneur wanting to become
employment of entrepreneurial principles, processes and successful needs to be committed and determined to excel
operations to address social problems or to achieve a social at what he/she does. This characteristic becomes even more
change. Some of these social problems may include crime, important at the initial stage of the business when things
poverty, gender issues and environmental deterioration. may look shaky and success seems to be lingering in the
Social entrepreneurship allows individuals or businesses to shadows of the distant future. A number of entrepreneurs
combine their social mission with business principles and often boast that success came to them by their remaining
innovation. While a number of social entrepreneurial busi- committed to the task and being determined to overcome
nesses are not for profit, such as Child Right Foundation the challenges that they faced along the way.
or The Women’s Foundation, they also include for-profit
businesses such as community development banks. Success oriented
Social entrepreneurs include people or firms who are A mind-set of failure will only serve to nullify any
philanthropists or activists or who may have a foundation success that might have been garnered from the business
which is dedicated to community development and renewal. operations. Successful entrepreneurs are those who will
These people often play a key role in society by acting as remain committed and focused in the face of adversities. The
agents of change. entrepreneur must have a desire to be successful and work
assiduously to ensure that the success is realised.
EXERCISE Self-confidence and reliance

Identify a firm within your country that would fall into ‘Self-confidence’ refers to the belief in oneself and one’s
each category and discuss how they display their acts ability. This trait is very important for the successful
of social entrepreneurship. entrepreneur. For success to be realised, the entrepreneur
must first believe in his/her ability to reach the desired goal.
The truth is that you cannot always rely on other people to
give you the drive to accomplish your tasks. Self-confidence
Characteristics of successful will enable the entrepreneur to try things that are different
entrepreneurs from the normal. A lack of confidence tends to spill over
While the entrepreneurial spirit is quite evident throughout into the way the business is managed and whether or not
the Caribbean, not all people who start businesses continue the entrepreneur will be able to get others (investors and
to achieve the successes they had desired. Likewise, the customers) to buy into his/her ideas.
debate also continues as to whether or not entrepreneurs
are ‘born’ or ‘made’. Whichever is true, though, there are Willingness to take moderate risks
some notable characteristics that a successful entrepreneur People who start businesses are willing to take risks. However,
often possesses. These include, but are not limited to, the unlike the popular view that the larger the risk, the larger
following: the benefits, a successful and prudent entrepreneur will
take moderate and calculate risks. By doing so, he/she will
Goal and opportunity oriented prevent the loss of his/her assets from uncalculated risks or
An entrepreneur usually has an eye for opportunities. gambles.
Instead of spending time complaining about the existing
situation and the shortcomings that come with it, successful Very responsible and reliable
entrepreneurs seek ways in which they can improve the A successful entrepreneur is often accountable and reliable.
situation. The entrepreneur focuses his/her attention on A big turn-off for customers is having a promise made to
identifying and capitalising on the opportunities that are them and it not being fulfilled. Without some degree of
created on a daily basis. For the successful entrepreneur, a responsibility the firm may lose or waste valuable resources.
problem that exists is just another opportunity. The firm’s creditors will want to know that the entrepreneur
is reliable and will make payments when they become due.
328 MODULE 3 | UNIT 2 | SMALL BUSINESS MANAGEMENT
Good problem-solving technique changes, the entrepreneur may have to make certain
More than likely, the entrepreneur will be faced with changes in order to remain viable in the market.
problems at some point. This could be a problem with the
product offering or even conflict between employees. The
Team oriented
successful entrepreneur must first be able to identify the Team working is rapidly becoming the hallmark of many
problem precisely and then develop a strategy to solve it. businesses as they realise that pooling human resources
He/she must be able to see a way out of the current situation may bring greater success. As discussed in Unit 1, teamwork
facing the firm. This may mean that the entrepreneur may provides numerous benefits to firms. The successful
have to spend long hours working through a problem to entrepreneur must therefore be a team player.
ensure that the impact on the organisation is minimal. As we look at the attributes or characteristics that a
successful entrepreneur should possess, you may be wonder-
Opportunistic attitude to failure ing if it is always worth starting a business or whether we
A successful entrepreneur should not be daunted by failures should just continue to work for other individuals. However,
but instead should see each one as an opportunity to ‘bounce starting a business of your own can offer a number of
back’ with an improved product or strategy. What is cause benefits. The question that we should be asking is, then,
for concern is when the same mistake is being made over ‘Why do people go into business?’. Probably the most
and over again. The successful entrepreneur learns from common answer you will get is ‘To make profits’. Which
previous mistakes and implements steps to prevent such is indeed true, since no-one, except for not-for-profit
mistakes from recurring. organisations, starts a business without the desire to make
profits. However, there are other benefits that the entrepre-
Flexibility neur may receive along with profits.
We are living in a rapidly changing world and so the
entrepreneur must be willing to adapt to any situation that
may arise. The successful entrepreneur is able to adjust its Benefits of entrepreneurship
product offering or strategy to meet the changing tastes Self-fulfilment or actualisation – some people will only
and preferences of consumers. As the global environment feel comfortable when they have reached their full
CASE STUDY
A waste of money
Selvin Shaker was recently laid off from a job he had for over ten years. As part of his severance package, Selvin received nearly
$300 000. Employees were also given the opportunity to purchase some of the stock and office equipment of the firm, as it
would be closing down. Before the employees’ last day at work, they were invited to be a part of an investment seminar that
would be held for their benefit so that they could make wise investment decisions for their severance packages.
Upon receiving his redundancy payment, Selvin decided to start a wholesale business. He decided that he would purchase
stock from local and regional suppliers and he would rent an empty shop in the town centre. This he did, and business started.
Things went well for the first couple of months, as Selvin was committed to the cause as he wanted to ensure that he could
maintain the lifestyle he had prior to his job loss. This success didn’t just come about while he was sitting around, however – he
had to work very hard, as he could only hire two employees at first.
As he charts the way forward, Selvin is well aware that it will not be easy but the early success is enough motivation for him
to go on and achieve even more.
Questions
1. Who is an entrepreneur? (1 mark)
2. Describe four (4) characteristics that Selvin should possess as an entrepreneur if he is to be successful. (12 marks)
3. Outline three (3) benefits and three (3) drawbacks of being an entrepreneur. (12 marks)
Total 25 marks
CHAPTER 35 | THE NATURE AND CHARACTERISTICS OF ENTREPRENEURSHIP 329
potential or surpass expectations. Starting a business can because the business and the entrepreneur is one and
be a good way to express a person’s creativity and vision the same person. A bad business venture could result in
Profits can be made on investment – the reward for the loss of the entrepreneur’s own assets
taking risk is the profit made. The entrepreneur has the Operating a business can be very stressful – the running
potential to make a large amount of profit over time. of a business can be a gruelling experience, especially
This can be more fulfilling that just receiving a salary at when it is in its early stage of development. Working
the end of the month very hard and for long hours can result in fatigue and
For recognition – some people enter into business with other stress-related symptoms.
a hope of being revered by their immediate community Entrepreneurship offers benefits not only to the
and the wider society. Such people will often become entrepreneur but also to the country in which the business
philanthropists, giving back to the community, in order is located. Some of these benefits include:
to receive increased publicity or to achieve a personal Improvement in the standard of living – this could be
goal. Some entrepreneurs may also use the business as a result of the creation of new products to make
venture as a means of giving back to their community people’s lives easier or through the fact that more
through job creation and sponsorship, etc. people are working and can afford more of their basic
Opportunity to make a difference – some individuals needs or better-quality products
are just frustrated with their current situation and may Entrepreneurship helps to provide jobs – a person
enter into business to make a difference for themselves starting a business may employ other people to work
and others. for him/her. This will provide employment for those
While the successes of starting a business can be great, people. The amount employed is dependent on the
becoming an entrepreneur is not without its share amount size of the business and whether it is labour intensive
of drawbacks. or capital intensive. As more jobs are provided, the
unemployment rate will be lowered
Economic growth and wealth creation – as more goods
Drawbacks of entrepreneurship and services are produced; the country’s Gross Domestic
Loss of a steady income – in starting a business, the Product will increase, resulting in a possible increase in
entrepreneur must be aware that he/she may lose a economic growth. Increased business activities will also
steady stream of income. This is coupled with the fact provide wealth for people within the economy. Some of
that the business may not necessarily be profitable in this wealth may be reinvested to improve the economy
the short run. The entrepreneur may need to have further
a contingency plan for income for the first couple of Possible expansion of exports – with growth in the
months to a year entrepreneurial business, the firm may decide to
Possibility of very long working hours – since the produce for the export market. This will increase the
entrepreneur may be the only one managing or even amount of goods in the country that are produced for
working in the business, it may require him/her to exports and at the same time increase foreign exchange
spend long hours attending to business-related matters. earnings.
This can in turn affect the entrepreneur’s social and
family life
The risk of losing all of one’s assets and investment EXERCISE
– entering into business as a sole trader makes the Discuss the potential benefits of entrepreneurship to
entrepreneur susceptible to the risk of losing everything, your country’s economy.
including personal assets, if the business fails. This is
CHAPTER SUMMARY
Entrepreneurship is the ‘capacity and Entrepreneurship can also be Entrepreneurship brings benefits
willingness to undertake conception, described in terms of the impact of self-fulfilment, recognition
organisation, and management of a on society. This is known as ‘social and profits to the entrepreneur.
productive venture with all attendant entrepreneurship’ However, he/she must be aware of
risk, while seeking profit as a reward’ the drawbacks which include loss
There are a number of important of steady income and long working
When firms create new businesses characteristics that a successful hours.
and ideas this is referred to as entrepreneur should possess. These
‘corporate entrepreneurship’ characteristics help to propel the
entrepreneur to success
MULTIPLE CHOICE QUESTIONS 5. Entrepreneurship can contribute to a country in ALL of the

following ways EXCEPT which one?
1. The ‘capacity and willingness to undertake conception,
a. Job creation
organisation, and management of a productive venture with
all attendant risk, while seeking profit as a reward’ best b. Resource depletion
defines which of the following? c. Expansion of export
a. Corporate entrepreneurship d. Improved standard of living
b. Entrepreneurship
c. Social entrepreneurship
d. Intrapreneurship
2. The ‘initiation or combination of innovations to address a a. Identify and discuss four (4) characteristics of
problem in society’ best defines which of the following? a successful entrepreneur. (16 marks)
a. Corporate entrepreneurship b. Discuss three (3) contributions that
entrepreneurship can make to your Caribbean
b. Entrepreneurship
country’s economy. (9 marks)
c. Social entrepreneurship
d. Intrapreneurship
3. Which of the following would NOT be a characteristic of a

successful entrepreneur?
a. Goal oriented
b. Determined and committed
c. Passive and fearful
d. Responsible and reliable
4. Which of the following is NOT a drawback of starting a

business?
a. Risk of losing personal assets
b. Uncertainties of earning an income
c. The stress of long working hours
d. Self-fulfilment and actualisation
331
36 Economic Systems and

Business Growth
lands for agriculture or for housing? Should we cultivate
LEARNING OBJECTIVES: sugar cane or rice?
State what an economic system is
How should goods be produced?
Evaluate the different types of economic system The method of production, location, type of raw material
and type of labour should be decided on. This may vary
Discuss the impact of these economic systems on
business decision making across different products or firms. For example: should flow
Analyse the criteria for measuring size and growth production or batch production be used to produce the
Discuss the advantages and disadvantages of small firms product?
versus large firms
For whom to produce?
The economy must allocate the final product to different
groups in society. For example: are we producing for the
The economic problem elderly or for students or for the unemployed? A decision on
W
e all have wants and needs and we seek to have how the products will be distributed should also be made.
them satisfied through economic activities. In These questions are answered through the establishment
Chapter 1 we looked at the different business of economic systems. An economic system is the institutional
organisations that attempt to meet our daily needs and means through which resources are utilised to satisfy human
wants. However, the truth is that our needs and wants are wants. The way in which the questions above are answered
never fully met. This is because we have unlimited wants depends on the type of economic system involved.
but the resources (land, labour, capital and entrepreneur-
ship) used to fulfil these wants are limited. This causes the
problem of scarcity which states that there is only a limited Types of economic system
amount of resources available to produce the unlimited
amount of goods and services desired by society. Traditional or subsistence
The problem of scarcity forces individuals, businesses This type of system is etched in the history of our ancestors.
and governments to make choices. A choice will have to The decisions of what, how and for whom to produce
be made on how resources should be allocated to meet the are based on tradition or custom. The system emphasises
needs of each party. When one option is chosen, it means subsistence living, where households produce the sufficient
that other options have to be forgone. This concept is known amount of goods and services to meet their individual
as ‘opportunity cost’ which is the highest valued alternative needs. The subsistence economic system is characterised by
that had to be sacrificed for the option that was chosen. The low living standards and little or no specialisation of trade.
choices that economic agents make are often based upon If there is any surplus in production, exchange usually takes
three economic questions: place through bartering. A barter system is one where people
trade goods for goods. This system is rare but is still present
What to produce? in remote areas in some countries.
Since resources are scarce, they must be used to produce The main features of this type of economic system would
the most needed products and in the most efficient way. By include:
virtue of the fact that resources cannot be used to produce Ownership of resources is inherited from ancestors
everything we desire, a decision has to be made on what The country is usually divided into clans, so there is no
to produce. For example: should the country use its prime formal government system
Resource allocation is done by private individuals Government’s role is limited in the free market system.
As mentioned earlier, trade is conducted via the barter Its role is limited to:
system so there is no money in this type of system • Enacting laws that protect the rights of individuals
Traditional economies are closed to external trade. and businesses
While we may think of this system as backward and even • Implementing proper monetary and fiscal policies in
ineffective, it does have a few advantages: order to foster investment and growth
The chance of overproduction is low • Preventing firms from dominating the market
Negative impact on the environment is greatly • Producing essential services that would not be
minimised. produced by the free market.
Some of the notable disadvantages of this system are: The benefits of this type of economic system are
Living standards are often very low summarised below:
There is often poor education and healthcare. A wide variety of goods and services are produced
Producers are free to produce what is demanded by
Market (free, capitalism) economic system consumers, while consumers are free to purchase what
The market system is one where the three economic they desire
questions are answered by households and firms. The parties Firms are free to make decisions and so there is greater
interact in the market for goods and services as buyers and participation
sellers. This interaction determines the price of the product There is little government intervention in the market
and, by extension, the market value of the resources. For Greater competition facilitates efficiency and firms seek
example, when there is shortage of a product on the market, to acquire greater market share.
its price will increase to match the high demand, and vice The drawbacks of this economic system are:
versa. Since businesses are profit driven, products that do not
The free economy is characterised by the concept of the yield sufficient profits will not be produced
‘invisible hand’ developed by the Scottish economist, Adam Wealthy individuals can influence the market by
Smith. He believed that there is an invisible hand (the market increasing demand for products
mechanism) which coordinates the independent decisions Larger and more powerful businesses can buy out the
of buyers and sellers, without anyone being consciously smaller ones, thus minimising competition
involved in the process. The market mechanism, which is Consumers are vulnerable to exploitation through high
the forces of demand and supply, will keep the market in prices, especially where there is no legal framework to
equilibrium. The closest example to this type of system is the prevent this
United States of America. Wastage of money when businesses collapse.
The market economic system has the following features:
Property is usually owned by individuals or groups of Planned (command) economic system
individuals. However, these private properties may be The planned or command system is one where government
subjected to the legal framework of the laws and courts controls most of the resources and makes the decision of
Consumers decide what is to be produced, as businesses what, how and for whom to produce. The government
will only produce those products being demanded by usually sets up a central planning board which is responsible
them. Anything outside of this may lead to failure of the for the composition and organisation of production and the
business. Producing what is demanded by consumers distribution of output. The board makes decisions about
will help firms to maximise profits what goods should be produced, the quantities of output
Competition restricts the ability of an individual buyer and the methods of production and for whom to produce.
or seller to influence the price of the product. This also This type of system ignores the workings of the market
ensures that firms produce their product efficiently in mechanism in the determination of prices. In addition, there
an attempt to bring in higher profits is no competition and so firms may not strive for efficiency.
Prices give a signal of the value of resources, therefore, Countries such as Cuba and North Korea have economies
producers tend to direct their resources to the products that are close to the command economic system. This system
that will give the highest returns was practised by China and Russia in previous years.
CHAPTER 36 | | ECONOMIC SYSTEMS AND BUSINESS GROWTH 333
Unlike in the free economic system, the government has on what, how and for whom to produce involve interaction
control of the resources. It assumes responsibility for: between both parties. The following are the main features of
Resource allocation – this is allocated in terms of what the mixed economic system:
the government sees as being best Some products, such as cars and computers, are not
Setting production targets for the sectors in the only produced by the private sector
economy The state provides most of the essential services such as
Determining income and wages education and national security
Ownership of productive resources and property. Government collects taxes in order to finance state-
Some benefits of this type of economic system are: owned and operated services
Profits gained can be reinvested in the provision of The state may place limits on businesses to prevent
essential goods and services pollution and the development of private monopolies.
There is a more equal and equitable distribution of The mixed economic system has the following advantages:
income Government can intervene to pass laws to protect
Consumers are protected from exploitation through consumers from unfair trading practices
high prices There may be collaboration between the public and
State production leads to a reduction in the wastage of private sectors to provide certain goods and services –
resources for example, private hospitals that work along with the
Private monopolies are not allowed to develop. government, or joint transport services
However, its drawbacks are: Government can keep a grip on social costs such as
The products produced by the state may not be what the pollution
people want Producers and consumers can be protected by the use of
This system might be slow in response to change price controls – that is, price flooring and price ceiling.
The free enterprise and competition spirit is discouraged Some of its drawbacks are:
Initiative might be stifled because of the lack of scope If there are too many restrictions in the market, it may
for individual incentive. deter investments
The inefficient operation of state-owned businesses
The mixed economic system leads to wastage of resources
This is the most popular type of economic system and is Government’s price control tactics may lead to excess
used by most of the Caribbean countries. It involves the demand or excess supply, which may be difficult and
participation of private enterprises and the state in decisions costly to regulate.
on resource allocation. There is both private and public See Table 36.1 for an overview of the impacts different
ownership of the productive resources. Therefore, decisions economic systems have on business decision making.
Economic systems Possible impact on business decision making

Market, Free The market mechanism (demand and supply) automatically allocates resources. As a result, as demand
increases, more factors of production will be utilised and more rewards will be earned
Firms face stiff competition and so they are forced to be efficient and innovative. Businesses will take the
necessary steps to minimise costs
Some businesses become culprits in environment degradation, since government intervention may be limited
This system promotes the entrepreneurial spirit, as people are free to start businesses
Planned The entrepreneurial spirit is dampened, as resources are owned and utilised by the government
Businesses are generally government owned and their production targets are based on need rather than
profits
Central planners will guide businesses to produce standardised products – thus there is little, if any, variety
This type of system promotes the development of the ‘black market’ or underground economy, as people find
other means of getting products sometimes not produced by the government or in insufficient quantities
Mixed This system is gleaned from the two preceding systems and its impact will be a mixture of both
Table 36.1: The impact of economic systems on business decision making

CASE STUDY
Changing the system

For years, Ms Gogetter had wanted to establish a small business in her country. She realised that there was a need for the
proposed business and the commodity she would be selling. Even though the business idea seems sound and there was a strong
possibility of success, Ms Gogetter had to keep her idea on the back burner. The main reason behind her decision was because
of the way business is done in her country. For the business to be established, it would have to go through a central planning
authority which is set up by the government. Secondly, the factors of production are owned and operated by the government. In
fact, Ms Gogetter works in one of the government owned businesses.
This financial year has brought with it a glimmer of hope. Lobby groups and other political activists have been successful in
their bid to get the government to relax its stringent measures and to allow a private sector to operate in the country. This is to
be discussed in the upcoming months and a decision will be made. If the decision is favourable, then the country will see some
changes in business ownership and the ability of private individuals to establish businesses. This would work in Ms Gogetter’s
favour as she would finally get the chance to pursue her goal.
Questions
1. What are the three (3) economic questions that are often asked by economic agents? (3 marks)
2. Identify the type of economic system that is in operation within the country. Give one (1) reason to substantiate
your claim. (3 marks)
3. Outline two (2) advantages and two (2) disadvantages of the economic system that you chose in Question 2. (8 marks)
4. If the political activists and lobby groups are successful, which economic system would they be most likely to use? (2 marks)
5. Discuss one (1) way in which changing to this economic system would benefit each of the following:
a. Government
b. Economy
c. Individual/firm (9 marks)
Total 25 marks
Criteria for measuring size and growth of this measurement is that larger firms usually produce larger
volumes of output than smaller firms.
businesses
If you examine the economy of your own country, you will
The labour force
realise that there are different businesses of various sizes.
It is fair to say that there is a correlation between the size of
Some are small (for example, a corner shop), and others
a firm and the amount of workers it employs. Smaller firms
large (for example, a supermarket chain). But how can the
may employ just a few people or are sometimes operated
size of these businesses be measured, since there is more
by their owners. However, larger firms tend to have large
to size than the size of the building in which they operate?
workforces with specialised labour. We must be cautious,
Below are a common set of criteria used to measure business
though, as a small workforce does not necessarily mean
size and growth.
that the firm is small. It may mean that the firm is capital
Volume of output intensive – that is, it utilises more machines than it does
labour. According to the Small Business Association of
This method is generally used to measure the size of busi-
Jamaica, the size of businesses is broken down as follows:
nesses in the same industry. It cannot measure size across
industries, since they differ in terms of structure, product Micro business – annual sales less than US $100 000
and level of production. The amount of output of each firm Small business – annual sales between US $100 000 and
is compared in order to ascertain the firm with the highest US $5 million and a labour force of 1–50 employees
volume of output. For example, each firm in the bauxite Medium-sized business – annual sales between
industry could be compared to find out which one has the US $5 million and US $25 million and a labour force of
highest output in a particular period. The thinking behind 50–500 employees.
Market share is calculated by multiplying the market price of its shares by

This measures the amount of control that each firm in an the number of shares issued – that is:
industry has. This is done by calculating the percentage of Market value = market share price × number of issued shares
each firm’s sales to total sales. Larger companies will have a higher market capitalisation.
Total sales of firm In calculating the market capitalisation, we must be aware of
Market share = × 100 the fact that share prices may fluctuate significantly, which
Total industry sales
The firm with the highest percentage market share may give differing results.
has control of the market. This measure is common in Other options available to firms in measuring size include:
the telecommunication, newspapers, radio and television Profit – the amount of profit that a firm makes can give
industries in the Caribbean. The market share of each firm an indication of its size. Larger firms tend to make more
can give an indication of the size of the firm, especially where profits than smaller firms. However, we must bear in
the industry is a large one. This is because larger firms in a mind that large firms can also make losses
market tend to control a larger percentage of the market. Numbers of branches – businesses with branches or
Having calculated the percentage market share of each firm subsidiaries are seen as being large. Some of these
in the industry, it can be represented diagrammatically by businesses operate within other countries. These
using a pie chart. See Figure 36.1. are known as multinational companies and will be
examined in the next section. Cable & Wireless is one
Capital employed example of a multinational company.
Capital employed refers to the value of the assets used to
generate the revenue of the firm. The amount of money
invested in the business can give an indication of its size. A comparison of small firms and large
Larger businesses tend to invest more capital in their firms
operation. We should be cautious, though, since the results Does size really matter? Or is success really dependent on
may be misleading. For example, if the comparison is made how large or small an organisation is? These are questions
between a firm in the manufacturing industry and one in the many people have asked, especially when they are planning
service industry, the manufacturing firm will seem larger. on establishing a business. In this section we will examine
The reason for this lies in the fact that the manufacturing the advantages and disadvantages of small firms versus large
firm tends to have large and very expensive machines and firms.
equipment compared with, say, a bank. However, this does
not necessarily mean that the manufacturing firm is larger. Size and financial requirements
Some people opt to start small businesses since they require
Market capitalisation less capital outlay. The advantage of doing this is that, over
This method is used for public companies and measures the time, the business can expand if it is successful. If the business
market value of the company. The estimated market value fails, then the resources that will be lost would be far less
than for a very large firm. For example, a supermarket can
4.26% start out as a corner shop and then expand as it generates
more profits. As a corner shop, it would not need a lot of
capital and so the financial requirements would be lower.
9.87% This method is evident in the formation of the Jamaican
company, Juici Patties which started as a cottage industry
14.28% in the family kitchen. Juici has now grown into a very
large company offering a variety of products and having
71.59% distributors within some Caribbean countries.
EXERCISE
In your class discussions, try to identify companies
Google Yahoo Bing Other within your country that started out very small but
have grown into large firms today.
Figure 36.1: Market share illustrated in a pie chart
Sourcing finance may pose a big challenge for small firm buys in bulk, it may reduce its transportation cost since
firms. Some financial institutions are reluctant to lend to items would be bought regularly.
small firms since there may not be enough collateral or
because of their perceived inability to repay the loan. This Managerial economies
may hamper expansion and cause undercapitalisation. To There is a tendency for managers of small firms to multi-
compound the problem, even if small firms secure loans, the task. They have to play many roles, such as Accountant,
cost of borrowing (interest rates) might be enormously high, Marketing Manager, Public Relations Officer, etc. These firms
preventing them from servicing these debts effectively. cannot afford to pay different managers to perform these
Large firms usually require a large and expensive capital tasks. However, as they get larger they can take advantage
outlay. For example, a mining company will need huge of specialisation of labour. Instead of having one person
finances for start-up capital. This can be disadvantageous for doing so many tasks, the firm can employ a specialist in the
the firm and its investors, especially if the business fails. In particular field to carry out each task. This may lead to an
addition, the firm will have to source the necessary finance increase in efficiency. Larger firms are also able to contract
and may have to utilise various sources such as loans, outside management services to carry out tasks that they are
shares and owners’ funds. This funding may not be readily not able to do within the business. They are able to afford to
available, depending on the type of business and the level of pay larger and more attractive salaries to attract and employ
risk involved. some of the best and most qualify people.
Being large presents some advantages, as the firm will be
able to secure better loans with more reasonable servicing Technical economies
terms. Banks will generally prefer giving large firms loans As a firm increases its size, it can take advantage of larger
because of the existence of collateral. Larger businesses may and more efficient machinery. For example, a small farmer
have goodwill and so will be more likely to generate revenue may not be able to afford much, if any, machinery and so
to recoup start-up costs. will have to toil daily using simple machines, but as his
farm increases in size he can afford to purchase a tractor
Economies and diseconomies of scale to help with the ploughing of the soil. Larger firms are able
As firms expand and increase their scale of production, they to utilise flow production, where the production process is
benefit from a lowering of the ‘per unit’ cost of production. done on an assembly line. This allows the firm to use highly
This is referred to as ‘economies of scale’, which is the specialised machines, replacing its sometimes large labour
reduction of costs as the business grows. For example, if a cost and increasing its productivity and output.
business has a fixed cost of $10 000, the first unit it produces
would bear all of that cost plus any variable costs. If the firm Risk-bearing economies
expands its production and produces 1,000 units, the fixed Going into business involves risk and all firms are subjected
cost per unit now become $10. The firm therefore benefited to such risk once they are in operation. For example, there
from its decision to produce more, as its fixed cost per unit is a risk of losing all the initial investment if the business
fell drastically. Economies of scale can be subdivided into fails or a risk of the changing business environment and
internal and external economies of scale. factors such as demand. Factors such as the downturn
in the world’s economy may lead to the closing down of
Internal economies of scale many small firms. If the conditions of demand and supply
This is the reduction in costs that a firm gains directly as change for the major or the only product of a smaller firm
it increase the size of its operations. Internal economies of then sales may be greatly affected. Conversely, if the same
scale include: problem exists for a larger firm, it can shift its production to
another product or diversify the present product or diversify
Purchasing economies its market. Large firms are also able to invest in research and
One of the benefits of being large is that the firm can afford development which helps to minimise the risk involved in
to buy larger quantities of raw materials. In doing so, larger the development of a new product or setting up operation
firms tend to receive better prices for these raw materials. at a new location.
These firms benefit from trade discounts and will be better
able to bargain with their suppliers who do not want to Financial economies
lose their custom. As the firm increases its order size, the As discussed earlier, sourcing financing poses a big problem
administrative cost per unit ordered decreases. Since the for most small firms and, even when they acquire the
funding, it might be very expensive. Large firms have the Training and education
advantage of sourcing finance. They have better bargaining As the number of training institutions grows in a country,
power, more collateral and are more likely to receive firms will benefit from improvement in the skill level of
financing through the issuing of shares or borrowing from workers and the labour force in general. Universities and
lending institutions. colleges have developed programmes and courses to meet
the needs of the industry. For example, the HEART Trust
Marketing economies NTA has been training and certifying workers in Jamaica. As
Marketing is very important when conducting business. A a result, firms can benefit from these improvements while
number of firms fail because their products are not publicised reducing ‘per unit’ costs of production.
properly. Marketing involves a large amount of funds and
differs depending on the method of advertisement used. The Development of auxiliary services
firm needs to decide whether or not to advertise and to lease The growth of an industry sometimes attracts other small
delivery vans or purchase them. Advertising can be very businesses which perform auxiliary services for the firms in
expensive and as a result some small firms are not able to the industry. The services offered may range from marketing
advertise. However, as firms get larger they can implement to waste disposal, among others. The services being offered
advertisements and other promotional tools. The firm may can be contracted by the existing firms that would otherwise
also be able to purchase its own fleet of delivery vehicles, have to perform the service themselves. Outsourcing these
which may be more cost effective. services might be cheaper for the firms in the industry than
perform them.
External economies of scale
External economies of scale occur where all firms in an Cooperation among businesses
industry benefit from lower unit costs as the entire industry In Chapter 1 we discussed that cooperatives pool together to
increases in size. External economies of scale include: benefit from lower costs. When this occurs, the firms benefit
from external economies of scale.
Improvement in transport and communication links
The Caribbean has benefited from improvements in Diseconomies of scale
communication over the last decade or so. With the Growing is not always good for businesses, as they can become
liberalisation of most, if not all, of the telecommunications too large so that instead of experiencing a reduction in ‘per
industry, firms now have more options for and access to unit’ costs there is an increase. In other words, the average
communication. The quality of transportation in the region total cost will rise, as seen in Figure 36.2. Diseconomies of
has also improved over the years. The number of courier scale therefore occur when a business becomes so large that
services has also grown rapidly. These improvements have cost per unit increases.
spun off on business firms which will have seen a reduction Figure 36.2 shows that as a firm expands its output, it
in transportation and communication costs. Transportation benefits from a reduction in its average total cost, i.e. total
has also been aided by the improvement of the road network cost divided by output. As it continues to increase, it will
in some countries – for example, the building of Highway reach a point of optimum production. If the firm continues
2000 in Jamaica. to expand, its average total cost will start rising and
diseconomies of scale will set in.
Costs $ The following are some of the causes of diseconomies of
Optimum level of production
(constant returns to scale) Average
scale:
total cost
curve
Poor communication
Communication is key in any organisation, as managers
have to ensure that their line of communication is working.
Economies Diseconomies
of scale of scale However, the expansion of the business might make the
communication process long and bureaucratic. Management
Output may no longer be able to communicate with employees and
vice versa. The breakdown in communication may prevent
employees from receiving clear instructions and may
Figure 36.2: Diseconomies of scale
increase wastage.
Demotivation limited companies. A business may expand for different

This topic was dealt with further in Module 2. Over time, reasons, including reducing risk, increasing profits, entering
workers may become discouraged if they are not treated more markets, gaining market power and diversifying its
fairly and properly. As some businesses grow, employees product line.
may feel isolated and unappreciated. This will lead to low While a business will benefit from growing, it will also
motivation and, by extension, a reduction in productivity. encounter problems, some of which include diseconomies of
As productivity falls, output will also fall and the average scale, cash flow problems and loss of ownership.
cost per unit will increase, leading to diseconomies of scale. There are various methods of growth and a business may
expand internally or externally.
Lack of control and coordination
As a business grows, the span of control widens and it is Internal growth
more difficult to manage. Managers may find it difficult to This is where a firm expands its existing operations without
ensure that all employees are working towards the goals the involvement of other businesses. This can be achieved by
of the business and operating to their full potential. As the increasing the sale of its product to a wider range of people
business loses control and coordination, its costs of operating in different markets at home or abroad. As sales revenue and
may rise and diseconomies of scale set in. profit increase, the business can reinvest in its operations. This
form of growth tends to take a long time to be realised but can
provide a good foundation for development of the business.
Strategies for growth
It is the desire of most businesses to expand over time. Many External growth
businesses started as a sole proprietor or family-owned This is a quicker method of growth and takes place by merger,
business and have expanded into large private or public takeover or joint venture. A merger is where two or more
CASE STUDY
The expansion of Stewart Hardware

Stewart Hardware, a 40-year-old company, operates mostly within the Middlesex County of the country and serves a number of
customers. It operated four stores – one in the parish of St Catherine and three in the parish of Clarendon. It has now opened
its fifth store in the parish of Manchester. This branch was built at a cost of some J$500 million and was built on a hardware/
home centre concept. While it is not eyeing further expansion in the near future because of the economic climate in the country,
the company is not ruling out the possibility. However, the immediate plan is to upgrade all the other stores to match the concept
of its newest store in Mandeville, Manchester. This is projected to cost an additional J$500 million.
In an interview with the Gleaner, the company’s CEO, Mr Stewart, says that it is also looking into training its customers to
carry out do-it-yourself activities and is targeting mostly women. He believes that this move will give the hardware company a
competitive edge over its main rivals. The company is also engaged in the manufacturing of interior doors and decorative strips
for ceilings, walls, floors and roofing.
With the recent expansion, the company is said to employ some 300 employees among the stores in operation and may even
be able to employ more if business picks up in the future. Currently its revenue is below projections and this has been worsened
further by the depreciation of local currency against the US dollar.
Questions
1. Based on information provided in the case, how would you classify Stewart Hardware in terms of size?
Substantiate your claim. (3 marks)
2. Define the term ‘economies of scale’. (1 mark)
3. Discuss three (3) internal economies of scale from which the company is likely to benefit. (9 marks)
4. Bearing the type of business in mind, from which one of the external economies of scale is Stewart Hardware
most likely to benefit? Explain your response. (3 marks)
Total 16 marks
companies agree to join together to form a new company. A Horizontal integration

takeover is where one company buys out or takes control of This takes place when firms at the same level of production
another. A joint venture is a business arrangement between merge under the same management – for example, two
two or more parties to pool their funds or resources in order computer manufacturers combine to expand their operations.
to carry out a specific task or purpose. Mergers and takeovers
are popular methods of expansion around the world and Lateral integration
even in the Caribbean. This is where firms with similar, but not competing, products
join together to diversify and expand their product offering
– for example, a computer manufacturer merges with a
EXERCISE television maker.
In your class discussions, try to identify some of
examples of business mergers and takeovers in your Conglomerate integration
country. This is where firms expand into unrelated areas of production
– for example, a computer manufacturer merges with a firm
This process of merger and takeover is often referred to in the furniture industry. See Figure 36.3.
as ‘integration’. Integration can be broken down into four Although there are many benefits to business expansion,
categories: some small firms have managed to survive even in tough
Vertical (backward and forward) economic times. These small firms play an important role in
Horizontal our communities and, by extension, our countries and their
Lateral and survival is of the utmost importance. Some reasons for their
Conglomerate integration. survival may include:
Some of their services are easily supplied, such as
Vertical integration hairdressing or plumbing
This is the joining of businesses at different stages of produc- Some small firms produce products or components of
tion but in the same industry. Forward integration occurs products for larger firms
where a firm merges with or takes over another firm at Small firms are at times beneficiaries of government
the next stage of production – for example, a computer assistance
manufacturer merges with or takes over a computer store They are flexible and may react more quickly than large
outlet. Backward integration occurs where a firm merges firms to changes in market conditions
with or takes over another firm at the previous stage of Most small firms cater for local markets where some
production – for example, a computer manufacturer merges larger firms might not be able to reach – for example,
with or takes over a hard drive manufacturer. the corner shop in your community
Small firms may be faced with lower labour costs than
larger firms.
Forward re)
(compute
r sto Management and control
The management of small and large
firms may be very different in terms of its
Lateral structure. As was discussed in Chapter 1,
maker)
(television l business organisations such as sole traders
Horizontaess)
n
(same busi and partnerships are usually managed by
their owners. In such cases the owners can
cturer steer the firm in the direction they want
ter manufa
Compu it to go. In terms of the span of control,
smaller firms tend to have a smaller span,
erate
Conglom aker) which may mean that the manager has
it u re m
(furn
Backward greater control over the activities of the
(hard drive r)
ure firm. In some cases, the owner is the only
manufact
worker within the firm and so would not
Figure 36.3: An example of conglomerate integration need to manage anyone else. A manager in
a smaller firm may also find it easier to communicate the a decision on whether it will be able to repay the loan. Lack
vision of the firm to all of the employees and for them to of proper record keeping can lead to:
follow. It is also easier for the manager to ensure that each Theft by employees
employee adopts and practises whatever strategy or policy Inadequate or improper allocation of funds
he/she implements. The firm not being able to trace how monies were
In must be said, though, that managers in small firms can spent.
become overwhelmed with work and because of their size Conversely, entrepreneurs who keep proper records are
and limited resources are not able to employ other managers. likely to benefit in different ways:
This is one of the benefits of large firms. Larger firms often They have better knowledge of the daily activities of the
benefit from managerial economies of scale which allow firm, such as sales revenues
them to employ qualified managers to be in charge of the Can use records to predict future performance and put
different functional areas. However, firms can become so strategies in place to prevent shortfalls
large that management starts losing control as diseconomies Can use the information to make more informed
of scale set in. Unless the firm is using a centralised system, decisions
it is sometimes difficult to get all the employees to adopt The information can be used to identify who is indebted
the vision and objectives of the firm. Larger firms may then to the firm and to whom the firm is indebted itself.
become harder to manage because of the larger span of Larger firms tend to have proper record keeping. Large
control that each manager has, meaning that the manager firms are able to hire qualified people to deal with its finances.
has to supervise a greater number of employees. These firms usually have an entire finance or accounting
department which ensure that proper records are kept. In
Lack of record keeping the case of the public limited company, records are not only
Keeping good records can offer numerous benefits to kept but are published so that shareholders can be aware of
the entrepreneur. The sad truth, though, is that some how their investment is being used. Therefore larger firms
entrepreneurs do not keep proper records if any at all. tend to have fewer problems with record keeping.
This is particularly the case, but not limited to, where the
entrepreneur is the sole worker and manager. Spending and Working capital deficiencies
revenue tend to be done arbitrarily, without any clear record As was mentioned in Chapter 13, money is needed to finance
of the amount of cash involved. These small businesses are the day-to-day operations and expenses of the business,
often very cash oriented and with no proper record keeping including bills and creditors. This is money is called ‘working
will be more susceptible to theft and misappropriation of capital’ and is calculated as:
funds. Some corner shop owners may just use an exercise Current assets – Current liabilities
book to write down how much they spent at the wholesaler A firm that is having working capital deficiencies is not
but do not record each sale as it is made. Instead, money is able to meet its daily financial needs sufficiently. This can
just thrown in the cash till whenever it is received. Some be very detrimental to the firm, as it may mean that it is
entrepreneurs often give patrons goods on credit and depend unable to meet its immediate liabilities. Cash is one of the
on their own memory to ask for payment. Unfortunately, most valuable resources for the small business, especially
sometimes memory fails and funds are not collected from where it does not have a proper credit record to be able to
these debtors. All of this is magnified by the fact that some obtain loans. The lack of cash can cause a total shutdown of
entrepreneurs do not have formal training or experience in the business. Working capital deficiencies can be caused by
record keeping and they do not have the financial resources the following:
to employ someone else to do it for them. Having too much inventory – this will mean that the
There are some very important records that should be firm’s cash is tied up in stock which may take some time
kept by the entrepreneur. These include: receipts, order to be sold. This will definitely affect the firm’s liquidity
books, cash books, sales books, expense records and stock Debtors’ payment period – the firm may be giving
control records. Proper record keeping should also involve debtors too much time to make payments. It would
those mentioned in Module 3, Unit 1: financial statements have sold its product on credit but is not able to collect
and cash flow statements. Failure to keep these records for these goods within a time that will ensure that it has
may make it difficult for the firm to acquire a loan from a cash available
reputable financial institution. Banks will want to see the Liability to creditors is too high – having too much
firm’s historical and forecasted statements in order to make liability can also result in working capital deficiency
when these liabilities become due. The firm will have to As mentioned earlier, larger firms tend to benefit from
honour its liability payments, which may be difficult if managerial economies of scale where they are able to employ
the funds are not available. different managers to focus on the different functional areas
Please review in Chapter 13 the methods that a firm can of management. Larger firms are able to both attract and pay
use to increase its working capital. for managers who are competent in their particular field to
increase the firm’s chances of being successful.
Poor management skills
In most businesses the ‘buck’ normally stops with the Regulation and legislation
manager. If you look at the trend in most businesses, once A person wanting to start a business must be aware of the
the firm is consistently failing, it is the manager who will be legalities of doing so and the impact that the existing laws
asked to step aside or who is dismissed. Therefore, proper and regulations will have on the business. Every country has
management is needed for the business to be successful. This its fair share of regulations and legislations that businesses
is sometimes a challenge for entrepreneurs who are not very must abide by once they are operating there. For example, a
qualified or are inexperienced. A number of people start person wanting to start a business involving food preparation
businesses in a bid to make profits but have not sought to is required to acquire a food handler’s permit. Likewise, an
improve their management skills and ability. Some of these operator of a bar or pub must hold a spirit licence.
people lack the capacity and ability to run these businesses Regulations affect both large and small firms. There are
successfully and, at the same time, are constrained by their certain regulations that a large firm must abide by when
finances so they cannot employ a qualified person to manage starting up which are not binding on smaller firms. A firm
the business. starting as a company must adhere to the requirements of
The ideal condition to start small businesses would be the Companies Act, including registration and the filing of
one where the entrepreneur is knowledgeable about the the relevant documents. However, this is not a requirement
area of business and possesses the adequate technical ability for sole traders, who are required to register only the name
that is needed to run it successfully. Therefore, it would be of the businesses. Firms can be affected by a number of other
advisable for a person wanting to establish a restaurant to laws and regulations and may have to adhere to the policies
have some knowledge about cooking and the rudiments of of the different consumer organisations that are found in
running that type of business. different countries across the Caribbean. These may include:
Poor management skills can also result in the staff not Fair trading requirements
being motivated to work to their full potential. With a Bureau of Standards requirements
number of Caribbean countries struggling to overcome the Tax compliance
effects of the recession, effective management is even more Advertising laws
important. Some Caribbean countries have seen situations Trade licence
where a number of these small businesses had to close their Environmental regulations
doors because of their financial woes and the inability of the Minimum wage legislation
management to steer them through these tough times. National insurance schemes.
CASE STUDY
The troublesome takeover of Fine Fish Joint

Approximately two years ago, fish retail giant Seafood Experts purchased Fine Fish Joint from its original owners after they
started having financial trouble and had to sell it. Fine Fish Joint was well known for its different fish meals and ambiance in its
restaurants. The company made the decision to close its doors after it started finding it difficult to pay its creditors and utility
bills. This cash crunch started late last year when the owner and head chef died and some people felt that in future the meals
would not taste the same if cooked by someone else. That prompted the family to sell the firm.
Seafood Experts has been around for the past ten years and sells a variety of seafood and also freshwater fish. It supplies a
number of restaurants, households and hotels, among others. Incidentally, Fine Fish Joint was one of its customers before falling
into financial difficulty. The firm believes that by purchasing this type of business, it will be able to capture customers who are
seeking a comfortable place to eat tasty seafood.
Questions
1. Describe the type of integration that occurred between the two firms. (3 marks)
2. Outline two (2) benefits that Seafood Experts can derive from this business arrangement. (4 marks)
3. Explain two (2) possible causes of the working capital deficiency that Fine Fish Joint was having. (4 marks)
4. Discuss two (2) ways in which this working capital deficiency could have been dealt with instead of selling
the business. (4 marks)
Total 15 marks
CHAPTER SUMMARY
The concept of scarcity states that The criteria for measuring business External economies include:
man’s wants are unlimited while size are: volume of output, labour improvement in transport, training
resources are limited force, market share, capital structure and education, development of
and market capitalisation auxiliary services and cooperation
This problem presents choices which among businesses
include: what to produce, how to ‘Economies of scale’ refers to the
produce and for whom to produce reduction of costs as the business Diseconomies of scale occur when a
grows. This is broken down into business becomes so large that cost
An economic system is the internal and external economies of per unit increases
institutional means through which scale
resources are utilised to satisfy Integration can be broken down into
human wants Internal economies include: four categories: vertical (backward
managerial, purchasing, financial, and forward), horizontal, lateral and
There are four types of economic technical, risk bearing and marketing conglomerate integration.
system: traditional, free (market), economies of scale
planned (command) and mixed
MULTIPLE CHOICE QUESTIONS 7. If a firm’s total sales is $2.4 million and the industry sales
is $10 million, what is the firm’s market share in percentage
1. The trading of commodity for commodity is best described terms?
as:
a. 24 per cent
a. Money
b. 416 per cent
b. Medium of exchange
c. 240 per cent
c. Barter
d. 2.4 per cent
d. All of the above
8. Which of the following is NOT an internal economy of scale?
2. Which of the following is NOT an advantage of the market
a. Technical economies
economic system?
b. Purchasing economies
a. A wide variety of goods and services are produced
c. Loss-minimising economies
b. Consumers may be exploited
d. Risk-bearing economies
c. Firms are free to make decisions and so there is greater
participation 9. The firm experiences which of the following when its average
d. There is little government intervention in the market total cost curve is rising?
a. Constant returns to scale
3. The economic system where government controls most of the
resources and makes the decision of what, how and for whom b. Economies of scale
to produce is called the ___________ c. Increasing returns to scale
a. Market system d. Diseconomies of scale
b. Mixed system
10. A bakery merging with a wheat farmer is an example of:
c. Traditional system
a. Backward integration
d. Command system
b. Lateral integration
4. A drawback of the planned economic system is that: c. Horizontal integration
a. There is a more equal and equitable distribution of income d. Forward integration
b. Consumers are protected from exploitation through high
prices
c. State production leads to a reduction in the wastage of
resources Question one Total 25 marks
d. The system might be slow in response to change a. Explain three (3) features of the planned
system. (9 marks)
5. Which economic system is the most popular in the b. ‘The planned economic system stifles the entrepreneurial
Caribbean? spirit and tends to be inefficient. There is no incentive
a. Traditional for a private individual to be innovative and create
ways and means to make profit and wealth.’ To what
b. Free
extent do you agree with this statement? Discuss
c. Command
four (4) points to substantiate your claim. (16 marks)
d. Mixed
6. A business with annual sales of US$2.35 million would fall a. Explain four (4) criteria that can be used to
under which category? measure the size of a firm. (12 marks)
a. Micro b. Explain what is meant by the term ‘economies
of scale’ and discuss four (4) types of internal
b. Medium
economies of scale. (13 marks)
c. Small
d. Large
344
37 Major Challenges and Opportunities

Faced by Small Businesses
multi-transaction agency where people could pay all their
LEARNING OBJECTIVES: bills. She managed to turn this idea into an actual product
At the end of this chapter students should be able to: and so Paymaster was established as a Jamaican entity in
Identify successful business opportunities 1997 and is said to be the first of such businesses in the
Assess the different sources of capital Caribbean. Many of you reading this book now will have
seen in your own lives a need for something that is not
Outline the different types of business organisation
yet there or the need to improve on an existing product or
Discuss the factors that influence the location of the firm
service. You too can turn your idea into an actual product
Discuss the impact of globalisation and trade
liberalisation on small businesses and reap the benefits of such decision.
The potential entrepreneur must be cautioned, though, as
Discuss the opportunities and challenges of e-commerce
for small businesses not all ideas will become successful, especially those where
Assess the impact of intellectual property right on the the market is already saturated. The entrepreneur must be
business a critical thinker; one who is innovative; one who sees the
opportunity in every setback or challenge; and one who is
not willing to settle for what is but rather what can be. A
good way to start is to write down all the business ideas that
I
n Chapter 36, we looked at the advantages and disad- you have, then critically peruse the list to see which ones
vantages that may occur as a result of the size of the should be given further consideration. Once this is done, the
firm. Some of the disadvantages to small firms will end next step should be to look at the financial viability of those
up posing serious challenges for it. Small firms are often ideas that were shortlisted. This will give the entrepreneur a
faced with a number of challenges especially in their start- clearer view of how to move forward.
up stage. However, the successful entrepreneur can turn
these challenges into opportunities. These challenges and/or
opportunities are discussed below. Sourcing capital (finance)
Getting the money needed to start a business can present a
huge challenge, especially for people without collateral. In
Identifying successful business Chapter 13, the different sources of finance were discussed
opportunities and it was pointed out that finance can be in the form of
Having a desire to become an entrepreneur is good – but debt or equity. In most cases, small businesses will be
the entrepreneur cannot thrive on just a desire. One of the either sole traders or partnerships and very few may start
first and major challenges of the entrepreneur is identify- as private limited companies. Of the three types of business
ing a potentially successful business idea. If you were to organisations mentioned, the sole trader may find it most
stop a moment and reflect, you may have had a number of difficult to source finance. In most cases, funds are taken
business ideas of your own. Some of these ideas have prob- from personal savings or borrowed from family and friends.
ably already been exploited by other people. Identifying Some sole traders have managed to secure loans from some
successful business opportunities may be a tedious process lending institutions. With many Caribbean governments
for some people. It may mean that a group of ideas may have realising the importance of these small and micro-
to be screened to identify the one with the most potential. enterprises, steps have been taken to provide the necessary
Business opportunities often arise because there is a need funding facilities for people wishing to start businesses.
for a product or for something different. Audrey Marks, the Some of these institutions will be evaluated in Chapter 38.
founder of Paymaster, is said to have seen the need for a
CHAPTER 37 | | MAJOR CHALLENGES AND OPPORTUNITIES FACED BY SMALL BUSINESSES 345
Selection of business types Globalisation and trade liberalisation

The entrepreneur has a number of options to choose Globalisation is seen as the increased connectivity and
from when deciding to start a business. These include interdependence of the world economy, while trade
sole proprietorship, partnership, cooperative, franchise, liberalisation involves the removal of trade barriers that
private and public limited company. In starting a business would prevent trade among countries. The world has
the entrepreneur needs to make a decision on the type of become one big global market where goods and services
business that he/she wants to establish. The entrepreneur are offered to people regardless of where they are located.
may consider the following factors in making this decision: This is further amplified by the fact that internet technology
Whether or not ownership will be shared has improved connectivity and communication across the
The level of funding available against what is required world. As a result, the entrepreneur is no longer competing
The level of risk involved, especially against personal with only local businesses but with businesses worldwide.
possessions This can be a challenge for a small business in its state of
Any other people who are interested in the business infancy. In some cases, the products being offered by these
venture international firms are being sold at cheaper prices than
Whether the product is already being offered by another those of the local small business. Therefore people will tend
well-established firm. to buy the international product to make the best use of
Having considered the above factors, the entrepreneur their money unless the government implements some form
can now make a decision. Where the entrepreneur wants to of protectionism. This would be a good time to revise how
involve his/her friends in the business it may be advisable to globalisation and trade liberalisation affect businesses, as
start a partnership or private limited company rather than a mentioned in Chapter 4.
sole proprietorship. However, if the entrepreneur wants to It is important that you realise that globalisation presents
keep his/her business activities personal then choosing a sole the small business owner not only with challenges but also
proprietorship may be the best option. Review Chapter 1 and with opportunities. Though this might be difficult, the small
revise the features, advantages and disadvantages of each of business also has the opportunity to offer its product to a
each type of business organisation and see how they can help wider market. This could increase the firm’s sales revenue
the entrepreneur to select the most suitable type of business and profit margin. Over time, the small business could also
to match his/her ideas. benefit from economies of scale as the business grows and
access to improved technology. Therefore globalisation
and trade liberalisation can affect the small business either
Determining a location way. The effect may be determined by the ability of the
Location can be integral to the success of a business venture. entrepreneur and the firm to turn the challenges into
For example, locating a restaurant in an isolated area may opportunities and the level of government intervention.
result in wastage of valuable resources and money. Likewise,
locating the same restaurant where there are a number of
similar businesses may not be profitable either, as the market E-commerce
will become saturated. Therefore the entrepreneur must As was mentioned in Chapter 34, electronic commerce, or
give serious thought to where the business will be located. e-commerce, is defined as the interaction of buyers and
One of the challenges that the small business might face is sellers via the use of internet for the purpose of exchange.
that the ideal site for location may be too expensive, so it has E-commerce is a growing activity and a number of firms are
to settle for somewhere less appropriate. This could result in buying into it. Some of the larger firms in the Caribbean
the business underperforming. have been advertising and making their products available
Before deciding on a location, the entrepreneur must for purchase online. Some small businesses have been
consider the quantitative and qualitative factors that may catching on to the practice too.
influence his/her decision. These include: site cost, transport Trading electronically can offer the small business
cost, labour cost and revenue cost (quantitative factors) and owner the opportunity to reach more individuals across the
infrastructure, environmental and planning consideration country or internationally. The use of e-commerce among
and management preferences (qualitative factors). All of small businesses can be seen in the way that owners of
these factors were discussed in Chapter 18; therefore please villas advertise. If you were to search online you would
review them and then assess how they will influence the be able to find a number of ‘bed and breakfast’ locations
location of small businesses. which are usually small businesses. Instead of taking on the
CASE STUDY
An indecisive entrepreneur
To have an idea without any money to implement it can be a stressful situation for a potential entrepreneur. Having lost his job
and being unable to find another, young Roy Rampaul started examining his options. He has an idea to establish a sales outlet
selling bicycles and skateboards. Being in his twenties, he believed that he would be able to reach out to others within his age
group. However, Roy is now facing some struggles.
As result of his age, Roy is finding it difficult to secure funding for his idea. He tried a few banks but they were unwilling to
finance such a venture. Roy is now contemplating starting a partnership with a few of his friends or starting a private limited
company. However, it is going to be difficult to secure all the funds needed to rent or buy a building and to buy stock. In addition,
Roy needs to find the best location for such a business. Of course, he has to think of accessibility and the cost of the location and
to date there has been no decision on these issues.
Roy may also face other challenges presented by globalisation, as people can now simply go online to purchase a bicycle or
skateboard and have it shipped to their location.
Questions
1. Discuss two (2) reasons why financial institutions may not want to lend Roy the money he needs to start the business.(6 marks)
2. What are three (3) factors that Roy should consider when deciding where to locate his proposed business? (6 marks)
3. Outline two (2) challenges that he may face as a result of globalisation. (6 marks)
4. In your estimation, do you think Roy went about starting his business in the correct way? Substantiate your answer. (2 marks)
Total 20 marks
hassles of arranging direct payment online, which would it as ‘creations of the mind: inventions, literary and artistic
need huge investment in security technology, most of these works, and symbols, names, images, and designs used in
firms use the available payment agencies such as PayPal, commerce’. The organisation divides intellectual property
Western Union or other bill payment agencies or simply give into two broad categories:
customers a bank account to which payment must be made. Industrial property – this deals with inventions
Customers are then able to book their stay online just as (patents), trademarks, industrial designs, and geographic
they would do at the larger all-inclusive hotels. The use of indications of source
e-commerce by small businesses is not limited to the field Copyright – this deals with literary and artistic works
of accommodation, as there are lots of other small firms such as novels, poems and plays, films, musical works,
that offer their products online – for example, marketing artistic works such as drawings, paintings, photographs
products or as online distributors of a product. and sculptures, and architectural designs.
These categories can be further broken down into five
legal components, however, for the purposes of your CAPE
EXERCISE Management of Business course, only three of them will be
In your class discussions, try to identify some of these explored below:
small businesses within your country. Patent – this is granted by the government and it gives
the firm or person the right to take legal action against
anyone who uses, makes or sells your invention with
the patent still in force
Intellectual property Trade mark – this is a word, symbol, device, name
The Jamaican Intellectual Property Office defines graphical representation or any combination of these
‘intellectual property’ as ‘the Legal Rights which result which is intended to distinguish your product from
from intellectual activity in the scientific, industrial, literary, other products within the marketplace
artistic, musical and dramatic field among others’. Likewise, Copyright – refers to laws that give the holder the right
the World Intellectual Property Organisation (WIPO) defines to prevent others from reproducing his/her work.
CHAPTER 37 | | MAJOR CHALLENGES AND OPPORTUNITIES FACED BY SMALL BUSINESSES 347
The aim of the intellectual property laws is to protect CDs and DVDs and the proliferation of online sites which
the expression of ideas, inventions and developments of offer free downloads or viewing.
individuals. These ideas and creations are protected by the Small business owners must be aware of the protection
company from any outside use or implementation without that is available to them under the laws pertaining to
its consent. A country that desire to improve its business intellectual property and at the same time must ensure that
district has to be mindful that the work of individuals they are not contravening the laws themselves. A common
are very important and so should be protected. In order mistake that some small business owners make is to leave
to promote the entrepreneurial and inventive spirit the their inventions or expression of ideas unprotected. As a
country will want to assure inventors and entrepreneurs result, their ideas are copied and produced by other people,
that their efforts, resources and expression of ideas are leaving them with little redress under the law.
protected from unscrupulous people. The truth is that these
people sometimes spend large sums of money in order to EXERCISE
realise their dreams or produce a product but it is so easy In your class discussions, examine the policies and laws
for someone else to use their ideas to make money having in your country as they relate to protecting intellectual
not incurred any of the costs involved in the product’s property and what you can do yourselves to prevent
development. We see situations where a number of artistes breaching the rights of others.
and movie makers are losing revenues because of ‘bootleg’
CHAPTER SUMMARY
The process of choosing a business The entrepreneur is faced with many Intellectual property is defined as
idea can be a tedious one and so challenges that he/she needs to ‘creations of the mind: inventions,
should be done through careful overcome in order to be successful. literary and artistic works, and
thought and research These challenges include: identifying symbols, names, images, and designs
business opportunities, sourcing used in commerce’. It is generally
finance, selecting a type of business broken down into industrial property
and choosing a suitable location and copyright.
MULTIPLE CHOICE QUESTIONS 3. Burning CDs with copies of a newly released reggae album
and selling them to your friends at school is a breach of:
1. Which of the following types of business separates the
a. Industry property
owner’s identity from the business’s identity?
b. Copyright
a. Sole trader
c. Trade mark
b. Partnership
d. Protocol
c. Public limited company
d. Joint venture
2. Which of the following is a type of debt capital?

a. Loan from a credit union
b. Shares
c. Money from your savings account
d. Money given to you by a friend

Mrs Trying has had the desire to start her own business for
some time now. She has a number of ideas in her head that she
is yet to put in practice. Last month she was made redundant
and so the idea of starting a business has become even more
pressing and important. As a good friend of the Trying family
and a good Management of Business student, you are asked to
explain how the following challenges might affect her business
prospects and how she could overcome them:
a. Briefly describe the five (5) marketing or business
concepts.
b. Sourcing capital
c. Selection of business type
d. Determining a location
e. E-commerce. (25 marks)
349
38 Types and Nature of Assistance

Available to Small Firms
Likewise, the type of assistance offered may also be different.
LEARNING OBJECTIVES: You are encouraged as you study this section of the course
At the end of this chapter students should be able to: to look closely at some of these government agencies in
Identify the agencies that offer assistance to small your own country, paying attention to points such as their
business functions, objectives and type of assistance offered. Some of
Outline the type of assistance offered to small businesses these agencies include the following:
by each of these agencies
State the potential benefits to be derived from these Jamaica Business Development Corporation (JBDC)
forms of assistance This government agency was established to assist small
and medium-sized businesses. The JBDC offers technical
and business support. It also offers consultancy services,
financial and incubation services. The JBDC works in
T
here are a number of people who wish to start busi- collaboration with other government agencies, educational
nesses but are constrained by a number of factors, as institutions and private-sector organisations to create a
discussed in Chapter 37. While there are challenges, friendly environment where budding businesses can be
though, there are also agencies that offer assistance to small assisted. Since its inception, many businesses have benefited
businesses. The type of assistance varies from firm to firm from the services that are offered by the JBDC.
and sometimes depending on the country in question.
Recent economic crises have forced a number of Development Bank of Jamaica (DBJ)
countries to start thinking of how to foster the growth of The Development Bank of Jamaica Limited is a government-
small businesses. However, small businesses are nothing owned corporation that was established in 2000 through the
new to Caribbean territories, as they range from the merger of the Agricultural Credit Bank of Jamaica Limited
street-side vendor to some private limited companies. and the National Development Bank of Jamaica Limited.
However, the desire to start small businesses has increased The bank has a mandate to foster economic growth and
significantly since the economic contraction resulted in a development of strategic sectors of the Jamaican economy.
number of lay-offs and close-downs. For example, in 2009 In order to carry out this mandate it must offer different
the Barbados Government published its Medium Term services to small businesses. One of the main services offered
Development Strategy which is geared towards offering by the DBJ to micro, small and medium-sized enterprises
technical support to small and medium-sized businesses. We (MSMEs) is financial. The bank works along with other
see where more universities have started to offer Bachelor’s financial institutions within the country to provide financing
degrees in entrepreneurship and other forms of certification for ventures that will foster growth and development.
to some of these business owners in different areas of
studies. In this section of the book we will examine some of Rural Agricultural Development Authority (RADA)
the stakeholders that offer assistance to small businesses and This statutory organisation was developed in 1990 with a
the types of assistance that are offered. mandate to offer assistance to farmers across the country.
There are three main stakeholders that offer assistance to It aims to create development in the agricultural sectors
small businesses in most countries. and works in tandem with the Ministry of Agriculture.
RADA has offered farmers (entrepreneurs) technical advice
and marketing opportunities and also has given seeds and
Government agencies fertilisers to a number of farmers within the country. The
The government agencies or ministries that offer assistance agency also offers training for farmers and help to promote
to small businesses may vary across regional territories. agriculture in schools as a viable career opportunity.
Scientific Research Council Non-government agencies

The Scientific Research Council is a government agency There are also a number of non-government agencies
that fosters and coordinates scientific research in the across the Caribbean that offer services to micro, small and
agro-industrial sector in Jamaica. The agency also offers medium-sized Enterprises (MSMEs). Like the government
technical support and training through the implementation agencies, these may vary from one country to another.
of the various technologies that are available. A number of However, in your class discussions, be sure to discuss some
MSMEs have benefited from the research of this agency as of these agencies in your own country. Some of the more
individuals seek to come up with various innovations and popular agencies are:
business ideas.
Small Business Association of Jamaica
Barbados Investment and Development Corporation This association was established in 1974 as a private non-profit
(BIDC) organisation with a mandate to foster the development and
This is an agency of the Barbados Government with growth of businesses and to offer representation to small and
responsibility for promoting establishment and growth of micro businesses. For more information about its objectives
businesses and offering a number of other services to them. and mission, you can visit the association’s website
The BIDC provides small businesses with innovation support, (http://www.sbaj.org.jm/).
incubator services, technical assistance and mentorship. This
should help to promote the development of small businesses Private Sector Organisation of Jamaica
within Barbados. This organisation was established in 1976 and helps to
promote a competitive and productive private sector,
National Entrepreneurship Development Company including micro, small and medium-sized enterprises. It also
Limited (NEDCO) (Trinidad) offer technical assistance and advocate for its members.
This agency is owned by the Trinidadian Government and is
charged with a mandate to assist people over the age of 18 to Barbados Small Business Association (BSBA)
start small to medium-sized business. The NEDCO provides a This organisation was established in the 1980s as a non-profit
myriad of services to small and micro enterprises in Trinidad representative body for MSMEs. In addition to sourcing
and Tobago. Its services include the provision of funding, finance, the BSBA seeks to expand business opportunities
training, business advisory and promotional assistance. for its members, provide education and development
services and lobby to ensure an enabling environment for
Guyana’s Small Business Council the growth and sustainability of the small business sector.
This was formed in 2004 by an Act passed in Parliament.
It was formed together with the Small Business Bureau
and the establishment of a development fund. Some of the Financial institutions
functions of the agencies were to: One of the things that have been observed is that as more
Review draft legislation proposed by the Government, emphasis is placed on the importance of small businesses,
relating to or affecting small businesses more and more financial institutions have been creating
Preparing annually a Small Business Policy and financing opportunities. To date, there are a number of
Administrative Reform Agenda financial institutions which are offering loans to individuals
Maintaining a Register of Small Businesses under the wishing to establish MSMEs. These financial institutions
Act include commercial banks, building societies, credit unions,
Managing and advising the Small Business Bureau development banks, government agencies and other
Preparing a Small Business Procurement Programme financial institutions. Different institutions will however,
and reporting thereon. have different product offerings for small business owners
The Small Business Council would also help to fund small and so individuals are usually encouraged to shop around.
businesses and provide training for entrepreneurs. It was In Jamaica, financial institutions such as the National
hoped by the Guyanese Government that the establishment Commercial Bank (NCB) and Jamaica Nation Building
of these agencies would help to improve employment, Society (JNBS) have created a small and medium enterprise
increase the development of small businesses, an expansion (SME) division. This division is mostly responsible for
of existing businesses and increased earnings for individuals. making loans available to people wishing to start their own
CHAPTER 38 | TYPES AND NATURE OF ASSISTANCE AVAILABLE TO SMALL FIRMS 351
businesses at competitive interest rates. The Caribbean use this avenue, especially when there are liquidity
Microfinance Trinidad and Tobago Ltd (MICROFIN) is a problems
private-sector company that has been set up to provide Auto loans – some financial institutions have been
business loans to very small-scale business owners. offering auto loans to small business owners. This
As we have discussed earlier, however, one of the major provides entrepreneurs with the opportunity to own a
challenges being faced by MSMEs is sourcing finance. Some, means of transport which can enhance their product
if not all, financial institutions will require some form of offerings.
collateral before a loan is processed and granted. The sad
reality is that some of these small and medium enterprises Technical
do not own such collateral. In such cases, the establishment It is quite evident that the entrepreneur will not possess all
of the entrepreneurial business might be hampered. the requisite technical skills that are needed to be successful
in business. This is particularly true for businesses that require
EXERCISE in-depth research or the use of highly technical equipment
In your class discussions, try to identify the financial and machinery. Technical assistance could also involve plant
institutions within your country that offer special design and layout, equipment selection, use of computer
arrangements to MSMEs. technology and methods of production. In the agricultural
industry MSMEs may also receive technical assistance in
terms of greenhouse technology, nursery management, pest
Types of assistance offered to small control and irrigation technology. The assistance received
businesses could be given in a classroom or through in-plant or on-the-
job training.
Financial
As was discussed in the previous section, there are a number Education and training
of institutions that offer financial assistance to micro, small In addition to technical training and support, entrepreneurs
and medium-sized enterprises (MSMEs). The financial can also receive other forms of education and training. In
services offered can be categorised as follows: recent times, a number of educational institutions, including
Energy conservation loans – this type of loan is universities, have been developing special programmes to
becoming increasingly popular in Jamaica and some certify entrepreneurs and provide the requisite skills that are
other regional countries as they grapple with the needed to run a business successfully. Some of this training
effects of rising energy costs largely due to the rising oil and education involves management strategies, financial
prices on the world market. Firms can receive loans to management, marketing management and technology
improve their energy conservation techniques and also and computer courses, among other things. The topic of
implement renewable energy sources entrepreneurship has also been included in a number of
Start-up capital financing – this is probably the most business courses done at the CSEC and CAPE levels, with
popular loan that is given to MSMEs. Entrepreneurs Management of Business being one of them.
who do not have the requisite start-up capital often The level of importance being placed on entrepreneurship
turn to financial institutions for assistance. While there has come at a time when a number of countries are
are a number of institutions that are willing to lend promoting the development of MSMEs in a bid to improve
to potential entrepreneurs, some are still faced with employment and promote economic growth. However, just
different challenges, as was discussed in this module starting a business is not enough, as a number of businesses
Venture capital – as was mentioned in Chapter 13, have failed because of the lack of knowledge and the requisite
venture capital refers to funds invested or that are made skills. In many cases, the required skills can be taught and so
available for investment, in a business venture which educational institutions have capitalised on the opportunity.
offers favourable returns. Some entrepreneurs have
benefited from this type of funding, especially where Incubation
they are having problems acquiring funding from other ‘Business incubation’ is defined by businessdictionary.com
financial institutions as a ‘facility established to nurture young (start-up) firms
Debt factoring – this concept was also discussed in during their early months or years. It usually provides
Chapter 13. Small business owners may choose to affordable space, shared offices and services, hands-on
management training, marketing support and access to to grow and benefit from a host of other services such as
some form of financing’. There are a number of institutions, mentoring and training.
agencies or associations that offer this kind of service to small
businesses. The Technology Innovation Centre (TIC) on the EXERCISE
campus of the University of Technology, Jamaica is known In your class discussions, try to identify businesses
for its incubation services. The centre makes its office spaces within your country that offer incubation services to
available for small businesses at start-up until they are able budding entrepreneurs.
to branch out on their own. This will give businesses time
CASE STUDY
A cry for help

When Cherrie Reddish was growing up, she would enjoy her mother’s cooking. The family lived on a farm and both parents would
work on the farm daily. Her mother would improvise with cooking whatever crop was planted. One of the most intuitive products
was Cherrie’s mother’s corn tea. This was a hit and one that Cherrie hadn’t seen anywhere else. She would enjoy this tea as a
child and now that her parents have died she longs for that taste.
In hindsight, she probably should have got the recipe and directions to make it. All she can remember is that her mother
would use the dried corn, parched it and then crushed it using a mortar and pestle until it resembled instant coffee or cocoa.
Now that she is running the farm, Cherrie wants to commercialise some of her mother’s creations, including her classic corn tea.
One of Cherrie’s biggest setbacks, though, is that this recipe has never been put to the test to ascertain whether there are
any side effects or whether it should be drunk black or with a milk base. In addition, the mortar and pestle that her mother
had used back then would not be able to crush corn to be used in commercial quantities and, even so, that would not give it as
smooth a finish as she would like. If Cherrie is to carry out her planned product she is going to need assistance in more than
one way – but where should she go?
Questions
1. Discuss three (3) types of assistance that Cherrie Reddish may need in starting her business. (9 marks)
2. Suggest an institution or organisation that could offer her each of the above types of assistance. (3 marks)
3. What are two (2) legal requirements that Cherrie may have to fulfil in order to start this business? (2 marks)
Total 14 marks
CHAPTER SUMMARY Extended Essay Question

Increasingly, small business owners are finding that a. Identify five (5) agencies or institutions within
there are more financial institutions or government your country that offer some form of assistance
agencies that are willing to offer assistance to small businesses. (5 marks)
b. Discuss, with examples, the following types of
There are also a number of non-government agencies assistance offered to small businesses and
across the Caribbean that offer services to micro, small outline why each is important:
and medium-sized enterprises (MSMEs) i. Financial
ii. Technical
The types of assistance offered to MSMEs can be iii. Education and training
categorised as financial, technical, education and iv. Incubation services (20 marks)
training and incubation services.
353
39 Preparation of a Business Plan

for a Small Business
Can help to identify possible problems so that management
LEARNING OBJECTIVES: can implement strategies to mitigate their effects
At the end of this chapter students should be able to: The information gathered can be used to make critical
Draft a feasibility study decisions on the way forward
Outline the elements of a business plan The findings could enable the business to access
financing for start-up.
Prepare a simple business plan
The feasibility study can focus on different areas of the
Discuss the benefits of writing a business plan
prospective business venture, including:
Do the actual presentation of a business plan
Market feasibility – this would analyse certain
characteristics of the market, including the level of
demand, the composition, market size, consumers’ taste
H
aving a plan is mind is not sufficient for an entre- and preference and income
preneur to be successful and gain access to possi- Operational feasibility – the firm must assess how the
ble finances for lending institutions. A plan in your main stakeholders will affect its operations. It must be
mind can easily change and is unstable and so putting ideas able to secure adequate staff with the requisite skills,
on paper is very important. At the end of this chapter, it is suppliers of raw materials who will help to maintain
hoped that you will be able to develop a simple business plan. quality and consumers who will buy the products
Financial feasibility – this is probably the most important
aspect, since people enter into business with an aim of
Feasibility study making profits. The firm has to assess whether or not
It is advisable that before a business plan is drafted the it will be able to secure start-up capital, be it debt or
firm conduct a feasibility study. A feasibility study is an equity. It should also be concerned about whether or
in-depth analysis of the firm’s ability to complete a project not it will be able to secure substantial returns on its
or create a successful business venture amid legal, economic, investment and profitability
technological, scheduling and other factors. Conducting a Technical feasibility – this looks at the required machinery
feasibility study will help the prospective business owner and equipment and the expertise that is needed to use
to minimise the risk involved and the level of uncertainty them effectively. The entrepreneur must consider whether
about the market. While doing a feasibility study does not he/she will be able to secure staff with the technical skills
guarantee success, the entrepreneur will then have a fair to operate this machinery and equipment.
idea of whether or not to continue pursuing a business
venture or whether the business venture will be sustainable.
Once a business is deemed to be unfeasible the entrepreneur The business plan
is discouraged from investing large sums of money or he/ Once the feasibility plan has been conducted and favourable
she can make adjustments to the business idea and retest its results are received, the prospective entrepreneur can now
feasibility. consider writing a business plan for the business venture. At
this point, some of you may be wondering why we need a
Reasons for conducting a feasibility study business plan and why we can’t just invest some money in
While the list below is not exhaustive, some of the main order to make more money. However, creating a business
reasons for carrying out a feasibility study would include: plan is actually an integral part of starting a business. While
New opportunities could become clear from the study you can start a business without a plan, you run a higher
Enables the firm to focus on the business idea and the of risk of failure and furthermore may not be able to secure
possibility of success loans and other financial assistance from lending institutions.
CASE STUDY
John De Spender, a welder, came into some money last year following a longstanding lawsuit against the Government for injuries
sustained when he fell into an open manhole. The cover of the manhole was stolen and presumably sold to the scrap metal trade.
This is one of many manhole covers that have gone missing in the last year or two. Some of them have been replaced, while the
Government’s Transport Ministry is exploring the option of replacing them with concrete covers instead of metal.
When John De Spender received his settlement he decided that he did not want someone else to suffer the same fate as had
befallen him and so he had the idea of making metal manhole covers and selling them to the Government. He did so without
making any checks to see if he could get a contract with the Transport Ministry.
He quickly went into production and very soon he made what he thought was enough to go and convince personnel from the
Transport Ministry to buy from him. To his not so pleasant surprise, his attempt failed as the Ministry told him that it already
had a supplier and furthermore it is pursuing the idea of concrete manhole covers to prevent further theft. Now John De Spender
is left with a large supply of manhole covers and money tied up in his stock.
Questions
1. What is a feasibility study? (2 marks)
2. Outline three (3) reasons for conducting a feasibility study. (6 marks)
3. Explain three (3) areas of feasibility that John De Spender could have tested if he had used this route. (9 marks)
4. Discuss two (2) ways in which things could have gone better if John had done a feasibility study. (8 marks)
Total 25 marks
A business plan is: Elements of a business plan

A document describing the nature of a business, its
sales and marketing strategy, and financial back- Executive summary
ground, and including a projected profit and loss This is placed almost at the beginning of the business plan
statement. and often is right after the title page. Interestingly, it should
It is also seen as a road map or written summary that be the first thing that is seen but should probably be the
provides business owners with directions on how to operate last thing that is written. It is probably the most important
the business and plan effectively for the future. A business element of the plan, as it should contain a summary of
plan serves two general purposes: everything that is mentioned throughout the rest of the plan.
To give business operators guidance in terms of the It is a synopsis of the total plan and must be able to capture
firm’s future course and the strategies that will be the attention of its readers. Some financial institutions may
needed to get there not look beyond this point to decide whether or not further
To give prospective lenders and investors a clear idea consideration should be given to the plan and the business
of the company’s plans and whether the venture is venture. As a result, the executive summary must be
feasible enough to warrant their investment or financial interesting and captivating: it should encourage the reader
support. As a matter of fact, most financial institutions to continue reading. With the above in mind, the executive
will not lend money for a venture where there is no summary should also be concise (limited to possibly one or
business plan. two pages at the most) and must be written in a language
Planning for a business is a process. This process requires that is easy to understand.
that the prospective business owner carries out the following
tasks: Business description
Construct a vision statement This section gives a clear and comprehensive description
Develop a proper mission statement of the business. There should be a clear description of the
Outline the values of the business following:
Develop business objectives The name and location of the business – care must be
Develop a feasible and realistic business plan. taken to ensure that the business is not given a name
CHAPTER 39 | PREPARATION OF A BUSINESS PLAN FOR A SMALL BUSINESS 355
that is already established. To prevent this, the business in terms of its demographics – that is, size, income, race,
can do a name search through its local Companies gender, age and religion, etc.
Office. The description should also state the address of Consumer needs – the needs of the society must also
the firm and how it can be reached to conduct business be ascertained. This is further explained in the market
The nature of the business and product – this will analysis where the plan must say how these needs were
outline the main purpose for which the business was ascertained. Suffice it to say, though, the environment
established. Information should be given on the product in which consumers are located can have some impact
that is being offered and how it will satisfy the wants on their needs or wants
and needs of the target market. The owner(s) could also Location – the location of the business must also be
state the sector in which the business will operate – that carefully chosen. Locating the business has to be done
is, primary, secondary or tertiary sector after careful analysis of the prospective environment.
Information regarding the legal establishment of the The firm should assess such matters as size of the
business is also included – this speaks to the formation population, local amenities, political and social stability
of the business and the legal requirements in doing so. and services being offered. It should also consider
The legal requirements at start-up and beyond depend the closeness and availability of its suppliers and raw
on the type of business organisation (sole proprietorship, materials. It is advisable that you revisit Chapter 18
partnership and joint stock company, among others). and review the factors that influence the location of
Of those organisations mentioned above, the joint stock businesses.
company tends to have the most legal requirements
Objectives and mission statement – in describing the Industry background
business, the owner should also outline the objectives of The business plan must also give prospective lenders and
the business and also the vision and mission statement. investors an overview of the industry in which the firm
All three will help the readers and prospective investors will operate. The background covers such aspects as the size
to get a clear understanding of what the business is of the industry, the patterns in demand and the prevailing
hoping to achieve and the mission by which it is guided. standards. It is also imperative that the firm identifies the
other players in the industry and the level of control that
Business environment analysis exists. A good industry background also outlines the current
The firm’s business plan should also include information to and future trends in terms of the potential of growth or how
suggest that an extensive environment analysis was done. This it will evolve over the years. This segment could also include
section of the business plan will show potential investors that the likelihood of the industry being affected by the different
the business is quite aware of the different environmental issues environmental factors as mentioned above.
that it may be affected by. An environment analysis will include
a clear and in-depth analysis of the following environmental Competitor analysis
factors: political/legal, socio-cultural, economical, demographic The competitor analysis segment assesses the level of
and technological. Careful analysis of these factors will give the competition in the market and identifies who these
firm a greater probability of success. They will help to determine competitors are. The aim here is to determine the level of
the state of the environment in which the firm is operating. saturation within the market and whether or not the firm
Where the environment is not conducive to the type of business, can gain a competitive edge over these existing firms. If
the firm may run the risk of losing the money it is planning to possible, it would also be very important to ascertain the
invest or has invested. market share of each of these competitors. This would give
Careful analysis must also be made of: the firm a good idea of who the main competitors are. In
Target market – this section should give a clear carrying out the competitor analysis the prospective business
indication of the targeted market and all the owner should ask and answer the following questions:
stakeholders that the business will serve. The Who are the main competitors?
stakeholders will include consumers, the community What strategies are they using to make themselves
and other organisations. There should be a clear known?
indication of how the needs and wants of these What are their strengths and weaknesses?
stakeholders will be provided for by the firm. The firm What is their perceived image in the market?
also needs to assess the composition of its target market Are they successful and, if so, how successful are they?
The firm must then give a clear overview of the strategies want to price its product near to the perceived price
that it will employ in order to gain a competitive edge over of the customer. In some cases, the firm could ask the
its main rivals with the industry. These plans should be solid prospective customer to select a price range for the
and convincing in order to woo investors and lenders of product when it is conducting the market analysis.
funds. Promotional strategy – the business plan must outline
the strategies that will be used to promote the product.
Market analysis Having a great product without awareness on the
Understanding the market for the firm’s product is integral part of the customers will not lead to success and
to formulating a marketing plan. In order to analyse the so the firm must outline the different promotional
market, the prospective business owner has to conduct strategies that will be used. As you would have learnt
detail market research to capture the relevant data about earlier in the book, the firm can promote its product
the target market. This should include: by using advertising, sales promotion, personal selling
A clear indication of what the customer needs are. Since or publicity. The promotional strategy should outline
firms aim to make profit, providing a product that caters which of these tools of promotion will be employed. It
to customers’ needs and wants will give the firm a better should include other things such as:
chance of success. If customers have varying needs and • The budget for promotion
wants, the firm could also consider using the concept • The targeted customers
of product differentiation or simply offering a line of • The media through which promotion will take place
products instead of one The firm should choose the option that will give the
The market analysis also serves the purpose of locating most favourable benefits while being cost effective. The
the target market and identifying who they are. Even tool chosen may also depend on the type of business or
though the firm may be targeting an entire market, product that is being promoted. Lenders and investors
it may have a greater concentration of customers in will want to know that the firm will be able to generate
a particular segment. When this occurs, the firm may enough sales in order to repay the loan given or give
want to consider segmenting the market and creating sufficient returns on investments
different marketing mixes for each segment Distribution (place) strategy – there must be a clear
The question of how to reach the prospective customers indication of how the firm plans to sell and distribute
relates to the distribution strategy that will be employed. the product. The firm has to choose between and
However, before the firm formulates such a strategy, clearly state whether or not it will be using a direct or
the marketing analysis should give an idea of how an indirect channel of distribution. As mentioned in
the customers will be reach and the preferred way as Chapter 32, there are two types of indirect channels
indicated by the prospective customers on the market available to the business. This decision may be based on
research. the size of the target market, in addition to other factors.
In completing this section, the entrepreneur should
Marketing plan consider the following:
Having obtained the relevant information through the • Will it employ its own salespeople?
market analysis, the firm must now devise a proper • Will distribution be done locally or internationally or
marketing plan that will help to accomplish the firm’s goals both?
and objectives. A marketing plan outlines the actions that • If an indirect channel is used, who are the
will be taken to spark the interest of prospective consumers intermediaries?
and outlines how the firm will achieve its projections for sales • The cost involved in the distribution of the product.
and revenues. The marketing plan should include three of
the ‘Four Ps’ of the marketing mix, since the product would Operations plan
have been chosen already at this point: The operations plan is also known as the ‘production plan’.
Pricing strategy – this should outline the firm’s pricing It outlines the day-to-day operation of the firm and describes
plans in terms of the type of pricing strategy that it is such matters as the plant location, facilities required,
using to attach a price to the product. The price to be machinery and equipment needs, space required and labour
charged for the product should also be specified in this needs. The operations plan may differ depending on the
section. Care must be taken, though, to ensure that type of business that is to be established. For example, a
the product is not priced too high or low. The firm will manufacturing business will need to discuss more aspects
of this plan than would a service oriented business, since described, since the firm will incur these costs even
the former usually uses more machinery and equipment. without producing any product.
The manufacturing business may have to also outline the
control strategies that will be employed; whether or not it Managerial summary
will be producing all its product and components; and how This section describes how the business will be managed and
its production costs will be broken down. Now let us look the various positions that will make up the management
more closely at some of these requirements: team. The size of the management team or structure of
Facilities and space required – the size of the facility management is often dependent on the size of the business
required will depend on the nature of the business and and the type of business. For example, a sole trader is often
the product that it is offering; the production method the only manager while a joint stock company is often made
being used; and the level of production. For example, up of a board of directors, shareholders, and managers
a firm that is planning on mass producing will need employed by the firm.
a larger facility. The plan should outline whether the Management structure and personnel – this outlines
facility will be purchased, leased or rented. The space the number of managers that will be needed and the
required in the facility is also important and should line of authority that will be present. This is best shown
be outlined. This can be determined by the amount through an organisation structure, as you have learnt
of activities that will take place at the business. For earlier in the course. It would also be advisable to
example, the more departments that the business has, mention the span of control for each manager. The level
the greater will be the space needed. This section of the of qualification required of each manager and a job
operations plan could also describe the layout strategy description may also be included in this section
that will be used and why it was chosen Staffing – as was mentioned in the last section, securing
Machinery and equipment required – a clear description good labour is important. This section describes the key
of the machinery and equipment need must also be employees and their job descriptions. The plan could
included in this section. The firm has to decide and also include the staffing needs for each department and
state whether it is using a capital-intensive or labour- the company as a whole.
intensive product method. The type, amount and
technicality of the machinery and equipment should be Financial plan
described here. It should outline how this machinery Investors and lenders will be very interested in this section
and equipment will be acquired. Will they be purchased of the business plan and so it should be done as accurately as
in full or on hire purchase or leased or rented? What is possible. This section describes the current financial position
the expected cost for this machinery and equipment and of the firm (that is, if it is already established) and gives
will they be purchased new or used? projections for the future earnings, profit and loss and cash
Labour requirement – it is obvious that machines flow. In order to attract investors or lenders, a three-year
cannot operate themselves and so the firm is going to projection should be done of the financial statements. These
need labour. The operations plan should also describe its financial statements include:
labour requirement in terms of its day-to-day running. Profit and loss (income statement)
It should outline the number of workers that will be Balance sheets
needed and the level of skill and qualification that is Cash flow statements.
required. A description of how the workforce will be This may be a good time to review Module 3 of Unit
organised in terms of part-time or full-time or shift 1, which demonstrates how to calculate and draft these
workers must also be given. The section should give a statements. These three financial statements will either
breakdown of the remuneration and fringe benefits or help or hinder a firm in getting finance. Investors and
incentive package for the different positions and the lenders will want to know that the business will be able to
level of training that will be required or done generate sufficient funds in order to repay its debt and to
Cost of production – the plan should give a breakdown be profitable. While this is a projection, it gives a good idea
of the cost that the business will incur in manufacturing of what the actual figures may look like. If the projections
its product(s). This would include all the direct material are not favourable, the firm may not be able to secure the
cost, direct labour cost, direct expenses and factory investment or loan it is looking for.
overheads. The fixed costs of the firm should also be
In addition, firms often carry out an analysis of the final be contributing? Will shares be offered to the public or
accounts figure. This is done through ratio analysis. This families and friends and, if so, how many shares will be
technique can be used to show trends in historical and offered? How much money is expected to be raised from
projected data. Ratio analysis is also a good method to use the Initial Public Offering (IPO)?
in making comparisons and assessing performance. The
financial plan should include the calculation of the main EXERCISE
ratios such as profitability, liquidity, efficiency and gearing. You are responsible for identifying or deciding on a
The financial plan also includes the following sections: product that you would want to produce and market.
Working in groups, write a simple business plan (of not
Breakeven analysis – this studies the interrelationships
more than 12 pages) that you would present to a bank
of costs, output and profit at different production levels.
and potential investors when applying for funding.
This plan should indicate the level of production and
sales that the business will require in order to cover
its variable and fixed costs – that is, to break even. It Benefits of writing a business plan
should clearly show what the expected breakeven point While the business plan does not guarantee success, it offers
is in both units and sales volume. This analysis can also a number of benefits to the prospective business owner.
be used to indicate the number of units that must be These benefits include, but not limited to:
sold for the firm to achieve a targeted profit It gives exposure to the possible risks or opportunities in
Source of funds – sourcing funds can be a tedious starting a business
process, as we have discussed in Unit 1. However, the It gives prospective financiers an outline of the business
business plan should give an indication of the sources and its projected revenue so that they can make an
of funds for the business. A breakdown of how the informed decision in terms of financing
business will be funded should be included here. This It can be used to determine whether the product has the
should include whether debt capital or equity capital or level of market support needed for success
a combination of both will be used. If debt capital, who Can be used as an internal planning tool for the
will be the lenders and how much money is expected business
to be raised through borrowing? What is the projection The firm can assess the level of competition and decide
for these loan repayments? If equity capital, who will whether or not it can gain a competitive advantage.
CASE STUDY
Mrs Cash-Rich has decided to start a business in the catering industry. She is a very good cook and teaches Food and Nutrition
at a prominent high school but wants to leave to pursue her dream of becoming an entrepreneur. She believes that if she saves
enough money and obtains funding from a financial institution, such as a credit union or commercial bank, she will be able to
make this dream a reality.
While wanting to pursue her goal, Mrs Cash-Rich is mindful that many businesses have failed because of a lack of planning.
She is determined not to suffer the same fate and so last month she put together a questionnaire and carried out some research.
The aim of this research was to test the market feasibility of the proposed plan. Based on her findings, she is optimistic that
once she has the necessary funds the business will be successful. To obtain additional funds, though, she will definitely have to
write a business plan.
Questions
1. Define a ‘business plan’. (1 mark)
2. Describe four (4) benefits that Mrs Cash-Rich could derive from writing a business plan. (14 marks)
3. Based on the business idea outlined in the case above, write the following aspects of the business plan:
a. Business description d. Operations plan
b. Competitor analysis e. Financial plan.
c. Marketing plan (20 marks)
Total 35 marks
CHAPTER SUMMARY
Conducting a feasibility study will that will be needed to get there The financial plan is also very
help the prospective business owner • To give prospective lenders important, as it indicates whether
to minimise the risk involved and the and investors a clear idea of the the business will be able to repay its
level of uncertainty about the market company’s plans and whether the debt and be profitable.
venture is feasible enough to
The feasibility study can cover warrant their investment or
different areas of the business, financial support
including: market, technical,
operational and financial feasibility A business plan has a number of
elements. However, the executive
A business plan serves two general summary, which is at the very front,
purposes: gives a synopsis of the total plan and
• To give business operators must be able to capture the attention
guidance in terms of the firm’s of its readers immediately
future course and the strategies
MULTIPLE CHOICE QUESTIONS c. Direct labour

d. Direct expenses
1. A feasibility study often covers ALL of the following areas
EXCEPT which one? 5. Which of the following is categorised as a financial
a. Location statement?
b. Market a. Cash flow statement
c. Financial b. Breakeven analysis
d. Technical c. Manufacturing account
d. Ratio analysis
2. Which of the following would NOT be included in the ‘business
description’ segment of the business plan?
a. Nature of the business and product Extended Essay Question
b. Business name and address Question one Total 25 marks
c. How the business will be financed Your school has started a business club and has been given
d. Legal establishment permission to create and sell a product of the club’s choice.
Having been voted in as Vice President of Marketing, and
3. The firm’s marketing plan should include ALL of the
with your business background, you have been asked to
following EXCEPT which one?
advise the club on the way forward. Therefore, you decide to
a. Promotional strategy tell the members about business plans.
b. Product development a. Define the term ‘business plan’. (1 mark)
c. Pricing strategy b. The typical business plan has 10 elements.
Explain these elements briefly. (20 marks)
d. Distribution strategy
c. State four (4) benefits of writing a
4. Which of the following is NOT a part of the cost of business plan. (4 marks)
production?
a. Direct materials
b. Administrative expenses
360
MANAGEMENT OF BUSINESS
UNIT 2 – PAPER 2
END OF UNIT TEST
DURATION OF TEST: 2hr 30min
INSTRUCTIONS TO STUDENTS
1. This test consists of THREE sections
2. Each section has TWO questions
3. Candidates MUST answer ONE question from EACH section
MODULE 1: PRODUCTION AND OPERATIONS MANAGEMENT
a. With the use of suitable examples, describe the production a. Outline four (4) key features of the Just-in-Time model.
process. 6 marks 8 marks
b. Jack presently operates a small Fish Centre where he b. State three (3) advantages and two (2) disadvantages of the
prepares fish meals to order when customers arrive and Just-in-Time model.
make a purchase. Because of his sumptuous meals his name 5 marks
has spread far and wide. Jack recently got an offer from a c. Tab Core Ltd is a new computer tablet maker that has
nearby Revenue Centre to supply them with fish meals every entered the very competitive tablet market. In order to gain
Friday. There are approximately 100 persons within the a foothold in the market the company knows that it has to
revenue centre. produce a high-quality product.
i. Which production method was Jack using initially and Discuss four (4) dimensions of quality that Tab Core Ltd
which is the MOST LIKELY for him to switch to? should consider in making its new line of tablets.
4 marks 12 marks
ii. Outline three (3) features for each of the two (2) Total 25 marks
methods of production named in (b. i) above.
6 marks
iii. Citing at least three (3) potential benefits and
drawbacks, discuss whether this is an appropriate
production method to be used by Jack once he starts
supplying the Revenue Centre.
9 marks
Total 25 marks
362 END OF UNIT ASSESSMENT
MODULE 2: FUNDAMENTALS OF MARKETING
There is no doubt that the way firms do business has changed a. Differentiate between probability sampling and non-
since the early 1900s. In fact, a number of firms have taken a probability sampling.
more societal marketing concept in these global competitive 4 marks
times. b. State four (4) advantages of using focus groups as a means
a. Discuss how the marketing (business) concepts have evolved of gathering information.
since the early 1900s. 4 marks
25 marks c. Define the term ‘segmentation’.
Total 25 marks 2 marks
d. Discuss three (3) bases which a hotelier can use to segment
his service offering to his customers.
15 marks
Total 25 marks
MODULE 3: SMALL BUSINESS MANAGEMENT
a. Define the following terms: a. Jamie Jamison lives in a country whose economic system
i. Entrepreneurship is characterised by government ownership of the factors
ii. Corporate entrepreneurship of production. Jamie wants to start his own business but
iii. Social entrepreneurship might be limited in his ability to do so because of the type of
6 marks economic system in his country.
b. Discuss five (5) characteristics that a successful i. Outline four (4) features of the type of economic
entrepreneur should possess. system that exists in Jamie’s country.
15 marks 8 marks
c. Outline two (2) potential drawbacks to the entrepreneur in ii. If Jamie should move to another Caribbean country
starting his/her own business. with a mixed economic system, discuss two (2) benefits
4 marks that he could derive as a result.
Total 25 marks 8 marks
b. Discuss three (3) challenges that an entrepreneur could face
in trying to start a business.
9 marks
Total 25 marks
364
40 Internal Assessment
should I do?’, ‘How am I going to put what’s in my head

LEARNING OBJECTIVES: on paper?’ and ‘How do I write this topic?’. This challenge
At the end of this chapter students should be able to: is further compounded by the fact that, in most cases, you
Choose appropriate topics for their research have not yet done a substantial part of the content of the
Garner enough information to complete their School course. However, to overcome that challenge, each student
Based Assessment is encouraged to own a syllabus so that you can scan through
Organise their School Based Assessment in a manner the content of the Unit you are studying.
that is easy to understand The success of your SBA starts with your topic selection.
Use the various statistical tools in presenting data A poor topic that cannot be researched will hinder the
Make conclusions and draw inferences based on their sourcing of relevant information. In order to choose your
research topic, you need to be aware of the content of the course (via
Sharpen their ability to carry out research the syllabus). The following are some general points that
should assist you in this regard:
The topic chosen should provide you with the
opportunity to incorporate the content of one, two or all
A
s a CAPE Management of Business student, you three modules in your report. Let us examine this using
have to complete a School Based Assessment (SBA) the following topic:
unless entered as a private candidate. The SBA forms ‘To what extent does the leadership style of Company X
an integral part of the learning process and represents 20 per affect the level of employees’ motivation?’
cent of your final grade, therefore care must be taken when This topic was taken from Unit 1, Module 2. In the
completing it. A proper SBA cannot be done overnight, so analysis and interpretation segment of the research we could
you are encouraged to start on time and to make progress make a link between the topic and the content of Module 2
in a timely manner. Information submitted should portray only, or could incorporate all the related content of two or
your ability to analyse and evaluate data while drawing all three modules. Table 40.1 (p 365) shows the content that
on the content of the course (including laws, theories and could be incorporated in your discussions surrounding the
generalisations). To this end, it is advisable that you start research topic.
working on your SBA as soon as you start the new school Your research topic can be in the form of a question
year and plan your progress through to completion and or statement. Your research should be based on this
submission. Students should also consult the syllabus to statement or question and at the end you should be
obtain further guidance in relation to organisation of the able to make a generalisation based on your findings.
SBA, requirements for it, the word limit, the mark scheme Here are some of the popular stems that are used when
and the rules governing the SBA in general. writing a research topic:
This chapter is designed to assist students in overcoming • To what extent has . . . ?
the fears, challenges and misconceptions that come with • An assessment of . . .
SBA writing. It provides you with a step-by-step process that • A study of . . .
will take you from beginning of the SBA to the end. • An investigation into . . .
• What is the impact of . . . ?
• An inquiry into . . .
Choosing an appropriate topic or title for • To research the implication of . . .
your research The topic should be researchable – that is, not vague,
This is probably the most tedious activity in the SBA process, too wide and not outside the scope of the Management
as you ask yourself the following questions: ‘What topic of Business syllabus. This extent to which your topic
CHAPTER 40 | INTERNAL ASSESSMENT 365
Module Related content in each module

1 Business objectives – the objectives of the firm could influence the style of leadership employed by
management
Decision making – the leadership style being used will definitely affect how decisions are made within the
firm
2 Organisational structure – this will give a breakdown of the lines of authority within the business, which will
have some bearing on the leadership style being used
Motivation – this is a part of the research topic and so must be discussed and analysed
Leadership – this is also a part of the research topic
Communication – the leadership style often determines the flow of communication in the business and can
also decide whether employees are motivated or not
3 Financial statements, as the cash position of the business may be used to determine the motivational
strategies that are used by management
Table 40.1: Module content related to SBA topics
is researchable often depends on the words you used. ‘An assessment of the use of teamwork in [firm’s name]
For example, a topic such as ‘To assess the operations and its impact on its performance’
of Company Y’ is very broad based and has not focused It is also important that you get approval for your topic
on a particular problem or interest. The operations of from your teacher. Obtaining this prior approval paves
Company Y could include a host of things. What also the way forward for future guidance and suggestions.
makes a topic researchable are the variables being
measured. There are two correlated variables that are
often measured in research: Introduction
• Independent variable – this is a variable over which The introduction of the research is broken down into two
the researcher has control and which he/she can sections:
manipulate. It often has an impact on the dependent
variable. Therefore, in our previous example, this Aims/objectives of the project
would be ‘leadership styles’ The objectives of your research set its parameters and the
• Dependent variable – this is a variable being outline its purpose and focus. They outline the fundamental
affected by the independent variable. It is what the questions that need to be answered by doing the research.
researcher measures during the experiment or The objectives can also indicate the specific needs of the
research. Therefore in the previous example, ‘level research – that is, what should be investigated and how
of employees’ motivation’ would be the dependent should you go about doing so?
variable. A common mistake students make is to copy the objectives
While not all research topics will be measuring two outlined by CXC in the SBA section of the syllabus. However,
variables it is advisable that you narrow the scope of the these do not relate to your individual research and are too
topic and ensure that it can be measured and is specific general and so should not be used. Your objectives should be
rather than vague. based on the topic of the research and the other content areas
You can choose topics from personal business-related that you planning to incorporate in the study. By doing so,
interests or things that have affected the business you will be giving an overview of the concepts you plan to
environment in relation to the content of the course. discuss and measure. Your objectives should be stated using
Since you are required by the syllabus to complete ‘action words’ that are specific and measurable. These words
your SBA on a topic in the Unit you are completing, could include, but are not limited to, ‘explain’, ‘ascertain’,
care must be taken to ensure that your topic does not ‘measure’, ‘outline’, ‘discuss’, ‘evaluate’, ‘identify’ and ‘find
related to the other Unit. A strategy that can be used out’. For uniformity and to prevent repetition, a stem or
to select the topic for research is to comb through the phrase could be used before stating your objectives – for
relevant Unit of the syllabus and find a content area example, ‘at the end of the research’, ‘the researcher hopes
that interests you. Once this has been identified you can to’ or ‘the objectives of this research are to’. This stem or
then formulate a question or statement surrounding phrase would then be followed by the list of objectives or
that content area. For example, if the topic ‘teamwork’ aims. Going back to the first example, these objectives could
is of interest, you could formulate the following topic: read:
366 INTERNAL ASSESSMENT
The objectives of this SBA are to: Literature review

Ascertain the leadership styles being used at This is a follow-up on the background information collected
Company X for the research. In the preceding section you would have
Assess the level of motivation of the employees given a summary of what is mentioned in the theories and
Identify the financial and non-financial motivation concepts that spark your interest in the topic. However,
strategies that are used by the firm in this section you are required to conduct research on
Describe the type of organisation structure employed information from books, journals, newspapers and other
by the firm printed or electronic sources that are relevant to the research
Explain how decisions are made within the firm and you are conducting. A literature review gives a description
whether or not employees are involved. of the existing information that is relevant to the topic being
The number of aims or objectives you have will be researched. The review should outline what was said in
dependent on your topic. However, it is advisable that you regard to the topic and by whom it was said. It should also
do not write fewer than three objectives but, at the same display your understanding of the firm you are studying.
time, not too many either. The important thing is to ensure Information about the firm is often found on its website
that your objectives capture the scope of the research and or can be obtained by visiting the firm in person. A proper
highlight what you are researching. literature review should:
Give a summary of important information on the
Background of the research research topic/problem
This section of the introduction should make reference to Summarise and report on the previous studies that were
previous published or unpublished studies and say how they conducted on the same topic
affect your research. In order to do this, you must find out Outline the strengths and weaknesses of these existing
if there was previous research done on your general topic. studies
This segment requires the student to give a background to Critically compare and analyse existing literature,
the topic being researched and also outline the significance pointing out their similarities, differences and
of the topic: contradictions
Background – here, the student must examine previous Be done in a coherent fashion.
studies and use them to show the relevance of what
is now being researched. It provides information Once you have settled on your research topic, written
surrounding the research topic. This could include your objectives and completed the background of the
information on the business you are researching, research, it is time to carry out your review of literature.
stating why you want to conduct this research on that This is how it is done:
particular firm. You could discuss what the different Search for information about the topic – as mentioned,
theorists say about the area of study you are doing and this can come from books, newspapers, journals and
then show why it now warrants research from you. For other sources. The search can be done using the topic,
example, for the topic given earlier, the background of the surrounding concepts or an aspect of the topic. Once
such research would include a synopsis of the views of the relevant information is found it is time to move to
the different leadership and motivation theorists and the next step
how these views have impacted on the research now Writing the literature review – this is going to take
being pursued careful planning and organisation, as you want the
Significance – here, the student is expected to show information to flow in a logical order. The review
why this research is important and the contributions should be written in continuous prose and should
that it will make. It should indicate the usefulness of the incorporate the information that was researched in
research’s findings. Using the same topic from above, the first step. You could probably start by defining the
the significance of the research could be to test whether key terms within your topic. That could be followed by
or not employees at Company X are affected in the same information that supports your hypothesis and then
way that the theories say they would be. You could by information that opposes it. You could also make
want to prove whether they are motivated by those comparisons of the relevant information and point out
things as mentioned in previous research. You could any contradictions or differences
also state who could use the findings of the research and Correct citing of sources in the literature review is
what decisions could it be used to make. very important. Since the information being written
here is from previous research, care must be taken Observation – this is where data is gathered by
to give credit to the relevant sources. While I will observing the people or process involved in the research.
not outline them here, the internet has a host of For example, the researcher could observe consumers
guidelines on how to do in-text citing, using both the in the business place or a restaurant could observe a
American Psychological Association (APA) style and the location to ascertain the numbers of members of the
Modern Language Association (MLA) format. You are commuting public who would be potential customers
encouraged to consult both of these before writing the Survey – this is where information is gathered from a
literature review. sample of a relatively large group of people which is
While your syllabus did not suggest a length for this referred to as the ‘population’. These people are usually
section, you should try to keep it within two pages. It is also asked to answer a series of questions pertaining to the
important that you make reference to at least two sources of problem being researched. A questionnaire or interview
data, whether primary, secondary or a combination of both. is often used to gather such data
Experiment – this information can be gathered by
conducting laboratory research where both variables are
Writing your methodology scientifically assessed.
This is a plan for gathering the necessary data to conduct the
research. Here, the researcher outlines to the examiners the Secondary data/sources
sources that were used in the gathering of data for the SBA. This is where previously used data is gathered to be used
This should be written in the past tense. The methodology in the current research. Secondary data can therefore be
should also outline the research design; give a brief defined as data that has been collected for previous research.
description of the sample and state how it was selected; and This data is not specific to the current research but can offer
state the research instrument(s) used and how the research some guidance as to how to proceed. A rule of thumb is that
will be carried out. These areas of focus are explained in secondary data should be consulted before the researcher
more detail below, however, you do not have to write the collects primary data. It can be collected from books,
methodology in those sections but you must ensure that you journals, newspapers, company reports and publications,
mention the relevant information. internet sources and government publications.
This section of the methodology should clearly state the
Description of the research design sources of data collection that were used for the SBA.
This section is expected to state whether the research is Ideally, you should use both sources, as that would result
quantitative or qualitative and why such a design was used. in a more comprehensive research. Though rare, there are
Quantitative research is the use of sampling techniques, some research topics that may require only secondary data.
such as surveys, to gather data that can be represented However, every effort should be made to use both sources.
numerically and mathematically manipulated to draw
conclusions or make generalisations. Research instrument
Qualitative research is where data is obtained from Once a survey is being done, the best way to gather the
individuals based on their opinions and value judgements relevant data would be through the use of a questionnaire.
and is not analysed with statistical techniques – for example, If the research is being carried out on a group then you
a focus group or an interview. could do an interview, which would mean that you need
to formulate an interview instrument. Whichever you use
Sources of data for your SBA, there should be a clear description of the
Two main sources are used to collect the relevant data instrument, including information regarding the number of
needed for the research: questions and the composition of the instrument, i.e. the
use of open- or closed-ended questions. For an interview,
Primary data/sources you should include information about the length of the
A primary data source is one where information is gathered interview, how many questions will be asked and how
for the purpose of that particular research problem, i.e. will the interview be conducted, i.e. face to face, via the
collected specifically for the research being conducted. telephone or on social media.
Primary data can be gathered through different means, Now let us examine what your questionnaire should
including: look like:
The questionnaire represents a collection of items which group to take part in the research. This section of the
have been designed to capture data from the sampled methodology should state the size of the sample and
population (respondents) the sampling technique that was used to select the
Your questionnaire should have an introductory participants (on this, you might like to review Chapter
statement which introduces the researcher, states 28). In the case of an interview, the number of people
the purpose of the research, includes a statement of who participated, in addition to their positions, should
confidentiality and gives the respondents instructions on be mentioned
how to complete the questionnaire Conducting the research – the methodology should give
The questionnaire can consist of open- and closed- a timely and logical breakdown of how the research
ended questions. Open-ended questions are those will be conducted. It should give the period of time over
giving the respondent an opportunity to write their which the research was conducted. You should include
responses freely. Closed-ended questions are those such matters as: seeking permission from the firm;
giving the respondent options to choose from. In order when questionnaires were issued; when you conducted
to save time and narrow the length of the responses, it the interview; and how long it lasted.
is advisable that more closed-ended questions be used.
The responses for the closed-ended questions should
be guided by the Likert Scale, which breaks down the Presentation of data
responses in the following format: Once you have completed the research and sourced all your
• Strongly Agree [ ] Agree [ ] Neutral [ ] relevant data, it must be presented in a way that is clear and
Disagree [ ] Strongly Disagree [ ] appropriate for the SBA. This could be done as a section of
• Excellent [ ] Very Good [ ] Good [ ] the SBA or it could be incorporated in the Analysis section.
Fair [ ] Poor [ ] Whichever method you use, it should give a summary of
• Always [ ] Often [ ] Sometimes [ ] your findings.
Rarely [ ] Never [ ] So, you have done your research and now you have in
You could also create other options based on the topic hand a ‘bunch’ of questionnaires and responses from an
you are researching. However, as much as possible, stay interview that was conducted but you don’t know what to do
away from questions inviting ‘yes’ or ‘no’ answers, as with them. A good way to start is to go through each question
they do not lend themselves to substantial analysis on the questionnaire and tally the different options that were
Using the topic from the previous sections, an example chosen. This would represent your raw data. You could then
of closed-ended and open-ended questions, respectively, go ahead and calculate the percentage of people who choose
would be: each particular option. As for the open-ended questions on
1. How would you rate the current motivational the questionnaire, you could summarise the respondents’
strategies being used by the firm? answers, looking for any similarities or differences. Once
Excellent [ ] Very Good [ ] Good [ ] this is done, you need to consider presenting the data using
Fair [ ] Poor [ ] the different statistical tools available. These tools include:
2. State two (2) incentives that the firm could use to pie charts
increase your level of motivation. histograms
–––––––––––––––––––––––––––––––––––––––––––––––– bar charts
–––––––––––––––––––––––––––––––––––––––––––––––– tables
The questions asked on the questionnaire should be graphs.
based on the objectives of the research and geared See Figure 40.1 (p 369) for examples.
towards gathering sufficient information to complete Whichever of these tools you use, you must ensure
the SBA that they are properly numbered and labelled. The data
Description of the sample and selection – sampling presented should be relevant to your topic and in particular
is the process of selecting a segment of the target to the aims or objectives of the SBA. It is also important to
population on whom the research will be conducted note that you cannot generate a diagram for every question
and a generalisation can be made. Since the targeted on the questionnaire but instead you should generate those
population in most cases will be too large, you are that have greater impact on the research and answering the
expected to choose a smaller and more controlled research topic.
Figure 40.1: Examples of statistical tools Pie chart
8.5%
10.5%
15%
66%
Histogram Graph
15 Sales Linear trend
10
Frequency
0
0 2 4 6 8 10 12 Quarters
Departures per minute
Table Bar chart
Category Electrical Mechanical Hydraulic 150

Gear 17 5
Torque 23
Exhaust 12 100
Vibration 2 19
Bearings 25
Engine 11 58 33
Pump 8 4 50
Fuses 3
Belt 42 2 8
Axle 19 12 0
Lighting 12 25 0 20 40 60 80 100 120
Analysis of data similarities and disparities. This should be done using

While the presented data gives a good graphical summary of percentages or actual data. For example:
the information that was collected, it is not an end in itself. Six out of ten people stated that they were comfort-
The purpose of the analysis of data is to find answers to the able with the leadership styles being used
topic being researched. This section should give a breakdown or
of the responses to the questions asked. The discussion 60 per cent of respondents stated that they were
should also be based on the diagrams that you constructed comfortable with the leadership style in Company X.
or generated in the preceding section. The analysis could be As a matter of caution, students are discouraged from
done under each diagram but this may differ from class to using very general terms such as ‘many’, ‘few’, ‘most’,
class, depending on the teacher. ‘some’, ‘majority’ and ‘minority’ to describe their findings.
The analysis should give a summary of the findings Students should also pay attention to their calculations to
(responses), outlining patterns, trends, high points, ensure that the information is accurate.
Interpretation of results were not paraphrased within the SBA must be cited so as to
This section of the SBA draws on your knowledge of the give credit to their authors. These sources from which the
content of the subject. The interpretation of results is where citations were taken must then be placed in the references.
you discuss the results of the research in terms of the theories The references should be organised in accordance with the
and concepts taught in the subject. Students wanting to standards stipulated by CXC. These are the APA format and
acquire full marks for this section must demonstrate that the MLA style mentioned above. You should consult the
they have a good grasp of the course content and are latest version of one of the two formats and organise your
able to relate that knowledge to the findings of the SBA. references and citations in the same manner. These can be
Students should ensure that the interpretation of the results found on the internet or in your school library.
also incorporates the previous research that was done, as
mentioned in their literature review.
Appendices
While no mark is assigned to this section, it serves the
Conclusion and recommendations purpose of holding all additional documents, graphs,
The section summarises the entire SBA and makes the charts and diagrams that could not be a part of the body
necessary recommendations based on the findings. The of the SBA. Where graphs or diagrams are placed in the
conclusion should state the salient points that were appendices which have information that was used in the
discussed within the SBA. Here, the researcher should state SBA, reference should be made so that the reader can refer
the outcome of the research in terms of the research topic to these graphs – for example ‘See Figure 6 in Appendix 1’.
and objectives. You should seek to answer the questions: You are also required to place in your appendices a blank
‘What did the findings prove or disprove?’ and ‘Did the copy of your research instrument(s) – that is, questionnaires
findings show any correlation between the variables being and interview questions.
measured?’ Some other general comments that should be made here
The recommendations made should be based on the are:
findings of the research. Having done the research, you In order to maximise marks, use the guidelines in your
should now look at the shortcomings or the potential for syllabus to organise the SBA – that is, the way in which
shortcomings and recommend how these could be overcome the information is presented. Please note the different
by the firm. Recommendations could also be made on issues headings and what should fall under each heading
that need to be addressed or how something being done can To optimise the help being offered by the teacher, the
be improved. Good recommendations are those which show SBA should be done in a timely manner. The schedule
that the student has a good grasp of what was mentioned dates that have been agreed on by you and your teacher
in the research and the business theories and concepts. MUST be adhered to, especially if you have chosen to
The recommendations should preferably be done in bullet have more than one draft being corrected and handed
points, as this makes it easier to identify them. Try to ensure back to you
that you make at least four recommendations. The report should be approximately 2,500 words, either
typed using double spacing with a 1-inch margin or
legibly handwritten. If handwritten, please write on
References and citations every other line. Please note that observing the word
While some students may put very little effort into this limit is in itself allocated a mark.
section of the SBA, it is very important. Plagiarism is a
deadly and dangerous ‘sin’ in research. As such, the plea
is that, if you refer to another author’s work, you should Note to teachers
identify the source of the information. Do not take it and One of the strategies that I have used over the years which
make it look like your own. Special care must be taken to works for me is to discuss the SBA in a class in the very first
ensure that all the secondary data (including books, reports week of the school term. I then use the opportunity to set
and internet sources) used in the process of this research deadlines for parts of the SBA before collecting the whole as
are documented and included as part of the references. If a draft. To this end, a date for topics and aims could be set in
you had conducted an interview and used the responses September for, say, methodology and then literature review
throughout the SBA, this should also be referenced. Please is due in, say, October, and so on. Each piece is then corrected
note that the all quotations, definitions or information that and returned to students. You could also ask your students
to keep a portfolio with all the corrected pieces inside. This

enables you to see the students’ progress and also makes
marking easier by the time the full draft is submitted.
Another suggestion I would want to make is that you
should look over the students’ research instruments.
Students are apt to write anything that comes to mind on a
questionnaire or a set of interview questions, even if it has
no bearing on the research. Doing the correction before the
research is done will save all stakeholders valuable time.
372
Glossary
Above-the-line promotion – includes the use of Batch production – allows a group of products to
advertising undergo a production process at the same time
Absenteeism rate – the amount of the total workforce Below-the-line promotion – includes personal selling,
that is absent from work during a given time period sales promotion and publicity
when they should have been at work Benchmarking – the process whereby a firm identifies the
Absorption costing – a type of cost accounting system best practices of another firm and then implements them
that includes both fixed and variable costs to arrive at in order to improve its own product
production costs Bond – a loan from individuals or firms at a fixed income
Accounting – the systematic recording, summarising, rate and for a defined period of time
analysing and reporting of business and financial Boston Matrix – an illustration showing the total
transactions. It is imperative that individuals and percentage market share of each product and the rate of
businesses keep proper accounting records growth in the market, ranging from high to low
Actual or formal product – this focuses on the attributes Brand equity – the amount of value that a brand adds to
or features of the product a product
Adjourning – a stage in the life of a team that is Brand mark – the non-verbal part of the brand which is
temporary, where it wraps up its activities and prepares easily recognised and is used to identify the product
for disbandment Brand name – can be a combination of words, letters and
Advertising – any paid form of non-personal presentation numbers which can be spoken of or verbalised
and promotion of ideas, goods or services by an Branding – where a firm places its name, mark, symbol
identified sponsor and/or design on its product which then acts as a means
Augmented product – this focuses on the additional of identification
benefits and services that the consumer receives from Breadth of the product mix – this measures the amount
purchasing and using the product of product lines or different products that the firm has
Autocratic leadership – an autocratic leader makes all Breakeven analysis – the assessment of the
the major decisions in the firm, gives orders and closely interrelationship that exists among costs, volume and
monitors the activities of employees profits at different levels of output
Average rate of return – shows the average profit per Breakeven chart – shows the levels of fixed costs,
year expressed as a percentage of the initial capital variable costs and total revenue at all levels of output
outlay from zero to full capacity
Avoidance – as form of resolution where the conflict does Breakeven point – the level of output that enables the
not have much bearing on the organisation itself and so firm to cover its costs exactly
management may choose to allow the parties to resolve Budget – a financial plan or statement which shows
the issue on their own specific objectives or targets that a business hopes to
achieve over a given period of time
Balance sheet – shows the financial position of the firm Budgetary control – involves the use of budgets to
at a given point of time: that is, its assets (what it owns) monitor performance of the business and makes plans to
and its liabilities (what it owes) combat future problems
Bank overdraft – an agreement where the business is Bureaucratic leadership – this leadership style is very
allowed to draw cheques in excess of its account balance stringent, as the leader does so in accordance with the
at the bank stated rules of the firm
Barriers to communication – anything that prevents the Business culture – is defined as the beliefs, attitudes and
effective transmission of a message values of the employees in an organisation
GLOSSARY 373
Business ethics – refers to the morals or set of standards Common external tariff – countries within the free trade
that are used to guide a business on how it should area trade free of tariffs but all products coming into the
conduct its affairs region are subjected to a common tariff or extra charge
Business plan – a written document describing the nature Communication – a two-way process which enables
of the business, the sales and marketing strategy, and the information to be disseminated between two or more
financial background, and containing a projected profit persons
and loss statement Communication process – illustrates the successive steps
that occur between when a sender (source) sends a
Capacity – the level of output that the current system is message and when it is received by the receiver
capable of producing in a specified period of time Company – a business unit that is regarded by law as an
Capacity utilisation – the measure of the percentage of artificial person, distinct and separate from its members,
the firm’s total capacity that is being used i.e. its owners
Capital – the money invested in a business venture which Compensation – the remuneration package that is given
is used to purchase assets so as to facilitate trade to workers for work done
Capital employed – the total of fixed and current assets Competition-based pricing – this pricing method is
minus current and long-term liabilities one that seeks to price the product base on the firm’s
Capital or stock market – this market involves the competitors’ prices
buying and selling of company stock and shares and Compromise – a form of conflict resolution where it is
government bonds agreed that there will be no clear winner or loser but
Cash budget – a statement showing the estimated cash both parties will be willing to accept the solution reached
inflows and outflows, including revenue and capital Computer-aided design – involves the use of computer
items systems to create, modify and analyse a product’s design
Cash equivalents – include short-term, highly liquid Computer-aided manufacturing – uses computer
investments that are easily and readily converted into software and hardware to convert CAD data and models
known amounts of cash into instructions to be used in the manufacture of the
Cash flow statement – shows the movement of cash into product
and out of the business Conflict – disagreements that exist between two or more
Cellular layout – based on a concept called group individuals
technology, where dissimilar machines and equipment Confrontation – where conflicting parties meet face to
are grouped into a single work centre known as a ‘cell’ face and are coerced into stating their disagreements and
Cellular production – involves dividing the factory into stances on the issue at hand
cells that will carry out specific tasks on the product Consumer buying behaviour – the actions that are
Centralisation – where senior management maintain displayed by individuals in purchasing goods or services
full control of decision making and there is minimal Consumer survey – a form of marketing research that
delegation of responsibility is used to ascertain the level of potential demand for a
Chain of command – shows the line of authority in the firm’s product
organisation Content theories – these focus on the needs of employees
Coercive power – where the leader exercises control and how these needs motivate them
over employees and the activities that take place in the Contribution – the difference between selling price and
organisation variable costs per unit
Collaboration – seeks to meet the needs and satisfy the Controlling – where managers evaluate and correct
concerns of each party activities to ensure that the business is on track to attain
Collective bargaining – a situation where trade unions its objectives
and employers meet to negotiate for better terms and Cooperative – a form of business consisting of a group of
conditions of employment people who have come together to perform a business
Command economic system – see Planned economic venture that is more efficient when done collectively
system rather than individually
Commission – a reward given to employees for making a Copyright – laws that give the holder the right to prevent
number of sales in a given period of time others from reproducing his/her work
374 GLOSSARY
Core product – represents the actual benefit that a Delphi Method – uses a group of experts who are
consumer is seeking from the purchase and use of the anonymous to each other to make forecasts of sales,
product among other matters
Corporate entrepreneurship – the creation, innovation Demand – the call for a product or service by customers or
or renewal of products or ideas within or outside of an users
existing organisation Democratic leadership – where the leader allows
Corporate governance – a set of rules, practices and employees to share their ideas and suggestions and
processes which guide the way in which a business is participate in the decision-making process
operated Demographic factors – the characteristics and structure
Corporate objectives – specific, realistic and measurable of a population, including age, size of families, marital
aims which an organisation plans to achieve within a status, sex, income and occupation
given period of time Depth of the product mix – the variations or features of
Cost plus pricing – where the firm arrives at a price for each product line
the product by adding a percentage or an amount to the Design brief – a document outlining how the product will
unit cost of the product be produced to get the desired results
Costing – a system of computing the costs of producing a Design capacity – the total achievable capacity if all
product or operating a business equipment and processes work in perfect order
Critical path – the sequence of activity in the network Direct costs – those costs that can be directly identified
diagram which takes the longest time to complete with the production of goods or the rendering of a
Critical path analysis – a network map of a project or service
activity that traces the sequence of tasks from start to Direct distribution channel – where the product is
finish distributed or sold by the firm to the consumer without
Cultural factors – include the attitudes, beliefs and values the use of any intermediary or middleman
that influence how people think and act Direct expenses – expenses that are incurred in the
Culture – a combination of beliefs, values, rituals and production of particular goods
practices that shape a person’s behaviour over time Direct labour – the remuneration that is paid to workers
Current assets – assets that can be easily converted into who have worked on the production of particular goods
cash, sold or consumed within a one-year period or services
Current liabilities – monies owed by the business that are Direct material variance – a measure of the amount by
expected to be repaid within the next 12 months which the actual costs of material used differ from the
Customer satisfaction – an individual’s comparative budgeted amount
judgement as a result of the perceived value that is Direct materials – materials used in the production of a
placed on a product product and which can be apportioned to such a product
Directing – involves the motivation and leading of
Debenture – fixed-interest loans that are issued to employees in order to attain business objectives
companies and are secured against its assets Discounted cash flow – a technique that takes into
Debt capital – any money that is borrowed by the account the time value of money by equating its future
business which must be repaid with interest value to what it is worth now
Debt switching – the process of raising a new longer-term Diseconomies of scale – these occur when a business
loan to pay off existing short-term loans becomes so large that production cost per unit increases
Decentralisation – a decentralised organisation is Distribution – the process that is used by the firm to
often separated into divisions, with some amount of make its goods available to its target market
autonomy, while still working towards the fulfilment of Distribution intermediaries – organisations (wholesalers
the organisation’s goals and retailers) that operate between the producer of the
Decision tree – a graphical representation of a series of product and the final consumer
interrelated sequential decisions Division of labour – dividing work into smaller tasks to
Delegation – the tendency of management to entrust promote specialisation, thereby increasing efficiency,
subordinates with responsibility and authority to carry productivity and output
out a task
GLOSSARY 375
Downward communication – allows information to be Equity capital – money or funding that is raised from the
passed down from top management to subordinates issuing of shares
Dummy activity – in critical path analysis, this is Equity theory – suggests that inequities will exist if people
represented by a dotted line, as it uses no resources or believe that the rewards they received for a completed
carries no value (i.e. it has a duration of zero) task are unequal to those received by other people
Ethics – define what is right or wrong or what is moral;
E-business – a broader concept that incorporates the principles or guidelines that help to inform
e-commerce along with internal processes. These individuals or groups of individuals as to how they
internal processes may include, but are not limited to, should behave
inventory control, production, product development, Exchange control – a deliberate restriction of the foreign
risk management and finance currency available to citizens
E-commerce – the interaction of buyers and sellers via the Exchange rate – the rate at which one country’s currency
use of the internet for the purpose of exchange trades for another
Economic animal – refers to man being rational and Exclusive distribution – the firm’s product will be made
making economic choices based on the monetary or available at only one outlet in the geographical area
material reward to be gained Expected monetary value – the expected financial
Economic factors – those which influence consumer outcome of a decision
spending patterns and purchasing power Expert power – this stems from the ability and knowledge
Economic order quantity – the amount of stock that will of the leader
be purchased so that it does not over- or understock the Export subsidies – where the government may grant
business subsidies to local firms so that their products can be sold
Economic system – the institutional means through at a lower price than imports
which resources are utilised to satisfy human wants External economies of scale – these occur where all
Economics – a social science which deals with the study firms in an industry benefit from lower unit costs as the
of human behaviour and how scarce resources are entire industry increases in size
allocated to satisfy their unlimited wants
Economies of scale – the benefits received from lowering Factoring – an agreement between a specialist finance
per unit cost of production as a firm expands and company and a business that is in need of ready cash, to
increases its scale of production purchase the amount owed by debtors
Effective capacity – the estimated capacity that would Factory overheads – the sum of indirect materials,
result in the efficient operation of the business indirect labour and indirect expenses
Efficiency ratios – measure how efficiently resources are Feasibility study – an in-depth analysis of the firm’s
utilised and also determine the efficiency of the firm in ability to complete a project or create a successful
collecting its debts business venture amid legal, economic, technological,
Electronic communication – the sending of written, oral scheduling and other factors
or visual messages via an electrical means – for example, Fixed budget – one that remains the same even if the
e-mails activity levels of the firm are different from the projected
Embargo – a complete ban on trade between two or more figures
countries Fixed costs – costs that do not vary with the level of
Entrepreneur – an individual who employs and organises output – that is, they remain constant regardless of the
the factors of production to create a business venture level of production or output
with the aim of making profits Fixed-position layout – the product remains at a
Entrepreneurship – a systematic innovation which specific location while all the tools, machinery and
consists of the purposeful and organised search for equipment are carried to that location in order to work
changes; it is the systematic analysis of the opportunities on the product
such changes might offer for economic and social Flexible budget – this budget is adjusted when there are
innovation changes to the business environment or activity
Entropy – the tendency of systems, especially where they Flow production – involves the organisation of the work
are not properly maintained, to run down and die process in sequential steps so that each item passes
through each stage before moving to the others
376 GLOSSARY
Forecast – an estimate of the possible future levels of costs, Income statement – a financial statement that assesses
sales, stock or production the firm’s financial performance over an accounting
Formal communication – the use of the established period, usually a year
channels of communication in the organisation Incubation – facility established to nurture young (start-
Forming – at this stage in the activities of a team, members up) firms during their early months or years
are just getting to know each other Indirect costs – these include all costs that cannot be
Franchise – a system where an already established and classified as direct costs
successful business (franchisor) enters into a contractual Indirect distribution channel – one where the product
arrangement with a semi-independent business owner passes through an intermediary before reaching the final
(franchisee) to operate under the franchisor’s trade name consumer
Free float – the maximum increase in the time taken by Indirect expenses – other costs incurred by the factory
one activity that will not alter the floats available to but which cannot be traced or allocated to a particular
other activities department or product
Free market economy – the market system is one Indirect labour – includes the payment for labour which
where the three economic questions are answered by is indirectly linked to production
households and firms Indirect materials – materials that make production
Fringe benefits – forms of compensation to employees possible but which are not directly related to the
apart from wages and salaries production of the product
Functional structure – where the organisational Inflation – a continuous or sustained increase in the
structure is designed in terms of the functional areas of general price level in an economy
the business Informal – this does not take established channels of the
firms into consideration but instead communication is
Gearing – the relationship of the business’s equity capital done through the channels of the employees
to its loan capital Integration – (a) this involves the assembly of a product
Gearing ratios – these assess the financial structure of the from different component parts that work together as
business including the proportion of its financing that is the final product; (b) the process of merger and takeover
obtained from debt capital by firms to increase their size
Geographical structure – this structure organises the Intellectual property – the legal rights which result from
enterprise in terms of regions or countries intellectual activity in the scientific, industrial, literary,
Globalisation – this entails the increased connectivity and artistic, musical and dramatic fields, among others
interdependence of the world economy Intensive distribution – a firm using this strategy will
Grapevine – an informal network that exists among distribute its product on a very large scale by making it
employees or individuals that is not officially sanctioned available in as many outlets as possible
by management Interest rate – the amount that borrowers pay to lenders
per dollar of the money borrowed
Hierarchy – shows the different levels of authority in the Internal economies of scale – the reduction in costs
organisation that a firm gains directly as it increases the size of its
Holding company – one that purchases enough shares of operations
other companies so that it can control the decisions that Internal rate of return – refers to a discounted rate of
are made by the board of directors and the policies that return which, when calculated, gives a net present value
are implemented of zero
Horizontal integration – takes place when firms at Internet marketing – a term that is used to describe the
the same level of production merge under the same marketing of a firm’s product online or via the web
management Inventory – any items or resources that are owned by the
Human resource management – the policies, practices business
and systems that influence employees’ behaviour, Inventory control – involves carefully assessing the
attitudes and performances material needs of the firm, given its projected output,
providing proper and secure storage and issuing
materials as required by the Production Department
GLOSSARY 377
Investment – includes the expenditure by businesses or Labour turnover – measures the number of workers who
individuals on items used to produce goods and services leave an organisation in a given time period
in the future Labour variance – a measure of the amount by which the
Investment appraisal – a quantitative technique used by actual labour costs differ from the budgeted labour costs
firms to assess the attractiveness and viability of different Laissez faire – where the leader is seen as the
capital projects representative of the group of persons being led and acts
ISO quality standards – a set of standards developed by a on their behalf
network of national standards organisations around the Lateral communication – these channels allow
world communication to flow among peers and co-workers
Lateral integration – where firms with similar, but
Job analysis – the examination of what the job entails: not competing, products join together to diversify and
that is, the responsibilities, skills, training and tasks that expand their product offering
are required for the job Lead time – the amount of time between placing an order
Job description – having completed a job analysis, the and receiving the order
firm then describes the position that is available Leader – anyone who influences others
Job enlargement – workers are given more than one task Leadership – the process of influencing people towards a
to perform at the same level of skill and responsibility specific or common goal
Job enrichment – the workers’ tasks are improved upon Leading change – involves actions on the part of senior
to make them more interesting and satisfying management to create a plan of action to implement the
Job evaluation – a process of measuring the worth of change
a job using prescribed factors such as qualification, Lean production – a process that was developed to
knowledge, responsibilities and skills reduce wastage of resources by using as few as possible
Job production – the process used when a single product resources in production
is produced to meet individual specifications Legitimate power – power here comes from the belief
Job rotation – where workers get the chance to work that the leader has the right, by virtue of his position, to
in different positions throughout the business, doing give orders and instruction
different tasks before being moved to another task Line and staff relationship – one combining the line
Job satisfaction – occurs where an employee regards his/ authority with the supporting or specialist roles within
her work with a positive attitude the organisation
Job specification – a description of the profile of a Line relationship – this relationship is one that exists
suitable person to fit the job outlined. It states the years between senior management and subordinates where
of experience, minimum qualifications and character of authority or directives flow from top management down
the person required for the job through the organisational structure
Joint venture – a business that is jointly owned by two or Lines of communication – the flow or direction of
more parties or firms to undertake an economic activity communication from the sender to the receiver
Jury of experts – a technique based on the notion that Liquidity ratios – these show whether or not the
the managers of the different functional areas of the firm company can effectively pay its debts
are armed with knowledge that can be used to predict Logistic strategy – the science of evaluating the physical
sales distribution process with the aim of finding the most
Just in time – a technique where very little stock, if any, cost-effective way to get the product to the customer and
will be held at the firm. As such, raw materials would provide maximum satisfaction
then be ordered when they are needed for production
Macro forecasting – deals with making a prediction for
Kaizen – a Japanese concept of continuous improvement, the overall market – for example, predicting the demand
based on the notion that the improvement of a product for the firm’s products
should be a never-ending process Macro-environment – the external and uncontrollable
factors which impact on the business’s performance,
Labour productivity – this measures the ratio of output decision-making processes and ability to serve its
to the unit of labour used. It indicates the efficiency with customers
which labour is used in production
378 GLOSSARY
Managing change – this involves actions on the part of Micro forecasting – deals with a prediction of the future
lower-level management to implement and oversee the performance of a specific department of the firm
change while evaluating the progress and effectiveness Miniaturisation – the development of very small products
of such change that have the same function and use as the larger
Margin of safety – the amount by which sales exceed the products they replaced
breakeven point. It shows the amount by which sales Minimum stock – the lowest amount of stock the firm
can fall before the firm starts making a loss would want to hold at any given time
Marginal costing – this type of costing system charges Mission statement – this gives a clear outline of the
variable costs to the production of the product business’ aspiration and values
Market – the process by which buyers and sellers interact Mixed economic system – one involving the
for the purpose of exchange participation of private enterprises and the state
Market research – the process of collecting, analysing and in decisions on resource allocation. There is both
interpreting data in order to make an informed decision private and public ownership of the productive
about a product, customers, target market or industry resources
Market research plan – outlines the courses of action Modularisation – the process whereby a product is
that will be taken throughout the research divided into subsets known as modules, which are used
Marketing – the process of planning and executing the to assemble the finished product
conception, pricing, promotion and distribution of Money market – a market where financial institutions
ideas, goods and services to create exchanges that satisfy such as banks lend and borrow money from each other
individual and organisational goals on a short-term basis
Marketing concept – this holds that, in order to achieve Motivation – the internal and external forces that arouse
its organisational goals, the firm should ascertain the a person to carry out a task with enthusiasm
needs and wants of its potential customers and fulfil Moving averages – this statistical technique analyses a set
their desired satisfaction more effectively than the firm’s of data points by creating an average of a subset at a time
competitors do out of the entire set of data
Marketing environment – the forces, whether internal Multinational corporation – one that owns and controls
or external, which influence a firm’s ability to conduct other business operations outside the country in which it
business with its target market effectively is situated
Marketing intermediaries – these assist the firm to
promote, sell and distribute its products to the final Nationalised industries – enterprises that have been
customers taken over by the government from private-sector
Marketing mix – the combination of factors that are used organisations
by a firm to influence a customer’s buying decision Natural factors – the natural resources that are used as
Mass marketing – where the firm does not practise inputs into production
segmentation but rather markets the same product to Net present value – represents the value that the firm
the entire customer base obtains when it discounts its cash inflows and outflows
Master budget – a summary of the firm’s plans for a of a future investment project
particular period of time Network organisational structure – this organisational
Material budget – a forecast of the quantity of raw structure links a number of separated organisations
materials needed for production with a desire to achieve a common goal through their
Matrix structure – this structure often depicts two lines interactions
of authority and combines elements of the functional, Niche marketing – this strategy is one where the firm
product and possibly geographical organisational identifies a small segment of the market and creates a
structures marketing plan to satisfy that segment
Maximum stock – the maximum amount of stock that the Node – in critical path analysis, a circle used to show the
business can hold, based on its objective or storage space start or end of an activity
Micro-environment – the factors within the business’s Non-current assets – assets that can be easily
immediate environment that impact its performance, converted into cash, sold or consumed within a
decision-making process and ability to serve its customers one-year period
GLOSSARY 379
Non-current liabilities – monies owed by the firm which Penetration pricing – where a low initial price is set by
are not expected to be paid within a one-year period the firm in order to generate sales
Non-probability sampling – does not give each member Perceived value pricing – a strategy where the firm
of the population an equal chance of being selected in ascertains or estimates the price that consumers are
the sample willing to pay for the product and tries to sell its products
Non-verbal communication – communication without at that price
words (speech or written), including body language, Performance appraisal – the ongoing process of
gestures and pictures measuring and evaluating employees’ performance
Norming – at this stage in the activities of a team, Performance management – the process that is used to
members start developing good relationships and identify, measure, manage and develop the performance
cohesion of the employees within the firm
Performing – at this stage in the activities of a team, the
Off-the-job training – where employees are trained at team’s focus is on getting the job done and achieving its
separate locations and possibly times to working on the objectives
job itself Personal selling – this promotional tool is a direct
On-the-job training – where employees learn while they two-way communication between the salesperson and
are performing the job itself the potential buyer of the product
Operational budget – these focus on the revenues and Piece rates – where a worker is paid a specific or agreed
expenses related to the day-to-day use of resources by rate per unit produced
the business Planned economic system – one where government
Operational objectives – detailed costed and timed plans controls most of the resources and makes the decisions
of what the organisation will do to meet each tactical or on what, how and for whom to produce
strategic objective Planning – this function of management relates to setting
Oral communication – the use of spoken words when business objectives and establishing the necessary plan to
communicating achieve such objectives
Organisation – a group of people working together to Political factors – include the laws and regulations that
achieve a common or collective goal influence the operations of a firm in an industry
Organisational structure – a framework that outlines Price – the value that is placed on a product. It is the
the lines of authority and communication in the amount of money that the firm requires the consumer to
organisation pay in order to acquire the goods or service
Organising – in this function the manager organises the Price ceiling – a maximum price set by government and
human and other resources necessary to execute the set below the prevailing market price. It is illegal for
plan and objectives in the preceding function firms to charge a price above this one
Outsourcing – the process whereby firms subcontract Price elasticity of demand – measures the
some of their operations to independent suppliers of responsiveness of a change in quantity demanded due to
services a change in price of that product
Price flooring – the minimum price that can be charged
Partnership – a business where between two and twenty for a product. It is set by government, above the
persons work together towards a common goal of prevailing market price
making profits Price skimming – where a high price is deliberately
Patent – this is granted by the government and it gives the charged in a bid to ‘skim’ the available profit from the
firm or person receiving it the right to take legal action market in the initial stage of the product’s lifecycle
against anyone who uses, makes or sells their invention Primary data source – one where information is gathered
while the patent is still in force for the purpose of that particular research problem
Paternalistic leadership – a paternalistic leader is like Primary packaging – the material that is used to hold or
a ‘father figure’ who gives attention to the social needs encase the product. It is the part of the package that is in
and opinions of the employees direct contact with the product
Payback period – the time that cash inflows from a Primary sector – incorporates all the extractive
capital investment will take to be equal with the initial industries such as mining (bauxite), fishing, forestry
outflow of funds and farming
380 GLOSSARY
Prime cost – the sum of direct materials, direct labour and Profit sharing plan – an incentive for hard work done.
direct expenses It can also be used to encourage workers to put in extra
Private sector – consists of businesses that are owned by effort in carrying out their responsibilities
individuals or groups of individuals with the main aim of Profitability ratios – these measure how well the
making profits business is doing in terms of profit, turnover or sales and
Privatisation – the change of ownership of a firm from capital employed
state (government) to private persons Promotion – the means through which a firm informs,
Probability sampling – a technique giving each member persuades and reminds its target market about a product
of the population an equal and known chance of being Protectionism – attempts by the government of a country
selected in the sample to restrict the importation of goods and services
Process layout – where machinery and equipment that Psychological pricing – a firm using this technique will
are similar or have the same function are grouped ‘play’ on customers’ perception of the price for the
together in specified areas of the facility and the product product and the psychological effect that such a price
being produced is transported to the different areas will have on the consumer
Process theories – essentially argue that people’s thought Public corporations – are owned and controlled by the
processes will influence their behaviour government. They are usually formed by an Act of
Product – any item or service that is offered for sale to the Parliament as a separate legal entity
market with the aim of satisfying a consumer’s need or Public relations – the building of relationships between
want the firm and different groups of stakeholders
Product concept – the focus of this concept is on the Public sector – this includes businesses that are owned
product and it is believed that consumers will demand and controlled by the government or local authorities of
products that are of high quality, give excellent a country
performance and contain innovative features Publicity – a non-personal communication or message via
Product layout – this type of layout is one where the the mass media but not paid for directly by the firm
machinery and equipment are organised according to Purchases – these represent goods that are bought with an
the progressive steps that the product will go through intention of reselling them
during its production
Product lifecycle – this represents the stages that a Qualitative decision – one that is made based on
product goes through from its introduction to its decline non-quantifiable information. It often entails people’s
Product line – represents a group of products, offered by value judgements and opinions.
a firm, which have similar characteristics and similar Qualitative factors – those that cannot be measured
intended uses numerically or in monetary terms
Product mix – the group of products that are sold or Qualitative forecast – this technique focuses on value
distributed by the company judgements and the individual’s opinions on future
Product organisational structure – one where outcomes
management separates the activities for each product. Quality – the set of characteristics of an entity that give
Each product has its own management structure which that entity the ability to satisfy expressed and implicit
is answerable to top management needs
Production – any activity that a firm undertakes to add Quality assurance – a guarantee to maintain an agreed or
value to the factors of production by converting them established set of quality standards
into another product Quality circles – groups of lower-level workers who meet
Production budget – the determination of the products regularly to analyse and critically review the design and
to be produced during a particular period of time production of a product
Production concept – this concept is based on the notion Quality control – the process of ensuring that the product
that the business should produce those products that it meets its established quality standards
can produce most efficiently Quality standards – standards that are established by
Production process – this outlines the steps involved in independent organisations to ensure that the interests of
converting input to output consumers are protected
Productivity – the amount of output that is produced per
unit of input (labour, land or capital)
GLOSSARY 381
Quantitative decision – one that is made based on Sample frame – outlines the strategy that will be used to
statistical data. It relies on historical data that can be identify the elements in each sampling unit
quantified and analysed to make generalisations and Sampling – the process of selecting a segment of the target
draw conclusions population on whom the research will be conducted and
Quantitative factors – those that can be measured in a generalisation be made
monetary terms Scarcity – the theory that states that there is only a limited
Quantitative forecast – this technique uses historical amount of resources available to produce the unlimited
data and previous experience to forecast sales amount of goods and services desired by society
Quota – a restriction placed on the quantity of a product Secondary data source – where previously used data is
that can be imported at a given time gathered to be used in the current research
Secondary packaging – the outer layer of the package
Recruitment – the activities or practices that define the which is often used to group the primary packages
desired characteristics of applicants for specific jobs together
Recruitment plan – outlines the steps that will be taken Secondary sector – involves the changing of raw material
to recruit individuals for a particular job into finished goods
Referent power – this source of power is largely based on Segmentation – the division of the market into subsets
the qualities of the leader or segments of potential customers who have similar
Reorder level – the point at which a new order will be buying behaviour and characteristics
placed in order to replenish stock Selective distribution – where the firm makes its product
Reorder quantity – the amount that is ordered once the available in selected outlets, that is, using more than one
stock level reaches the reorder level but not all the intermediaries who would want to sell
Research and development – involves steps taken by the firm’s product
the firm to improve either the product itself or the way Semi-variable cost – a combination of fixed and variable
in which it is made costs
Resistance to change – any action of non-conformance Services – an intangible economic activity that cannot be
taken by employees because of a perception that a stored and is received by the consumer at the point of
change will be a threat to them sale
Retained earnings (profit) – this represents a business’s Shareholders’ ratios – these measure the returns on the
after-tax profit that is ploughed back into the business capital invested by shareholders or other investors
Reward power – this is associated with the distribution of Smoothing – where the manager seeks to emphasise areas
rewards to employees of the agreement among employees but downplay the
areas of disagreement
Sales – represent the total amount of money earned from Social entrepreneurship – the initiation or combination
the provision of goods and services to customers of innovations to address a problem in society
Sales budget – a plan showing forecasted sales for the Social responsibility – a practice of firms to act in a
period manner so that their actions do not negatively affect
Sales concept – the main focus of this concept is not on society or the environment
whether or not the firm could mass-produce the product Societal marketing concept – where firms make a
but on how well it can convince customers to buy concerted effort not to satisfy the desires and demands of
Sales force composite – this technique relies on the sales consumers at the expense of society
force of the firm to make projections of the future levels Sole trader – a business owned and operated by one
of demand for the firm’s product individual
Sales promotion – where people in the target market Span of control – the number of employees directly
are given incentives by the firm to encourage them to under the control of one manager or supervisor
purchase its products Staff relationship – where individual employees offer
Sales variance – a measure of the amount by which actual specialist advice to managers but have no authority to
sales are above or fall below the budgeted sales carry out the advice
Sample – the representative segment of the population Staffing – this function of management deals with the
that has been drawn from the sample frame to be recruitment, selection, development and compensation
studied of the staff
382 GLOSSARY
Start-up capital – the amount of money that is needed to Trade credit – the deferment of payment for goods or
establish a business services supplied to the business
Statutory boards – these are controlled by the state but Trade liberalisation – the removal of barriers to trade and
operate with a board of directors partially appointed by giving free access to the market
central government Trade mark – this can be a brand or part of a brand for
Stock exchange – a marketplace that allows trading in the which the firm has received the legal right to exclusive
stock market to take place use
Storming – at this stage in the activities of a team, Trade union – an association of workers who have joined
members start to share ideas and become more together to accomplish a common goal of improvement
acquainted with each other, but intra-team conflict and in the terms and conditions of employment
disagreements may develop Traditional economic system – the system emphasises
Strategic objectives – usually medium- to long-term subsistence living, where households produce a
objectives relating to outcomes that strengthen an sufficient amount of goods and services to meet their
organisation’s overall business position and competitive individual needs
vitality Training – the process of improving the knowledge and
Subsystem – these are the individual parts of the entire skills of employees
system and are interdependent Trait theory – this approach to leadership seeks to
Synergy – this occurs where the total output of the system identify the characteristics of leaders and how these
is greater than the sum of all of its input characteristics affect their effectiveness
System – a set of interdependent parts (subsystems) that Transformational leadership – a leader using the
relate to each other in the accomplishment of a purpose transformational leadership style seeks to inspire his/her
or task subordinates to achieve a shared goal or objective
System approach – focuses on the organisation as a Trial balance – a statement showing a list of balances of
system that transforms inputs into outputs all the accounts
Tactical objectives – performance targets established by Unemployment rate – the rate measuring the percentage
middle management (department heads) for achieving of the population between the ages of 18 and 65 who are
specific organisational outcomes currently not working but actively seeking employment
Target marketing – involves the division of the market Upward communication – this channel is particularly
into different segments for the firm to target utilised under a democratic leadership style where
Tariff – a tax on imported goods employees can freely share their suggestions and
Team – the interaction of two or more persons, in an concerns
interdependent way, to achieve a common goal or
objective Value added – this is where a firm’s value can be added
Team cohesiveness – the degree to which group members to the existing value of a product through the delivery
are drawn to each other and are encouraged to remain of excellent service, features and benefits to the product
within the group and offering convenience
Team organisational structure – the structure seeks to Value analysis – a systematic attempt to minimise
remove departmental boundaries by establishing teams costs and/or improve performance of a product either
which work to complete an overall business objective purchased or produced by the firm
Tertiary sector – one that does not provide goods but Variable costs – costs that vary with the level of output,
offer services based on the goods that are produced normally increasing when production increases
Total float – the maximum increase in time that an Variance analysis – the process of assessing a firm’s
activity can take without causing an increase in the performance by comparing actual results with budgeted
overall duration of the project figures
Total quality management – a management philosophy Venture capital – funds invested, or that are made
which ensures that quality is maintained in all areas available for investment, in a business which offers
of the organisation in order to meet customers’ favourable returns
expectations
GLOSSARY 383
Verbal communication – communication that uses

words and which may be spoken (oral) or written
Vertical integration – the joining of businesses at
different stages of production but in the same industry
Virtual structure – the virtual organisation uses networks
to create linkages among persons, assets and ideas
Visual communication – the transmission of information
in a form that can be read or seen
Workforce planning – the process whereby a firm

forecasts its future demand for labour and develops a
plan to meet such demand
Working capital – money that is needed to finance the
day-to-day operations and expenses of the business
Written communication – includes the use of letters,
memos, bulletins, reports and notices, among other
things
Zero-based budget – one drafted on the basis of the need

of each activity, as opposed to the basis of past spending,
bearing inflation in mind
Zero defects – involves the production of products that
are free of faults, and adhering to this standard
384
Answers to Multiple Choice

Questions
Chapter 1 Chapter 5 Chapter 9 Chapter 13
1. B 1. C 1. C 1. B
2. C 2. B 2. B 2. C
3. B 3. B 3. D 3. A
4. D 4. C 4. B 4. D
5. A 5. B 5. A 5. B
6. C 6. D 6. B
Chapter 10
7. C 7. A 7. D
1. B
8. B 8. C 8. A
2. A
9. B 9. B 9. C
3. A
10. C 10. D 10. A
4. D
Chapter 2 Chapter 6 5. A Chapter 14
1. C 1. D 1. C
Chapter 11
2. B 2. A 2. C
1. B
3. C 3. C 3. C
2. C
4. B 4. A 4. C
3. A
5. D 5. A 5. A
4. B
6. C 6. A 6. C
5. D
7. C 7. B
Chapter 7 6. D
8. C 8. D
1. A 7. B
Chapter 3 2. D 8. A Chapter 15
1. A 3. D 9. D 1. A
2. A 4. A 10. D 2. C
3. B 5. D 3. B
Chapter 12
4. C 6. A 4. A
1. A
5. A 7. A 5. C
2. C
6. C 8. B
3. B Chapter 16
7. B 9. D
4. D 1. B
8. C 10. C
5. C 2. C
Chapter 4 Chapter 8 6. C 3. B
1. C 1. D 7. B 4. D
2. D 2. A 8. A 5. C
3. B 3. B 9. D
Chapter 17
4. C 4. D 10. A
1. C
5. B 5. C
2. D
6. C 6. B
3. A
7. D
4. D
8. C
9. B
10. C
ANSWERS TO MULTIPLE CHOICE QUESTIONS 385
Chapter 18 Chapter 24 Chapter 30 Chapter 36

1. D 1. C 1. B 1. C
2. C 2. A 2. C 2. B
3. B 3. C 3. A 3. D
4. A 4. A 4. A 4. D
5. C 5. C 5. C 5. D
6. C 6. A 6. C
Chapter 25
7. A 7. B 7. A
1. B
8. A 8. C 8. C
2. C
9. D 9. D
Chapter 19 3. D
10. B 10. A
1. B 4. C
2. D Chapter 31 Chapter 37
Chapter 26
3. C 1. B 1. C
1. B
4. A 2. D 2. A
2. D
5. B 3. A 3. B
3. A
6. C 4. C
4. B Chapter 39
7. D 5. D
5. C 1. A
6. C
Chapter 20 2. C
Chapter 27 7. A
1. B 3. B
1. C 8. D
2. D 4. B
2. C
3. C Chapter 32 5. A
3. D
4. D 1. C
4. B
2. C
Chapter 21 5. A
3. A
1. C
Chapter 28 4. C
2. A
1. B 5. A
3. C
2. D
4. B Chapter 33
3. A
5. C 1. C
4. C
6. A 2. A
5. B
7. B 3. B
6. D
8. D 4. D
7. A
5. B
Chapter 22 8. B
6. D
1. C 9. C
7. B
2. A 10. A
8. D
3. A
Chapter 29
4. B Chapter 34
1. B
5. C 1. B
2. A
6. D 2. B
3. C
7. C 3. D
4. C
8. B
5. A Chapter 35
Chapter 23
6. D 1. B
1. C
2. C
2. B
3. C
3. D
4. D
4. B
5. B
5. A
6. C
7. D
386
Index
above-the-line promotion bar chart 369 business ethics 32–5 CART acronym 37
312 Barbados Investment and business growth 334–5 cash budget 169, 170
absenteeism rate 131 Development Corporation MNCs 49–50 cash equivalents 155
absorption costing 218–19 (BIDC) 350 strategies 338–43 cash flow statement 155–7
accessibility 193 Barbados Small Business business opportunities 344 cash management 138
accountability 74 Association (BSBA) 350 business plan 353–4 cell phones 51, 231
accounting 149–52 Barbados Stock Exchange benefits of writing 358 cellular layout 213, 214
accounting records (BSE) 146 elements of 354–8 cellular production 189
external users 149 barriers to communication business registration 16, 25 centralisation 75
and firm size 340 119–21 chain of command 73
internal users 148 bartering 331 capacity 206 change
need for 148 batch production 187–8, 190 diseconomies of scale 210 leading and managing 108
accounts receivable 138 bauxite industry 208 economies of scale 208–10 in organisations 107–8
acid test ratio 162 behavioural segmentation options for increasing 208 resistance to 108–9
activity ratios 163–4 280–1 capacity planning 206–7 strategies for managing
actual product 285 below-the-line promotion capacity utilisation 207–8, 110–11
Adams’ Equity Theory 80 312 298–9 charities 25
adjourning stage 99 benchmarking 232–3 capital 137–40, 142, 150 classical management
administrative management board of directors 18 equity 18, 19–20 theories
59–60, 61 bonds 142 equity versus debt 140, administrative 59–60, 61
advertising 312–14, 315 Boston Matrix 286–9 141 bureaucratic 60, 61
aesthetics 231 brand 292, 293 loan 143 scientific 58–9, 61, 83
aim 31 brand equity 292 share 143, 153 closed system 63
allowances 128 brand mark 292 sourcing 344 coaching 95, 128
Amazon.com 71, 72 brand name 292 start-up 137, 335–6, 351 code of ethics 34
applications (job) 126 branding 292–4 venture 137, 142, 351 coercive power 88
apprenticeship 128 breakeven analysis 220–1 see also working capital collaboration 103, 104
arbitration 133 breakeven chart 221 capital employed 154, 335 collective bargaining 132
articles of association 18 breakeven point 220, 221 capital market 145–6 command economic system
asset turnover 164 Bright Future Program 33 capital outlay 190, 336 332–3
associate companies 20 British Standards Institution Caribbean business 47 commission 81
audio-visual training 129 (BSI) 54 culture 48–9 commitment 99, 327
augmented product 285–6 budgetary control 170–2 growth of MNCs 49–50 common external tariff
autocratic leadership 89, 92, budgets 167 protectionism 54–5 (CET) 49, 50
93, 102 categorisation 168 trade liberalisation and communication
auxiliary services 50, 210, definition 167 globalisation 50–4 barriers to 119–21
337 process 167–8 Caribbean Development channels 114–19
average rate of return (ARR) projections 167 Bank (CDB) 143–4 and conflict 102
174–5, 178 types 168–70 Caribbean Free Trade definition 113
avoidance 103, 104 bureaucratic leadership/ Association (CARIFTA) 50 in leadership 90–1
management 60, 61, 92, Caribbean Single Market in management 111
balance sheet 153–4, 160 93 Economy (CSME) 39, process 113–14
bank loans 16, 138, 141, business analysis 289–90 50–2 types 113
149, 336, 350 business culture 48–9 CARICOM 18, 19, 21, 34, Companies Act 18, 263, 341
bank overdraft 141 business description 354–5 49, 50, 134, 146 Companies Office 18, 19, 25
INDEX 387
company 15 corporations 24 debtors 138 direct expenses 216

see also limited companies see also multinational decentralisation 75 direct labour 216
company size 307, 335–8 corporations (MNCs) decision making direct material variance 171
compensation 127–8 cost of sales 152–3 analysing alternatives 39 direct materials 216
competition-based pricing ‘cost plus’ pricing 302–3 by consensus 100 directing 64
298, 303 costing data collection 38, 39 discounted cash flow (DCF)
competitor analysis 355–6 approaches to 217–19 developing alternatives 175–6
competitors 149, 261 see also marginal costing 38, 39 diseconomies of scale 210,
compromise 103, 104 costs 301, 307 ecological factors 43, 44 337–8
computer-aided design direct and indirect 216 economic factors 41–2, dispute settlements 132–3
(CAD) 206 labour 192, 234 44, 333 distance learning 129
computer-aided site 192 evaluation 39 distribution 307
manufacturing (CAM) storage space 193 government, political and channels 308–9
206 see also fixed costs; variable legal factors 39–40, 44 factors affecting decisions
conciliation 132 costs human and natural factors 307–8
conflict management 101–5 counselling 95 43 logistics 309–10
conformance 230 credit union 20, 21, 141 levels of 37 strategies 310, 356
confrontation 103, 104 creditor to purchases ratio problem/opportunity distribution intermediaries
conglomerates 20, 339 164 definition 38, 39 308–9
consumer buying behaviour creditors 149 and productivity 244 dividend 163
281 critical path 248 qualitative versus division of labour 59
decision-making process critical path analysis (CPA) quantitative 37–8 double entry system 150,
281–2 247–50 selecting/implementing 151
factors influencing 283 critical thinking 91 alternatives 39 downward channels 117–18
globalisation 53–4 cultural factors 41, 44, 263–4 social and cultural factors dummy activity 249–50
consumer cooperative 21 culture 40–1, 44 durability 230–1
consumer feedback 243 business 48–9 stages of 38–9
consumer preference/ and communication 120, technological factors 41, e-business 324
perception 301 121 44 e-commerce 322–4, 345–6
consumer rights 40 definition 41 decision trees 250–2 e-learning 129
consumer survey 197–8 current assets 137, 150, decoding 114 e-mail 117
content theories 78–9 153–4 delegation 74–5 earliest start time (EST)
contingency theory 63–4 current liabilities 137, 150, Delphi method 197 247–9
continuous flow production 154 demand 186, 190, 191, 299 earnings per share (EPS)
188 customer satisfaction 236, democratic leadership 89, 162–3
continuous improvement 237, 238, 255 92, 93, 118 economic activity
235–6, 238 customer service 107, 255 demographic factors 108, primary sector 12–13
contribution 217–18, 220 customer value 255 262, 278–9 secondary sector 13
controlling 64 customers 262 dependent variable 201, 267, tertiary sector 13–14
cooperatives 20–1 cyclical unemployment 42 365 economic animal 58
copyright 346 depth of product mix 286 economic factors 107–8,
core marketing concepts data analysis 271–2, 369 deregulation 52 262–3
254–60 data collection 267–8 design brief 204 decision making 41–2, 44,
core product 285 in decision making 38, 39 design capacity 207 333
corporate entrepreneurship in surveys 198 development 129 globalisation 52–3
326 data presentation 272, 368–9 product 289–90 economic order quantity
corporate governance 34 data sources 367 teams 99 225, 227
corporate objectives 31–2 day books 150–2 Development Bank of economic sectors
corporate responsibility 32–3 debentures 142 Jamaica (DBJ) 349 legal structures 14–15
in decision making 40–1, debt capital 140, 141 Digicel Jamaica 51 private 15–23
43 debt factoring 351 direct costs 216 public 23–6
lack of 35 debt switching 139 direct distribution channel economic systems
to stakeholders 34 debtor to sales ratio 163–4 308 market 332, 333
388 INDEX
mixed 333 expected value 251–2 forming stage 99 Herzberg, Frederick 79, 84,
planned 332–3 expenses 153 franchises 21–2 92
traditional 331–2 expert power 88 free float 247 hierarchy 75
economics 41 export subsidies 55 free market economy 332, hierarchy of needs 78–9, 85,
economies of scale 208–10, external change factors 333 92
336–7 107–8 fringe benefits 81–2 hire purchase 141
effective capacity 207 external economies of scale functional organisational holding companies 20
efficiency ratios 160, 163–4 209–10, 337 structure 68–9 horizontal integration 339
elasticity 299, 300 Human Relations School
electricity costs 193 facsimile 117 gearing 143 61–2, 63
electronic communication factoring 139, 141 gearing ratio 143, 160, human resource
115, 117 factory overheads 216 164–5 management
embargo 55 Fayol, Henri 59–60, 61 General Agreement on compensation 127–8
employment laws 39 feasibility study 353 Tariffs and Trade (GATT) health and safety 134–5
empowerment 244 feedback 62 52 labour–management
entrepreneur 65, 137, 326 in communication 114, geographic segmentation relations 131–4
assistance available 121 279–80 performance appraisal
349–52 consumer 243 geographical organisational 129–31
business location 345 performance appraisal 130 structure 69–70 performance management
business opportunities 344 quality assurance 243 global warming 40, 43, 193, 129
characteristics 327–8 fees 82 263 recruitment 125–6
e-commerce 345–6 finance, sources of 140–3 globalisation 52–4, 345 role and importance 124
intellectual property financial analysis 159–65 consumer behaviour 53–4 selection process 126–7
346–7 financial economies 336–7 domestic businesses and training and development
selecting business type financial institutions 350–1 54 128–9
345 financial motivation economic impact of 52–3 workforce planning 124–5
sourcing capital 344 strategies 80–3 government role in 53
entrepreneurship financial plan 357–8 see also multinational ideas, generating and
benefits 328–9 financial statements 152–8 corporations (MNCs) screening 289
corporate 326 analysis see financial government agencies 349–50 import restrictions 49
definitions 326 analysis government incentives 192 income 301
drawbacks 329 fixed assets 153 government policy 35, 49, income statement 152–3,
social 326–7 disposal 138–9, 140 301, 308 154, 155
entropy 63 fixed budget 168 and decision-making incubation 351–2
environmental analysis 355 fixed costs 216, 217, 218–19, 39–40, 44 independent variable 201,
environmental laws 40, 193 302 and globalisation 53 267, 365
environmental protection fixed exchange rate 42 Grace Kennedy Group Ltd indirect costs 216
campaigns 32–3 fixed-position layout 212–13 20 indirect distribution channel
equity capital 18, 19–20, fixed time period model grapevine 118–19 308–9
140, 141 225–6 grievance procedure 132–3 indirect expenses 216
equity theory 80 flexibility 100, 328 Gross Domestic Product indirect labour 216
ergonomics 83, 244 flexible budget 168 (GDP) 49 indirect materials 216
ethics 32–5 floating exchange rate 42 gross profit 152, 161 individual job needs 77, 84
evaluation flow production 188–9, 190 groups see teams industrial action 131, 133
of alternatives 282 fluctuations 199 growth stage 290–1 industrial property 346
in decision making 39 focus groups 271, 272 Guyana’s Small Business inflation rate 41–2
job 82–3, 125, 127 forecast 196 Council 350 informal communication
exchange control 55 forecasting techniques channels 118–19
exchange rate 42 qualitative 196–8, 202 Hawthorne study 62 informal leadership 95–6
exclusive distribution 310 quantitative 199–202 health and safety 134–5 informal teams 98
exhibitions and trade fairs foreign exchange 42, 49 Health and Safety at Work information 37, 282
314 formal communication Act (1974) 134 infrastructure 192–3
expectancy theory 79–80 channels 117–18 health insurance 128 Inland Revenue 149
INDEX 389
input turnover 139–40, 164 core traits 89 inventory control 225–7

production 185 inventory control 224–5, 310 definition 88 labour–management
systems management management 225–7 informal 95–6 relations 131–4, 241–2
62–3 investment 173 roles 95 levels of 64, 73
inseparability 294, 295 investment appraisal 173 skills 90–1 location preferences 193
intangibility 294, 295 analytical methods 173–8 styles 92–5, 102, 236 motivation implications
integration 205, 339 comparison of methods theories 88–90 85
intellectual property 346–7 178 see also management performance 129
intensive distribution 310 limitations 178 leading change 108 poor skills 341
Inter-American investment capital 140 lean production 236 principles of 59–60
Development Bank (IDB) ISO quality standards 233–4 leasing 142 roles of 65
144 least squares regression small and large firms
interest rate 42, 176 Jamaica Business 201–2 339–40
internal auditors 148 Development Corporation legal factors 39–40, 108 see also human resource
internal economies of scale (JBDC) 349 legislation 263, 341 management; leadership;
209, 336–7 Jamaica Producers Group health and safety 134–5 project management
internal rate of return (IRR) Ltd 47 intellectual property management theories
177–8 Jamaica Public Service 346–7 classical 58–61
internal recruitment 126 Company (JPS) 26 legitimate power 88, 92 contingency 63–4
International Accounting Jamaica Stock Exchange liaison 65 Human Relations School
Standard (IAS) 152 (JSE) 145 limited companies 18–20 61–2, 63
International Bank for job advertisement 126 finance and management system approach 62–3
Reconstruction and job analysis 125, 127 18 managerial economies 336
Development (IBRD) 144 job description 125 private 18–19, 23 managing change 108
International Development job enlargement 62, 84 public 19–20, 23 manufacturing industry 13
Association (IDA) 144 job enrichment 62, 84 Limited Liability Partnership margin of safety 221
International Labour job evaluation 82–3, 125, Act (2000) 17 marginal costing 217–18,
Organisation (ILO) 134 127 line and staff relationship 73 219, 222
International Monetary job production 186, 187, 190 line relationship 73–4 applications 220–1
Fund (IMF) 145 job rotation 62, 84–5, 128 linear regression analysis mark-up 161–2
International Organization job satisfaction 84 201–2 market 254–5
for Standardization (ISO) job specification 125 lines of communication capital 145–6
54, 233 joint ventures 22, 71, 339 117–19 market analysis 356
internet jury of experts 198 liquidity ratios 160, 162 market economic system
advertising 313, 314 ‘just in time’ model 226–7 literature review 366–7 332, 333
and decision making 41 loan capital 143 market growth 287–8
e-learning 129 Kaizen 235–6, 238 loan stock 142 market share 287–8, 335
electronic communication location 49, 345 market size 190, 307
115, 117 labour budget 169 production 191–4 marketing
and globalisation 52 labour costs 49, 192, 234 logistics strategy 309–10 core concepts 254–60
internet marketing labour force 334 London Stock Exchange definitions 254
challenges with 322 labour–management (LSE) 146 marketing concept 257, 259
development 320–1 relations 131–4, 241–2 core 254–60
e-commerce 322–4 labour productivity 130, 243 McGregor, Douglas 88, 92 societal 257–8, 259
opportunities from 321–2 labour turnover 130 macro-environment 262–4 marketing environment
interviews laissez-faire leadership 92, macro-forecasting 196 macro 262–4
job applicants 127 93 macroeconomics 41 micro 261–2
market research 271, 272 lateral integration 339 ‘make or buy’ decisions marketing intermediaries
intranet 117 latest finish time (LFT) 221–2 261–2
intrapreneurship 326 247–9 management marketing mix 285
inventory 138, 219, 224 lead time 225 communication in 111 marketing plan 356
holding 224 leader 65 conflict 101–5 marketing research 186, 243
opening and closing 153 leadership functions of 59, 64–5
390 INDEX
data analysis and management implications hierarchy of 31–2 participation 84, 99–100,
presentation 271–2 85 importance of 30 130, 244
data collection 267–8 non-financial strategies marketing research 267 partnership 15, 17, 23
importance of 266 83–5 promotion 312 Partnership Acts (1890)
limitations 272–3 theories 78–80 research 365 (1907) 17
management problem motivators 79, 84 teams 98 partnership deed 17
identification 266–7 moving averages 199–201 type 30 patents 346
objectives 267 multi-stage sampling 269 observation 271, 272 paternalistic leadership 92,
research plan 266 multinational corporations off-the-job training 128–9 93
sampling 268–70 (MNCs) 48–50 on-the-job training 128 payback period 173–4, 178
techniques 270–1 advantages to host one-channel intermediary payment schemes 80–1
Maslow’s Hierarchy of Needs country 49–50 308, 309 penetration pricing 303–4
78–9, 85, 92 disadvantages to host operating profit 217–18 pension fund 128
mass marketing 277 country 50 operational budget 168 perceived value pricing 303
mass production 188, 190, see also globalisation operational objectives 32 performance, quality and
244 operations plan 356–7 230
master budget 170 National Entrepreneurship opportunity cost 331 performance appraisal 82,
material budget 169 Development Company opportunity identification 129–31
material price variance Ltd (NEDCO) 350 38, 327 performance management
171–2 National Environmental oral communication 114 129
material usage variance 171 Protection Agency (NEPA) ordinary shares 142 performance ratios 160–2
materials handling 310 33 organisational structure 68 performance-related pay 82
matrix organisational nationalised industries 24 characteristics of 73–5 performing stage 99
structure 70 natural factors 49, 263 functional 68–9 perishability 294–5
maximum stock level 224, net assets 154, 335 geographical 69–70 personal selling 316
225 net present value (NPV) matrix 70 persuasive advertising
media 313–14, 315 176–8 network 71 312–13
mediation 132 net profit 139, 161 product 69 PEST analysis 38
medium-term financing New York Stock Exchange team 70–1 physical barriers 120, 121
141–2 (NYSE) 146 virtual 71–2 piece rates 81
medium-term objectives 30 newspapers and magazines organisations planned economic system
memorandum of association 314 benefits of teams to 101 332–3
18 niche marketing 277 centralisation and planning 64
mentoring 128 Nissan UK 238 decentralisation 75 capacity 206–7
mergers 107, 338–9 node 247–9 classification 68–72 in leadership 91
methodology 367–8 ‘noise’ 120, 121 factors influencing product design 204
micro-environment 261–2 non-current assets see fixed 72–3 profit-sharing 244
micro-forecasting 196 assets definition 68 research 266
miniaturisation 205 non-current liabilities 154 factors causing change workforce 124–5
minimum stock level 224, non-financial strategies 83–5 107–8 political factors 263
225 non-governmental need and nature of 58 see also government
mission statement 31 organisations (NGOs) organising 64 headings
mixed economic system 333 25–6 output pollution 50
MNCs see multinational non-probability sampling production 185 posters and billboards 314
corporations (MNCs) 269–70 systems management price 298
modularisation 204–5 non-verbal communication 62–3 price ceiling 301
money market 145 113, 115, 120, 121 outsourcing 234 price/earnings ratio (P/E)
monopolies 24 norming stage 99 overheads 153 163
motivation not-for-profit organisations overproduction 50 price elasticity of demand
definition 77 25–6 overtime 80, 133 (PED) 299–301
factors stimulating/ price flooring 301
influencing 77–8 objectives packaging 293 price skimming 304
financial strategies 80–3 definition 29 pricing 298–9
INDEX 391
factors influencing product organisational local authority Registrar of Cooperative

299–302 structure 69 undertakings 25 Societies 20
strategies 302–4 production 185 nationalised industries 24 research and development
primary data 38, 198, 267–8, factors of 185 not-for-profit (R&D) 236
367 layout 210–14 organisations 25–6 research instrument 367–8
primary packaging 293 lean 236 statutory boards 25 research techniques 270–1
primary sector 12–13 location 191–4 publicity 316–18 research topic 364–5
prime cost 216 mass 188, 190, 244 purchases 153, 282 resellers 262
private limited companies methods 186–90 hire 141 resistance to change 108–9
18–19, 23 overproduction 50 purchases day book 151–2 responsibility 74
private sector 15–23 product choice 186 purchasing economies 336 see also corporate
cooperatives 20–1 versus productivity 241 responsibility
franchises 21–2 timing of 191 qualitative decision 37–8 retained profit 140
joint ventures 22 production budget 169 qualitative factors 192–3 return on capital employed
legal structure changes production concept 256, 259 qualitative forecasting (ROCE) 160–1
22–3 production costs 49, 218–19, techniques 196–8, 202 revenue potential 192
limited companies 18–20, 222 qualitative research 270, 367 revenues 153
23 production process 185 quality reward power 88
partnership 15, 17, 23 productivity definition 230 risk taking 327
sole trader 15, 16–17, 23 definition 241 dimensions 230–1 Rural Agricultural
Private Sector Organisation factors affecting 241–3 techniques for improving Development Authority
of Jamaica 350 improving 243–6 231–9 (RADA) 349
privatisation 26 measuring 243 quality assurance 54, 232,
probability 250–2 versus production 241 261 safety 78, 134–5
probability sampling 268–9 profit 298 feedback 243 salaries 128
problem awareness 281–2 profit and loss account 153 quality chains 237–8 sales 153
problem identification 266–7 profit motive 186 quality circles 85, 234–5, 237 sales budget 168
problem solving 91, 328 profit sharing 83, 244 quality control 231–2 sales concept 257, 259
process development 236 profitability ratios 160–2 quality standards 227, 232, sales force composite 196–7
process layout 211–12 project management 233–4 sales promotion 314–16
process production 188 critical path analysis quantitative decision 37–8 sales variance 171
process theories 79–80 247–50 quantitative factors 192 sample 268
product 285 decision trees 250–2 quantitative forecasting sample frame 268
branding and packaging promotion techniques 199–202 sample selection 197
292–3 advertising 312–14, 315 quantitative research 270, sampling 268–70
choices 331 objectives 312 272, 367 scarcity 185
type/nature 307 personal selling 316 quota 55 scientific management 58–9,
product concept 256–7, 259, publicity 316–18 quota sampling 269–70 61, 83, 92
285–6, 289 sales 314–16 Scientific Research Council
product design promotion opportunities 85 ratio analysis 159–60 350
capacity 207 protectionism 54–5 types 160–5 Scotiabank 33
planning 204 prototype 290 re-order level 224, 225 secondary data 38, 198, 268
strategies 204–6 psychographic segmentation re-order quantity 224 secondary data sources 367
product development 280 rebranding 294 secondary packaging 293
process 289–90 psychological pricing 304 reconciliation 133–4 secondary sector 13
product launch 290 public corporations 24 record keeping see segmentation 276–7
product layout 212 public limited companies accounting records behavioural 280–1
product life extension 291–2 19–20, 23 recruitment 125–6 criteria for effective 278
product lifecycle, stages 190, public relations 316–17 recruitment plan 125 demographic 278–9
202, 290–2, 302 public sector 23–6 referent power 88 geographic 279–80
product line 286 corporations 24 Regional Stock Exchange psychographic 280
product mix 286 government departments 146 selective distribution 310
25
392 INDEX
selective perceptions 119, strategic objectives 32 trade mark 292, 346 working capital 137–40, 154
121 strikes 133 trade unions 132, 133, 149, deficiences 340–1
self-actualisation needs 78, subcontracting 71, 234 242 working environment 121,
85 subsystems 62, 63 trading account 152–3 244
semi-variable costs 217 sugar industry 55 traditional economic system World Bank 144–5
services 13–14, 293–6 suppliers 261 331–2 World Trade Organization
auxiliary 50, 210, 337 surveys 271, 272 training 128–9 (WTO) 52
customer 107, 255 SWOT analysis 38 assistance 351 written communication
share capital 143, 153 synergy 63, 100 health and safety 134 114–15
share ownership 83 system management and productivity 244
shareholders 18, 19, 149 approach 62–3 trait theory 89–90 zero-based budget 168
shareholders’ ratios 160, systems 62, 63 transformation 62–3 zero defects 232, 237
162–3 transformational leadership
shares 18, 19–20, 140, 142 tactical objectives 32 92–3
short listing 126–7 takeover 107, 339 transportation 192, 193, 310
short-term financing 140–1 target marketing 277 Treaty of Chaguaramas 50–2
simple moving averages tariff 49, 54–5 trial balance 152, 154
(SMA) 199–200 Taylor, Frederick W. 58–9, Trinidad and Tobago Stock
site costs 192 61, 68, 83, 92 Exchange (TTSE) 145–6
sleeping partner 17 team organisational two-channel intermediary
Small Business Association structure 70–1 308, 309
of Jamaica 350 team work 85, 189, 205,
SMART objectives 29, 30, 237, 328 unemployment rate 42, 50
267 teams upward channels 118
smoothing 103, 104 advantages/disadvantages
social entrepreneurship 101 value added 255
326–7 benefits to the value analysis 205–6
social networking 313 organisation 101 variability 294, 295
social responsibility see characteristics of 99–100 variable costs 216, 217,
corporate responsibility cohesiveness 100–1 218–19, 222, 302
societal marketing concept composition 98 variance analysis 170–2
257–8, 259 conflict management venture capital 137, 142,
sole trader 15, 16–17, 23, 101–5 351
344 definition 98 verbal communication 113
staff relationship 74 development 99 vertical integration 339
staffing 64–5 interaction 98 virtual organisational
stakeholders objectives 98 structure 71–2
corporate responsibility to types of 99 visual communication 115
34 technology factor 41, 44, 50, voluntary export restraints
and mission statement 31 52, 107, 244 (VER) 55
online marketing 320–1 telecommunication industry Vroom’s Expectancy Theory
quality circles 235 40, 51, 231 79–80
virtual organisations 71 television 314, 315
standardisation 227 tertiary sector 13–14 wages 128
start-up capital 137, 335–6, test marketing 271, 272, 290 warehousing 309–10
351 time rates 80–1 Weber, Max 60, 61, 92
statement of financial total float 247 weighted moving averages
position 155 total quality management (WMA) 200
statutory boards 25 (TQM) 205, 236–9 work measurement 83
stock see inventory tourism 14 work study 83
stock exchange 145–6 toxic waste 35 work to rule 133
stock market 145–6 trade credit 140–1 workers’ cooperative 21
storming stage 99 trade liberalisation 50–2, 345 workforce planning 124–5

CAPE Management of Business Textbook

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CAPE Management of Business Textbook

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MANAGEMENT OF

CAPE is a registered trade mark of the

List of figures and tables Protectionism 54

Stages of team development 99 14 Accounting Information and

Qualitative forecasting techniques 196 25 Project Management 247

20 Production Design Strategies and MODULE 2 FUNDAMENTALS OF MARKETING 254

Multiple Choice Questions 305 Selection of business types 345

37 Major Challenges and Opportunities Faced

List of figures and tables

Figures Figure 17.1 NPV graph 178

Figure 30.1 The Four Ps 285 Tables

Table 13.1 Advantages and disadvantages of

Table 14.1 Transactions illustrating the double

Table 15.1 Net profit figures for analysis 159

Table 17.1 KEP Industry initial capital outlays

Table 19.1 Data for calculating simple

Table 21.1 Calculating operating profit under

Table 25.1 Getting ready for school 248

Table 26.1 Overview of business concepts 259

Table 28.1 An evaluation of marketing

Table 30.1 Possible responses from marketers

Table 31.1 Information for calculating price

Table 33.1 Overview of types of advertising media 314

Table 36.1 The impact of economic systems

Table 40.1 Module content related to SBA topics 365

This textbook is geared towards students studying CAPE®

The text breaks down accounting information so that

The book gives a number of definitions, examples from

The text also contains photographs, artwork and diagrams

Module 1 Business and its Environment

1 Economic and Legal Structures

Figure 1.1: An example of industry in the primary sector

Disadvantages of involvement in the secondary sector

Figure 1.3: An example of industry in the tertiary sector

Switching the economic focus

Ease of formation partnership. At the same time, a sole proprietorship business

Sole Limited Joint

Figure 1.5: A sole-trader business

upon purchase. The number of shares will determine the

Holding companies Cooperatives

Figure 1.7: A cooperative business:

Main features of cooperatives Advantages of cooperatives

Producer cooperative Franchises

Tanya Taylor’s choice of business

The public sector

private-sector enterprise may be nationalised for a number

Statutory boards Promote democracy.

b. Public limited company d. Cooperative

a. Sole trader c. Nationalisation

c. Partnership 8. The following are reasons for nationalisation EXCEPT which

a. The rights of the shareholders c. To protect consumers

b. Procedures for meetings d. To provide certain goods and services

c. The process for transferring shares

b. Owner cooperative a. To generate much-needed income

c. Producer cooperative b. To improve efficiency

d. Consumer cooperative c. To lay off workers

Extended Essay Questions

may vary among employees. The targets of the business

Objectives can also be used to set targets for individual

Hierarchy of objectives Give a clear indication of the purpose of the

management. An example would be ‘To increase profits

Tactical objectives Questions

Scotiabank’s commitment to corporate social responsibility

Government’s response to social

2. Discuss two (2) ways in which this behaviour could b. Separable

b. $4,000 b. Describe two (2) financial and two (2)