Professional Documents
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CIMA E1 Enterprise Operations Study Text
CIMA E1 Enterprise Operations Study Text
T
U
D
Y
OPERATIONAL
T
PAPER E1 E
X
T
ENTERPRISE OPERATIONS
Signpost how each chapter links to the syllabus and the learning outcomes
Provide lots of exam alerts explaining how what you're learning may be tested
Include examples and questions to help you apply what you've learnt
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iii
Contents Page
Introduction
How our Study Text can help you pass iv
Features in our Study Text v
Streamlined studying vi
Syllabus and learning outcomes vii
Studying E1 xiii
The exam paper xviii
Part D Marketing
8 Marketing and business strategy 215
9 Marketing plans, branding and communications 243
10 Developments in marketing 277
Index 419
Review form
iv INTRODUCTION
Practice and Providing lots more question practice and helpful guidance on how to pass the exam
Revision Kit
Passcards Summarising what you should know in visual, easy to remember, form
Success CDs Covering the vital elements of the E1 syllabus in less than 90 minutes and also
containing exam hints to help you fine tune your strategy
i-Pass Providing computer-based testing in a variety of formats, ideal for self-assessment
Interactive Allowing you to learn actively with a clear visual format summarising what you must
Passcards know
Online classroom Through live interactive online sessions it provides you with the traditional
live structure and support of classroom learning, but with the convenience of
attending classes wherever you are
Online classroom Through pre-recorded online lectures it provides you with the classroom
experience via the web with the tutor guidance and support you’d expect from
a face to face classroom
Basics Plus A guided self study package containing a wealth of rich e-learning and physical
content
Basics Online A guided self study package containing a wealth of rich e-learning content
You can find out more about these packages by visiting www.bpp.com/cimadistancelearning
INTRODUCTION v
KEY TERM
Key Points are points that you have to know, ideas or calculations that will be the
foundations of your answers
KEY POINT
Exam Skills are the key skills you will need to demonstrate in the exam, linked to
question requirements
Questions give you the practice you need to test your understanding of what you’ve
learnt
Case Studies link what you’ve learnt with the real-world business environment
CASE STUDY
Links show how the syllabus overlaps with other parts of the qualification, including
Knowledge Brought Forward that you need to remember from previous exams
Website References link to material that will enhance your understanding of what
you’re studying
Further Reading will give you a wider perspective on the subjects you’re covering
Streamlined studying
What you should do In order to
Read the Chapter and Section Introductions See why topics need to be studied and map your
way through the chapter
Go quickly through the explanations Gain the depth of knowledge and understanding
that you'll need
Highlight the Key Points, Key Terms and Formulae Make sure you know the basics that you can't do
To Learn without in the exam
Focus on the Exam Skills and Exam Alerts Know how you'll be tested and what you'll have to
do
Work through the Examples and Case Studies See how what you've learnt applies in practice
Prepare Answers to the Questions See if you can apply what you've learnt in
practice
Revisit the Section Summaries in the Chapter Remind you of, and reinforce, what you've learnt
Roundup
Answer the Quick Quiz Find out if there are any gaps in your knowledge
Answer the Question(s) in the Exam Question Bank Practise what you've learnt in depth
Further help
BPP Learning Media’s Learning to Learn Accountancy provides lots more helpful guidance on studying. It
is designed to be used both at the outset of your CIMA studies and throughout the process of learning
accountancy. It can help you focus your studies on the subject and exam, enabling you to acquire
knowledge, practise and revise efficiently and effectively.
INTRODUCTION vii
%
A The Global Business Environment 20
B Information Systems 20
C Operations Management 20
D Marketing 20
E Managing Human Capital 20
Learning Outcomes
Lead Component Syllabus content
A The Global Business Environment
1 Explain the (a) Explain the emergence of Cross-cultural management and
social, political major economies in Asia different forms of business
and economic and Latin America organisation.
context of (b) Explain the emergence and Emerging market multinationals.
business. importance of outsourcing
Liberalisation and economic
and offshoring
nationalism.
(c) Explain the impact of
Outsourcing and offshoring.
international
macroeconomic Major economic systems including
developments (eg long- US, European and transition
term shifts in trade economies.
balances), on the National account balances
organisation’s competitive (especially from international
environment. trade), monetary policy and their
impact on markets.
2 Analyse the (a) Explain the principles and Corporate governance, including
relationship purpose of corporate social stakeholders and the role of
between the responsibility and the government.
internal principles of good
Principles of corporate social
governance of corporate governance in an
responsibility and the scope for
the firm and international context
international variation, eg between
external (b) Analyse relationships developed and developing
sources of among business, society economies.
governance and government in
and regulation. Business-government relations in
national and regional
developed and developing
contexts
economies.
(c) Apply tools of country and
Regulation in the national and
political risk analysis
international context and its impact
(d) Discuss the nature of on the firm.
regulation and its impact
Role of institutions and governance
on the firm.
in economic growth.
Corporate political activity in
developed and developing markets.
Country and political risk.
viii INTRODUCTION
Learning Outcomes
Lead Component Syllabus content
B Information Systems
1 Discuss the (a) Identify the value of The role of information systems in
wider business information and organisations.
context within information systems
Emerging information system
which organisations
trends in organisations (eg
information (b) Discuss the reasons for Enterprise-wide systems;
systems organisations’ increased knowledge management systems;
operate. dependence on information customer relationship management
systems systems, eg E-business, Web 2.0
(c) Discuss the transformation tools).
of organisations through Information technology enabled
technology transformation; the emergence of
new forms of organisation.
Geographically dispersed (virtual)
teams; role of information systems
in virtual teams and challenges for
virtual collaboration.
2 Analyse how (a) Discuss ways for Assessing the costs and benefits of
information overcoming problems in information systems; criteria for
systems can information system evaluating information systems.
be implementation
Privacy and security.
implemented (b) Discuss ways of organising
in support of System changeover methods (ie
and managing information
the direct, parallel, pilot and phased).
system activities in the
organisation’s context of the wider Information system implementation
strategy. organisation. as a change management process;
avoiding problems of non-usage
and resistance.
Information system outsourcing
(different types of sourcing
strategies; client-vendor
relationships).
Aligning information systems with
business strategy (eg strategic
importance of information systems;
information systems for
competitive advantage; information
systems for competitive necessity).
INTRODUCTION ix
Learning Outcomes
Lead Component Syllabus content
C Operations management
1 Explain the (a) Explain the shift from Supply chain management as a
relationship of price-based to relational strategic process.
operations procurement and
An overview of operations strategy
management operations
and its importance to the firm.
to other (b) Explain the relationship of
aspects of the Supply chains in competition with
operations and supply
organisation’s each other; role of supply
management to the
operations. networks; demand networks as an
competitiveness of the firm
evolution of supply chains.
(c) Explain the particular
Design of products/services and
issues surrounding
processes and how this relates to
operations management in
operations and supply.
services
The concept of sustainability in
(d) Explain the importance of
operations management.
sustainability in operations
management.
2 Apply tools (a) Apply contemporary Different methods of quality
and thinking in quality measurement (eg Servqual).
techniques of management
Approaches to quality
operations (b) Explain process design management, including Total
management.
(c) Apply tools and concepts Quality Management (TQM),
of lean management various British and European
Union systems as well as
(d) Illustrate a plan for the
statistical control processes.
implementation of a
quality programme External quality standards.
Learning Outcomes
Lead Component Syllabus content
Application of lean techniques to
services.
Practices of continuous
improvement (eg Quality circles,
Kaizen, 5S, 6 Sigma).
The characteristics of lean
production.
Criticisms and limitations of lean
production.
Developing relationships with
suppliers, including the use of
supply portfolios.
D Marketing
1 Explain (a) Explain the marketing The marketing concept as a business
developments concept, and the philosophy.
in marketing. alternatives to it
The marketing environment,
(b) Describe the marketing including societal, economic,
environment of a range technological, political and legal
of organisations factors affecting marketing.
(c) Explain marketing in a Marketing in not-for-profit
not-for-profit context organisations (ie charities, non-
(d) Explain the social context governmental organisations; the
of marketing behaviour public sector).
(e) Describe theories of Theories of consumer behaviour (eg
consumer behaviour. social interaction theory), as well as
factors affecting buying decisions,
types of buying behaviour and stages
in the buying process.
Social marketing and corporate
social responsibility.
2 Apply tools (a) Explain the relationships Market research, including data
and between market gathering techniques and methods of
techniques research, market analysis.
used in segmentation, targeting Segmentation and targeting of
support of the and positioning markets, and positioning of products
organisation’s (b) Apply tools within each within markets.
marketing. area of the marketing
How business to business (B2B)
mix
marketing differs from business to
(c) Describe the business consumer (B2C) marketing in its
contexts within which different forms (ie consumer
marketing principles can marketing, services marketing, direct
be applied marketing, interactive marketing, e-
(d) Describe the market marketing, internal marketing).
planning process Promotional tools and the promotion
(e) Explain the role of mix.
branding and brand The ‘service extension’ to the
equity. marketing mix.
INTRODUCTION xi
Learning Outcomes
Lead Component Syllabus content
Devising and implementing a pricing
strategy.
Experiential marketing.
Marketing communications,
including viral, guerrilla and other
indirect forms of marketing.
Distribution channels and methods
for marketing campaigns.
The role of marketing in the business
plan of the organisation.
Brand image and brand value.
Product development and
product/service life-cycles.
Internal marketing as the process of
training and motivating employees
so as to support the organisation’s
external marketing activities.
The differences and similarities in
the marketing of products, services
and experiences.
Product portfolios and the product
mix.
E Managing human capital
1 Explain the (a) Explain how HR theories Theories of Human Resource
relationship of and activities can Management relating to ability,
Human contribute to the success motivation and opportunity.
Resources of the organisation
The psychological contract and its
(HR) to the (b) Explain the importance of importance to retention.
organisation’s ethical behaviour in
operations. The relationship of the employee to
business generally and for
other elements of the business.
the line manager and their
activities. Personal business ethics and the
fundamental principles (Part A) of
the CIMA Code of Ethics for
Professional Accountants.
2 Discuss the (a) Explain the HR activities Practices associated with recruiting
activities associated with developing and developing appropriate
associated the ability of employees abilities including recruitment and
with the (b) Discuss the HR activities selection of staff using different
management associated with the recruitment channels (ie
of human motivation of employees interviews, assessment centres,
capital. intelligence tests, aptitude tests,
(c) Describe the HR activities
psychometric tests).
associated with improving
the opportunities for Issues relating to fair and legal
employees to contribute to employment practices (eg
the firm recruitment, dismissal,
redundancy, and ways of
managing these).
xii INTRODUCTION
Learning Outcomes
Lead Component Syllabus content
(d) Discuss the importance of The distinction between
the line manager in the development and training and the
implementation of HR tools available to develop and train
practices staff.
(e) Prepare an HR plan The design and implementation of
appropriate to a team. induction programmes.
Practices related to motivation
including issues in the design of
reward systems (eg the role of
incentives, the utility of
performance-related pay,
arrangements for knowledge
workers, flexible work
arrangements).
The importance of appraisals, their
conduct and their relationship to
the reward system.
Practices related to the creation of
opportunities for employees to
contribute to the organisation
including job design,
communications, involvement
procedures and appropriate
elements of negotiating and
bargaining.
Problems in implementing an HR
plan appropriate to a team and
ways to manage this.
HR in different organisational
forms (eg project based, virtual or
networked firms) and different
organisational contexts.
Preparation of an HR plan (eg
forecasting personnel
requirements; retention, absence
and leave, wastage).
INTRODUCTION xiii
Studying E1
1 What's E1 about
E1 explores several discrete subjects which all affect how organisations operate. However, please note
that exam questions are likely to cover more than one of these subjects. You should therefore appreciate
the various links between them.
The focus of Chapter 2 is on how governments affect their economies through economic policy and
regulation. The chapter also looks at non-legal regulation, in the form of corporate governance and
corporate social responsibility, which are becoming increasingly important to all business organisations.
Chapter 4 is primarily concerned with how organisations implement new systems. However, you should
also understand the importance of organisations aligning their information systems with their overall
business strategy.
We begin by studying how operations develop around a value chain and how organisations join together
to form supply chains and networks. Quality is an important issue for all businesses, whether in terms of
products or services, and we shall see how quality can be measured and managed to ensure the
customer is satisfied. Finally, we shall find out how organisations can balance their inputs (inventory) and
outputs (products and services) with changing demand levels.
1.4 Marketing
Marketing is about communicating the organisation’s sales messages to the customer. It forms a major
part of its business strategy and is the subject of Chapters 8, 9 and 10. We shall firstly study the
marketing environment and see how a marketing strategy and plan are put together. Following on from
this, our study looks into how the marketing message is communicated to the customer and the
important issue of corporate branding.
The syllabus also covers several smaller areas of marketing. These include; consumer behaviour,
marketing not-for-profit organisations, marketing an organisation’s message to its employees (internal
marketing) and how corporate social responsibility affects how an organisation markets its products and
services. We shall cover all these areas in full as well.
xiv INTRODUCTION
2 What's required
You will face a variety of questions in the E1 exam. Each type of question tests a different skill and you
must be confident in answering each of them.
20% of the marks are for objective test questions, such as those requiring a short written answer or the
selection of one correct answer from a choice of four. These questions test your ability to make quick
decisions and write succinctly.
When answering multiple choice questions try to eliminate any obviously wrong answers first before
considering the others.
A further 30% of the marks are available for answering five short answer questions which are based
around a single scenario. These test your ability to assimilate information quickly and either apply
theoretical knowledge or provide a brief analysis or evaluation.
It is always a good idea to list a few bullet points as a plan for each question, covering what you want to
say. This helps to focus your mind on the subject and your answers on the question.
The final 50% of the marks are awarded for answering one or two compulsory questions, each of which
may be related to a scenario. These scenarios will not necessarily be any longer than those in the short
answer questions, but your answers must be in more depth to earn the majority of the marks available.
Always produce an answer plan, including any models or theory that you need to mention. A good tip for
answering questions that require you to, for example,’ explain five advantages of…’ is to produce a bullet
list which you then use to provide the headings in your answer. Add some good explanation to this and
you’ll be well on your way to passing.
You will see that there are 5 levels of Learning objective, ranging from Knowledge to Evaluation, reflecting
the level of skill you will be expected to demonstrate. CIMA Certificate subjects were constrained to levels
1 to 3, but in CIMA’s Professional qualification the entire hierarchy will be used.
At the start of each chapter in your study text is a topic list relating the coverage in the chapter to the
level of skill you may be called on to demonstrate in the exam.
INTRODUCTION xv
3 How to pass
3.1 Study the whole syllabus
You need to be comfortable with all areas of the syllabus, as questions will often span a number of
syllabus areas. For example, question four in the Specimen Paper tested training (from the Managing
Human Capital syllabus area) in the context of systems implementation (from the Information Systems
syllabus area). A little wider reading will help you keep up to date with the global environment and new
technologies.
Section C questions will often require you to produce an answer in the context of the scenario. Always
read the question carefully and answer the question set, not the question you hoped would be set!
Answers with answer plans attached tend to score better and don't repeat the same material in
different question parts.
You should consider in advance how you are going to use the 20 minute reading time as it can
help reduce time pressure. It is suggested that a good use of this time is to begin answering the
multiple choice questions by marking the question paper. Your answers can be transferred to your
answer book when writing time commences. Do not mark your answer book until you are
permitted to do so.
Read the question carefully. A question that may appear on first glance to be about the product
lifecycle, may not require you to state the main stages of the cycle, but discuss how the model is
used or the principles behind it.
Leave time to check your answers at the end to identify and correct any silly mistakes.
INTRODUCTION xvii
CIMA guidance
CIMA has stated that credit will be given for focusing on the right principles and making practical
evaluations and recommendations. Plausible alternative answers could be given to many questions, so
model answers should not be regarded as all-inclusive.
Numerical content
Questions in this paper usually require written answers. These involve applying theory or explaining key
concepts, so do not expect many calculations. However you should bring a calculator with you to the
exam just in case.
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Section A
1 Ten multiple-choice questions covering the whole syllabus
Section B
2 Six short written questions covering a wide range of syllabus areas
Part A
1
2
THE SOCIAL, POLITICAL AND
ECONOMIC CONTEXT
We start our E1 studies by looking at the develop and then apply our knowledge to the recently
wider environment that organisations operate emerging economies of Asia and Latin America.
in. This consists of the global economy and
Finally, we consider the different types of organisation
the nations which participate in it.
and the important cultural issues that face businesses
Once we have set the global context for business we who operate globally.
shall turn our attention to looking at how nations
3
4 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
Introduction
Today, international trade is truly global. In this section we consider the factors which led to the
globalisation of world trade.
(a) The ability of individuals to enter into transactions with individuals and organisations based in
other countries.
(b) The increased importance of global economic policy relative to domestic policy.
(a) Global manufacture. A company can manufacture components for a product in a number of
different countries. China is becoming the workshop of the world.
(b) Country/continent alliances, such as the European Union, which foster trade and other
phenomena such as tourism.
(c) Legal factors such as patents and trade marks, which encourage the development of technology
and design.
(d) Markets trading in international commodities. Commodities are not physically exchanged, only the
rights to ownership. A buyer can, thanks to efficient systems of trading and communications, buy a
commodity in its country of origin for delivery to a specific port.
The WTO has over 150 members and these represent 97% of international trade. The organisation seeks
to promote the free flow of trade by removing obstacles to trade, and to make sure that individuals,
companies and governments know what these rules are.
The WTO:
GATT is the WTO's main guidelines on international trade in goods. It is the result of negotiations
between nations and is subject to updating and revision. For example, when the WTO was set up, GATT
was extended to intellectual property, services, dispute settlement and other areas.
The WTO Agreements contain the principles of liberalisation of free trade. They include commitments by
each country to lower customs tariffs and other trade barriers, and to open and keep open services
markets. They also set procedures for settling disputes.
1.3.2 The G8
The G8, or Group of Eight, is a forum for eight of the main developed nations. Membership of the G8
includes France, Germany, Italy, Canada, Russia, Japan, the United Kingdom and the United States.
The forum, which has no official powers or resources, was originally established so that talks on
economics and trade can take place, however in recent years, politics has also been discussed and
agenda items have included global warming, AIDS and poverty. The group is seen to take a lead in world
affairs and often sets a direction for the international community to follow.
The group meets at an annual summit meeting. The members rotate the presidency of the forum and
responsibility for hosting the summit. Matters often discussed include:
The International Bank for Reconstruction and Development (IBRD) which provides loans to middle-
income and creditworthy low-income countries. Funds are raised by the IBRD and provided to nations at
a commercial (but low) rates of interest and on favourable terms.
The International Development Association (IDA) which provides interest-free (or low rate) loans, called
credits, and grants to the poorest countries. Funds are raised by subscription from donor countries and
distributed to borrowing countries.
The International Finance Corporation (IFC) which provides loans, equity and technical assistance to
stimulate private sector investment in developing countries.
The Multilateral Investment Guarantee Agency (MIGA) which provides guarantees against losses caused
by non-commercial risks to investors in developing countries.
The International Centre for Settlement of Investment Disputes (ICSID) which provides international
facilities for conciliation and arbitration of investment disputes.
(a) Relocation. Firms may need to relocate their operations to reduce costs, avoid tariffs and quotas,
or to take advantage of areas of industrial excellence.
(b) Markets. New markets may emerge as closed markets (such as China) open up or as nations
become more developed. Consumer tastes change and products become more homogenised and
can therefore be sold in more countries.
(c) Competition. Reduced trade barriers and advances in communications greatly increases the
number of competitors that a firm faces.
(d) Alliances. The opportunities for forming alliances or merging/acquiring other firms will also
increase for the same reasons.
(e) Economic divisions. Wealthy countries with access to modern communications technology will
become more wealthy at the expense of poorer nations that cannot afford to make the necessary
investment. Such nations may also be pressured into producing goods for export rather than
ensuring the production of goods and services needed locally.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 7
Section summary
Global production involves manufacturing and sourcing on a global scale.
World trade has been encouraged by financial factors, trade alliances, legal factors, international
markets and various organisations.
Introduction
The global business environment can be analysed against a number of factors, such as political,
economic, social/cultural and technological. This is known as PEST analysis. There will be differences
between different countries.
Political risk is the risk of an organisation incurring losses due to non-market factors. These factors are
usually related to government policy, for example trade rules, investment incentives and the tax regime.
KEY POINTS
Political risk is also related to financial factors such as currency controls and the economy, and stability
factors such as rioting and civil war.
Some countries present a higher political risk than others. For example, less developed countries are
often viewed as more unstable than developed countries and therefore a higher risk in comparison.
Even in a developed country, there is significant political risk at the time a new government is elected.
This is particularly true where a previous opposition party is elected, as it may hold completely different
views about how the country should be run than the previous regime.
Some political risk directly affects a business (see the table below for examples). However, some political
risk indirectly affects a business (for example government economic policy that affects the general
business environment).
Corporate Political Activity (CPA) refers to the involvement of companies in the political process with the
aim of influencing policies towards their preferences. Common activities include lobbying and donating to
KEY POINT political party campaigns.
8 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
Corporate political activities are generally used by companies to attempt to gain competitive advantage
and can be classified into two types, buffering and bridging.
(a) Buffering refers to proactive actions such as warning the government about the impact of
legislation while it’s being considered, in an attempt to influence the content.
(b) Bridging is more reactive and focuses more on ensuring the firm is aware of and meets required
standards of behaviour, for example ensuring the company is aware of proposed new legislation
and complies with it when it is passed.
Organisations may need to deal with governments and make their policy preferences known in a number
of situations. Examples include:
(a) Multinational companies from developed countries may negotiate terms for their investment in that
country. For example finance, taxation and export agreements.
(b) Multinationals may lobby governments to provide conditions in the economy that benefit them.
For example reducing restrictions or controls over labour such as working hours and minimum
wages. The MNC may threaten to withdraw its investment if the government fails to agree.
(c) New industries in developing nations may seek protection from their government, for example
import restrictions.
(d) Developing industries may seek government support such as subsidies or tax breaks to help them
compete in the global market.
There is a difference in corporate political activity between businesses in developed and developing
nations.
In developed nations CPA is well-organised with large organisations nurturing close relationships with
relevant government departments. Businesses often have special government liaison departments to foster
their relationships. There are also organisations set up to lobby government on behalf of interested
parties. Examples of lobby groups in the UK include, Chambers of Commerce, the Confederation of British
Industry (CBI), the Institute of Directors (IOD) and the Federation of Small Businesses (FSB).
This contrasts with developing nations where relationships are not so subtly managed. Businesses are
often more direct in approaching individual policy makers, government departments and politicians to put
across their needs. In some instances, those with the power to make government policy may be subjected
to bribery, corruption and threats.
Country risk is similar to political risk, although it is usually wider in scope and includes all risks relevant
to the business environment (including market factors) in a specific country.
KEY POINT
It is important that organisations analyse the political and country risk of a nation before investing or
trading with it to minimise the risk of losses.
Macro-political risks are general risks that affect all foreign firms in the same way. The risk of the seizure
of all overseas owned business assets is an example of a macro political risk. Risks relevant to particular
organisations or sectors are referred to as micro-political risks. Industry specific regulation is an example
of a micro political risk.
Many organisations employ a third party to carry out a risk assessment for them.
Rugman and Hodgetts summarised different aspects of political risk as shown in the following tables.
Impact of risk
Low High
Probability of risk
High A B
Low C D
10 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
The model is used to classify the probability of the risk and impact of the risk as low or high. Four
possible situations will result:
(a) Situation A – High probability of risk, low impact. There is a good chance of the risk occurring,
although if it does it will not have a significant impact on the organisation. The company should
accept the risk but take action to manage it. If the cost of risk management is too high, the
organisation may decide to simply accept the risk (if it has a very low impact).
(b) Situation B – High probability of risk, high impact. Due to the high risk and potential impact on
the organisation, investing or dealing with the country should only go ahead if the risk can be
managed and contingency plans put in place. The potential benefits of the deal must outweigh the
costs of managing the risk.
(c) Situation C – Low probability of risk, low impact. The probability of the risk is low and the
potential impact on the organisation is also low. This is the ideal situation as the costs of
managing the risk will be low. The organisation may decide that risks classified in this quadrant
can be accepted with minimal or no additional risk management actions.
(d) Situation D – Low probability of risk, high impact. It can be difficult to decide what action is
appropriate in this situation because although the probability of risk is low, the damage it can
inflict on the organisation is high. If the organisation chooses to go ahead, then it must take action
to minimise the chance of the risk occurring and the potential impact it will have (for example, an
insurance policy). If this cannot be achieved in a cost-effective manner then the organisation
should consider abandoning its plans.
Once the investment is made, the business should review the risks regularly. It should, in particular, look
out for the emergence of new risks or minor risks becoming more serious. These reviews ensure that the
risks can be addressed as soon as possible once they are detected.
Country risk can be analysed three ways – politically, financially and economically.
Political factors include the stability of the government and any tensions between groups (such as
religious or ethnic groups). Financial factors are usually macro-economic factors in relation to levels of
government debt, the exchange rate and balance of trade. Economic factors are key statistics relating to
economic activity – for example levels of GDP and inflation.
Once these factors are identified and analysed, the level of country risk can be assessed.
The following table contains general examples of how businesses can minimise the probability and
impact of both types of risk.
2.1.7 Legal
The system of courts and the law will differ from country to country although many share similar
characteristics. The rule of law and independent judiciaries may be strong in one country but absent in
another. Rules relating to corporate status, property, the regulation of business and to financial reporting
may all be very different.
Economic factors affect the demand for, and the ability to acquire, goods and services. As countries
develop, demand increases for more and more sophisticated products and services. Countries generally
have larger agricultural sectors in the early stages of economic development. As the economy develops,
the manufacturing sector increases.
PEST analysis can also be used as a tool to identify the risks within an economy. In this case, potential
risks are generated for each of the four headings.
LESSER DEVELOPED COUNTRY (LDC). Relies heavily on primary industries (mining, agriculture, forestry,
fishing). Low GDP and poorly developed infrastructure.
KEY TERMS
EARLY DEVELOPED COUNTRY (EDC). Largely primary industry based but with developing secondary
(manufacturing) industrial sector. Low but growing GDP, developing infrastructure.
SEMI-DEVELOPED COUNTRY (SDC). Significant secondary sector still growing. Rising affluence and
education with the emergence of a 'middle class'. Developed infrastructure.
FULLY DEVELOPED COUNTRY (FDC). Primary sector accounts for little of the economy. Secondary sector
still dominates, but major growth in tertiary (service) sector. Sophisticated infrastructure.
TRANSITIONAL ECONOMIES (TES). These are countries which used to be part of the planned economy of
the Soviet Union but which are now in various stages of transition towards a market economy.
2.3 Social/cultural
A country's culture consists of a number of factors such as beliefs, morals and how citizens behave. A
nation's culture is very difficult to change and if change does occur it will take place very slowly.
National culture is important to businesses because it influences the perceptions and behaviour of
consumers as well as employees and managers. The national way of doing things pervades society.
Business practice is part of the structure of society and therefore subject to cultural influences.
12 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
Language is another important aspect of culture. While English is fast becoming the international
language of business, there are many areas where it is not commonly understood, sometimes as a matter
of local pride. Mistaken use of a foreign language can have a detrimental affect on a business.
2.4 Technology
Technology is the key driver of global economic activity. It is an enabler, allowing new types of business
and organisational structure. It has had other impacts, such as:
(a) Protection of intellectual property. Patents, trademarks and copyright are particularly important in
international operations. Can they be protected? Similarly, in manufacturing, can trade secrets be
protected, perhaps by importing part-completed assemblies? Some countries require local
ownership of relevant patents before production can proceed in that country.
(b) If advanced technology is involved, it will be necessary to consider local standards of education
and technical infrastructure.
(c) Reliance on 'e' methods for marketing communications and product delivery (eg information or
music downloads) depends on potentially differing levels of infrastructure (eg availability of
broadband Internet connections) and adoption (eg mobile phone ownership).
(d) Ease of communication with overseas markets (eg via email and e-commerce) creating potential
fulfilment/delivery problems (given distance and infrastructure).
You can use PEST analysis to analyse many aspects of an organisation’s environment so
expect to apply it in your future exams, up to and including TOPCIMA.
We shall also apply PEST in connection with gathering information about an organisation’s environment,
and in relation to the marketing environment.
PEST analysis is also sometimes known as PESTEL analysis. This is the same as PEST, but considers
ecological factors and at legal factors separately from political factors.
Section summary
The global business environment can be analysed into political, economic, social and technological
factors, this is known as PEST analysis.
3 Economic context
Introduction
Free trade is not a new concept, but free trade on a global scale has grown massively in recent decades.
There are arguments for and against free trade.
In the global business environment a number of regional trading arrangements exist. These regional
trading groups take three forms, free trade areas, customs unions and economic unions/common
markets.
Another feature of the global environment is the increasing number of transition economies which are
becoming more outward looking and competitive.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 13
PROTECTIONISM aims to restrict trade with one or more other country to protect home country producers
from overseas suppliers.
KEY TERM
Protectionism is sometimes referred to as economic nationalism.
14 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
However, in the mid to late twentieth century economic liberalisation took place. Governments moved
away from the single minded view of looking after their own economies, towards working with others in
groups for the common good of all members.
Several forms of trading group have developed, including, free trade areas, customs unions, economic
unions/common markets and single markets.
Those in favour of such trading groups point out that by harmonising economic policies and removing
trade restrictions, trade is encouraged and prices are reduced.
However, critics of these trading groups point out that trade is encouraged within the group at the
expense of nations outside the group – even if their prices are lower.
The World Trade Organisation (WTO) opposes trading groups because they develop trade internally by
creating barriers to prevent external organisations entering their market. World trade may be affected as
each group seeks to promote trade within itself, this may create conflicts between different groups – for
example caused by import and export restrictions imposed. Protectionism may also be encouraged at the
time when the WTO is trying to free up world trade.
As an alternative to free trade or protectionism, countries may seek a policy of 'balanced trade'. The
objective of balanced trade is to manage the imports and exports between two nations so that neither
runs up a large trade deficit.
The European Union (EU) began as a single market and was created in 1957 by the Treaty of Rome.
This treaty had the goals of:
Creating common policies on areas such as farming and transport that member countries should
abide by.
Encouraging competition within the market by removing restrictive practices created by business.
Allowing the free movement of goods, services, people and capital between member countries.
Creating a customs union and common trade policies between members and non-members.
Since 1957, the EU has developed and now an economic union has been created. Some member states
have adopted a common currency, the Euro.
Free movement of
Free trade eg EFTA
goods and services
area
between members
(a) North American Free Trade Agreement (NAFTA) – A free trade area between the US, Canada and
Mexico.
(b) European Free Trade Association (EFTA) – Norway, Switzerland, Iceland, Liechtenstein.
(c) European Union (EU) – A single market / economic union between Ireland, United Kingdom,
France, Germany, Italy, Spain, Portugal, Finland, Sweden, Denmark, Luxembourg, Belgium, the
Netherlands, Austria, Greece, Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Malta, Poland, Romania, Slovakia, Slovenia.
(d) Asean Free Trade Area (AFTA) – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the
Philippines, Singapore, Thailand, Vietnam.
(e) Asia-Pacific Economic Co-operation (APEC) – Australia, Brunei, Malaysia, Singapore, Thailand,
New Zealand, Papua New Guinea, Indonesia, the Philippines, Taiwan, Hong Kong, Japan, South
Korea, China, Canada, US, Mexico, Chile, Peru, Russia and Vietnam.
(f) Mercosur – A customs union between Brazil, Argentina, Paraguay, Uruguay and Venezuela
(Bolivia, Chile, Columbia, Ecuador and Peru are associates).
(g) Southern African Development Community (SADC); Angola, Botswana, Democratic Republic of the
Congo, Lesotho, Malawi, Mozambique, Mauritius, Namibia, South Africa, Seychelles, Swaziland,
Tanzania, Zambia, Zimbabwe.
(h) West African Economic and Monetary Union (UEMOA) – Ivory Cost, Burkina Faso, Niger, Togo,
Senegal, Benin, Mali and Guinea-Bissau.
(i) South Asian Association for Regional Co-operation (SAARC) – India, Pakistan, Sri Lanka,
Afghanistan, Bangladesh, the Maldives, Bhutan and Nepal.
(k) Association of Southeast Asian Nations (ASEAN) – A free trade area between Brunei, Indonesia,
Malaysia, Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar and Cambodia.
(l) The Economic Community of West African States (ECOWAS) – A single market between Benin,
Burkina Faso, Cabo Verde, Ivory Coast, Gambia, Ghana, Guinee, Guinee-Bissau, Liberia, Mali,
Niger, Nigeria, Senegal, Sierra Leone and the Togolese Republic.
Section summary
Economic nationalism is a nation's view that it should protect its own economy and industries.
Economic liberalisation involves nations moving away from economic nationalism towards working with
others in a group to benefit all member economies and industries.
Free trade areas, customs unions and economic unions/common markets are all types of economic
system designed to provide members with a trade advantage.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 17
Introduction
Economies develop over time. Development begins with agriculture and moves to manufacturing and
services once demand for such goods is created and the economy is wealthy enough to afford them.
Traditionally the largest and most powerful economies of the world were those of the US, Japan and
Western Europe. These countries were the first to become developed and therefore they had a 'head start'
on the rest of the world. However, in recent years a number of other countries have begun to compete
with them.
Smith’s theory of absolute advantage is based on the assumption that the nation is more efficient at
production of certain goods than are its trading partners, and that nations would gain from trade.
Smith’s theory was refined by David Ricardo (around 1817) and in the 1930s by Hecksher and Olin to
become the theory of comparative advantage. This held that relative opportunity costs were most relevant
when considering economic activities in relation to other countries. Even if a country is able to produce all
its goods at lower costs than another country can, trade would benefit both countries.
Porter believes the conditions within a country affects the ability of organisations and industries based in
that country to compete with organisations based in other countries. He identifies four principal factors,
that impact on the competitiveness of organisations as shown in the following diagram - the diamond.
Governments can intervene in their economy to support each factor and as a result can influence the
competitiveness of its organisations.
Porter’s diamond
Firm strategy,
structure, rivalry
Factor Demand
conditions conditions
Related and
supporting industries
18 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
(a) Basic factors are natural resources, climate, semiskilled and unskilled labour. They are inherent, or
at best their creation involves little investment. They are unsustainable as a source of national
competitive advantage, since they are widely available. For example, the wages of unskilled
workers in industrial countries are undermined by even lower wages elsewhere.
(b) Advanced factors are associated with a well-developed scientific and technological infrastructure
and include modern digital communications networks, highly educated people (eg computer
scientists), university research laboratories and so on. They are necessary to achieve high order
competitive advantages such as differentiated products and proprietary production technology.
An abundance of factors is not enough. It is the efficiency with which they are deployed that matters.
The former Soviet Union had an abundance of natural resources and a fairly well educated workforce, but
was an economic catastrophe.
Porter also notes that generalised factors, such as transport infrastructure are not significant in
establishing competitive advantage as specialised factors. Specialised factors are relevant to a limited
range of industries, such as knowledge bases in particular fields and logistic systems developed for
particular goods or raw materials. Such factors are integral to innovation and very difficult to move to
other countries.
(b) Segmentation of the home market shapes an organisation’s priorities. Companies will be
successful globally in segments which are similar to the home market.
(c) Sophisticated and demanding buyers at home encourage high quality standards.
(d) Anticipation of buyer needs. If consumer needs are expressed in the home market earlier than in
the world market, the organisation benefits from experience.
(e) The rate of growth. Slow growing home markets do not encourage the adoption of state of the art
technology.
(f) Early saturation of the home market will encourage an organisation to export.
Strategy. Industries in different countries have different time horizons, funding needs and so forth.
(a) National capital markets set different goals for performance. In Germany and Switzerland, banks
are the main source of capital, not equity shareholders. Short-term fluctuations in share prices are
not regarded as of great importance as funds are invested for the long term. In the USA, most
shares are held by financial institutions whose own performance indicators emphasise short-term
earnings growth.
(b) National attitudes to wealth are important. The egalitarian Swedes (as a generalisation) may be
less motivated to pursue success in industries that have the potential to create individual fortunes
but depend on new start-ups.
(c) National culture affects industrial priorities through the relative prestige it allots to various
industries and their leaders. Italy values fashion and furnishings, for instance, while in Israel the
most prestigious industries are agriculture and those related to defence.
The promotion of one or two 'national champions' who can reap major economies of scale in the domestic
market is undermined by the vigorous domestic competition among high-performing companies. Examples
are the Swiss pharmaceutical industry and the US IT industry.
Porter’s diamond is a key theory which you will use again in the future, for example in paper
E2.
Machinery that
produces the goods
Finished goods
Inputs, supplies
Related services
20 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
(a) Factors of production provide the seeds for development. A large endowment of easily mined iron
ore would suggest metal-working industries.
(b) Related and supporting industries can also be a foundation, if the competences within them can
be configured in a new way.
(c) Government policy should support cluster development and promote high standards of education,
research and commercially relevant technologies.
(d) Extraordinary demand in the home market based on national peculiarities and conditions can set
the demand conditions determinant in the diamond.
It must be remembered that the creation of competitive advantage can take many years.
Individual organisations will be more likely to succeed internationally if there is a supporting cluster.
Businesses should be prepared to invest in co-operative ventures in such fields as training, infrastructure
and research. However, the cluster approach is not guaranteed to be successful.
SERVICE LEVEL AGREEMENTS are contracts between organisations and outsourcing partners that set out the
terms of the outsourcing agreement. It may include factors such as, details of the precise service to be
provided, targets and benchmarks that must be met, response times for technical issues and serious
problems, reporting procedures, complaints procedures and termination procedures.
Developments in technology have made offshoring and outsourcing feasible in many situations. These
technological advances permit business processes to be split up and performed in several locations.
Communication devices such as smartphones and computers allow people in various locations to work
together and to share information.
The most common motivation for offshoring is to make cost savings by taking advantage of lower labour
and / or other costs.
Risks associated with currency exchange rates and political and economic stability of the offshore
country
Loss of skills and jobs in the home country
Exercising control from a distance and security of sensitive information
Cost savings and efficiency improvements may be slow to accrue or may not be realised at all
Dealing with cultural, time zones and language differences
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 21
Offshoring has grown significantly in many developing countries in recent years. It is popular due to the
creation of new jobs and improvements in technological infrastructure and in education and skills that are
created. However, some nations have voiced concerns over wages, working hours and other issues
regarding the treatment of employees.
India is one popular offshoring country, for example many UK banks and other large companies now have
service centres based in India.
Outsourcing of non-core activities is widely acknowledged as having the potential to achieve important
cost savings. However, it can be difficult to distinguish between core and non-core competences.
Threshold competencies are activities that an organisation must possess in order to be a realistic
competitor in a market. Outsourcing may be the only way for some organisations to obtain this type of
competence.
Quinn and Hilmer developed three tests that can be used to identify an organisation's core competences.
If the answer to the questions is yes, then it is likely that the competence is core.
Quinn and Hilmer also identified three tests to establish whether an activity should be outsourced.
Search and information costs. These are the result of determining which products are needed and
selecting a supplier at an appropriate cost and quality.
Bargaining costs. These result from negotiating a deal with the supplier and completing any legal
formalities such as drawing up contracts.
Policing and enforcement costs. These are the costs of monitoring whether the supplier adheres to
the terms of the contract and taking appropriate legal action if they do not.
Asset specificity – where the assets required are specific to the transaction then the process
should be taken on in-house as the corresponding transaction costs will be high.
Williamson suggests that the main concern in the decision is asset specificity which can be classified into
six main types.
Brand name capital specificity A brand name may become so associated with an
activity or process that it cannot be used in other
activities or for other customers.
Dedicated asset specificity This is similar to physical asset specificity but
relates to assets acquired solely for work
undertaken for a specific customer.
Temporal specificity Some activities, such as those involving
perishable goods, are so time specific that an
alternative processor is unlikely to be found in
time if the current supplier fails.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 23
(a) Outsourcing can remove uncertainty about cost, as there is often a long-term contract where
services are specified in advance for a fixed price.
(b) Long-term contracts (maybe up to ten years) encourage planning for the future. The organisation
can focus on its core business.
(c) It can save on costs by making use of a suppliers' economies of scale, reduced headcount, reduced
research and development costs and reduced capital spending on equipment.
(d) It can increase effectiveness and quality of output where the supplier deploys higher levels of
expertise.
(e) Access to specialist knowledge and innovations in technology is made possible, and easier, if the
organisation is experiencing a skills shortage. A specialist company can share staff with specific
expertise between several clients.
(f) Flexibility (contract permitting). Resources may be able to be scaled up or down depending upon
demand. In the long-term, the organisation may be able to switch suppliers to match cost and
quality requirements.
(a) Difficulties negotiating and managing a Service Level Agreement that meets the organisation’s
needs.
(b) There are cost implications to consider, for example, the supplier will need to make a profit, which
may result in outsourcing being more expensive than doing the work internally. Transaction costs
will also arise as a consequence of the outsourcing arrangement.
(c) It can lead to loss of control, particularly over quality and continuity of supply.
(d) It means giving up an area of threshold competence that may be difficult to reacquire. The
organisation may become out-of-touch with new developments resulting in a lack of in-house
knowledge.
(e) The same outsourcing service is likely to be available to competitors. There is a risk of confidential
information being leaked.
(f) Potential damage to employee morale due to redundancies and impact on corporate culture.
NIEs are often (but not always) located in Asia and Latin America and include the BRIC nations (Brazil,
Russia, India and China – see below) and other countries such as Argentina, Mexico, South Korea,
Taiwan, and Singapore.
24 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
China has attracted most attention. China is now the second largest economy in the world (behind the
US), having recently overtaken Japan.
The BRICs have been affected by the global economic downturn since 2008. For example, inward FDI
and outsourcing arrangements have reduced, as has demand for exports. However, they are expected to
continue to see high growth, driven by strong national consumer demand and public spending, using
reserves built up from foreign trade.
In South Korea since the 1980s the government has reduced the amount of control it held over industry
and allowed more foreign investment. Controls over the financial system were removed and the previously
controlled exchange rate was left to market forces.
This liberalisation saw the Korean government abandon many of the principles that had brought previous
economic growth, but was necessary for the country to integrate into the global economy – which is seen
as essential for long-term prosperity.
Taiwan's government initially focussed on the development of certain industries such as plastic, fibreglass
and textiles. Like South Korea, import-substitution policies were introduced for protection. This
development created an industrial base that could be built on.
The government was able to steer private investment away from industries which already produced a
surplus, or which operated in a non-growth market, into products that could be exported.
As a result of government intervention and operational efficiency, Taiwan has moved from a textiles based
economy to one which now produces hi-tech electrical goods.
Mexico suffered an economic crisis caused by its level of international debt and the oil price crash of
1981. After the economic crisis Mexico followed protectionist policies while it tried to stabilise itself. This
was followed by reform and more liberal trade and economic policies. The country formed an association
with the USA and Canada (NAFTA) and entered into a trade agreement with the European Union. These
measures led to an opening up of the economy to global business and helped to drive investment in the
economy to record levels.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 25
A planned economy is one which is controlled by the government. This means that the state fixes the
price of goods and services and makes all the decisions regarding how resources are allocated in the
economy.
Free market economies are the opposite of planned economies. This means that prices and the allocation
of resources are not controlled by any individual or the state, but by market forces and the actions of
producers and suppliers.
In reality, there are no true free market economies in the world as governments tend to have some kind of
input into the economy and may intervene to influence the actions of private sector organisations. This
means that most economies are a halfway house between free market and planned economies – and are
known as mixed economies.
The term ‘transition economy’ has been applied to the countries that abandoned the Soviet-type political
and planned economic system at the end of the twentieth century. Often quoted examples include the
Russian Federation, Poland, Hungary, Romania, the Czech Republic, Ukraine, Kazakhstan, the Slovak
Republic, Bulgaria and Belarus. A number of these countries have completed their transition to a market
economy and have become members of the European Union.
The term is sometimes used with a wider meaning, referring to any country emerging from a socialist-type
economy towards a market-based economy (eg China). This means that in general usage, there is overlap
between transition economies and emerging economies.
4.7.2 Import-substitution
Once the economy has created wealth through exporting natural resources it begins to invest in new
industries which produce the more advanced products that it needs. Historically, to protect these
fledgling industries so that they can be developed and to reduce the country's dependence on foreign
imports, protectionist measures were used (eg import tariffs and quotas).
FDI can take a number of forms but two of the most common is to acquire an existing organisation in the
local market or to develop new production facilities (known as greenfield investment).
FDI is now global in nature, with investment flows becoming more multi-directional. The BRIC nations are
now making and well as receiving foreign investments. For example, Ford sold its Jaguar and Land Rover
operations to India’s Tata Group in 2008.
Section summary
Porter identifies four principal factors that influence the competitiveness of an economy. These are factor
conditions, demand conditions, related and supporting industries and firm strategy, structure and
rivalry.
Governments can influence the context in which an industry operates and can create opportunities and
pressures for investment.
Offshoring is the relocation of an organisation's business activities (such as manufacturing) from one
country to another. Outsourcing involves an organisation sub-contracting business activities to external
providers.
Newly industrialising and emerging nations (NIEs) are countries which are grouped together by virtue of
the fact that their economies have grown significantly in recent years and they are becoming increasingly
important in world politics.
The term transition economy has been applied to the countries that abandoned the Soviet-type political
and economic system at the end of the twentieth century.
Introduction
Economies contain different types of organisation and the economy itself can be divided into the public
and private sectors.
In this section we consider the different types of organisation found in each sector.
Such organisations still aim to operate as efficiently as possible, but their primary objective is to provide a
service rather than to maximise profit. Not-for-profit organisations include co-operatives, charities and
unincorporated clubs, societies and associations.
Not-for-profit organisations use the surplus they generate to further their other objectives. Clubs and
associations exist to provide some kind of benefit to their members. Charities and voluntary organisations
generally exist to provide some kind of benefit to society at large.
Although not-for-profit organisations are not profit seekers, they still use economic factors of production to
produce goods or services. Therefore they need to be efficiently managed so that their resources are used
effectively to meet the objectives of the organisation whilst not making a financial loss.
It is also possible for the managers of mutuals to pursue purposes other than maximise their trading
surplus. These can include a high level of charitable giving, the promotion of community interests and a high
quality of service. Mutuals therefore resemble both not-for-profit organisations and profit-seeking companies,
but as they don’t produce profit for shareholders, strictly speaking are not-for-profit organisations.
(a) An individual may set up business on their own account as a sole trader or in partnership with
others. In either case, the law will not distinguish between the private assets and liabilities of the
owners and those of the enterprise. The owners have unlimited liability for the debts of their
businesses.
(b) This degree of risk is unattractive to many potential investors, so to enable them to invest and
therefore release more funds for wealth-producing enterprise, the legal systems of most countries
provide for some form of limited liability enterprise. Such businesses are referred to as
corporations or companies.
In the UK, there are two forms of limited liability company. They both limit the liability of investors to the
nominal value of their share holdings but they differ in the extent to which they are permitted to solicit
investment from the general public.
Private limited companies may not offer their securities to the public – public limited companies (plcs) may.
KEY POINT When the shares of plcs are regularly bought and sold on a stock exchange, they may be referred to as
quoted companies, because the current price of their shares will be quoted in a journal of record.
28 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
Exam skills
Remember that not all public limited companies are quoted companies.
There is no ‘typical’ multinational, some may operate in hundreds of countries, some in only a few. Many
types of businesses may be multinational – from large scale manufacturing operations to small scale
financial service companies. Finally, some may get the majority of their revenue from their foreign
operations, whereas others may only do a fraction of their trade overseas.
MNC's are estimated to account for a quarter of the world's economic output (Campbell and Craig, 2005;
Worthington and Britton, 2006).
Due to these factors and especially Internet improvements and political changes such as the opening of
trading borders, some organisations, although they are still small, are actually 'born global' now .
MNC's have many opportunities because they are able to identify countries in which they are able to
maximise their competences and make the most of the variances in the business environment.
Many UK based IT companies are now retaining their sales divisions in the UK, but moving their system
development activities to India where there is a large pool of newly qualified system development
specialists who can be employed at a cheaper rate than in the UK. This is an example of offshoring that
we explained earlier.
MNC's also benefit from being able to spread their risk over many businesses in many countries.
Companies such as Proctor & Gamble, Pepsi co, Philips and Nestle for example, have large portfolio's of
businesses and brands which are located in many countries.
The legal and tax differences between countries in which they operate also means that MNC's, through the
process of internal transfer pricing, can reduce their overall tax burden and significantly increase profits.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 29
Many emerging nations have made use of MNCs by attracting their investment through subsidies and low
labour costs. We have already seen that (for some organisations) it no longer really matters where an
organisation is based. This type of organisation has been the key to export-led industrialisation.
In the UK, many providers of public services such as hospitals and schools, and formerly state owned
industries such as London Underground, are now involved in different forms of public-private partnership.
In such partnerships, the private sector provides funds for public sector purposes such as education. For
example the Private Funding Initiative (PFI) for schools seeks private partners to fund and manage school
buildings in return for an agreed fee. Some services in the UK such as the National Health Service (NHS)
are provided by self-governing trusts. These trusts sell their services to the NHS.
Public sector bodies are all, ultimately, responsible to government for their activities, and their purposes
are defined in the laws that establish them. They have a range aims and objectives but rarely will they set
out to trade at a profit. Nevertheless, their managers will be expected to exercise good stewardship and
prevent waste of resources. Public sector bodies' objectives will usually be defined in terms of the
provision of a service that is deemed to be beneficial to society.
An important feature of public sector bodies is that they have little control over their income. This is because
they depend upon government for the funds they need to operate. The funds they receive will be influenced
by a large number of factors, including current public opinion, government aspirations, the skill of their
leaders in negotiation, the current state of the public finances overall and the current economic climate.
Non-governmental organisations are defined by the World Bank as “private organisations that pursue activities
to relieve suffering, promote the interests of the poor, protect the environment, provide basic social services or
KEY POINT
undertake community development.” Many of the largest NGOs are charities such as Oxfam and the Red Cross.
There are two main types of NGO. The first seeks to influence government policy through lobbying and
generating public feeling in its favour – through marketing and public relations techniques. These are
known as campaigning NGOs. The second attempts to make a positive impact directly in the area it is
interested in. This might be through though specific projects or undertaking work to make a change.
These are known as operational NGOs.
Many NGOs have developed relationships with business organisations, for example where they share a
common goal. The benefits to each party of such an arrangement might include; the acquisition of skills
and knowledge that it might no otherwise obtain, the creation value (through reduced of duplication of
effort), to reduce their environmental impact, to develop corporate social responsibility and improve their
credibility in the eyes of their stakeholders.
Another type of NGO is the quasi autonomous non-governmental organisation (QUANGO). These share
similar objectives to public sector organisations, but are actually private organisations, independent of the
government, but to which the government has devolved the authority for running public services.
Examples of QUANGOs in the UK include ACAS (the independent employment relations mediator) and
Ofsted (the school inspection body).
30 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
Section summary
The economy of a developed country can usually be divided into two sectors – public and private.
Private sector organisations are of two main types – those that seek profit for their owners and those that
have other objectives.
Examples of profit making organisations include sole traders, partnerships and companies.
Multinational companies have the capacity to produce in more than one country, usually with a centrally
located head office.
Public sector organisations provide services to the general public such as hospitals and schools.
Introduction
We have already discussed culture in a society as a factor of an organisation's environment. The issue of
corporate culture is important for multinational businesses because culture influences how things are
done.
CULTURE embodies the common set of values: 'the way things are done around here'.
Culture is embodied in rituals and behaviour.
KEY TERM
Culture is an important filter of information and an interpreter of it. For example, an organisation might
have a cultural predisposition against embarking on risky ventures. Existing behaviour patterns may make
a proposed strategy incompatible with the culture and so impossible to implement.
(a) The organisation's founder. A strong set of values and assumptions may have been established by
the organisation's founder. Even after they have retired, these values have their own momentum.
(b) The organisation's history. The effect of history can be determined by stories, rituals and symbolic
behaviour. They legitimise behaviour and promote priorities.
(c) Leadership and management style. An organisation with a strong culture recruits managers who
naturally conform to it.
(e) The industry (eg computer software organisations in the 'silicon valley' had a reputation for being
laid back on office dress).
MANAGEMENT CULTURE is a part of overall organisational culture and relates to the prevailing view within
management about how to do its job.
KEY TERM
Dimension Comment
Power – This refers to how far society and organisations tolerate an unequal distribution of power.
distance In high power-distance cultures (eg India) and organisations, power tends to be
concentrated at the top and managers exert their status and power over subordinates.
Uncertainty This measures the extent to which people are able to tolerate ambiguity and uncertainty.
avoidance For example whether individuals wait until they are completely sure of all details before
acting.
Individualism This measures the extent to which people see themselves in individual terms as opposed
versus to being members of a group – be it family, company, caste, class or even simply a
collectivism sporting club.
Masculinity This is about the degree to which a culture encourages one set of qualities (the
versus 'masculine' ones such as competitiveness and assertiveness) as opposed to another set
femininity (the so-called 'feminine' ones such as concern for others, attention to quality of life or to
the environment).
Long term This refers to whether people associate themselves with a long-term (forward looking)
orientation orientation (values such as thrift and perseverance – often associated with China) or a
(Confucian short-term (historical) orientation (values such as tradition, meeting social obligations
dynamism) and saving face – often associated with Germany).
Hofstede’s work has its critics. The following points must be considered.
(a) Hofstede's study is based on data that is now thirty years old. International attitudes have
changed significantly in that time – many people in the middle 1970s had hardly travelled
away from their home country. Today we have global organisations and markets, and the
consequent movement of people across the world.
(b) People's experience of other cultures has therefore changed, and so has their own self
image and behaviour.
Category Consequences
High power-distance Autocratic organisation
Many layers of management
Different work statuses of managers and sub-
ordinates
High uncertainty avoidance Rules and regulations prevail
Formal structures
Standardisation
High individualism Autonomy
Personal achievement
Self-reliance
32 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
Category Consequences
High masculinity Achievement of challenge
High status sought
High earnings required
High long-term orientation Education and training respected
Strong ethic of work
Hofstede also found cultural differences in the following areas of employee attitude.
Motivation – Incentives used to motivate employees must match the culture. Not all cultures are
motivated by money.
Structure – In some cultures a bureaucracy works best, in others a more open and professional
approach is more effective.
Leadership – In some cultures a manager is expected to take a personal and social interest in their
subordinates, in other cultures this is discouraged.
The 'golden arches' logo of McDonalds is one of the most recognised symbols in the world. Alongside the
CASE STUDY
logo, McDonalds have developed a business format that is successful and established in 130 countries of
the world.
This success has occurred even in places where there has been 'cultural resistance', for example France
and Spain where there is a very distinctive (perceived and real) attitude to food as a key aspect of national
and regional culture.
Countries have absorbed the influences of McDonalds and have grown familiar with the nature of the
brand and what it has to offer. McDonalds have absorbed the influences of the communities in which
they locate, by offering differentiated and localised meals and foods according to location.
Five of their dimensions relate to how people deal with each other.
1 Universalism versus particularism. In universalistic cultures, rules are more important than
personal relationships. For example, high value is placed on written contracts.
2 Individualism versus collectivism (or communitarianism). Does the culture value and encourage
self-orientation and decision making or group orientation and decision making?
3 Neutral versus emotional (or effective). In neutral cultures, emotions aren’t expressed openly.
4 Specific versus diffuse. This refers to whether people change the way they act and relate to each
other in specific situations (specific) or whether behaviour and relationships are consistent
(diffuse). For example, in a culture that favoured specific behaviour people may relate to each
other differently outside the workplace than at work.
5 Achievement versus ascription. Is status based on achievement, or on other factors such as age
and years of experience?
The sixth dimension refers to how different societies view the concept of time.
The seventh and final dimension looks at how culture views the effect of the general environment.
7 Internal or high context versus external or low context. High context behaviour includes tradition
and ritual, the environment controls behaviour. Low context behaviour is controlled by individuals
rather than the environment.
Ronen and Shenkar (1985) identified four key characteristics of national culture.
Models provide a framework that enables managers to consider what management structure and style
may work best in different countries. Managers need to be flexible enough to adapt to cultural differences
and are able to ride what Ronen and Shenkar refer to as ‘the waves of culture’.
(a) Some headquarters functions are diffused geographically. For example, R&D might be based in
the UK, marketing based in the US. Or certain products made in one country and others elsewhere
(motor manufacturers do not make every model of car at each factory.) Some central functions
might be split up – many organisations are experimenting with having several centres for R&D.
(b) Subsidiary managers have a strategic role for the corporation as a whole (eg through bargaining
and coalition forming).
(c) Co-ordination is achieved through corporate culture and shared values rather than a formal
hierarchy. Experienced employees might have worked in a number of different product divisions.
(d) Alliances can be formed with other parts of the company and with other businesses, perhaps in
joint ventures or consortia.
Central control may be appropriate if the volume of international business or the company's experience in
international operations is low. Centralisation is seen as promoting efficiency and prevents duplication of
effort between regions. Even when operations are on a limited scale, when conformity with demanding
technical standards is required, functional representation in international management may be necessary.
For example, a largely autonomous international subsidiary may have to accept supervision of its quality
assurance or financial reporting functions.
If business is done globally, a form of regional organisation may be appropriate if there is some measure
of social and economic integration within regions. The need for rapid response to local opportunities and
threats may be served by a significant measure of decentralisation. National political and cultural
sensitivities may reinforce this, but a shortage of local talent may limit it.
34 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
As far as management processes and decision making are concerned, typical problems include:
(a) Poor information systems and communications. However, the rapidly falling costs of
telecommunications and the development of e-mail and video-conferencing facilities mean this is
now less likely to be a problem.
(b) Interpretation of information. Culture affects how information is interpreted and can also
determine the priorities of the planners. By failing to allow for diversity or to understand local
culture, planners based elsewhere can make marketing on the ground more difficult.
(i) Managing a local market in a large country with a rural population would be different from
marketing to a small country with most people living in cities.
(ii) High tech products may not be suitable for a country with a poorly developed educational
and technological infrastructure.
(iii) Consumers and managers in countries with very high rates of inflation will have different
priorities to those in countries with low inflation. Managers' may need to minimise holdings
of local currency, by converting it into a harder currency or into tangible assets.
(c) Meetings can be difficult when a company expands internationally. Air travel and hotel costs can
be significant. Video-conferencing is emerging as an alternative to face-to-face meetings.
(a) Poor educational opportunities in the market may require the import of skilled technicians and
managers. For example, expatriates have been needed in many western business operations in
Russia and Eastern Europe, simply because they understand the importance of profit.
(b) Some senior managers believe that a business run by expatriates is easier to control than one run
by local staff.
(c) Expatriates might be better able than locals to communicate with the corporate centre.
(d) The expatriate may know more about the organisation overall, which is especially important if
they are fronting a sales office.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 35
(b) Culture shock. The expatriate may fail to adjust to the culture (eg by associating only with other
expatriates). This is likely to lead to poor management effectiveness, especially if the business
requires personal contact.
(i) Basic facts about the country will be given with basic language training and some briefings
about cultural differences.
(ii) Immersion training involves detailed language and cultural training and simulation of social
and business experiences. This is necessary to obtain an understanding and awareness of
the culture.
(a) A glass ceiling might exist in some companies. Local managers may not make it to board level if,
as in many Japanese organisations, most members of the board are drawn from one country.
(b) In some cases, it may be hard for locals to assimilate into the corporate culture, and this might lead
to communication problems.
(c) They will have greater local knowledge but may not be trained to understand the wider corporate
picture, but this is true of most management at operational level.
Identify four issues which may affect an organisation that wishes to set up an overseas subsidiary.
(4 marks)
Section summary
Culture embodies the common set of values: 'the way things are done around here'.
Local conditions and the scale of operations will influence the organisational structure of companies
trading internationally.
Chapter Roundup
Global production involves manufacturing and sourcing on a global scale.
World trade has been encouraged by financial factors, trade alliances, legal factors, international
markets and various organisations.
The global business environment can be analysed into political, economic, social and technological
factors, this is known as PEST analysis.
Economic nationalism is a nation's view that it should protect its own economy and industries.
Economic liberalisation involves nations moving away from economic nationalism towards working with
others in a group to benefit all member economies and industries.
Free trade areas, customs unions and economic unions/common markets are all types of economic
system designed to provide members with a trade advantage.
Porter identifies four principal factors that influence the competitiveness of an economy. These are factor
conditions, demand conditions, related and supporting industries and firm strategy, structure and
rivalry.
Governments can influence the context in which an industry operates and can create opportunities and
pressures for investment.
Offshoring is the relocation of an organisation's business activities (such as manufacturing) from one
country to another.
Newly industrialising and emerging nations (NIEs) are countries which are grouped together by virtue of
the fact that their economies have grown significantly in recent years and they are becoming increasingly
important in world politics.
The term transition economy has been applied to the countries that abandoned the Soviet-type political
and economic system at the end of the twentieth century.
The economy of a developed country can usually be divided into two sectors – public and private.
Private sector organisations are of two main types – those that seek profit for their owners and those that
have other objectives.
Examples of profit making organisations include sole traders, partnerships and companies.
Multinational companies have the capacity to produce in more than one country, usually with a centrally
located head office.
Public sector organisations provide services to the general public such as hospitals and schools.
Culture embodies the common set of values: 'the way things are done around here'.
Local conditions and the scale of operations will influence the organisational structure of companies
trading internationally.
Quick Quiz
1 Which type of country is described below?
'Largely primary industry based, but with a developing secondary (manufacturing) industrial sector. Low
but growing GDP, developing infrastructure.'
A Poland
B Romania
C Japan
D Belarus
A China
B Singapore
C South Korea
D Hungary
4 Briefly explain the main reason why organisations choose to offshore or outsource their operations.
A A school
B A charity
C A public limited company
D A partnership
38 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT
2 C Transitional economies include those countries which have recently emerged from the planned
economy of the Soviet Union and are moving towards a free market economy.
3 D NIEs are mainly located in Asia and Latin America and include nations such as Brazil, Argentina,
Mexico, India, South Korea, Taiwan, Singapore and China.
4 Cost reduction is the primary reason for offshoring and outsourcing. Organisations will locate
production units where production costs are lowest and then move completed units around the
world for sale.
5 A Public sector organisations provide services for the general public. Charities are part of the private
sector as not-for-profit organisations. Companies and partnerships are examples of profit seeking
organisations in the private sector.
Answers to Questions
1.1 Offshoring and outsourcing
Offshoring is the relocation of part of an organisation’s business activities from one country to another.
Four issues which may affect an organisation that wishes to set up an overseas subsidiary include:
Educational constraints – poorly educated employees will result in poor management and decision making.
Sociological constraints – the employees of some countries may have a greater work ethic than others.
Legal and political constraints – legal or other regulations may restrict the subsidiary’s working practices.
Economic constraints – factors such as inflation will affect the subsidiary’s cost base and profitability.
Governments have a key role to play in the Government influence is usually associated with economic
economy and development of a nation. policy, but as we shall see, governments also affect a
market through regulation.
The decisions they make and the policies they establish
Later in this chapter we consider the impact of two topical
all have an effect on an organisation's business
areas – corporate governance and corporate social
environment.
responsibility.
39
40 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT
Introduction
In the previous chapter we focussed on the emergence of newly industrialised nations in the global
economy. In this chapter we consider how governments influence their economies and the competitive
environment of organisations.
A country's government has a major role to play in the success or failure of its economy. We have already
seen how it can influence a number of factors related to competitive advantage and foreign investment
but these are only part of the story. Governments can influence a number of other areas:
Section summary
Government influence over business extends to the macroeconomic environment, legal and market
regulations, corporate governance and social responsibility.
Introduction
The macroeconomic environment is concerned with factors in the overall economy, for example interest
rates, exchange rates and levels of demand and supply.
A government will usually have four main objectives for its macroeconomic policy.
Economic growth
Controlled inflation
Employment
A controlled balance of trade and exchange rate
These objectives are affected by macroeconomic policy, and in particular, fiscal and monetary policy.
2.1.1 Growth
Growth means the expansion of the economy and it is usually measured in percentage terms compared to
previous years. It is the product of a number of factors, the main factor being demand in the economy.
Demand from consumers and the Government for goods and services stimulates business organisations
to increase production and sell more.
Growth can be measured using two figures, GDP and GNP. Gross Domestic Product (GDP) is the total
value of a nation’s income produced by economic activity from within its borders. Gross National Product
(GNP) is a more complete figure than GDP because it also includes income earned overseas but
deducting income earned domestically by overseas residents.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 41
An effect of growth is that employment levels rise as more employees are required to produce the goods
and services, and those employed should enjoy increasing wages. This means the cycle of demand is
continued as consumer demand increases further. ‘Real’ growth is net of the nation’s inflation rate and
therefore growth must exceed inflation for any benefits to be created.
Despite the positive aspects of growth, it is not without issues. If demand for goods cannot be met by
what can be produced within the economy, then the amount of imported goods will rise to fill the gap,
worsening the nation’s balance of trade. Growth may also increase the gap between the rich and the
poor if its effects are unevenly distributed across the population. The environment and the poor may be
exploited by businesses taking advantage of commercial opportunities. For example, natural resources
may be increasingly used up in the production of goods and low paid workers may be forced to work
harder as production levels rise. Finally, growth may occur in unwelcome areas, such as in the trade of
illegal substances.
2.2.2 Inflation
Inflation is the increase in prices over time and, like growth, is measured in percentage terms compared
to previous years. Governments seek low, stable inflation for a number of reasons:
Stable inflation creates certainty – the ideal condition for business investment.
Low inflation levels are fairer to those on low or fixed incomes. If incomes increase at a lower rate
than the inflation rate then individuals will be worse off.
If the inflation rate is greater than interest rates then savers will be worse off as they see the value
of their savings being eroded. Individuals are encouraged to spend rather than save.
Higher prices reduce the amount of money individuals have to spend and therefore spending
within the economy falls. This may encourage savings to increase (the ‘real balance’ effect).
Inflation acts to distort the price mechanism as prices are driven increasingly by cost rather than
true demand and supply factors.
In extreme cases, soaring inflation rates, where prices rise on a daily basis, can create civil unrest.
2.2.3 Employment
Although some degree of unemployment within an economy is unavoidable (as some people are unable to
work and others will be between jobs), governments are keen to increase the overall level of employment
for a number of reasons.
Large numbers of employment people can stifle economic growth because being on a low income
means an individual can afford to spend less and therefore demand within the economy falls.
Welfare payments to those out of work have to be paid out of taxes collected from the working
population. High levels of unemployment increase the welfare bill, resulting in pressure to increase
taxes and cut back on other public services – both of which will harm economic growth.
A number of societal problems, such as crime, poor health and the breakdown of family units are
linked to unemployment.
National account balances measure the production, income and expenditure levels within an economy.
The balance of trade forms part of the current account of a nation's national account balances.
42 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT
Factor Influence
Availability, price and If local producers are able to supply the home market with high-quality,
quality of goods competitively priced goods, it will be difficult for overseas producers to export to
produced by local that market.
producers
Inflation If a nation's inflation rate is higher than its competitors, producers in that
country will face higher costs which will cause the price of their products to
rise.
Exchange rates If a nation's currency weakens against those which export to it, then the goods
it imports become more expensive.
Trade agreements Trade agreements affect the volume of imports and exports between nations.
Nations are more likely to be able to export competitively to nations they are on
an ‘even playing field’ with.
Taxes, tariffs and trade Taxes and tariffs increase the price of imports, making them less attractive to
measures buy. Governments may attempt to help home producers with subsidies,
although free trade agreements mean this may be difficult (or lead to tit-for-tat
retaliation).
The business cycle Nations looking for export-led growth require sufficient demand in overseas
markets for their products.
If producers in one country are able to produce something cheaper than producers in other countries, it is
likely they will export it. This improves the balance of trade in the country in which the producers are
based.
On the other hand, if overseas suppliers are able to supply something cheaper than domestic producers
can, demand for imports will increase.
Most countries expect to import some goods and services and export others. For example New Zealand
produces lamb for export, far more is produced than the home market could consume. Many countries
import oil as they lack their own supply.
The volume of imports and exports, and the price levels of the products and services imported and
exported, affect the balance of trade.
A long-term trade surplus creates a positive national income because it represents the country making a
net inflow of funds. However, it may contribute to a rising inflation rate as demand within the economy
increases. This may contribute to reduced international competitiveness in the future, as firms face
increasing costs that must be passed on in their prices.
On the other hand, a long-term trade deficit is a major problem because the country experiences a net
outflow of funds. A deficit has to be financed through a reduced national income account (see below) and
this will impact on the nation’s production capacity and future growth prospects as demand in the
economy falls.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 43
(i) Production accounts – the value of the nation's output less the value of the goods and
services used to create it. The difference is the nation's gross domestic product (GDP).
(ii) Income accounts – the total income generated by production less government redistribution
of tax and social security benefits. The difference is the nation's disposable income.
(iii) Expenditure accounts – this records how the nation's disposable income is either spent or
saved.
(b) Capital account. This records the total accumulation of the nation's non-financial assets and how
they were financed. The difference is the nation's net borrowing or lending.
(c) Financial account. This records the nation's net acquisition of financial assets and liabilities. The
difference between them is the change in the nation's financial position.
(d) Balance sheet. This records the nation's financial and non-financial assets and liabilities. The
difference between them is the nation's net worth.
If a country imports more than it exports, the deficit will reduce the income account. This will also feed
to the financial account and balance sheet. If a nation’s income falls, it has less money to invest in assets
and it may have to increase its liabilities in order to support its industries.
Whilst reducing demand for local goods, it also may reduce demand imports and increase demand for
exports (high interest rates usually reduce inflation which makes exports cheaper).
However, this strategy may worsen the deficit as high interest rates can increase the value of a nation’s
currency, making exports more expensive and imports cheaper. It may also reduce investment in the
nation as the cost of borrowing is high. Unemployment may also increase as a consequence of this policy.
Demand in the home nation can also be reduced by contracting the money supply or increasing taxation.
Exchange controls – reducing the amount of foreign currency available to domestic consumers to
buy imports with.
Currency devaluation/depreciation – to reduce demand for imports whilst making exports cheaper
to overseas countries.
Export guarantees – reducing the risk to exporters seeking to sell their goods overseas.
The aim, generally, is to keep inflation relatively low (between 2% and 3%) while maintaining high
employment levels. This is a balancing act, as stimulating a stagnant economy to increase demand and
employment may result in a decrease in the value of money – inflation.
INDIRECT TAXES are levied on spending or expenditure. For example, Value Added Tax, specific sales taxes
such as those imposed on tobacco and petrol, import duties, road tax etc. Governments favour indirect
taxation as it is easy and cheap to collect. The tax is collected by sellers of goods and services and paid
over to the government. However, indirect taxes are often viewed by the public as regressive, unfair and
difficult to understand.
A key decision that governments need to make in their fiscal policy is what proportion of tax should be
paid by individuals rather than businesses.
By mainly taxing individuals the Government risks stopping the economy growing as people do not have
enough disposable income to spend on goods and services, this will also reduce company profits and
reduce the level of corporation tax collected.
If levels of corporation tax are too high then the country may become a less attractive place for foreign
companies to set up business and they may relocate their operations to other countries with a more
favourable tax regime. This may have an affect on the products and services available in the country as
well as on growth and unemployment levels.
The second key decision that is required is what proportion of tax should come from direct and indirect
taxes.
Indirect taxation is generally cheaper for the Government to administer as the cost of collecting and
paying the tax is a burden on business organisations, but it will increase inflation since it increases the
cost of goods and services. It is also generally more popular with the public than direct tax, as they feel
that they have a choice of whether to incur it (by deciding whether or not to buy goods subject to the tax).
It becomes unpopular where all goods and services are subject to indirect taxation and it is impossible to
avoid.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 45
Direct taxation is generally unpopular with the general population as they see that their income is
reduced. This reduction in income helps to reduce inflation by reducing demand but it is expensive for the
Government to administer and requires sometimes complex laws and regulations to be introduced.
Monetary policy focuses on three factors, interest rates, exchange rates and national income.
A rise in interest rates increases the price of borrowing for both companies and individuals. If companies
see the rise as relatively permanent, rates of return on investments will become less attractive and
investment plans may be curtailed. Corporate profits will fall as a result of higher interest payments.
Companies will reduce inventory levels as the cost of having money tied up in stocks rises. Individuals
should be expected to reduce or postpone consumption in order to reduce borrowings, and should become
less willing to borrow for house purchases.
Although it is generally accepted that there is likely to be a connection between interest rates and
investment (by companies) and consumer expenditure, the connection is not a stable and predictable
one. Interest rate changes are only likely to affect the level of expenditure after a considerable time lag.
Impact Comment
Spending falls Higher interest rates increase the cost of credit. The higher interest rate makes
it more attractive to hold money than to spend it.
Investment falls The higher rate will increase the opportunity cost of investment (for example in
new projects) and reduce the net present value of the investment. This will
discourage organisations from investing.
The increased interest rates will make borrowing more expensive.
Foreign funds are Interest rates are the reward for capital, so a rise in interest rates will encourage
attracted into the overseas currency investors because of the increased rate of return relative to
country other countries.
Exchange rate rises The inflow of foreign funds (above) increases the demand for the home currency
and therefore strengthens the exchange rate making exports more expensive and
imports cheaper.
Inflation rate falls This is often the main goal of an interest rate rise. The reduction in spending
and investment will reduce aggregate demand in the economy.
The stronger exchange rate means imported goods will be cheaper.
Note, however, the potential conflicting objectives which monetary policy faces. A change in interest
rates will have effects on both the domestic economy and on a country's international trade position (for
example through exchange rate movements).
46 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT
It may be the case that the interest rate movement required for the domestic economy conflicts with that
required to achieve a balance on the external current account.
(a) If the exchange rate falls (or weakens), exports become cheaper to overseas buyers and so the
nation becomes more competitive in export markets. Imports will become more expensive and so
less competitive against goods produced by manufacturers at home. A fall in the exchange rate
might therefore be good for the domestic economy, by giving a stimulus to exports and reducing
demand for imports.
(b) An increase (or strengthening) in the exchange rate will have the opposite effect, with dearer
exports and cheaper imports. If the exchange rate rises and imports become cheaper, there should
be a reduction in the rate of domestic inflation. A fall in the exchange rate, on the other hand,
tends to increase the cost of imports and adds to the rate of domestic inflation.
When a country's economy is heavily dependent on overseas trade it might be appropriate for government
policy to establish a target exchange value for the domestic currency. However, the exchange rate is
dependent on both the domestic rate of inflation and the level of interest rates. Targets for the exchange
rate cannot be achieved unless the rate of inflation at home is first brought under control.
For this reason, although a target growth rate in national income itself is, in theory, probably the most
suitable target of monetary policy, it is the least practical because the authorities would always be
working with out-of-date information.
Briefly explain how a nation’s exchange and inflation rates may affect its national income. (4 marks)
Section summary
Key elements of the macroeconomy include, interest rates, exchange rates and levels of demand and
supply.
A number of factors influence a nation's balance of trade because they affect the price of domestic goods
compared to foreign imports.
Monetary policy refers to government policy on money supply, the monetary system, interest rates,
exchange rates and the availability of credit. It can directly affect a nation's balance of trade.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 47
Introduction
Regulation can be defined as any form of state interference with the operation of the free market.
Efficient regulation is where the total cost of the regulation is less than the benefit it provides to society.
Regulation is effective if the function of business is not impeded and the end-product or service being
controlled is safe and works as it should.
In the UK, much regulation concerns competition. However the government also plays a part in regulating
externalities (costs or benefits that arise from industry which are experienced by wider society rather than
producers and consumers). The actions of business people may also be controlled – for example to
prevent insolvent companies trading and where market abuse, insider dealing and money laundering
occur.
The regulators aim to promote competition, for example by imposing price caps and performance
standards or removing barriers preventing new organisations entering the market.
The RTP considers applications made by the Director General of Fair Trading in respect of agreements
under which at least two parties are imposing restrictions on the price or supply of goods.
48 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT
The Commission also has authority to prevent national governments within the EU offering subsidies or
other state aid to organisations in their countries which will distort competition across the wider market.
3.5 Self-regulation
In many markets, the participants may decide to maintain a system of voluntary self-regulation, possibly
in order to try to avert the imposition of government controls. Self-regulation often exists in the
professions.
(a) Enforcement costs. Direct costs of enforcement include the setting up and running of the
regulatory agencies. Indirect costs are those incurred by regulated organisations in conforming with
the regulations relevant to them.
(b) Regulatory capture. This refers to the process by which the regulator becomes dominated and
controlled by the regulated companies, such that it acts increasingly in the latter's interests, rather
than those of consumers. This is a phenomenon which has been observed in the USA.
(c) Unintended consequences of regulation. Organisations will not react passively to regulatory
constraints on their behaviour – instead they try to limit their effectiveness. In general, theory and
observation suggest that if it’s practical, businesses will move away from regulated activities
towards those which are less constrained or completely unregulated.
3.7 Deregulation
Deregulation can be defined as the removal or weakening of any form of statutory (or voluntary)
regulation of free market activity. Deregulation allows free market forces more scope to determine the
outcome.
There was a shift in policy in the 1980s in the UK and in the USA towards greater deregulation of
markets, in the belief that this would improve efficiency.
A rational assessment of deregulation should weigh the potential benefits against the costs. If there will
be a net gain to society, we can say that the deregulation should proceed. It would be simplistic to
contend that all regulation is detrimental to the economy.
(a) Increased incentive to find internal cost savings and efficiency. Increased competition should lead
to the most efficient organisations being the most successful.
(b) Improved allocative efficiency. Competition should result in prices closer to marginal cost and
therefore result in overall production that is closer to the socially optimal output level.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 49
(a) Loss of economies of scale. If increased competition means that each organisation produces less
output on a smaller scale, unit costs will be higher.
(b) Lower quality or quantity of service. The need to reduce costs may lead organisations to reduce
quality or eliminate unprofitable but socially valuable services.
(c) Need to protect competition. It may be necessary to implement a regulatory regime to protect
competition where inherent forces have a tendency to eliminate it.
Section summary
Regulation can be defined as any form of state interference with the operation of the free market.
In the UK there have been various pieces of legislation enacted to maintain competition in the market
place and there are a number of industry regulators.
European Union competition policy is intended to ensure free and fair competition in the EU.
Deregulation can be defined as the removal or weakening of any form of statutory (or voluntary)
regulation of free market activity.
4 Corporate governance
Introduction
Although shareholders own a company, the responsibility for directing and controlling it rests largely with
the board of directors. In the UK, a series of high profile corporate scandals in the 1980s and 1990s led
to a range of corporate governance controls.
CORPORATE GOVERNANCE is the system by which companies and other entities are directed and
controlled.
KEY TERM (CIMA Official Terminology)
Corporate governance concerns shareholders (the owners) and directors (the management), as between
them they direct and control the company.
Sometimes, particularly in smaller businesses, companies are owned and managed by the same people.
This is the situation where people form a company to carry out their own business, buy the shares and
appoint themselves as directors.
In other, mainly bigger, companies, the directors and shareholders are different sets of people. Often in
larger companies quoted on stock exchanges, shareholders purchase shares as an investment and may
have very little personal contact with the company. Directors are employed for their management
expertise and have no other connection with the company.
There is a key difference between these two types organisation, which is known as the 'knowledge gap' or
‘agency problem’. In the owner-managed company, as the directors and shareholders are the same
people, they have access to the same information and are in a position to direct company policy. In the
other company, the shareholders do not have access to day-to-day company management information
and therefore have to rely on the directors to act in their interest.
50 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT
4.1 Stakeholders
Stakeholders are persons or groups that have a legitimate interest in a business's conduct and whose
concerns should be addressed as a matter of principle. Many stakeholder groups have influence over the
way in which organisations are managed and operated. They can therefore be fundamental to corporate
governance.
STAKEHOLDERS are those persons and organisations that have an interest in the strategy of an
organisation.
KEY TERMS (CIMA Official Terminology)
STAKEHOLDER THEORY states that shareholders should not be the sole focus of an organisation’s attention,
but that it should be accountable to all stakeholders.
Stakeholders
Internal INTERNAL, eg
Management
Employees
External Pressure
Community Government
groups
The extent to which external stakeholders are interested and recognised is linked in some ways to the size
of the organisation. For example the policies and actions of larger organisations are more likely to be of
interest to national governments and even international bodies than are those of smaller organisations.
Stakeholders may also be analysed into those who have a formal contractual relationship with the
organisation and those who do not. These two groups are called primary and secondary stakeholders.
Internal and connected stakeholders fall into the primary category, while external stakeholders are
secondary stakeholders.
It is important for management to consider stakeholders when determining corporate goals, objectives
and strategy for two reasons. Firstly, certain stakeholder groups, that hold power in the organisation,
might be able to disrupt or prevent certain policies being carried out. For example, staff may go on strike
and suppliers may choose not to supply the organisation if they do not agree with its activities. Secondly,
the organisation may legitimise its goals if it discusses them with those affected. In other words, the
organisation can demonstrate that its goals have been agreed upon by not just the senior management
team and therefore the decision may not be questioned by others.
You will use your understanding of the types of stakeholders in paper E3 when you study how
to manage them.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 51
Shareholders demanding rising profits and customers wanting higher quality (more costly) products
Employee demand for pay rises against the need for management to maximise profit (perhaps at
least in part to achieve their bonuses)
The community wanting minimal environmental impact from the organisation but shareholders
want the least costly option for disposing of waste chosen
Directors may recommend that the business is taken over by another but shareholders want to
remain independent
Directors usually give priority to those stakeholders which have the most power, but decisions are usually
a compromise between the various stakeholder groups.
Mendelow classifies stakeholders on a matrix whose axes are power (or influence) and degree of interest
in the organisation's activities. These factors help define the type of relationship the organisation should
seek with its stakeholders.
Level of interest
Low High
Power/influence
Low A B
High C D
(a) Key players are found in segment D. Any strategy must be acceptable to them, at least. An
example would be a major customer. These stakeholders may participate in decision-making.
(b) Stakeholders in segment C must be treated with care. While often passive, they may be capable of
moving to segment D. They should, therefore be kept satisfied. Large institutional shareholders
might fall into segment C.
(c) Stakeholders in segment B do not have great ability to influence strategy, but their views can be
important in influencing more powerful stakeholders, perhaps by lobbying. They should therefore
be kept informed. Community representatives and charities might fall into segment B.
(d) Minimal effort should be expended on segment A. An example might be a contractor's employees.
Internal stakeholder groups are likely to have both more influence and more interest than external groups.
Coalitions of stakeholder groups are likely to have more influence than single stakeholders or small
uniform groups.
4.3.2 Performance
Performance should improve if accountabilities are made clear and directors' motivation is enhanced by
performance-related remuneration. Also, the extra breadth of experience brought by non-executive
directors and measures to prevent domination by a single powerful figure should improve the quality of
decision-making at board level.
4.4.1 Leadership
Every company should be headed by an effective board. The board consists of the chairman, chief
executive, executive directors and non-executive directors.
The roles of chairman and chief executive should not be exercised by the same individual. The chairman
runs the board and the chief executive runs the operations of the company. If the board decides that the
roles of chief executive and chairman should be held by the same individual, they should consult major
shareholders in advance, setting out their reasons.
54 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT
Executive directors are involved in the day-to-day management of the company and may have titles that
describe their function – such as Finance Director. The main role of non-executive directors (NEDs) is to
attend board and board committee meetings and constructively challenge and help develop proposals on
strategy.
The board should include sufficient non-executive directors. What is ‘sufficient’ in terms of number of
NEDs depends on the company. In larger companies, NEDS should make up half the board (excluding the
Chairman), but in small companies on two NEDS are required.
A ‘senior independent director’ should be appointed out of the NEDs and act as a point of contact for
shareholders who wish to raise issues that concern them.
4.4.2 Effectiveness
The board should have an appropriate balance of skills, experience, independence and knowledge.
There should be a formal and transparent procedure for the appointment of new directors via a
nomination committee. This committee should ensure that appointments to the board are based on
finding the best person for the job (ie on merit).
All directors should receive induction on joining the board and should regularly update and refresh their
skills and knowledge. Directors should be submitted for re-election at regular intervals.
The board should be supplied in a timely manner with information in a form and of a quality appropriate
to enable it to discharge its duties.
The board should include an appropriate combination of executive and non-executive directors such that
no individual or small group of individuals can dominate.
4.4.3 Accountability
The board should present a balanced and understandable assessment of the company’s position and
prospects.
The board is responsible for determining the nature and extent of risks it is willing to take to achieve
strategic objectives.
The board should establish an audit committee of at least three (or in the case of smaller companies
two), independent non-executive directors. At least one member of the audit committee should have
recent and relevant financial experience.
The main role and responsibilities of the audit committee should include monitoring the integrity of
accounting policies and financial statements, reviewing the company’s internal controls and risk
management, reviewing the work and effectiveness of the internal audit function, monitoring the external
auditor’s independence and objectivity, short-listing external audit firms when a change is needed and
being available for internal and external auditors to speak to.
4.4.4 Remuneration
Director remuneration should be sufficient to attract, retain and motivate directors of the quality
required, but should not be more than is necessary. A significant proportion of executive directors’
remuneration should be linked to corporate and individual performance.
There should be a formal and transparent procedure for developing policy on executive remuneration and
for fixing the remuneration of individual directors. No director should be involved in deciding his or her
own remuneration, rather a remuneration committee with a number of non-executive directors should set
director pay. The number of NEDs on the remuneration committee should be the same as the audit
committee.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 55
Exam skills
You may be asked to read a scenario and identify any corporate governance issues. Learn the principles
of good corporate governance rather than the specific requirements of the UK Corporate Governance
Code or any other country-specific regime.
Further details of the UK Corporate Governance code are available on the web. Visit
www.frc.org.uk
Briefly explain what is meant by corporate governance and explain three measures concerning directors
recommended by the UK Corporate Governance Code. (4 marks)
Section summary
Corporate governance is the system by which companies and other entities are directed and controlled.
Stakeholders are persons or groups that have a legitimate interest in a business's conduct and whose
concerns should be addressed as a matter of principle.
Since their interests may be widely different, conflict between stakeholders can be quite common.
An increasing number of high profile corporate scandals and collapses prompted the development of
governance codes in the early 1990s.
The UK Corporate Governance Code sets out standards of best practice in relation to issues such as
board composition, remuneration and accountability.
56 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT
Introduction
Corporate social responsibility (CSR) refers to the expectation in society that companies are accountable
for the social and ethical effects of their actions. This expectation has grown since the 1970s and
organisations are expected to demonstrate a duty of care to society. If they fail in their duty to the public
then compensation may be sought from them.
In most countries, some CSR issues are covered by legal regulations (eg pollution and child labour).
Increasingly, consumers are demanding that producers of the products and services they use do more
than simply comply with laws - they expect companies to behave ethically and with moral responsibility.
The term Corporate Social Responsibility (CSR) is used to describe a wide range of obligations that an
organisation may feel it has towards its secondary or external stakeholders, including the society in which
KEY POINT
it operates.
The traditional view of business is that companies have the sole objective of maximising profits for
shareholders and that social responsibility has no part to play in business decision making. In recent
times, however, this view has shifted towards CSR related strategies that may offer a business a number
of advantages. The main benefits are to improve the organisation’s image in society and create a long-
term attachment with customers. Other advantages include the following:
Whilst CSR principles tend to be similar the world over, there are differences in application. For example,
in America, the approach of many businesses is to make charitable donations, but in Europe, the focus
tends to be on investing in communities and having responsible business practices. Although some
investment is needed when implementing a CSR policy, most firms see them as profitable in the long-
term as customers expect companies to be socially responsible, and if they’re not, they will spend their
money elsewhere.
Political rights, by channelling (allowing individuals to promote their causes by using corporate
power)
58 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT
(a) Culture. Many developing nations already have in their culture a tradition of ethics and
community. Often this has come about through religion. As businesses are part of a nation's
culture it is natural for such traditions to be followed.
(b) Politics. Political reform and the introduction of democracy is common in developing countries as
this is often the spark which drives economic development. Countries undergoing development
often follow examples of good practice, such as CSR, in developed nations.
(c) Socio-economic priorities. Developing countries often face a conflict of priorities. For example,
reducing pollution may be desirable to preserve the environment, but cleaner production methods
may be more expensive and hinder economic progress.
(d) Governance gaps. CSR can be used as a form of governance to 'plug the gaps' that result from
poor government services. For example, organisations can be used to provide healthcare or
education where the government cannot afford to.
(e) Market access. As developed nations have high public pressure for CSR, companies in developing
nations must follow the same principles if they are to sell in the same market.
(f) Multinational companies. Multinational companies strive for consistency across all their
international subsidiaries and production units. Where these are located in developing countries,
they will adopt the same policies as those in developed countries. Countries (or companies) that do
not adopt CSR are less likely to receive investment (or orders) from MNCs.
Exam skills
You may be asked to apply the concept of corporate social responsibility to a number of business areas.
For example in March 2013 a 5 mark question required candidates to link it to HR policies. Students
who understand the subject, rather than just rote learning facts, should be able to deal with such
situations successfully.
Section summary
Corporate social responsibility (CSR) is a recent development brought about by pressure on companies to
show an awareness of the social and ethical effects of their actions.
Developing economies face different corporate social responsibility challenges. For example, culture,
politics, socio-economic priorities, governance gaps, market access and the influence of multinational
companies all influence government, company and consumer attitudes towards corporate social
responsibility.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 59
Chapter Roundup
Government influence over business extends to the macroeconomic environment, legal and market
regulations, corporate governance and social responsibility.
Key elements of the macroeconomy include, interest rates, exchange rates and levels of demand and
supply.
A number of factors influence a nation's balance of trade because they affect the price of domestic goods
compared to foreign imports.
Monetary policy refers to government policy on money supply, the monetary system, interest rates,
exchange rates and the availability of credit. It can directly affect a nation's balance of trade.
Regulation can be defined as any form of state interference with the operation of the free market.
In the UK there have been various pieces of legislation enacted to maintain competition in the market
place and there are a number of industry regulators.
European Union competition policy is intended to ensure free and fair competition in the EU.
Deregulation can be defined as the removal or weakening of any form of statutory (or voluntary)
regulation of free market activity.
Corporate governance is the system by which companies and other entities are directed and controlled.
Stakeholders are persons or groups that have a legitimate interest in a business's conduct and whose
concerns should be addressed as a matter of principle.
Since their interests may be widely different, conflict between stakeholders can be quite common.
An increasing number of high profile corporate scandals and collapses prompted the development of
governance codes in the early 1990s.
The UK Corporate Governance Code sets out standards of best practice in relation to issues such as
board composition, remuneration and accountability.
Corporate social responsibility (CSR) is a recent development brought about by pressure on companies to
show an awareness of the social and ethical effects of their actions.
Developing economies face different corporate social responsibility challenges. For example, culture,
politics, socio-economic priorities, governance gaps, market access and the influence of multinational
companies all influence government, company and consumer attitudes towards corporate social
responsibility.
60 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT
Quick Quiz
1 Briefly explain the impact a falling exchange rate will have on a nation's balance of trade.
A Shareholders
B Customers
C Suppliers
D Pressure groups
5 Charitable donations are an example of which layer of corporate social responsibility according to Caroll
and Buchholtz?
A Economic
B Legal
C Ethical
D Philanthropic
2 B An increase in interest rates makes company and individual borrowing more expensive.
3 D Pressure groups are external stakeholders. The others are connected stakeholders.
5 D Charitable donations are an example of the philanthropic layer of corporate social responsibility
according to Caroll and Buchholtz.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 61
Answers to Questions
2.1 Exchange and inflation rates
Exchange rates affect the relative cost of a nation’s imports and exports. If its currency falls in value, imports
become more expensive and exports cheaper. This leads to an improvement in national income as the country
exports more than it imports.
Inflation rates affect the cost-base of organisations. If a nation experiences rising inflation, then the cost of
producing goods will rise. As a result, organisations have to raise their prices. This makes the price of goods
produced locally relatively more expensive compared to imports. Consequently, this will lead to a worsening
national income as the local demand for cheaper imports increases and overseas demand for expensive exports
decreases.
Corporate governance can be defined as the system by which an organisation is directed and controlled.
It is concerned with systems, processes, controls, accountability and decision making at the highest level of an
organisation. Therefore, it affects the way in which board members and senior managers execute their
responsibilities how they account for that authority to those who have entrusted them with assets and resources.
(a) Companies should appoint non-executive directors to the board. They are intended to provide a check or
balance against the power of the chairman and chief executive.
(b) The posts of chairman and chief executive should not be held by the same person. This is to prevent
excessive executive power being held by one individual.
(c) Directors should not set their own remuneration. A remuneration committee consisting of non-executive
directors should set executive pay.
Note: These are just three possible examples, your answer may have included other examples.
Part B
63
64
THE ROLE OF INFORMATION SYSTEMS
In this chapter we introduce information working and how IT enabled 'transformations' have led to
systems and explain their role within new forms of organisation both real and 'virtual'.
organisations.
Later, we consider two major issues concerning
In particular, we are interested in how developments in information systems – privacy and security.
technology have provided organisations new ways of
65
66 3: The role of information systems PART B INFORMATION SYSTEMS
Introduction
In this section we look at the role information systems play in organisations. Two main roles can be
identified:
Recording transactions
KEY POINT
Decision making
Planning
Performance measurement
Control
1.3 Planning
Planning requires a knowledge of, among other things, available resources, possible time-scales for
implementation and the likely outcome under alternative scenarios. Information systems can provide a
number of planning tools.
1.5 Control
Once a plan is implemented, its actual performance must be controlled. Information is required to assess
whether it is proceeding as expected or whether there is some unexpected deviation from the plan. It
may consequently be necessary to take some form of corrective action. Information systems can be used
to monitor and control the outcomes of plans.
PART B INFORMATION SYSTEMS 3: The role of information systems 67
Introduction
When discussing information systems the terms data and information often crop up. It is worth defining
these terms.
Data collection
Data gathering from internal and external sources.
Data evaluation
The data collected is examined and filtered. Irrelevant data may be deleted or ignored.
Data analysis
Data collected is compared against benchmarks or yardsticks, for example actual versus
budget..
Interpretation
Data is considered, interpreted and meaning added. For example an explanation as to why
actual differs from budget.
Reporting
Information is distributed to those who require it, for example as a report sent out as an
email attachment.
There are costs associated with developing and running the system required to convert data into
information. For example costs associated with system design, purchasing, housing and testing
equipment, and operating costs such as electricity and staff salaries.
It is important that such costs do not exceed the value of the information created by the system.
Information may have an intrinsic value and may be sold, but it may also have a value to the organisation
in terms of creating competitive advantage, cost control and reduction, improving corporate decision
making and strategy (such as marketing decisions).
2.1.4 Timesheets
Many service businesses, notably accountants and solicitors, need to keep detailed records of the time
spent on various activities, both to justify fees to clients and to assess the efficiency and profitability of
operations.
Factor Comment
Political/legal National or local politics may affect how an organisation operates. Changes in legislation
may put new responsibilities or liabilities on an organisation.
Economic Economic factors affect an organisation’s finances such as the availability of loans or
sales levels.
Social Society’s views may put pressure on how the organisation is run, for example pressure to
reduce environmental pollution.
Technological Technological advances may affect an organisation’s production and/or management
processes. Technology may also allow the development of new products and services
which were not previously possible.
(a) Competitors – how successful are they, are they developing new products?
(b) Customers – what are their needs, how large is the potential market, are there any new market
segments?
(c) Suppliers – what are their prices, what is the quality of their products like, are there any new
potential suppliers in the market?
(a) A company's tax specialists will be expected to gather information about changes in tax law and
how this will affect the company.
(b) The company's legal expert or company secretary would collect relevant information relating to
any new legislation on health and safety at work, or employment regulations.
(c) Research and development (R & D) work often relies on information about other R & D work being
done by another company or by government institutions.
(d) Marketing managers need to know about the opinions and buying attitudes of potential customers.
To obtain this information, they might carry out market research exercises.
PART B INFORMATION SYSTEMS 3: The role of information systems 69
The phrase ENVIRONMENTAL SCANNING is often used to describe the process of gathering external
information from a wide range of sources.
KEY TERM Sometimes additional external information is needed, requiring an active search outside the organisation.
The following additional external sources may be identified; the Government, advice or information
bureaux, consultancies, newspaper and magazine publishers, specific reference works which are used in a
particular line of work, libraries and information services, customer or supplier systems can be a source of
information, for instance via electronic data interchange (EDI) and web-based sources of information are
becoming ever more important.
Quality Example
Figures in a report should add up, the degree of rounding should be appropriate,
Accurate there should be no typos, items should be allocated to the correct category,
assumptions should be stated for uncertain information. Must be reliable.
Information should include everything relevant to the decision being considered. if
relevant, comparative information should be included. Information should be
Complete consistent, for example it should be collected on the same basis each time, to
allow for meaningful comparison. Excessive information should be avoided.
It should not cost more to obtain the information than the benefit derived from its
Cost-effective use. Information collection and analysis should be efficient. Presentation should be
clear, such that users do not waste time working out what the information means.
The needs of the user are paramount. The information must be easy to read and
Understandable well presented.
Information that is not needed for a decision should be omitted. All significant
Relevant information that is relevant to the decision being considered should be included.
The choice of medium to provide the information should appropriate (face-to-
Accessible face, email, letter, written report) and consider the needs of the user.
The information should be available when it is needed and in time for required
Timely action to be effective.
As well as being understandable (clear and well presented) and accessible
Easy to use (correct choice of medium) the information should be presented in a manner that
the user can easily use or pass on as required.
70 3: The role of information systems PART B INFORMATION SYSTEMS
Section summary
Information systems play a key role within organisations. In particular they are used in planning,
controlling, recording transactions, performance measurement and decision making.
Data consists of raw, unprocessed facts and figures. Information is data that has been processed in a way
that makes it meaningful for planning or decision making.
Information used by organisations comes from a variety of internal and external sources.
Information systems should provide information that possesses certain specific qualities (ACCURATE).
Introduction
There are a large range of information systems available to an organisation, with different purposes. In
this section we shall look at common forms of information system, and later, some recent trends and
developments in information systems.
Exam alert
You must be aware of the difference between information systems and information technology.
Information systems provide management information and assist with business operations. Information
technology is the underlying hardware equipment that the system is built on.
Organisations require different types of information system to provide information at different levels of the
organisation, and in a range of functional areas.
Different types of information systems exist with different characteristics – reflecting the different roles
they perform. The most common are described below.
KEY POINTS
A centralised information system or department involves all functions being based out of a single central
location, such as head office.
A decentralised information system or department involves functions being spread out throughout the
organisation’s locations.
There is no single 'best' structure, so an organisation should consider the merits of each.
(a) Assuming centralised processing is used, there is only one set of files. Everyone uses the same
data and information.
(b) It gives better security/control over data and files. It is easier to enforce standards.
(d) There may be economies of scale available in purchasing computer equipment and supplies.
(e) Computer staff are in a single location, and more expert staff are likely to be employed. Career
paths may be more clearly defined.
(a) Local offices might have to wait for IS/IT services and assistance.
(c) A system fault at head office will impact across the organisation.
(a) Each office can introduce an information system specially tailored for its individual needs. Local
changes in business requirements can be taken into account.
(c) Increased risk of data duplication, with different offices holding the same data on their own
separate files.
Exam skills
The advantages and disadvantages described above are a good starting point for an exam answer, but it is
important to think widely and apply your knowledge to the scenario you are presented with.
For example, in May 2012 a 10 mark question was set requiring a discussion of the advantages of a
decentralised system. Given the scenario, other advantages included being a boost to moral and job
satisfaction, empowering the workforce and reducing red tape.
TPS are used for routine tasks in which data items or transactions must be processed so that operations
KEY TERM
can continue. TPS support most business functions in most types of organisation. Transaction Processing
Systems are sometimes referred to as Data Processing Systems (DPS).
An MIS provides regular reports and access to the organisation's current and historical performance.
MIS usually transform data from underlying transaction processing systems (TPS) into summarised files
that are used as the basis for management reports.
An EIS should provide senior managers with easy access to key internal and external information. The
system summarises and tracks strategically critical information, possibly drawn from internal MIS and
DSS (see below), but also including data from external sources eg competitors, legislation and external
databases such as Reuters.
Executive Information Systems are sometimes referred to as Executive Support Systems (ESS). An
ESS/EIS is likely to have the following features.
Flexibility
Quick response time
Sophisticated data analysis and modelling tools
74 3: The role of information systems PART B INFORMATION SYSTEMS
Menus
Graphics
Communications
Local processing
EIS EIS
workstation workstation
.. Internal data
TPS/MIS data
Financial data
.. External data
Share prices
Market research
Menus
Graphics
Communications
.. Office systems
Modelling/analysis .. Legislation
Competitors
Menus
Graphics
Communications
Local processing Local processing
Exam alert
Exam questions may require you to explain the value of a good MIS or EIS. To gain good marks you must
think about the benefits these systems bring to an organisation.
DSS have more analytical power than other systems, enabling them to analyse and condense large
volumes of data into a form that aids managers' decision making. The objective is to allow the manager to
consider a number of alternatives and evaluate them under a variety of potential conditions.
KWS help knowledge workers create new knowledge and expertise. Examples include:
OAS support the major activities performed in a typical office such as document management, facilitating
communication and managing data. Examples include:
For example, many financial institutions now use expert systems to process straightforward loan
applications. The user enters certain key facts into the system such as the loan applicant's name, their
most recent addresses, their income, monthly outgoings and details of other loans. The system will then:
(a) Check the facts given against its database to see whether the applicant has a good credit record.
(b) Perform calculations to see whether the applicant can afford to repay the loan.
(c) Match up other criteria such as whether the security offered for the loan or the purpose for which
the loan is wanted is acceptable and the applicant’s is risk profile. The system makes these
judgements based on previous experience (as represented within the system).
A decision is then suggested, based on the results of this processing. This is why it is now often possible
to get a loan or arrange insurance over the telephone, whereas in the past it would have been necessary
to go and speak to a bank manager or send details to an actuary and then wait for them to come to a
decision.
Exam skills
Do not just learn what these systems are – you need to understand which levels of an organisation's
hierarchy would use them and how they support its operations.
(d) Surveillance, for example of the number of customers entering a supermarket to decide when more
checkouts need to be opened – or of machines in a factory, to determine when they need
maintenance.
(e) Diagnostic systems to identify causes of problems, for example in production control in a factory,
or in healthcare.
(g) Education and training, diagnosing a student's or worker's weaknesses and providing or
recommending extra instruction as appropriate.
76 3: The role of information systems PART B INFORMATION SYSTEMS
An organisation can use an expert system when a number of conditions are met.
(b) The expert can define some rules by which the problem can be solved.
(c) The problem cannot be solved by conventional transaction processing or data handling.
(d) The expert could be released to more difficult problems. Experts are often highly paid, meaning
the value of even small time savings is likely to be significant.
Explain why organisations use expert systems for decision-making tasks which humans are naturally
better able to perform than computers? (5 marks)
(a) An intranet is like a mini version of the Internet. Organisation members use networked computers
to access information held on a server. The user interface is a browser – similar to those used on
the Internet. The intranet offers access to information on a wide variety of topics.
(b) An extranet is an intranet that is accessible to authorised outsiders, using a valid username and
password. The username will have access rights attached – determining which parts of the
extranet can be viewed. Extranets are becoming a very popular means for business partners to
exchange information.
An INTRANET is a private network inside a company or organisation accessed through web-browser like
software. Intranets are for the use of staff only, they are not accessible by the public. Intranets are used to
KEY TERMS provide and distribute information.
An EXTRANET allows customers and suppliers to gain limited access to an intranet in order to enhance the
speed and efficiency of their business relationship. Put another way, it is an intranet that allows some
access by authorised outsiders.
3.10 Databases
A DATABASE is a collection of data organised to service many applications. The database provides
convenient access to data for a wide variety of users.
KEY TERMS
A DATABASE MANAGEMENT SYSTEM (DBMS) is the software that centralises data and manages access to
the database. It enables numerous applications to utilise the same files
The term 'database system' is used to describe a wide range of systems that utilise a central pool of data.
PART B INFORMATION SYSTEMS 3: The role of information systems 77
INPUT DATA
DATABASE
MANAGEMENT DATABASE
SYSTEM
APPLICATION
PROGRAMS
(a) Shared. Different users are able to access the same data for their own processing applications.
This removes the need to hold the same data in different files.
(c) Flexibility. The database system should provide for the needs of different users, who each have
their own processing requirements and data access methods. The database should be capable of
evolving to meet future needs.
Databases connected to a web server are able to be accessed by people outside the organisation through
their web browser. Microsoft ADO is an example of a database connectivity component that enables this
functionality. Potential customers are able to view product and service information, and if the site is
enabled for e-commerce, make a purchase.
(a) Avoidance of unnecessary duplication of data (data redundancy) brings time and efficiency savings
and reduced storage costs.
(b) Data is looked upon as serving the organisation as a whole, not just for individual departments.
The database concept encourages management to regard data as a resource that must be properly
managed.
78 3: The role of information systems PART B INFORMATION SYSTEMS
(c) The installation of a database system encourages management to analyse data, relationships
between data items, and how data is used in different applications.
(d) Consistency (data integrity) – because data is only held once, the possibility of departments
holding conflicting data on the same subject is reduced.
(e) Data on file is independent of the user programs that access the data. This allows greater
flexibility in the ways that data can be used. New programs can be easily introduced to make use
of existing data in a different way. More than one user can use the information at any one time.
(f) Developing new application programs with a database system is easier because the programmer is
not responsible for the file organisation.
(a) There are problems of data security and data privacy. There is potential for unauthorised access to
data. Administrative procedures for data security must supplement software controls. Staff training
may be required.
(b) Since there is only one set of data, it is essential that the data should be accurate and free from
corruption. This process is known as data cleansing.
(c) There may be disputes over who ‘owns’ the data so has the right to decide how it is maintained.
(d) Since data is held once, but its use is widespread, the impact of system failure would be greater.
A contingency plan in case of data loss is required.
(e) If an organisation develops its own database system from scratch, initial development costs will be
high.
Section summary
Different types of information system exist with different characteristics – reflecting the different roles
they perform.
Organisations are increasingly using intranets, extranets and database systems to manage and provide
access to data and information.
Introduction
In recent years information systems and technology have continued to develop rapidly. Three trends in
information system have emerged as being popular with many types of organisation. These are enterprise-
wide systems, knowledge management systems and customer relationship management systems.
The central database allows each business area to access and update information in real-time and this
means that information is easy to share, available to all business areas, and above all, reliable.
In some enterprises, even though the system spans the whole organisation individual locations have their
own specific data processing capability, via a direct link to the central database. This is known as
Distributed Data Processing (DDP). The link is provided a network – a connection between devices that
allows them to communicate. The two main types of network are Local Area Networks (LANs) and Wide
Area Networks (WANs).
The difference between the two is where the networked devices are located. Local Area Networks are
often found within an office and are often used to connect printers and other peripherals to computers.
Wide Area Networks are used when the devices are dispersed geographically – even around the world.
A KMS is primarily of benefit to knowledge based organisations, such as those involved in research and
development or providing services such as legal advice. This is because their information is best suited to
storing and sharing by a database.
We have already seen examples of knowledge management systems. These include, extranets and
intranets, groupware and LANs and WANs.
(a) Valuable data is preserved for the future and not lost, for example, where an employee leaves
(d) It allows employees to 'get up to speed' on knowledge quickly and easily and this may reduce the
time they need to spend training
CRM systems are often used by customer facing staff who handle customer enquiries, orders or
complaints and who need to understand the customer's immediate needs and provide an appropriate
response.
Social networking sites such as Facebook are Twitter are also part of the web 2.0 movement, and are
increasingly being used by businesses. They are frequently used to monitor customer feedback and to
influence sales by providing online content.
4.4.2 E-commerce
E-commerce (the selling of goods or services over the Internet) has developed alongside CRM systems.
The trend is towards providing the customer with a unique shopping experience that is tailored to their
needs. The view and products presented to a customer is geared to their individual tastes, based on their
profile and past behaviour on the site.
Most organisations have e-commerce capability on their website. Many have gone further, for example
Amazon suggests potential purchases for customers when they log-on. These suggestions are driven by
the customer's previous orders and their history of viewing products.
Berens (2006) identifies the following points to consider when building a website with e-commerce
capability.
(a) Ensure transactions are secure, and tell customers they are. Customer trust is essential.
(b) Comply with all applicable consumer, privacy and data protection legislation.
(d) Don’t require customers to provide excessive amounts of information as this may deter them.
(e) Maintain on-going communication with willing customers, for example by e-mail.
The term e-business refers to conducting business on the Internet. It has a wider meaning than e-
commerce, because it covers not only buying and selling but also servicing customers and collaborating
with suppliers.
Benefits to a business of using e-commerce include; improved marketing and decision making though the
collection of sales and customer data, increased sales as customers increasingly look to the Internet to
purchase goods, and reduced costs as it is cheaper to operate a website than a physical shop.
Despite the benefits of e-commerce, some organisations face a number challenges when adopting it. For
example, they may lack the necessary in-house skills to develop the website, it may be expensive to set-
up and maintain the trading platform, it may be difficult to integrate back-office and fulfilment systems,
there may be security concerns and certain staff may be unhappy or unwilling to work with the new
system.
Twitter provides a ready made network to share information about your business, to set up a trading
network and to build your brand. What’s more, Twitter is global.
As a social networking tool Twitter has had a meteoric rise to fame with between 3 and 6 million users.
When I first tried it, I was unimpressed. How can I make use of it? How do I know who to follow? How do
I get followers? How could I say it in only 140 characters?
PART B INFORMATION SYSTEMS 3: The role of information systems 81
Today, I’m a convert, I use Twitter every day. It’s an excellent source of news and information on just
about any topic. It allows me to keep my finger on the pulse of IT and business information and to share
information about Sage, as well as my other passions, with people who have chosen to follow me.
The Twitter network means if one of my follower’s re-tweet’s my tweet, then all of their followers see my
tweet, and so on. I tweeted a link to my last blog ‘The secret to successful innovation’ and watched what
happened.
Although I only have a few hundred followers myself, within the first hour, my original tweet had an
audience of over 30,000 people. Within a couple of days my blog had turned up on other sites such as
Innovation America. Others had reused parts of my blog in their own innovation blogs, a way to keep the
message alive and a complement indeed. One piece of information, seen by a huge audience across the
globe and recycled a second and third time.
What’s more, it significantly increased traffic on sage.co.uk - all from a single tweet. The power of social
networking is amazing. Remember though, Twitter is a tool to build your network, headline key
information and lead people to your business. When they get there they need to find a website, or a blog,
with more meaningful and relevant information, and the ability to make a purchase.
Give it a try, other than a little of your time and effort, it’s free, and you might be as amazed with the
results as I was.
Section summary
Enterprise-wide systems are designed to co-ordinate all business functions, resources and information.
The purpose of knowledge management systems (KMS) is to record and store the knowledge held within
an organisation.
Customer relationship management (CRM) systems are software applications which specialise in
providing information concerning an organisation's products, services and customers.
Web 2.0 applications are second generation’ Internet-based services. These sites usually include tools
that let people collaborate and share information online.
E-commerce (the selling of goods or services over the Internet) continues to grow rapidly.
Introduction
Information technology and information systems allow an organisation to transform how it does business.
A dependence on IT commits an organisation to continual change. The pace of technological change is
rapid. Computer systems – both hardware and software – are likely to be superseded after a few years.
The benefits an IT Strategy can bring to an organisation are numerous. For example it may:
The table below indicates the numerous ways in which IT may enable change within an organisation.
High
5
Degree of 3
business
transformation Revolution level
Evolution level
2
Low
Low High
Range of potential benefits
Section summary
IT may enable an organisation to transform how it does business. In particular:
The type of products or services that are made and sold
The way in which products are made
The way in which employees are mobilised
The way in which services are provided
To enable change
To aid communication and co-ordination
As a source of unity and structure
Introduction
As we have seen, information technology can affect an organisation in many ways including changing the
way it does its business. As a consequence IT has allowed different types of organisation to emerge.
Some examples of emerging types of organisation are described below.
Technology has facilitated this kind of collaboration, simulating team working through the use of
teleconferencing, video-conferencing, networked computers and the Internet.
(a) Dispersed individuals and units can use such technology to access and share product, customer,
inventory and delivery information (eg using web-based databases and data tracking systems).
(b) Electronic meeting sites and systems allow virtual meeting participants to talk and listen to each
other while sharing data and using electronic 'white boards' on their PCs.
(a) Outsource areas of organisational activity to other organisations and freelance workers (even 'off-
shore' in countries where skilled labour is cheaper) without losing control or co-ordination.
(b) Organise 'territorially' without the overhead costs of local offices and without the difficulties of
supervision, communication and control. Dispersed centres are linked to a 'virtual office' by
communications technology and can share data freely.
(c) Centralise shared functions and services (such as data storage and retrieval) without the
disadvantages of 'geographical' centralisation, and with the advantages of decentralised authority.
Databases and communications (email) create genuine sharing of, and access to, common data.
(d) Adopt flexible cross-functional and multi-skilled working by making expertise available across the
organisation. A 'virtual team' co-opts the best people for the task – regardless of location.
PART B INFORMATION SYSTEMS 3: The role of information systems 85
Forming a virtual team is different to forming a team based in a single location. The main issue is the
lack of face-to-face contact. This makes it difficult for team members to bond and build trust, share
knowledge, establish a hierarchy and team processes, and support morale. Cultural differences between
team members may create misunderstandings that damage working relationships.
Skyrme (1997) developed a number of principles regarding virtual teams. These principles suggest that:
The team should develop a sense of purpose, support members and build high levels of trust
Team members should give back what they get in terms of support, information and knowledge
Teams should be small and multi-disciplined
Communication – there should be frequent communication, where emails are used they should
only have one topic per email, emails should be used to summarise face-to-face meetings and
should be informal
A traditional SUPPLY CHAIN is made up of the physical entities linked together to facilitate the supply of
goods and services to the final consumer.
A VIRTUAL SUPPLY CHAIN (VSC) is a supply chain that is enabled through e-business links, for example
the web and extranets.
A relatively recent development is the virtual company. This is created out of a network of alliances and
subcontracting arrangements. It is as if most of the activities in a particular value chain are conducted by
different organisations, even though the process is loosely co-ordinated. For example, assume an
organisation produces small toys. It could in theory outsource:
The virtual company relies on technology such as remote networking, the Internet and extranets. Many
companies have become, or are becoming, more 'virtual'. They are developing into looser affiliations of
companies, organised as a supply network.
Virtual Supply Chain networks have two types of organisation: producers and integrators.
(a) Producers produce goods and services. Producers must focus on delivery to schedule and within
cost. The sales driver within these companies is on ensuring that their capacity is fully sold.
Producers are often servicing multiple chains, so managing and avoiding capacity and commercial
conflicts becomes key.
(b) Integrators manage the supply network and effectively 'own' the end customer contact. The focus
of the integrating organisation is on managing the end customer relationship. This includes
synchronising the responses and performance of network functions and members.
Many of the most popular Internet companies are integrators in virtual companies, for example
Amazon.com and Lastminute.com. These organisations 'own' customer contact and manage customer
relationships for a range of producers.
86 3: The role of information systems PART B INFORMATION SYSTEMS
Organisations must complement each other and form close relationships if the venture is to
succeed
Customers may recognise the virtual characteristics and this might negatively affect customer
perceptions of the service or product
First Virtual Corporation, one of the few truly virtual organisations in existence, was set up in 1993 by
Ralph Ungermann and it generates multi-million dollar sales of its multimedia networking equipment.
CASE STUDY Everything except the crucial design and development work is outsourced. The company has two 'core
competences' according to Ungermann: technical development and forging alliances with large
companies.
Section summary
The global explosion of information technology has led to the creation of virtual teams, companies and
supply chains.
Virtual teams are interconnected groups of people who may not be present in the same office or
organisation.
A virtual company is a collection of separate companies, each with a specific expertise, who work
together, to compete for bigger contracts/projects than would be possible if they worked alone.
A Virtual Supply Chain (VSC) is a supply chain that is enabled through e-business links, for example the
web or extranets.
Introduction
Most of the advances in technology and information systems that we have seen in this chapter rely on the
Internet as a means of communication. However, establishing Internet links makes organisations
vulnerable to privacy and security risks. Therefore suitable systems, policies and procedures should be
implemented to minimise them.
PART B INFORMATION SYSTEMS 3: The role of information systems 87
Computer systems are exposed to privacy and security risks. Some of the main risks are explained below.
Denial of service Another threat, to websites is the 'denial of service attack'. This involves an organised
attack campaign to bombard a site with excessive volumes of traffic at a given time, with
the aim of overloading the site.
Natural disasters Fires, floods and other natural events may damage the place where the system is
stored. It is important for the organisation to protect the system by selecting a
suitable location and environment to house it. Backups should be taken regularly
and be stored in a separate location so that the system can be restored if necessary.
Steps should be taken to prevent risks as far as possible, for example by installing
sprinkler systems and locating the system on a high floor to avoid flooding.
Hardware and Systems may malfunction for a number of reasons. This risk can be minimised by
software failure designing them to cope with extreme volumes of demand. Backups will enable the
system to be restored if it does fail.
Human error Operators may accidently damage or delete information held on the system. This risk
can be minimised by staff training and in-built protections, such as only allowing
certain individuals to alter or amend information.
Operator injury Repetitive strain injury (RSI) is a risk faced by computer operators. This risk can be
minimised through the design of workstations and the office environment.
88 3: The role of information systems PART B INFORMATION SYSTEMS
A number of websites provide information on hoaxes and 'real' viruses – for example
www.sophos.com. If you receive a warning of a virus or the promise of rewards for forwarding
an e-mail to a number of others, this is a good place to look to establish if the warning is a
hoax or not.
Additional precautions include disabling external media to prevent viruses entering an organisation via
external storage devices. However, this can disrupt work processes. At the very least, organisations should
ensure all files received via external media and e-mail are virus checked.
7.1.2 A firewall
External e-mail links can be protected by way of a firewall that may be configured to virus check all
messages, and may also prevent files of a certain type being sent via e-mail (eg .exe files, as these are the
most common means of transporting a virus). Firewalls can be implemented in both hardware and
software, or a combination of both. A firewall disables part of the telecoms technology to prevent
unauthorised intrusions. However, a determined hacker may well be able to bypass this.
7.1.3 Encryption
Data that is transmitted across telecommunications links is exposed to the risk of being intercepted or
read during transmission (known as 'eavesdropping'). Encryption is used to reduce this risk and involves
scrambling the data at one end of the line, transmitting the scrambled data, and unscrambling it at the
receiver's end of the line. A person intercepting the scrambled data is unable to make sense of it.
An alternative is the use of encryption products which support key recovery, also known as key
encapsulation. These products incorporate a Key Recovery Agent (KRA) which allows the authorised user
to unscramble data by approaching the KRA with an encrypted portion of the message.
7.1.5 Authentication
Authentication is a technique of making sure that a message has come from an authorised sender.
Authentication involves adding extra data in a form previously agreed between sender and recipient.
PART B INFORMATION SYSTEMS 3: The role of information systems 89
Personal data is information about a living individual, including expressions of opinion about him or her.
Data about organisations is not personal data.
Data users are organisations or individuals who control personal data and the use of personal data.
1 Personal data shall be processed fairly and lawfully in accordance with the Act.
2 Personal data shall be obtained only for one or more specified and lawful purposes, and shall not
be further processed in any manner incompatible with that purpose or those purposes.
3 Personal data shall be adequate, relevant and not excessive in relation to the purpose or purposes
for which they are processed.
5 Personal data processed for any purpose or purposes shall not be kept for longer than is necessary
for that purpose or those purposes.
6 Personal data shall be processed in accordance with the rights of data subjects under this Act.
7 Appropriate technical and organisational measures shall be taken against unauthorised or unlawful
processing of personal data and against accidental loss or destruction of, or damage to, personal
data.
8 Personal data shall not be transferred to a country or territory outside the European Economic Area
unless that country or territory ensures an adequate level of protection for the rights and freedoms
of data subjects in relation to the processing of personal data.
(a) To protect individual privacy. Previous UK law only applied to computer-based information. The
1998 Act applies to all personal data, in any form.
(b) To harmonise data protection legislation so that, in the interests of improving the operation of the
single European market, there can be a free flow of personal data between the member states of
the EU.
(a) A data subject may seek compensation through the courts for damage and any associated distress
caused by the loss, destruction or unauthorised disclosure of data about himself or herself or by
inaccurate data about himself or herself.
(b) A data subject may apply to the courts for inaccurate data to be put right or even wiped off the
data user's files altogether. Such applications may also be made to the Registrar.
(c) A data subject may obtain access to personal data of which he or she is the subject. (This is
known as the 'subject access' provision.) In other words, a data subject can ask to see his or her
personal data that the data user is holding.
(d) A data subject can sue a data user for any damage or distress caused to him by personal data
about him which is incorrect or misleading as to matter of fact (rather than opinion).
PART B INFORMATION SYSTEMS 3: The role of information systems 91
Most e-marketing activities are covered (such as email and SMS messages) and such communications
are only permitted if the recipient has ‘opted-in’ to receive them. For the sender, this means having to
obtain consent from the recipient before contacting them for the first time. The sender must also identify
themselves in any direct marketing communication and provide a valid reply email address.
Permission is also deemed granted where a person is an existing customer (and has already provided
their contact details) or where they have emailed or sent a text enquiry directly to the organisation.
All communications must provide a free ‘unsubscribe’ service and a fine of £5,000 may be imposed on
the sender of any unlawful communications.
The regulations also impose certain controls on the use of cookies which are used to store information
about website visitors.
Section summary
Computer systems with links to other systems such as the Internet are exposed to privacy and security
risks.
The key privacy and security risks come from hackers and eavesdroppers, viruses, hoaxes and denial of
service attacks.
Organisations can take various measures against privacy and security risks, including anti-virus software,
firewalls, encryption, electronic signatures, authentication and dial-back security.
The Data Protection Act 1998 provides individuals with some protection regarding how data held about
them is used.
92 3: The role of information systems PART B INFORMATION SYSTEMS
Chapter Roundup
Information systems support operations and management activities within organisations. In particular
they are used in recording transactions, decision making, planning, performance measurement and
control.
Data consists of raw, unprocessed facts and figures. Information is data that has been processed in a way
that makes it meaningful for planning or decision making.
Information used by organisations comes from a variety of internal and external sources.
Information systems should provide information that possesses certain specific qualities (ACCURATE).
Different types of information system exist with different characteristics – reflecting the different roles
they perform.
Organisations are increasingly using intranets, extranets and database systems to manage and provide
access to data and information.
Enterprise-wide systems are designed to co-ordinate all business functions, resources and information.
The purpose of knowledge management systems (KMS) is to record and store the knowledge held within
an organisation.
Customer relationship management (CRM) systems are software applications which specialise in
providing information concerning an organisation's products, services and customers.
Web 2.0 applications are second generation’ Internet-based services. These sites usually include tools
that let people collaborate and share information online.
E-commerce (the selling of goods or services over the Internet) continues to grow rapidly.
IT may enable an organisation to transform how it does business. In particular:
– The type of products or services that are made and sold
– The way in which products are made
– The way in which employees are mobilised
– The way in which services are provided
– To enable change
– To aid communication and co-ordination
– As a source of unity and structure
The global explosion of information technology has led to the creation of virtual teams, companies and
supply chains.
Virtual teams are interconnected groups of people who may not be present in the same office or
organisation.
A virtual company is a collection of separate companies, each with a specific expertise, who work
together, to compete for bigger contracts/projects than would be possible if they worked alone.
A Virtual Supply Chain (VSC) is a supply chain that is enabled through e-business links, for example the
web or extranets.
Computer systems with links to other systems such as the Internet are exposed to privacy and security
risks.
The key privacy and security risks come from hackers and eavesdroppers, viruses, hoaxes and denial of
service attacks.
Organisations can take various measures against privacy and security risks, including anti-virus software,
firewalls, encryption, electronic signatures, authentication and dial-back security.
The Data Protection Act 1998 provides individuals with some protection regarding how data held about
them is used.
PART B INFORMATION SYSTEMS 3: The role of information systems 93
Quick Quiz
1 Which of the following is not a type of information system?
A EIS
B MIS
C DSL
D OAS
2 A private network inside an organisation that is accessed through web-browser like software is known as:
A Internet
B Extranet
C Intranet
D Privatenet
3 Which type of system is designed to co-ordinate all an organisation's functions, resources and
information?
2 C A private network inside an organisation that is accessed through web-browser like software is
known as an intranet.
4 A Web 2.0 applications allow the customer to interact with the organisation with the purpose of
engaging them in the organisation.
5 A virtual company is a collection of separate companies, each with a specific expertise, who work
together to compete for bigger contracts/projects than would be possible if they worked alone.
94 3: The role of information systems PART B INFORMATION SYSTEMS
Answers to Questions
3.1 Expert systems
The primary reason has to do with the relative costs. A 'human' expert is likely to be more expensive either to
employ or to use on a consultancy basis.
Secondly, enshrining an expert's accumulated wisdom in a computer system means that this wisdom can be
accessed by more people. Therefore, the delivery of complicated services to customers, decisions whether or not
to extend credit and so forth, can be made by less experienced members of staff. If a manufacturing company
has a complicated mixture of plant and machinery, then the repair engineer may accumulate a lot of knowledge
over a period of time about the way it behaves. If a problem occurs, the engineer will be able to make a
reasoned guess as to where the likely cause is to be found. If this accumulated expert information is made
available to less experienced staff, it means that some of their learning curve is avoided.
An expert system is advantageous because it saves time, like all computer systems (in theory at least) but it is
particularly useful as it possesses both knowledge and limited reasoning ability.
3.2 IT transformation
The current labour-intensive process of manufacture can be made more efficient. Computer Aided Design (CAD)
can be used to allow efficient and accurate design, rather than relying on hand drawings which may contain
inaccuracies or be unclear.
Computer Integrated Manufacturing (CIM) could be used to change the manufacturing process of the bike
frames. Data from the design can be fed into an automated system that cuts and forms the metal into frames.
This will ensure consistent standards of production and will reduce labour costs.
The use of modern production methods will facilitate a move to new types of material in the bicycle frame.
Materials not suitable for use under manual methods, such as carbon-fibre, may be used.
The combination of state-of-the-art design technology and modern materials permit new types of product to be
made. For example, professional race bikes, that need to be aerodynamic and extremely light, could be
produced.
Velospeed could change its paper-based ordering and filing system to one which is based on an enterprise-wide
system. Orders could be made electronically over the Internet and invoices posted to an accounting system,
perhaps using EDI.
Data could be stored in a database, and reports extracted. This will result in more accurate and consistent
reports, as all systems will use the same source information.
In this chapter we move on from looking at system failure is user resistance – we look at a number of
the role of information systems to looking at ways to overcome or prevent this.
their implementation and alignment with
Later we consider how aligning a new information system
business strategy.
with the organisation's overall business strategy can help
Implementing a system involves a number of stages, make the system a success and even be a source of
each of which is vital if the completed system is to be a competitive advantage.
success. We shall see that a key cause information
95
96 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS
Introduction
Implementation is part of the systems development cycle, or systems development life cycle (SDLC). The
main stages of the SDLC are Planning, Analysis, Design, Development and Implementation (PADDI).
The planning stage includes a feasibility study into relevant technical, operational, economic and social
factors. A cost-benefit analysis may be used to check that the costs of the new system do not exceed the
benefits. At this stage, the costs and benefits are estimated.
Costs of a new system can be divided into initial costs and running costs, these include: System design,
purchase of equipment, purchase or development of software, testing and implementation, training, staff
costs to operate and maintain the system, consumables associated with the system and support costs for
the developers or in-house IT team.
Benefits of a new system include: Better quality of information, efficient operations, increased capacity,
cost savings (labour), improved access to information across the organisation, better communications,
improved customer service, and potential competitive advantage.
System analysis determines the system’s purpose and the features and procedures required in it. The future
users of the new system should have the opportunity to provide their input, to ensure the new system
satisfies their needs.
After system requirements have been documented, work can begin on system design. Here the
component parts of the system (its hardware and software) are decided upon and purchased. The
systems development stage follows and involves writing software and integrating it with hardware.
Implementation comes next. This is the process the E1 syllabus focuses on – we cover this in detail in
this chapter.
Following implementation comes system review and maintenance. Where appropriate, the outcomes of
both feedback into the planning stage and the cycle starts again.
The items in the list above do not necessarily happen in a set chronological order and some may be done
at the same time – for example staff training and system testing can be part of the same operation. The
requirements for implementation vary from system to system.
1.1 Installation
Installing a mainframe computer or a large network is a major operation that is carried out by the
manufacturer/supplier. If just a few PCs are being installed in a small network, this may be able to be
performed by non-specialists.
Most new software is provided on CD-ROM or DVD and may be able to be installed by non-specialists,
depending upon the complexity of the system and the checks required to ensure it is operating correctly.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 97
1.2 Testing
A system must be thoroughly tested before implementation, to prevent the system ‘going live’ with faults
that might prove costly. The scope of tests and trials will vary with the size and complexity of the system.
To ensure a coherent, effective approach to testing, a testing strategy should be developed.
System logic
Program testing
System testing
User acceptance testing
The testing process should be fully documented – recording data used, expected results, actual results
and action taken. This documentation may be referred to at a later date, for example if program
modifications are required. Two types of program testing are unit testing and unit integration testing.
98 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS
Unit testing involves detailed testing of part of a program. If it is established that a program is not
operating as intended, the cause of the error must be established and corrected. Automated diagnostic
routines, that step through the program line by line may be used to help this process.
Test cases should be developed that include test data (inputs), test procedures, expected results and
evaluation criteria. Sets of data should be developed for both unit testing and integration testing. Cases
should be developed for all aspects of the software.
System testing will involve testing both before installation (known as off-line testing) and after
implementation (on-line testing). As many problems as possible should be identified before
implementation, but it is likely that some problems will only become apparent when the system goes live.
It is vital that users are involved in system testing to ensure the system operates as intended when used
by the people expected to utilise it. Any problems identified should be corrected – this will improve
system efficiency and should also encourage users to accept the new system.
(a) Realistic tests. These involve using the system in the way it will be used in reality – ie the actual
environment, users and types of data.
(b) Contrived tests. These are designed to present the system with unusual events to ensure these are
handled correctly, for example that invalid data is rejected.
(c) Volume tests present the system with large numbers of transactions to see how the system copes.
(d) Acceptance tests are undertaken by users to ensure the system meets user needs.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 99
Limitation Comment
Poor testing process The test plan may not cover all areas of system functionality. Testers
may not be adequately trained. The testing process may not be
adequately documented.
Inadequate time Software and systems are inevitably produced under significant time
pressures. Testing time is often 'squeezed' to compensate for project
over-runs in other areas.
Future requirements not The test data used may have been fine at the time of testing, but
anticipated future demands may be outside the range of values tested. Testing
should allow for future expansion of the system.
Inadequate test data Test data should test 'positively' – checking that the software does
what it should do, and test 'negatively' – that it doesn't do what it
shouldn't. It is difficult to include the complete range of possible input
errors in test data.
Software changes inadequately System/software changes made as a result of testing findings or for
tested other reasons may not be adequately tested as they were not in the
original test plan.
1.3 Training
Staff training in the use of a new system is essential if the system is to meet its full potential. Training
should be provided to all staff who will use the system. Training should focus on the specific tasks the
user is required to perform such as entering an invoice or answering a query. There are a range of options
available to deliver training, as shown below.
The training method applicable in a given situation will depend on the following factors:
Time available
Software complexity
User skill levels
Facilities available
Budget
User documentation may be used to explain the system to users. Much of this information may be
available online using context-sensitive help eg 'Push F1 for help'.
100 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS
The various scenarios that file conversion could involve are outlined in the following table.
The file conversion process is shown in the following diagram, which assumes the original data is held in
manual files.
It is essential that the 'new' converted files are accurate. Various controls can be utilised during the
conversion process.
(a) One-to-one checking between records on the old and new systems.
(b) Sample checking. Selecting and checking a sample of records. This is used if there are too many
records to check individually.
(d) Control totals and reconciliations. These checks could include checking the total number of
records, and the value of transactions.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 101
Exam alert
You may find it useful to remember the main system implementation stages as FITT. File conversion,
Installation, Testing, Training and documentation.
1.5 Changeover
Once the new system has been fully and satisfactorily tested, the final stage of implementation,
changeover, can begin. There are four approaches to system changeover, each varies in terms of time
required, cost and risk.
While this method is comparatively cheap and convenient, it is risky (system or program corrections are
difficult while the system has to remain operational). The new system should be introduced during a
quiet period, for example over a bank holiday weekend or during an office closure.
Parallel running delays the actual implementation of the new system, which may be perceived as a lack
of confidence in the system. Also, more staff are required to cope with systems running concurrently.
This cautious approach, if adopted, should be properly planned, and the plan should include:
Pilot operation is cheaper and easier to control than running the whole system in parallel, and provides a
greater degree of safety than a direct changeover.
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Pilot operation Less risky than direct changeover Can take a long time to achieve total
Less costly than complete parallel changeover
running Not as safe as complete parallel running
Phased or modular Less risky than a single direct Can take a long time to achieve total
changeover changeover changeover
Any problems should be in one area – Interfaces between parts of the system
other operations unaffected may make this impractical
Facing frequent outages in the DSL (Digital Subscriber Line) network serving 50-plus corporate-owned
gyms, Gold's Gyms management knew it was time for a significant upgrade. After looking into the various
CASE STUDY options they opted to replace DSL with a carrier-provided voice VoIP (Voice over Internet Protocol)
service.
If they had to this again, however, they would take a more phased approach. 'We tried the big-bang
theory, doing everything at once,' a spokesman said. That decision was driven by business needs,
because the DSL network was so unreliable, and because the supplier was urging Gold's to sign a contract
that included every gym. 'I think we should've done two or three gyms first, and made sure they worked
OK, before we did the rest.' This would have reduced system downtime.
Adapted from Case study: VoIP implementation The problems of the 'big bang' approach
Paul Desmond, PC Advisor
Section summary
The main stages in the implementation of a computer system are:
Introduction
Any change, such as the introduction of a new information system, involves structural and behavioural
factors which may result in resistance from individuals to that change. Many new systems fail, not
because of hardware or software problems, but because the users themselves are against it.
This section considers what causes user resistance and how it can be overcome or prevented by
management action.
(b) Indifference – usually where the change does not directly affect the individual: apathy, lack of
interest, inaction
(d) Active resistance – deliberate 'spoiling', go-slows, deliberate errors, sabotage, absenteeism or
strikes
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John Hunt highlights a number of responses that may not look like resistance on the face of things, but
are behaviours aimed at reinforcing the status quo. There are a number of responses that the manager
should learn to recognise.
(b) Delayed judgement: ('let's wait and see ...'), perhaps stalling for time with comparisons ('there are
other ways ...').
(c) Defensive stances: ('This isn't going to work', 'It'd be too expensive', 'It's the wrong time to ...').
(d) The display of various personal insecurities: ('I won't be able to cope', 'I won't see my team
anymore', 'We won't have control over our planning any more', 'Why can't we just go on as we
are?'); fear, anxiety, resentment at the manner of change, frustration at perceived losses.
(e) Withdrawal, or disowning of the change: ('Oh well. On their heads be it', 'I'm not interested in
flexitime anyway').
(a) IS project managers are often technicians, not managers. Technical ability for IS staff is no
guarantee of management skill – an individual might be a highly proficient analyst or programmer,
but not a good manager.
(b) The project manager may accept an unrealistic deadline where the timescale is fixed early in the
planning process. User demands may be accepted as deadlines before sufficient consideration is
given to the realism of this.
(c) Poor or non-existent planning is a recipe for disaster. Unrealistic deadlines would be identified
much earlier if a proper planning process was undertaken.
(e) Users change their requirements, resulting in changes to the system as it is being developed.
(f) Poor timetabling and resourcing. It is no use being presented on Day 1 with a team of
programmers, when there is still systems analysis and design work to do. The development and
implementation of a computer project may take a considerable length of time (perhaps two years
for a relatively large installation). Major projects require formal planning and scheduling.
Stage/activity Problems
Analysis The problem the system is intended to solve is not fully understood.
Investigation of the situation is hindered by insufficient resources.
User input is inadequate through either lack of consultation or lack of user
interest.
The project team is unable to dedicate the time required or insufficient time
spent planning the project.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 105
Stage/activity Problems
Design Insufficient user input.
Lack of flexibility. The organisation's future needs are neglected.
The system requires unforeseen changes in working patterns.
Failure to perform organisation impact analysis. An organisational impact
analysis studies the way a proposed system will affect organisation structure,
attitudes, decision making and operations. The analysis aims to ensure the
system is designed to best ensure integration with the organisation.
Organisational factors sometimes overlooked include:
Ergonomics (including equipment, work environment and user interfaces)
Health and safety
Compliance with legislation
Job design
Employee involvement
Programming Insufficient time and money allocated to programming.
Programmers supplied with incomplete or inaccurate specifications.
The logic of the program is misunderstood.
Poor programming technique results in programs that are hard to modify.
Programs are not adequately documented.
Testing Insufficient time and money allocated to testing.
Failure to develop an organised testing plan.
Insufficient user involvement.
User management do not review and sign-off the results of testing.
Conversion Insufficient time and money allocated to data conversion.
Insufficient checking between old and new files.
The process is rushed to compensate for time overruns elsewhere.
Final implementation Insufficient time, money and/or appropriate staff mean the process has to be
rushed.
Lack of user training increases the risk of system under-utilisation and rejection.
Poor system and user documentation.
Lack of performance standards to assess system performance against.
System maintenance provisions are inadequate.
UNFREEZE MOVE REFREEZE
existing behaviour attitudinal/behavioural change new behaviour
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Unfreeze is the most difficult (and in many cases neglected) stage of the process, concerned
mainly with selling the change, with giving individuals or groups a motive for changing their
attitudes, values, behaviour, systems or structures. If the need for change is immediate,
clear and perceived to be associated with the survival of the individual or group (for example
change in reaction to an organisation crisis), the unfreeze stage will be greatly accelerated.
Routine changes may be harder to sell than transformational ones, if they are perceived to
be unimportant and not survival-based.
Unfreezing processes require four things. These are: a trigger, someone to challenge and
expose the existing behaviour pattern, the involvement of outsiders and alterations to the
power structure.
Move is the second stage. It is mainly concerned with identifying what the new, desirable
behaviour or norm should be, communicating it and encouraging individuals and groups to
'own' the new attitude or behaviour. This might involve the adoption of a new culture. To be
successful, the new ideas must be shown to work.
Refreeze is the final stage, implying consolidation or reinforcement of the new behaviour.
Positive reinforcement (praise and reward) or negative reinforcement (sanctions applied to
those who deviate from the new behaviour) may be used.
This model is based on the view that change is capable of being planned. You should note that this is not
always possible.
(a) Education and communication. This method is effective where the cause of the resistance is lack
of information about the change.
(b) Participation and involvement. Where those affected by the change have the power to resist it,
this method reduces the resistance by taking their views into account.
(c) Facilitation and support. Where the cause of the resistance is anxiety and insecurity, support such
as training is effective.
(d) Negotiation and agreement. Compensating those who lose out (for example redundancy packages)
may be appropriate in some instances.
(e) Manipulation and co-optation. This method involves the presentation of partial or misleading
information to those resisting change or 'buying-off' the main individuals who are at the heart of the
resistance.
(f) Explicit and implicit coercion. This involves the use or threat of force to push through the change.
A very last resort if parties are operating from fixed positions and are unwilling to move.
The final two options raise ethical and legal issues. They also risk alienating people, making the change
even less likely to be accepted.
The six approaches are not intended to be used separately in isolation – a combination of them is likely to
be required. Remember that people may disguise their real reason for opposing change (such as possible
loss of influence or status) with technical objections.
Exam alert
Exam questions may require you to discuss potential strategies for overcoming resistance to change and
identify which would be most suitable for the organisation in the scenario.
You may also be asked for an analysis of how an organisation has managed resistance to a change.
Which of Kotter and Schlesinger’s six methods of dealing with resistance to change is best suited to a
situation where resistance is caused by a lack of information about the change?
Section summary
User resistance is a key cause of information systems failure.
Theories that may help when considering how to overcome user resistance include:
Lewin/Schein's unfreeze, move, refreeze
Kotter and Schlesingers' six methods of dealing with resistance
Introduction
Rather than dealing with resistance to change after it has occurred, a better approach is to try and
prevent resistance before it occurs.
Several theories have been developed that aim to help managers deal with change more effectively so that
resistance is prevented or at least minimised.
3.1.1 Pace
The more gradual the change, the more time is available for questions to be asked, reassurances to be
given and retraining (where necessary) embarked upon. People can get used to the idea of new methods
and become acclimatised at each stage.
(a) Presenting the individuals concerned with change as a fait accompli may avoid resistance at the
planning stage, but may result in resistance surfacing later – probably strengthened by resentment.
(b) Timing will also be crucial. Those responsible for change should be sensitive to incidents and
attitudes that might indicate that 'now is not the time'.
3.1.2 Manner
The manner in which a change is put across (communicated) is very important. The need for change
must made clear, fears soothed, and if possible the individuals concerned positively motivated to embrace
the changes as their own.
(a) Resistance should be welcomed and confronted, not swept under the carpet. Talking thorough
areas of conflict may lead to useful insights and the adaption of the programme of change to the
company’s advantage. Repressing resistance will only send it underground.
(b) There should be free circulation of information about the reasons for the change, its expected
results and likely consequences. That information should appear sensible, clear, consistent and
realistic. There is no point issuing information which will be seen as a blatant misrepresentation of
the situation.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 109
(c) The change must be sold to the people concerned. Objections must be overcome, but it is also
possible to get people behind the change in a positive way. If those involved understand that there
is a real problem, which poses a threat to the organisation and themselves, and that the solution is
a sensible one and will solve the problem, there will be a firm rational basis, for implementing
change. It may even be possible to get staff excited by the change, by emphasising the challenge
and opportunity and perhaps by offering rewards and incentives.
(d) Individuals must be helped to learn, that is, to change their attitudes and behaviours. Few
individuals will really be able to see the big picture in a proposed programmed of change. In order
to put across the overall objective, the organisation should use visual aids to help conceptualise.
Learning programmes for any new skills or systems necessary will have to be designed according
to the abilities of the individuals concerned.
(e) The effects of insecurity and resentment may be lessened if people are involved in the planning
and implementation of the change, so that it is not perceived to have been imposed from above.
3.1.3 Scope
The scope or extent of the change is important and should be reviewed. Total transformation will create
greater insecurity – but also provides the opportunity for greater excitement – than moderate innovation.
There may be hidden changes to take into account. For example, a change in technology may necessitate
changes in work methods, which may in turn result in the breaking up of work groups. Management
should be aware of how many various aspects of their employees' lives they are proposing to alter – and
therefore on how many fronts they are likely to encounter resistance.
Section summary
It is better for the organisation to prevent or minimise resistance occurring in the first place. Theories
aimed at achieving this include:
4 System evaluation
Introduction
A system should be reviewed after implementation, and periodically when in operation, so that any
unforeseen problems may be resolved and to confirm that it is achieving the desired results. The system
should have been designed with clear, specified objectives, and justification in terms of cost-benefit
analysis or other performance criteria.
A cost-benefit review might categorise items under the five headings of direct benefits, indirect benefits,
development costs, implementation costs and running costs.
Required
Give two examples of items which could fall to be evaluated under each heading. (5 marks)
Metrics should be carefully thought out, objective and stated clearly. They must measure significant
aspects of the system, be used consistently and agreed with users. Examples of metrics include system
response time, the number of transactions that can be processed per minute, the number of bugs per
hundred lines of code and the number of system crashes per week.
Many facets of system quality are not easy to measure statistically (eg user-friendliness). Indirect
measurements such as the number of calls to the help-desk per month can be used as an indication of
overall quality/performance.
(a) The growth rates in file sizes and the number of transactions processed by the system. Trends
should be analysed and projected to assess whether there are likely to be problems with lengthy
processing time or an inefficient file structure due to the volume of processing.
(b) The staffing requirements of the system, and whether they are more or less than anticipated.
(c) The identification of any delays in processing and an assessment of their consequences.
(d) An assessment of the efficiency of security procedures, in terms of number of breaches, or number
of viruses encountered.
(e) A check of the error rates for input data. High error rates may indicate inefficient preparation of
input documents, an inappropriate method of data capture or poor design of input media.
(f) An examination of whether output from the computer is being used for a good purpose. (Is it used?
Is it timely? Does it go to the right people?)
(g) Operational running costs can be examined to discover any inefficient programs or processes. This
examination may reveal excessive costs for certain items although in total, costs may be
acceptable.
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A special steering committee may be set up to ensure that post-implementation reviews are carried out,
although the internal audit department may be required to do the work of carrying out the reviews.
The post-implementation measurements should not be made too soon after the system goes live, or else
results will be abnormally affected by 'teething' problems, lack of user familiarity and resistance to
change. A suitable period is likely to be between one month and one year after completion (the
appropriate length of time will depend upon the role of the system, and how complex it is).
(a) A summary of their findings should be provided, emphasising any areas where the system has
been found to be unsatisfactory so the organisation can learn from its mistakes.
(b) A review of system performance should be provided. This will address the matters outlined above,
such as run times and error rates and whether it meets users' needs.
(c) A cost-benefit review should be included, comparing the forecast costs and benefits identified at
the time of the feasibility study with actual costs and benefits.
(d) Recommendations should be made as to any further action or steps which should be taken to
improve performance. It will also make recommendations on how the project was managed to help
future initiatives.
Section summary
After implementation the system should be evaluated to see if it is a success and whether there are any
lessons to be learned.
Evaluation often takes the form of a cost-benefit review or performance measurement using metrics or
other measurable features of the system.
A post-implementation review compares actual and expected performance levels and is a formal report
that should be compiled after a suitable period of time following implementation.
5 System maintenance
Introduction
After implementation, the system will require regular maintenance if it is to continue operating as
expected and to develop with the organisation.
CORRECTIVE MAINTENANCE is carried out when there is a systems failure of some kind, for example a
defect in processing or in an implementation procedure. Its objective is to ensure that systems remain
KEY TERMS operational.
PERFECTIVE MAINTENANCE is carried out in order to perfect the software, or to improve it so that
processing inefficiencies are eliminated and performance is enhanced.
ADAPTIVE MAINTENANCE is carried out to take account of anticipated changes in the processing
environment. For example new taxation legislation might require changes to be made to payroll software.
Perfective maintenance consists of making enhancements requested by users to improve or extend the
facilities available. The user interface may be amended to make software more user friendly.
(a) The system needs minor modifications to cope with changes in the computer user's procedures or
volume of business.
(b) The system can benefit from advances in computer hardware technology without having to switch
to another system altogether.
Factor Comment
Errors However diligently a system is tested, it is likely that bugs will exist in a
newly implemented system. These require fixing.
Poor documentation If old systems are accompanied by poor documentation, or even a complete
lack of documentation, they may be difficult to understand. It is difficult to
update or maintain these systems. Programmers may opt instead to patch up
the system with new applications using newer technology.
114 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS
Factor Comment
Changes in requirements Although users should be consulted at all stages of systems development,
problems may arise after implementation, for example users may have found
it difficult to express their requirements, or not participated fully in
development.
Cost constraints may have meant that certain requested features were not
incorporated. Time constraints may have meant that requirements suggested
during development were ignored in the interest of prompt completion.
Regression testing involves repeating system tests that had been executed correctly before the recent
changes were made. Only the changes expected as a result of the system maintenance should occur
under the regression test – other changes could be due to errors caused by the recent change.
Problems with regression testing include deciding on the extent of testing required, envisaging all areas
possibly affected, and convincing users and programmers that the tests are necessary.
Section summary
Corrective Maintenance is carried out when there is a systems failure of some kind, for example a defect
in processing or in an implementation procedure. Its objective is to ensure that systems remain
operational.
Perfective Maintenance is carried out in order to perfect the software, or to improve it so that processing
inefficiencies are eliminated and performance is enhanced.
Adaptive Maintenance is carried out to take account of anticipated changes in the processing
environment. For example new taxation legislation might require changes to be made to payroll software.
Introduction
We shall now consider the application of outsourcing to information systems.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 115
Classification Comment
Ad-hoc The organisation has a short-term requirement for increased IT skills. An
example would be employing programmers on a short-term contract to help
with the programming of bespoke software.
Project management The development and installation of a particular project is outsourced. For
example, a new accounting system. This approach is sometimes referred to as
systems integration.
Partial Some services are outsourced. Examples include hardware maintenance,
network management or ongoing website management.
Total An external supplier provides the vast majority of an organisation's IS services.
For example, a third party owns or is responsible for IT equipment, software
and possibly staff.
(a) Timeshare. The vendor charges for access to an external processing system on a time-used basis.
Software ownership may be with either the vendor or the client organisation.
(b) Service bureaux usually focus on a specific function. Traditionally bureaux would provide the same
type of service to many organisations, eg payroll processing. As organisations have developed their
own IT infrastructure, the use of bureaux has decreased.
(c) Facilities management (FM) . The terms 'outsourcing' and 'facilities management' are sometimes
confused. Facilities management traditionally involved contracts for premises-related services such
as cleaning or site security.
In the context of IS, facilities management involves an outside agency managing the organisation's
IS facilities. All equipment usually remains with the client, but the responsibility for providing and
managing the specified services rests with the FM company. FM companies operating in the UK
include Accenture, Cap Gemini, EDS and CFM.
The retailer Sears outsourced the management of its vast information technology and accounting functions
to Accenture. First year savings were estimated to be £5 million per annum, growing to £14 million in the
CASE STUDY following year, and thereafter. This is clearly considerable, although re-organisation costs relating to
redundancies, relocation and asset write-offs are thought to be in the region of £35 million. About 900
staff were involved: under the transfer of undertakings regulations (which protect employees when part or
all of a company changes hands), Accenture was obliged to take on the existing Sears staff. This provided
new opportunities for the staff who moved, while those who remained at Sears were free to concentrate
on strategy development and management direction.
(a) Multiple sourcing. This involves outsourcing different areas of the IS function to a range of
suppliers. Some suppliers may form alliances to present a stronger case for selection.
(b) Incremental approach. Organisations progressively outsource selected areas of their IS function.
Possible problems with outsourced services are solved before progressing to the next stage.
(c) Joint venture sourcing. This term is used to describe an organisation entering into a joint venture
with a supplier. The costs (risks) and possible rewards are split on an agreed basis. Such an
arrangement may be suitable when developing software that could be sold to other organisations.
(d) Application Service Providers (ASP). ASPs are third parties that manage and distribute software
services and solutions to customers across a Wide Area Network. ASPs could be considered the
modern equivalent of the traditional computer bureaux.
(a) Strategic importance of system. If the decision relates to an information system, strategic
information systems are generally not suited to outsourcing as they require a high degree of
specific business knowledge that a third party IT specialist cannot be expected to possess.
(b) Is the function and/or system relatively isolated? Functions that have only limited interfaces are
most easily outsourced, eg payroll.
(c) Is there enough in-house system knowledge to manage the outsourced service agreement? If an
organisation knows very little about a particular technology it may be difficult to know what
constitutes good service and value for money. It may be necessary to recruit additional expertise to
manage the relationship with the other party.
(d) Are the organisation’s requirements likely to change? Organisations should avoid tying themselves
into a long-term outsourcing agreement if requirements are likely to change.
(e) Communication with employees. Once the decision to outsource has been taken it is important for
employees to be kept informed of the reasons behind the decision and how it may impact on
them. If redundancies are planned then this should be managed sensitively.
A contract, known as a Service Level Contract (SLC) or Service Level Agreement (SLA) should be drawn
up that sets out the terms and conditions of the arrangement.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 117
Once the arrangement has been established, handover should take place at an appropriate time either
directly or be phased in stages.
If full facilities management is involved and almost all management responsibility for IS lies with the
entity providing the service, then a close relationship between the parties is necessary (a 'partnership').
Factors such as organisation culture need to be considered when entering into such a close and critical
relationship.
On the other hand, if a relatively simple function such as payroll were outsourced, such a close
relationship with the supplier would not be necessary. A 'typical' supplier – customer relationship is all
that is required.
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(a) Outsourcing can remove uncertainty about cost, as there is often a long-term contract where
services are specified in advance for a fixed price. If computing services are inefficient, the costs
will be borne by the outsourcing company. This is also an incentive to the third party to provide a
high quality service.
(b) Long-term contracts (maybe up to ten years) encourage planning for the future.
(c) Outsourcing can bring the benefits of economies of scale. For example, an outsourcing company
may conduct research into new technologies that benefits a number of their clients.
(d) A specialist organisation is able to retain skills and knowledge. Many organisations would not have
a sufficiently well-developed IS department to offer IS staff opportunities for career development.
Talented staff would leave to pursue their careers elsewhere.
(e) New skills and knowledge become available. A specialist company can share staff with specific
expertise (such as programming in HTML to produce Web pages) between several clients. This
allows the outsourcing company to take advantage of new developments without the need to
recruit new people or re-train existing staff, and without the cost.
(f) Flexibility (contract permitting). Resources may be able to be scaled up or down depending upon
demand. For instance, during a major changeover from one system to another the number of IT
staff needed may be twice as large as it will be once the new system is working satisfactorily.
An outsourcing organisation is more able to arrange its work on a project basis, whereby some
staff will expect to be moved periodically from one project to the next.
(a) It is arguable that information and its provision is an inherent part of the business and of
management. Unlike office cleaning, or catering, an organisation's IS services may be too
important to be contracted out. Information is at the heart of management.
(b) A company may have highly confidential information and to let outsiders handle it could be seen
as risky in commercial and/or legal terms.
(c) Information strategy can be used to gain competitive advantage. Opportunities may be missed if a
third party is handling IS services, because there is no onus upon internal management to keep up
with new developments and have new ideas. Any new technology or application devised by the
third party is likely to be available to competitors.
(d) An organisation may find itself locked in to an unsatisfactory contract. The decision may be very
difficult to reverse. If the outsourcing company supplies unsatisfactory levels of service, the effort
and expense the organisation would incur to rebuild its own computing function or to move to
another provider could be substantial.
(e) The use of outsourcing does not encourage awareness of the potential costs and benefits of IS
within the organisation. If managers cannot manage in-house IS resources effectively, then it could
be argued that they will not be able to manage an arrangement to outsource effectively either.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 119
Effective information systems and information management contribute towards the attainment of
organisational goals. To best achieve this, a cohesive IS strategy should be developed that supports the
organisation's overall strategy.
As with any expenditure, the benefits of information systems should be greater than their costs.
Section summary
Four broad types of information systems outsourcing are ad-hoc, project management, partial and total.
Examples of outsourcing arrangements include multiple sourcing, incremental approach, joint venture
sourcing, Application Service Providers (ASP).
The identification of business needs and the information technology framework to satisfy them is at the
heart of a strategy for information systems. However, this is not always feasible, especially if an
organisation's use of technology has grown in a haphazard fashion. The purpose of the strategy in this
situation may be to impose some sort of order on a disorganised situation.
The ways in which IS can impact an industry according to Porter and Millar are:
Potential
entrants
Threatof
newentrants
Bargaining Bargaining
powerof Industrycompetitors powerof
suppliers customers
Suppliers Rivalryamong Customers
existingfirms
Threatofsubstitute
productsorservices
Substitutes
(a) Defensively. IS can increase economies of scale, raise the capital cost of entry (by requiring an
investment in IS) or effectively colonising distribution channels by tying customers and suppliers
into the supply chain.
(b) Offensively. IS can leap over entry barriers. An example is the use of telephone banking, which
sometimes obviates the need to establish a branch network.
7.2.2 Suppliers
Supplier power can derive from various factors such as geographical proximity and the fact that the
organisation requires goods of a certain standard in a certain time.
(a) By increasing competition between suppliers. IS can provide a purchases database, which enables
easy scanning of prices from a number of suppliers.
(b) Suppliers' power can be shared. An example is using CAD to design components in tandem with
suppliers. Such relationships might be developed with a few key suppliers. The supplier and the
organisation both benefit from performance improvement.
(c) Suppliers can be integrated, in purely administrative terms, by a system of electronic data
interchange (EDI). This involves the creation of standardised electronic documents (such as order
forms) that can be transmitted between supplier and customer to save duplication of effort in terms
of getting the information into each computer system.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 121
7.2.3 Customers
The bargaining power of customers can be affected by using IS to 'lock them in'.
(a) IS can raise switching costs in both cash terms, and in terms of operational inconvenience). An
example is where IS provides a distribution channel for certain services (eg airline tickets). Another
example comes from the computer industry itself. Until the advent of the PC, most computers were
run with proprietary software in other words, you could not run ICL software, say, on IBM
mainframes. This made any switch in supplier (of hardware or software) too much trouble to
contemplate.
(b) Customer information systems can enable a thorough analysis of marketing information so that
products and services can be tailored to the needs of certain market segments.
7.2.4 Substitutes
IS has the following relationships to existing and substitute products and services.
(a) In some cases IS itself is the 'substitute'. PC-based word processing packages were originally
a substitute for typewriters, e-commerce is a substitute for a high street shop.
(b) Technology is the basis for new leisure activities (eg computer games. Alternatively, IT based
systems can imitate existing goods (eg electronic keyboards imitating pianos).
(c) Technology can add value to existing services by allowing more detailed analysis, by generating
cost advantages, or by extending the market.
7.2.5 Rivalry
IS can be used to compete – as a source of competitive advantage (see below).
Porter’s five forces is another important strategy for analysing an organisation’s environment.
Be prepared to use it again as it is part of the syllabus for Paper E2.
Where the majority of organisations in an industry use IS for competitive advantage, or the industry is
based on IS to a large extent, there may be a competitive necessity to use it.
COMPETITIVE ADVANTAGE is a profitable and sustainable position. It exists in the minds of customers, who
believe the value they will receive from a product or service is greater than both the price they will pay
KEY TERM and the value offered by competitors.
(a) Cost leadership means being the lowest-cost producer in the industry as a whole. A cost
leadership strategy seeks to achieve the position of lowest-cost producer in the industry.
(b) Differentiation is the exploitation of a product or service which the industry as a whole believes to
be unique. A differentiation strategy assumes that competitive advantage can be gained through
particular characteristics of a product or service.
(c) Focus involves a restriction of activities to only part of the market (a segment or niche) through:
(i) Providing goods and/or services at lower cost to that segment (cost-focus).
(ii) Providing a differentiated product or service to that segment (differentiation-focus).
122 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS
Cost leadership and differentiation are industry-wide strategies. Focus involves segmentation – pursuing
within the segment a strategy of cost leadership or differentiation. Examples of how IS can support each
of these strategies are shown in the following table.
The value chain is usually applied in relation to operations management. We are considering it briefly
here as it can be applied to IS strategy as well.
Value chain analysis can be used to assess the impact of IS, and to identify processes where it could be
used to add value. The activities and how IS can benefit them are described below.
7.4.1 Logistics
In both inbound logistics and outbound logistics IS can have an impact.
(a) Inbound logistics. The use of inventory control systems such as MRP, MRPII, ERP and JIT.
(c) It is possible to create computer models, or virtual warehouses of inventory held at different
locations.
7.4.2 Marketing
Marketing and services can be made more effective by customer databases enabling market segmentation.
(a) Buying and analysing a mailing list is a more precise method of targeting particular groups of
consumers than television advertising.
(b) A variety of market research companies use IS to monitor consumers' buying habits.
(c) Supermarkets can use automated EPOS systems to have a precise hour-by-hour idea of how
products are selling to enable speedy ordering and replenishments.
Customer relationship management (CRM) systems can encourage closer customer relationships.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 123
(a) Procurement. IS can automate some purchasing decisions. Paperwork can be saved if the
organisation's purchase systems are linked directly to the sales order systems of some suppliers (eg
by electronic data interchange).
(b) Technology development. Computer Aided Design (CAD) is, in a number of areas, an important
influence.
(i) Drafting. CAD produces engineer's drawings, component design, layout (eg of stores, wiring
and piping) and electronic circuit diagrams in complex systems.
(ii) Updating. It is easy to change design in CAD systems and to assess ramifications of any
changes. Some CAD systems have archive data (eg for reference).
(iii) CAD enables modelling to be checked without the necessity of producing working
prototypes. Some 'stress testing' can be carried out on the model.
(c) There is perhaps less impact on human resources. However, HR applications include the
maintenance of a skills database, staff planning, computer based training, time attendance
systems, payroll systems, pension systems.
7.5.2 Clegg
Clegg (2003) stated that an organisation’s information strategy is a plan for ensuring that information is
appropriate, accurate, available, timely and effective. A starting point for achieving this could be the
organisation reviewing its information for duplication or errors, or taking a ‘blank page’ approach and
simply deciding its information requirements from scratch.
He emphasised that information strategy should not be left in the hands of IT experts. It’s the managers
within the organisation that know what information they require.
7.5.3 Boomer
Boomer (2007) identified a number of issues relevant when planning information systems.
Using each of Porter’s five forces, identify and briefly explain five ways that information systems could be
used to create a competitive advantage for an organisation that manufactures wooden furniture for sale
through a chain of its shops. (10 marks)
Section summary
The ways in which IS can impact an industry according to Porter and Millar are, change the industry
structure, create new businesses and industries and be used to create competitive advantage.
Porter proposes three generic strategies for achieving competitive advantage, cost leadership,
differentiation and focus.
Value chain analysis can be used to assess the impact of IS, and to identify processes where it could be
used to add value.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 125
Chapter Roundup
The main stages in the implementation of a computer system are:
It is better for the organisation to prevent or minimise resistance occurring in the first place. Theories
aimed at achieving this include:
After implementation the system should be evaluated to see if it is a success and whether there are any
lessons to be learned.
Evaluation often takes the form of a cost-benefit review or performance measurement using metrics or
other measurable features of the system.
A post-implementation review compares actual and expected performance levels and is a formal report
that should be compiled after a suitable period of time following implementation.
Corrective Maintenance is carried out when there is a systems failure of some kind, for example a defect
in processing or in an implementation procedure. Its objective is to ensure that systems remain
operational.
Perfective Maintenance is carried out in order to perfect the software, or to improve it so that processing
inefficiencies are eliminated and performance is enhanced.
Adaptive Maintenance is carried out to take account of anticipated changes in the processing
environment. For example new taxation legislation might require changes to be made to payroll software.
Four broad types of information systems outsourcing are ad-hoc, project management, partial and total.
Examples of outsourcing arrangements include multiple sourcing, incremental approach, joint venture
sourcing, Application Service Providers (ASP).
The ways in which IS can impact an industry according to Porter and Millar are, change the industry
structure, create new businesses and industries and be used to create competitive advantage.
Porter proposes three generic strategies for achieving competitive advantage, cost leadership,
differentiation and focus.
Value chain analysis can be used to assess the impact of IS, and to identify processes where it could be
used to add value.
126 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS
Quick Quiz
1 Which of the following is the final step in Lewin and Schien's three stage model of change?
A Refreeze
B Move
C Unfreeze
D Fix
‘The vendor charges for access to an external processing system on a time-used basis.’
A Service bureaux
B Timeshare
C Facilities management
D Processing rental
A Lewin
B Schein
C Porter
D Clegg
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 127
4 B Timeshare is where the vendor charges for access to an external processing system on a time-used
basis.
Answers to Questions
4.1 Resistance to change
A Education and communication is effective where the cause of the resistance is lack of information about
the change.
Direct benefits might include reduced operating costs, for example lower overtime payments.
Indirect benefits might include better decision-making and the freeing of human 'brainpower' from routine tasks
so that it can be used for more creative work.
Development costs include systems analysts' costs and the cost of time spent by users in assisting with fact-
finding.
Implementation costs would include costs of site preparation and costs of training.
Running costs include maintenance costs, software leasing costs and on-going user support.
The following are just some ideas that are possible, you may have thought of others.
Potential entrants
Technology can reduce the labour cost of manufacturing and speed up the production process so that substantial
economies of scale are created. This may mean that new entrants cannot compete with the organisation on cost.
Suppliers
The organisation can store price, and other data, regarding suppliers on a database. This will allow it to quickly
scan which suppliers provide the best deal, increasing the competition between them and therefore reducing
their bargaining power.
Customers
The organisation can store marketing data that it collects from its customers on a database. This information can
be analysed and used to improve the targeting of the marketing effort, therefore reducing customer bargaining
power.
Substitutes
The organisation can develop a website and an in-store product database that allows customers to analyse and
compare the products that are on offer. For example by colour, size and style. Such value-added activities can
help reduce the threat of substitutes.
128 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS
Industry rivalry
Porter proposed three strategies for competitive advantage. Cost leadership, differentiation and focus.
We have already seen how IS can help the organisation compete on cost. Differentiation can be achieved
through the provision of the website and in-store database – not all of the organisation’s competitors will provide
this.
IS can also help focus the organisation’s activities by allowing it to trade under two different brands on the
Internet. For example one brand could compete on cost – this would sell cheaper products. Another brand could
compete on product differentiation such as stylish or luxury products. Each brand could have a separate website
and be marketed differently, even though the organisation that manufactures their products is the same.
Part C
129
130
OPERATIONS MANAGEMENT AND
THE ORGANISATION
In this chapter we begin our study of organisation structures itself and its relations with
operations management by discussing what it suppliers, to meet the needs of the customer.
is and the important role it plays in
Finally, we look at the issue of sustainability in operations
organisations.
management. This is a recent development that many
We then continue by considering an organisation's broad organisations are under pressure from customers to
operations strategy. This is concerned with how the address.
131
132 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT
1 Operations management
Introduction
The overall objective of operations is to use a transformation process to add value and create competitive
advantage. It involves taking input resources and transforming them into outputs of products or services
for customers. Operations management involves the design, implementation and control of these
processes.
OPERATIONS MANAGEMENT is concerned with the transformation of 'inputs' into 'outputs' that meet the
needs of the customer.
KEY TERM
(a) Operations. This is responsible for fulfilling customer orders and requests through production of the
goods or services, and for delivery of products or services to the customer.
(b) Marketing and sales. This is responsible for identifying customer needs and perhaps more
significantly, for communicating information about the organisation's products or services to
customers so as to procure sales orders.
(c) Product and service development. This is responsible for designing new products and services that
will meet customer needs, to generate sales orders.
There are also support functions within an organisation that help the core functions to operate effectively.
Traditionally, support functions might include accounting, HR and IT. However, what is actually a core
function or a support function will depend on the particular organisation. For example, organisations that
rely heavily on technology (eg the use of computer-aided manufacturing) may consider IT a core function.
The functions within an organisation overlap, and for any particular task or process, input is often
required from more than one core function or support function.
At its simplest, operations management tries to ensure that organisations are run as efficiently as possible.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 133
Strategic
Apex
Support
Technostructure Staff
Middle
Line
Operating Core
Transformation processes
The transformation process could be a physical transformation, a change in nature or form (for example,
a transformation of data into information), a change in location, a change in ownership, or, in the case of
customers, a psychological change (eg giving enjoyment).
Inputs to the transformation process can be categorised as either transformed resources or transforming
resources.
(a) Transformed resources are manipulated and formed into a different condition by the process.
These resources can be materials, information or customers themselves.
(b) Transforming resources are the resources that are used to alter the condition of the transformed
resources. These consist of the work force of the organisation and facilities such as buildings,
equipment and vehicles.
(a) In a manufacturing process, inputs of raw materials and components are manipulated into a
finished product. The output is the product. This is then distributed to the customer.
(b) In the legal profession, a client seeks clarification about a legal problem. A lawyer holds a meeting
with the client and provides the necessary advice. The output is an informed client.
(c) In the rail industry, rail service providers take customers, and use their work force and facilities (eg
trains) to deliver the customers from one location to another. The output is a re-located customer.
(d) In banking, instructions from a customer (information) are processed using the facilities of the
bank, and the instructions are carried out, for example by the transfer of money. The output is the
completed transfer.
(e) In the entertainment industry, the customer might be provided with entertainment input such as a
comedian telling a joke. The output is an entertained customer.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 135
(a) The manufacture of machine tools is primarily concerned with the output of products. However,
the organisation will also provide training and technical support services to customers.
(b) An education and training organisation might provide lectures, tutorials and workshops. The
service may include the provision of products in the form of study notes or books. It might also
provide an online helpline.
(c) A restaurant provides products in the form of food and drink. However, for the customer an
essential ingredient of going to a restaurant is usually the overall dining experience that includes
the enjoyment obtained from the service style, entertainment and general ambience.
V Description
Volume The volume of units produced. High volume usually means capital intensive, low
volume usually means labour intensive.
Variety Whether the operation handles a number of different inputs or produces a range
of different outputs.
Variation in Demand for same operations may be seasonal or regular peaks and dips in
demand demand may be experienced.
Visibility The degree to which business operations are visible to the customer.
Section summary
Operations is a core part of any organisation.
The transformational process model describes how inputs are converted through processes into outputs.
2 Operations strategy
Introduction
Organisations may employ one or more of a number of operations strategies to improve their processes
and as a source of competitive advantage over competitors. Common strategies involve what is known as
the value chain and supply chain management. This is the view that an organisation is one link in a
chain that aims to turn raw materials into what the customer wants. As a result all links in the chain
benefit.
136 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT
(a) Functions are the familiar departments of a business (eg production function, the finance function)
and reflect the formal organisation structure and the distribution of labour.
(b) Activities are what actually goes on, the work that is done. Activities are the means by which an
organisation creates value in its products – sometimes referred to as value activities. Activities
incur costs and provide a product or service which earns revenue.
An example should make this clear. An organisation needs many inputs of resources to function. It needs
to secure resources from the environment. This activity can be called procurement. However,
procurement will involve more departments than purchasing, for example the accounts department will
certainly be involved and possibly production and quality assurance.
Organisations create value for their buyers by performing these activities. The ultimate value a firm
creates is measured by the amount customers are willing to pay for its products or services above the cost
of carrying out value activities. A business is profitable if the realised value to customers exceeds the
collective cost of performing the activities.
(a) Customers purchase value, which they measure by comparing an organisation's products and
services with similar offerings from competitors.
(b) The business creates value by carrying out its activities either more efficiently than other
businesses, or combined in such a way as to provide a unique product or service.
Porter’s value chain is a model of value activities (which procure inputs, process them and add value to
them in some way, to generate outputs for customers) and the relationships between them.
Primary activities are those directly related with production, sales, marketing, delivery and services.
(a) Inbound logistics are those activities involved with receiving, handling and storing inputs to the
production system.
(b) Operations are those activities which convert resource inputs into a final product. In a
manufacturing business, this is relatively easy to identify as the factory. In a service company,
operations include those activities which make up the basic service.
(c) Outbound logistics are those activities relating to storing the product and its distribution to
customers.
(d) Marketing and sales are those activities that relate to informing customers about the product,
persuading them to buy it, and enabling them to do so.
(e) After-sales service includes activities such as installing products, repairing them and providing
spare parts.
(a) Procurement consists of those activities which acquire the resource inputs to the primary activities
(eg purchase of materials, subcomponents, equipment).
(b) Technology development (in the sense of apparatus, techniques and work organisation). These
activities are related to both product design and to improving processes and/or resource utilisation.
(c) Human resource management is the activities of recruiting, training, developing and rewarding
people.
(d) Firm infrastructure. The systems of planning, finance, quality control and management are
activities which Porter believes are crucially important to an organisation's strategic capability in all
primary activities.
(b) Indirect activities enable direct activities to be performed (eg maintenance, sales force
administration).
(c) Quality assurance. This type of activity monitors the quality of other activities, and includes:
inspection, review and audit (eg the quality of the financial records).
Linkages connect the interdependent elements of the value chain together. They occur when one element
of the value chain affects the costs or effectiveness of another. They require co-ordination.
(a) More costly product design, or better quality production, might reduce the need for after-sales
service.
(b) To deliver goods on time requires smooth functioning of operations, outbound logistics and service
activities such as installation.
138 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT
Porter’s Value Chain is a key theory which will crop up in other papers, for example E3 and
P2.
A Inbound logistics
B Human resource management
C Marketing and sales
D Service (2 marks)
Distributor/retailer
value chain
Organisation's Customer
value value
chain chain
Supplier
value
chain
As well as managing its own value chain, a business can secure competitive advantage by managing the
linkages with its suppliers and customers. A company can create competitive advantage by making best
use of these links. An example is a Just-in-Time system where close integration of the organisation's
operations with those of its suppliers is essential.
Purchasing today, in most organisations, is viewed as a strategically important function that impacts
significantly on organisational performance. A degree of control is sought over the supply process and
businesses actively manage the number of suppliers they use, implement outsourcing arrangements as
necessary and consider developing strategic partnerships where appropriate.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 139
2.3.1 What caused the need for closer supply chain links?
Christopher (2005) identified a number of factors.
Porter recognised that management of the supply chain and supply network could be a source of
competitive advantage. He referred to the position of firms in supply chains and networks in relation to
their proximity to the customer. If a firm is closer to the customer than another, it is ‘downstream’ of it. If
a firm is further away from the customer than another, it is ‘upstream’ of it.
Supply chains today must be responsive and reliable. The relationships between members must
demonstrate a high degree of mutual understanding. Integration between the organisation and other
chain members, both upstream and downstream, should be facilitated by integrated information systems.
2.3.4 Cousins
Cousins (2000) conducted a 12-month research project to investigate the level of strategic maturity in
the purchasing function of UK/European companies. In particular, the research aimed to establish the
level of collaboration between leading UK companies (ie suppliers) and their major customers. The
research looked at a range of inter-connected aspects considered important when looking at how an
organisation deals with relationships relevant to overall strategy and supply strategy.
The research revealed that all of the aspects identified and shown in the Strategic Supply Wheel are
inter-connected. Cousins stated that it was clear that a focus on anyone area (eg relationship
development) would be to the detriment of another area (eg performance measures). Organisations need
to balance these resources and issues.
The research also examined the 'relationship type', using a simple classification of 'opportunistic' (low
level of co-operation with the supplier) versus 'collaborative' (high level of co-operation). The results
showed that the more collaborative the relationship the greater the degree of strategic alignment required
(between overall strategy and purchasing strategy).
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 141
An ‘opportunistic’ (or ‘competitive’) approach is one where suppliers are selected on price and is based
on the power and threat of the purchasing organisation to switch suppliers and insist of heavy penalty
clauses in supply contracts. There is little trust between the parties and very little information passes
between them (as the buyer seeks to retain as much power in the relationship as possible). This means
that the true potential of the arrangement can never be exploited.
A ‘collaborative’ approach is based on the customer and supplier working together to provide the a
package that best meets the needs of the market. The end-result should be that both parties increase
their market share. Such relationships are long-term partnerships where both parties work together when
designing products and overcoming problems. In this regard, the purchasing organisation may offer sole
supply contracts in return for the supplier’s commitment.
Increasingly, organisations are recognising the need for and benefits of establishing close links with
companies in the supply chain. Historically, businesses in the supply chain have operated relatively
independently of one another to create value for an ultimate customer. Independence was maintained
through holding buffer stocks and managing lead-times. There was very little control over other channel
members, and no wider perspective on the system as a whole.
Market and competitive demands are now, however, compressing lead times and businesses are reducing
inventories and excess capacity. Linkages between businesses in the supply chain must therefore become
much tighter. This new condition is shown in the 'Integrated supply chain' model (the second model in
the following diagram).
There seems to be increasing recognition that, in the future, it will be whole supply chains which will
compete and not just individual organisations – we saw earlier how Porter's value chain achieves this.
The aim is to co-ordinate the whole chain, from raw material suppliers to end customers. The chain
should be considered as a network rather than a pipeline - a network of vendors support a network of
customers, with third parties such as transport businesses helping to link the companies. In marketing
channels, organisations have to manage the trade-off between the desire to remain independent and
autonomous, and the need to be interdependent and co-operative.
INDEPENDENCE: each channel member operates in isolation and is not affected by others, so maintaining
a greater degree of control.
KEY TERMS
INTERDEPENDENCE: each channel member can affect the performance of others in the channel.
If the supplier 'knows' what its customers want, it does not necessarily have to guess, or wait until the
customer places an order. It will be able to better plan its own delivery systems. The potential for using
the Internet to allow customers and suppliers to acquire up-to-date information about forecasted needs
and delivery schedules is a recent development, but one which is being used by an increasing number of
companies. Some supply chain relationships are strengthened and communication facilitated through the
use of extranets (intranets accessible to authorised outsiders).
Reduction in customers served. For the sake of focus, companies might concentrate resources on
customers of high potential value.
Price and inventory co-ordination. Businesses co-ordinate their price and inventory policies to
avoid problems and bottlenecks caused by short-term surges in demand, such as promotions.
Linked computer systems. Closer links may be facilitated through the use of Electronic Data
Interchange (EDI), for example to allow paperless communication, billing and payment and
through the use of a computer extranet.
Early supplier involvement in product development and component design.
Logistics design. Hewlett-Packard restructured its distribution system by enabling certain product
components to be added at the distribution warehouse rather than at the central factory. For
example user-manuals which are specific to the French market would be added at the French
distribution centre.
Joint problem-solving.
Supplier representative on site.
The business case for supply chain management is the benefit to all the participants in terms of the
performance objectives of speed, dependability and cost.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 143
Businesses that are perceived by customers and potential customers to excel at delivering the desired
performance objectives are likely to derive a competitive advantage.
In a traditional supply chain, producers form links between themselves in order to produce a product that
the customer wants at an appropriate selling price and cost to the producer. The chain is formed to 'push'
KEY POINT
the product out into the market.
By contrast, products produced by demand networks are 'pulled' into existence in response to demand
signals. Organisations within a demand network share information and collaborate to produce a product
or service the market is demanding.
A demand network is the result of companies evolving internally (or within their departments) and
externally (with their partners). This evolution is a four-stage process.
Reacting
Departments optimise their operations to meet demand. Reacting organisations cannot
sense demand or tie it into corporate strategy – they simply react to market conditions.
Anticipating
Anticipating companies have developed internally to respond to long and short-term
demand. They often use lean production or six sigma (see later) to bring order to their
operations. They can anticipate upstream demand (the demand which is coming to them)
but not downstream demand.
Collaborating
Collaborating organisations have established external relationships with business partners
that allow intelligence to be gathered on downstream demand. This allows better
forecasting and adjustment of plans.
Orchestrating
Supply and demand have evolved into a flow of information throughout the network.
Companies plan new products and product life cycles, and can begin to influence demand
patterns. Production decisions are based on costs and profitability.
144 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT
To create competitive advantage, organisations within a demand network have to manage three factors:
Exam alert
Exam questions may require you to consider a range of operations strategies and decide which is the most
suitable in a given scenario.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 145
Suppliers may also be selected from a number of countries to guard against the risk of supplies
from one country being affected by circumstances such as bad weather.
Suppliers are of different sizes so buyers can match order sizes to appropriate suppliers (ie small
suppliers may not be suitable for larger orders).
Expertise varies between suppliers so building relationships with a number of them can help the
buyer make more informed choices.
The mix of suppliers should be optimised so that the organisation maximises the benefits they offer and
minimises any risks involved in supply – the result is a supply portfolio.
(b) Which method would you recommend to an organisation whose product is based upon a trade
secret and relies on quality for competitive advantage? (1 mark)
(c) List four criteria that could be used to assess supplier performance. (Hint: Come up with these
yourself based on what you have read and your own experience when you order a product or
service.) (4 marks)
Process maps:
There are many types of process maps (also known as process charts) and many charting conventions.
Two common types of process map are:
A deployment chart – which provides an overview and also indicates where or by whom actions
are performed
Process maps should be simple enough for the process under review to be understood by almost anyone,
even someone unfamiliar with the process.
(a) Changing systems and working methods without understanding the underlying processes can lead
to costly mistakes. It can also create conditions that make it difficult for staff to work effectively.
(b) If organisations don’t understand a process they will not be able to manage it effectively – and if
they cannot manage a process they cannot improve it.
(c) Process mapping enables businesses to clearly define current processes, identifying problem areas
such as bottlenecks, delays or waste. This knowledge provides a solid basis from which to develop
solutions and plan new improved processes.
Gather information to understand where waste and inefficiencies exist and their impact on
employees, customers and/or partners
Process map flowcharts set out the sequence of activities and decision points. They illustrate the
main steps and decisions in the process. Labels showing the type and level of staff doing each step
can be added if required.
Deployment process map flowcharts are similar to basic process maps, but also show who does
what, including interactions between the parties involved. This type of chart is sometimes referred
to as a ‘swim lane’ chart – as the page is divided into vertical lanes for each person or party
involved.
148 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT
Flowcharting symbols
Start/End
Action or
process
A box can represent a single step (‘add two cups of flour’), or an entire sub-process
(‘make bread’) within a larger process.
Document
A printed document or report. This symbol is not always used – it depends upon the level
of detail required in the model.
Decision
This arrow indicate the sequence of steps and the direction of flow.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 149
Having thought through the main 'steps' of the process, flowchart them in the sequence they
are performed.
Use rectangles for 'tasks' and diamonds for ‘decisions’. Use connecting arrows between
boxes to represent the direction of the sequence.
Concisely describe each task or decision in its own box. Boxes may be numbered and a key
provided where the activity is described in more detail.
If the process includes decision points, this will normally imply some 'return-routing' causing
some boxes to have more than one input. ‘Return routing’ or ‘loops’ often indicate an
inefficiency or waste.
Decisions usually (but not always) pose questions answerable by ‘Yes’ or ‘No’. Structure
questions so that the preferred answer is 'Yes'.
Conventions include drawing the 'Yes' route out of the bottom of the diamond (ie normal
flow downward through the chart) and the 'No' route as a line to the side of the box).
150 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT
When the flow moves from one function to another, this is ideally denoted by a horizontal line.
Apart from the horizontal moves between functions, aim when possible to sequence activities from
top to bottom.
It may be useful to also use the D symbol to indicate any delays in the process, particularly at the
boundaries between agencies or sections.
Bowhill (2008) saw process design as a way of highlighting inefficiencies and designing improved
processes that ultimately lead to increased customer satisfaction.
An important technique that an organisation can use to identify inefficiencies is through benchmarking.
2.9.1 Benchmarking
Benchmarking is the analysis of performance compared with a similar activity elsewhere. Types of
benchmarking include:
Other management techniques covered elsewhere in this book could be used to improve processes, for
example supply chain management, TQM, Kaizen and Business Process Re-engineering.
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Item Comment
Capability required What is it that the organisation wants to 'do' or produce?
Range and location of operations How big and/or widespread does the organisation want to be?
Investment in technology How will processes and production be performed?
Strategic buyer-supplier relationships Who will be key strategic partners?
New products/services How long will the business be able to keep doing what it
does? What are the expected product life-cycles?
Structure of operations How will staff be organised and managed?
(a) Setting operational objectives that are consistent with the organisation‘s overall business strategy.
(b) Translating business strategy or marketing strategy into operations strategy, by means of
identifying key competitive factors.
(d) Assessing current operational performance by comparison with the performance of competitors.
(e) Using the idea of a clean-slate or 'green-field' approach to strategy selection. Managers are asked
to consider how they would ideally design operations if they could start again from scratch. The
ideal operations design is then compared with actual operations, and important differences
identified. Strategy decisions are then taken to move actual performance closer towards the ideal.
(f) Formulating strategy could be based on other types of gap analysis, such as comparing what the
market wants with what the operation is actually achieving, and taking decisions aimed at closing
the significant gaps.
(g) Emphasising the iterative process of strategy selection. Strategies should be continually reviewed,
refined and re-developed through experience and in response to changes in the environment.
Section summary
Porter saw organisations as value chains that are made up of different processes. A competitive
advantage can be gained by ensuring these processes are efficient.
Organisations can become part of a larger supply chain. They purchase from suppliers and sell to other
organisations which are buyers. Eventually raw materials are converted into what the end-customer
wants.
Supply chains are a source of competitive advantage as each organisation works towards a common goal.
Demand networks are an evolution of supply chains. They are formed by demand acting as a stimulus to
produce a product.
Supply portfolios are the mix of suppliers selected by an organisation to balance the benefits and risks
involved in relying on them.
Process maps can be used to present the processes involved in supply chains and networks.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 153
For organisations, sustainability involves developing strategies that balance environmental, economic and
social needs. The eventual aim is that the organisation only uses resources at a rate that allows them to
be replenished, and that emissions of waste are at a level the environment is able to absorb.
(a) Ecological sustainability concerns the preservation of the environment so it can function as
naturally as possible. The operations management issue is whether organisations should continue
production processes which are harmful to the environment, or should they look for other less
harmful (but possibly more expensive) alternatives?
154 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT
(b) Social sustainability is about personal growth and development. For organisations the issue is
whether or not employees should be treated like robots by requiring them to perform repetitive
tasks, or should they be given scope to develop their abilities and perform a wide range of
production roles?
(c) Economic sustainability is about producing goods and services that people want whilst maximising
the organisation’s profitability. The operations issue here is to ensure the organisation produces
products and services that its customers want whilst minimising waste to maximise profit.
Quality – by attempting to reduce waste and rework, an organisation may also improve the efficiency of
its production process and improve the quality of its output.
Process and product design – improvements in operational efficiency should be designed into the
production process. Products should be designed to minimise the amount of resources needed to produce
them. Where waste is created, it should be recycled where possible.
Supply chain – an organisation implementing sustainability will look to purchase materials from
sustainable sources, select suppliers that share its objectives and are located the minimum possible
distance away from it.
In the year since Comerica Bank opened its first Leadership in Energy and Environmental Design (LEED®)
certified banking centre, the bank has received recognition for its progress in implementing its
CASE STUDY commitment to sustainability.
‘Integrating green practices into the way we do business is a core commitment and allows us to enhance
our performance as a company and create long-term value for our stakeholders,’ said Richard J. Plewa,
Comerica Bank's Chief Sustainability Officer.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 155
In 2009, Comerica Bank was named to the following sustainability leadership indices in recognition of its
recent sustainability successes:
The Carbon Disclosure Project's (CDP) Carbon Disclosure Leadership Index. The CDP represents 534
global investors responsible for the management of $64 trillion of assets.
For the second year in a row, Comerica was named to the CDP's Carbon Disclosure Leadership Index,
which rates firms according to the level and quality of their disclosure and reporting on greenhouse gas
emissions and climate change strategy. In 2009, Comerica's index score of 91 was top among S&P 500
companies.
Maplecroft Climate Innovation Leaders Index. The Maplecroft Index focuses on U.S. companies with at
least $1 billion of market capitalisation and identifies top performers in climate-related innovation and
carbon management. Comerica was ranked number 61 overall and number 5 in the finance sector.
FTSE4Good Index. The FTSE4Good Index is a leading global responsibility investment index designed to
measure the performance of companies that meet globally recognised corporate responsibility standards.
Companies named in the FTSE4Good Index have demonstrated that they have put policies and
management systems in place to help address relevant corporate responsibility risks as they pertain to
social and environmental change. Comerica launched the following sustainability initiatives to increase
the efficiency of resources and decrease greenhouse gas emissions:
Energy and Emissions. During 2009, Comerica implemented a range of initiatives to reduce energy use,
corporate travel and the related greenhouse gas emissions. Total corporate emissions decreased by almost
5 percent from 2008 to 2009, partly reflecting the positive contributions of these initiatives.
Reducing Paper Use. Other initiatives implemented in 2009 were designed to reduce the use of paper
throughout the company. Paper purchases were down by almost 19 percent for the year, a reduction of
almost 6 million printed pages.
Greener Procurement. A Green Procurement Work Group was established in 2009 and a new Supplier
Questionnaire & Scorecard was developed to help identify environmentally preferred providers of goods
and services. Comerica plans to use this to improve the sustainability performance of its supply chain.
Eco-Friendly Buildings. All of Comerica's newly constructed banking centres in 2010 will have green
features. Specifically, Comerica has five new banking centres that are LEED-certified by the U.S. Green
Building Council. Comerica also is seeking LEED certification for three additional banking centres opening
in 2010. In addition, four existing Comerica buildings received Energy Star certification in 2009 from the
U.S. Environmental Protection Agency.
Sustainability Reporting. Comerica published its Inaugural Sustainability Report in September 2009. The
report was based on the Global Reporting Initiative framework and included a wealth of information on
Comerica's sustainability programs and performance, including baseline environmental performance data
against which future progress can be measured.
‘We've been working hard to develop awareness of sustainability issues among our employees and to tap
into the deep reservoir of creativity they possess when it comes to identifying better and more sustainable
ways to operate,’ noted Plewa. ‘For example, on Earth Day 2010, Comerica teams will be sponsoring and
participating in a range of educational and service projects at Comerica locations and beyond.’
Section summary
Sustainability in operations is concerned with efficient use of resources and minimising the effect of an
organisation's activities on society and the environment.
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Chapter Roundup
Operations is a core part of any organisation.
The transformational process model describes how inputs are converted through processes into outputs.
Porter saw organisations as value chains that are made up of different processes. A competitive
advantage can be gained by ensuring these processes are efficient.
Organisations can become part of a larger supply chain. They purchase from suppliers and sell to other
organisations which are buyers. Eventually raw materials are converted into what the end-customer
wants.
Supply chains are a source of competitive advantage as each organisation works towards a common goal.
Demand networks are an evolution of supply chains. They are formed by demand acting as a stimulus to
produce a product.
Supply portfolios are the mix of suppliers selected by an organisation to balance the benefits and risks
involved on relying on them.
Process maps can be used to present the processes involved in supply chains and networks.
Sustainability in operations is concerned with efficient use of resources and minimising the effect of an
organisation's activities on society and the environment.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 157
Quick Quiz
1 Which of the following are parts of an organisation according to Mintzberg?
A Firm infrastructure
B Technology development
C Procurement
D Marketing and sales
A Porter
B Mintzberg
C Cousins
D Reck and Long
4 Organisations within a demand network need to manage which three factors to create a competitive
advantage?
5 List the six items Brown identified that should be covered by an organisation's operations strategy.
158 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT
4 D Organisations within a demand network need to manage alignment, agility and adaptability to
create a competitive advantage.
5 Capability required, range and location of operations, investment in technology, strategic buyer-
supplier relationships, new products/services and the structure of operations.
Answers to Questions
5.1 Activities
Delegated sourcing – the buyer chooses a supplier to deliver a complete sub-assembly of part of the
product.
Parallel sourcing – the buyer mixes the other three approaches to maximise their benefits.
(b) Single sourcing. This method allows a strong relationship to develop between buyer and supplier and
helps to ensure confidential treatment of trade secrets and allows the development of a quality assurance
programme.
(c) Quality – whether the product or service is fit for purpose, defect rates.
Flexibility and capability – is the supplier open to reasonable requests and able to meet them?
A significant trend in all business sectors over analyse problems with management of quality in an
recent years has been an increased emphasis organisation described in the question.
on quality. In an increasingly competitive
The purposes of external quality standards (eg the various
environment, quality is seen as vital to success.
ISO standards appropriate to products and organisations)
As with many topics in this paper, you must learn the are also highly examinable.
relevant theory, but also be able to apply it to a
We start this chapter by looking at the concept of quality,
practical situation. For example, a theoretical question
before moving on to the various approaches used to
may require you to evaluate various contemporary
ensure quality in both the product or service produced and
approaches to the management of quality – while a
the systems used by the organisation.
more practical question could ask you to identify and
159
160 6: Quality management PART C OPERATIONS MANAGEMENT
Introduction
In the modern commercial environment, there has been a change in emphasis away from quantity
(produce as much as we can) to quality (produce the best we can). Customers have become more
sophisticated and discerning. Poor quality products and services are no longer tolerated.
Quality applies to both goods and services. Whether a customer goes shopping for food or visits a dentist,
they expect a quality experience. More importantly, quality is increasingly a source of competitive
advantage.
Quality is concerned with 'fitness for purpose'. Quality management is concerned with ensuring that
products or services meet their planned level of quality and conform to specifications.
QUALITY is 'the totality of features and characteristics of a product or service which bears on its ability to
meet stated or implied needs'. (Holmes, 1992)
KEY TERMS
QUALITY MANAGEMENT is concerned with controlling activities with the aim of ensuring that products or
services are fit for their purpose, and meet specifications. Quality management encompasses quality
assurance and quality control.
QUALITY ASSURANCE focuses on the way a product or service is produced. Procedures and standards are
devised with the aim of ensuring defects are eliminated (or at least minimised) during the
development/production process.
QUALITY CONTROL is concerned with checking and reviewing work that has been done. Quality control
therefore has a narrower focus than quality assurance.
(a) Commitment. A commitment to quality is required from top management down to the most junior-
level employees.
(b) Competence. Employees must 'know what they are doing'. Training is important.
(c) Communication. The need for quality, and the benefits of quality, must be communicated
throughout the organisation.
(d) Continuous improvement. Quality involves always looking to 'raise the bar'.
Receiving inspection
Floor or process inspection
Final inspection or testing
PART C OPERATIONS MANAGEMENT 6: Quality management 161
The problem with this 'inspection' approach is that it allows for and often entails built-in waste.
(a) The inspection process itself does not add value. If it could be guaranteed that no defective items
were produced there would be no need for a separate inspection function.
(b) The inspection function itself involves requires resources, both people and facilities.
(c) The production of substandard products is a waste of materials, machine time, human efforts, and
overheads.
(d) The production of defects is not compatible with newer production techniques such as just-in-time
– there is no time for inspection.
(f) In a service industry, damage will have been done to customer relations before inspection takes
place.
Quality control involves establishing standards of quality for a product or service, implementing
procedures that are expected to produce products of the required standard in most cases and monitoring
output to ensure sub-standard output is rejected or corrected.
Most modern approaches to quality have therefore tried to assure quality in the production process,
(quality assurance) rather than inspecting goods or services after they have been produced.
The term 'quality assurance' is used where a supplier guarantees the quality of goods or services they
supply. Quality assurance programmes usually involve a close relationship between supplier and
customer, which may extend to allowing customer representatives to view and/or monitor production
procedures.
Quality assurance emphasises the processes and procedures used to produce a product or service – the
logic being that if these are tightly controlled and monitored the resulting product and service will be high
quality. As quality has been 'built-in', the need for inspection after production should be eliminated.
Section summary
Most modern approaches to quality try to assure quality in the production process (quality assurance)
rather than inspecting goods or services after they have been produced.
Introduction
For any quality policy to be successful a suitable system should be developed and the levels of quality
measured to enable the system's success to be monitored. In recent years a number of approaches to
quality management have been developed.
162 6: Quality management PART C OPERATIONS MANAGEMENT
Plan. Establish:
(b) Procedures or production methods that ought to ensure that these required
standards of quality are met.
Quality auditing involves a systematic inspection to establish whether quality objectives are
being met.
The activities and steps above describe a general approach to quality management. In the following
sections, we will look at some specific methodologies or approaches associated with quality.
2.2.1 SERVQUAL
SERVQUAL was developed in the 1980s by Zeithaml, Parasuraman and Berry as a method of measuring
quality in service organisations. It was primarily concerned with measuring the gap between a customer's
preconceived expectations and the actual experience they receive.
When it was first introduced, SERVQUAL measured ten aspects of service quality – understanding the
customer, tangibles, courtesy, security, credibility, competence, communication, access, reliability and
responsiveness. However in the 1990s the model was refined and is now known as RATER.
Aspect Description
Reliability Employee ability to perform the service dependably and accurately
Assurance Employee ability to inspire confidence and trust in the customer
Tangibles The tangible environment, for example facilities, equipment and staff appearance
Empathy The extent to which a caring, personal service is provided
Responsiveness Employee willingness to help and respond to customer requests
SERVQUAL and RATER are not without their critics. Francis Buttle, for example, noted that the five
aspects are not universals and that the model is not based on established economic, statistical or
psychological theory.
PART C OPERATIONS MANAGEMENT 6: Quality management 163
The scorecard is 'balanced' in the sense that managers are required to think in terms of all four
perspectives, to prevent improvements being made in one area at the expense of another.
The types of measure which may be monitored under each of the four perspectives include the following.
The list is not exhaustive but it will give you an idea of the possible scope of a balanced scorecard
approach. The measures selected will vary considerably with the type of organisation and its objectives.
Perspective Measures
Customer New customers acquired
Customer complaints
Customer satisfaction
Telephone response times
Delivery speeds
Operational: internal operations Quality control rejects
Productivity levels
Speed of producing management information
Streamlining/systems simplification
Operational: innovation and Training days for employees
learning Skills enhancement
Percentage of revenue generated by new products and services
Average time taken to develop new products and services
Financial Return on capital employed
Revenue growth
Cash flow
Earnings per share
The basic approach involves identifying and measuring key aspects of performance, such as: money
spent, inputs purchased, outputs and outcomes achieved.
The relationship between money spent and inputs purchased provides a measure of economy. The
relationship between inputs and outputs provides a measure of efficiency. Comparing outputs with
outcomes achieved provides a measure of effectiveness, eg ten clients serviced (output), nine 'extremely
satisfied' clients (outcome).
Problem Explanation
Conflicting measures Some measures in the scorecard such as research funding and cost reduction
may naturally conflict. It is often difficult to determine the balance which will
achieve the best results.
Selecting measures Not only do appropriate measures have to be devised but the number of
measures used must be agreed. Care must be taken that the impact of the results
is not lost in a sea of information.
Expertise Measurement is only useful if it initiates appropriate action. Non-financial
managers may have difficulty with the usual profit measures. With more
measures to consider this problem will be compounded.
Interpretation Even a financially-trained manager may have difficulty in putting the figures into
an overall perspective.
Too many measures The ultimate objective for commercial organisations is to maximise profits or
shareholder wealth. Other targets should offer a guide to achieving this objective
and not become an end in themselves.
Section summary
Three methods of measuring quality include:
SERVQUAL – this can be used to measure quality in a service organisation. It measures the gap between
customer expectations and their actual experience.
Balanced scorecards – these rate quality across four financial and non-financial perspectives.
Value for money audits – these identify and analyse key aspects of performance which are often related
to economy, efficiency and effectiveness.
Introduction
The development of total quality management (TQM) heralded a new era and philosophy of dealing with
quality. Rather than 'fire-fighting' quality issues, the approach aims to continuously improve quality in all
aspects of the organisation. Customer satisfaction is a key objective of TQM.
TOTAL QUALITY MANAGEMENT (TQM) is the continuous improvement in quality, productivity and
effectiveness obtained by establishing management responsibility for processes as well as output.
KEY TERM
The principles of TQM evolved through a number of management theorists and 'quality gurus', it is
therefore an amalgamation of related but different ideas.
PART C OPERATIONS MANAGEMENT 6: Quality management 165
His 14 points for quality improvement stressed the need for statistical control methods, participation,
education, openness and improvement.
Interpersonal skills
Building relationships
Group interaction and decision-making
Participative management
Free flow of information
Trust
Retention of hierarchical rules and control
Formal procedures for planning and setting objectives
Theory Z combined aspects of US management practice (which Ouchi referred to as Theory A) and
Japanese management practices (Theory J).
Juran emphasised that quality management should aim to ensure that the way in which work is
performed (ie systems and processes) facilitated high quality output. He believed 85% of quality problems
were the result of ineffective systems.
Principle Description
Prevention Organisations should take measures that
prevent poor quality occurring.
Section summary
Total quality management (TQM) is the continuous improvement in quality, productivity and effectiveness
obtained by establishing management responsibility for processes as well as output.
The key principles of TQM are, prevention, right first time, eliminate waste, continuous improvement,
everyone's concern, participation and teamwork/empowerment.
Introduction
The introduction of TQM requires new ideas and methods of managing quality within an organisation. In
particular, relationships between an organisation's departments and its culture are affected.
TQM promotes the concept of the internal customer and internal supplier. The work done by an internal
supplier for an internal customer will eventually affect the quality of the product or service to the external
customer.
Internal customers are therefore linked in quality chains. Internal customer A can satisfy internal
customer B who can satisfy internal customer C who in turn can satisfy the external customer.
Service level agreements have been criticised, however, for over-formalising the relationship between the
internal supplier and internal customer, therefore creating barriers to the development of a constructive
relationship and genuine co-operation between them.
Every person within an organisation has an impact on quality and it is the responsibility of everyone to
get quality right.
Individuals should be encouraged not just to comply with performance standards and procedures, but to
also be proactive improving their performance and the performance of others. This requires the
empowerment of employees (covered in the next section). Customers are better served by employees who
are in a position to make decisions in meeting their needs without having to obtain authorisation from
others.
Teamworking skills are a key competence required of modern management. This recognises that
employees are individuals with individual strengths and weaknesses. They need to work together to
optimise their personal attributes for the collective benefit of the company.
168 6: Quality management PART C OPERATIONS MANAGEMENT
Commitment is also important in achieving quality. This will require management to apply their skill in
persuading and motivating staff into a true commitment to quality. Ultimately it is the employees that will
have to deliver the quality.
4.4 Empowerment
Empowerment recognises that employees are likely to know how best to perform their role and to improve
quality. It contrasts with traditional ‘top down management’ which assumes that management is best
KEY POINT
qualified to make decisions.
(a) Allowing workers to have the freedom to decide how to do the necessary work, using the skills
they possess and acquiring new skills as necessary to be an effective team member.
(b) Making workers responsible for achieving production targets and for quality control.
Empowerment may be more appropriate in service organisations where formal procedures might hamper
the flexibility of employees responding quickly to a customer's needs. The concept of empowerment must
be embraced by management and staff at all levels to be effective.
Kaizen looks for uninterrupted incremental change. It can be implemented by improving every aspect of a
business process in a step-by-step approach, while gradually developing employee skills through training,
education and increased involvement.
(a) The five why process. This process seeks to identify the root cause of a problem by encouraging
the employee to ask ‘Why’ to generate a symptom. This creates issues and questions and the
process repeats until the solution or reason is discovered (often after 5 'Whys'.) This process was
developed by Toyota.
(b) Fishbone diagrams. These are cause and effect diagrams used to analyse all causes (or inputs)
that result in a single effect (or output). A map in the form of a Fishbone is created and the route
of continuous improvement is drawn. Potential problems that may be encountered will ‘splinter’ off
from the path.
Pareto analysis is based on the idea that 80% of an outcome is dependent on only 20% of the
work (inputs or processes). Another way of looking at the rule would be to consider that 20% of
output accounts for 80% of the overall revenue or value. In terms of quality, this means an
organisation should focus its attention on the important 20% of factors that make up 80% of the
overall quality. By doing so it will gain the most benefit from the minimum input.
Some argue that producing higher quality output increases costs, as more expensive resources are likely
to be required to achieve a higher standard.
Others argue that poor quality output will lead to customer dissatisfaction, which generates costs
associated with complaint resolution and loss of revenue as customers move to competitors.
There are four types of quality cost – prevention, appraisal/inspection, internal and external failure.
Prevention and appraisal costs are known as conformance costs, internal failure and external failure costs
are known as non-conformance costs.
(a) Failure and poor quality are unacceptable. The inevitability of errors is not something that an
organisation should accept. The target should be zero defects.
(b) Quality costs are difficult to measure, and failure costs in particular are often seriously under-
estimated. The real costs of failure include not just the cost of scrapped items and re-working
faulty items or placating an unhappy customer or client. There is also all the management time
spent sorting out problems and the loss of confidence between different parts of the organisation
whenever faults occur.
(c) A TQM approach does not accept that the prevention costs of achieving zero defects becomes
unacceptably high. If everyone in the organisation is involved in improving quality, the cost of
continuous improvement need not be high.
(d) If an organisation accepts an optimal quality level that it believes will minimise total quality costs,
there will be no further challenge to management to improve quality further.
(a) Prevention costs and appraisal costs are subject to management influence or control. It is better to
spend money on prevention, before failures occur, than on inspection.
(b) Internal failure costs and external failure costs can be reduced through additional effort on
prevention.
In other words, higher spending on prevention will eventually lead to lower total quality costs. The
emphasis should be on getting things right first time and designing quality into the product or service.
Obtain senior management support and provide them with training on quality
Form a quality steering committee to oversee the implementation
Communicate the change down through the organisation’s hierarchy to obtain employee support
Form quality circles if appropriate
Record all actions taken and monitor progress against expectations
PART C OPERATIONS MANAGEMENT 6: Quality management 171
(a) Lack of management buy-in. Managers continue to monitor, control and punish rather than being
facilitators of open communication and worker involvement.
(b) Tail-off. After the initial enthusiasm, interest and support fades.
(d) Rejection. TQM is not compatible with managers who feel their authority is threatened and make
decisions with the aim of maintaining their position.
(e) General cynicism about quality and its role in fulfilling customer needs.
Briefly explain what in TQM needs to be consistent, and why consistency is important. (4 marks)
Section summary
In a TQM approach, all parts of the organisation are involved in quality issues, and need to work together.
Every person and every activity in the organisation affects the work done by others.
Some organisations formalise the internal supplier-internal customer concept by requiring each internal
supplier to make a service level agreement with its internal customer.
There are four types of quality costs – prevention, appraisal/inspection, internal failure and external
failure.
Introduction
The concept of Kaizen and continuous improvement has led to the development of new management
strategies and processes to handle it. Multinational organisations, often those which are American or
Japanese, have been at the forefront of this development.
Suggestions are encouraged regarding how the product or service produced could be made better, and
how processes and working practices could be improved. Members are encouraged to analyse issues in a
logical way.
Wider issues may also be discussed, as it is recognised that the complete working environment will affect
quality levels. In some organisations this has led to quality circles having input on issues such as health
and safety, employee benefits and bonuses, and training and education programmes.
Rewarding the circle for suggestions that are implemented (eg a share of any savings made).
Providing a budget and support to run the quality circle in terms of room provision, refreshments,
staff to take minutes etc.
Ensuring management are supportive and prepared to act on useful suggestions from the circle.
Management asking the circle for suggestions and comments on specific issues and problems
facing the company, without anticipating the outcomes.
The concept of quality circles has expanded to now include groups drawn from separate organisations but
with a common interest.
By minimising defects, customer satisfaction should improve and this should improve profitability. The
thinking might be summarised as follows.
Yield Profitability
Defect reduction Customer delight
improvement improvement
A key advantage of Six Sigma is that it can be implemented alongside other initiatives such as TQM and
ISO 9000. However, where Six Sigma is different is that it is customer focused, rather than operations
orientated. It looks at strategically critical outcomes that affect customer satisfaction.
The method was first devised by Motorola in the USA in 1985 to help manufacture a virtually defect free
pager. It has been successfully implemented by recognised corporations such as Polaroid, Kodak, and
IBM. However, it was General Electric that propelled it to current prominence and popularity.
(i) The customer sets the quality standard, rather than some manager within the company.
(ii) A focus on performance, reliability, price, delivery, service and transaction processing.
(ii) There is a need to understand what the customer is seeing and feeling as regard the
company's processes.
(iii) Customer knowledge is used to improve company processes and add value.
(i) GE recognises that people are key to creating quality and generating results.
The Tiffinwalla system in Mumbai, India, was singled out by Forbes Magazine as an outstanding example
CASE STUDY
and awarded a Six Sigma grading.
Each day, 175,000 tiffins (lunchboxes) are delivered to offices and schools throughout Mumbai and later
returned home, by approximately 5,000 people called tiffinwallahs. Each tiffin holds a variety of dishes of
food. Each tiffin is collected by a tiffinwallah and taken to one of Mumbai's suburban railway stations,
where they are sorted. They are collected at the destination station and taken to the building.
There is a fairly simple method of coding which manages a very low failure rate. Each tiffinwallah does
not have to deal with too many tiffin boxes. The tiffinwallas make only one error in 16 million
transactions. Statistically this represents 99.999% of correctness, thereby achieving Six Sigma.
Section summary
A quality circle is a team of workers from within the organisation which meets at intervals to discuss
issues relating to the quality of the product or service produced.
The 5Ss is a Japanese approach to quality that focuses on the five aspects of structurise, systemise,
sanitise, standardise and self-discipline.
Six Sigma is a process that is designed to assist organisations to focus on developing and delivering near-
perfect products and services.
Introduction
Lean production is a manufacturing methodology developed originally for Toyota. It is also known as the
Toyota Production System. Its goal is 'to get the right things to the right place at the right time, the first
time, while minimising waste and being open to change'.
Lean production or lean process improvement involves the systematic elimination of waste, such as:
Ohno (an engineer) is generally credited with developing the principles of lean production. He argued that
it eliminated waste and led to improved product flow and improved quality.
Lean production focuses on reducing system response time so that the production system is capable of
rapid change to meet market demands.
PART C OPERATIONS MANAGEMENT 6: Quality management 175
Recent years have seen a renewed interest in lean techniques, particularly since the reduction of
inventory. Dell Computers and Boeing Aircraft have embraced the philosophy of lean production with
great success.
Lean techniques are applicable not only in manufacturing, but also in a service environment. Every
system contains waste (ie something that does not provide value to the customer).
Lean supply chains occur when lean techniques are applied in firms across the chain. This requires a
high degree of trust and coordination. Integrated information systems would be required to ensure each
organisation in the chain is aware of the activities of other chain members.
It is difficult to know whether this is due to shortcomings in the lean philosophy or whether the
techniques involved are being interpreted and applied correctly.
For example, the 5Ss concept should be used with the aim of creating a workplace with real organisation
and order which creates pride by employees in their work, improves safety and results in better quality.
However, in some organisations 5S has become a cleaning and housekeeping exercise only.
Lean techniques should be seen and treated as outward signs of a more fundamental approach to
operations and quality. Real improvements require a change in thinking and in culture – which are
difficult to achieve.
There is often a high initial investment required to achieve lean production. For example in terms of
training employees, acquiring new equipment for processes and re-organising factory floors. If the
organisation is not 100% committed to the change, then it may not make sufficient investment to ensure
success. Even where it does, the benefits achieved may be outweighed by the costs.
Many companies use lean manufacturing and Six Sigma techniques to reduce costs, rather than a
fundamental commitment to eliminating waste and adding value.
As customer requirements often change, flexibility in manufacturing operations is a key feature of world-
class manufacturing.
Three factors Japanese manufacturing organisations focussed on that contributed to world class
manufacturing are:
Team leaders that involved employees’ (team members) in quality issues and developed both their
own and employees problem-solving skills
Tightly integrated value chains with close, productive relationships between supply chain partners
Flexible manufacturing describes the situation where 'economies of scope' make it economical to produce
small batches of a relatively wide range of products using the same machines or production facilities.
This is the opposite of traditional large-scale assembly lines with their emphasis on economies of scale.
Exam alert
Exam questions may require you to associate flexible operations with demand management.
TQM, Kaizen, lean production and the balanced scorecard all feature in papers P2 and E3.
PART C OPERATIONS MANAGEMENT 6: Quality management 177
Section summary
The goal of lean production is 'to get the right things to the right place at the right time, the first time,
while minimising waste and being open to change'.
Introduction
A number of organisations produce quality standards. The most widely used are those published by the
International Organisation for Standardisation (ISO).
The ISO 9000 quality standards have been adopted by many organisations world-wide.
ISO issue standards are applicable to many types of organisation and they are updated periodically.
The ISO 9000:2000 series of standards consists of a number of primary standards: ISO 9000, ISO
9001, ISO 9004, ISO 19011 and ISO 140011.
(a) ISO 9001:2000 contains ISO's current quality management system requirements. This is the
standard you need to use if you wish to become certified (registered).
(b) ISO 9000:2000 and ISO 9004:2000 contain ISO's quality management system guidelines. These
standards explain ISO's approach to quality management presenting definitions and a set of
guidelines for improving performance, but they are not intended to be used for certification
purposes.
(d) ISO 14001 relates to environmental management systems. It specifies a process for controlling
and improving an organisation's environmental performance. Issues covered include:
(i) Planning
(ii) Policies on the environment
(iii) Implementation and operation
(iv) Reviews by management
(v) Checking and taking corrective action
The ISO 9000 standards are process standards, not product standards. Organisations are granted
certified or compliant status on the basis that their processes rather than their products and services meet
ISO 9000 requirements. The logic is that high quality processes ensure high quality output.
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(b) Policies and procedures encourage management by manual, discourage innovation and initiative.
(d) Formal methods may conflict with working practices in small and medium-sized organisations.
The model provides a basis for measurement of 'enablers' (people, leadership, policies, strategies,
processes, partnerships and resources) and 'results' in relation to customers, people, society and
performance indicators.
Criticisms of this and similar schemes include their expense (in terms of time) and the fact that scoring is
largely subjective.
Section summary
ISO certified organisations have had their processes and procedures checked and verified by an
independent auditor.
ISO compliant organisations self-certify that they meet the ISO requirements, however such claims have
not been verified.
Introduction
Quality issues do not just affect production processes. They filter into every part of the organisation
including the maintenance of production equipment. Total productive maintenance or TPM originated in
Japan. It is defined as 'the productive maintenance carried out by all employees through small group
activities'.
(a) Improve equipment effectiveness. The goal should be to examine how the facilities of an operation
are contributing to its effectiveness. Loss of effectiveness could be caused by defects, down-times
and loss of operating speed.
(b) Achieve autonomous maintenance. The employees who use an item of equipment should be
allowed to take on some of the responsibility for its maintenance. Specialist maintenance staff
should be encouraged to take on the responsibility for improving maintenance performance.
PART C OPERATIONS MANAGEMENT 6: Quality management 179
(c) Plan maintenance. Maintenance should be planned, and the frequency and level of preventive
maintenance and standards for condition-based maintenance should be specified.
(e) Achieve early equipment management. This goal is linked to maintenance prevention, by which
the causes of failure and the ease of maintenance of an item of equipment are considered at the
design, manufacture, commissioning and installation stages, ie before the equipment is brought
into operation.
Step 1
Discover what the nature of the failure has been, its possible consequences, and the
reasons why it has happened. Finding out the reason for a failure is not, at this
stage, an in-depth investigation. Being aware of the reason for the failure can,
however, help with making a decision about what the recovery procedure should be.
Step 2
Act by:
(I) Telling people involved what you propose to do about the failure, for example by
keeping customers informed
(ii) Containing the failure in order to stop the consequences from spreading
(iii) Following up to make sure that the containing action has been successful
Step 3
Learn. Use the failure as a learning opportunity, to find out in some depth why the
failure occurred and 'engineering out' the cause to prevent it from happening again.
Step 4
Plan. Operations managers should incorporate the lessons learned from past failures
to plan how they would deal with similar failures in the future. This involves
identifying what failures might occur and their reasons and devising formal
procedures to be followed if and when it occurs.
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(b) Identify core business processes, and rank them in order of priority. Make sure that employees
understand these priorities.
(d) Determine what resources will be needed to carry out the recovery, and make sure that the
resources will be available if and when required.
(e) Communicate with everyone in the organisation and others involved in the recovery process to
ensure they know what they will be required to do in the event of a disaster.
Section summary
Total productive maintenance is a policy that ensures quality is reflected in the maintenance of
production equipment.
Introduction
As explained earlier, TQM focuses on the needs of customers. In order to fully understand TQM we need
to understand how all elements of an organisation work towards the ultimate goal – customer satisfaction.
Ho (1999) devised his TQMEX model to indicate the relationship between quality management and other
aspects of operations management. The model demonstrates how contemporary approaches to quality
may be integrated to achieve a philosophy of quality throughout the organisation.
5S 5S practice
Operations management
The one tool mentioned in Ho’s model that we haven’t covered yet is Business Process Re-engineering
(BPR).
PART C OPERATIONS MANAGEMENT 6: Quality management 181
BUSINESS PROCESS RE-ENGINEERING is the fundamental rethinking and radical redesign of business
processes to achieve dramatic improvements in critical contemporary measures of performance, such as
KEY TERM cost, quality, service and speed. Hammer and Champy (2001).
As the definition states, BPR involves fundamental changes in the way an organisation operates. Other
key words from the definition are ‘radical’, ‘dramatic’ and ‘process’.
(a) Fundamental and radical indicate that BPR assumes nothing: it starts by asking basic questions
such as ‘why do we do what we do’, without making any assumptions.
(b) Dramatic means that BPR should achieve ‘quantum leaps in performance’, not just marginal,
incremental improvements.
(c) A process is a collection of activities that takes one or more kinds of input and creates an output.
For example, order fulfilment is a process that takes an order as its input and results in the delivery
of the ordered goods.
(a) Process reorientation. There should be a focus on resources, tasks and constraints.
(b) Creative use of IT should be explored.
(c) Ambition. Don’t be restricted by current ways of working. Think widely and ambitiously.
(d) Challenge and break rules. Think radically. Old rules may not apply to new processes.
Planning
Internal learning
External learning
Redesign
Implementation
Example of BPR
CASE STUDY
A company employs 25 staff to perform the standard accounting task of matching goods received notes
with orders and then with invoices. A process review established that 50% of employee time was spent
trying to match the 20% of document sets that do not agree.
One way of improving the situation would be to computerise the existing process to facilitate matching.
This would help, but BPR would go further.
A BPR approach may question why any incorrect orders are accepted. To enable incorrect orders to be
identified before being accepted, all orders could first be entered in to a computerised database. When
goods arrive, they either agree to goods that have been ordered (as recorded in the database) or they
don't.
Goods that agree to an order are accepted and paid for. Goods that are not agreed are sent back to the
supplier. Time is not wasted trying to sort out unmatched documents.
Gains would include staff time saved, quicker payment for suppliers, lower stocks, and lower investment
in working capital.
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BPR has become associated with narrow targets such as reductions in staff numbers and other cost-
cutting measures. Some companies, attracted by the latest high-tech gadgetry, believed they could
enhance their performance solely by re-deploying office automation systems (and laying off workers)
rather than through the much harder task of significant organisational process redesign, which may
involve neither IT investment nor redundancies, just the better use of people.
Exam alert
BPR could be examined together with process mapping – redesigning a process requires an understanding
of the process that may best be obtained from a process map.
Section summary
Ho's TQMEX model indicates the relationship between quality management and other aspects of
operations management.
10 Service quality
Introduction
Many of the models and techniques that we have already studied can be applied to the service industry.
We have already seen how SERVQUAL can be used to measure quality in service organisations by
reference to customer expectations. Therefore managing these expectations and the actual service
provided are key to service quality.
SERVICE QUALITY is the totality of features and characteristics of that service which bears on its ability to
meet stated or implied needs.
KEY TERM
Service organisations have a different nature to those that manufacture goods. For example:
Goods have a physical presence, whereas services are intangible and cannot be stored.
Delivery of goods is a separate process to production and purchase and does not involve the
customer. In service industries, delivery is part of the service and customers may be involved in it.
The manufacture of goods does not usually involve face-to-face contact with the customer. In
service industries, there usually is face-to-face contact. This means that the social skills of the
person providing the service will be evaluated by the customer when deciding on the overall quality
of the service.
Manufacturing organisations are usually machine-intensive. Service industries are usually labour-
intensive.
(a) Technical quality of the service encounter (ie what is received by the customer). Was the meal
edible? Was the train on time? Were the shelves fully stocked? Problems of this sort must be
addressed by improving the processes of production and delivery.
PART C OPERATIONS MANAGEMENT 6: Quality management 183
(b) Functional quality of the service encounter (ie how the service is provided). This relates to the
psychological interaction between the buyer and seller and is typically perceived in a very
subjective way.
(ii) Appearance and personality of service personnel For instance, do they seem interested in
the customer and the customer's needs? Are they smartly presented? Do they convey a
positive image?
(iii) Service-mindedness of the personnel For example, do they appear to understand and
identify with the needs of the customer? Do they convey competence? Do they show
willingness to help?
(iv) Accessibility of the service to the customer Do the service personnel explain the service in
language which the customer can understand?
(v) Approachability of service personnel. For instance, do the service personnel appear alert,
interested or welcoming? Or are they day-dreaming, yawning or looking at their watches?
Various authors have tried to identify generic factors that determine a customer's assessment of service
quality. The following is a useful list of 18 service quality factors. (Johnston and Clark, 2001)
The following diagram and table explain some major factors that shape customer expectations.
PART C OPERATIONS MANAGEMENT 6: Quality management 185
Factor Example
Marketing Claims may be difficult to deliver eg an optician advertises that no appointments are
required, but a client has to actually wait 50 minutes for an eye test.
Price Customer expectations usually increase as price increases eg if a hair salon charges
high prices, clients expect a good cut and styling.
Alternatives A good past experience at one service provider is likely to set the standard next time
for an alternative service provider eg a tasty meal at one burger chain is likely to
engender expectations of a similar dining experience when visiting another outlet.
Word of mouth Often this is the most influential source for setting up customer expectations.
Previous This helps the customer develop a clearer view of what to expect. This adds to the
experience challenge faced by the service provider but on the other hand also helps to
moderate the consumers' expectations eg experience of travelling with a certain rail
service may inject a certain sense of reality into what a passenger can expect.
Customer's mood It is inevitable that a customer's mood and attitude is likely to influence their
and attitude expectations eg a guest at a restaurant who has received some good news (got a
promotion or passed an exam etc) is more likely to be tolerant of slow service.
There are various ways in which service quality factors may be classified.
Classifications Comment
Hygiene factors These are very much base line factors. If not present will tend to dissatisfy a
customer, eg a hotel guest will expect proper security but it is unlikely to delight.
Enhancing factors These may partially delight but will not be a source of dissatisfaction if absent eg a
hotel guest is likely to really appreciate friendly staff but might not be dissatisfied if
they are not all that cheerful.
Critical factors These have the potential to delight as well as dissatisfy eg a hotel guest will expect
staff responsiveness.
Neutral factors These usually have little impact on satisfaction eg a hotel guest may be delighted if
a hotel is aesthetically pleasing with nice wallpaper, smart fittings etc, but may well
not miss them if not present.
You have recently been appointed to manage an underground rail system for a major international city.
Required
Classify the 18 service quality factors (from the previous section) in terms of the four key categories;
Hygiene factors; Critical factors; Neutral factors and Enhancing factors. (8 marks)
Exam alert
The concepts of quality, quality assurance and quality management are now well-established in the
business world. Quality proved highly popular as a topic for examination questions in the past, and can be
expected to feature prominently in the future.
Section summary
Service quality is the totality of features and characteristics of that service which bears on its ability to
meet stated or implied needs.
PART C OPERATIONS MANAGEMENT 6: Quality management 187
Chapter Roundup
Most modern approaches to quality try to assure quality in the production process (quality assurance)
rather than inspecting goods or services after they have been produced.
SERVQUAL – this can be used to measure quality in a service organisation. It measures the gap
between customer expectations and their actual experience.
Balanced scorecards – these rate quality across four financial and non-financial perspectives.
Value for money audits – these identify and analyse key aspects of performance which are often
related to economy, efficiency and effectiveness.
Total quality management (TQM) is the continuous improvement in quality, productivity and effectiveness
obtained by establishing management responsibility for processes as well as output.
The key principles of TQM are, prevention, right first time, eliminate waste, continuous improvement,
everyone's concern, participation and teamwork/empowerment.
In a TQM approach, all parts of the organisation are involved in quality issues, and need to work together.
Every person and every activity in the organisation affects the work done by others.
Some organisations formalise the internal supplier-internal customer concept by requiring each internal
supplier to make a service level agreement with its internal customer.
There are four types of quality costs – prevention, appraisal/inspection, internal failure and external
failure.
A quality circle is a team of workers from within the organisation which meets at intervals to discuss
issues relating to the quality of the product or service produced.
The 5Ss is a Japanese approach to quality that focuses on the five aspects of structurise, systemise,
sanitise, standardise and self-discipline.
Six Sigma is a process that is designed to assist organisations to focus on developing and delivering near-
perfect products and services.
The goal of lean production is 'to get the right things to the right place at the right time, the first time,
while minimising waste and being open to change'.
ISO certified organisations have had their procedures and procedures checked and verified by an
independent auditor.
ISO compliant organisations self-certify that they meet the ISO requirements, however such claims have
not been verified.
Total productive maintenance is a policy that ensures quality is reflected in the maintenance of
production equipment.
Ho's TQMEX model indicates the relationship between quality management and other aspects of
operations management.
Service quality is the totality of features and characteristics of that service which bears on its ability to
meet stated or implied needs.
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Quick Quiz
1 List five principles of TQM.
1 ...........................................................................................................................................
2 ...........................................................................................................................................
3 ...........................................................................................................................................
4 ...........................................................................................................................................
5 ...........................................................................................................................................
A Structurise
B Systemise
C Simplify
D Self-discipline
A Has its processes independently checked and verified as meeting the ISO requirements
B Has self-certified the fact that its processes meet the ISO requirements
C Aims to meet the ISO requirements
D Meets ISO 9000 requirements at least 90% of the time.
A Responsiveness
B Integrity
C Communication
D Competence
3 B An ISO compliant organisation self-certifies the fact that its processes meet the ISO requirements.
ISO certified or registered organisations have their claims independently verified.
Answers to Questions
6.1 TQM and consistency
When producing a product or service, consistency means using the same standard of resources and employing
the same methods and procedures (processes). Consistency in processes should result in consistently high
quality output, and a consistently satisfied customer.
In this final chapter on operations Today's business environment demands speed and
management, we turn our attention to efficiency in the delivery of products and services. This
strategies for balancing capacity with changing nature of business has implications for inventory
demand and the management of inventory. management.
Capacity management is concerned with the The just-in-time philosophy, covered in the final section of
organisation's ability to meet the demand for its this chapter, is one approach that minimises holding costs
products or services. Capacity is a limiting factor on how while allowing timely production and delivery of products
much an organisation can produce, and how much it and services.
can earn.
191
192 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT
1 Capacity management
Introduction
Capacity is a measure of what an operation is able to produce within a specified period of time. Capacity
management aims to maximise the returns an organisation achieves on the assets and systems it utilises.
CAPACITY has been defined as the maximum level of value added activity over a period of time that can
be achieved by a process or production unit under normal working conditions.
KEY TERM
Overcapacity or undercapacity can be detrimental to the business activities of an organisation.
1.1 Overcapacity
Overcapacity means resources available for production are not fully utilised.
(a) Resources are underutilised and return on assets is lower than it could be. If an attempt is made to
increase selling prices to improve the return, products and services may become expensive relative
to competitors.
(b) In the service industry it could send out the wrong messages to customers eg a restaurant that is
not full may give that impression that the food is not good.
1.2 Undercapacity
Undercapacity means more production is being demanded than is able to be produced.
(a) If the organisation is unable to satisfy customer demand it is missing out on profits from the
products or services the market was ready to buy. Also, the customer is likely to acquire the
product or service from a rival organisation and the customer may be lost.
(b) In the service industry, undercapacity may result in slower or less comfortable service, reducing
customer satisfaction and customer retention.
Capacity planning aims to balance capacity with the demand for the product or service.
Section summary
Overcapacity means resources available for production are not fully utilised.
Introduction
One important operations management task within an organisation is balancing the amount it is able to
produce (capacity) with the amount it is able to sell (demand).
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 193
Dependent demand is demand that is predictable because it is based on a factor that is known. For
example, an organisation providing school meals can predict the demand for its meals because the size of
each school population is known.
Dependent demand occurs often in manufacturing, where the demand for raw materials and components
can be predicted from the demand for the main product. Materials requirement planning (MRP) is a form
of dependent demand planning and control. However, many organisations and / or operations within
organisations aren’t able to predict demand as easily. They have to make capacity decisions based on
experience and judgement about the likely level of demand.
Fast turnaround time is important for airlines because, by minimising time on the ground, an airline can
maximise the productivity of its planes in the air (ie maximise capacity).
CASE STUDY
To help airlines achieve the benefits of a fast turnaround time, the Airbus A320 family aircraft has the
following features.
(a) Loading
(b) Sequencing
(c) Scheduling
(d) Monitoring and controlling
2.2.1 Loading
Loading is the amount of work allocated to an operating unit. The term was first applied to the allocation
of work to a machine or group of machines, but is applicable to any operating unit (eg a hair salon).
2.2.2 Sequencing
Decisions have to be taken when work comes in about the order in which different jobs will be done or
different orders fulfilled. The sequencing of operations could be on the basis of any of the following.
The preferred sequencing criteria should be the one that optimises operational performance in terms of:
(a) Dependability of delivery (ie meeting the due dates promised to customers)
(b) Speed of delivery (ie minimising the amount of time that jobs spend in the process)
(c) Cost
(d) Minimising idle time in work centres (which is an aspect of cost)
(e) Minimising inventory levels (which is another aspect of cost)
2.2.3 Scheduling
Once work has been sequenced, it might be necessary to prepare a detailed timetable, specifying the
time that jobs should be started and when they should end.
Formal schedules are only needed when detailed planning is necessary to make sure that customer
demand can be met. In operations where demand is unpredictable, scheduling is impracticable, and the
operation must simply react to orders as they arrive, for example petrol stations.
For an operation that processes a large number of jobs, there is a risk that with poor scheduling,
bottlenecks will occur in different parts of the operation at different times.
The terms 'push control' and 'pull control' refer to when control action is taken to manage the flow of
work. With push control, production and inventory levels are forecasted and the focus is on pushing work
through each stage of the process, regardless of whether the next stage is ready to receive it.
With pull control, the focus is on each stage of the process calling for work to be delivered from the
previous process when it is needed. The work is not delivered from the previous process until it is needed.
With pull control, there should be less inventory in the system.
Section summary
There are four planning and control activities associated with balancing capacity and demand, loading,
sequencing, scheduling and monitoring and controlling.
3 Capacity planning
Introduction
Capacity planning aims to balance the capacity of an operation with the demand from customers. The
objective is to maximise both profits and customer satisfaction.
Long-term strategic decisions have to be made about what the capacity of an operation should be, and
investment decisions taken to achieve the planned capacity.
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 195
Capacity planning in the short- and medium-term has several implications for operational performance.
Implication Comment
Cost Costs are affected by planned capacity. When the capacity of an operation exceeds
demand, there will be under-utilised resources and costs will be higher than if
capacity were more closely matched to demand.
Revenue On the other hand, revenues could also be affected by the capacity of an
operation. If demand exceeds the capacity of an operation to meet it, revenues will
be forgone that could otherwise have been earned.
Quality The quality of an operation could be affected by capacity planning. For example, if
an operation varies its capacity by using part-time or temporary staff, the quality of
the product or service might be impaired.
Speed of response The speed of response to demand can be improved either by building up finished
to demand goods inventories (which has a cost) or by providing sufficient capacity to avoid
customers having to queue or to wait (which also has a cost).
Dependability of The closer an operation works to its capacity limit, the less easily will it be able to
supply cope with unexpected disruptions to the work flow. Supply will therefore be less
dependable.
Flexibility The flexibility of an operation, and in particular its ability to vary the volume of
output it can produce, will be improved by having surplus capacity. An operation
working at or close to its capacity limit is much less flexible.
(a) For operations management purposes, demand forecasts should be expressed in terms of units
rather than in terms of sales revenue. For example, for a manufacturing operation it is more
relevant to express demand in terms of labour hours or machine hours.
(b) Forecasts should be as accurate as possible, because capacity will be planned on the basis of the
forecasts.
(c) Forecasts of demand should give some indication of the degree of uncertainty. Where possible, the
variation in demand should be assessed statistically, perhaps on the basis of demand patterns
from the past.
Capacity might therefore be measured either in terms of input resources available or in terms of output
produced.
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Where output is non-standard, any capacity measurement based on output will have to use an average
measure. For example, a doctors' surgery might measure its capacity in terms of being able to treat 400
patients each week, this might be based on the assumption that an average time for treating each patient
is ten minutes. In practice, some patients will need more than ten minutes and some less.
Often, one or more parts of an operation will work at their capacity limit. The parts of an operation that
work at their capacity limit are the capacity constraints for the entire operation. Capacity constraints
limit the total output achievable. They can cause bottlenecks in the work flow and result in unsatisfied
demand. For example, if visitors to an out-of-town shopping centre all use the centre's car park and the
car park is limited to 1,000 spaces, the number of car parking spaces is a capacity constraint for the
centre.
In a manufacturing operation, when demand is lower than capacity, the operation will produce goods for
inventory.
In a service operation, there will be idle resources when demand is low and delays and probably lower
service quality when demand is high.
To achieve this, resources must be flexible. For example, staff numbers might have to be variable and
staff might be required to work overtime or shifts. Variations in equipment levels might also be necessary,
perhaps by means of short-term rental arrangements.
Project-based teams and virtual organisations may help provide the flexibility needed to implement a
chase demand plan.
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 197
The aim of demand management planning is to reduce peak demand by switching it to the off-peak
periods.
The most obvious way of managing demand is through price discrimination. Examples include:
(a) Offering low off-peak fares on trains to encourage some customers to switch their travelling time.
(c) Off-peak holiday prices to build up demand out of the holiday season.
Producers can also use advertising and other marketing tools to attempt to stabilise demand.
Yield management techniques have been evident in airline operations, where the techniques used include:
(a) Price discounting. When demand is expected to be low, an airline might sell a block of tickets at a
very cheap price.
(b) Varying the capacity of different types of service. In an airline operation, this could mean
switching the space in an aircraft from first class or business seats to economy class, or vice versa.
(c) Over-booking. An airline will expect a percentage of its customers who have booked in advance to
fail to arrive for their flight. Airlines therefore tend to book more passengers on to a flight than they
have seats. If more passengers arrive than there are seats, some passengers will be offered
inducements to take a later flight, or will be upgraded to first-class or business class travel.
These systems enable production to switch quickly between orders of small batches of output. This
provides a responsive, customer-focussed service. However, they may be less efficient than production
systems which focus on a single product, as these benefit from economies of scale and specialisation.
198 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT
Benefits of applying queuing theory include the ability to give customers an estimated waiting time, plan
peaks and dips in demand to ensure staffing levels are appropriate, manage demand through
appointment systems and use queuing theory data as benchmarks to compare performance.
3.4.3 Forecasting
Forecasting systems seek to match production with customer demand by anticipating the latter. These
systems rely on accurate customer information and past demand data, which is not always available.
The organisation must also understand demand and its processes well enough to match the two.
Section summary
There are four main ways of planning for capacity, level capacity plans, chase demand plans, demand
management plans and a mix of the other three types of plan.
4 Capacity control
Introduction
Capacity control involves reacting to actual demand and influences on actual capacity as they arise.
(a) Calculate the quantity of materials required, for each type of material, and
(b) Determine when they will be required.
(a) Known future orders, ie firm orders already received from customers, plus
(b) A forecast of other future orders that, with a reasonable degree of confidence, will be received.
The quantities of each type of materials required for the product or service will be defined in its bill of
materials. Estimates of firm and likely demand can therefore be converted into a materials requirements
schedule.
MRP I enables manufacturing organisations to determine when to order material, by working back from
when they will be required for production, and allowing the necessary lead time for production or for
purchasing from the external supplier.
There are numerous benefits to an organisation which uses an MRP I system. For example, it can
reduce its stock levels whilst being able to meet orders, the system can identify and warn of production
problems such as bottlenecks and assist with JIT management by forging close relationships with
suppliers.
MRP II is a computerised system that incorporates a single database used by many different areas of the
organisation. The engineering department, manufacturing function and finance function will all be using
the same version of the bill of materials. All functions work from a common set of data.
MRP II is a sophisticated system that enables optimal inventory control based on the matching of supply
and demand.
Features include:
Production planning
Capacity planning
Forecasting
Purchasing
Order-entry
Operations control
Financial analysis
200 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT
However, MRP II implementations are not always successful. Some potential drawbacks are illustrated in
the following case study.
A family-owned building construction company builds residential and commercial buildings. At any time,
the company is working on about 12 projects.
CASE STUDY
The operations department is organised around project managers, each responsible for between two and
four projects at any time, and a foreman for each site. Full-time employees are organised into work groups
of two, three or four individuals, and each work group has a specialist skill. The company also uses sub-
contractors for many aspects of building work.
One of the projects it is working on is the construction of a new residential estate of 50 houses. The
houses on the estate will be of three different designs. Each design differs in terms of size, layout, window
sizes, roof tile design, electricity supply features, water supply and central heating, furnishings and
kitchen fittings. House buyers also have the option to pay for extra items, such as additional or more
expensive bathroom fittings.
Project managers and site foremen have complained about the MRP II system. They identified the
following issues.
1 The system generates a lot of figures, often using complex formulae (algorithms) to estimate the
required quantities and timing of materials. The figures are produced by production planning staff,
but a large number of people need to be kept informed – the foremen, project managers, possible
sub-contractors and possibly also specialist work teams. This is bureaucratic.
2 The material requirements are estimated by a computer system of the production planning section.
The final users of the information – and of the materials – have no sense of ownership of the
figures. The figures, having been computer-produced, will be difficult to check. Project managers
and foremen etc will probably have no incentive to check the figures to see whether they appear to
make sense.
3 Small hold-ups or difficulties in the building work can have a significant effect on materials
requirements. For example, bad weather could hold up production. Whenever scheduling has to be
changed, there will be a new materials requirements schedule, and this new information will have
to be distributed to all the people affected. This will add to the problems of information over-load.
4 MRP II methods work reasonably well for standardised building, but are not easily applied to one-
off construction work, where materials requirements and scheduling have to be done on a one-off
basis.
It is used to:
Enterprise Resource Planning (ERP) software attempts to integrate all departments and functions of an
organisation in a computer system able to meet the needs of users from across the whole organisation.
An ERP system includes a number of integrated modules designed to support all of the key activities of an
enterprise. This includes managing the key elements of the supply chain such as production planning,
purchasing, inventory control and customer service including order tracking.
ERP has been extended to the growing number of e-business applications, connecting to customers and
supply chain members.
One of the most popular ERP systems has been the R/3 system supplied by SAP. The R/3 system
integrates most of an organisation's business applications and contains sections for manufacturing and
logistics, sales and distribution, financial accounting and human resource management.
ERP has been effective in some situations, for example where it has been implemented as a means of
rationalising and integrating systems where mergers and acquisitions have led to an uncoordinated mix
of systems. ERP also provides efficiencies in supply chain management through facilitating reduced lead
times.
However many ERP implementations have failed to live up to expectations, failing to deliver significant
efficiency gains.
As they cover many areas of an organisation, ERP implementations are relatively expensive. They also
carry significant 'hidden' costs through requiring organisations to change the way they operate. Some
businesses have been restructured simply to fit the restrictions of the ERP software.
Identify the ways that service organisations differ from manufacturing organisations when considering
capacity management. (5 marks)
MRP and ERP are included on the paper P1 syllabus in connection with integrating
accounting functions with other systems.
Section summary
MRP I, MRP II, OPT and ERP systems all include elements of capacity control.
202 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT
5 Inventory management
Introduction
Inventories held in any organisation can generally be classified under four main headings.
Raw materials
Spare parts/consumables
Work in progress
Finished goods
For example, the raw materials of a furniture company would be wood and upholstery. Consumables
would be items such as nails, screws and castors. Work in progress would be partly completed furniture.
Finished goods would be tables, chairs, desks etc ready for sale. Not all organisations will have
inventories of all four general categories.
Inventory control includes the functions of inventory ordering and purchasing, receiving goods into store,
storing and issuing inventory and controlling the level of inventory.
5.2 Controls
There should be controls over the following functions.
One of the objectives of storekeeping is to maintain accurate records of current inventory levels. This
involves the accurate recording of inventory movements (issues from and receipts into stores).
When the inventory levels drops below a predetermined level, an order for a fixed amount is issued to
replenish inventory.
(a) Expensive and medium-cost materials are subject to careful stores control procedures to minimise
cost.
(b) Inexpensive materials can be stored in large quantities because the cost savings from careful stores
control do not justify the administrative effort required to implement the control.
This selective approach to stores control is sometimes called the ABC method whereby materials are
classified A, B or C according to their value. A refers to high value inventory, B to medium and C to low
value inventory. It is based upon the Pareto 80/20 rule which suggests that 20% of the items are likely to
account for 80% of the overall value.
From the perspective of operations management, proper controls should be instituted to minimise the
incidence of losses arising from obsolescence or wastage.
Slow-moving inventories are items which are likely to take a long time to be used up.
204 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT
(a) Costs of storage and stores operations. Larger stocks require more storage space and possibly
extra staff and equipment to control and handle them.
(b) Interest charges. Holding inventory involves the tying up of capital (cash) on which interest must
be paid.
(c) Insurance costs. The larger the value of inventory held, the greater insurance premiums are likely
to be.
(d) Risk of obsolescence. The longer an inventory item is held, the greater is the risk of obsolescence.
(e) Deterioration. When materials in store deteriorate to the extent that they are unusable, they must
be thrown away with the likelihood that disposal costs would be incurred.
(a) Clerical and administrative costs associated with purchasing, accounting for and receiving goods
(c) Production run costs, for stock which is manufactured internally rather than purchased from
external sources
Holding costs
Ordering costs
Stockout costs
Based on an analysis of past inventory usage and delivery times, a series of control levels can be
calculated and used to maintain inventories at their optimum level (in other words, a level which
minimises costs). These levels will determine 'when to order' and 'how many to order'.
(a) Reorder level. When inventories reach this level, an order should be placed to replenish stocks.
The reorder level is determined by considering the rate of consumption and the lead time (lead
time is the time between placing an order with a supplier and the stock becoming available for
use).
(b) Minimum level. This is a warning level to draw management attention to the fact that inventories
are approaching a dangerously low level and that outages are possible.
(c) Maximum level. This acts as a warning level to signal to management that stocks are reaching a
potentially wasteful level.
(d) Reorder quantity. This is the quantity of inventory which is to be ordered when stock reaches the
reorder level. If it is set so as to minimise the total costs associated with holding and ordering
inventory, then it is known as the economic order quantity.
(e) Average inventory. The formula for the average inventory level assumes that inventory levels
fluctuate evenly between the minimum (or safety) inventory level and the highest possible
inventory level (the amount of inventory immediately after an order is received, ie safety inventory
+ reorder quantity).
Exam skills
You need to understand that holding inventories and ordering inventories involve costs and that these
should be minimised and balanced against the risk of stock-outs.
Section summary
Continuous or perpetual inventory is the name for a system that involves recording every receipt and
issue of inventory as it occurs.
Under the ABC method of inventory control materials are classified A, B or C according to their value. A
refers to high value inventory, B to medium and C to low value inventory. It is based upon the Pareto
80/20 rule which suggests that 20% of the items are likely to account for 80% of the overall value.
If inventory levels are too high, holding costs will be incurred unnecessarily.
If inventories are kept low, small quantities will have to be ordered more frequently, thereby increasing
ordering or procurement costs
The overall objective of inventory control is to maintain inventory levels so that the total of holding,
ordering and stockout costs is minimised.
Inventory control levels can be calculated in order to maintain inventory at the optimum level. The three
critical control levels are reorder level, minimum level and maximum level. The Economic Order Quantity
(EOQ) is the order quantity which minimises inventory costs.
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6 Just-in-time (JIT)
Introduction
Just-in-time (JIT) is an approach to operations based on the idea that goods and services should be
produced only when they are needed – neither too early (so that inventories build up) nor too late (so that
the customer has to wait). JIT is also known as 'stockless production' and may be used as part of a lean
production process. In its extreme form, a JIT system seeks to hold zero inventories.
(a) High quality. Any errors in quality will reduce throughput and reduce the dependability of supply.
(b) Speed. Throughput in the operation must be fast, so that customer orders can be met through
production rather than out of inventory.
(d) Flexibility. To respond immediately to customer orders, production must be flexible, and in small
batch sizes (often a ‘batch’ of one).
(e) Lower costs. As a consequence of high quality production, and with a faster throughput and the
elimination of errors, costs will be reduced.
Under JIT, if there is no immediate demand for output the operation should not produce goods.
It is important that organisations which run a just-in-time system develop close relationships with their
suppliers. This is because they rely heavily on the quality of the their goods and on their ability to delivery
on-time as required.
Location of suppliers – suppliers may locate close to the manufacturing plant. This reduces costs
and delivery times.
On-time delivery – close relationships should improve the reliability of suppliers to deliver on-time.
Quality of supplies – the quality of goods supplied should improve as the supplier gets to know the
requirements of the customer better. This means less need to inspect delivered goods, resulting in
fewer production delays and better quality of output.
Low inventory levels – the combination of the three factors above should mean that the
organisation can rely on small, frequent deliveries that match its production schedule.
(a) Work standards. Work standards should be established and followed by everyone at all times.
(b) Flexibility in responsibilities. The organisation should provide for the possibility of expanding the
responsibilities of any individual to the extent of their capabilities. Grading structures and
restrictive working practices should be eliminated as far as possible.
(c) Equality of all people working in the organisation. Equality should exist and be visible. For
example, there should be a single staff canteen.
208 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT
(d) Autonomy. Authority should be delegated to the individuals responsible directly in the activities of
the operation. Management should support people involved in production, not direct them.
(f) Quality of working life. The quality of working life should be improved, through better work area
facilities, job security and involvement of everyone in job-related decision-making.
(g) Creativity. Employees should be encouraged to be creative in devising improvements to the way
their work is done.
(h) Use several small, simple production units. Small machines can be moved around more easily,
and so offer greater flexibility in a shop floor layout. The risk of making a bad and costly
investment decision is reduced, because relatively simple small machines usually cost much less
than sophisticated large machines.
(i) Work floor layout and work flow. Work can be laid out to promote the smooth flow of operations.
Work flow is an important element in JIT, because the work needs to flow without interruption in
order to avoid a build-up of inventory or unnecessary down-times.
(j) Total productive maintenance (TPM). Total productive maintenance seeks to eliminate unplanned
breakdowns and the damage they cause to production and work flow. Staff operating on the
production line are brought into the search for improvements in maintenance.
(k) JIT purchasing. With JIT purchasing, an organisation establishes a close relationship with trusted
suppliers, and develops an arrangement with the supplier for being able to purchase materials only
when they are needed for production. The supplier is required to have a flexible production system
capable of responding immediately to purchase orders.
6.4.1 Kanban
Kanban is the Japanese word for card or signal. A kanban system controls the flow of materials between
one stage in a process and the next. In its simple form, a card is used by an 'internal customer' as a signal
to an 'internal supplier' that the customer now requires more parts or materials. The card will contain
details of the parts or materials required.
The receipt of a card from an internal customer sets in motion the movement or production or supply of
one unit of an item, or one standard container of the item.
The application of JIT to a service operation calls for multiskilling, so that employees can be used more flexibly
and moved from one type of work to another, in response to work flow requirements.
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 209
A postal delivery service has delivery staff allocated to their own routes. However, there may be scenarios
where, say, Route A is overloaded while Route B has a relatively small number of deliveries.
CASE STUDY Rather than have items for Route A piling up at the sorting office, the person responsible for Route B
could finish their route and then help out on Route A.
Teamwork and flexibility can be difficult to introduce because some people are more comfortable with
clearly defined boundaries and responsibilities.
However, the customer is only interested in receiving a timely service.
Some service organisations use a buffer operation to minimise customer queuing or minimise the
likelihood of customer dissatisfaction during queuing.
For example, hairdressers often give clients a shampoo to reduce the impact of waiting for the stylist.
Restaurants may have an area where guests may have a drink if no vacant tables are available
immediately. Such facilities may even encourage guests to plan in a few drinks before dinner thereby
increasing the restaurant's revenues.
Discuss why a level capacity strategy might be difficult for a firm wishing to adopt a just-in-time (JIT)
philosophy. (5 marks)
Section summary
Just-in-time is an approach to operations based on the idea that goods and services should be produced
only when they are needed.
The key elements of JIT are elimination of waste, the involvement of all staff in the operation and
continuous improvement.
Kanban is the Japanese word for card or signal. A kanban control system is a system for controlling the
flow of materials between one stage in a process and the next.
JIT philosophy can be applied to service operations. Whereas JIT in manufacturing seeks to eliminate
inventories, JIT in service operations seeks to remove queues of customers.
210 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT
Chapter Roundup
Overcapacity means resources available for production are not fully utilised.
There are four planning and control activities associated with balancing capacity and demand, loading,
sequencing, scheduling and monitoring and controlling.
There are four main ways of planning for capacity, level capacity plans, chase demand plans, demand
management plans and a mix of the other three types of plan.
MRP I, MRP II, OPT and ERP all include elements of capacity control.
Continuous or perpetual inventory is the name for a system that involves recording every receipt and
issue of inventory as it occurs.
Under the ABC method of inventory control materials are classified A, B or C according to their value. A
refers to high value inventory, B to medium and C to low value inventory. It is based upon the Pareto
80/20 rule which suggests that 20% of the items are likely to account for 80% of the overall value.
If inventories are kept low, small quantities will have to be ordered more frequently, thereby increasing
ordering or procurement costs.
The overall objective of inventory control is to maintain inventory levels so that the total of holding,
ordering and stockout costs is minimised.
Inventory control levels can be calculated in order to maintain inventory at the optimum level. The three
critical control levels are reorder level, minimum level and maximum level. The Economic Order Quantity
(EOQ) is the order quantity which minimises inventory costs.
Just-in-time is an approach to operations planning and control based on the idea that goods and services
should be produced only when they are needed.
The key elements of JIT are elimination of waste, the involvement of all staff in the operation and
continuous improvement.
Kanban is the Japanese word for card or signal. A kanban control system is a system for controlling the
flow of materials between one stage in a process and the next.
JIT philosophy can be applied to service operations as well as to manufacturing. Whereas JIT in
manufacturing seeks to eliminate inventories, JIT in service operations seeks to remove queues of
customers.
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 211
Quick Quiz
1 An organisation is unable to produce enough output to fulfil demand. This is this an example of:
A Overcapacity
B Undercapacity
C Demand-pull production
D Stockouts
2 'A plan to maintain activity at a constant level over the planning period.' This statement defines:
3 Which inventory control level indicates that inventories are nearing a potentially wasteful level?
A Re-order level
B Minimum level
C Maximum level
D Economic order quantity
True
False
A Cards are used to signal that more items of inventory are required
B Stocks are ordered when they reach the minimum level
C Stockouts are commonplace
D Holding costs are maximised
2 C A level capacity plan seeks to maintain constant activity over a planning period.
3 C The maximum level indicates that inventories are nearing a potentially wasteful level.
4 True. A perpetual inventory system can also be referred to as a continuous inventory system.
5 A The main feature of the Kanban system is that cards are used to signal that more items of
inventory are required.
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Answers to Questions
7.1 Capacity management
Service organisations differ from manufacturing organisations when considering capacity management in the
following ways.
• Production and consumption occur at the same time. Inventories of services can't be built up in quieter
times, which makes the balancing of capacity and demand more difficult.
• Greater interaction. The customer plays an active role in the delivery process. Customer service quality is
integral to the customer experience.
• Output is different each time. Each customer service interaction is different in some way eg different
conversation, attitude etc. Achieving a consistently high level of output is more challenging.
• Generally greater reliance on staff. Service delivery depends on the people delivering the service. The
'mood' of staff on the front line shouldn't adversely impact upon the customer experience.
• Intangible output makes measuring the quality level of output more difficult as there is no physical
product to inspect. Obtaining feedback of customer satisfaction is important.
A level capacity strategy involves building up an inventory buffer to enable orders to be met from stores when
demand exceeds capacity.
A Just in Time (JIT) approach involves producing goods when they are needed – eliminating the need to hold
inventory.
The build up of inventory required under a level capacity strategy contradicts the no inventory approach required
under JIT. Therefore, the two approaches are incompatible.
Under JIT, production is driven by immediate demand. The capacity management approach consistent with JIT
is a chase strategy – which involves adjusting production levels to match demand. This would allow nil (or
minimal) inventory, as required under JIT.
Part D
213
214
MARKETING AND BUSINESS STRATEGY
In Part D of this Text we cover the marketing at how marketing plans are organised and managed – and
area of the syllabus. the role of marketing within an organisation.
We start this chapter with an explanation of marketing, The key activities that we are concerned with in this
the marketing concept and the marketing environment chapter are market research, segmentation, targeting and
which organisations operate in. positioning – the marketing strategy.
215
216 8: Marketing and business strategy PART D MARKETING
Introduction
We begin our study of marketing by considering what marketing is and what adopting a marketing
orientation means We consider the marketing concept, as a business philosophy.
Later in the chapter we look at marketing as a core element of an organisation's corporate strategy and
the processes involved in creating a marketing plan.
'Marketing is the management process which identifies, anticipates and supplies customer
requirements efficiently and profitably.'
This definition emphasises the wide scope of marketing, ranging from initial identification of customer
needs by means of research, right through to eventual, profitable satisfaction of those needs. This
definition is important because it stresses the importance of the customer and, more particularly,
customer satisfaction.
Kotler, on the other hand, emphasised the importance of marketing as getting 'the right product or
service to the customer, at the right price, at the right time'.
(a) Soap powder is an example of a fast moving consumer good (FMCG). It is a physical product that
is bought often.
(b) Durable goods are purchased less often and tend to be more expensive than FMCGs. Televisions,
cars and computers are examples of durable goods.
Broadly speaking, the word product can refer to physical goods or services. FMCGs and durable goods
combined are sometimes referred to as consumer goods.
(a) Strategic marketing is tied in with corporate strategy, by identifying which products and markets
the organisation wishes to operate in.
(b) Tactical marketing is focused more on the short term and on particular elements of the marketing
mix.
PART D MARKETING 8: Marketing and business strategy 217
Example: retail
Strategic marketing A fashion retailer decides to open in the capital city of a country it had not
operated in before as it believes there are new, wealthy customers.
Tactical marketing End of season sale to make way for new stock.
Distinguish between strategic and tactical marketing, and provide an example. (4 marks)
1.4 Exchanges
The role of marketing is to identify, anticipate and supply satisfactions to customers, to facilitate
mutually beneficial exchanges.
Customer needs
Identifying
Mutually beneficial
Marketing Anticipating exchange
Supplying
Organisation’s objectives
The organisation as a whole can claim to be 'customer orientated'. Many organisations refer to customer
satisfaction in their statements of corporate purpose (mission statements). But official claims to be
customer orientated are often just claims – with little basis in fact.
218 8: Marketing and business strategy PART D MARKETING
As part of becoming properly ‘customer orientated’, organisations need to seek out gaps in the market
where the organisation or its competitors fail to meet customer demand. They should then produce
appropriate products.
A market-led approach will make what is on sale more appealing to customers. Salespeople will be able
to devote a greater proportion of their time to more productive activities such as developing leads,
providing better customer service and identifying changes in customer requirements.
All good sales presentations focus on the benefits that customers will receive from the company's
product or service.
It assumes that customers will want to buy products that have been produced efficiently.
The comparison between a marketing orientation built around the customer and an orientation built
around production is illustrated in the following diagram.
Perhaps the most well-known example of production orientation was the Model T Ford, one of the
earliest motor cars to be produced for the mass market. Henry Ford famously said that Ford's customers
could have the (mass-produced) Model T in any colour, so long as it was black.
PART D MARKETING 8: Marketing and business strategy 219
Selling is preoccupied with the seller's need to convert their product into cash. Marketing is concerned
with satisfying the needs of the customer by means of the product and the whole cluster of things
associated with creating, delivering and finally consuming it.
Customers of banking services generally have expectations that their accounts will be updated efficiently
and effectively, over a period of time, so that they have access to funds. They may also have other needs.
CASE STUDY
(a) Traditional 'western' banking
Banks like to offer other products to their customers, so that a customer with a current account
may also open a savings account. The bank is able to use the money to lend, at higher interest
rates, to other customers, thereby earning a profit. Competition between banks is often based on
interest rates.
The classic banking model is held by some Muslims to contradict certain tenets of Islam (such as
the payment of interest). Many banks are now able to structure lending transactions in a fashion
that is acceptable to Islam.
In both cases (a) and (b) the bank is providing a service and, over the long term, engaging in a
relationship with its customers.
Compare and contrast product orientated organisations and production orientated organisations.
(4 marks)
A 'pull' approach on the other hand, aims to produce a product that consumer demand will pull into retail
outlets. Product promotion is shared between the manufacturer and final seller.
220 8: Marketing and business strategy PART D MARKETING
(b) It involves strategy. A company must select the markets it intends to sell to and the products or
services it will sell. These selections are strategic decisions.
(c) It involves tactics. Marketing tactics can be considered as the 7Ps of the marketing mix.
Exam skills
The syllabus refers to the marketing concept as a business philosophy. Therefore when answering
questions in this area you need to demonstrate that you understand 'marketing' means much more than
the traditional view of 'advertising' and 'public relations'.
In May 2012, a 5 mark exam question was set that required marketing principles and practices to be
applied to a public sector organisation. This was followed by a similar 10 mark question in November
2012 where the application was in relation to Government Policy.
Section summary
Marketing is the process of planning and executing the concepts of pricing, promotion and distribution of
ideas, goods and services in order to create exchanges that satisfy individual and organisational
objectives.
The marketing concept is a business philosophy which attempts to match goods to consumer needs.
A production orientation may be defined as the management view that success is achieved through
producing goods or services of optimum quality and cost.
Under a sales orientation the tendency is to make the product and then actively and aggressively sell it.
Introduction
All organisations exist in, interact with and are influenced by factors in their environment. It is
important for organisations to identify and monitor these factors as they often have a direct effect on the
performance of the business.
The macro-environment includes all factors that can influence the organisation, such as the PESTEL
factors explained in the next section. The macro-environment is generally out of the organisation’s control.
The micro-environment is comprised of factors specifically related to the organisation, such as the
organisation’s customers and suppliers. The organisation can have some influence over these factors.
The internal environment refers to factors within the organisation, such as its assets, employees and
finance. These factors are able to be controlled by the organisation.
PART D MARKETING 8: Marketing and business strategy 221
PESTEL factors
Political Economic Social/Cultural Technological Ecological Legal
These factors influence the organisation in many ways. However in marketing, we are particularly
interested in how they impact on markets and customers.
Environment
(PESTELfactors)
Company
Customers
Suppliers
Competitors
For example, political factors may influence the market for financial services by encouraging customers to
take out certain types of investment. Economic factors may influence customers' buying power. The
following table shows the type of impact on customers.
business. Government policy could give
Political instability could lead to warfare or civil consumers more rights in relation to business.
unrest.
Economic factors Ultimately, this determines consumers’ effective
These include overall rate of economic growth, demand for products and services. Uncertainty
inflation, interest rates, exchange rates, consumers about the future may lead to more saving and
propensity to save. less spending. General prosperity may lead to
more spending on luxury items.
Social/cultural factors Demographic factors suggest the size and
Demography relates to the composition of the purchasing power of customer groups. Some
population, where people live, social classification. products may indicate high status.
Culture relates to people's values and beliefs. There Culture has significant consequences for the
may be many subgroups (subcultures) within a acceptability of marketing communications
culture. messages, attitudes to products (eg alcoholic
drinks), attitudes towards purchasing, and so on.
222 8: Marketing and business strategy PART D MARKETING
vegetables. Natural disasters are a business
Natural climatic impacts, such as flooding, opportunity for insurance companies, but also
earthquakes and so on. those supplying aid and construction companies.
As well as considering the physical
environment, we should consider customers'
attitudes to it, as a developing cultural factor
with an influence on political decision-making.
Legal factors Do legislation and judicial decisions increase
The law affects ways of doing business. the customer's rights?
Specific laws exist for particular areas of Particular classes of customer may be
economic activity. protected in some cases (eg funeral services)
Are customers increasingly willing and able to
take legal action?
Exam skills
Exam questions may require you to evaluate the environment an organisation operates in. You could use
the PESTEL factors as headings and generate ideas for each of them. This way you can earn marks
quickly and demonstrate good breadth of knowledge.
(a) The areas of the organisation that have strengths that should be exploited by suitable strategies
(b) The areas of the organisation that have weaknesses which need strategies to improve them.
The strengths and weaknesses analysis is intended to shape the organisation’s approach to the external
world. For instance, the identification of shortcomings in products could lead to a programme of product
development.
Opportunities
Threats
(a) What threats might arise to the company or its business environment?
(b) How will competitors be affected?
(c) How will the company be affected?
(a) The organisation can develop resource-based strategies which enable the organisation to extend
the use of its strengths. This is common in retailing, for example, as supermarket chains extend
their own brands from food to other areas.
(b) The business can develop positioning-based strategies. In other words identifying what
opportunities are available and what the firm has to do exploit them.
Section summary
An organisation's marketing environment can be analysed into political, economic, social, technological,
ecological and legal factors (PESTEL).
Introduction
In this section we look at how an organisation develops and implements a marketing plan. The process
begins by considering what the overall corporate strategy is – the marketing plan is driven by the overall
corporate strategy.
Corporate Marketing
Set objectives For the organisation as a whole: eg For products and market: eg increase
increase profits by X%. market share by X%; increase turnover.
Internal appraisal Review the effectiveness of the Conduct a marketing audit. A review of
(strengths and different aspects of the marketing activities. Does the organisation
weaknesses) organisation. have a marketing orientation?
224 8: Marketing and business strategy PART D MARKETING
Corporate Marketing
External appraisal Review political, economic, social, Review environmental factors as they affect
(opportunities and technological, ecological factors customers, products and markets.
threats) impacting on the whole
organisation.
Gaps There may be a gap between The company may be doing less well in
desired objectives and forecast particular markets than it ought to.
objectives. How should the gap be Marketing will be focused on growth.
closed?
Strategy Develop strategies to fill the gap: eg A marketing strategy is a plan to achieve the
diversifying, entering new markets. organisation's objectives by specifying:
Resources to be allocated to marketing
How those resources should be used
In the context of applying the marketing
concept, a marketing strategy would:
Identify target markets and customer
needs in those markets
Plan products which will satisfy the
needs of those markets
Organise marketing resources, so as to
match products with customers
Implementation Implementation is delegated to The plans must be put into action, eg
departments of the business. advertising space must be bought.
Control Results are reviewed and the Has the organisation achieved its market
planning process starts again. share objectives?
Section Content
The executive summary This is the finalised planning document with a summary of the main goals
and recommendations in the plan.
Situation analysis This consists of a SWOT analysis and forecasts.
Objectives and goals What the organisation is hoping to achieve, or needs to achieve, perhaps in
terms of market share or 'bottom line' profits and returns.
Objectives should be SMART (Specific, Measureable, Achievable, Realistic
and Time-bound).
Marketing strategy This considers the selection of target markets, the marketing mix and
marketing expenditure levels, as described in the preceding table.
Strategic marketing plan Three to five or more years long
Defines scope of product and market activities
Aims to match the activities of the organisation to its distinctive
competences
Tactical marketing plan One year time horizon
Generally based on existing products and markets
Concerned with marketing mix issues
PART D MARKETING 8: Marketing and business strategy 225
Section Content
Action plan This sets out how the strategies are to be achieved.
Marketing mix strategy
– The product – People
– The price – Processes
– Place (distribution) – Physical evidence
– Promotion (advertising etc)
The mix strategy may vary for each segment.
Budgets These are developed from the action programme.
Controls These will be set up to monitor the progress of the plan and the budget.
To summarise, the following diagram shows how marketing planning fits into the corporate plan.
Section summary
An organisation's marketing plan is driven by and must therefore be consistent with its corporate
strategy.
226 8: Marketing and business strategy PART D MARKETING
4 Marketing strategy
Introduction
In this section we look at marketing strategy – in other words how the organisation decides which
markets to attack and how to position itself within each market. The key activities in this process are
market research, market segmentation, targeting and positioning.
Market research is the initial stage in which the organisation obtains data about its customers and their
needs.
A market segment is a group of customers with similar characteristics who can be targeted with the same
marketing mix. Segmentation bases can include objective classifications (eg age) as well as more
subjective approaches such as lifestyle or attitudes.
Having analysed the attractiveness of a segment, the organisation chooses one or more target markets.
Market positioning is the act of designing the company's offer and image so that it occupies a distinct
and valued place in the target customer's mind.
Example
Example
In some studies, the researchers have a particular question they want to test. The purpose
of some research may be to see if it is worth doing further research.
Collecting data
Example
Example
The type of analysis depends on the type of research. Not all research is quantitative with
statistical validity. The emphasis on statistical assumptions is important – statistics can be
misunderstood and misused.
Example
The results of the research are written up and presented in a report to the client.
Quantitative data enables measurement. The purpose is to measure the response of a sample of
consumers, on the assumption that measurable conclusions can be drawn from it. An example could be a
KEY POINTS
survey of structured questionnaires sent out to a sample of a population.
Qualitative data is not measurable, but it is useful to get people to say what they feel and think, as
opposed to giving relatively simple answers to unstructured questions.
Secondary data may be generated by sources internal or external to the organisation. It is termed
secondary because its intended use is not the specific research the organisation is using it for. Secondary
KEY POINT
data is usually gathered before primary data as it is often cheaper to collect and is used to guide the
primary research. It is not normally sufficient for research purposes by itself.
Secondary data
Source Uses
Internal
From existing information systems
Accounting data
Customer databases Before primary research to give guidance
Data produced by other departments (eg complaints) Instead of expensive primary research –
External some questions may already be answered
Published statistics from government, professional/ Some information can only be acquired via
trade bodies secondary data
Review of journals Where primary research is not possible
Research already collected by market research
agencies can be purchased, eg Nielsen Index on
grocery chains and random surveys
Primary data may be collected from sources internal or external to the organisation and may be
qualitative or quantitative in nature. Primary data is collected for a specific research purpose.
228 8: Marketing and business strategy PART D MARKETING
Primary data
Data collection method Comment
Questionnaires, such as the following. A number of precise questions requiring precise responses.
Post surveys Ensuring questions are free of ambiguity is absolutely vital.
Prepare a macroeconomic forecast – what will happen to overall economic activity in the
relevant economies in which a product is to be sold.
Prepare an industry sales forecast – what will happen to overall sales in an industry based
on the issues that influence the macroeconomic forecast.
Prepare a company sales forecast – based on what management expect to happen to the
company's market share.
What customers are currently doing in the market (industry sales data, company
sales data)
What customers have done in the past in the market (past-sales analysis)
Prepare an income forecast – based on the information created in Steps 1-4. Income is
dependent on forecasted demand and prices.
Unfortunately, sales people may try to forecast low sales if these forecasts will form the basis of their
future sales targets. On the other hand, marketing executives may provide over-optimistic forecasts to
help gain approval for the project or motivate the sales force.
MARKET SEGMENTATION may be defined as the subdividing of a market into distinct and increasingly
homogeneous subgroups of customers, where any subgroup can conceivably be selected as a target
KEY TERM market to be met with a distinct marketing mix.
Although the total market consists of widely different groups of consumers, each group consists of people
(or organisations) with common needs and preferences, who perhaps react to 'market stimuli' in much
the same way. Each market segment can become a target market for an organisation, and would require
a unique marketing mix if the organisation is to exploit it successfully. The organisation can then position
its offer to account for the roles of each segment.
Demographic, (geographical area, age, gender, family lifecycle stage – see below)
Situational and end-use (products being bought at different times or for different uses such as for
work or leisure)
Level of income
Occupation
Education
Religion
Ethnicity
Nationality
Socio-economic (social class – A Upper middle class, B Middle class, C1 Lower middle class, C2
Working class, D subsistence)
Buyer behaviour
Psychological (lifestyle – see below)
PART D MARKETING 8: Marketing and business strategy 231
Demographical segmentation considers a number of factors such as gender and stage in family lifecycle.
For example, individuals and families may be categorised as bachelor, newly married couple, full nest (i,
ii and iii) and empty nest (i and ii).
Bachelors (unmarried males) are considered to be the most financially well-off and may be frequent
purchasers of cars, holidays and expensive kitchen equipment.
Newly married couples still have some disposable income but their priorities change.
The full nest category describes most families. Those in the full nest category are often the least
financially well-off as much of the family income is spent on housing and raising children. Categories ii
and iii describe families becoming better off as the children age and perhaps both partners work. As
incomes rise, the products purchased become less practical and more luxury.
The final category of empty nest describes two possible situations in later life. Those in the empty nest i
category have a good level of income and can spend on expensive goods and holidays. ‘Empty nest ii’
describes people with very little disposable income, for example those living on just the state pension and
struggling to get by. Purchases are limited to necessitates such as food and medicines.
Lifestyle segmentation deals with the person as opposed to the product and attempts to discover the
particular lifestyle patterns of customers. Lifestyle refers to 'distinctive ways of living adopted by
particular communities or subsections of society'. It involves combining a number of behavioural factors,
such as motivation, personality and culture.
Lifestyle categories
Upwardly mobile, These individuals seek a better and more affluent lifestyle, principally through
ambitious better paid and more interesting work, and a higher material standard of living. A
customer with such a lifestyle will be prepared to try new products.
Traditional and Here, compliance and conformity to group norms bring social approval and
sociable reassurance to the individual. Purchasing patterns will therefore be 'conformist'.
Security and status This group stresses 'safety' and 'ego-defensive' needs. This lifestyle links status,
seeking income and security. It encourages the purchase of strong and well known
products and brands, and emphasises those products and services which confer
status and make life as secure and predictable as possible. Products that are well
established and familiar inspire more confidence than new products, which will
be resisted.
Hedonistic This lifestyle places emphasis on 'enjoying life now' and the immediate
preference satisfaction of wants and needs. Little thought is given to the future.
Criteria Comment
Can the segment be It might be possible to conceive a market segment, but it is not necessarily easy
measured? to measure it. For example, with a segment based on people with a conservative
outlook to life, can conservatism of outlook be measured by market research?
Is the segment big There has to be a large enough potential market to be profitable.
enough?
232 8: Marketing and business strategy PART D MARKETING
Criteria Comment
Can the segment be There has to be a way of getting to the potential customers via the organisation's
reached? promotion and distribution channels.
Do segments respond If two or more segments are identified by planners, but each segment responds in
differently? the same way to a marketing mix, the segments are effectively one and the same.
Consequently there is no point in distinguishing them from each other.
Can the segment be Do the identified customer needs, cost less to satisfy than the revenue they earn?
reached profitably?
Is the segment The stability of the segment is important, if the organisation is to commit huge
suitably stable? production and marketing resources to serve it. The organisation does not want
the segment to 'disappear' next year. Of course, this may not matter in some
industries.
Company characteristics – type of business, the market they operate in, and their size
Expectations – what benefit does the company expect to get out of the product? ie reliability,
quality, serviceability, support and safety
Specialists can be used for each of the organisation's major segments. For example, small business
counsellors can be employed by banks to deal effectively with small organisations. A computer
consultancy can have specialist sales staff for, say, shops, manufacturers, service industries and local
government authorities. This builds competences and establishes effective marketing systems.
The total marketing budget can be allocated proportionately to each segment and the likely return from
each segment. This optimises return on investment.
The organisation can make small adjustments to the product and service offerings and to the promotional
aspects for each segment. This again promotes efficient use of resources.
The organisation can try to dominate particular segments, therefore gaining competitive advantage.
Advantages created may function synergistically, promoting improved competitive ability – in other words,
the outcome is more than the sum of its parts.
The product range can more closely reflect differences in customer needs. Marketing relies on
responsiveness to the consumer. When this is improved, benefits can flow.
PART D MARKETING 8: Marketing and business strategy 233
Identify and briefly explain five benefits that a company may obtain through market segmentation.
(10 marks)
For decades, marketing has been youth-focused. But the fact is, 90 million Americans are 50 and over –
CASE STUDY
that's 42% of the adult population of the U.S. And during the next decade that number will grow by 22
million.
'Small-business owners who start recognising the needs and preferences of middle-aged and older
consumers have the chance to gain an advantage over larger firms’, says Dick Stroud.
234 8: Marketing and business strategy PART D MARKETING
Stroud is the founder of 20plus30, a London-based marketing consultancy. He spoke recently with
columnist Karen E. Klein, edited excerpts of their conversation follow.
'When talking about older people, the U.S. media and marketing industry uses the term 'boomers.' Europe
has adopted the term '50-plus.' These groups represent a very large number of potential customers.
During the next decade, their numbers will increase six times faster than their children and
grandchildren's age group of 15- to 34-year-olds.
'The other reason why the over-50s are so important relates to their purchasing power. Older consumers
are the primary purchasers of transportation, healthcare, housing, food, pensions, and personal insurance.
More than half of all cars purchased by an average American household occur after the head of the
household turns 50; and they are big spenders on vacations and travel.
To market to this group effectively, business owners should decide what segment of the over-50
population is appropriate to their product or service. This could be done on the basis of geography,
income, lifestyle, gender, or any number of other factors. Then, research is needed to understand what
the target customers really want.
The most dangerous stereotype is to view all over 50s as a single group. The next mistake is to believe
any of the nonsense about older people being averse to trying new brands, not wanting to use technology,
or not seeking new life experiences. None of these assumptions is substantiated by research.
The Internet is a really important marketing tool for this group. The physiological effects of aging need to
be considered here – image size, colour, contrast and website structure are all important.
I think the bottom line is that smaller companies are already leading the way in marketing to this demographic
and they're going to continue to do so. For example, there are an awful lot of small travel companies that
focus almost exclusively on 50-plus customers because they do spend a lot on travel. They have found,
maybe by accident, that this is a growth market for them, and they've become very successful at it.
I've also seen this in the insurance industry. Real estate, with the amount of people who sell their
property and move as they reach this age group, is another huge sector. But there are lots of other ways
to think about it, if business owners get creative and pay attention.
4.6 Positioning
Market position refers to how customers perceive a brand or product relative to other brands or products.
When positioning their products and services, most organisations want to achieve a clear, unique, and
positive position, such as the cheapest supermarket or highest quality vehicle manufacturer.
(a) Many products are, in fact, very similar, and the key issue is to make them distinct in the
customer's mind.
(b) Few products occupy a market space on their own. Inevitably they will be positioned in relation to
competing products and companies.
(c) People remember 'number 1', so the product should be positioned as 'number 1' in relation to a
positioning variable.
Development Comment
There is a growing awareness For example, the same customers of a retail bank can be segmented by
that consumers should be their account profile, for the purpose of product cross-selling, by their
segmented according to the attitudes to risk-taking for the purpose of delivering advertising messages
purpose of the segmentation. and by socio-economic type for the purpose of selecting a marketing
medium.
There is growing interest in Customer information on a database is analysed in order to identify
customer database analysis, segments or patterns of behaviour. This technique, known as 'data
and the idea of 'letting the mining' is likely to increase in significance as e-commerce grows in
data speak for itself'. popularity.
There is growing emphasis on Consumer attitudes and needs and lifestyles (as distinct from 'hard data'
segmentation by 'soft' data. such as age, lifestyle, socio-economic grouping, and so on).
There is a growing use of sub- Consumers within a particular segment can be sub-divided into different
segmentation or 'hybrid segments, and each sub-segment is targeted in a different way.
segmentation' methods.
Computer models are used. These will discover suitable additions to a product line, that will appeal
to a separately-distinguished market segment.
Products
Existing New
Market Product
Existing Penetration Development
1 4
Markets
Market
New Diversification
Development
16
2
The numbers in the quadrants are an approximate indication of the risk attached to each strategy.
Diversification is the riskiest.
(a) Market penetration involves increasing sales of the existing products in existing markets.
(b) Market development entails expansion into new markets using existing products.
(c) Product development involves the redesign or repositioning of existing products or the introduction
of completely new ones in order to appeal to existing markets.
(d) Diversification involves producing new products for new markets. It is much more risky than the
other three because the organisation is moving into areas in which it has little or no experience.
236 8: Marketing and business strategy PART D MARKETING
Identify and explain Ansoff's possible strategies for products and markets as shown in his matrix.
(4 marks)
Broad Cost
target leadership Differentiation
You should already understand the terms cost leadership and differentiation. Porter suggests that these
strategies can be applied in a broad or narrow range of the market.
Two critical success factors (such as price and quality) are identified and the current market is mapped.
Price
C
A
Quality
A, B and C are products in the market. The gap between A and B suggests a gap in the market for a low
to mid range product in terms of price and quality.
PART D MARKETING 8: Marketing and business strategy 237
Section summary
Market research is used to determine the characteristics of markets, suggest opportunities for products
and selling approaches and to suggest segments.
Market research information can help forecast future sales levels.
Market segmentation involves subdividing a market into distinct and increasingly homogeneous
subgroups of customers which may be selected as a target market to be met with a distinct marketing
mix.
Market position refers to how customers perceive a brand or product relative to other brands or products.
Market penetration involves increasing sales of existing products in existing markets.
Market development entails expansion into new markets with existing products.
Product development involves the redesign or repositioning of existing products or the introduction of
completely new ones in order to appeal to existing markets.
Diversification involves producing new products for new markets.
238 8: Marketing and business strategy PART D MARKETING
Chapter Roundup
Marketing is the process of planning and executing the concepts of pricing, promotion and distribution of
ideas, goods and services in order to create exchanges that satisfy individual and organisational
objectives.
The marketing concept is a business philosophy which attempts to meet consumer needs.
A production orientation may be defined as the management view that success is achieved through
producing goods or services of optimum quality and cost.
Under a sales orientation the tendency is to make the product and then actively and aggressively sell it.
An organisation's marketing environment can be analysed into political, economic, social, technological,
ecological and legal factors (PESTEL).
An organisation's marketing plan is driven by and must therefore be consistent with its corporate
strategy.
Market research is used to determine the characteristics of markets, suggest opportunities for products
and selling approaches and to suggest segments.
Market segmentation involves subdividing of a market into distinct and increasingly homogeneous
subgroups of customers which may be selected as a target market to be met with a distinct marketing
mix.
Market position refers to how customers perceive a brand or product relative to other brands or products
Market development entails expansion into new markets with existing products.
Product development involves the redesign or repositioning of existing products or the introduction of
completely new ones in order to appeal to existing markets.
Quick Quiz
1 Which type of marketing involves identifying the products and markets the organisation wishes to operate
in?
A Mass marketing
B Target marketing
C Strategic marketing
D Tactical marketing
3 According to Ansoff, which approach should be taken when introducing a new product to an existing
market?
A Market development
B Product development
C Market penetration
D Diversification
1 ...........................................................................................................................................
2 ...........................................................................................................................................
3 ...........................................................................................................................................
4 ...........................................................................................................................................
5 ...........................................................................................................................................
3 B According to Ansoff, product development should be undertaken when introducing new products
into an existing market. This means making sure the product will be acceptable to the market.
4 Geographical area, age, gender, income level, occupation – others may be equally valid.
5 A Data mining involves analysing a database to identify new information such as behavioural
patterns of customers.
Answers to Questions
8.1 Strategic and tactical marketing
Strategic marketing covers long-term decisions such as which market to operate in.
Example: a retailer decides to set up an outlet in a new country.
Both production and product orientated organisations place little emphasis on market research or customer
needs – and producing products takes precedence over identifying customers.
The table below contains some examples of benefits. You may have thought of others.
Product development – changing existing products or introducing new ones into existing markets.
Once an organisation has formed its overall different mixes are required due to the differing nature
marketing strategy work can begin on an of products and services.
action plan which consists of the marketing
Once the action plan has been developed, the
activities required for the strategy to be successful.
organisation's message needs to be communicated. This
The key activities are centred around the traditional can be achieved in a myriad of ways, the choice of which
4Ps of the marketing mix (for products) and the 7Ps depends on whether a consumer or another business is
of the extended marketing mix (for services). The the subject of the marketing campaign.
243
244 9: Marketing plans, branding and communications PART D MARKETING
Introduction
Once an organisation has determined which market segments to attack and which strategies it should
use, the next stage in the marketing plan is to develop and action plan.
Action plans are usually based around what is known as the marketing mix. Kotler and Keller (2006)
define the marking mix as 'the set of controllable variables and their levels that the firm uses to influence
the target market'.
These variables should be carefully considered as each will directly affect the success of failure of the
marketing effort.
Media and public spaces are full of advertisements such as posters, TV ads, pop-up ads on websites,
even text messages on mobile phones. In marketing terminology these are known as promotion (or
marketing communications).
Many of these messages aim, to persuade people to want to purchase certain products or services.
People are trained to produce and deliver these products or services to places where we can buy them.
Sophisticated processes might be involved in production and managing the sale. Delivery is also designed
and managed.
For a service (which by its nature is intangible), sometimes we require physical evidence that the service
is to be provided. For example, a letter or guarantee for building work or testimonials or references to
reassure potential customers. The price we pay is not arbitrary – it has been thought through. Phrases
such as 'that was good value for money' suggest that price and value are important in buying decisions.
In the paragraphs above, seven words or phrases beginning with 'p' have been emboldened. These form
what is known as the extended marketing mix. Traditionally, the marketing mix was the 'four Ps'
(product, price, place, promotion). Three extra 'P's have been added to describe the issues in service
industries (eg for a restaurant: people waiters, processes the cooking process, place the physical
environment of the restaurant).
(a) Customer value is the customer's estimate of how far a product or service goes towards satisfying
their need(s).
(b) Every product has a price, and so the customer makes a trade-off between the expenditure and
the value offered.
(c) According to Kotler a customer must feel that they get a better deal from buying an item than by
any of the alternatives.
Products can be classified as consumer goods or industrial goods. Consumer goods are sold directly to
the person who will ultimately use them. Industrial goods are used in the production of other products.
KEY POINTS
Consumer goods can be classified as follows.
Convenience goods Weekly groceries are a typical example. There is a further distinction
between staple goods (eg bread and potatoes) and impulse buys, like the
bar of chocolate found at the supermarket checkout. Brand awareness is
extremely important in this sector.
Shopping goods These are the more durable items that you buy, like furniture or washing
machines. This sort of purchase is usually only made after a good deal of
advance planning and shopping around.
Speciality goods These are items like jewellery or the more expensive items of clothing.
Unsought goods These are goods that the customer did not realise they needed! Typical
examples are new and sometimes 'gimmicky' products, such as 'wardrobe
organisers', or fire resistant car polish!
Installations, eg major items of plant and machinery like a factory assembly line
Accessories, such as PCs
Raw materials, for example plastic, metal, wood, foodstuffs and chemicals
Components, eg the Lucas headlights on Ford cars, the Intel microchip in most PCs
Supplies, such as office stationery and cleaning materials
246 9: Marketing plans, branding and communications PART D MARKETING
Product attributes
The core/generic product is those benefits that all the products in the category would have – all cars, for
example, provide transport.
KEY POINTS
The augmented product is the core product plus extra benefits that differentiate it from other products in
the category. These might include warranty, delivery, installation, after-sales support.
Many products are marketed at the augmented product level – the total package of the customer's
experience of purchasing and consuming the product/service is relevant. The expected product level is
also important, because of the potential for customers to be dissatisfied (by disappointed expectations) or
delighted (by exceeding expectations). The potential product is important in providing the marketing
organisation with future avenues to develop the product (and marketing message) in order to stay
competitive and 'fresh' in the market. Product issues in the marketing mix will include such factors as
design (size, shape), after-sales service (if necessary), features, packaging, quality and reliability.
A company's product range (or product portfolio, assortment or mix) is all the product lines and items that
the company offers for sale.
KEY POINT
Introducing variations in models or style (eg a paint manufacturer introducing different colours,
types and pot sizes)
Differentiating the quality of products offered at different price levels (eg 'premium' paints and
'value' paints)
Developing associated items (eg a paint roller and brushes, paint trays, colour charts)
Developing new products with little technical or marketing relationship to the existing range (eg
wallpaper and DIY accessories – or something completely different)
Managing the product range also raises broad issues such as:
What role a product should play in the range. ('Flagship' brand? Profit provider? Niche filler? New
market tester/developer? Old faithful, retaining customer loyalty?) The roles of products in the mix
should create a balanced range, with sufficient cash-generating products to support cash-using
(declining or new/market-developing) products
How far products should be integrated within the brand image and be recognisable as part of the
brand family
Marketing is not an exact science and there is no definitive approach or technique which can determine
how resources should be shared across the product range. There are, however, techniques which can aid
decision making. Ultimately the burden of the decision is a management responsibility and requires
judgement, but tools such as the BCG matrix and the product life cycle can help the decision-making
process.
The BCG matrix classifies products or brands on the basis of their market share and according to the rate
of growth in the market as a whole, as a way of assessing their role in the product range.
KEY POINT
Question mark
Market growth rate
High Star
(or Problem child)
On the basis of this classification, each product may fall into one of four broad categories.
(a) Question mark (or problem child): A small market share in a high growth industry.
The generic product is clearly popular, but customer support for the particular brand is limited. A
small market share implies that competitors are in a strong position and that if the product is to be
successful it will require substantial funds, and a new marketing mix. If the market looks good and
the product is viable, then the company should consider a 'build' strategy to increase market share
by increasing the resources available for that product to permit more active marketing. If the future
looks less promising, then the company should consider withdrawing the product. Which strategy
is chosen will depend on the strength of competitors, availability of funding and other relevant
factors.
The star has potential for generating significant earnings, currently and in the future. At this stage
it may still require substantial marketing expenditure as part of a 'maintain' strategy, but this is
probably regarded as a good investment for the future.
Typically, a well established product with a high degree of consumer loyalty. Product development
costs are typically low and the marketing campaign is well established. The cash cow will normally
make a substantial contribution to overall profitability. The appropriate strategy will vary according
to the precise position of the cash cow. If market growth is reasonably strong then a 'holding'
strategy will be appropriate. However, if growth and/or share are weakening, then a 'harvesting'
strategy may be more sensible by cutting back on marketing expenditure to maximise short-term
profit.
Like the cash cow, this is a well established product, but one which is apparently losing consumer
support and may have cost disadvantages. The usual strategy would be to consider divestment,
unless the cash flow position is strong, in which case the product would be harvested in the short
term, prior to deletion from the product range.
The BCG matrix will be a useful tool to use in paper P2 to carry out a product mix analysis.
Stage 2 Screening
The concept should be considered carefully to ensure it meets certain criteria such as
profitability or taking market share.
Stage 3 Design
The design process can be in different forms such as building an electronic or physical
prototype. Value engineering procedures may be followed to ensure all components add
value.
Stage 4 Time-to-Market
This is the time a product or service takes to get to the market place. A short time span is
desirable to reduce cost and to get ahead of the competition.
Stage 5 Testing
The product or service should be tested to check that it works, that it meets the needs of
the customer and that the customer likes it.
PART D MARKETING 9: Marketing plans, branding and communications 249
The classic pattern of a product life cycle (PLC) is in four-stages, an introduction to the market, a
growth, market maturity and then decline. However, products can be rejuvenated so that their life cycle
KEY POINT
continues.
The priorities for performance objectives will change as a product goes through the phases of its life cycle.
(a) Introduction stage. The product or service offers something new to customers. There are unlikely
to be any competing products, but heavy advertising costs may be incurred to raise customer
awareness. Design changes may be required, as customer needs become better understood. A
business needs to establish an operational capability that allows it to be flexible and capable of
adapting and changing.
(b) Growth stage. The volume of demand for the product increases, and there are likely to be more
competitors in the market. Product features may become important between different suppliers.
The main objective for the operations function could be to keep up with the growing demand.
Speed of response to customer orders and reliability of supply could also be significant. Quality
standards will have to be maintained or improved in response to the growing competition, and cost
and price are likely to be much more significant.
(c) Market maturity. Demand levels off. Some early competitors are likely to have left the market,
which might now be shared by a small number of organisations. Product design will be largely
standardised, although organisations might try to develop new varieties of the product to extend its
life cycle. Organisations in the market are likely to compete on price and/or on value for money
(product differentiation). To remain competitive, it will be important to achieve low costs through
productivity improvements, whilst still providing reliability of supply.
(d) Decline stage. Total demand declines and competitors will start to withdraw from the market.
There will nevertheless be excess capacity in the industry, and the remaining organisations will
compete on price. Cost targets will remain the key operational objective. The company may also
decide to stop making and selling the product, and to focus its energies instead on another
developing/growing product.
Some writers refer to an additional phase between market growth and market maturity. Often at this time,
some of the weaker players in the market (initially attracted by market growth) are 'shaken out' of the
market by the stronger organisations. This is referred to as a 'shakeout'.
250 9: Marketing plans, branding and communications PART D MARKETING
1.3 Place
Place deals with how the product is distributed, and how it reaches its customers.
(a) Channel. Where are products sold? Supermarkets, corner shops? Which outlets will be chosen?
Zero level distribution is where the organisation sells directly to the customer. In one level
distribution, the organisation sells to the retailer, who sells to the customer. Two level distribution
involves the organisation selling to a wholesaler who in turn sells to the retailer.
(b) Logistics. The location of warehouses and efficiency of the distribution system is also important.
A customer might have to wait a long time if the warehouse is far away. Arguably, the speed of
delivery is an important issue in place.
An organisation can distribute the product itself (direct distribution) or distribute it through intermediary
organisations such as retailers.
BELOW-THE-LINE promotion involves product-integral and negotiated sales incentives, such as packaging,
merchandising, on-pack discounts and competitions and so on.
In recent years the range of promotional tools has continued to grow. The variety of media that can be
used for above-the-line campaigns has expanded, both in the printed advertising field and in the
broadcast field. There are literally thousands of publications aimed at different target groups. In the
broadcast field the number of television stations steadily increases through satellite, cable and digital
television and the number of commercial radio stations has also grown considerably.
PART D MARKETING 9: Marketing plans, branding and communications 251
The traditional emphasis on heavy mass above-the-line advertising has given way to more highly targeted
campaigns. Below-the-line, and even what Fill (2002) terms 'through-the-line' promotion is now far more
common. The following quote is from Fill.
The table above sets out the strategic focus for each phase, and the main promotional activities to be
considered. What the table does not show is the way the promotional tools are used to support a push as
opposed to pull approach. One particular benefit of the PLC is that it is possible to overlay the various
stages of the process of diffusion. Through this it is possible to identify the different types of buyer
involved with the product at each stage and through this fine tune the appropriate message and media.
1.4.3 Introduction
For consumer brands this phase is critical as the primary need is to secure trade acceptance (and hence
shelf space) and then build public (target audience) awareness. Sunny Delight was developed by Proctor
& Gamble in consultation with major multiple grocers. When the product was launched the multiples
accepted the brand as it had been developed partly to their specification on price, ingredient and
packaging/size.
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1.4.4 Growth
During growth, promotional activity is used competitively to build market share. Customers are normally
willing to buy, having been made aware, but their problem becomes one of brand choice. Marketing
communications should therefore be used to differentiate and clearly position the product such that it
represents significant value for the customer.
1.4.5 Maturity
Once the rapid growth in a market starts to ease, the period of maturity commences. The primary
characteristic of this stage is that there is little or no growth. The battle therefore is to retain customer
loyalty. To do this, sales promotions are often used, to encourage trial by non-users and to reward current
users.
1.4.6 Decline
As sales start to decline it is normal practice to withdraw a great deal of promotion support. Direct
marketing and a little well targeted advertising to remind and reassure brand loyalists is the most
commonly used.
1.5 Price
There are three main types of influence on price setting: costs, competition and customers (the 3Cs).
Other aspects of the pricing mix include factors such as any bulk purchase discounts given, credit
offered and methods of payment.
1.5.1 Costs
In practice, cost is the most important influence on price. Many organisations base price on simple cost-
plus rules. In other words, costs are estimated and then a profit margin is added in order to set the price.
This method is fairly easy to apply and ensures that costs are covered. A common example occurs with
the use of mark-up pricing. This is used by retailers and involves a fixed margin being added to the
buying-in price of goods for resale.
Because the cost-plus approach leads to price stability, with price changing only being used to reflect cost
changes, it can lead to a marketing strategy which is reactive rather then proactive. In addition, there is
very limited consideration of demand in cost-based pricing strategies. From a marketing perspective, cost-
based pricing may lead to missed opportunities as little or no account is taken, particularly in the short
run, of the price consumers are willing to pay for the brand, which may actually be higher than the cost-
based price.
1.5.2 Competition
In some markets, going rate pricing in which some form of average level of price becomes the norm,
perhaps, in the case of a high level of branding in the market, including standard price differentials
between brands.
In some market structures price competition may be avoided by informal agreement leading to
concentration on non-price competition – the markets for cigarettes and petrol are examples of this.
PART D MARKETING 9: Marketing plans, branding and communications 253
1.5.3 Customers
Rather than cost or competition as the prime determinants of price, a organisation may base pricing
strategy on the intensity and elasticity of demand. Strong demand may lead to a high price, and a weak
demand to a low price – much depends on the ability of the organisation to segment the market price in
terms of elasticity. In other words, price is determined by what customers are willing to pay.
For products or services with a typical downward sloping demand curve, fewer purchasers will buy at a
higher price. If a supplier can identify those purchasers still willing to pay the higher price the supplier
could benefit through charging them a higher price. This is called price discrimination or differential
pricing.
In practice, measurement of price elasticity and, implementing differential pricing can be very difficult.
There are a number of bases on which discriminating prices can be set.
(a) By market segment. A cross-channel ferry company would market its services at different prices in
England, Belgium and France, for example. Services such as cinemas and hairdressers are often
available at lower prices to old age pensioners and juveniles.
(b) By product version. Many car models have 'add on' extras which enable one brand to appeal to a
wider cross-section of customers. Final price need not reflect the cost price of the add on extras
directly. Usually the top of the range model would carry a price much in excess of the cost of
provision of the extras, as a prestige appeal.
(c) By place. Theatre seats are usually sold according to their location so that patrons pay different
prices for the same performance according to the seat type they occupy.
(d) By time. This is perhaps the most popular type of price discrimination.
Price sensitivity will vary amongst purchasers. Those who can pass on the cost of purchases will be
least sensitive and will respond more to other elements of the marketing mix.
Pricing research is notoriously difficult, especially if respondents try to give rational rather than their 'real'
response. As the respondent is not actually faced with the situation they may give a hypothetical answer
that is not going to be translated into actual purchasing behaviour. Nevertheless, pricing research is
increasingly common as organisations struggle to assess the perceived value customers attribute to a
brand to provide an input to their pricing decisions.
In established industries dominated by a few major organisations, it is generally accepted that a price
initiative by one organisation will be countered by a price reaction by competitors. Here, prices tend to
be fairly stable, unless pushed upwards by inflation or strong growth in demand.
In the event that a rival cuts prices expecting to increase market share, an organisation has several
options.
(a) It will maintain its existing prices if the expectation is that only a small market share would be
lost, so that it is more profitable to keep prices at their existing level. Eventually, the rival
organisation may drop out of the market or be forced to raise its prices.
(b) It may maintain its prices but respond with a non-price counter-attack. This is a more positive
response, because the organisation will be securing or justifying its current prices.
(c) It may reduce its prices. This should protect the organisation's market share at the expense of
profitability. The main beneficiary from the price reduction will be the consumer.
254 9: Marketing plans, branding and communications PART D MARKETING
(d) It may raise its prices and respond with a non-price counter-attack. The extra revenue from the
higher prices might be used to finance promotion on product changes. A price increase would be
based on a campaign to emphasise the quality difference between the organisation's own product
and the rival's product.
In some cases, intermediate customer pricing, may be used. This involves the setting of a recommended
retail price to assist the reseller in setting their own price.
Unit costs will fall with increased output (economies of scale) and experience (experience curve)
The market is price sensitive and relatively low prices will attract additional sales
Low prices will discourage new competitors
There is insufficient production capacity and competitors cannot increase their capacity
Some buyers are relatively insensitive to high prices
High price is perceived as high quality
PART D MARKETING 9: Marketing plans, branding and communications 255
This strategy looks at the whole range from two points of view.
(a) Category
The product is cosmetically modified to justify a price differential. For example a 'budget' version of
a product is modified into a 'premium' version. Premium pricing is the term given where rich
customers are targeted with a high price, differentiated product.
The price differential is justified by targeting different consumer groups for example, OAP or
student prices. They are often used by leisure facilities such as leisure centres or galleries.
(c) Peak
The price is set in accordance with demand. For example, the price of train ticket is often more
expensive in the morning when most people travel to work. Alternatively, a lower price can be set
during quiet periods to stimulate demand. This is also known as a variable pricing policy.
The danger is that price cuts to one buyer may be used as a negotiating lever by another buyer. This can
be countered in three ways.
(a) Buyers can be split into clearly defined segments, such as overseas and home, or students'
concessionary fares.
(b) Own branding, where packaging is changed for that of a supermarket, is a variation on this.
(c) Bulk buying discounts and aggregated rebate schemes can favour large buyers.
256 9: Marketing plans, branding and communications PART D MARKETING
The role of price leader is based on a track record of having initiated price moves that have been
accepted by both competitors and customers. Any dramatic changes in industry competition, (a new
entrant, or changes in the board room) may endanger the price leadership role.
Predatory pricing is a similar strategy but the reason for setting a low price is to damage the competition.
SERVICES include:
'... those separately identifiable but intangible activities that provide want-satisfaction, and that are not, of
KEY TERM
necessity, tied to, or inextricable from, the sale of a product or another service. To produce a service may
or may not require the use of tangible goods or assets. However, where such use is required, there is no
transfer of title (permanent ownership) to these tangible goods.' (Cowell, 1995)
'... any activity of benefit that one party can offer to another that is essentially intangible and does not result in
the ownership of anything. Its production may or may not be tied to a physical product.' (Kotler et al. 2002)
The following characteristics of services distinguish them from goods, and have marketing implications.
Intangibility Inseparability
SERVICES
Ownership Heterogeneity
Perishability
PART D MARKETING 9: Marketing plans, branding and communications 257
1.7.1 Intangibility
'Intangibility' refers to the lack of substance which is involved with service delivery. Unlike goods, there
are no substantial material or physical aspects to a service – no taste, feel, visible presence and so on.
This creates difficulties and can inhibit the desire to consume a service, since customers are not sure
what they will receive.
Marketers and consumers need to try to overcome this problem. The marketer wishes to make the choice
of the product 'safer' and make the consumer feel more comfortable about paying for something they do
not then own and which has no physical form.
(a) Increasing the level of tangibility. Use physical or conceptual representations/illustrations to make
the customer feel more confident as to what it is that the service is delivering.
(b) Focusing the attention of the customer on the principal benefits of consumption. Communicating
the benefits of purchasing the service so that the customer visualises its use. Promotion and sales
material could provide images or records of previous customers' experience.
(c) Differentiating the service and reputation-building. Enhancing perceptions of customer service
and customer value by offering excellence in the delivery of the service. This reputation can be
attached to brands, which must then be managed to secure and enhance their market position,
(for example, the Virgin brand).
1.7.2 Inseparability
Services often cannot be separated off from the provider, for example having dental treatment or taking a
journey. Neither exists until they are actually being experienced/consumed by the person who has bought
them. The 'creation' of many services is simultaneous with consumption, where the service is
Made available
Produced
all at the same time
Sold
Consumed
Provision of the service may not be separable from the person or personality of the seller. Consequently,
increasing importance is attached to the need to instil values of quality, reliability and to generate a
service ethic in customer-facing staff. This points up the need for excellence and customer orientation and
the need to invest in high quality people and high quality training.
In terms of marketing policy, heterogeneity highlights the need to develop and maintain processes for:
1.7.4 Perishability
Services cannot be stored – they are innately perishable. Seats on a bus or the services of a doctor exist
only for periods of time. If they are not consumed, they 'perish'. They cannot be used later. They cannot
be 'produced' in advance, to allow for peaks in demand.
This presents specific marketing problems. Meeting customer needs depends on staff being available as
and when they are needed. This must be balanced against the need for an organisation to minimise
unnecessary expenditure on staff wages. Anticipating and responding to levels of demand is, therefore, a
key planning priority.
Policies must seek to smooth out fluctuations in supply/demand relationship, or allow for contingencies.
Examples include:
Using promotions to stimulate off-peak demand (eg free mobile calls between certain hours)
Using flexible staffing methods to cover fluctuations in demand (eg part-time and temporary
working, outsourcing to call centres)
1.7.5 Ownership
Services do not result in the transfer of property. The purchase of a service only gives the customer
access to or the right to use a facility, not ownership. This may lessen the perceived customer value of a
service – particularly if the benefit does not accrue until some time in the future (like a pension, or a
voucher for future use).
(a) Promote the advantages of non-ownership. This can be done by emphasising the benefits of paid-
for maintenance, or a periodic upgrading of the product.
(b) Make available a tangible symbol or representation of ownership such as a certificate, voucher,
merchandise item or simple receipt. This can come to embody the benefits enjoyed.
In the UK, in the nineteenth century, railway passengers could buy tickets for first, second and third
CASE STUDY
classes. Now they buy first and 'standard' classes. The UK was a society heavily stratified by wealth, and
so offering three classes of tickets would seem a natural way of targeting a market segmented by wealth.
In India today, again there are first, second and third classes (with permutations based on air conditioned
compartments, sleepers etc). In China there exist 'hard' and 'soft' classes.
Airlines offer a useful contrast. Segmentation is partly based on purpose of visit and time of booking.
Business class was directed to people travelling on business expense accounts (who would travel
economy on their own account). Some airlines offer 'premium' economy seats to those who want more
legroom. The 'low-cost' airlines flying in the US and Europe designed for the 'no-frills' consumer, are
increasingly frequented by business travellers, for short haul trips.
1.8.1 People
The role of employees in the marketing mix is particularly important in service marketing, because of the
inseparability of the service from the service provider. Front-line staff must be selected, trained and
motivated with particular attention to customer care and public relations.
In the case of some services, the physical presence of people performing the service is a vital aspect of
customer satisfaction. The staff involved are performing or producing a service, selling the service and
also liaising with the customer to promote the service, gather information and respond to customer needs.
1.8.2 Processes
Efficient processes can become a marketing advantage in their own right. If an airline, for example,
develops a sophisticated ticketing system, it can offer shorter waits at check-in or wider choice of flights
through allied airlines. Efficient order processing not only increases customer satisfaction, but cuts down
on the time it takes the organisation to complete a sale.
Policies, particularly with regard to ethical dealings (a key issue for many consumers)
Procedures, for efficiency and standardisation
Automation and computerisation of processes
Queuing and waiting times
Information gathering, processing and communication times
Capacity management, matching supply to demand in a timely and cost effective way
Accessibility of facilities, premises, personnel and services
Such issues are particularly important in service marketing. This is because the range of factors and
people involved make it difficult to standardise the service offered. Quality in particular specifications will
vary with the circumstances and individuals. This creates a need for process planning to ensure efficient
work.
Issues of intangibility and ownership can be tackled by making available a physical symbol or
representation of the service and the benefits it confers. For example, tickets and programs relating to
entertainment and certificates of attainment in training are symbolic of the service received and a provide
a history of past positive experiences.
Physical evidence of service may also be incorporated into the design and specification of the service
environment by designing premises to reflect the quality and type of service. Such environmental factors
include finishing, decor, colour scheme, noise levels, background music, fragrance and general ambience.
Exam skills
If a question refers to four elements of the marketing mix the examiner is referring to the traditional elements
of product, price, place and promotion – the 4Ps. If five elements are referred to, add 'people' to the
traditional four. The other additional Ps referred to above could be referred to in longer written questions.
260 9: Marketing plans, branding and communications PART D MARKETING
Briefly explain the nature of services and the three additional Ps relevant to services marketing. (5 marks)
Section summary
Traditionally, the marketing mix was the 'four Ps' (product, price, place, promotion). The three extra 'Ps’
have been added to describe additional issues relevant to service industries (people, process, physical
evidence), giving an extended marketing mix of seven Ps.
Introduction
A brand is a name, term, sign, symbol or design intended to identify the product of a seller and to
differentiate it from those of competitors. It is a key element of marketing and corporate strategy as it
generates revenue and therefore has a value.
Branding is a very general term covering brand names, designs, trademarks, symbols, jingles and the like.
A brand name refers strictly to letters, words or groups of words which can be spoken. A brand image
KEY POINTS
distinguishes a company's product from competing products in the eyes of the user.
Brand equity is the premium customers are prepared to pay for the branded product compared to a non-
branded product.
Brand management is the development of a long-term strategy to keep the brand in customers’ minds at
all times.
Branding might be discussed under any of the four Ps. For instance, part of the branding of a Rolls Royce
is the unmistakeable design of the product, or you might buy a 'cheaper brand' of washing-up liquid if you
are concerned about price.
Tesco has been named the most valuable brand on the high street, worth £8.6bn (2008), almost £4bn
more than rival Sainsbury's. A report has said that Tesco's top ranking was "almost inevitable" following
CASE STUDY sales of £32bn and its market leading share in the supermarket and convenience store markets. Brands in
the study were valued after looking at public sales figures for the last five years and attributing a score to
measures such as future growth, price positioning, customer service and brand heritage.
Tesco's strong brand is likely to give it a better chance to weather tougher times on the UK high street,
because consumers need more reasons to buy.
A brand identity may begin with a name, such as 'Kleenex' or 'Ariel', but extends to a range of visual
features which should assist in stimulating demand for the particular product. The additional features
include typography, colour, package design and slogans. Any distinctive features associated with the
product, that make it recognisable, also form part of the brand.
In addition a brand shares the attributes of a product – it is a bundle of tangible and intangible benefits
which deliver customer value. Consistency of the product is also an essential element. For example it is
important to McDonalds that the same type of burger is identical wherever in the world it is purchased.
PART D MARKETING 9: Marketing plans, branding and communications 261
It aids product differentiation, conveying a lot of information very quickly and concisely. This helps
customers readily to identify the goods or services and thereby helps to create customer loyalty to
the brand. It is therefore a means of increasing or maintaining sales.
It maximises the impact of advertising for product identification and recognition. The more similar
a product (whether an industrial good or consumer good) is to competing goods, the more
branding is necessary to create a separate product identity.
It supports market segmentation, since different brands of similar products may be developed to
meet specific needs of categories of uses
It supports brand extension or stretching. Other products can be introduced into the brand range
to 'piggy back' on the articles already known to the customer (but ill-will as well as goodwill for one
product in a branded range will be transferred to all other products in the range).
The relevance of branding does not apply equally to all products. The cost of intensive brand advertising
to project a brand image nationally may not be justified.
The decision as to whether a brand name should be given to a range of products or whether products
should be branded individually depends on quality factors.
If the brand name is associated with quality, all goods in the range must be of that standard.
If a company produces different quality (and price) goods for different market segments, it would be
unwise and confusing to give the same brand name to the higher and the lower quality goods.
New additions to the product range are beneficial for two main reasons.
They require a lower level of marketing investment (part of the 'image' already being known).
The extension of the brand presents less risk to consumers who might be worried about trying
something new.
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2.2.3 Multi-branding
This is the introduction of a number of brands that all satisfy very similar product characteristics. This
can be used where there is little or no brand loyalty, in order to pick up buyers who are constantly
changing brands.
The best example is washing detergents. The two major producers, Unilever and Procter & Gamble, have
created a barrier to fresh competition as a new company would have to launch several brands at once in
order to compete.
Family branding uses the power of the brand name to assist all products in a range. This strategy is being
used more and more by large companies, such as Heinz. In part it is a response to retailers' own-label
(family branded) goods. It is also an attempt to consolidate expensive television advertising behind one
message rather than fragmenting it across the promotion of individual items.
For example, when Whitbread PLC entered the hotel market (in the UK) it create the Premier Inn brand.
2.2.5 Co-brands
Co-branding is where two separate, but compatible brands are used to support each other. For example,
Nike developed running shoes that are compatible with Apple’s iPod.
Market approach
Cost approach
Income approach
Define what a ‘brand’ is and briefly explain three methods by which an organisation may value its brand.
(7 marks)
Section summary
Branding is a very general term covering brand names, designs, trademarks, symbols, jingles and the like.
A brand name refers strictly to letters, words or groups of words which can be spoken. A brand image
distinguishes a company's product from competing products in the eyes of the user.
There are three approaches to valuing a brand – market, cost and income.
3 Marketing communications
Introduction
Once an organisation has decided upon its marketing plan it needs to put it into practice. This means
communicating its message to the market and customers. There is a growing range of methods that it
can employ for this purpose which we will now look at.
When conducting a marketing campaign, there is a range of possible communication methods and
channels the campaign could utilise. The most popular methods are shown below.
264 9: Marketing plans, branding and communications PART D MARKETING
Promotional tools
These tools represent the deployment of deliberate and intentional methods calculated to bring about a
favourable response in the customer's behaviour. Approaches to promotion may be grouped in three
general categories.
Mass media – the whole market segment is targeted with the same communication.
Personal and interactive – two-way communication between a sales person and potential
customer.
Personal and direct – one-way communication from the seller to the potential customer, usually by
letter or email.
The diagram represents the most obvious promotion methods, though other parts of the marketing mix,
including the product itself, pricing, policy and distribution channels are also important.
Choosing the correct tools for a particular promotions task is not easy. The process is still very much an
art, though it is becoming more scientific because of the access to consumer and media databases.
Computer systems may be utilised to match consumer characteristics with promotional tools.
In reality, an experienced marketing manager may be able to reach sensible conclusions almost
intuitively, based on what has been successful in the past and on knowledge of both customers and
competitors.
PART D MARKETING 9: Marketing plans, branding and communications 265
Consumer markets (or business-to-consumer markets B2C) are categorised as consisting of mass
audiences which are cost-effectively accessible by television or national newspaper advertising.
KEY POINTS
Supermarkets allow customers to serve themselves and there is little or no personal selling.
Business-to-business markets (B2B), by contrast, involve a great deal of personal selling at different
levels in the organisation. The needs of individual companies are different and therefore mass advertising
would be most wasteful. Building on these generalised comments it is possible to present the mix of
appropriate tools in the following diagram.
Product
Decisions
Pricing
Decisions
Advertising
The
Product The
Maker Customer
Place
Decisions
Advertising
Public relations
Promotion
Decisions
Sales promotion
Personal selling
Marketing mix Communications mix
(a) Response. Direct marketing is about getting people to respond to invitations and offers.
(b) Interactive. The process is two-way involving the supplier and the customer.
(c) Relationship. Direct marketing is in many instances an on-going process of communicating and
selling again and again to the same customer.
(d) Recording and analysis. Response data is collected and analysed so that the most cost-effective
procedures may be arrived at.
(e) Strategy. Direct marketing should be seen as a part of a comprehensive plan stemming from
clearly formulated objectives.
PART D MARKETING 9: Marketing plans, branding and communications 267
Because direct marketing removes all channel intermediaries apart from the advertising and delivery
mediums, it is known as a ‘zero level channel’. There are no other parties between the seller and the
customer.
Direct marketing encompasses a wide range of media and distribution opportunities, such as:
Direct Line, the insurance company, turned the motor insurance industry on its head through its ability to
by-pass the traditional brokers and offer the average consumer not only a cheaper form of insurance, but
CASE STUDY a high degree of service.
The power of the computer and the Internet has transformed the processes by which marketers relate to
their customers. Improvements in database software mean the smallest of operations are able to benefit
from the information era.
3.5.1 Telemarketing
One form of direct marketing is telemarketing. Telemarketing is a quick, accurate and flexible tool for
gathering, maintaining and helping to exploit relevant up-to-date information about customers and
prospects.
TELEMARKETING is the planned and controlled use of the telephone for sales and marketing opportunities.
Characteristics of telemarketing
KEY TERM
(a) Targeted. The message is appropriately tailored to the recipient.
(b) Personal. Telemarketers can determine and respond immediately to the specific needs of
individuals, building long-term personal and profitable relationships.
(c) Interactive. Since the dialogue is live, the conversation can be guided to achieve the desired
results; the representative is in control.
(d) Immediate. Every outbound call achieves an immediate result, even if it is a wrong number or 'not
interested'. Customers can be given 24 hour constant access to the company (for inbound calls).
(e) Flexible. Conversations can be tailored spontaneously as the representative responds to the
contact's needs. Campaign variables can be tested quickly, and changes made whilst the
campaign is in progress.
Telemarketing can be costly. There are few economies of scale, and in some situations techniques such
as direct mail may be more cost effective.
If poorly handled, telemarketing may be interpreted as intrusive. This may alienate potential customers.
KEY TERM With indirect marketing the organisation does not push products or services onto customers. Instead it
performs a number of related activities that arouse interest in the product or service.
Examples include posting blogs on the internet and publishing articles. A common example is food
magazines including 'advertising features' in the form of recipes which use a particular producer's products
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Another form of indirect marketing is 'word of mouth' advertising. This involves customers who have had
positive experiences with the organisation recommending the organisation to their family and friends.
Recent developments in indirect marketing have been guerrilla and viral marketing.
The term guerrilla marketing was created by Jay Conrad Levinson in the 1980s. Levinson encouraged
marketers to devise their own ideas, utilising their contacts and the organisations' products and services
as sources of inspiration.
Guerrilla marketing
In the U.S, (Boston) in 2007, a number of flashing electronic signs designed to promote the television
program Aqua Teen Hunger Force were planted around the city. Unfortunately these were mistakenly
identified as explosive devices, causing huge disruption.
However, even examples of guerrilla marketing ‘gone wrong’ may actually be considered a success by
some, as they can generate more publicity than campaigns that ‘go well’.
Viral marketing messages will eventually run out of steam as people who receive the message fail to pass
it on. They can be effective though, even with a relatively short life span.
Individuals who pass on viral marketing are said to have a high 'Social Networking Potential' (SNP).
These people tend to use social networks for much of their time and like to become involved in spreading
messages. It is the goal of viral marketers to identify these individuals and design messages that have a
high probability of being passed on by them.
(c) The transmission method must be scalable from small to large very quickly to aid the spread of the
message
(d) The message must exploit common motivations and behaviours. Greed, love, success and the need
to look 'cool' can provide motivation to spread the message
(e) Use existing communication networks. People have lists of contacts on their email and social
networking sites – getting the message in the right place means it will multiply very quickly
(f) Take advantage of other people's resources – for example getting banner ads and links onto other
websites.
(a) 'Will it blend?' – a series of video clips where various items were blended in a Blendtec blender.
(b) The Cadbury Dairy Milk Gorilla advert which was made popular on YouTube and Facebook.
(c) The movie 'Cloverfield' where Myspace pages were created for the characters and websites created
for fictional companies mentioned in the film.
(d) 'Compare the meerkat.com' a website created as part of a viral marketing campaign for 'Compare
the Market.com'. It was featured in a national TV advertising campaign.
E-commerce has made interactive marketing easier as customer information can be 'remembered' in
databases and electronic communications with the customer occur very quickly through the Internet.
An organisation which makes good use of interactive marketing is Amazon.com. Customers can set
preferences and the site records their past transactions. In future visits they are presented with possible
purchases based on this information.
Experiential marketing encourages potential customers to engage with the personality of the brand,
through experiencing it. It is a combination of in-store promotion techniques and field marketing. It aims
not only to sell more products in the short-term, but also to encourage customers and potential customers
to engage with the personality of the brand.
Experiential marketing is seen as an effective way of connecting with customers, as the emotional
connection encourages brand loyalty.
In Australia, Absolut Vodka launched a brand called ‘Cut’ using experiential marketing - combining public
relations, point-of-sale, online and event marketing. Absolut leased two bars in Sydney and Melbourne,
CASE STUDY put on DJ sets, band concerts and photo exhibitions in these spaces.
Visitors to the Absolut Cut bars got a free bottle of Cut, and consumers were given a chance to contribute
their photos to the exhibits, generating what Absolut hoped would be a viral element to the campaign.
The campaign flew in the face of traditional ways to launch a brand. Instead of using mass marketing to
blanket the millions in order to reach the few, Absolut chose to target the few to eventually reach the
masses.
Briefly explain the concepts of guerrilla and viral marketing, providing an example of each. (4 marks)
E-marketing now includes the use of Short Message Service (SMS) or text messages, e-mail, online
surveys and the use of social network sites such as Facebook and Twitter.
(a) Attract visitors – good quality, up-to-date content, easy to navigate, fast to download and quick
response times.
(b) Enable participation – interactive content, and suitable facilities to allow for transactions
PART D MARKETING 9: Marketing plans, branding and communications 271
(c) Encourage return visits – design the site to target the needs of particular segments. Offer free
services and added value facilities
(d) Allow for two-way information sharing – personalisation reflecting visitor preferences, direct
marketing and information retrieval provide visitors with the information they are seeking
(e) Integrate with back office systems – systems must be in place to process orders and dispatch
products that have been generated by the website.
Set-up and running costs for a state-of-the-art website can be high, especially with search engine
optimisation being required to ensure the website appears high up in the search rankings.
Banner adverts are a source of revenue for the websites they appear on. Affiliate schemes and Pay-per-
click advertising pay the host site a small fee for every visitor they attract or if they make a subsequent
purchase.
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Search engines such as Google make money in a similar way, but organisations can also pay them a fee
to display an advert whenever key words are entered into the search box. For example, if you search for
‘accountant’ results will include paid-for listings – ie an advertisement.
Advertisers may get visitors to register their interest in the product when they are on the site so that they
can be directly targeted in future. At the very least advertisers know exactly how many people have
viewed their message and how many were interested enough in it to click on it to find out more.
Unsolicited e-mail is probably more intrusive than traditional 'junk mail', though less so than the
telephone. However, poor use of e-mail can upset large numbers of people.
Section summary
Once the organisation has decided on its marketing plan it needs to get its message out to the market
and its customers.
Exam alert
‘New’ forms of marketing such as e-markeing and viral marketing are topical. CIMA are keen for their
exams to be topical and up-to-date, so these topics could be examined regularly.
PART D MARKETING 9: Marketing plans, branding and communications 273
Chapter Roundup
Traditionally, the marketing mix was the 'four Ps' (product, price, place, promotion). The three extra
‘Ps’ have been added to describe additional issues relevant to service industries (people, process,
physical evidence), giving an extended marketing mix of seven Ps.
Branding is a very general term covering brand names, designs, trademarks, symbols, jingles and the like.
A brand name refers strictly to letters, words or groups of words which can be spoken. A brand image
distinguishes a company's product from competing products in the eyes of the user.
There are three approaches to valuing a brand – market, cost and income.
Once the organisation has decided on its marketing plan it needs to get its message out to the market
and its customers.
Quick Quiz
1 Which of the following is included in the additional 3Ps of the extended marketing mix?
A Processes
B Product
C Promotion
D Price
2 Which of the following stages comes immediately after 'introduction' in the product life cycle?
A Growth
B Market maturity
C Market penetration
D Decline
3 Which branding strategy uses the power of the brand name to assist all products in a range?
A Brand expansion
B Multi-branding
C Family branding
D Corporate branding
A Business to brand
B Brand to brand
C Business to business
D Buyer to business
1 ...........................................................................................................................................
2 ...........................................................................................................................................
3 ...........................................................................................................................................
4 ...........................................................................................................................................
PART D MARKETING 9: Marketing plans, branding and communications 275
2 A Growth follows the introduction stage as demand for the product increases.
3 C Family branding uses the power of the brand name to assist all products in a range.
1 Attract visitors
2 Enable participation
3 Encourage return visits
4 Allow for two-way information sharing
Answers to Questions
9.1 The extended marketing mix
Services have a different nature to traditional products. In particular they have the following characteristics that
products do not. They are have no physical form, are inseparable from the provider and may lack consistency as
a different member of staff may provide them each time they are provided. Additionally, they cannot be stored
and usually do not result in the transfer of property.
People – services are provided by members of staff who are inseparable from the service
Process – services involve a process, for example a hair cut may involve waiting to be served, a hair wash,
styling, colouring and hair drying
Physical evidence – as services are intangible, some physical item should be provided to give the customer
evidence of ownership.
9.2 Branding
A brand is a name, term, sign, symbol or design intended to identify the product of a seller and to differentiate it
from those of competitors.
This approach generates a value on the basis of market transactions. A common method used is known as
relief-from-royalty. A potential income stream is calculated on the basis of what the owner of the brand could
generate by licensing it to third parties and it is the value of this income stream which is used to calculate the
brand’s value.
Under this approach, the value of the brand is based on the amount of costs incurred in building it. However, it
is not the most accurate method of valuation because the cost of building the brand is usually unrelated to its
ability to generate revenue.
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This approach is based on the brand's expected future earnings, or cash flows – ie the amount of cash it is
expected to generate less the costs of building it. The net income figure is then discounted at an interest rate
that an investor would expect as a return based on the brand's risk profile and characteristics. This final value is
the value of the brand.
Guerrilla marketing
Guerrilla marketing is an unconventional method of marketing and involves taking people by surprise and
'creating a buzz' in unexpected places.
Example: Surprising store customers with ‘for today only sales’ to which they are given very little notice.
Viral marketing
Viral marketing involves the use of pre-existing social networks to spread brand awareness or other marketing
objectives.
In this chapter we conclude our study of Internal marketing is about training and motivating
marketing by considering several 'stand- employees to support the organisation's external
alone' areas. marketing activities. Employee 'buy-in' is often critical
to the success of the marketing effort – especially in
Consumer behaviour and the purchasing process is
service organisations.
an important consideration for marketers since
understanding how consumers think and act will help Finally, we turn our attention to the increasingly
them to fine tune their marketing activities. important issue of social marketing and corporate
social responsibility. Society now expects organisations
Not-for-profit organisations have different
to have a wider responsibility than earning profit for
requirements of marketing than those for whom profit
shareholders.
maximisation is key. There is a distinct charity
marketing mix which is important for you to
understand.
277
278 10: Developments in marketing PART D MARKETING
1 Consumer behaviour
Introduction
Marketing aims to produce mutually beneficial exchanges between customer and supplier. However, 'the
customer' in a transaction can involve a number of different roles.
The value of this distinction is that it enables marketing efforts and activities to be correctly focused on
the people involved in the transaction. For example, an office supplies company would direct most of its
marketing efforts to the office manager buying the stationery. The approach to the accounts department
would be slightly different – a relationship might have to be built up to ensure speedy payment.
Consumers as buyers
Organisations as buyers
The cognitive paradigm sees a purchase as the outcome of a rational decision-making process.
The learned behaviour theory emphasises the importance of past purchases.
The habitual decision-making theory emphasises habit and brand loyalty.
Element Comment
Briefly explain the five stages of the consumer buying process. (5 marks)
Influences on buyers
Personal factors
Age and life-cycle Psychological
stage factors
Occupation Motivation
Social factors Cultural factors Economic Learning
Reference groups Cultural circumstances Perception
Family Sub-culture Lifestyle and Beliefs and
Roles and status Social class personality attitudes
Buyer
280 10: Developments in marketing PART D MARKETING
A reference group is an actual or imaginary group that influences an individual's evaluations, aspirations
or behaviour.
Reference groups influence a buying decision by making the individual aware of a product or brand,
allowing them to compare their attitude with that of the group, encouraging the individual to adopt an
attitude consistent with the group, and then reinforcing and legitimising the individual's decision to
conform.
A 'role' is the sum or 'system' of expectations which other people have of an individual. For example, a
male may consider himself to be a father and husband, a good neighbour, an active member of the local
community, a supporter of his sports club, an amateur golfer and perhaps a tradesman or a professional.
Families differ in many ways, not only in broad issue of socio-economic status but in buyer behaviour and
consumption patterns.
Individuals will buy different types of product depending on their age. This is particularly relevant to such
products as clothes, furniture and recreation.
The family life cycle is used in the West to model purchase behaviour patterns. For example, couples at
the early stages of their marriage before having children will have different needs and consumption
patterns from those, say, after their children have left home. In the UK, where house purchase is the
norm, this has particular implications for sellers of financial services.
A person's occupation will influence consumption and the task for marketers is to identify the
occupational groups that have an above average interest in their products and services.
Buying patterns are also heavily influenced by an individual's economic circumstances. An individual's
economic circumstances consist of:
Borrowing power
A lifestyle is an individual's way of living as identified by their activities, interests and opinions. Marketers
will search for relationships between their products and lifestyle groups. There are many different lifestyle
classifications.
PART D MARKETING 10: Developments in marketing 281
Motivation Learning
Perception Beliefs and attitudes
Motivation is an inner state that energises, activates, or moves, that directs or channels.
(a) Maslow's (1954) theory of motivation seeks to explain why people are driven by particular needs at
particular times. Maslow argues that human needs are arranged in a hierarchy comprising, in their
order of importance: physiological needs, safety needs, social needs, esteem needs and self-
actualisation needs.
(b) Herzberg (1968) developed a 'two-factor theory' of motivation that distinguishes between factors
that cause dissatisfaction and factors that cause satisfaction. The task for the marketer is,
therefore, to avoid 'dissatisfiers' such as, for example, poor after-sales service, as these things will
not sell the product but may well unsell it. In addition the marketer should identify the major
satisfiers or motivators of purchase and make sure that they are supplied to the customer.
Perception is the process whereby people select, organise and interpret sensory stimuli into a meaningful
and coherent picture. The way consumers view an object (for example, their mental picture of a brand or
the traits they attribute to a brand) may vary according to their past experience, expectation, needs,
interests, attitudes and beliefs.
Learning concerns the process whereby an individual's behaviour changes as a result of their experience.
A belief is a descriptive thought that a person holds about something. Beliefs are important to marketers
as the brand beliefs that people have about products make up the brand images of those products.
Children as consumers
What do you call a consumer who wants to buy everything you have, doesn't care what it costs and is less
CASE STUDY than five feet tall? A marketer's dream? Nope. You call them kids. – AdRelevance Intelligence Report,
2000
Children are bombarded by brand messages almost from birth, including counting books for preschoolers
that use M&Ms or Cheerios, exposure to brightly coloured and appealing branded packaging in the
supermarket, movie and toy tie-ins in fast-food restaurants, product placement in movies, advertisements
on television and the Internet, and pitches from entertainment and sports stars in a range of media. In
fact, it's almost impossible to escape marketing messages. No wonder, then, that children as young as
two are starting to recognize logos and request specific brands as soon as they begin to speak.
Children are a prime target for marketers. Not only do children today have more disposable income at
younger ages, but they have significant influence over family purchases. YTV's 2002 Tween Report
estimated that Canadian children aged 9 to 14 spend $1.9 billion and influence $20 billion in family
purchases per year. Marketing experts call it "pester power," or the "nag factor" – the ability to get kids to
nag their parents to buy a specific product or take them to a specific restaurant. After all, if your child
asks you for the latest toy 37 times a day for a week, the odds are that you'll eventually give in and buy it.
As a result, there is now a whole segment of the marketing industry devoted to figuring out how to sell
things to kids.
Professionals who work with children are becoming increasingly concerned about this onslaught. In
2003, the Canadian Paediatric Society issued a position statement on the impact of media on children
and youth that raised several concerns about advertising.
282 10: Developments in marketing PART D MARKETING
In 2004, a coalition of Canadian health groups led by the Centre for Science in the Public Interest called
for a ban on advertising aimed at children 13 or younger. Quebec has already banned print and broadcast
advertising aimed at children under 13, although children certainly see advertising from other sources as
well.
Many activists consider food advertising to be a leading cause of the increase in overweight in children. A
report released in December 2005 by the Institute of Medicine, Food Marketing to Children and Youth:
Threat or Opportunity?, observed that in the United States alone, over $11 billion dollars a year is spent
on marketing food and beverages to children. And the food advertised to children is generally less than
nutritious: most of it is highly processed, rich in saturated fat, salt, and sugar, and poor in nutrients like
fibre, vitamins, calcium, and iron.
http://television-vs-children.blogspot.com/2008/11/target-market-children-as-consumers.html,
November 19, 2008.
When considering organisational markets the following factors should be taken into account:
(a) Organisational markets normally comprise fewer buyers, with a few buyers responsible for the
majority of sales.
(b) Because of this smaller customer base and the importance and power of larger customers there is
generally a close relationship between buyer and seller.
(c) Demand for industrial goods is ultimately derived from the demand for consumer goods. In
addition, the total demand for many industrial products is inelastic, in other words, it is not
affected much by price changes.
(d) The purchase decision is usually made by consensus in an organisational setting, rather than being
the responsibility of one person.
The size, structure and formality of the DMU will vary depending on the specific situation. Key
considerations include:
What evaluative criteria do each of the participants make use of and how professional is the
buying process?
The people involved in the buying process must be convinced that the purchase will be safe for them, for
example, there was an advertising slogan to the effect that 'nobody gets sacked for buying IBM'.
Section summary
In consumer marketing, the customer may combine a number of roles, for example buyer, payer and
user.
The influences on a consumer’s purchasing decision may be classified as social, cultural, personal and
psychological.
Business to business marketing reflects the more complex and formal organisational buying process.
Introduction
Increasingly, public sector and charitable organisations are adopting a more commercial approach to their
operations, including the use of marketing techniques.
Marketing techniques are now recognised as just as appropriate in NFP organisations as in a commercial
environment. The tasks of setting objectives, developing strategies, devising appropriate marketing mixes
and implementing controls are just as relevant for charities and NFP organisations.
Public sector organisations may use marketing tools to encourage competitive tendering to provide
government services. Almost all organisations need to compete with other employers to recruit employees.
Many NFP organisations have introduced initiatives to raise money, such as hospitals selling paramedical
services to local industry, and universities developing commercial centres to sell research and consultancy
skills.
There are many other possible examples, the key point is that even though we are talking about public
sector bodies an exchange is taking place, and therefore there is likely to be a role for marketing.
PART D MARKETING 10: Developments in marketing 285
(a) Objectives will not be based on profit achievement but rather on achieving a particular response
from target markets. The organisation will need to be open and honest in showing how it has
managed its budget and allocated funds raised. Efficiency and effectiveness are particularly
important in the use of taxpayer funds or donations.
(b) Target marketing will involve identifying a number of different audiences. Bruce (2005) identifies
three types of customers for charities.
(i) Beneficiaries include not only those who receive tangible support, but also those who
benefit from lobbying and publicity.
(ii) Supporters provide money, time and skill. Voluntary workers form an important group of
supporters. Those who choose to buy from charities are supporters, as are those who
advocate their causes.
(iii) Regulators include both formal bodies, such as the Charities Commission and local
authorities, and less formal groups such as residents' associations.
The groups NFPs marketing activities try to reach can be classified as contributors (for example of
time), customers (for example clients, patients, students) and volunteers.
(c) Charities and NFP organisations often deal more with services than products. In this sense the
extended marketing mix that includes people, processes and physical evidence is important.
(d) Control aims to ensure progress is proceeding as planned. For example a charity would compare
donations and expenditure to budget. To control NFP marketing activities, managers must specify
what factors need to be monitored and permissible variance levels. Relevant measures could
include number of employees, number of volunteers (charities), number of ‘customers’ served and
satisfaction levels.
NGOs use marketing to find a position for themselves in the market, gain supporters, establish client and
donor needs and to communicate with stakeholders.
2.3.1 Product
A charity's product is essentially the cause it supports and the help it provides, for example cancer
research aims to reduce the suffering and improve the prospects of future cancer patients. It is important
to communicate what work the charity does and what donations are used for.
When a supporter provides money to a charity, the idea of what the money will be used for is their source
of satisfaction, knowing they have helped others or furthered a particular cause.
2.3.2 Price
Price is very important to larger charities since sales of goods and services provide their largest single
source of income. Proper cost accounting techniques must be applied where appropriate.
2.3.3 Processes
Since supporters are crucial to a charity's income and beneficiaries are the reason why it exists, processes must
be as customer-friendly as possible. This is certainly an area where philosophy is important.
2.3.4 Place
If charities distribute physical goods this can present challenges, for example providing disaster relief
overseas.
On the other hand, charities that distribute funds, to the poor, for instance, or to pay for medical research,
may have very short and easily managed distribution chains. Donations for many charities are increasingly
being made online.
Section summary
Charities and not-for-profit organisations are increasingly utilising marketing tools and techniques,
particularly in relation to segmentation, targeting and positioning.
Charities are similar in some respects to service organisations and the extended marketing mix is
particularly relevant to them.
The charity marketing mix adopted must suit the charity's overall philosophy.
PART D MARKETING 10: Developments in marketing 287
Introduction
In this section we shall study what internal marketing is and its importance in motivating employees to
support the marketing effort of the organisation.
KEY POINT
'Internal marketing is concerned with creating, developing and maintaining an internal service
culture and orientation, which in turn assists and supports the organisation in the achievement of
its goals. …
'The basic premise behind the development of internal marketing is the acknowledgement of the
impact of employee behaviour and attitudes on the relationship between staff and external
customers. The skills and customer orientation of these employees are, therefore, critical to
the customers' perception of the organisation and their future loyalty to the organisation.'
In other words, it is through internal marketing that all employees can develop an understanding of how
their tasks, and the way they perform them, create and deliver customer value and build relationships.
To inspire its employees to practise the marketing concept, LL Bean has for decades displayed posters
CASE STUDY
around its office that proclaim the following:
‘What is a customer? A customer is the most important person ever in this company, in person or
by mail. A customer is not dependent on us, we are dependent on him. A customer is not an
interruption of our work, he is the purpose of it. We are not doing a favour by serving him, he is
doing us a favour by giving us the opportunity to do so. A customer is not someone to argue or
match wits with, nobody ever won an argument with a customer. A customer is a person who
brings us his wants; it is our job to handle them profitably to him and to ourselves.’
Regular staff surveys: assessing the internal service culture and attitudes
Internal customer segmentation: adapting the internal marketing mix to different employee groups
Personal development and training: focused on core competencies for internal marketing
Empowerment and involvement: enabling staff, within defined parameters, to use their discretion
to deliver better service to customers
Building supportive working relationships: creating a climate of consideration, trust and support,
within which internal communications and service delivery can be encouraged and improved
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Product The marketing plan and strategies that are being proposed to employees or other
functions, together with the values, attitudes and actions needed to make the
plan successful (eg marketing budgets, extra staff).
Price What internal customers are being asked to pay or sacrifice as a result of
accepting the marketing plan (eg lost resources, lower status, new ways of
working or harder work).
Promotion (or The communications media and messages used to inform, persuade and gain the
communications) support of internal customers for the marketing plan. The message and language
will have to be adapted to the needs, concerns and understanding of the target
audience (eg eliminating marketing jargon).
Place How the product (plan) and communications are delivered to internal customers:
eg via meetings, committees, seminars, informal conversations and so on. This
may be direct or via intermediaries (eg consultants).
Supporters: those who are likely to gain from the change or plan, or are already committed to it.
Neutrals: those who are likely to experience both gains and losses from the change or plan.
Opposers: those who are likely to lose from the change or plan, or are traditional opponents.
The product (plan) and price may have to be modified to gain acceptance from opponents. Place
decisions will be used to reach each group most effectively (eg high-involvement approaches such as
consultation meetings for supporters and neutrals). Promotional objectives will also differ according to the
target group, because of their different positions on issues.
Contactors have frequent or regular customer contact and are typically heavily involved with
conventional marketing activities (eg sales or customer service roles). They need to be well versed
in the organisation’s marketing strategies and trained, prepared and motivated to service customers
on a day-to-day basis in a responsive manner.
Modifiers are not directly involved with conventional marketing activities, but still have frequent
contact with customers (eg receptionists, switchboard, the credit department). These people need
a clear view of the organisation's marketing strategy and the importance of being responsive to
customers' needs.
Influencers are involved with the traditional elements of marketing, but have little or no direct
customer contact (eg in product development or market research). Companies must ensure that
these people develop a sense of customer responsiveness, as they influence the total value offering
to the customer.
PART D MARKETING 10: Developments in marketing 289
Isolateds are support functions that have neither direct customer contact nor marketing input – but
whose activities nevertheless affect the organisation's performance (eg HR and IT). Such staff need
to be sensitive to the needs of internal customers as well as their role in the chain that delivers
value to customers. Gummesson uses the term 'part-time marketers' to describe such employees.
Employer branding The organisation's image, mediated by communication, creates an employer brand:
the organisation's image or identity as an employer in the market in which it
competes for quality labour.
Recruitment communications (job ads, application handling, interviews and so on)
are public relations and marketing exercises. They must reflect the organisation's
values and make an attractive offering to potential employees.
Employee In many countries, there are legal requirements for communication and consultation
communication and with employees on matters that affect them.
involvement The sharing of marketing information encourages employees to identify with the
organisation, its products/ services and its customers and other stakeholders: the
marketing function effectively 'sells' quality – and customer-focused values.
Information sharing also supports task performance (keeping employees informed
about new products and marketing plans, and equipping them to make a competent
contribution) and decision-making (eg by supplying market information or customer
feedback to managers in other departments).
Internal communications (eg through meetings, presentations, newsletters, intranet
sites or suggestion schemes) can be used to improve information flow in all
directions through the organisation. This may be particularly helpful where it
encourages information – and ideas-sharing between management and front-line
customer-facing staff, and between different organisational functions.
Employee relations Armstrong (2000) describes the aims of employee relations as:
Building stable and co-operative relationships with employees.
Achieving commitment through employee involvement and communications.
Developing mutuality: a common interest in achieving the organisation's goals,
through the development of a culture of shared values
Co-operative employee relations depend on direct and open communication with
employees, and giving employees a voice on matters that concern them (including
customer care and corporate social responsibility).
Flatter management structures, meaning that managers have more people reporting to them (a
wider 'span of control')
Downsizing, creating workload pressures that may hinder communication and networking
A trend towards tele-working and 'virtual' organisation, so that staff may be geographically remote
from the office, manager and each other
Globalisation, creating increasingly diverse workforces and culturally distinctive units within the
organisation, which pose barriers to 'mass' communication.
290 10: Developments in marketing PART D MARKETING
'It is very easy for senior management to decide upon a set of values that represent a company's ethos,
CASE STUDY
but much harder to engage employees' attention. This was the problem Microsoft faced when trying to
communicate its identity as a company internally. It expressed its company values in terms of six
attributes: passion, respect, accountability, integrity, self-criticism and eagerness.
Its internal marketing strategy was to ensure this ethos was communicated to employees in three
stages. First, there was a campaign across the UK to generate positive feelings about the project.
Second, a series of road-shows was held around the firm's UK offices to discuss the core values in
depth. Third, a compulsory education programme was launched to ensure all staff understood the
proposition.
The creative element of the programme was centred on the well-known David Brent character from the
BBC series The Office. Actor Ricky Gervais, who played this character, became involved and a special
15-minute video in the style of the programme was filmed, adding humour to the project and raising its
appeal to staff.
The result was that the project achieved high recognition levels for the main message of the campaign
among employees, national press coverage and an award for the best internal marketing campaign from
the magazine Marketing.'
E-mail is cheap
Messages can be sent worldwide at any time: e-mail is 24-7, regardless of time zones and office
hours
The user can attach complex documents (spreadsheets, graphics, photos) where added data or
impact are required
E-mail message management software (such as Microsoft Outlook) enables the sending of
messages to multiple recipients, integration with an 'address book' (database of contacts),
corporate stationery options and facilities for mail organisation and filing.
3.6.2 Intranet
An intranet is an internal, mini version of the Internet, using a combination of networked computers and
web technology.
PART D MARKETING 10: Developments in marketing 291
'Inter' means 'between' and 'intra' means 'within'. This may be a useful reminder. The Internet is used to
disseminate and exchange information among the public at large, and between organisations. An Intranet
is used to disseminate and exchange information within an organisation: only employees are able to
access this information.
Performance data: linked to sales, inventory, job progress and other database and reporting
systems, enabling employees to process and analyse data to fulfil their work objectives
Employment information: online policy and procedures manuals (health and safety, equal
opportunity, disciplinary rules, customer service values and so on), training and induction material,
internal contacts for help and information
Employee support/information: advice on first aid, healthy working at computer terminals, training
courses offered and so on
Notice boards for the posting of messages to and from employees: notice of meetings, events,
trade union activities and so on
Departmental home pages: information and news about each department's personnel and
activities, to aid cross-functional understanding
Bulletins or newsletters: details of product launches and marketing campaigns, staff moves,
changes in company policy – or whatever might be communicated through the print equivalent,
plus links to relevant pages for details
E-mail facilities for the exchange of messages and reports between employees in different locations
Individual personnel files, to which employees can download their training materials, references,
certificates, appraisals, goal plans and so on.
Cost savings from the elimination of storage, printing and distribution of documents that can
instead be exchanged electronically or be made available online
More frequent use made of online documents than printed reference resources (eg procedures
manuals) and more flexible and efficient searching and updating of data
Wider access to corporate information. This facilitates multi-directional communication and co-
ordination (particularly for multi-site working). It is also a mechanism of internal marketing and
corporate culture
Virtual team working. The term 'virtual team' has been coined to describe how technology can link
people in structures which simulate the dynamics of team working (sense of belonging, joint goals,
information sharing and collaboration) despite the geographical dispersion of team members in
different locations or constantly on the move
Formal discussions are used for information exchange, problem-solving and decision-making. For
example, negotiations with suppliers, meetings to give or receive product/idea presentations or
'pitches', and employee interviews.
Informal discussions may be called regularly, or on an ad hoc basis, for communication and
consultation on matters of interest or concern: for example, informal briefings and marketing or
project team meetings.
292 10: Developments in marketing PART D MARKETING
Despite the relative inconvenience (compared to group emails, say) of gathering people together in a
physical location, team meetings are an excellent tool of internal communication and marketing.
Briefly explain four benefits that an intranet will bring an organisation in terms of its internal marketing.
(4 marks)
Section summary
Internal marketing enables employees to develop an understanding of how their role delivers customer
value and build relationships.
The internal market can be segmented according to the roles employees play in relation to the customer.
Internal marketing has implications for employer branding, employee communication and employee
relations.
Key communication tools used in internal marketing include email, intranets, team meetings and
personal/informal communication.
PART D MARKETING 10: Developments in marketing 293
Introduction
Marketing techniques may be applied to encourage consumption of products which are potentially
damaging to the health and well-being of the individual and society. Examples include tobacco, alcohol,
cars, detergents and even electronic goods such as computers.
There may be conflict between what is profitable for a business organisation and the interests of the
customer, or of society.
Many organisations and businesses now accept responsibility for their actions, rather than simply setting
out to provide consumer satisfaction and maximise profits.
CORPORATE SOCIAL RESPONSIBILITY involves an organisation accepting that it is part of society and, as
such, is accountable to society for the consequences of its actions. Socially responsible firms believe that
KEY TERM
they have an obligation to maximise the positive impact they have on their stakeholders.
Ethics are concerned with judgements of society that have no enforceable impact on an organisation. On
the other hand, laws are rules that can actually be upheld in court. Behaviour which is not subject to
legal penalties may still be unethical and socially irresponsible.
We can classify marketing decisions according to ethics and legality in four different ways.
Abbott Laboratories
Global citizenship reflects how a company advances its business objectives, engages its stakeholders,
CASE STUDY implements its policies, applies its social investment and philanthropy, and exercises its influence to
make productive contributions to society.
At Abbott, global citizenship also means thoughtfully balancing financial, environmental and social
responsibilities with providing quality health care worldwide. Our programs include public education;
environment, health and safety; and access to health care. These efforts reflect an engagement and
partnership with stakeholders in the pursuit of sustainable solutions to challenges facing the global
community.
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AT&T
For AT&T, corporate citizenship means caring about the communities it is involved with, keeping the
environment healthy, making AT&T a safe and rewarding place to work and behaving ethically in all its
business dealings.
Coca-Cola
Responsible corporate citizenship is at the heart of The Coca-Cola Promise, which is based on four core
values
Marketplace. We will adhere to the highest ethical standards, knowing that the quality of our
products, the integrity of our brands and the dedication of our people build trust and strengthen
relationships. We will serve the people who enjoy our brands through innovation, superb customer
service, and respect for the unique customs and cultures in the communities where we do
business.
Workplace. We will treat each other with dignity, fairness and respect. We will foster an inclusive
environment that encourages all employees to develop and perform to their fullest potential,
consistent with a commitment to human rights in our workplace. The Coca-Cola workplace will be
a place where everyone's ideas and contributions are valued, and where responsibility and
accountability are encouraged and rewarded.
Environment. We will conduct our business in ways that protect and preserve the environment.
We will integrate principles of environmental stewardship and sustainable development into our
business decisions and processes.
Community. We will contribute our time, expertise and resources to help develop sustainable
communities in partnership with local leaders. We will seek to improve the quality of life through
locally-relevant initiatives wherever we do business.
Texas Instruments
Beyond the bottom line, the worth of a corporation is reflected in its impact in the community. At TI, our
philosophy is simple and dates back to our founding fathers. Giving back to the communities where we
operate makes them better places to live and work, in turn making them better places to do business. TI
takes its commitment seriously and actively participates in community involvement through three ways –
philanthropy, civic leadership and public policy and grass roots efforts.
Ethical issues relating to the product or service may range from omission of uncomfortable facts in
product literature to deliberate deception.
A particularly serious problem is when an unsafe product is supplied, requiring product recall.
Ethical considerations are also relevant to promotional practices. Advertising and personal selling are
areas in which there may be temptation to exaggerate, slant, conceal, distort and falsify information.
Many people think that persuading people to buy something they don't really want is intrinsically
unethical, especially if ‘hard sell’ tactics are used.
The targeting of children in marketing campaigns has also attracted criticism – potentially damaging an
organisation’s reputation and brand.
Also relevant to this area is the issue of inducements. It is widely accepted that a small gift such as a
mouse mat or a diary is a useful way of keeping a supplier's name in front of an industrial purchaser.
Most people would however condemn the payment of substantial gifts as a way of encouraging use of a
particular supplier. But where does the dividing line lie between these two extremes?
PART D MARKETING 10: Developments in marketing 295
Banks and wealth advisers are preying on vulnerable elderly people, with commission-driven staff
CASE STUDY
encouraging customers in their seventies or eighties to move large sums of money from savings accounts
into equities.
Many elderly people do not understand the implications of their new investments and end up losing tens
of thousands of pounds when they thought their capital was secure.
Emma Parker, of the Financial Ombudsman Service (FOS), says: ‘We receive thousands of complaints
from elderly people who believe that they have been mis-sold a long-term investment product.
Increasingly, the complaints are about bank or building society branch staff.’
With today’s complex financial products, some pensioners believe they are receiving advice when they are
merely hearing a sales pitch. Since April the FOS has received 1,809 investment complaints from
consumers aged 65 or older. The elderly now account for 22 per cent of all investment complaints,
compared with 19 per cent last year.
Toyota has announced the recall of vehicles in the US, Europe and China over concerns about accelerator
pedals getting stuck on floor mats.
CASE STUDY
The firm has announced plans to recall 1.1 million more cars in the US a day after saying it was
suspending sales of eight popular US models.
According to an application to China's quality control office, it wants to recall 75,552 RAV4 vehicles
there. The cars in question were manufactured between 19 March 2009 and 25 January 2010 in
Tianjin, according to a notice on the website of the General Administration of Quality Supervision,
Inspection and Quarantine of the People's Republic of China.
The specifics of the recall in Europe have yet to be decided – the carmaker was trying to establish how
many European models shared the parts used in the cars recalled in the US.
Last week, Toyota recalled 2.3 million cars in the US with faulty pedals. It has now recalled almost 8
million cars in the US in the past four months. Last November, it recalled 4.2 million cars because of
worries over pedals getting lodged under floor mats.
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‘Toyota's remedy plan is to modify or replace the accelerator pedals on the subject vehicles to address the
risk of floor mat entrapment,’ the company said.
The latest recall affects five models in the US: the 2008-2010 Highlander and the 2009-2010 Corolla,
Venza, Matrix and Pontiac Vibe.
Toyota shares fell a further 3.9% in Japan, after dropping 4.3% on Wednesday, as concerns about the
impact of the recalls on the carmaker's financial health and reputation gripped investors.
Separately, Ford said it would be suspending production of a van made and sold in China that has an
accelerator pedal made by the same firm at the centre of Toyota's investigations.
However, Ford said it had only been using the pedal in the Transit Classic model since December, with
only 1,663 vehicles produced.
Merit goods are goods or services provided free for the benefit of society by the government, for example
education or healthcare.
Demerit goods are those considered by the government to be unhealthy or damaging to society.
Examples include alcohol, cigarettes and gambling.
For example, a social marketing campaign could encourage people to stop smoking, drive safely, eat
healthily or practise safe sex.
Exam skills
Corporate social responsibility and social marketing are not areas of the syllabus which you can learn and
repeat textbook knowledge. Exam questions are likely to be scenario based and you may be expected to
comment on issues raised in them.
Section summary
Corporate social responsibility involves an organisation accepting that it is part of society and, as such, is
accountable to society for the consequences of its actions.
Unethical marketing practices are ultimately likely to damage an organisation’s reputation and brand –
and ultimately sales.
Social marketing is the application of marketing techniques to achieve non-commercial goals, for
example to encourage behaviour that benefits the environment or encourages good health.
PART D MARKETING 10: Developments in marketing 297
Chapter Roundup
In consumer marketing, the customer may combine a number of roles, for example buyer, payer and
user.
The influences on a consumer’s purchasing decision may be classified as social, cultural, personal and
psychological.
Business to business marketing reflects the more complex and formal organisational buying process.
Charities and not-for-profit organisations are increasingly utilising marketing tools and techniques,
particularly in relation to segmentation, targeting and positioning.
Charities are similar in some respects to service organisations and the extended marketing mix is
particularly relevant to them.
The charity marketing mix adopted must suit the charity's overall philosophy.
Internal marketing enables employees to develop an understanding of how their role delivers customer
value and build relationships.
The internal market can be segmented according to the roles employees play in relation to the customer.
Internal marketing has implications for employer branding, employee communication and employee
relations.
Key communication tools used in internal marketing include email, intranets, team meetings and
personal/informal communication.
Corporate social responsibility involves an organisation accepting that it is part of society and, as such, is
accountable to that society for the consequences of its actions.
Unethical marketing practices are ultimately likely to damage an organisation’s reputation and brand –
and ultimately sales.
Social marketing is the application of marketing techniques to achieve non-commercial goals, for
example to encourage behaviour that benefits the environment or encourages good health.
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Quick Quiz
1 Which type of customer is described as 'the person who selects a product or service'?
A The payer
B The user
C The consumer
D The buyer
2 Which group within an organisation's decision making unit initiates the buying process and helps define
purchase specifications?
A Initiators
B Influencers
C Deciders
D Gatekeepers
A Beneficiaries
B Supporters
C Regulators
D Lobbyists
5 According to Caroll & Buchholtz (2000), what are four main layers of corporate social responsibility?
2 A Initiators are the group within an organisation's decision making unit that initiates the buying
process and helps define purchase specifications.
Beneficiaries are those who receive tangible support from the charity and who benefit from
lobbying and publicity.
Supporters are those who provide the charity with money, time and skill.
Regulators include formal bodies, such as the Charities Commission, and less formal groups such
as residents' associations.
4 'Internal marketing is concerned with creating, developing and maintaining an internal service culture and
orientation, which in turn assists and supports the organisation in the achievement of its goals.'
5 B According to Caroll & Buchholtz (2000), the four main layers of corporate social responsibility are
economic, legal, ethical and philanthropic (this revises what you studied in Chapter 2).
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Answer to Questions
10.1 Consumer buying
The customer recognises a need or a problem to solve. There is a motive to search for a solution.
The customer searches for information they can use to base their decision on.
The purchase decision is made and the product or service selected based on how it meets their needs and other
factors such as cost.
The customer evaluates their purchase. If they are dissatisfied, they will be back at the problem recognition stage
again. If they are satisfied, the next decision process for the product may be cut short and they may skip straight
to the decision, on the basis of loyalty.
Four benefits that an intranet will bring an organisation in relation to its internal marketing are:
Cost savings
Intranets eliminate the need to store, print and distribute documents of internal marketing. Instead they can be
exchanged electronically or be made available online.
Efficiency
It is often quicker, easier and generally more efficient to search for and update material which is stored
electronically.
Distribution
Intranets facilitate multi-directional communication and co-ordination. This means information can be distributed
quickly to a number of sites in many countries.
Employees may work in isolated locations but still be part of a team. Intranets promote virtual teams by
providing a central source of information and corporate culture that enables such individuals to feel part of the
organisation.
Part E
301
302
HUMAN RESOURCE MANAGEMENT
In this chapter we examine the subject of the maximum output from employees. In particular we
human resource management (HRM) and by will focus our attention on the factors which contribute to
way of introduction, we note that HRM is employee motivation.
different from traditional personnel management.
Later in the chapter we shall consider recent
Human resource management takes a strategic developments in terms of how organisations are structured
approach to an organisation's recruitment, training and and the effect this has had on working arrangements for
appraisal systems. Personnel management is concerned employees.
with the low-level detail of day-to-day management.
Before concluding with a look at ethical issues, we revisit
However, we will focus most of our attention on a HRM from a strategic perspective by looking at how
number of human resource theories which aim to get organisations develop an HR plan.
303
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Introduction
In this chapter we look at what human resource management is, the theories behind it and how it
contributes to the success of an organisation. We also consider the importance of ethics to organisations
and its relevance to the line manager.
PERSONNEL MANAGEMENT deals with day-to-day issues such as hiring and firing and industrial relations in
general. Unlike HRM it does not play a strategic role in an organisation.
(a) To develop an effective human component for the organisation which will respond effectively to
change.
(b) To obtain and develop the human resources required by the organisation and to use and motivate
them effectively.
(c) To create and maintain a co-operative climate of relationships within the organisation and to this
end to perform a 'firefighting' role dealing with disputes as they arise.
(d) To meet the organisation's social and legal responsibilities relating to the human resource.
(a) Increased productivity. Developing employee skills might make employees more productive.
(b) Enhanced group learning. Employees work more and more in multi-skilled teams. Each employee
has to be competent at several tasks. Some employees have to be trained to work together (ie in
teamworking skills).
(c) Reduced staff turnover. Training and developing staff often reduces turnover rates. This increases
the effectiveness of operations and profitability as staff become more experienced.
(d) Encouragement of initiative Organisations can gain significant advantage from encouraging and
exploiting the present and potential abilities of the people within them.
HRM reflects a wider, modern view than traditional personnel management which is primarily concerned
with managing day-to-day operations.
1.4.1 Armstrong
Armstrong (2003) defined HRM as 'a strategic approach to the acquisition, motivation, development and
management of the organisation's human resources.'
(a) The personnel function has become centrally concerned with issues of broader relevance to the
business and its objectives, such as change management, the introduction of technology, and the
implications of falling birth rates and skill shortages for the resourcing of the business.
(b) HRM should be integrated with strategic planning that is, with management at the broadest and
highest level. The objectives of the HR function should be directly related to achieving the organisation's
goals for growth, competitive gain and improvement of 'bottom line' performance.
Some companies will have a separate human resource function with staff authority over other
departments. Smaller companies may not be able to afford the luxury of such a function.
HRM is therefore a set of activities that may or may not have a separate department to manage it.
Exam alert
You may be asked to explain the role of an 'HR' division.
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Briefly explain how human resource management contributes to the success of an organisation.
(2 marks)
Selection is important to ensure the organisation obtains people with the qualities and skills required.
Appraisal enables targets to be set that contribute to the achievement of the overall strategic objectives of the
organisation. It also identifies skills and performance gaps, and provides information relevant to reward levels.
Training and development ensure skills remain up-to-date, relevant, and comparable with (or better than)
the best in the industry.
The reward system should motivate and ensure valued staff are retained.
Performance depends upon each of the four components and how they are co-ordinated.
The model proposes that HRM practices should aim to result in high staff commitment and high quality,
flexible employees. Achieving these three HRM outcomes will facilitate the achievement of the
behavioural, performance and financial outcomes shown in the table.
External factors such as competition, technology, political/legal factors, economic factors and
social/cultural factors will all impact upon HRM.
KEY POINTS
Internal factors such as the organisational structure and culture will also impact upon HRM.
In addition, the way people are managed often depends upon the approach favoured by their line
manager. Some managers favour the 'hard' or rational approach – others believe in a 'softer' approach that
emphasises individual and organisational development.
Cultural, economic and legal traditions within a country will also shape HR policies. For example, in
Japan and the USA there is little state intervention in business and therefore organisations are free to
form their own practices. However, in former communist states such as China and some Eastern
European countries there remains a relatively high degree of state intervention.
Section summary
Human resource management (HRM) involves evaluating an organisation's human resource needs,
finding people to fill those needs, and getting the best work from each employee by providing the right
incentives and job environment.
HRM contributes to the success of an organisation through increased productivity, enhanced group
learning, reduced staff turnover and encouragement of initiative.
There are a number of factors both internal and external to the organisation which limit the success of
any HRM policy.
Introduction
In this section we look at some of the most significant theories related to the management of people.
Exam questions may require you to spot them in a scenario or you may be asked to explain them directly.
Human resource management theories often relate to three interlinked aspects, ability, opportunity and
motivation. Many theorists believe that individual employee performance is a multiplicative function of
ability and motivation and that the environment also determines the level of performance.
2.1 Ability
Ability refers the skill, knowledge and capability required of employees in order to fulfil the objectives of
the organisation.
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Taylor was an engineer and mostly concerned with engineering management. His aim was increased
efficiency in production, that is, increased productivity. His methods were later applied to many other
types of work.
(a) The development of a true science of work. 'All knowledge which had hitherto been kept in the
heads of workmen should be gathered and recorded by management. Every single subject, large
and small, becomes the question for scientific investigation, for reduction to law.'
(b) The scientific selection and progressive development of workers. Workers should be carefully
trained and given jobs to which they are best suited.
(c) The bringing together of the science and the scientifically selected and trained men. The
application of techniques to decide what should be done and how, using workers who are both
properly trained and willing to maximise output, should result in maximum productivity.
(d) The constant and intimate co-operation between management and workers. 'The relations
between employers and men form without question the most important part of this art.' There is
much that is relevant today in this approach and the pursuit of productivity is still a major
preoccupation for management at all levels.
(a) Work study techniques established the 'one best way' to do any job. No discretion was allowed to
the worker. Subsequently, Henry Ford's approach to mass production broke each job down into its
smallest and simplest component parts: these single elements became the newly-designed job.
(b) Planning the work and doing the work were separated. Workers did what they were told – they
did not have any control over how they completed a task.
(c) Workers were paid incentives on the basis of acceptance of the new methods and output norms
as the new methods greatly increased productivity and profits.
(d) All aspects of the work environment were tightly controlled in order to attain maximum
productivity.
(a) Facts were first gathered by management as to the number of shovel loads handled by each man
each day, with particular attention paid to the relationship between weight of the average shovel
load and the total load shifted per day. From these facts, management was able to decide on the
ideal shovel size for each type of material handled in order to optimise the speed of shovelling
work done.
(b) By organising work a day in advance, it was possible to minimise the idle time and the moving of
men from one place in the shovelling yard to another.
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(c) Workers were paid for accepting the new methods and 'norms' and received 60% higher wages
than those given to similar workers in other companies in the area.
(d) Workers were carefully selected and trained in the art of shovelling properly; anyone consistently
falling below the required norms was given special teaching to improve performance.
(e) 'The new way is to teach and help your men as you would a brother; to try to teach him the best
way and to show him the easiest way to do his work.'
(f) At the Bethlehem Steel Works, Taylor said, the costs of implementing this method were more than
repaid by the benefits. The labour force required fell from 500 men to 140 men for the same work.
2.2 Opportunity
Employees work within an environment that is provided by their employer. This environment must be
appropriate if employees are to be given the opportunity to perform their role at their maximum.
Contingency theory is a concept based upon the idea that the organisation's structure and management
approach must be tailored to the situation. There is no one best way to manage.
KEY POINT
One form of contingency theory was developed by Lawrence and Lorsch (1967). They concluded that
organisations in a stable environment are more effective if they have more detailed procedures and a
more centralised decision-making process while organisations in an unstable environment should have
decentralisation, employee participation, and less emphasis on rules and procedures to be effective.
2.3 Motivation
Motivation is an employee's desire to perform their role. It is often linked to the outcome and any reward.
KEY POINT It is in an organisation's interests to know the reasons or motives behind people's behaviour. Motivation
influences employee productivity and their quality of work. By understanding what motivates their staff,
an organisation is better equipped to provide an environment that maximises employee performance. We
now outline some of the main theories of motivation.
(a) Science should be used to determine fair pay for a day's work.
(b) Scientific methods should be used in the recruitment and selection of staff who should be
developed to ensure they are capable of meeting output and quality targets.
(d) There should be constant and intimate co-operation between management and staff.
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Taylor appreciated how productivity would improve if staff were specialised and equipped with the
knowledge and skills required to perform their role. Jobs should be broken down into functions that would
each be performed by an individual. However, this view resulted in over-staffing in some organisations as
a relatively large number of middle managers controlled the other workers.
Taylor also held the view that as workers were rational and would be motivated by the highest
remuneration that was possible.
Attention shifted towards people's higher psychological needs for growth, challenge, responsibility and
self-fulfilment. Herzberg suggested that only these things could positively motivate employees to
improved performance.
The human relations approaches contributed an important awareness of the influence of the human
factor at work on organisational performance.
(a) Most theorists offer guidelines to enable practising managers to satisfy and motivate employees
and so (theoretically) to obtain improved productivity.
(b) However, as far as the practising manager is concerned there is still no simple link between job
satisfaction and productivity or the achievement of organisational goals.
Apart from 'biogenic needs' or 'drives', that is, biological determinants of behaviour, activated by
deprivation, there are psychogenic needs – emotional or psychological needs. The American psychologist
Abraham Maslow argued that man has seven innate needs, and put forward certain propositions about
the motivating power of these needs.
(a) The need for freedom of inquiry and expression: for social conditions permitting free speech and
encouraging justice, fairness and honesty.
(b) The need for knowledge and understanding: to gain and order knowledge of the environment, to
explore, learn, experiment. These are essential pre-requisites for the satisfaction of the remainder.
The other five needs can be arranged in a 'hierarchy of relative pre-potency'. Each level of need is
dominant until satisfied – only then does the next level of need become a motivating factor. A need which
has been satisfied no longer motivates an individual's behaviour. The need for self-actualisation can never
be satisfied.
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(a) Empirical verification for the hierarchy is hard to come by. Physiological and safety needs are not
always uppermost in the determination of human behaviour.
(b) Research does not bear out the proposition that needs become less powerful as they are satisfied,
except at the very primitive level of primary needs like hunger and thirst.
(c) It is difficult to predict behaviour using the hierarchy: the theory is too vague.
(d) Application of the theory in work contexts presents various difficulties. For example, the role of
money or pay is problematic, since it arguably represents other rewards like status, recognition or
independence.
(e) The ethnocentricity of Maslow's hierarchy has also been noted – it does seem broadly applicable
to Western English-speaking cultures, but it is less relevant elsewhere.
Herzberg identified two groups of work related factors which caused satisfaction and dissatisfaction
respectively. He called these factors motivators and hygiene factors.
MOTIVATORS produced satisfaction when present and were capable of motivating the individual.
HYGIENE FACTORS (or MAINTENANCE FACTORS) could not give satisfaction or provide motivation when
KEY TERMS
present. Their absence, however, caused dissatisfaction.
In his book Work and the Nature of Man, Herzberg distinguished between hygiene factors and motivator
factors, based on what he saw as two separate 'need systems' of individuals.
(a) There is a need to avoid unpleasantness. This need is satisfied at work by hygiene factors.
Hygiene satisfactions are short-lived: individuals come back for more, in the nature of drug addicts.
(b) There is a need for personal growth, which is satisfied by motivator factors, and not by hygiene
factors.
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A lack of motivators at work will encourage employees to focus on poor hygiene (real or imagined) and
to demand more pay for example. Some individuals do not seek personal growth: these are 'hygiene
seekers' who may be able to be satisfied by hygiene factors.
Hygiene factors are essentially preventative. They prevent or minimise dissatisfaction but do not give
satisfaction, in the same way that sanitation minimises threats to health, but does not give 'good' health.
KEY POINTS
They are called 'maintenance' factors because they have to be continually renewed to avoid
dissatisfaction.
Motivator factors create job satisfaction and are effective in motivating an individual to superior
performance and effort. These factors give the individual a sense of self-fulfilment or personal growth.
Herzberg suggested that if there is sufficient challenge, scope and interest in the job, there will be a
lasting increase in satisfaction, the employee will work well and productivity will be above normal levels.
The extent to which a job must be challenging or creative to a motivator-seeker will depend on each
individual's ability and their tolerance for delayed success.
(a) People compare what they receive with what others receive, for a perceived level of effort.
(b) Inequity exists if another person gets more for a given level of input.
(c) People get more upset the more inequity there is.
(d) The more upset someone is, the harder they will work to restore 'equity'.
Equity theory was backed up in the laboratory but is hard to apply in the real world.
KEY TERM
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(a) Theory X. Most people dislike work and responsibility and will avoid both if possible. Therefore,
most people must be coerced, controlled, and threatened with punishment to get them to make an
adequate effort towards the achievement of the organisation's objectives.
(b) Theory Y. Individuals wants to satisfy their individual needs through work and wish to make a
contribution towards goals that they have helped to establish. Therefore managers who take a
Theory Y approach seek to allow their staff to follow their own path and satisfy their own needs.
When deciding which approach to take, the following issues are important.
(ii) Self motivation and commitment may be more effective and less confrontational.
(iii) Treating individuals in a Theory X manner may prevent the use of initiative and encourage
doing the minimum required.
(iv) Theory X is ineffective when managing individuals who are not financially motivated or
who are not afraid of punishment.
In 1964 Victor Vroom, an American psychologist, worked out a formula by which human motivation
could actually be assessed and measured, based on an expectancy theory of work motivation. Vroom
suggested that the strength of an individual's motivation is the product of two factors.
(a) The strength of their preference for a certain outcome. Vroom called this valence. It may be
represented as a positive or negative number, or zero – since outcomes may be desired, avoided or
considered with indifference.
(b) The individual's expectation that the outcome will result from a certain behaviour. Vroom called
this subjective probability – it is the individual's 'expectation' and depends on their perception of
the probable relationship between behaviour and outcome. As a probability, it may be represented
by any number between 0 (no chance) and 1 (certainty). It is also called expectancy.
In its simplest form, the expectancy equation therefore looks like this.
Force or strength of Valence ie strength of Expectation that
motivation to do = their preference for a behaviour will result
something certain outcome in desired outcome
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This group is motivated by the maximisation of economic gain and by following their own self-
interest.
Performance of this group is improved by raising morale, through socialisation at work. Rather
than acting as a controller, managers should be seen as facilitators.
This group is motivated through self-fulfilment. In terms of work they are motivated by challenge
and responsibility.
Motivation is based on a 'psychological contract' between employers and employees. Each has
their own expectations of the 'contract' and motivation depends on their fulfilment.
(a) Challenging goals, providing they have been accepted, lead to better performance than easy goals.
(b) The best goals are specific as they focus people's attention.
(c) Knowledge of results is essential.
Goal theory has the most empirical support of any motivation theory, but there are some limits to how it
applies.
(b) At work, people pursue several goals consecutively; achieving one may mean neglecting another.
This is particularly a problem for organisations where trade offs have to be made.
PART E MANAGING HUMAN CAPITAL 11: Human resource management 315
Classification Examples
Economic reward Pay and benefits
Intrinsic satisfaction Enjoyment of the job and personal development
Social relationships Team working and forming friendships with colleagues
Douglas McGregor suggested that managers have one of two views or theories about subordinates.
View 1. Individuals want to satisfy their needs through work and wish to make a contribution to the goals
they have helped to establish.
View 2. Most people dislike work and responsibility, and so have to be coerced, controlled, and
threatened with punishment, to get them to do their job adequately.
Which of the following statements is correct?
A View 1 is called Theory X and view 2 is called Theory Y, and McGregor suggested that the most
effective managers hold view 1
B View 1 is called Theory Y and view 2 is called Theory X, and McGregor suggested that the most
effective managers hold view 2
C View 1 is called Theory X and view 2 is called Theory Y, and McGregor suggested that the most
effective managers hold view 2
D View 1 is called Theory Y and view 2 is called Theory X, and McGregor suggested that the view
held by the most effective managers depends on the circumstances
(2 Marks)
If the organisation attempts to demand greater efforts without increasing the rewards, the
psychological contract will revert to a coercive one, and motivation may become negative.
(c) Co-operative contract. This is a contract in which the individual identifies themselves with the
organisation and its goals, so that they actively seek to contribute further to the achievement of
those goals. Motivation comes out of success at work, a sense of achievement, and self-fulfilment.
The individual will probably want to share in the planning and control decisions which affect their
work, and co-operative contracts are therefore likely to occur where employees participate in
decision-making.
Motivation happens when the psychological contract, within which the individual's motivation calculus
operates for new decisions, is viewed in the same way by the organisation and by the individual, and
when both parties are able to fulfil their side of the bargain. The individual agrees to work, or work well,
in return for whatever rewards or satisfactions are understood as the terms of the 'contract'.
Psychological contracts are particularly relevant when considering staff turnover and retention rates.
Employees are more likely to stay and be loyal to an organisation where they perceive to have a co-
operative contract rather than a coercive one.
Section summary
The success of any HRM policy can be measured by the contribution of the employees to the success of
the organisation.
There are a number of HRM theories which relate to ability, opportunity and motivation.
Psychological contracts are the expectations that the employee and employer have of each other.
Introduction
Pay is part of the reward system, and can be a motivator in certain circumstances. However, this
depends on the value individuals ascribe to pay and the way in which incentive schemes are
implemented. Pay is usually considered a hygiene factor.
Employees need an income to live and most probably have two basic concerns – to earn enough money
and that their pay should be fair. This can be assessed in two ways.
Aid recruitment
Retain employees
Reward employees for performance
PART E MANAGING HUMAN CAPITAL 11: Human resource management 317
Broad-banded structures usually encompass the whole workforce from the clerk to the senior
manager. The range of pay in this structure is typically higher than in graded structures.
Individual. Pay is allocated to individuals rather than 'bands'. It is used for senior management
positions and avoids the problem of over/under payment which can result from grading.
Job family structures. Jobs in specific functions such as accounts or HR are grouped into families.
The jobs differ in terms of skill levels or responsibility (such as accounts technician and
management accountant) and pay is determined accordingly.
Pay or profession/maturity curves. These recognise that in certain roles, pay must be progressive
to allocate pay fairly. Especially where knowledge or experience is key to the role.
Spot rates. Allocate a rate of pay for a specific job often linked to the market price.
Rate for age. Allocates a rate of pay or pay bracket for employees based on age.
Pay spines are often used by government organisations where it is important for pay to be relative
across a range of roles. They are a series of incremental points from the lowest to the highest paid
jobs. Pay scales for specific jobs are superimposed onto the spine to ensure pay is relative.
Manual worker pay structures recognise the difference in status between those who work in
manual roles against those in other parts of the organisation. Real differentials are incorporated
that reflect differences in skill and responsibility but otherwise they are similar to other pay
structures.
Integrated structures incorporate one grading system for all employees except senior management.
They are often used where employees were paid historically under separate agreements.
The assumption behind most payment systems is that money is the prime motivating factor. As
Herzberg, among others, suggested, however, it is more likely to be a cause of dissatisfaction.
Herzberg himself admitted that pay is the most important of all the hygiene factors. Goldthorpe,
Lockwood et al, in their Affluent Worker study of the Luton car industry, suggested that workers may
have a purely instrumental orientation to work – deriving satisfaction not from the work itself but from the
rewards obtainable with the money earned by working. The Luton workers experienced their work as
routine and dead-end, but had made a rational decision to enter employment which offered high
monetary reward rather than intrinsic interest.
As expectancy theory indicates, pay is only likely to motivate a worker to improved performance if there is
a clear and consistent link between performance and monetary reward and if monetary reward is valued.
Salary structures do not always allow enough leeway to reward individual performance in a job (since
fairness usually dictates a rate for the job itself, in relation to others). Incentive schemes, however, are
often used to re-establish the link between effort and reward.
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Plot job scores on a scatter diagram and draw a line of 'best fit'.
Plot the upper, median and lower market pay rates from the available information.
Decide on the overall shape of the pay structure based on the pay policy.
Define pay ranges for each level taking into account flexibility for pay-progression.
Decide on a pay range policy and plot upper and lower pay rates using the 'best fit' policy as
the mid-range.
(a) Staff members' effort and attention are directed to where they are most needed – performance.
(b) Commitment and motivation are enhanced. This is particularly important when there are cultural
obstacles to improvement.
(c) Achievement can be rewarded separately from effort, with advantages for the recruitment and
retention of high quality employees.
PART E MANAGING HUMAN CAPITAL 11: Human resource management 319
Individual schemes are common when the work is essentially individualistic and the output of a single
person is easy to specify and measure. However, much work is performed by teams and it is impossible
to identify each person's output. Such work calls for a group incentive scheme.
The main problem with team incentive payments is that there is unlikely to be a single consistent
standard of effort or achievement within the group. Inevitably there will be those who perform better than
others and they are likely to be aggrieved if all group members are rewarded equally.
The ultimate group incentive scheme is the organisation wide scheme, in which all employees are
rewarded in accordance with overall performance, usually as measured by profit . This tends to be very
popular in good times and the cause of disappointment and resentment when the business is doing badly.
The value of such schemes is questionable.
The most common individual PRP scheme for wage earners is straight piecework: payment of a fixed
amount per unit produced, or operation completed.
KEY POINT
For managerial and other salaried jobs, however, a form of management by objectives will probably be
applied. The SMART criteria (Specific, Measureable, Achievable, Realistic and Time-bound) should be
applied.
(a) Key results will be identified and specified, for which merit awards (on top of basic salary) will be
paid.
(b) There will be a clear model for evaluating performance and knowing when, or if, targets have
been reached and payments earned.
(c) The exact conditions and amounts of awards can be made clear to the employee, to avoid
uncertainty and later resentment.
For service and other departments, a PRP scheme may involve bonuses for achievement of key results, or
points schemes, where points are awarded for performance on various criteria (efficiency, cost savings,
quality of service and so on). Certain points totals (or the highest points total in the unit, if a competitive
system is used) win cash or other awards.
However, Otley (1987) discovered that employees become demotivated if they fail to meet targets,
resulting in a high degree of performance reduction.
Bonus schemes are supplementary to basic salary, and have been found to be popular with
entrepreneurial types, usually in marketing and sales. Bonuses are both incentives and rewards.
KEY POINT
Group incentive schemes typically offer a bonus for a group (equally, or proportionately to the earnings or
status of individuals) which achieves or exceeds specified targets. Typically, bonuses would be calculated
monthly on the basis of improvements in output per man per hour against standard, or value added (to
the cost of raw materials and parts by the production process).
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Value added schemes work on the basis that improvements in productivity increases value added, and
the benefit can be shared between employers and employees on an agreed formula. So if sales revenue
increases and labour costs stay the same, or sales revenue remains constant but labour costs decrease,
the balance becomes available. There has been an increase in such schemes in recent years.
Profit sharing schemes offer employees (or selected groups of them) bonuses, perhaps in the form of
shares in the company, related directly to profits. The formula for determining the amounts may vary, but
KEY POINT
in recent years a straightforward distribution of a percentage of profits above a given target has given way
to a value added related concept.
Profit sharing is in general based on the belief that all employees can contribute to profitability, and that
that contribution should be recognised. If it is, the argument runs, the effects may include profit-
consciousness and motivation in employees, commitment to the future prosperity of the organisation and
so on.
The actual incentive value and effect on productivity may be wasted, however, if the scheme is badly
designed.
(a) A perceivably significant sum should be made available to employees – once shareholders have
received appropriate return on their investment – say, 10% of basic pay.
(b) There should be a clear, and not overly delayed, link between performance and reward. Profit
shares should be distributed as frequently as possible – consistent with the need for reliable
information on profit forecasts and targets and the need to amass a significant pool for distribution.
(c) The scheme should only be introduced if profit forecasts indicate a reasonable chance of achieving
the target. Profit sharing is welcome when profits are high, but the potential for disappointment is
great.
(d) The greatest effect on productivity arising from the scheme may in fact arise from its use as a focal
point for discussion with employees, about the relationship between their performance and results,
and areas and targets for improvement. Management must be seen to be committed to the
principle.
Exam alert
Exam questions may require you to discuss the difficulties of designing and operating a reward scheme for
performance.
(a) Increased earnings simply may not be an incentive to some individuals. An individual who already
enjoys a good income may be more concerned with increasing their leisure time, for example.
(b) Workers are unlikely to be in complete control of results. External factors, such as the general
economic climate, interest rates and exchange rates may play a part in profitability in particular.
In these cases, the relationship between an individual's efforts and their reward may be indistinct.
(c) Greater specialisation in production processes means that particular employees cannot be
specifically credited with the success of particular products. This may lead to frustration amongst
employees who think their own profitable work is being adversely affected by inefficiencies
elsewhere in the organisation.
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(d) Even if employees are motivated by money, the effects may not be altogether desirable. An
instrumental orientation may encourage self-interested performance at the expense of teamwork.
It may encourage attention to output at the expense of quality, and the lowering of standards and
targets (in order to make bonuses more accessible).
(e) It is often all too easy to manipulate the rules of the incentive scheme, especially where there are
allowances for waiting time, when production is held up by factors beyond the control of the
people concerned. Special allowances, guaranteed earnings and changes in methods also
undermine incentive schemes.
(f) Poorly designed schemes can produce labour cost increases out of proportion to output
improvements.
All such schemes are based on the principle that people are willing to work harder to obtain more money.
However, the work of Elton Mayo and Tom Lupton has shown that there are several constraints which
prevent most people from seeking to maximise their earnings.
(a) Workers are generally capable of influencing the timings and control systems used by
management.
(b) Workers remain suspicious that if they achieve high levels of output and earnings then
management will alter the basis of the incentive rates to reduce future earnings. Work groups
therefore tend to restrict output to a level that they feel is fair and safe.
(c) Generally, the workers conform to a group output norm. The need to have the approval of their
fellow workers by conforming to that norm is more important than the money urge.
In the Affluent Worker study referred to above, Goldthorpe and Lockwood recognised that people do not,
by and large, seek to maximise their earnings. Instead, a person will work as hard as necessary to earn
the money they want – but not past the point at which the deprivations demanded of them (in terms of
long hours or danger or antisocial conditions) are greater than they feel are worthwhile.
Total reward schemes recognise that individuals are all different and may not all be motivated by money.
KEY TERM
The fact that an individual can supplement their remuneration package may in itself be an attraction for
prospective employees.
Carrington (2004) identified the drivers for the development of total reward package. The key driver was
the skills shortage in the 1990s that caused 'talent wars' where organisations had to attract staff in a
more competitive manner. Around the same time many organisations were developing a vision and
culture – these schemes helped further this development.
Flexible benefits are another method of rewarding staff. Certain incentives have become more or less
popular over time and Prickett (2006) identified which are growing, static and declining in popularity.
Training
Flexible working hours
Working at home
Career progression
The pursuit of green or ethical policies by the company (may be an attraction to individuals with
strong views on these issues)
Carrington (2004) identified a number of advantages of such schemes. In particular they make a positive
statement about the culture of the organisation, the creation of a more inclusive rather than a 'them and
us' attitude and improved recruitment and retention as a result of employer branding.
Advantages Disadvantages
Attracts potential employees It might have no effect
Improves employee motivation It might cause organisational stagnation as
employees may not push themselves for further
reward
It ignores employee welfare
Employees may prefer to have cash only
She also emphasised the importance of people being involved in decisions and procedures that affected
them. This was an important source of motivation.
Section summary
In many circumstances pay can be a motivator for employees.
Schemes that link reward to employee performance include, profit related pay, bonus schemes and
profit sharing.
Total reward schemes offer employees bundles of benefits from which they can pick and choose what
they want.
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Introduction
Frustration, conflict, feelings of failure and low prospects tend to show themselves in such effects as
high labour turnover, absenteeism or preoccupation with financial rewards (in compensation for lack of
other satisfactions). These can be as self-defeating for the organisation as they are unhealthy for the
individual.
However, there are a great many other work and non-work variables in the equation. A happy workforce
will not necessarily make the organisation profitable (if the market is unfavourable). They will not
necessarily be more productive (if the task itself is badly designed or resources scarce) nor even more
highly motivated.
Therefore, to ensure employee performance benefits the organisation, organisations should take into
account all factors that influence employee motivation.
(a) Job redesign aims to improve performance through increasing the understanding and motivation of
employees. Job redesign also aims to ensure that an individual's job suits them in terms of what
motivates them and their need for personal growth and development.
(b) Job rotation allows for a little variety by moving a person from one task to another. Employees
often do this spontaneously. Job rotation permits the development of extra skills, but does not
develop depth of skill.
(c) Job enlargement increases the width of the job by adding extra, usually related, tasks. It is not
particularly popular with workers, many of whom prefer undemanding jobs that allow them to chat
and daydream.
(d) Job enrichment increase the depth of responsibility by adding elements of planning and control to
the job, therefore increasing its meaning and challenge. The worker achieves greater autonomy and
growth in the role.
Hackman and Oldham's motivating potential score (MPS) is an attempt to measure a job's potential to
produce motivation and satisfaction. The MPS is computed from scores in questionnaires designed to
diagnose the extent to which the job displays five core characteristics.
(a) Skill variety: the breadth of job activities and skills required
(b) Task identity: whether the job is a whole piece of work with a visible outcome
(c) Task significance: the impact of the job on other people
(d) Autonomy: the degree of freedom allowed in planning and executing the work
(e) Feedback: the amount of information provided about the worker's job performance
Hackman and Oldham suggest that the first three characteristics above contribute to the 'experienced
meaningfulness of the work' and this is borne out by empirical research. The extent to which a job's
autonomy and feedback, as measured by Hackman and Oldham, contribute to job satisfaction is less
clear-cut.
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Exam alert
Motivation is an ideal topic for a Section C question. You might be introduced to a situation and asked to
explain why the people in the organisation are, say, demotivated. You could be asked to comment on the
motivational impact of changes proposed by management.
Section summary
There are a number of methods of improving an employee's experience of work and their motivation.
These include, job redesign, rotation, enlargement and enrichment.
This has implications for the HR plan and policies. For example, if a general pool of multi-skilled
employees is required, recruitment policy should reflect that fact – rather than recruiting large numbers of
specialists. Extensive training programmes are also likely to be required. The advantages and
disadvantages of project-based organisations can be summarised as follows.
Advantages Disadvantages
Greater flexibility of: Dual authority threatens a conflict between
People. Employees develop an attitude geared functional managers and product/project area
to accepting change. managers.
(a) Flat structures. The flattening of hierarchies does away with levels of organisation which
lengthened lines of communication and decision-making and encouraged ever-increasing
specialisation. Flat structures are more responsive, because there is a more direct relationship
between the organisation's strategic centre and the operational units serving the customer.
(b) 'Horizontal structures'. What Peters (Liberation Management) calls 'going horizontal' is a
recognition that functional versatility (through multi-functional project teams and multi-skilling, for
example) is the key to flexibility. In the words (quoted by Peters) of a Motorola executive: 'The
traditional job descriptions were barriers. We needed an organisation soft enough between the
organisational disciplines so that … people would run freely across functional barriers or
organisational barriers with the common goal of getting the job done, rather than just making
certain that their specific part of the job was completed.'
(c) 'Chunked' and 'unglued' structures. So far, this has meant teamworking and decentralisation, or
empowerment, creating smaller and more flexible units within the overall structure. Charles
Handy's 'shamrock organisation' (with a three-leafed structure of professional core, contractual
fringe and flexible part-time labour) is gaining ground as a workable model for a leaner and more
flexible workforce, within a controlled framework.
(d) Output-focused structures. The key to all the above trends is the focus on results, and on the
customer, instead of internal processes and functions for their own sake. A project management
orientation and structure, for example, is being applied to the supply of services within the
organisation (to internal customers) as well as to the external market, in order to facilitate listening
and responding to customer demands.
(e) 'Jobless' structures. The employee becomes not a job-holder but the vendor of a portfolio of
demonstrated outputs and competences (Bridges). This is a concrete expression of the concept of
employability, which says that a person needs to have a portfolio of skills which are valuable on
the open labour market. Employees need to be mobile, moving between organisations rather than
settling in to a particular job.
(a) Outsource areas of organisational activity to other organisations and freelance workers (even 'off-
shore' in countries where skilled labour is cheaper), without losing control or co-ordination.
(b) Organise 'territorially' without the overhead costs of local offices, and without the difficulties of
supervision, communication and control. Dispersed centres are linked to a 'virtual office' by
communications technology and can share data freely.
(c) Centralise shared functions and services (such as data storage and retrieval, technical support or
secretarial services) without the disadvantages of 'geographical' centralisation, and with the
advantages of decentralised authority. Databases and communication (eg via e-mail) create
genuine interactive sharing of, and access to, common data.
(d) Adopt flexible cross-functional and multi-skilled working, by making expertise available across the
organisation. A 'virtual team' co-opts the best people for the task – regardless of location.
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Section summary
Organisations may adopt new structures or develop their own. Recent trends in organisational structure
include project-based teams, flat structures, horizontal structures, chunked and unglued structures,
output-focussed structures and 'jobless' structures. Some have even become virtual organisations.
6 Working arrangements
Introduction
The ways in which people are allowed and encouraged to work will affect their motivation and
performance. For example, allowing employees flexibility in when they complete their weekly hours
(flexitime) may allow them to deal with domestic issues when they arise, meaning the time they actually
spend working is more productive.
(a) Multi-skilling. Multi-skilled teams involve individuals who are able to perform a variety of team
tasks, as required. This enables tasks to be performed more flexibly, using labour more efficiently.
(b) Flexibility. Flexibility is about being able to respond and adapt quickly to rapidly-changing
customer demands, or to other changes such as technological change and different working
methods. This has created the following.
(iii) Flexible deployment of the labour resource, for example through part-time and temporary
working, outsourcing, flexitime and so on.
(c) Empowerment. Empowerment is based on the idea that those who are actually doing a job are
best positioned to make decisions relating to how the work is done.
It involves giving employees the freedom to take responsibility for their goals and actions and may
release hidden resources (creativity, initiative, leadership, innovation), which would otherwise
remain inaccessible. People are allowed to use their own judgement.
The extent to which these values are incorporated into an organisation's HR plan and policies will depend
upon the type of organisation, the role of the employees and the philosophy of top management.
A well-structured policy should be developed that provides a clear understanding of the expectations and
responsibilities of all parties involved in the flexible work arrangement, and ensures that the same criteria
for making decisions on flexible work arrangements are applied to all employees.
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The key to successful flexible work arrangements is to tailor the arrangement to the particular needs of
the individual and the organisation. When considering which flexible work arrangements to offer
KEY POINT
employees, organisations should consider the arrangement's practicality, fairness, and flexibility within the
environment of the organisation.
(a) Flexitime. Flexitime is an arrangement where employees work the standard number of hours in a
workday (or in some arrangements within a work week), but are given some flexibility as to when
they work these hours. Most organisations establish 'core working hours', meaning there are certain
hours during the day in which it is mandatory for the employee to be at the workplace. For
example, an employee on flexitime may have to work 7.5 hours per day, but be able to start their
day anytime between 7 and 10 a.m. and finish between 3 and 6 p.m.
(b) Compressed week. A compressed week is an arrangement where an employee works the standard
number of hours in a one-or two-week period, but compresses those hours into fewer work days
(therefore working longer hours on the days the employee is at work). For example, in a 40-hour
work week an employee on a compressed work week may work four 10-hour days in a week with
one day off, or nine 9-hour days with one day off every two weeks.
(c) Job sharing. Job sharing is an arrangement where two employees share one position. There are
many combinations of work hours that are used for job sharing. For example, one employee might
work Monday to Wednesday and the other employee Thursday and Friday, or one employee might
work mornings and the other afternoons.
(d) Part-time/Reduced hours. Part-time or reduced hours are arrangements where an employee works
less than the standard work week hours (and are paid only for those hours).
(f) Shift working. Shift patterns, outside of regular working hours, may be used to add flexibility in
relation to the time of day people work.
Organisations introducing flexible working should compile a formal flexible work agreement to be
completed and signed by the employer and the employee. The agreement should include the specific
details of the arrangement.
Often there is an unreasonable requirement that individuals who work a compressed work week should
be required to be available or on-call on their day off, or, on the other hand, the probably reasonable
expectation that employees with the right to work at home should come into work for a meeting held on
their work-at-home day. These issues should be covered by the flexible work arrangement agreement.
(a) Numerical flexibility can be achieved through the use of temporary workers – both contractors and
agency staff. Atkinson (1984) distinguished between 'core employees' (high status, job security)
and 'periphery workers' on temporary or flexible hour contracts.
(b) Financial flexibility is achieved through variable systems of reward (eg performance-related pay).
(c) Task flexibility (sometimes referred to as functional flexibility) involves having employees able to
undertake a wider range of tasks. Introducing task flexibility could involve employees undertaking a
wider range of tasks at the same 'level' (horizontally) or undertaking tasks previously carried out by
employees at higher or lower levels (vertically).
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Exam alert
Exam questions may ask for a discussion of how an organisation could achieve workforce flexibility.
Advantages Disadvantages
The potential benefits to the employer are: Possible disadvantages to the employer include:
Increased employee motivation and Increased difficulty co-ordinating work
productivity Loss of direct control
Increased employee commitment to the Dilution of the organisation’s culture as
organisation employees see less of each other.
The ability to attract high performing individuals
Reduced absenteeism and staff turnover.
The potential benefits to the employee are: Potential disadvantages to employee include:
Reduction in stress due to conflicting personal Loss of the distinction between home and office
and professional priorities life
Increased job satisfaction, energy and creativity Increased possibility of being distracted from
Reduced cost of commuting work tasks
Wider choice of housing as employees can live Lack of space at home for office equipment
further from work Lack of facilities such as IT equipment
Ease of balancing work/life commitments Increased utility bills as the employee is at
Privacy. home more often
Lack of social contact with other employees.
Section summary
Organisations are increasingly offering flexible working schemes for employees.
7 The HR plan
Introduction
HR planning should be based on the organisation's strategic planning processes, with relation to analysis
of the labour market, forecasting of the external supply and internal demand for labour, job analysis and
plan implementation.
PLANNING '(the) establishment of objectives, and the formulation, evaluation and selection of the policies,
strategies, tactics and action required to achieve them'.
KEY TERM
PART E MANAGING HUMAN CAPITAL 11: Human resource management 329
1. STRATEGIC ANALYSIS
of the environment
of the organisation's manpower strengths and
weaknesses, opportunities and threats
of the organisation's use of employees
of the organisation's objectives
2. FORECASTING
of internal demand and supply
of external supply
3. JOB ANALYSIS
investigating the task performed in each job
identifying the skills required
4. RECRUITMENT AND TRAINING
recruiting and selecting required staff
training and developing existing staff
(a) The environment: population and education trends, policies on the employment of women and on
pension ages and trends generally in the employment market must be monitored.
(b) The organisation's HR strengths, weaknesses, opportunities and threats need to be analysed so as
to identify skills and competence gaps and the level of innovation. Threats may involve competitors
'poaching' staff.
(c) Human resource utilisation. An assessment should be made of how effectively the organisation is
currently utilising its staff.
(d) Objectives. Core and subsidiary corporate objectives should be analysed to identify the manpower
implications. New products, technology, 'culture' and structure will all make demands on staff.
Timescales are very important. An immediate gap may prompt instant recruitment while long-term
corporate objectives allow planned staff development, providing them with the skills required.
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(a) Demand. Environmental factors (eg the economy) create uncertainties in the demand for labour.
(b) Supply. Factors such as education or the demands of competitors for labour create uncertainties in
the supply of labour.
(c) Goals. Employees have their own personal goals, and make their own decisions about whether to
undertake further training. When large numbers of individuals are involved, the pattern of
behaviour which emerges in response to any change in strategy may be hard to predict.
(d) Constraints. Legislation as well as social and ethical values constrain the ways in which human
resources are used, controlled, replaced and paid.
7.3 Forecasting
Estimating demand. Planning future HR needs requires accurate forecasts of turnover and productivity (eg
if fewer staff are required for the same output). The demand can be estimated from:
Estimating supply
(a) Current workers. A stocks and flows analysis will define the internal labour market. It describes,
not just aggregate quantities, but movements in and out of certain grades, by occupation and grade
and according to length and service. This can be used in modelling.
(b) The external labour market. Labour market research does four things.
A position survey compares demand and supply. Differences in the numbers required/available, their
grade, skills or location can be removed by applying an integrated manpower strategy.
7.4 Closing the gap between demand and supply: the HR plan 03/13
At the business unit level, the human resources plan will arise out of the strategic HR plan.
(a) The work required to be done will largely result from the business plan. Production management
might determine how the work will be done. If, for example, the company is introducing new
machinery, then the human resource requirements (eg training, possible redundancy, safety
measures) need to be considered.
(b) The skills base includes technical skills, interpersonal skills, and management skills. The need for
technical and management skills are obvious enough. Interpersonal skills are important, as they
deal with the service offered to customers and affect teamwork.
The HR plan is prepared on the basis of staffing requirements and the implications for productivity and
costs. It should include budgets, targets and standards, and should also allocate responsibilities for
implementation and control (reporting, monitoring achievement against plan).
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The HR plan can be broken down into subsidiary plans as shown in the following table.
Plan Comment
Recruitment plan Numbers; types of people; when required; recruitment programme.
Training plan Numbers of trainees required and/or existing staff needing training; training
programme.
Redevelopment plan Programmes for transferring, retraining employees.
Productivity plan Programmes for improving productivity, or reducing manpower costs; setting
productivity targets.
Redundancy plan Where and when redundancies are to occur; policies for selection and declaration
of redundancies; re-development, re-training or re-location of redundant
employees; policy on redundancy payments, union consultation etc.
Retention plan Actions to reduce avoidable labour wastage.
Exam alert
You may be required to describe the main issues and stages in devising a human resource plan.
332 11: Human resource management PART E MANAGING HUMAN CAPITAL
Corporate
objectives
Analysis of
existing records
Design organisation
Estimated changes structure
by target date
Target date
Recruitment Management
and selection Training development Redeployment Redundancies
Reconciliation of
supply and demand
(a) Actual numbers recruited, leaving and promoted should be compared with planned numbers.
Action may be required to correct any imbalance – depending upon the cause.
(b) Actual pay, conditions of employment and training should be compared with assumptions in the
HR plan. Do divergences explain any excessive staff turnover?
(c) Periodically, the HR plan itself should be reviewed and brought up to date.
Enthusiastic and committed employees ensure business success. Do you agree? (4 marks)
Section summary
HR plans identify the needs of the organisation in terms of numbers of staff and their skills and compare
this with the resources that the organisation currently has. A plan is formed to close the gap between
the two.
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8 Ethical behaviour
Introduction
Ethics refer to a code of moral principles that people follow with respect to what is right or wrong. Ethical
principles are not necessarily enforced by law, although the law incorporates moral judgements (eg theft
is wrong ethically, and is also punishable legally).
Companies have to follow legal standards, or else they will be subject to fines and their officers might
face similar charges. Ethics in organisations relates to business practice and social responsibility.
Increasingly, consumers and businesses prefer to purchase from and do business with organisations with
high ethical standards.
Business life is a fruitful source of ethical dilemmas because its whole purpose is material gain, the
making of profit. Success in business requires a constant, avid search for potential advantage over others
and business people are under pressure to do whatever yields such advantage.
Element Explanation
I Ethics concern an individual's professional responsibility to act.
DO Ethics concern the 'real world' practical actions an individual can take. It is important to consider
how an individual acts and not always what they do.
BEST Ethics concern choices between different courses of action. These may involve taking a course of
action which is less unpalatable than another.
In recent times, trust in businesses has fallen and increasingly more evidence is required to demonstrate
it.
The 'Show me' stage required some demonstration of trust, 'Prove to me' required independent verification
and assurance and the final stage of 'Obey me' would exist when the law creates legislation to cure
instances of unethical behaviour. We are some way off this point currently.
What caused this trust to disintegrate? Since the 1980s, the UK has seen a procession of corporate
disasters including the names of Barings Bank, Polly Peck and Maxwell. In an attempt to counter this
lack of trust, many corporations developed ethical strategies and policies to provide guidance and
training for their employees. The strategy is set by the leadership and feeds into all areas of the business,
becoming part of the cultural DNA of the organisation.
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Corporate (Social) Responsibility policies explain the organisation’s approach to helping the community
and reducing the environmental impact of the organisation.
KEY POINT
These policies must be consistent with the overall aims of the organisation, and should not be overstated
in an attempt to paint a ‘better’ image. Exaggerated claims are likely to harm an organisation in the eyes
of the public.
These reports focus included figures or statistics covering areas such as the orgnisation’s carbon footprint
and impact on the environment. These can be added to more conventional assessments such as staff
KEY POINT
turnover to provide a wide ranging picture of the organisation.
Corporate values also guide staff as to the expectations that employers have regarding their behaviour.
The aim is to end up with consistent behaviour across the workforce in terms of personal conduct and
professionalism. These policies are enforced on a voluntary basis and results are monitored through
audits, surveys and interviews.
It is important that all employees, especially line managers, follow the policies laid down by the
organisation's leadership. The media is quick to pick up on any ethical failings by employees, often
resulting in adverse publicity for the organisation.
In particular, members should pay attention to the fundamental principles given in the Introduction and
the discussion of objectivity and the resolution of ethical conflicts that appear in Part A. Despite being
aimed at accountants, these guidelines are also equally relevant to any employee or manager within an
organisation and are discussed briefly below.
Ethical behaviour and CIMA’s ethical guidelines are core to the CIMA qualification and
feature in many of the syllabuses.
CIMA's ethical guidelines are examinable. You should download a copy from the CIMA
website (www.cimaglobal.com).
PART E MANAGING HUMAN CAPITAL 11: Human resource management 335
(a) Integrity. This is more than not telling lies – professional accountants must not be party to
anything which is deceptive or misleading. You should be straightforward, honest and truthful in
all professional and business relationships.
(b) Objectivity. This is founded on fairness and avoiding all forms of bias, prejudice and partiality.
(c) Professional competence and due care. Individuals must ensure they remain up-to-date with
current developments and are technically competent. Those working under your authority must
also have the appropriate training and supervision.
(d) Confidentiality. Employers and clients are entitled to expect confidential information will not be
revealed without specific permission or unless there is a legal or professional right or duty to do so.
(e) Professional behaviour. Accountants should behave in such a way as to protect the reputation of
the professional and the professional body, and comply with relevant laws and regulations.
A CIMA member or student should act responsibly, honour any legal contract of employment and
conform to employment legislation. When dealing with an ethical dilemma, an individual should
consider:
In cases where the CIMA member/student is encouraged or required to act illegally, resignation may be
the only option (if discussion fails to resolve the situation).
Exam alert
An exam question could require a discussion around the necessary changes to HR practices and employee
attitudes when bringing in a corporate social responsibility policy.
For each of CIMA’s fundamental principles, give an example of a situation where someone would be
acting unethically.
(5 marks)
336 11: Human resource management PART E MANAGING HUMAN CAPITAL
Section summary
Ethics are moral principles that people follow with respect to what is right or wrong.
Businesses have ethical values, based on the norms and standards of behaviour that their leaders
believe will best help them express their identity and achieve their objectives.
Ethical strategies are not always visible to outsiders so many companies produce Corporate
Responsibility Policies (CRPs) and Corporate Responsibility Reports (CRRs).
It is important that all employees, especially line managers, follow the policies laid down by the
organisation's leadership.
All CIMA members and registered students are subject to CIMA's Ethical Guidelines. These guidelines are
also relevant to other employees.
PART E MANAGING HUMAN CAPITAL 11: Human resource management 337
Chapter Roundup
Human resource management (HRM) involves evaluating an organisation's human resource needs,
finding people to fill those needs, and getting the best work from each employee by providing the right
incentives and job environment.
HRM contributes to the success of an organisation through increased productivity, enhanced group
learning, reduced staff turnover and encouragement of initiative.
There are a number of factors both internal and external to the organisation which limit the success of
any HRM policy.
The success of any HRM policy can be measured by the contribution of the employees to the success of
the organisation.
There are a number of HRM theories which relate to ability, opportunity and motivation.
Psychological contracts are the expectations that the employee and employer have of each other.
Schemes that link reward to employee performance include, profit related pay, bonus schemes and
profit sharing.
Total reward schemes offer employees bundles of benefits from which they can pick and choose what
they want.
There are a number of methods of improving an employee's experience of work and their motivation.
These include, job redesign, rotation, enlargement and enrichment.
Organisations may adopt new structures or develop their own. Recent trends in organisational structure
include project-based teams, flat structures, horizontal structures, chunked and unglued structures,
output-focussed structures and 'jobless' structures. Some have even become virtual organisations.
HR plans identify the needs of the organisation in terms of numbers of staff and their skills and compare
this with the resources that the organisation currently has. A plan is formed to close the gap between
the two.
Ethics are moral principles that people follow with respect to what is right or wrong.
Businesses have ethical values, based on the norms and standards of behaviour that their leaders
believe will best help them express their identity and achieve their objectives.
Ethical strategies are not always visible to outsiders so many companies produce Corporate
Responsibility Policies (CRPs) and Corporate Responsibility Reports (CRRs).
It is important that all employees, especially line managers, follow the policies laid down by the
organisation's leadership.
All CIMA members and registered students are subject to CIMA's Ethical Guidelines. These guidelines are
also relevant to other employees.
338 11: Human resource management PART E MANAGING HUMAN CAPITAL
Quick Quiz
1 What are the objectives of human resource management?
A A contract in which the individual considers that they are being forced to contribute their efforts
and energies involuntarily.
B A contract, accepted voluntarily by the individual, in which they expect to do their job in exchange
for a readily identifiable set of rewards.
C A contract in which the individual identifies themselves with the organisation and its goals, so that
they actively seek to contribute further to the achievement of those goals.
D A contract in which the individual is made to believe their working conditions will be better than
they actually are.
4 Which of the following is the correct formula as stated in Victor Vroom's expectancy theory?
A F=VxE
B V=E+F
C E=VxF
D F=V/E
5 Which one of CIMA's fundamental principles is based on fairness and avoiding all forms of bias, prejudice
and partiality?
A Integrity
B Objectivity
C Confidentiality
D Professional behaviour
PART E MANAGING HUMAN CAPITAL 11: Human resource management 339
To develop an effective human component for the organisation which will respond effectively to
change
To obtain and develop the human resources required by the organisation and to use and motivate
them effectively
To meet the organisation's social and legal responsibilities relating to the human resource.
3 A A coercive psychological contract is one in which the individual considers that they are being
forced to contribute their efforts and energies involuntarily.
5 B Objectivity is based on fairness and avoiding all forms of bias, prejudice and partiality.
Answers to Questions
11.1 Human resource management
Human resource management concerns the strategic decisions organisations take in order to get the maximum
contribution from their workforce. The main benefit is increased productivity, but others include reduced staff
turnover, enhanced learning and the encouragement of employees to use their initiative.
D The more effective view of managers depends on the circumstances of the work. If a manager is in charge
of a large number of people doing repetitive, routine work, a Theory X approach is likely to be more
effective. At other times, a Theory Y approach will be more effective, for example in dealing with
subordinates who are managers or professionals.
Although enthusiastic and committed employees are often the driving force behind business success, they do not
guarantee or ensure success.
(a) No matter how good, loyal, committed and enthusiastic the people are, if the basic commercial strategy is
wrong, the company will fail.
(b) A strong culture of enthusiasm for all initiatives can inhibit people who have genuine valid concerns from
voicing these – which may led to expensive mistakes.
340 11: Human resource management PART E MANAGING HUMAN CAPITAL
11.4 Principles
There are a huge range of possible answers. Here are some examples, you probably thought of others.
Integrity – handing over work to a colleague that you know contains errors
Objectivity – allowing personal feelings to cloud your judgement
Professional competence and due care – taking on work you are not qualified to do
Confidentiality – leaving sensitive or confidential information where anyone can look at it
Professional behaviour – cheating in professional exams
In this final chapter we shall concentrate on Employee development is key to maintaining the
good HR practice at each stage of the workforce's skills and providing a source of future
employment process – from recruitment to managers for the organisation. Appraisal plays a major
dismissal. We shall also consider legal and ethical role in employee development as this is very often where
issues at each stage where relevant. training needs and future potential are discovered.
341
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Introduction
It is important that effective human resource management policies and procedures are followed if
maximum employee performance is to be achieved.
Good practice at the recruitment and selection stages help ensure the most suitable candidates become
employees. Training and development policies provide employees with skills and experience that enable
them to progress through the organisation, providing them with the motivation to stay and the
organisation with a flexible workforce that can meet its future needs.
Job analysis, so that for any given job there are two things.
(a) A statement of the component tasks, duties, objectives and standards (a job
description).
(b) A definition of the kind of person needed to perform the job (a person specification).
Identification of vacancies, by way of the personnel plan (if vacancies are created by
demand for new labour) or requisitions for replacement staff by a department which has
'lost' a current job-holder.
Evaluation of the sources of labour, again by way of the personnel plan, which should
outline personnel supply and availability, at macro- and micro-levels. Internal and external
sources, and media for reaching both, will be considered.
Environmental factors Working conditions, security and safety issues, equipment and so on.
(i) How many different tasks are contained in the jobs and how broad and narrow are these
tasks? The task may be determined by operations management. Until recently, there has
been a trend towards narrow specialisation, reinforced, perhaps by demarcations laid down
by trade unions. On the production line, a worker did the same task all the time. Modern
techniques, however, require workers to be multi-skilled.
(ii) To what extent does the worker have control over the work? At one extreme ('Scientific
Management') the worker has little control over the work. At the other extreme (eg an
electrician) the worker controls the task.
Belbin (1997) described a way of tailoring job design to delayered, team based structures and flexible
working systems.
(a) Flattened delayered hierarchies lead to greater flexibility but also to uncertainty and sometimes to a
loss of control.
Purpose Comment
Organisational Defines the job's place in the organisational structure
Recruitment Provides information for identifying the sort of person needed (person specification)
Legal Provides the basis for a contract of employment
Performance Performance objectives can be set around the job description
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 345
(a) Job title (eg Assistant Financial Controller). This indicates the function/department in which the job
is performed, and the level of job within that function.
(b) The location of the job within the organisation structure (division, department and section).
(c) The job title of the person to whom the jobholder is responsible to (eg the Assistant Financial
controller reports to the Financial Controller), in other words the person's immediate boss.
(d) The job title(s) of the person(s) responsible to the jobholder and the number of staff directly
supervised.
(h) Skills required to perform the job including technical skills and physical skills and capabilities.
(i) Typical working patterns or hours of work (eg 9 to 5), including any part-time or job-share options.
Exam alert
Exam questions may require you to produce a job description for a particular position.
Very detailed job descriptions are perhaps most suited for roles where the work is largely repetitive and
predictable. In other situations, a prescriptive job description could cause problems, with employees
perhaps wanting to adhere strictly to it, rather than responding flexibly to task or organisational
requirements.
Increasingly, job descriptions are being written in terms of the outputs and performance levels expected.
Some organisations are moving towards accountability profiles in which outputs and performance are
identified explicitly.
An alternative to job descriptions are role definitions. A role is a part played by people in meeting their
objectives by working competently and flexibly within the context of the organisation's objectives,
structures and processes.
Another trend is increased use of person specifications. These focus on the skills and qualities required by
the person who will fill the role.
Alec Rodgers devised a framework for the recruitment process that identifies seven points which can be
used to identify the type of person required by a particular position. It can be remembered using the
mnemonic BADPIGS.
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Point Examples
Background/Circumstances Location, car owner
Attainments Qualifications, career achievements
Disposition Calm, independent
Physical make-up Strength, appearance, health
Interests Mechanical, people-related
General Intelligence Average, above average
Special attributes Manual dexterity, mental sharpness
Fraser devised a similar framework which is known as the Five Point Plan.
Point Description
Flexibility and adjustment Ability to deal with stress, get on with others and
emotional stability.
Impact on other people Communication skills, personality and
appearance.
Required qualifications Experience, education and training.
Motivation Achievement, progression and determination.
Innate abilities Aptitude, comprehension, intelligence.
The job description and personnel specification can be used as guidelines for the wording of any
advertisement.
The choice of advertising medium will depend on cost, frequency, the frequency with which the
organisation wants to advertise the job vacancy and its suitability to the target audience.
Employment agencies may be used to ease the effort involved in both recruitment and selection. More
junior posts can often be filled from among an agency's pool of registered candidates. Recruitment and
selection of more senior staff may be outsourced to executive search agencies, who will manage the
whole process. This may include preparing the job definition and person specification, advertising and
word-of-mouth communication, and the initial interview process. One or two candidates will then be
presented for assessment.
1.3 Selection
Selection involves a filtering process, by reviewing application forms, interviewing and testing. A variety
of techniques may be used in selection, those chosen in a particular circumstance must be:
The application form should therefore help those making the selection to sift through the applicants, and
to reject some at once so as to avoid the time and costs of unnecessary interviews. It should therefore:
(a) Obtain relevant information about the applicant which can be compared with the requirements of
the job.
(b) Give applicants the opportunity to write about themselves, such as their career ambitions or why
they want the job.
Finding the best person for the job, through direct assessment
Giving the applicant the chance to learn about the business
In preparation for the interview, the interviewer should study three things.
(a) The job description (and specification if separate), to review the major demands of the job.
(b) The personnel specification, to make an assessment of the applicant's character and
qualifications.
(c) The application form, to decide on questions or question areas for each applicant.
(a) The layout of the room and the number of interviewers should be planned carefully.
(b) The manner of the interviewers, their tone of voice, and the way their early questions are phrased
can all be significant in establishing the tone of the interview.
(c) Questions should be put carefully. The interviewers should not be trying to confuse the candidate,
but should be trying to obtain the information they need.
(a) Individual interview. A one-to-one discussion between the candidate and the interviewer face-to-
face.
(b) Problem solving interview. Similar to an individual interview but the candidate is set a
hypothetical problem to solve.
(e) Stress interview. Another type of face-to-face interview where the candidate is put under pressure
by an aggressive interviewer.
(f) Succession/sequential interviews. An alternative to a panel interview where the candidate faces a
number of individual interviews with different people within the organisation.
(g) Group interview. Similar to a problem solving interview but with a number of candidates who must
solve the problem together.
(a) Unreliable assessments. Interviewers may disagree. A suitable candidate might be rejected or an
unsuitable candidate offered a job.
(b) They fail to provide accurate predictions of how a person will perform in the job. Research has
shown this time and again.
(c) The interviewers are likely to make errors of judgement even when they agree about a candidate.
(ii) Contagious bias. Interviewers might change the behaviour of the applicant through the
wording of questions or non-verbal clues.
(iv) Incorrect assessment of qualitative factors such as motivation, honesty or integrity. Abstract
qualities are very difficult to assess.
(v) Logical error. An interviewer might draw conclusions about a candidate without logical
justification.
Some courses offer tuition in interview technique to candidates looking for jobs. Do you think this means
interviews are likely to be less reliable as a means of candidate selection? (2 marks)
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 349
(a) Psychological tests and personality tests. An individual may be required to answer a long series of
questions or score a variety of statements which indicate basic attitude profiles. The best known
personality test is the Cattell P16 PF (Personality Factors), covering sixteen aspects of personality.
(b) Cognitive tests relate to thinking processes. These include intelligence tests which measure the
applicant's general intellectual ability (eg IQ tests), and aptitude tests. Aptitude tests aim to
provide information about the candidate's abilities in different areas, (eg tests in mathematics,
general knowledge, typing, reasoning, persuasion etc).
(c) Proficiency tests are perhaps the most closely related to an assessor's objectives, because they
measure ability to do the work involved.
(d) Psychometric tests contain features of all of the above. They are selection tests that seek to
quantify psychological dimensions of job applicants, for example intelligence, personality and
motivation. Candidates might be required to answer a list of questions. Those answers are then
marked and the candidate is given a score.
The Myers-Briggs Type Indicator is used to categorise people as to whether they are introvert/extrovert,
objective/intuitive, logical/emotional, decisive/ hesitant, and so forth. These tests may be used:
CASE STUDY
(a) In the initial selection of new recruits.
(b) In the allocation of new entrants to different branches of work.
(c) As part of the process of transfer or promotion.
Advantages Disadvantages
A test can be a sensitive measuring instrument. They may over-simplify complex issues.
Tests are standardised, so that all candidates are They are culturally-specific. Many tests for
assessed by the same yardstick. managers were developed in the US. The cultures
in other countries may differ.
Tests always measure the same thing (eg IQ). Results should only be used to support other
selection methods.
Advantages Disadvantages
Selectors have more time to study the candidates. Time and cost.
They test interpersonal skills. The lack of experience of interviewers/selectors.
They reveal more about the candidates' Candidates might behave atypically in a contrived
personalities. situation.
They are suitable for selection of potential
managers.
An assessment centre may or may not be a particular permanent location – the term refers more the
process of selection rather than to any specific building. The approach involves the candidate's behaviour
being observed and judged by more than one assessor, using specifically developed simulations. This
approach is generally used for senior positions, as it is time consuming (in terms of combined people
hours) and therefore relatively expensive.
Trained assessors observe and evaluate candidates on their managerial qualities while candidates are
performing a variety of situational exercises. Video is frequently used to help the assessors gather
information. Assessment centre exercises are intended to measure dimensions such as:
Assessor opinions are pooled and ratings discussed with fellow assessors. The exercises should allow key
job success behaviours to be directly observed and measured. Examples could include an in-tray exercise
or a report writing task.
Studies reveal that if assessment techniques are robust, targeted, well-designed and properly
implemented, the assessment centre approach produces reliable outcomes when compared to single-
method approaches such as interviews and questionnaires.
However, the approach can be costly and will only produce good results if the assessors have the required
skills to make meaningful judgements based on the behaviour of candidates. For example, assessors
should be able to organise their behavioural observations by job-related dimensions.
1.3.11 References
It is common to obtain references from the successful candidate's previous employers and other people
the candidate is acquainted with. A reference enables an employer to check the basic accuracy of the
candidate's CV – but often only this because many previous employers will only provide factual
information (for example the person’s job title, duties, period of employment, salary and attendance
record). General opinions about the person could be asked for, but are unlikely to be provided because
they are subjective and may leave the previous employer open to a complaint of providing false or unfair
information.
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1.3.12 Negotiation
A job represents an economic exchange. The employer obtains the services of the employee, who
receives benefits such as pay and paid holiday in return. Employees may also seek job satisfaction,
security of employment and personal development.
It is important that both employer and employee feel that the exchange they have contracted is a fair one.
If they do not their relationship will be strained from the outset. An employee who feels undervalued will
seek alternative employment. An employer who feels exploited will seek to cut pay, benefits and number
employed at every opportunity.
This usually involves a prospective employee spending some time 'shadowing' an existing employee in a
similar role.
RJPs have been found to lower expectations about the job and the organisation – sometimes resulting in
candidates withdrawing from contention. Candidates that do complete a RJP and accept the role are
more likely to be committed to the job and the organisation.
1.4 Induction
All new staff should go through a proper process of induction. The context of induction programmes may
vary, depending on the role being undertaken, but it is unlikely that anyone can make a satisfactory start
without at least some basic orientation. Induction may be carried out by the recruit's supervisor, by a
departmental trainer or mentor, by HR staff or by a combination of all three.
(a) A welcome
(c) Explanation of the nature of the job: a written job description will make this process easier. Some
detailed technical matters may be identified as suitable for deferment to a later date.
(e) Terms and conditions of employment: a booklet is often provided giving full details, but essential
matters such as hours of work; authorisation of absence and overtime; and any important legal
obligations should be explained in full.
(f) Orientation to the wider mission of the department and the organisation. This is particularly
important in organisations that provide services, because of the importance of staff attitude and
motivation in the provision of high quality service.
(g) Explanation of any systems of continuing training, coaching or mentoring. Many recruits are
expected (and indeed, themselves expect) to undertake significant amounts of training. Rules
relating to attendance, qualification and failure to progress must be explained.
Induction should enable the newcomer to make a quick start as a productive member of staff. It also
gives the recruit and the organisation a chance to become acquainted. From the point of view of the
organisation this can be helpful in such matters as deciding how best to make use of the recruit's
particular set of abilities and competences and how to deal with any problems. The recruit benefits by
obtaining a fuller picture of the new work environment.
352 12 Human resource practices PART E MANAGING HUMAN CAPITAL
(a) Advertising
(i) Any wording that suggests preference for a particular group should be avoided.
(iii) Recruitment literature should state that the organisation is an Equal Opportunities employer,
and actions should back this up.
(iv) The placing of advertisements only where the readership is predominantly of one race or sex
could be construed as indirect discrimination.
(b) Recruitment agencies. Instructions to an agency should not suggest any preference.
(c) Application forms. These should avoid questions which are not work-related (such as domestic
details) or which only one or some groups are asked to complete.
(d) Interviews. Any non-work-related question should be asked of all subjects, if at all, and even then,
some types of question may be construed as discriminatory. Interviewers should not, for example,
ask only women about plans to have a family or care of dependants.
(e) Selection tests. These must be wholly relevant, and should not favour any particular group.
(f) Records. Reasons for non-selection, and interview notes, should be recorded.
Many minor cases of poor performance or misconduct are best dealt with by informal advice, coaching or
counselling. If the problem persists, it may be decided that formal disciplinary action is needed.
Disciplinary action is usually thought of as consecutive stages, reflecting a progressive response.
(a) First warning. A first warning could be oral or written depending on the seriousness of the case.
(i) An oral warning should include the reason for issuing it, notice that it constitutes the first
step of the disciplinary procedure and details of the right of appeal. A note of the warning
should be kept on file but disregarded after a specified period, such as six months.
(ii) A first written warning is appropriate in more serious cases. It should inform the worker of
the improvement required and state that a final written warning may be considered if there
is no satisfactory improvement. A copy of the first written warning should be kept on file but
disregarded after a specified period, such as 12 months.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 353
(b) Final written warning. If an earlier warning is still current and there is no satisfactory
improvement, a final written warning may be appropriate.
This course of action would be next in order if the employee has committed repeated offences and
previous steps did not result in sufficient improvement. In the UK, suspension without pay is only
available if it is provided for in the contract of employment.
(b) Dismissal
Dismissal is a drastic form of disciplinary action, and should be reserved for the most serious
offences. For the organisation, it involves waste of a labour resource, the expense of training a new
employee, and disruption caused by changing the make-up of the work team.
Employers should take care at all times to avoid instances of constructive dismissal. This occurs where
the employee feels that they have been mistreated in a way that causes them to resign. It may happen if
the employer decides to reduce an employee’s salary or make their working conditions unbearable. If an
employment tribunal feels that an employee has been constructively dismissed then the employer will be
liable to pay compensation.
Organisations should have policies governing redundancy. These tend to cover areas such as pre-
redundancy consultation and post redundancy support. Selecting which employees will be made
redundant must be fair and in accordance with established policies.
In the UK, the legal position is that an employee dismissed on the grounds of redundancy (that is that
their position is no longer required) may claim remedies for unfair dismissal if in fact the position was not
actually redundant.
Reduced overtime
Recruitment limits (or a 'freeze')
Enforced retirement (of those over retirement age)
Voluntary early retirement (of those close to retirement age)
Shorter hours
Job shares (eg two employees working shorter hours)
Voluntary redundancy
Managers also need to ensure remaining employees remain motivated, and morale is as high as can be
expected in the circumstances.
(a) Immediacy means that after noticing the offence, the manager proceeds to take disciplinary action
as speedily as possible. On the other hand, care must be taken to avoid hasty decisions and on-
the-spot emotions which might lead to unwarranted actions.
(b) Advance warning. Employees should know in advance what is expected of them and what the
rules and regulations are.
(c) Consistency. Disciplinary action must be applied consistently. Any penalties should be connected
with the act and not based upon the personality involved. No grudges should be borne.
(d) Privacy. As a general rule disciplinary action should be taken in private, to avoid the spread of
conflict and the humiliation or martyrdom of the employee concerned.
Section summary
Good human resource practice should be followed in all aspects of human resource management, such as
recruitment, selection and dismissal.
There are a number of legal issues that should also be considered when recruiting and dismissing
employees.
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Introduction
Resourcing an organisation is about building and maintaining its skills and knowledge base.
HUMAN RESOURCE DEVELOPMENT (HRD) is the process of extending personal abilities and qualities by
means of education, training and other learning experiences.
KEY TERMS
DEVELOPMENT is 'the growth or realisation of a person's ability and potential through the provision of
learning and educational experiences'.
TRAINING is 'the planned and systematic modification of behaviour through learning events, programmes
and instruction which enable individuals to achieve the level of knowledge, skills and competence to carry
out their work effectively'. (Armstrong, Handbook of Personnel Management Practice)
Ensuring the organisation meets current and future performance objectives by…
Continuous improvement of the performance of individuals and teams, and by…
Maximising people's potential for growth (and promotion).
Identify the skills and competences are needed by the business plan.
Draw up the development strategy to show how training and development activities will
assist in meeting the targets of the corporate plan.
Relevance
Problem-based (ie corrects a real lack of skills)
Action-oriented
Performance-related
Principle Explanation
Participants Must have the ability, skills, knowledge and motivation to learn.
Overview An overview of what is to be learnt should be provided before focusing of
specific tasks.
Feedback Participants should receive, accurate and timely feedback on their progress.
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Principle Explanation
Rewards Progress should be rewarded by positive re-enforcement such as praise or
tangible items such as certificates.
Active involvement Successful learning involves taking part rather than listening or reading.
Learning curve Training must reflect the fact that some skills are picked up quickly whereas
some will take time to develop. Progress is not always at the same pace.
Job specific Training should be as realistic as possible to the job concerned to minimise
problems of applying the new skill of knowledge.
Benefit Comment
Minimise the learning Training and development programs ensure staff, and the organisation as a
costs of obtaining the whole, have the skills required to deliver the business strategy.
skills the organisation
needs
Lower costs and Some people suggest that higher levels of training explain the higher
increased productivity productivity of German as opposed to many British manufacturers.
Fewer accidents, and EU health and safety directives require a certain level of training. Employees
better health and can take employers to court if accidents occur or if unhealthy work practices
safety persist.
Less need for detailed If people are trained they can get on with the job, and managers can
supervision concentrate on other things. Training is an aspect of empowerment.
Flexibility Training ensures that people have the variety of skills needed – multi-skilling is
only possible if people are properly trained.
Recruitment and Training and development attracts new recruits and ensures that the
succession planning organisation has a supply of suitable managerial and technical staff to take over
when people retire.
Change management Training helps organisations manage change by letting people know why the
change is happening and giving them the skills to cope with it.
Corporate culture Training programmes can be used to build the corporate culture or to direct it in
certain ways, by indicating that certain values are espoused.
Training programmes can build relationships between staff and managers in
different areas of the business.
Motivation Training programmes can increase commitment to the organisation's goals.
Benefit Comment
Enhances portfolio of Even if not specifically related to the current job, training can be useful in other
skills contexts, and the employee becomes more attractive to employers and more
promotable.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 357
Benefit Comment
Psychological benefits The trainee might feel reassured that they are of continuing value to the
organisation.
Social benefit People's social needs can be met by training courses – they can also develop
networks of contacts.
The job Training can help people do their job better, thereby increasing job satisfaction.
(a) It is irrelevant to problems caused by faulty organisation, layout, methods, equipment, employee
selection and placement and so on.
(b) Cost, time, inconvenience, apathy and unrealistic expectations of training in the past may restrict
its effectiveness.
(c) Limitations imposed by intelligence, poor motivation and the psychological restrictions of the
learning process also restrict its effectiveness.
Identify and define the organisation's training needs. It may be the case that recruitment
might be a better solution to a problem than training.
Define the learning required – in other words, specify the knowledge, skills or competences
that have to be acquired. For technical training, this may include all finance department
staff having to become conversant with a new accounting system.
Define training objectives – what must be learnt and what trainees must be able to do after
the training exercise.
Plan training programmes – training and development can be planned in a number of ways,
employing a number of techniques. It covers three things.
Divisions of responsibilities between trainers, line managers or team leaders and the
individual personally.
The British Standards for Quality Systems (BS EN ISO 9000) identifies training needs for those
CASE STUDY
organisations registering for assessment, and also shows the importance of a systematic approach to
ensure adequate control.
The training, both specific training to perform assigned tasks and general training to heighten quality awareness
and to mould attitudes of all personnel in an organisation, is central to the achievement of quality.
The comprehensiveness of such training varies with the complexity of the organisation.
The difference between the two columns is the training gap. Training programmes are designed to improve
individual performance, thereby improving the performance of the organisation.
Training surveys combine information from a variety of sources to discern what the training needs of the
organisation actually are.
The job analysis can be used to generate a training specification covering the knowledge needed for the
job, the skills required to achieve the result, attitudinal changes required.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 359
Example
'At the end of the course the trainee should be able to describe … or identify … or distinguish x from y …
or calculate … or assemble …' and so on. It is insufficient to define the objectives of training as 'to give
trainees a grounding in …' or 'to encourage trainees in a better appreciation of …': this offers no target
achievement which can be quantifiably measured.
Training objectives link the identification of training needs with the content and methods of training.
Having identified training needs and objectives, the manager will have to decide on the best way to
approach training: there are a number of types and techniques of training, which we will discuss below.
SKILLS: what the individual needs to be able to do if results are to be achieved. Skills are built up
progressively by repeated training. They may be manual, intellectual or mental, perceptual or social.
Analyse the current position. You could do a personal SWOT analysis. The supervisor can
have an input into this by categorising the skills use of employees on a grid as follows, in a
skills analysis. The aim is to incorporate employees' interests into their actual roles.
360 12 Human resource practices PART E MANAGING HUMAN CAPITAL
Performance
High Low
Liking of skills
Low Dislikes but does well Dislikes and doesn't do well
Set goals to cover performance in the existing job, future changes in the current role,
moving elsewhere in the organisations, developing specialist expertise. Naturally, such goals
should have the characteristic, as far as possible of SMART objectives (ie Specific,
Measurable, Achievable, Realistic and Time-bound).
(a) Internal courses run by the organisation's training department or other employees.
(i) Day release: the employee works in the organisation and on one day per week attends a
local college or training centre for theoretical learning.
(ii) Distance learning, evening classes and correspondence courses, which make demands on
the individual's time outside work. This is commonly used, for example, by typists wishing
to develop or 'refresh' shorthand skills.
(iii) Revision courses for examinations of professional bodies.
(iv) Block release courses which may involve four weeks at a college or training centre followed
by a period back at work.
(v) Sandwich courses, usually involve six months at college then six months at work, in
rotation, for two or three years.
(vi) A sponsored full-time course at a university for one or two years.
(i) Lectures
(ii) Seminars, in which participation is encouraged
(iii) Simulations
(e) Computer-based training involves interactive training via PC. This could involve the use of CD-
ROMs, DVDs or online delivery via the Internet.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 361
(a) Lectures. Lectures are suitable for large audiences and can be an efficient way of putting across
information. However lack of participation may lead to lack of interest from, and failure to
understand by most of the audience.
(b) Discussions. Discussions aim to impart information but allow much greater opportunities to
audience participation. They are often suitable for groups up to 20 and can be a good means of
maintaining interest.
(c) Exercises. An exercise involves a particular task being undertaken with pre-set results following
guidance laid down. They are a very active form of learning and are a good means of checking
whether trainees have assimilated information.
(d) Role plays. Trainees act out roles in a typical work situation. They are useful practice for face-to-
face situations. However, they may embarrass and may not be taken seriously.
(e) Case studies. Case studies identify causes and/or suggest solutions. They are a good means of
exchanging ideas and thinking out solutions. However trainees may see the case study as divorced
from their real work experience.
(b) If the subject matter of the training course does not relate to an individual's job, the learning will
quickly be forgotten.
(c) Individuals may not be able to carry over what they have learnt to their own particular job.
Pedler (1986) pointed out that at management level, learning and development are often accidental or
unconscious. Any activity that results in a manager being more willing or capable to control events has a
developmental aspect to it.
More specific or structured on the job training schemes typically have the following characteristics.
(a) The assignments should have a specific purpose from which the trainee can learn and gain
experience.
(b) The organisation must tolerate any mistakes which the trainee makes. Mistakes are an inevitable
part of on the job learning.
(a) Demonstration/instruction: show the trainee how to do the job and let them get on with it. It
should combine telling a person what to do and showing them how, using appropriate media.
The trainee imitates the instructor, and asks questions.
(b) Coaching: the trainee is put under the guidance of an experienced employee who shows the
trainee how to do the job. The coach should:
(c) Job rotation: the trainee is given several jobs in succession, to gain experience of a wide range of
activities.
(d) Temporary promotion: an individual is promoted into their superior's position whilst the superior is
absent.
(e) 'Assistant to' positions: a junior manager with good potential may be appointed as assistant to the
managing director or another executive director.
(f) Action learning: a group of managers are brought together to solve a real problem with the help of
an advisor who explains the management process that actually happens.
(g) Committees: trainees might be included in the membership of committees, in order to obtain an
understanding of inter-departmental relationships.
(h) Project work: Work on a project with other people can expose the trainee to other parts of the
organisation.
Advantages Disadvantages
Training is provided that is relevant to the job Training is difficult when real customers are
being undertaken. being talked to – they may not take kindly to a
person being trained when they are attempting to
arrange insurance for example.
Training is 'just-in-time' – that is specific queries Where training is being carried out by a manager,
are identified. they may not have the appropriate training skills.
Experiential learning, on the other hand, involves doing and puts the learners in an active problem-
solving role.
Self-learning encourages learners to formulate and commit themselves to their own learning objectives.
The implication of Kolb's theory is that to be effective, learning must be reinforced by experience.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 363
(a) Theorist
Theorists feel unhappy with subjective judgements and having to think laterally. They prefer
certainty and process information logically.
(b) Reflector
Reflectors are cautious by nature and are often shy or indecisive individuals. They prefer to think
and absorb information before taking action and even see how others use the information before
making their minds up.
(c) Pragmatist
Pragmatists are open, practical people who like to experiment with ideas and theories. They are
quick to adapt ideas they like but do not enjoy debates that are open-ended.
(d) Activist
Activitists are enthusiastic individuals that seek challenges and are open-minded. They are keen to
become, without bias, fully involved in new experiences. Once the initial excitement dies down
however, they become disinterested with implementation and long-term input.
Hendry (1995) attributes these differences to different types of labour markets and points out that service
sectors tend to rely on retraining and training employees (an internal labour market).
Manufacturing industries have instead tended to rely on the apprenticeship system, which provides a
more 'portable' qualification resulting in an external, occupational labour market.
VALIDATION OF TRAINING means observing the results of the course and measuring whether the training
objectives have been achieved.
KEY TERMS
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EVALUATION OF TRAINING means comparing the actual costs of the scheme against the assessed benefits
which are being obtained. If the costs exceed the benefits, the scheme will need to be redesigned or
withdrawn.
(a) Trainees' reactions to the experience: course assessment sheets completed after training can ask
trainees whether they thought the training programme was relevant to their work, and whether
they found it useful.
(b) Trainee learning: measuring what the trainees have learned on the course by means of a test at
the end of it. A further test can be taken some time after the course to see if the trainee has
retained the knowledge learnt.
(c) Changes in job behaviour following training. This is relevant where the aim of the training was to
learn a skill.
(d) Organisational change as a result of training: finding out whether the training has affected the
work or behaviour of other employees not on the course.
(e) Impact of training on the achievement of organisational goals: seeing whether the training
scheme has contributed to the achievement of the overall objectives of the organisation.
(f) Trainer assessment: the trainer can complete an assessment that identifies gaps in trainee
knowledge or other deficiencies.
(g) HR review: human resources employees can conduct a critical review that evaluates the training
using a range of information to see if the organisation’s objectives for the training have been met.
Evaluating training usually requires measurement before and after training. It is difficult however to
establish with any certainty what changes are directly attributable to the training alone.
Exam alert
Exam questions may require you to explain how the effectiveness of a staff training event could be
evaluated. Good answers would consider issues before the event, after the event and the reaction of the
participants.
Whitbread pubs reported improved performance as a result of a change in the company's training scheme.
Previously the company's training scheme had aimed to improve the service standards of individuals, and
CASE STUDY there were also discussions with staff on business developments. It was felt however that other
companies in the same sector had overtaken Whitbread in these respects.
Pubs that fulfil all the criteria win a team hospitality award, consisting of a plaque, a visit from a senior
executive, and a party or points for goods scheme. To retain the award and achieve further points, pubs
have then to pass further assessments which take place every six months.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 365
The scheme seemed to improve standards. Significantly staff turnover was down and a survey suggested
morale had improved, with a greater sense of belonging particularly by part-time staff. A major cause of
these improvements may well be the involvement of staff and management in the design process.
(a) It ensures that the organisation has a reserve of managers-in-waiting. In flat or delayered
organisations this is particularly important, as the jump in responsibility from junior to senior
positions is much wider than in organisations with extensive hierarchies.
(b) It ensures people get the right training to enable them to develop the right abilities for the job.
For the organisation, career management also determines whether, as a matter of policy, the organisation
will promote from within when possible, as opposed to hiring outsiders.
Training relates to the person’s immediate work needs. For example they may need to be trained in order
to use the organisation’s IT system.
Development considers the person’s future needs given their career aspirations. For example, those
looking to obtain management positions in the future may need their management skills developing.
Self-development is now emphasised by many professional organisations such as CIMA. The modern
view is that membership of an organisation does not ensure competence in the future. New knowledge
KEY POINT
must be learnt and skills must be maintained and developed.
Pedlar et al found several possibilities for learning. It can be planned (conscious), accidental
(unconscious) and take place at or away from work. Although management development is in some
respects a natural process, the term is generally used to refer to a conscious policy within an organisation
to provide a programme of individual development. A variety of techniques could be used, either on or off
the job.
Accidental learning is unplanned. For example, situations at work or socially may develop personal
attributes of a manager.
The principle behind management development is that by giving an individual time to study the
techniques of being a good manager, and by counselling them about their achievements in these
respects, the individual will realise their full potential. The time required to bring a manager to this
potential is possibly fairly short.
(a) Individuals should be encouraged to acquire suitable educational qualifications for senior
management. 'High-fliers' for example might be encouraged to study for an MBA early on in their
career. Senior finance managers ought to have an accountancy qualification.
(b) In-house training programmes might be provided for individuals who are being groomed for senior
management. Formal training in general management skills can be very helpful.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 367
(c) Careful promotion procedures should aim to ensure that only managers with the potential to do
well are promoted into senior management positions.
(d) There should be a system of regular performance appraisal, in which individuals are counselled by
their managers on what they have done well and not so well, how to improve their performance in
their current job and how to develop their skills for a more senior job.
(e) Opportunities to gain suitable experience should be provided to managers who are candidates for
more senior positions. There are several possibilities.
(i) Allowing subordinates to stand in for their boss whenever the boss is away
A (i) only
B (i) and (ii) only
C (i), (ii) and (iii) only
D (i), (ii), (iii) and (iv)
(2 Marks)
Section summary
Human resource development has benefits for both the employee and employer.
The method of training or development chosen should meet the needs of the employee and employer.
However the training or development is delivered, it should be evaluated in order to ascertain its success.
Career and management training provide the employee with motivation and the employer with a source
of future managers.
368 12 Human resource practices PART E MANAGING HUMAN CAPITAL
3 Appraisal
Introduction
Appraisals review and reward performance and potential. They are part of performance management
and can be used to establish areas for improvement and training needs.
APPRAISAL: the systematic review and assessment of an employee's performance, potential and training
needs.
KEY TERM
(a) Managers and supervisors may obtain random impressions of employees' performance (perhaps
from their more noticeable successes and failures), but rarely form a coherent, complete and
objective picture.
(b) They may have a fair idea of their employees' shortcomings – but may not have devoted time and
attention to the matter of improvement and development.
(c) Judgements are easy to make, but less easy to justify in detail, in writing, or to the subject's face.
(d) Different assessors may be applying a different set of criteria, and varying standards of
objectivity and judgement. This undermines the value of appraisal for comparison, as well as its
credibility in the eyes of the appraisee.
(e) Unless stimulated to do so, managers rarely give their staff adequate feedback on their
performance.
(a) Reward review. Measuring the extent to which an employee is deserving of a bonus or pay
increase as compared with their peers.
(b) Performance review, for planning and following-up training and development programmes, ie
identifying training needs, validating training methods and so on.
(c) Potential review, as an aid to planning career development and succession, by attempting to
predict the level and type of work the individual will be capable of in the future.
(a) Establishing the key deliverables an individual has to produce to enable the organisation to
achieve its objectives.
(b) Comparing the individual's level of performance against a standard, as a means of quality control.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 369
(c) Identifying the individual's training and development needs in the light of actual performance.
(e) Monitoring the organisation's initial selection procedures against subsequent performance.
An appraisal interview, for an exchange of views about the appraisal report, targets for
improvement, solutions to problems and so on.
Review of the assessment by the assessor's own superior, so that the appraisee does not
feel subject to one person's prejudices. Formal appeals may be allowed, if necessary to
establish the fairness of the procedure.
The preparation and implementation of action plans to achieve improvements and changes
agreed.
(a) The formulation of desired traits and standards against which individuals can be consistently and
objectively assessed.
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(b) Recording assessments. Managers should be encouraged to utilise a standard and understood
framework, but still be allowed to express what they consider to be important, and without too
much form-filling.
(c) Getting the appraiser and appraisee together, so that both contribute to the assessment and plans
for improvement and/or development.
(a) Overall assessment. Managers write in narrative form their judgements about the appraisees.
There will be no guaranteed consistency of the criteria and areas of assessment, however, and
managers may not be able to convey clear, effective judgements in writing.
(b) Guided assessment. Assessors are required to comment on a number of specified characteristics
and performance elements, with guidelines as to how terms such as 'application', 'integrity' and
'adaptability' are to be interpreted in the work context. This is more precise, but still rather vague.
(c) Grading. Grading adds a comparative frame of reference to the general guidelines, whereby
managers are asked to select one of a number of levels or degrees to which the individual in
question displays the given characteristic. These are also known as rating scales. Numerical values
may be added to ratings to give rating scores. Alternatively a less precise graphic scale may be
used to indicate general position on a plus/minus scale.
(d) Behavioural incident methods. These concentrate on employee behaviour, which is measured
against typical behaviour in each job, as defined by common critical incidents of successful and
unsuccessful job behaviour reported by managers.
(e) Objectives and results-orientated schemes. This reviews performance against specific targets and
standards of performance agreed in advance. The manager becomes a counsellor. Learning and
motivation theories suggest that clear and known targets are important in modifying and
determining behaviour. The objectives set as part of an appraisal process should be agreed – and
(again) these should be SMART (Specific, Measurable, Achievable, Realistic and Time-bound).
(f) Assessments must be related to a common standard (the appraisal standard), in order for
comparisons to be made between individuals. On the other hand, they should also be related to
meaningful performance criteria, which take account of the critical variables in each different job.
3.6 Self-appraisal
Individuals may carry out their own self-evaluation as a major input into the appraisal process. This has
the advantage that the system is aimed at the needs of the individual. Other advantages are:
(a) It saves the manager time as the employee identifies the areas of competence which are relevant
to the job and their relative strengths in these competences.
(b) It offers increased responsibility to the individual which may improve motivation.
(c) This may be a way of reconciling the goals of both the individual and the organisation.
(d) It may overcome the problem of needing skilled appraisers, therefore cutting training costs and
reducing the managerial role in appraisal.
(e) In giving the responsibility to an individual, the scheme may offer more flexibility in terms of
timing, with individuals undertaking ongoing self-evaluation.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 371
However, people are often not the best judges of their own performance. Many schemes combine the two
– the manager and subordinate fill out a report and compare notes.
(a) Subordinates tend to know their superior better than superiors know their subordinates.
(b) As all subordinates rate their managers statistically, these ratings tend to be more reliable – the
more subordinates the better. Instead of the biases of individual managers' ratings, the various
ratings of the employees can be converted into a representative view.
(c) Subordinates' ratings have more impact because it is unusual to receive ratings from them. It is
also surprising to bosses because, despite protestations to the contrary, information often flows
down organisations more smoothly and comfortably than it flows up. When it flows up it is
qualitatively and quantitatively different. It is this difference that makes it valuable.
Problems with the method include fear of reprisals, vindictiveness, and extra form processing. Some
bosses in strong positions might refuse to act, even if a consensus of staff suggested that they should
change their ways.
360 degree appraisal involves taking downwards, upwards and customer appraisals together – so it
involves the collection of feedback on an individual's performance from a range of sources. Sources may
include:.
(b) People who report to the appraisee, perhaps divided into groups.
(c) Peers and co-workers. Most people interact with others within an organisation, either as members
of a team or as the receivers or providers of services. They can offer useful feedback.
(d) Customers. If sales people know what customers thought of them, they might be able to improve
their technique.
(e) The manager personally. All forms of 360 degree appraisal require people to rate themselves.
Those 'who see themselves as others see them will get fewer surprises'.
372 12 Human resource practices PART E MANAGING HUMAN CAPITAL
Sometimes the appraisal results in a counselling session, especially when the result of the appraisals are
conflicting. For example, an appraisee's manager may have a quite different view of the appraisee's skills
than subordinates.
The layout of the report and factors to be included in the report should be established before the
interview. The report is likely to focus on key performance issues that relate to the job description.
The report is likely to cover key competences. A competence is an observable skill or ability to complete a
particular task successfully. It can include the ability to transfer skills and knowledge to new situations.
Maier (The Appraisal Interview) identifies three types of approach to appraisal interviews.
(a) The tell and sell method. The manager tells the subordinate how they have been assessed, and
then tries to sell (gain acceptance of) the evaluation and the improvement plan. This requires
unusual human relations skills in order to convey constructive criticism in an acceptable manner,
and to motivate the appraisee.
(b) The tell and listen method. The manager tells the subordinate how they have been assessed, and
then invites the subordinate to respond. Moreover, this method does not assume that a change in
the employee will be the sole key to improvement – the manager may receive helpful feedback
about how job design, methods, environment or supervision might be improved.
(c) The problem-solving approach. The manager abandons the role of critic altogether, and becomes a
counsellor and helper. The discussion is centred not on the assessment, but on the employee's
work problems. The employee is encouraged to think solutions through, and to make a
commitment to personal improvement.
3.12 Follow-up
After the appraisal interview, the manager may complete the report, with an overall assessment of
potential and/or the jointly-reached conclusion of the interview, with recommendations for follow-up
action.
(a) Informing the employee of the results of the appraisal, if this has not been central to the review
interview.
(c) Monitoring the appraisee's progress and checking that they have carried out agreed actions or
improvements.
(d) Taking necessary steps to help the appraisee to attain improvement objectives, by guidance,
providing feedback, upgrading equipment, altering work methods and so on.
If appraisal systems operate successfully as feedback control systems (in other words, if they do alter
employees' performance) and identify behaviours to be encouraged, then, assuming organisational
success is to some measure based on individual performance, they will influence the success of strategy.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 373
A problem with many appraisal schemes in practice is that they reinforce hierarchy, and are perhaps
unsuitable to organisations where the relationship between management and workers is fluid or
participatory. Upward, customer and 360o appraisals address this, but they are not widely adopted.
Appraisal systems, because they target the individual's performance, concentrate on the lowest level of
performance feedback. They ignore the organisational and systems context of that performance. For
example, if any army is badly led, no matter how brave the troops, it will be defeated. Appraisal schemes
seem to regard most organisation problems as a function of the personal characteristics of its members.
Many employees consider that the appraisal system should be linked with the reward system, on the
grounds that extra effort or excellent performance should be rewarded.
374 12 Human resource practices PART E MANAGING HUMAN CAPITAL
(a) Funds available for pay rises rarely depend on one individual's performance alone – the whole
company has to do well.
(b) Continuous improvement is always necessary – many businesses have 'to run to stand still'.
Continuous improvement should perhaps be expected of employees as part of their work, not
rewarded as extra.
(d) Comparisons between individuals are hard to make, as many smaller organisations cannot afford
the rigour of a job evaluation scheme.
(e) Performance management is about a lot more than pay for past performance – it is often forward
looking with regard to future performance.
PRP may be used as additional payments above the maximum for the grade where performance is
very high.
All organisations can introduce PRP but it is often best implemented gradually.
By initially introducing it to senior management, they will experience it first hand before they apply it to
their staff.
The use of PRP could be restricted to specific groups of workers to allow adequate testing and to ensure
sufficient safeguards are in place before it is introduced to other workers.
(a) Many managers may not know enough about the performance of individual workers to make a fair
judgement.
(b) In some jobs, managers do not have the technical expertise to judge an employee's output.
(c) Employees depend on other people in the workplace/organisation to be effective – in other words,
an individual's results may not be entirely under their control.
A person's performance is often indirectly or directly influenced by the management style of their line
manager, who will also usually be the person conducting the appraisal.
However, given the seniority of the manager over the appraisee, the appraisee may be reluctant to raise
issues related to their manager's management style.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 375
Even the best objective and systematic appraisal scheme is subject to personal and interpersonal
problems.
(a) Appraisal is often defensive on the part of the appraisee, who believes that criticism may mean a
low bonus or pay rise, or a lost promotion opportunity.
(b) Appraisal is often defensive on the part of the superior, who cannot reconcile the role of judge and
critic with the human relations aspect of interviewing and management. Managers may in any case
feel uncomfortable about 'playing God' with employee's futures.
(c) The superior might show conscious or unconscious bias in the appraisal or may be influenced by
rapport (or lack of it) with the interviewee. Systems without clearly defined standard criteria will be
particularly prone to the subjectivity of the assessor's judgement.
(d) The manager and subordinate may both be reluctant to devote time and attention to appraisal.
Their experience in the organisation may indicate that the exercise is a waste of time (especially if
there is a lot of form-filling) with no relevance to the job, and no reliable follow-up action.
(e) The organisational culture may simply not take appraisal seriously. Interviewers are not trained or
given time to prepare, appraisees are not encouraged to contribute, or the exercise is perceived as
a 'nod' to Human Relations with no practical results.
Criteria Comment
Relevance Does the system have a useful purpose, relevant to the needs of the organisation
and the individual?
Is the purpose clearly expressed and widely understood by all concerned, both
appraisers and appraisees?
Are the appraisal criteria relevant to the purposes of the system?
Fairness Is there reasonable standardisation of criteria and objectivity throughout the
organisation?
Is it reasonably objective?
Serious intent Are the managers concerned committed to the system – or is it just something the
personnel department thrusts upon them?
Who does the interviewing, and are they properly trained in interviewing and
assessment techniques?
Is reasonable time and attention given to the interviews – or is it a question of
'getting them over with'?
Is there a genuine demonstrable link between performance and reward or
opportunity for development?
Co-operation Is the appraisal a participative, problem-solving activity – or a tool of management
control?
Is the appraisee given time and encouragement to prepare for the appraisal, so that
they can make a constructive contribution?
Does a jointly-agreed, concrete conclusion emerge from the process?
Are appraisals held regularly?
Efficiency Does the system seem overly time-consuming compared to the value of its outcome?
Is it difficult and costly to administer?
376 12 Human resource practices PART E MANAGING HUMAN CAPITAL
Required
Briefly describe the most common objectives of a performance appraisal system. (5 marks)
Section summary
Appraisal is an important part of human resource management because it enables employee performance
to be measured and corrective action taken if necessary. It also forms part of the reward process.
There are many types of appraisal including, appraisal by a manager, self appraisal, upward appraisal,
customer appraisal and 360 degree appraisal.
Whichever type of appraisal is used it must be carefully conducted and correctly followed up.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 377
Chapter Roundup
Good human resource practice should be followed in all aspects of human resource management, such as
recruitment, selection and dismissal.
There are a number of legal issues that should also be considered when recruiting and dismissing
employees.
Human resource development has benefits for both the employee and employer.
The method of training or development chosen should meet the needs of the employee and employer.
However the training or development is delivered, it should be evaluated in order to ascertain its success.
Career and management training provide the employee with motivation and the employer with a source
of future managers.
Appraisal is an important part of human resource management because it enables employee performance
to be measured and corrective action taken if necessary. It also forms part of the reward process.
There are many types of appraisal including, appraisal by a manager, self appraisal, upward appraisal,
customer appraisal and 360 degree appraisal.
Whichever type of appraisal is used it must be carefully conducted and correctly followed up.
Quick Quiz
1 Why should an organisation take an interest in an individual's personal development?
2 Which of the following is the final stage of recruitment before selection commences?
3 A typing test is an example of which type of test used in the selection process?
A Psychological test
B Aptitude test
C Intelligence test
D Personality test
A Theorising
B Actively experimenting
C Concrete experience
D Learning
5 Which of the following appraisal techniques requires the assessor to rate the assessee's characteristics on
a scale?
A Guided assessment
B Overall assessment
C Behavioural incident method
D Grading
378 12 Human resource practices PART E MANAGING HUMAN CAPITAL
2 C Recruitment ends when a short list of candidates for interview have been chosen. Interviews are
part of the selection process.
5 D Grading requires the assessor to rate the employee’s characteristics on a rating scale.
Answers to Questions
12.1 Interviews
If interview techniques are taught, it might imply that success at interview will have more to do with a candidate's
ability to present themselves in an interview situation rather than their ability to do the job.
On the other hand, an interview is a test of how well a person performs under pressure, in an unfamiliar environment
and with strangers. The interview might therefore reflect some of the interpersonal skills required for the job.
D HRD covers all aspects of personal and management development, including formal training and on-the-
job training, planning the succession into senior management positions, and career planning for
individuals (particularly management recruits). Job re-design is also related to development, because the
content of a job can be altered to provide better or different learning experiences.
The general purpose of an appraisal is to improve the efficiency of the organisation by ensuring individual
employees are performing their role to acceptable standards and to the best of their ability. The process also
considers the employees' potential to improve and to develop. Objectives of a formal performance appraisal
system include the following:
To enable a picture to be drawn up of overall staff levels and skills, strengths and weaknesses. This
enables more effective HR planning.
To monitor the undertaking's initial selection procedures against the subsequent performance of recruits.
To establish what the individual has to do in a job in order that the objectives for the section or
department are realised.
To assess an individual's performance including strengths and any weaknesses. This helps identify
training needs.
To assess appropriate rewards (pay, bonuses etc).
To assess potential. At the organisational level this permits career and succession planning. At the
individual level it facilitates an individual development plan.
379
380
Objective test question bank 381
Each of the questions numbered 1 to 10 has only ONE correct answer. Each of these questions is worth
2 marks.
A Sole traders
B Partnerships
C Mutual organisations
D Public limited companies
2 If the value of a nation’s currency rises in relation to those that it trades with, what will be the
effect?
A Its exports become relatively cheaper and its imports relatively more expensive
B Its imports become relatively cheaper and its exports relatively more expensive
C Its interest rates must rise
D Its national income must increase
A Worms
B Trap doors
C Logic bombs
D Trojans
A Direct changeover
B Parallel running
C Pilot operation
D Phased changeover
5 Which sourcing strategy is most likely to create a competitive advantage for the purchasing
organisation?
A Single sourcing
B Multiple sourcing
C Delegated sourcing
D Parallel sourcing
6 The 5Ss are often associated with lean production. Which one of the following is not one of the
5Ss?
A Self-discipline
B Sanitise
C Systemise
D Specify
382 Objective test question bank
8 Marketing activities which occur in unexpected places and take people by surprise are known as:
A Direct marketing
B Viral marketing
C Guerrilla marketing
D Interactive marketing
10 Integrating new recruits into the culture, beliefs and mission of an organisation is known, according
to Harrison, as:
A Recruitment
B Indoctrination
C Dialogic learning
D Training
Each of the questions numbered 11 to 15 require a brief written response. The response should be in
note form and should not exceed 50 words. Each of these questions is worth 4 marks.
1 C Mutuals are primarily in business to provide services to their customers. They are not
owned by shareholders whom they have to pay a share of their profit to.
2 B If a nation’s currency rises in value relative to those it trades with, then the cost to customer
nations of its exports will increase. Conversely, the cost of goods imported from those
nations will fall. Interest rates do not have to rise. The nation’s national income may fall if
the rise in prices results in decreased demand for exports. On the other hand, if demand for
exports remains steady, the higher price would mean an increase in national income.
3 D Trojans, or Trojan horses, are a type of virus that hides itself in legitimate software.
4 A Direct changeover is the cheapest because it only involves one step – the old system is
switched off and the new system is switched on (although if the changeover does not go as
expected additional costs may be incurred).
5 A Single sourcing is most likely to result in a competitive advantage because it strengthens the
supplier/purchaser relationship, secures confidential information, aids quality control and
creates economies of scale. Under the other methods the reverse is more likely to be true.
6 D Specify is not one of the 5Ss. The others are Structurise and Standardise.
7 B Differentiated marketing involves selling different product versions, each aimed at different
market segments.
8 C Guerrilla marketing events occur in unexpected places and usually involve taking people by
surprise.
10 C Harrison named the element of the induction process, where new recruits are integrated
into the culture, beliefs and mission of an organisation, as dialogic learning.
11 Political risk is the risk of an organisation incurring losses due to non-market factors, usually
related to government policy. These include financial factors such as currency controls and
economic data, and stability factors such as rioting and civil war.
12 Lean production aims to minimise the amount of resources (including time) used in all activities of
an enterprise. It involves identifying and eliminating all non-value-adding activities. Lean
production involves the systematic elimination of all forms of waste.
13 Quality assurance focuses on the way a product or service is produced. Production procedures and
standards are introduced that aim to prevent defects before the good/service is produced. Quality
control focuses on the checking of work that has been done – finding mistakes after the event
rather than eliminating them.
14 The traditional 'four Ps' (product, price, place, promotion) relate to both products and services.
Services have characteristics that led to the addition of three extra Ps (people, processes, physical
evidence) to more accurately reflect the service provision process (eg for insurance: representative,
the policy setting and selling process, insurance certificate).
15 Employee empowerment means giving staff at all levels the authority and freedom to make
decisions that affect how they do their job. The thinking behind the theory is that those who
actually do the work are best positioned to make decisions relating to how their work is done.
384 Objective test answer bank
EXAM QUESTION AND ANSWER
BANK
385
386
Guidance in our Practice and Revision Kit focuses on how the verbs are used in questions.
Exam question bank 387
TH is a manufacturing company based in Europe. The costs of labour and raw materials have increased
substantially in recent years and the board is now considering relocating all of its factories to a new
country outside Europe – Starland.
Until a year ago, Starland was run by an unpopular military dictatorship, but this was overthrown in a
civil war which finished six months ago. The country is now becoming a democracy and the new
government is keen to establish trade links with countries around the world in order to develop its
economy and new industries. To do this it is offering generous tax breaks for companies who locate their
businesses in the country. This, together with very low labour costs and a plentiful supply of cheap raw
materials, have led to TH considering the relocation.
Required
(a) Explain what country and political risks are and how TH can analyse the risks involved in
relocating to Starland. (10 marks)
(b) Using a model of your choice, analyse the risks TH will face in relocating to Starland and advise
the company whether the relocation should take place. (15 marks)
(Total = 25 marks)
(a) Define corporate governance and briefly explain four corporate governance issues that
organisations may face. (10 marks)
(b) Define corporate social responsibility and briefly explain the four layers of corporate social
responsibility identified by Caroll and Buchholtz. (10 marks)
(Total = 20 marks)
JM is a private company which manufactures a range of packaging materials for customers in the fresh
and frozen food industries. Before his recent retirement, the company's chairman and founder was the
main source of external information – he kept his 'finger on the pulse' of the industry utilising his network
of personal contacts built up over a period of some twenty years. Since his retirement, the board has felt
that external information has been lacking. They wish to implement a formal system to capture relevant
external information.
Required
(a) Describe the aspects of its environment that JM should gather information on and the sources that
may provide it. (22 marks)
(b) Explain four ways the board could use the captured information. (8 marks)
(Total = 30 marks)
388 Exam question bank
GDC provides a facilities management service for DS in respect of its information systems, however the
directors of DS are not satisfied with GDC ‘s performance. The appointment of GDC was made two years
ago and was relatively rushed through. Although an outline contract was agreed, no detailed Service Level
Agreement was produced.
The contract can be terminated by either party with three months' notice.
GDC will provide information systems services for DS, the services to include:
Purchase of all hardware and software
Repair and maintenance of all equipment
Help desk and other support services for users
Writing and maintenance of in-house software
Provision of management information
Price charged to be renegotiated each year but any increase must not exceed inflation, plus 10%.
Required
(a) Explain, from the point of view of DS, why it might have received poor service from GDC, even
though GDC has met the requirements of the contract. (15 marks)
(b) Explain five benefits of outsourcing that DS would have enjoyed if the contract and SLA had been
drafted properly. (10 marks)
(Total = 25 marks)
(a) Six factors that should be taken into account when devising an operations strategy are:
Capability
Range and location of operations
Investment in technology
Strategic buyer-supplier relationships
New products/services
Structure of operations
Briefly describe what each of the six factors identified above mean in the context of operations
strategy. Illustrate your answer with examples related to a retail supermarket chain. (15 marks)
(b) Explain the concept of sustainability, including four factors that should be taken into account when
considering the issue of sustainability in operations management. (15 marks)
(Total = 30 marks)
Exam question bank 389
Total Quality Management (TQM) and virtual companies are relatively new developments in operations
management.
(a) Explain the main characteristics of a Total Quality Management (TQM) programme. (15 marks)
(b) Define the term 'virtual company' and then explain how technological advances have enabled the
widespread formation of virtual companies and supply chains. (10 marks)
(Total = 25 marks)
(b) Identify and explain five features of a just-in-time (JIT) production system. (15 marks)
(Total = 30 marks)
Explain what is meant by 'the marketing concept'. Compare this with a production orientation and a sales
orientation.
(20 marks)
9 Branding 36 mins
Learning outcome: D2(xi)
(b) Explain brand extension, multi-branding and family branding as branding strategies. (6 marks)
(Total = 20 marks)
390 Exam question bank
(a) Explain the term ‘buyer behaviour’ and the various stages that household consumers go through
when making a purchase. (13 marks)
(Total = 25 marks)
The country of Mythland contains several areas of high unemployment, one such area is where CX Beers
were produced until recently. CX was an old, family-owned brewery that supplied licensed outlets,
including local restaurants, with its beer. CX represented one of the last local brewers of any size, despite
retaining many working practices that evolved at least a century ago. Situated on a (now) underused
dockside site, the company had, over the years, invested little in plant and machinery and someone
jokingly once suggested that much of the brewing equipment should rightfully be in a museum! The
company was forced to cease trading last month, despite having an enthusiastic, long-serving, highly
skilled workforce and a national reputation for the beer 'CX Winter Warmer' (thanks to winning several
national awards). The workforce, many of whom have only ever worked for CX Beers are now facing up to
the difficulty of finding alternative employment.
In a press statement the owners said that the brewery's closure was sad for the area, the local workforce
and traditionally brewed beer in general. The owners blamed the situation on inefficient and expensive
brewing methods, fierce competition from large rival brewers and limited geographical sales. They also
mentioned a dependence on seasonal sales that made cash flow difficult (35% over the Christmas
period). They concluded that they would like the CX tradition to continue by selling the company as a
going concern, however unlikely this was.
It is speculated that property developers may be interested in the site as the dockland area is showing
signs of regeneration as a leisure and tourism attraction (thanks to the efforts of the Mythland
government). However, two of CX's managers would like to save the business and are drawing up a
business plan for a management buy-out. They have three main initiatives that they feel could, in
combination, save the enterprise:
Use the site as a basis for a 'living' museum of traditionally brewed beer (with out of date brewing
equipment and methods of working as an attraction)
Produce bottled beer for sales in supermarkets
Employ a more flexible but suitably experienced workforce
One of the managers (your former boss) has asked for your help in advising him how to draft a detailed
human resource (HR) plan to inform the business plan.
Required
(a) Explain the key stages and issues involved in preparing a HR plan for the CX buy-out. (13 marks)
(b) Discuss how the buy-out team can achieve workforce flexibility. (8 marks)
(c) Identify five benefits to the organisation and the community in re-employing previous employees.
(5 marks)
(d) Identify two marketing opportunities available to the new organisation. (4 marks)
(Total = 30 marks)
Exam question bank 391
B3 is a family run personnel agency. It offers a range of services to both individuals and corporate clients
(mainly local medium-sized organisations). The son of the managing director (MD) is currently studying
for a specialist university business degree. His course includes a 'management consultancy' module where
students are required to analyse an organisation and identify a range of development options for the
business. The MD's son's investigations of B3 have led to a consultancy report being produced, extracts of
which include:
'B3 should maximise the opportunities offered by information technology to a greater extent. In particular:
Opportunity 1. B3 could develop its recent successful experiment in e-cruitment (the identification
of employment opportunities through the world wide web and the emailing of clients). Currently
details of vacancies are collected and matched to individual client's search criteria. When a match
is identified clients are emailed and, if they are interested, interviews arranged. This service is not
offered by any of B3's main competitors. There is a difficulty, however, in that many companies
have barred access to personal emails at work and web access to recruitment sites such as B3's
site from their offices. Market research suggests that significant opportunities for m-cruitment
(advertising jobs by mobile telephones) also exist. Making use of recent software developments, a
text message containing a job title and some contact details could be sent out to individual clients
instead of an email, so providing a more convenient and speedy service.
Opportunity 2. Virtually all CVs are currently received in electronic form and a policy decision
should be made to develop a paperless operating environment through the development of
databases, so upgrading existing office technology.
Analysis of profit indicates that executive searches, corporate 'headhunting' and vacancy identification for
individuals (traditional and especially e-cruitment) are all profitable activities.
Involvement in selection processes with corporate clients is unprofitable and should be discontinued.
Instead B3 should identify clear guidelines for corporate clients to follow once the short-listing of
candidates has occurred'.
Required
(a) Evaluate the opportunities for B3 identified in the consultancy report. (12 marks)
(b) Produce guidelines for the selection process that should be adopted by an organisation presented
with a short-list of candidates. (8 marks)
(c) Briefly explain five acceptable reasons for dismissing employees. (10 marks)
(Total = 30 marks)
392 Exam question bank
Exam answer bank 393
Political risk is the risk of an organisation incurring losses due to non-market factors. These factors
are usually related to government policy such as trade rules and the tax regime. However it also
relates to financial factors such as currency controls and economic data, and stability factors such
as rioting and civil war.
Country risk
Country risk is wider in scope than political risk and usually relates to risks in the business
environment (including market factors) in a specific country.
It is important that TH analyses the political and country risk of Starland before it commits to
relocating all of its factories. Once it knows the risks, the organisation can decide whether or not to
proceed with the relocation. If relocation does go ahead, by knowing what the risks are, TH can
put into place plans to reduce or avoid them.
Analysis of political and country risk is notoriously difficult. Some elements of risk, such as
financial factors, can be quantified, however some factors such as the risk of civil war are based
on assumptions and guess work.
TH has the choice of employing a third party (such as a global credit rating agency) to carry out
the risk assessment, or it can do its own research into Starland and produce its own assessment
using news stories and market information. Some organisations may provide this information for a
fee.
Once TH has identified the political and country risks of Starland, it needs to weigh up the
probability of the risk occurring and the consequences to its operations should the worst happen.
Jennings and Wattam (1998) devised the following model to weigh up political risk.
Impact of risk
Low High
Probability of risk
High A B
Low C D
Using the model, TH will classify Starland and its relocation according to the probability of risk and
the impact the risk will have on the business.
394 Exam answer bank
TH should accept the risks it classifies in this segment but introduce a policy to manage them.
However, it may have to reconsider its plans if the cost of preventing the risk is too high compared
to the impact that the risk will have on it.
The relocation to Starland is likely to fall into this category. Due to the high risk and potential
impact on TH, the relocation should only go ahead if the risk can be managed and contingency
plans put in place. The potential benefits of the plan must outweigh the costs of managing the risk
and the potential impact.
To the classified in this segment, the risk must be unlikely to occur and have low potential impact.
This is the ideal situation as the costs of managing the risk will be low, but this doesn’t apply to
TH and the proposed relocation.
Risks in this segment are problematic because although the probability of risk is low, the damage
it can inflict on TH is high. If TH chooses to go ahead then it must take action to minimise the
chance of the risk occurring and the potential impact it will have on the organisation. If this cannot
be achieved in a cost-effective manner then the organisation should consider abandoning its plans.
The main risks involved in relocating factories to Starland are civil war and failure of the fledgling
government. The nation has only just recovered from a previous war and it is highly possible that if
tensions rise or if the new government becomes unpopular, trouble could occur again. Therefore
there is a high probability of risk.
By relocating all of its factories to Starland means TH is risking its entire operation. If civil war or
governmental failure occurs, it will have a major impact on business operations. This will probably
mean the factories will stop production, or may even be destroyed. Therefore there is a high
impact on the organisation.
Advice
TH should only go ahead with the relocation if the risks can be managed and contingency plans
put in place.
The company cannot manage the risk because civil war and governmental failure are out of its
control. However, it could develop contingency plans to cover the risk of operations ceasing. This
is likely to be expensive as it will mean finding alternative locations to produce its goods. These
costs are likely to outweigh any benefits of moving production and therefore TH should not
relocate its factories – at least not until the country is stable.
Exam answer bank 395
Always present your answers clearly to maximise the amount of marks you can be awarded.
Both parts of this question could be answered using textbook knowledge and are quite straightforward as
they don’t require you to apply your knowledge or analyse a scenario. Not all questions will be structured
like this so make the most of it.
In part (b) you did not have to use the Caroll and Buchholtz model to come up with points, if you did
then you would indicate to the marker that you have good depth of knowledge. However you could have
come up with four equally valid points of your own.
Corporate governance is the system by which companies and other organisations are directed and
controlled. In other words it consists of an organisation’s internal rules which control how it
functions.
A number of high profile scandals and corporate failures have identified a number of corporate
governance failings that business organisations may face.
A feature of many corporate governance scandals has been boards dominated by a single senior
executive with other board members merely acting as a rubber stamp. Sometimes the single
individual may bypass the board to action their own interests. The report on the UK Guinness case
suggested that the Chief Executive, Ernest Saunders paid himself a substantial reward without
consulting the other directors.
An obvious weakness is a lack of internal audit, since this is one of the most important aspects of
internal control.
Another important control is the lack of adequate technical knowledge in key roles, for example in
the audit committee or in senior compliance positions. A rapid turnover of staff involved in
accounting or control may suggest inadequate resourcing, and will make control more difficult
because of lack of continuity.
Lack of supervision
Employees who are not properly supervised can create large losses for the organisation through
their own incompetence, negligence or fraudulent activity. The behaviour of Nick Leeson, the
employee who caused the collapse of Barings bank was not challenged because he appeared to be
successful, whereas he was using unauthorised accounts to cover up his large trading losses.
Leeson was able to do this because he was in charge of both dealing and settlement, a systems
weakness or lack of segregation of key roles that featured in other financial frauds.
Often, board members grow up with the company but lose touch with the interests and views of
shareholders. One possible symptom of this is the payment of remuneration packages that do not
appear to be warranted by results. Equally, the directors may choose to pursue their own interests
and ignore the requirements of the shareholders.
396 Exam answer bank
Caroll and Buchholtz identified four main 'layers' of corporate social responsibility that
organisations have.
Economic responsibilities
Legal responsibilities
All organisations are required to comply with the laws of the states that they operate in, for
example employment laws or companies legislation. Business have a duty to obey these legal
responsibilities because laws are based on the moral values and beliefs of the people who live in
the state and therefore they should uphold them.
Ethical responsibilities
Ethical responsibilities require organisations to act in a fair and just way even if the law does not
compel them to do so. An example of this is paying employees above the legal minimum wage if it
means they will have a better quality of life.
Philanthropic responsibilities
3 External information
Top tips. Your answer to part (a) should have considered a range of issues – a PEST analysis is a
particularly useful tool for doing this. However you did not have to use this model as a wide range of
answers could have scored well.
In part (b) you should have considered a strategic approach to using the information as this reflects the
level of the board within JM.
Some aspects of JM's external environment will be more important for the company than others.
Just what the most important aspects are vary from organisation to organisation. The first step that
should therefore be taken is for an individual or a committee to be appointed to establish (and
subsequently review) what aspects of the external environment should be monitored by formal
methods and procedures.
Exam answer bank 397
The aspects of the environment that might be monitored include the following.
Competitors
Information should be gathered about what competitors are doing, how successful they are and
how much of a threat they are. New contracts awarded by food companies will be of interest to
JM.
Suppliers
Information should be gathered about suppliers and potential suppliers, their prices, product or
service quality and delivery dates etc.
Customers
An organisation should always try to be aware of the needs of its customers, to identify changes in
these needs, to recognise potential market segments, and to assess the size of a potential market.
Customer awareness is vital for new product development and successful selling.
Legal changes
Changes in the law might affect how an organisation operates, and any such changes should be
monitored. For example, changes in data protection legislation.
Political changes
Some organisations are affected by national or local politics. If politics are important, the
organisation should try to monitor political decisions at both national and local level.
Most organisations have to monitor developments in financial and economic conditions. For
example, a company's treasury department must be aware of current money market interest rates
and foreign exchange rates. The general rate of inflation is also significant for decisions about wage
increases for employees.
Environmental pressures
The use of CFCs in packaging has been identified as contributing to the hole in the ozone layer.
Companies such as JM therefore need to find alternative materials to use in their products.
Sources of information
(ii) Published reports and accounts (of competitors, suppliers and business customers).
(iii) Government reports (often, reports on specific topics. Economic and trade reports, for
example, are frequently produced by central government).
(v) External databases, provided by specialist organisations and often available over the
Internet. Treasury departments, for example, use external databases to obtain information
about current interest rates and foreign exchange rates.
(b) The board will take a strategic approach when using the captured information. It is likely to use
the information for:
Planning
The information will help JM to formulate a plan to react to the external environment and therefore
assist with, among other things, resource planning, assessing possible time-scales for
implementation and the likely impact of alternative scenarios on the company.
Controlling
Once the plan is implemented, its actual performance must be controlled. Information is required
to assess whether it is proceeding as planned or whether there is some unexpected deviation from
plan. It may consequently be necessary to take some form of corrective action.
Performance measurement
Overall performance of the plan must be measured in order to enable its success or failure to be
determined. Constant monitoring of the external factors will help the board keep the plan on
course.
Decision making
The board requires information to make informed decisions. Without it they cannot react logically
to the situation that faces JM.
(a) GDC appears to have met its legal obligations even though the level of service it has provided to
DS has been poor. There are a number of reasons for this.
DS rushed the appointment of GDC and did not insist on a detailed Service Level Agreement
(SLA). The contract does not specify the level of service that GDC will provide.
For example, GDC is obligated to provide 'management information', but there is no detailed
definition of what this information will entail, and no deadline for the provision of the information.
(eg '…within 5 working days of month-end').
DS handed complete control of its systems to GDC. The absence of expertise within DS puts it at a
disadvantage when arguing its case with GDC.
For example, GDC could spend significant amounts of DS money on sub-standard hardware and
software. DS would not have the expertise to question or challenge this purchase, resulting in
poor use of DS funds and a poor level of service. However, even when purchasing sub-standard
hardware GDC would not have breached the requirement of the contract to 'purchase all hardware
and software'.
Exam answer bank 399
GDC is also responsible for the writing and maintenance of in-house software. Unless GDC has a
detailed understanding of DS the software written may not be suitable. As GDC receives a set
annual fee, it may be tempted to produce software as quickly and cheaply as possible. As the
contract has no mention of software standards, GDC would be meeting its legal obligations.
Age of agreement
Another reason that could be contributing to DS receiving poor service is that the agreement is
now two years old. Changes could have taken place inside DS within the past two years that an
outside organisation such as GDC does not understand. The nature of management information
required now may be different to that required two years ago.
Service levels could also be suffering because GDC has no financial incentive to provide a good
standard of service. GDC has the right under the contract to increase the annual fee, above the
rate of inflation, without any consultation and with no reference to the satisfaction of DS.
Cost
Outsourcing removes uncertainty about cost, as the annual contract price is fixed in advance. If
computing services are inefficient, the costs will be borne by GDC.
Stability
Successful contracts build a stable relationship over the long-term. This would encourage DS to
plan for the future.
Economies of scale
Outsourcing brings the benefits of economies of scale to DS. GDC may conduct research into new
technologies or agree deals with equipment suppliers that that benefit a number of its clients
including DS.
Specialist organisations, such as GDC, are able to retain skills and knowledge. DS may not have a
sufficiently well-developed information systems department to offer staff opportunities for career
development. Talented staff would leave to pursue their careers elsewhere.
Expertise
New skills and knowledge become available. A specialist company such as GDC can share staff
with specific expertise (for example, with experience of writing in-house software) between several
clients who would not otherwise benefit from them.
Flexibility
GDC can scale resources up or down depending upon demand. For instance, during a major
changeover from one system to another the number of information systems staff needed may be
twice as large as it will be once the new system is working satisfactorily.
400 Exam answer bank
5 Operations strategy
Top tips. Part (a) is based on Brown's theory. When reading the question, remember that 'brief
descriptions' mean basic 'book knowledge'. You are then required to apply this knowledge to a
supermarket chain.
Your answer to part (b) might be based on any of the five considerations mentioned in the chapter (you
only needed to mention four of them), however you would still earn marks for others as long as they are
relevant to operations management.
(a) Brown identified six factors important to operations strategy. Each of these is described below,
with examples relating to a retail supermarket chain
Capability required
Any operations strategy will be influenced by what it is that the organisation 'does'.
For example, a supermarket chain sells food and other items to consumers.
The operations strategy will be affected by the scale and geographical spread of the organisation's
operations.
For example, a supermarket chain with say 10 outlets in one region of a country will face different
operation strategy issues than a nationwide chain.
Investment in technology
Technology will impact upon operations and therefore operations strategy as it has the potential to
change the processes associated with operations.
For example, a supermarket chain that uses an electronic bar code scanning system at its
checkouts which is linked to its stock/warehousing system will operate differently to a chain relying
on less-automated systems.
Who the key strategic partners are will affect operations strategy.
For example, a supermarket may have a preferred supplier for canned food items. Operations may
then be designed to help facilitate this relationship. Relationships with 'buyers' (consumers) may
be developed using loyalty card schemes – and operations changed based on what the scheme
reveals.
New products/services
This relates to how long the business will be able to do what it is currently doing (in the same
way).
A supermarket may find it also needs to offer on-line shopping and home delivery. It could also
decide to move into non-traditional areas such as consumer electronics – or even consumer
insurance or finance. These types of changes require changes to operations strategy.
Structure of operations
Operations strategy will also be influenced by how staff are organised and managed.
For example, will 'regional managers' have responsibility and complete control over all stores in one
region – or will one national strategy apply?
Issues such as staff levels, shift patterns and human resources policies will also affect operations
strategy. For example, will stores be open 24 hours – and if so how will this be staffed?
Exam answer bank 401
(b) Sustainability
Sustainability is about ensuring a better quality of life for everyone, both now and in the future. It
focuses on social progress that recognises the needs of everyone, effective protection of the
environment, prudent use of natural resources and maintenance of high and stable levels of
economic growth or employment.
This issue concerns which species (other than humans) are to be sustained, the level of world
population that should be sustained and the needs of developing countries.
Social sustainability is about personal growth and development. For organisations the issue is
whether or not employees should be treated like robots by requiring them to perform repetitive
tasks, or should they be given scope to develop their abilities and perform a wide range of
production roles?
Economic sustainability is about producing goods and services that people want whilst maximising
the organisation’s profitability. The operations issue here is to ensure the organisation produces
products and services that its customers want whilst minimising waste to maximise profit.
The issue here is generational equity. This is about ensuring future generations can enjoy the same
environmental conditions as the current generation, and that social welfare is maintained or
increased.
The main operations management concern is the use of natural materials. As the world has finite
resources, production levels cannot be sustained forever. Therefore organisations need to plan their
use of resources carefully, especially the rate by which they use them up. They should also look for
new ways of producing the products that people want, as well as looking for sustainable resources.
There is a balance to be found between preserving the environment and natural resources with the
need to produce goods and services.
The operations management issue concerns sourcing materials which balance the need for
sustainability with the need to produce goods and services. For example, organisations can look at
substituting some raw materials with sustainable alternatives or look to produce products using
more sustainable processes.
Sustainable by whom
Ideally the whole world will take responsibility for sustainability, but this is unlikely due to a lack of
meaningful global international agreements.
The operations management issue is that individual organisations must take on responsibility for
sustainability themselves rather than waiting for legal regulation.
402 Exam answer bank
Principles of TQM
Prevention
Organisations should take measures that prevent poor quality occurring. The emphasis is on
quality assurance rather than quality control.
A culture should be developed that encourages workers to get their work right first time. This will
save costly reworking and help ensure high quality output. This ultimately results in satisfied
customers, repeat business and improved profitability.
Eliminate waste
The organisation should seek the most efficient and effective use of all its resources.
Continuous improvement
The Kaizen philosophy should be adopted. Organisations should seek to improve their processes
continually. High quality processes mean high quality output.
Everybody's concern
Everyone in the organisation is responsible for improving processes and systems under their
control.
Participation
All workers should be encouraged to share their views and the organisation should value them.
Workers across departments should form team bonds so that eventually the organisation becomes
one. Quality circles are useful in this regard. Workers should be empowered to make decisions as
they are in the best position to decide how their work is done.
A virtual company is a collection of separate companies, each with a specific expertise, who work
together, sharing their expertise to compete for bigger contracts/projects than would be possible if
they worked alone.
Within recent years it has become increasingly common for combinations of organisations and
individuals to combine in the form of a virtual company and virtual supply chains. Virtual
companies enable people such as executives, engineers, researchers and others, based in a
number of locations, to collaborate on a particular venture.
Exam answer bank 403
This trend has been made possible by the widespread use of remote networking which is now
available at relatively low cost to organisations of all sizes. The collaborators are able to utilise
technology to work together and present themselves as a single virtual entity to potential clients.
Virtual companies and members of virtual supply chains tend to utilise the Internet and related
technologies such as intranet and extranet. To be successful the partners involved must do more
than establish virtual links. They must provide complimentary areas of expertise, and develop a
close relationship based on mutual need and trust.
A virtual company may be the best way to implement business strategies particularly strategies
that require close collaboration with others. For example, in order to exploit a new opportunity,
business partners may be required to move fast. Establishing a virtual company may enable these
partners to quickly establish a united entity to pursue the opportunity. Establishing traditional
'bricks and mortar' links would take considerably longer – increasing the risk of competitors
grasping the opportunity first.
Part (b) is reasonably straightforward if you have studied JIT in sufficient depth. Your answer to this part
may have mentioned a number of other features of a JIT system – not just the ones we mention. As long
as your points are valid you will earn marks.
Part (c) requires you to think about some benefits of JIT. To answer this part you need to think a little
about what you have read and apply your knowledge. In the exam you would probably only need to
provide five (relevant) financial benefits to gain the full five marks.
Also, note the verb, ‘identify’. If you see this verb or ‘list’ then you know explanation is not required.
(a) (i) Reorder level. When inventories reach this level, an order should be placed to replenish
stocks. The reorder level is determined by considering the rate of consumption and the lead
time (lead time is the time between placing an order with a supplier and the stock
becoming available for use).
(ii) Minimum level. This is a warning level to draw management attention to the fact that
inventories are approaching a dangerously low level and that outages are possible.
(iii) Maximum level. This also acts as a warning level to signal to management that stocks are
reaching a potentially wasteful level.
(iv) Reorder quantity. This is the quantity of inventory which is to be ordered when inventory
levels reach the reorder level. If it is set so as to minimise the total costs associated with
holding and ordering inventory, then it is known as the economic order quantity.
(v) Average inventory. This is a calculation of the average inventory level that assumes actual
levels fluctuate evenly between the minimum (or safety) inventory level and the highest
possible inventory level (the amount of inventory immediately after an order is received, ie
safety inventory + reorder quantity).
404 Exam answer bank
Multi-skilled workers
In a JIT production environment, production processes are shortened and simplified, however, the
variety and complexity of work carried out by employees is increased. Workers must therefore be
flexible and adaptable. They should be trained to operate all machines on the production line and
undertake routine preventative maintenance.
JIT production systems go hand-in-hand with JIT purchasing systems. These match the usage of
materials with delivery of replacements from external suppliers. This means that material stocks
can be kept at near-zero levels.
For JIT purchasing to be successful, the organisation must have confidence that its suppliers will
deliver on time and that the materials supplied will be of very high quality. There can be no rejects
or returns which would result in production delays. Therefore the company and its suppliers must
build up close relationships.
Factory layouts under JIT production are designed to reduce the movement of workers and
products. Traditionally machines were grouped by function (drilling, grinding and so on). A part
therefore had to travel long distances, moving from one part of the factory to the other, often
stopping along the way in a storage area.
Under JIT systems, material movements between operations are minimised by eliminating space
between work stations and grouping machines or workers by product or component instead of by
type of work performed. Products can flow from machine to machine without having to wait for the
next stage of processing or returning to stores. Lead times and work in progress are therefore
reduced.
An emphasis on quality
Production management within a JIT environment seeks to both eliminate scrap and defective
units during production and avoid the need for reworking of units. Defects stop the production line,
creating rework and possibly resulting in a failure to meet delivery dates. Quality, on the other
hand, reduces costs.
Quality is assured by designing products and processes with quality in mind, introducing quality
awareness programmes and statistical checks on output quality, providing continual worker
training and implementing vendor quality assurance programmes to ensure that the correct product
is made to the appropriate quality level on the first pass through production.
Machinery set-ups are non-value-added activities which JIT aims to reduce or even eliminate.
Reducing set-up time also makes the manufacture of smaller batches more economical and
worthwhile. Managers do not feel the need to spread set-up costs over as many units as possible,
which then leads to high levels of inventory.
Exam answer bank 405
(i) Increase in labour productivity due to labour being multiskilled and carrying out preventative
maintenance
(vii) Reduction in costs associated with scrap, defective units and reworking
(viii) Higher revenue as a result of reduction in lost sales following failure to meet delivery dates
(because of improved quality)
One definition of the marketing concept is 'a management orientation or outlook, that accepts that the
key task of the organisation is to determine the needs, wants and values of a target market and to adapt
the organisation to delivering the desired satisfaction more effectively and efficiently than its competitors'.
In other words, customer needs and the market environment are considered of paramount importance.
Since technology, markets, the economy, social attitudes, fashions, the law and so on are all constantly
changing, customer needs are likely to change too. The marketing concept is that changing needs and
attitudes must be identified, and products or services adapted and developed to satisfy them.
If the marketing concept is to be applied successfully, it must be shared by all managers and supervisors
in an organisation. 'Marketing' in its broader sense covers not just selling, advertising, sales promotion and
pricing, but also product design and quality, after sales service, distribution, reliability of delivery dates
and in many cases (such as the retailing industry) purchasing supplies. This is because the customers'
needs relate to these items as well as more obvious 'marketing' factors such as sales price and how
products are promoted.
Production-oriented organisations
A production-oriented organisation is one which believes that if it can make a good quality product at a
reasonable price, then customers will inevitably buy it with a minimum of marketing effort. Businesses
which take this view will probably concentrate on product developments and improvements, and
production efficiencies to cut costs.
If there is a lack of competition in the market, or a shortage of goods to meet a basic demand, then
production orientation should be successful. However, if there is competition and over-supply of a
product, demand must be stimulated, and a production-oriented organisation will resort to the 'hard-sell'
or 'product push' to 'convince' the customer of what they want.
406 Exam answer bank
A sales-oriented organisation is one which believes that in order to generate large volumes of output, it
must invest heavily in sales promotion. This attitude implies a belief that potential customers are by
nature sales-resistant and have to be persuaded to buy (or buy more). This means that the task of the
business is to develop a strong sales department, with well-trained sales people.
Key differences
The fundamental difference between production, sales and marketing-oriented organisations can be
summarised very briefly.
Where an organisation follows a production or selling orientation, it produces goods or services, and then
expects to sell them. The nature of the organisation's business is determined by what it has chosen to
produce, and there will be a reluctance to change over to producing something different.
Organisations which embrace the marketing concept, commit themselves to supplying what customers
need. As those needs change, so too must the goods or services which are produced.
9 Branding
Top tips. Questions such as this are a gift because they provide you with a ready-made structure for your
answer and the mark allocations indicate how much you should write in each part. For example, part (a)
requires an explanation of four benefits for a total of eight marks – therefore you only need write enough
to earn two marks for each.
To earn the two marks you only need to identify each benefit and write a sentence or two to justify your
answer.
You should follow the same principles for parts (b) and (c).
Product differentiation
Branding aids product differentiation as it conveys a lot of information very quickly and concisely.
This helps customers to readily identify the goods or services and thereby helps to create customer
loyalty to the brand. It is therefore a means of increasing or maintaining sales.
Advertising
Branding maximises the impact of advertising for product identification and recognition. The more
similar a product is to competing goods, the more branding is necessary to create a separate
product identity.
Industry acceptance
Market segmentation
Branding supports market segmentation, since different brands of similar products may be
developed to meet specific needs of categories of user.
Brand extension involves the introduction of new products which 'piggy back' on the goods that are
already known to the customer. The idea is to capitalise on brand loyalty which should help make
the new products successful.
Exam answer bank 407
Multi-branding
Multi-branding is the introduction of a number of brands that all satisfy very similar product
characteristics. This can be used where there is little or no brand loyalty, in order to pick up buyers
who are constantly changing brands.
Family branding
This is the use of brand name power to assist all products in a range. It is often used to
consolidate expensive advertising costs by putting out one message – that of the brand - rather
than promoting a range of individual items.
The market approach generates a value on the basis of market transactions. A common method
used in this form of valuation is known as relief-from-royalty which reflects the fact that owners of
brands have use of the brand for free, whereas they could generate an income by licensing it. This
income stream, or royalty rate, can be derived by reference to royalty or license agreements for
similar assets and used to generate a value.
The cost approach is based on the costs incurred to build the brand. For example, costs involved
in registering trademarks and promotional activities. However, it is not the most accurate method
of valuation because the cost of building the brand is usually unrelated to its ability to generate
revenue.
The income approach is based on net present values. The brand's expected future earnings, or
cash flows, can be used to calculate the overall economic benefit that it will generate over its life.
This benefit is reduced by all expenditure relating to brand awareness that will be incurred over its
life to calculate a net income figure. This income figure is then discounted at an interest rate that
an investor would expect as a return based on the brand's risk profile and characteristics. This final
value is the value of the brand.
10 Consumer purchasing
Top tips. This answer may appear difficult to achieve, but it is just the repetition of textbook knowledge.
To produce a full answer you needed to remember the stages of the consumer decision-making process
and the factors which influence it. Each stage/factor is quite self-explanatory so you should have been
able to write a few sentences on each without too much trouble.
Buyer behaviour describes the activities and decision processes relating to buying. Treating
buying behaviour as a process enables organisations to distinguish between the different buying
roles that customers sometimes assume.
Marketers make a distinction between business and non-business (household) consumers when
considering buyer behaviour because the needs and processes used by each type of consumer are
very different.
According to Lancaster and Withey 2003, consumer decision making can be broken down into
five stages or steps.
Need/problem recognition
At this initial stage, the customer recognises that they have a need to fulfil or a problem to solve.
This creates a motive for them to search for a solution.
408 Exam answer bank
The consumer then searches for products or services that meet their need or solve their problem.
This may involve visiting shops, searching the internet or telephoning potential suppliers.
Evaluation of alternatives
Once they have done their research, the consumer will evaluate each of the possible solutions that
they have discovered. The evaluation will determine which of the possible solutions meet their
needs best, however issues such as price may also have an influence.
On the basis of their evaluation, the consumer selects the product or service they want and makes
the purchase.
Post-purchase evaluation
Following the purchase, the consumer evaluates the product or service to see if it does in fact meet
their needs. If they are satisfied then they may purchase the product or service again out of loyalty.
If they are dissatisfied then the purchasing process begins again as the need has not been fulfilled
nor the problem solved.
Social factors relate to the social groupings a consumer belongs to or aspires to, and trends
in society which influence buying patterns. Examples of social factors which influence the
consumer purchasing process are reference groups, families and roles or status.
Reference groups are actual or imaginary groups that influence an individual's evaluations,
aspirations or behaviour. They influence a buying decision by making the individual aware
of a product or brand, allowing the individual to compare their attitude with that of the
group.
All families differ, for example in terms of socio-economic status and consumption patterns.
Therefore they affect the amount of money the consumer has to spend and in what volumes
purchasing needs to be made.
Roles and status influence an individual’s purchasing decision because the products or
services selected must be compatible with them. For example a person who sees
themselves as being part of a high social class may not select an ‘economy’ range of food
products.
Culture comprises the values, attitudes and beliefs in the pattern of life adopted by people,
that help them integrate and communicate as members of society. It may affect a
purchasing decision in many ways. For example, alcohol consumption is part of the culture
of many countries in Western Europe, whereas it is frowned on in Muslim and some other
countries.
Personal factors include such things as a consumer’s age, stage of family life cycle, and
lifestyle. They each influence an individual’s purchasing decision because the products or
services they select must be compatible with them.
Individuals will buy different types of product depending on their age. This is particularly
relevant to such products as clothes, furniture and recreation.
The family life cycle affects a consumer’s needs and purchasing patterns. For example, a
single man will have different requirements to a man who is married with children.
Exam answer bank 409
The process of buyer behaviour is also influenced by four psychological factors, motivation,
perception, learning and beliefs and attitudes.
Perception is the process whereby people select, organise and interpret sensory stimuli into
a meaningful and coherent picture. The way consumers view an object may vary according
to their past experience, expectation, needs, interests, attitudes and beliefs.
A belief is a descriptive thought that a person holds about something. An attitude describes
a person's feelings and action tendencies toward some object or idea. Both can affect a
purchasing decision. For example if a person can demonstrate their beliefs through a
product, or if they have an emotional attachment to it, they may be more likely to purchase
it.
You might not have realised how HR can create marketing opportunities so you might need to think
laterally in Part (d).
Human resource planning involves developing a plan to recruit, utilise, develop and retain staff.
The CX buy-out involves three main initiatives; heritage 'real ale' tours, bottling beer for sale in
supermarkets and employing a flexible but experienced workforce. The HR plan associated with
the buy-out must support these initiatives.
The main issues involved in developing a HR plan for the CX buy-out are described below.
410 Exam answer bank
Workable
The plan must be realistic and suitable for implementation (taking into account cost and working
practices).
CX has a long history and a national reputation for traditional 'real ale' production. Although CX
wishes to change, the organisation and the people that work there should preserve this feeling and
reputation as it is a source of competitive advantage. Therefore, the HR plan should encourage
valued ex-employees back – it should not be a case of 'out with the old and in with the new'.
As the brewery has closed, technically there are no existing human resources. However, as the
shut down only occurred a month ago, and the workforce has specialist skills, it is highly likely
that most ex-employees would be available for re-employment. The buy-out team should consult
HR records and speak to key ex-employees to establish the current position.
Deciding who should be offered employment is a key task. Selection should take into account
existing employee skills and the potential to develop any new skills required. A key consideration
for re-employment would be a willingness to be flexible rather than simply 'I want my old job back'.
Past experience should provide a reasonable estimate of staff numbers required (including seasonal
fluctuations).
New activities (eg bottling) will require new skills – and increased workforce flexibility also needs
to be taken into account when estimating the numbers/skill mix required. Bottling may also impact
upon seasonal fluctuations. Brewery tours will require significantly different skills.
All of these factors need to be considered and addressed – within a realistic, budget.
In this situation, the external market is somewhat blurred with the internal market (as Stage 1 of
this plan included ex-employees). Supply for many positions/skills is likely to be able to be satisfied
from the pool of ex-employees – but areas such as bottling and brewery tours may require
specialist knowledge and skills that may need to be found from other sources. Teaching ex-
employees new skills is another option.
Information relating to ex-employees will be available using CX HR records. These should provide a
wide range of information including positions held, age, training undertaken and performance
levels.
When a realistic estimate of employee numbers and skills has been established, the next step is to
produce action plans that will result in the recruitment and training of a workforce that will meet
the demands of CX.
Exam answer bank 411
The plan should ensure steps are taken to ensure all required positions and skills are accounted
for. Key employees should be identified by name. There may also need to be contingencies built
into the plan to allow for circumstances where expected 'first options' are unavailable.
The four steps outlined above will not run completely sequentially – in reality many aspects of the
plan will span more than one stage.
Before the shut-down, seasonal fluctuations in sales were large – an indicator that labour flexibility
has always been important.
Logic dictates that as the old CX was ultimately unsuccessful the new CX must do something
different. Changes in working practices will therefore be required. This is why the CX buy-out team
have identified workforce flexibility as a key aspect of their plan.
Although the introduction of brewery tours and bottled beers may help smooth seasonal
fluctuations, they will also introduce the need for new skills and probably new working hours.
Flexibility is therefore essential.
Types of flexibility
For CX, the flexibility required would include numerical, task and financial.
Numerical flexibility
This is key to deal with seasonal fluctuations and for different demand levels during the day and or
week eg for tours.
The development of a numerically flexible workforce will involve the use of temporary and part
time workers supplementing full time employees (eg Handy's Shamrock). Another option is the
outsourcing of non-core functions.
This involves recruiting and developing multi-skilled staff able to perform a range of tasks. This
helps reduce overall numbers and provides ready made cover in cases of absence.
At CX, an employee may for example be able to help with brewing, carry out maintenance and
conduct a brewery tour all on the same day.
Financial flexibility
At CX, staff payments should be linked to output (eg litres brewed, bottles produced, feedback
scores from brewery tours or achieving financial targets related to sales figures and profitability).
(c) Five benefits of employing ex-employees to the new organisation and local community.
By re-employing skilled staff, CX will save money on training new employees. Their experience will
be vital to keep the brewery operating, as the business grows.
Local support
The local population may get behind the new venture and offer it support by going on tours or
purchasing the beer. This support may be enough to see the venture through its early stages.
Influx of cash
The influx of cash from employment and visitors to the area will benefit other local businesses who
may find their sales improve due to a knock-on effect.
412 Exam answer bank
Flexible working
Employees and their families may benefit from the flexible working practices on offer. Older
employees can enjoy semi-retirement and younger ones can fit the job around their family
commitments.
Local tradition/history
The local area will retain an important part of its history and tradition that would otherwise be lost
through property development.
Employing local ex-employees and the other benefits to the community offer excellent PR and
social marketing opportunities that may extend wider than the local area.
The diversification opportunity with the visitor centre should lead to tourism and also add more
personality to CX's own beer brand. The exposure the beer is likely to receive in the local news will
present CX with an opportunity to push the product further afield.
12 Online recruitment
Top tips. Open-ended questions such as Part (a) are best attempted by drawing up a list of reasonable
points first. Once you're happy with them you can flesh out your answer. You will need to think of wider
issues when considering the opportunities in the scenario, and the chances are you would have thought of
others that are not in this answer. However, you will still earn marks providing your answers are relevant,
well explained and related to the scenario.
Parts (b) and (c) are answerable using textbook knowledge – don’t forget to present your answer clearly
using headings.
The report identified a potential opportunity to expand B3's business by using the internet as a
source of employment opportunities and to match them with particular clients who have registered
with them. Clients would then be contacted by email or text message and interviews arranged.
How will candidate details be matched to appropriate vacancies? This is likely to rely on 'keywords'
but the matching criteria must be tested and refined to prevent unsuitable matches being
suggested.
Speed of service
Providing the client's requirements and job specifications from the employers are held in a
database, the process of matching clients to jobs would be very quick indeed. This speed would
increase client satisfaction.
Communication cost
Despite many clients not being able to access personal emails and B3's website at work, they
could still access them from home or Internet cafes. E-mail is far cheaper than telephone or post
and a large number clients with similar needs can be contacted by a single email. This will help
keep B3's costs down.
Exam answer bank 413
Text content
Are text messages a suitable format for this type of communication? Can sufficient detail be
provided to enable an informed judgement?
Database accuracy
It is essential B3’s database of vacancies and candidates is kept up-to-date. Candidates may fail to
inform B3 that they're no longer looking for a new position and employers websites may not be up-
to-date. There is a risk B3 would waste its (and its clients) time applying for interviews for
positions that had already been filled.
This opportunity involves B3 adopting a paperless office through the upgrading of office
technology.
Data security
B3 would be storing the personal details of individuals. It is important that steps are taken to
protect the security and privacy of data that is held.
Data protection
As the organisation would place very high reliance on the database, system failure and complete
data loss could result in its operations ceasing it. This risk can be reduced by B3 regularly backing
up its data and storing it in a safe location offsite.
Practicalities
It may not be practical for all tasks to be made paperless, for example client companies may not
wish to be invoiced electronically or may not have sufficient systems to process such invoices.
Where agreements or contracts are made between employees, employers and B3, paper copies
may still be required for signing and to give to the employee for their records.
Backup systems
In the event of a disruption to power supplies or equipment failure, B3 would struggle to continue
its operations. Therefore some kind of back up paper based manual system should be available
just in case.
Cost-saving
The expense of developing new software and investment in systems should create a benefit to B3
that offsets these costs. Paper, printing, filing, storage and general administration are fairly cheap
and it may take sometime for B3 to recoup its investment.
File conversion
Care must be taken when converting existing paper and electronic files into the new database. In
particular, it must be ensured that the source data is complete and accurate and the process of
converting data includes verification and validation.
Once a short-list has been created from a number of suitable applicants, the selection of the most
suitable can be made using the following techniques.
Interview
The aim of interviews is to find the best candidate for a position through direct assessment.
414 Exam answer bank
The potential employer must decide the type of interview that is most appropriate. Where the line
manager makes the decision of who to select, a one to one interview should suffice. Where the
input of more than one person is required, a final or sequential interview can take place.
The interviewer should use a job description for the vacancy as well as a person specification. This
will enable them to understand what is expected of a suitable candidate.
The interview should be conducted in a location that is quiet and comfortable to enable all parties
to relax.
Candidates should be given the opportunity to talk and ask questions as it is important for them to
learn about the organisation as much as the organisation to learn about them.
Testing
Testing candidates is a method of selection that allows the comparison of abilities and personality
traits that would not be discovered by interviewing alone.
Testing should be set directly in relation to the person and job specification. This will ensure the
personality and ability traits tested are required by the role.
The type of testing selected should be relevant to the position concerned. For example
psychometric tests may not be relevant to select between candidates who have applied for a
manual job making door knobs, however it would be relevant for a senior management position.
Care must be taken when interpreting test results since they do tend to over simplify results – the
best score may not indicate the best person for the job. Results should always be considered in
relation to other selection methods.
Assessment centres
Particular roles, such as those requiring leadership, problem solving or creative abilities may
benefit from the use of assessment centres in the selection process.
The location of centres should be easily reached by candidates and assessors. They should provide
all the facilities that are required by the types of assessment being carried out. Care must be taken
to select assessors with the right skills to make meaningful judgements.
Further into the process, reference checks, medical examination and the final decision/selection
should be made. The offer should be made in a formal letter.
All steps in the process should be reliable, valid, fair and cost effective.
Conduct
The employee's behaviour breaches acceptable limits deemed by the employer. Unacceptable
conduct may or may not be laid down in the contract of employment, however most employers
have rules concerning drunkenness, immorality or misconduct.
Before conduct becomes an acceptable reason for dismissal, the employee should be given
warnings and an opportunity to change behaviour. However, certain misconduct may be deemed
so serious that it warrants summary dismissal.
Capability
The standard of the employee's work is below that what is expected and after appropriate support
and guidance it is clear that they are not capable of performing the role.
Before dismissing on the grounds of capability, the employer should give an employee a
reasonable chance to improve. This can involve consulting with the employee to identify
difficulties and providing training to help them.
Exam answer bank 415
It is an acceptable reason for dismissal if by continuing the employment of the employee the
employer would breach a statutory duty (for example, a solicitor could not continue to be
employed if they are struck off the professional register). The employer would be justified in
terminating the employment as soon as the issue comes to light since the employer must not break
the law.
Employers are entitled to dismiss an employee where another substantial reason affects them
adversely. Examples include loss of trust in an employee or even where an employee marries a
direct competitor.
Redundancy
Redundancy occurs where the business ceases, is relocating far away (so the employee cannot
attend work), or where the role an employee performs is to cease and they cannot be
accommodated within the organisation in another role. To be an acceptable reason for dismissal,
the employer must select employees for redundancy fairly, provide reasonable notice and consider
offers of alternative employment.
416 Exam answer bank
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