Unit 2 topics

Benefits of using budgets

• To establish priorities by indicating the level of importance attached to a particular policy or division.
• To provide direction and coordination by ensuring that spending is geared towards the firm's aims.
• To assign responsibility by identifying the person who is directly responsible for any success or failure.
• To motivate staff by giving them greater responsibility and recognition when they meet targets.
• To improve efficiency by investigating reasons for failure and success.
• To encourage forward planning by studying possible outcomes.

Drawbacks of using budgets 

• Incorrect allocations - a budget that is too generous may encourage efficiency. A budget that is insufficient will demotivate staff and hinder progress through a lack of money.
• External factors - changes outside the budget holders' control may affect their ability to stick to the plan.
• Poor communication - budgets must be agreed between people who understand the area in question and also other factors that might influence the budgets.

Budgetary control is the establishment of the budget and the continuous comparison of actual and budgeted results in order to ascertain variances from the plan and to provide a basis for revision of the objective or strategy.

Variance analysis

A variance represents the difference between the planned standard and the actual performance. If the variance reveals a poorer performance than planned, it is known as an adverse (unfavourable variance) e.g. higher costs or lower sales revenue. If the variance shows a better performance than planned, it is known as a favourable variance, e.g. lower costs or higher sales revenue.

Identification of the causes of a variance can allow a company to:

• Identify responsibility
• Take appropriate action

For an adverse variance, providing the factor that caused it is under the firm's control, alternative methods can be investigated. Favourable variances can be used to indentify efficient methods that can be adopted more widely in the company.

Benefits of using budgets

• To establish priorities by indicating the level of importance attached to a particular policy or division.
• To provide direction and coordination by ensuring that spending is geared towards the firm's aims.
• To assign responsibility by identifying the person who is directly responsible for any success or failure.
• To motivate staff by giving them greater responsibility and recognition when they meet targets.
• To improve efficiency by investigating reasons for failure and success.
• To encourage forward planning by studying possible outcomes.

Drawbacks of using budgets

• Incorrect allocations - a budget that is too generous may encourage efficiency. A budget that is insufficient will demotivate staff and hinder progress through a lack of money.
• External factors - changes outside the budget holders' control may affect their ability to stick to the plan.
• Poor communication - budgets must be agreed between people who understand the area in question and also other factors that might influence the budgets.

Budgetary control is the establishment of the budget and the continuous comparison of actual and budgeted results in order to ascertain variances from the plan and to provide a basis for revision of the objective or strategy.

Causes of variances in costs

• Wages
• Quality of material
• Storage and wastage of materials
• Material costs 
• Efficiency changes 
• Morale and efficiency of staff

Causes of cash-flow problems

• Over investment in fixed assets, leaving no money to pay bills.
• Overtrading- producing too many goods and running out of cash.
• Credit sales- increasing sales and thus expenses, but with no cash recieved until a later date.
• Stockpiling- tying up assets in stock.
• Seasonal factors- low sales revenue or high costs during part of the year.
• Changing tastes- products do not sell.
• Management errors- poor market research or budgetary control leading to cash shortages.

Methods of improving cash flow

• Sale of assets
• Sale and leaseback of assets
• Bank overdraft
• Short-term loan/bank loan
• Debt factoring is when a company buys the right to collect the money from the credit sales of an organisation.

Net profit margin expresses profit as a proportion of the level of sales (turnover).

Net profit margin= net profit/sales (turnover) x 100%

A lowering of the percentage may indicate that the business is having problems controlling its costs, while an increase may indicate the business is becoming more efficient in controlling costs or is able to set a higher price.

Return on capital, capital is the money put into a business by the owner when it is first established, or in order to buy new equipment or machinery, or to invest in a new project. It is important that this capital brings in a suitable return for the business. Return on capital= net profit/capital invested x 100%

Improving profits/profitability

• Increasing prices, to widen the profit margin
• Decreasing costs by; sourcing cheaper supplies, employing fewer people, outsourcing production to a country with cheaper labour costs and reducing other costs.

Functional management

Jobs are grouped together and organised into departments, sections or functions, e.g. Marketing, Finance, Production. This form of management can lead to:

• Clearly defined channels of communication and hierarchy
• Clearly defined roles
• Decision making being more centralised

Organisational hierarchies: the wider the span of control the fewer the levels in the hierarchy.

Levels of hierarchy means the number of levels of management within an organisation. A company that has many levels of hierarchy will have a tall organisational structure, whereas one with fewer levels will have a flatter organisational structure.

Many levels in the hierarchy (tall structure)

• Greater opportunites for specialisation
• Greater opportunities for promotion
• Can create communication problems between the top and the bottom of the organisation when there are many layers through which communication has to pass
• May be less opportunity for delegation 
• Administration costs may be higher

Few levels in the hierarchy (flat structure)

• Fewer opportunities for specialisation
• Fewer opportunities for promotion
• Communication between top and bottom of the hierarchy is easier as there are fewer levels to pass through
• May be greater opportunities for delegation
• Administration costs may be lower 

Wide versus narrow span of control

Wide span

• Greater opportunities for delegation
• Supervision and control will be looser
• Distance between top and bottom of the organisation will be smaller
• Reduced contact and communication between manager and reportees
• If accompanied by delayering, this can lead to lower costs but also reduced opportunities for promotion

Narrow span

• Less opportunity for delegation
• Supervision and control are tighter
• Distance between the top and the bottom of the organisation is greater
• There is greater contact between managers and reportees
• Possibly greater opportunities for promotion exist

Centralised versus decentralised structures

Centralisation involves authority and responsibility for decision making being in the hands of senior managers. Decentralisation means that this responsibility is given to individual units, departments, branches or lower-level managers.

Centralised decision making may result in:

• Greater control over decisions made
• More consistency
• More efficient use of specialist skills of employees and managers

Decentralised decision making may result in:

• Increased motivation due to empowerment of lower-level managers
• The development of skills in lower-level managers
• Quicker decision making - but it will be difficult for these lower-level managers to have an overview and be aware of the wider impact of their decisions

Delegation

Tasks are handed down by a manager to a subordinate. The subordinate is given the authority to make decisions but the manager remains accountable. The process can be a way of motivating and empowering employees.

For delegation to be effective the manager must:

• Think carefully about getting the right person to do the job
• Ensure he/she is adequately trained
• Ensure that the interesting tasks, as well as boring ones, are delegated - will prevent managers from using power to their advantage
• Provide support mechanisms

Methods of recruitment and selection

• Supply of labour, cost, historical factors, approach and attitudes of management, level of job within the organisation, location of the job, size of the organisation and resources available.

Internal recruitment is recruiting an employee from within the organisation.

Advantages:

• Advertising is cheap, e.g. via internet, notice board and newsletter.
• The applicant already knows the organisation, potentially reducing costs of induction training.
• The applicant is known in terms of his/her potential for the post.
• It can create promotional opportunities, potentially increasing motivation among staff.

Disadvantages:

• New ideas or a fresh approach may not be generated.
• There will be a limited source of potential applicants, if only this method is used.
• It may create a vacancy elsewhere in the organisation which will need to be filled; recruitment costs may consequently increase rather than decrease.

External recruitment is recruiting an employee from outside the organisation.

Advantages:

• Applicants may bring in new ideas or fresh approaches to the organisation.
• Thee is a wider pool of applicants to choose from.

Disadvantages:

• It is more expensive.
• The process will take longer.
• The applicant is not known to the organisation and does not have a proven record.

Internal training takes place within the organisation in a work context. It is appropriate if training needs are specific to the individual organisation. Internal training that makes use of internal trainers and external providers can lead to the best of both worlds. The most common form of internal traininf is on-the-job training.

External training takes place away from the workplace. It is appropriate if there are only a few employees with this specific training need and the training requirement is not specifically linked to the organisation. It gives trainees the opportunity to meet people from other organisations, allowign for an interchange of ideas and a broadening of understanding. This can also make employees fell valued and increase their motivation. 

On-the-job training is likely to: 

• Be cheaper, as existing employees and equipment can be used
• Take place in realistic environment so there should be no problems in readjusting from a learning to a work situation

However, problems may result from:

• The employee conducting the training being a poor instructor who is unable to teach the proper skills
• The employee conducting the training having developed bad habits/short cuts that are passed onto the trainee
• The work situation being noisy and stressful and not the best learning environment

Off-the-job training often uses specially trained experts to provide the training. This approach may result in:

• Training being more highly valued by employees, leading to increased motivation
• Opportunities to meet staff from other organisations and learn about their systems
• Reduced stresses and distractions, because of being away from the workplace

The purpose and benefits of training

• Reduce costs in the long term
• Can lead to increased motivation
• Increases employees' job prospects
• Ensures employee has the necessary skills, knowledge and attributes required for the job
• Can identify potential for the future
• Increase efficiency

Maslow

From bottom to top:

• Physiological - good wage and salary structure, good working conditions.
• Safety - security at work (a safe job), pension arrangements, safe working environment.
• Social - opportunities for teamworking, social events.
• Esteem - providing positive feedback where possible and chances for promotion.

Herzberg

• Hygiene factors - salary, security, supervision, working conditions, company policy. Improvements to these might remove dissatisfaction, but they will not increase satisfaction and motivation.
• Motivators - recognition, responsibility, work itself, achievement, advancement. Improvements in these areas will lead to increase in motivation.

Mayo

• Employees are motivated by more than money and working conditions.
• Work is a group activity and employees should be seen as members of a group.
• Recognition, belonging and security are more important in influencing motivation than working conditions.
• Informal groups exert an important influence over employees' attitudes.
• Supervisors need to pay attention to individuals' social needs and the influence of informal groups.

Taylor

• He invented work study and founded the scientific approach to management, which aimed at maximising efficiency through specialisation.
• His method meant that jobs became boring and repetitive. He believed that workers are motivated by money and try to avoid work, so they need close supervision.
• He emphasised the benefits of piecework, where workers are paid according to how much they produce. It provides an incentive to work hard but can encourage staff to concentrate on quantity at the expense of quality.

Why is motivation important?

Poor morale in an organisation can lead to:

• High levels of absenteeism
• High levels of labour turnover
• Higher costs for the organisation due to the above factors
• Poor image, which could cause problems in recruiting and retaining employees
• Lower productivity 
• Loss of competitive advantage

Job enrichment is a means of giving employees greater responsibility and offering them challenges that allow them to utilise their skills fully.

Advantages:

• It develops worker's skills and presents them with challenges.
• It allows workers to make greater contributions to the decision-making process.
• It enhances worker's promotional prospects.
• It motivates workers by ensuring that their abilities and potential are exploited and that individuals gain a high degree of self-control over the setting of goals and the indentification of how to achieve those goals.

Disadvantages:

• Some workers may feel that it places additional pressure on them that they do not want.
• It could be seen simply as a way to delegate responsibility down through the hierarchy and to reduce the number of employees by delayering.
• Not all jobs lend themselves to enrichment. For example, routine production line work may give little scope for greater responsibility.

Job enlargement involves increasing the scope of a job, either by job enrichment or job rotation, where a worker takes a variety of roles, usually at the same level of responsibility.

Advantages

• It motivates workers through giving them greater recognition, improving their promotion prospects and increasing the feelings of achievement arising from the job itself.
• It can relieve the boredom of the work.
• If a person is absent, others can cover the job without difficulty.
• Workers may be more motivated because of their wider range of skills and they will become more flexible.
• There may be a greater sense of participation in the production process.

Disadvantages

• A firm can demoralise its workforce by giving them excessive workloads.
• Retraining costs will increase and there may be a fall in output because there is less specialisation.
• It could be seen as simply involving a greater number of boring tasks but with a reduction in the social benefits of working, since groups will be constantly changing.

Empowerment

This can be achieved through informal systems or through formal structures, such as autonomous work groups, giving employees autonomy and decision-making powers. The aim is to increase motivation while also improving flexibility and quality, thus adding value to the organisation. 

Teamworking

When accompanied by other techniques such as job rotation, enrichment and some degree of decision making, teamworking can enhance motivation and/or relieve the boredom of a monotonous job. This ties in with Mayo's principles and Maslow's social needs.

Financial incentives

These range from piece rates to profit sharing and share-ownership schemes. Links can be made with Taylor's view of 'rational economic man', Maslow's physiological needs and Herzberg's hygiene factors.

These may be set in terms of:

• Improvement in unit costs - measured by a reduction in costs, potentially leading to increased profits.
• Improvement in quality - measured by a reduction in wastage, decrease in level of complaints etc.
• Increased capacity utilisation - measured by an increase in actual output as a percentage of maximum possible output.

Unit costs

The unit cost is the cost of producing one unit of output. It is calculated by the following formula: Total cost/units of output = unit cost

Measuring quality 

It should be recognised that firms will use different measures of quality according to the needs of the firm or its customers. Examples of quality measures include: customer satisfaction ratings - a survey of customers can reveal customer opinions on a numerical scale (e.g. 1 to 10). Customer complaints - this calculates the number of customers who complain. Scrap rate (%) - this calculates the number of items rejected during the production process as a percentage of the number of units produced. Punctuality - this calculates the degree to which a business delivers its products on time. It is often measured as a percentage: deliveries on time/total deliveries x 100 = punctuality.

Capacity utilisation measures the percentage of a firm's total possible production level that is being reached at present. It is calculated as follows: actual output per annum/maximum possible output per annum x 100

Causes of under-utilisation of capacity

• New competitors or new products entering the market
• Fall in demand for the product as a whole due to changes in taste or fashion
• Unsuccessful marketing and seasonal demand
• Over-investment in fixed assets
• A merger leading to duplication of many resources and sites (e.g. between two banks)

Impacts of under-utilisation of capacity

• A higher proportion of fixed costs per unit
• Lower profit levels or the need to increase price to maintain the same levels
• A negative image and the perception that the company is unsuccessful and employee boredom
• More time for maintenance of machinery, training, improving existing systems etc.
• Less stress for employees, unless utilisation is so low that they fear for their jobs
• The ability to cater for a sudden increase in demand and motivational issues, either positive or negative

Ways of increasing capacity utilisation

• Stimulate demand for the product
• Rationalise production (improve efficiency by reducing the scale of operations). This can be achieved by:
• Leasing or selling off part of the production area
• Moving towards a shorter working week or shorter day
• Laying off workers or reducing their hours

Developing effective operations: quality

Quality: those features of a product/service that allow it to satisfy (or delight) customers.

Measures of quality include:

• Appearance, reliability, functions, after-sales service, image and brand and exclusivity.

Benefits of having a quality system

• Impact on sales volume - if a product/service meets the needs of the customers, then demand from the product will increase.
• Creating a unique selling point - businesses can use the level of quality of their products or services as a unique selling point in order to increase demand.
• Impact on selling price - having a unique selling point created by quality allows a business to charge a higher price.
• Pricing flexibility - a reputation for quality gives a firm the ability to be more flexible in its pricing in order to targer different market segments.
• Cost reductions - a quality system can reduce costs by improving production methods and reducing waste and the number of faulty products.
• The firm's reputation - a good quality system can prevent problems and help a business to avoid any damage to its reputation.

Issues involved in having a quality system

• Costs - quality procedures require a great deal of administrative expense to set up.
• Training - the training needed may be quite extensive and costly.
• Disruption to production - the training programme provided can be disruptive to the production line.

Benefits of quality control

• An inspection is at the end of the production process. It can prevent a defective product reaching the customer - thus eliminating a problem with a whole batch of products.
• It is more secure than a system that relies on one individual.
• It may detect common problems throughout the organisation.

Benefits of quality assurance

• Ownership of product rests with production operatives rather than with an independent inspector.
• It can have a positive effect on motivation, due to this sense of ownership.
• There is less need for reworking faulty products.
• There is a better quality first time. This results in less waste/scrap.
• It provides cost savings.
• It helps to ensure consistent product quality.

Customer expectations can be met by:

• Ensuring the organisation is selling what the customer wants. This can be monitored by undertaking market research.
• Ensuring that the product/service sold is of high quality.
• Ensuring that staff are friendly, helpful and knowledgeable about the product/service being offered.
• Ensuring that staff are efficient in dealing with customers.
• Ensuring that genuine customer complaints are dealt with efficiently and courteously.

Monitoring and improving customer service:

• Setting up systems for customer feedback, customer surveys and suggestion boxes to assess customer satisfaction. Using focus groups, mystery shoppers or observation methods to monitor employees' customer service skills and knowledge of product/service.
• Ensuring improvements are made in the light of comments and information recieved as part of the monitoring process.
• Training employees to ensure product/service knowledge and customer service skills.

Benefits of high levels of customer service

• It ensures long-term viability of the business
• It creates a good image for the organisation
• It creates a unique selling point
• It gains competitive advantage
• Customers returns

Choosing effective suppliers

• Price of raw materials - important if it is to make a sufficient level of profit.
• Quality of raw materials - to ensure the end product also has a good quality.
• Trade credit terms - favourable terms may enable an organisation to delay payments and improve cash flow.
• Reliability of supplier - they must be able to satisfy demands efficiently.
• Length of lead times - to ensure production is not held up.
• Flexibility of supplier - they may need to be able to satisgy sudden increases in demand.

• Robotics are used in many production situations, e.g. in the production of the Mini, the body-building process is highly automated with the use of robotics.
• Automated stock control enables accurate records to be kept of stocks levels of raw materials and finished goods. Automatic reordering can take place as part of this process, ensuring greater efficiency.
• Communications methods can involve any or all of the internet, e-mail, teleconferencing etc. These speed up communication processes and enable communication with different sections or organisations to be more efficient.
• Design technology involves using conputer-aided desing (CAD), which enables designs of new products to be produced and modified on screen in three-dimensional format.

Benefits:

• Technology replaces labour and therefore reduces labour costs.
• It brings improvements in quality, as organisations are more likely to get it right first time.
• It reduces waste, for the same reason.
• It increases productivity and therefore reduces the costs of production.
• It makes monitoring stock levels much easier.
• It ensures that stock is automatically reordered, removing human error.

Disadvantages

• The initial costs of investing in new technology will be high.
• Technology will constantly have to be updated, costing money.
• Employees will need to be trained in the use of new technology.
• Maintenance costs may be high.
• It can lead ot motivation problems, if employees fear being replaced by machines.
• It can lead to information overload, e.g. employees not reading e-mails.

Effective marketing, summarises the purposes of marketing, which are to:

• Anticipate customers' wants. The first stage of marketing is to conduct market research in order to discover the wants of customers.
• Satisfy those requirements in a way that delights customers. The approach used by organisations to achieve this aim is known as the marketing mix. An organisation will plan a suitable product, charge an attractive price, put the product into the right location or place and use promotion to make customers aware of the product.
• Meet the needs of the organisation. Ultimately marketing is intended to enable a business to meet its aims and objectives, such as earning profit.

Niche marketing - advantages

• May be fewer competitors, as large companies are not attracted to a relatively small market.
• Small firms can compete more effectively because large firms will be less able to produce goods at low unit costs if demand is limited.
• Limited demand may suit a small firm that would lack the resources to produce on a large scale.
• A firm can adapt its product to meet the specific needs of the niche market, rather than compromise between the needs of many different groups of consumers.
• Can be easier for firms to target customers and promote their products effectively when they are selling only to a certain type of customer: the content of advertisements can be designed to appeal to the specific market segment being targeting.

Niche marketing - disadvantages

• The small scale of the market limits the chances of high profit.
• Small firms in niche markets can be vulnerable to changes in demand as they may have no alternative products to fall back on.
• An increase in popularity may attract larger, more efficient firms into the market.

Advantages of mass marketing

• Large-scale production is possible, which will help to lower costs per unit through factors such as bulk buying.
• The high number of customers enables companies to earn huge revenues.
• Allows firms to use the most expensive (and usually the most effective) marketing.
• Helps firms to fund the research and development tools needed to introduce new products.
• Increases brand awareness, which can help to sell a range of products.

Disadvantages of mass marketing

• High fixed capital costs are incurred, such as the purchase of large factories. This may prevent some firms from operating in this market.
• Firms in this market may be less flexible in the face of change such as a sudden reduction in popularity of a product.
• Can be difficult to appeal directly to each individual customer because mass-market products must be designed to suit all customers.
• Less scope for adding value. High-income customers may prefer high-priced, unique products.

Many factors influence the elements of the mix. Examples include:

• Market research results may determine the price a business charges for its products/services and the places where these are sold.
• Availability of finance may influence the amount of money spent on promotion and product development.
• New technology may influence how often the product needs to be updated or whether it is made available for sale over the internet.

Using the marketing mix: product

Design of a product. To the consumer this means reliability, safety, convenience of use and whether it is fashionable, aesthetic and durable. To the organsation, the key elements are whether the product satisfies consumer tastes, the financial viability, its effect on reputation and whether the company can produce it without difficulty.

New product development. You need to know the stages involved in introducing a new product (from initial screening to the final launch). Link new product development to the product life cycle, Boston matrix, market research and research + development. These will be sources of new product ideas. Organisations must be prepared to respond to the actions of competitors by developing new products and/or adapting exisiting products through the use of extension strategies. This will ensure that they keep market share.

Other factors: technology, competitors' actions, entrepreneurial skills of managers/owners and a unique selling point.

Promotion attempts to draw consumers' attention to a product, brand or company. It can be above-the-line or below-the-line.

• Above-the-line: this is advertising through media - newspapers, television, radio, the cinema and posters.
• Below-the-line: this refers to all other types of promotion, such as public relations, branding, merchandising, sponsorship, direct marketing, personal selling and competitions.

The promotional mix

• Public relations
• Branding
• Merchandising
• Sales promotions
• Direct selling
• Personal sellinf
• Advertising e.g. television, radio, cinema, newspapers, posters, internet etc.

• Pricing strategies
• skimming pricing: a high price set to yield a high profit margin
• Penetration pricing: low prices set to break into a market
• Price leaders: large companies that set market prices, which are then followed by price takers (smaller firms)
• Price takers: small businesses that tend to follow the prices set by other firms (the price leaders)
• Pricing tactics  
• Loss leaders: very low prices that are used to encourage consumers to buy other, fully priced, products.
• Psychological pricing: prices that are set to give an impression of value (e.g. £99 rather than £100).

Cost-plus pricing is where the firm calculates its unit costs and then adds on a mark-up. The mark-up allows for risk and helps the firm to make a profit by setting a price that exceeds costs.

Price elasticity of demand measures how a change in the price of a good or service affects the demand for that good/service. price elasticity= % change in quantity demanded/change in price

Elastic demand: if the change in price leads to a greater percentage change in the quantity demanded, then the calculation will yield an answer greater than 1.

Inelastic demand: if the change in price leads to a smaller percentage change in the quantity demanded, then the calculation will yield an answer less than 1. 

This involves getting products to the places where customers can buy them. Shops do not automatically give space to suppliers. Many sales people are employed to persuade retailers to stock a product rather than trying to persuade customers to buy it. Customers cannot buy it if retailers do not sell it.

Traditionally the method of getting a product from the producer to the customer was producer > wholesaler > retailer > consumer. Many companies now bypass the wholesaler.