Business Studies Unit 1,2,4

9707/1,2 – Business Studies A Levels

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t 1: Business & Environment

BUSINESS AND ENVIRONMENT Business Activity:-

Transformation of resources resources into g oods and and services to satisfy the needs of customers with profit as an aim. Resources / Factors of Production - Land - Labour - Capital Enterprise – organization organization Entrepreneur Entrepreneur – person who invests consumer / capital Output goods durable / Non durable services – intangible two types – commercial or personal transportation doctor warehouses lawyer banking teacher insurance consultant s advertising hair dressers wastes products 

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Research & Development Marketing – Product

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to find out the exact needs of consumers

4 Ps and Packaging Price

Promotion Place HRM

– recruitment recruitme nt and appraisal of employees – training workshops workshops administration administration – physical office environment External Influences - Competition - Technological Technological - Economic situation - Pressure groups - Govern ment - World affairs - Consumers - Natural climate Economy – Inflation, unemployment, Interest rates Classification Classification of business Activity - Primary Sector - Extractive Industry deals with the extraction of raw material

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decide the price.


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- Secondary Sector - Manufacturing Industry - Tertiary Sector Service Primary secondary transition is called Industrialization Benefits – increase in GDP – Gross Domestic Product 

GDP is the value of all the products products or total output produced within a time. income per head increase, increasing living standards. employment employment as more jobs are created. drawbacks – pollution – urbanization – damages population population balance balance – inflation Secondary

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country over ove r a period of

Tertiary transition is called Deindustrialisation Deindustrialisation

Private sector – private individuals individuals control, own and finance the organizations. Public sector – owned and controlled by government Private sector – Sole traders – Partnerships – Limited companies companies Private Ltd. Co. Public Ltd. Co. • •


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DEFINITIONS 1.

BUSINESS ACTIVITY It is the the tra nsform nsformati ation on of of resour resources ces (raw (raw materi material al and and hu hu man resour resource) ce) into into pro pro ducts ducts (goods & se rvices) to satisfy the ne eds and and wa wa nts of customers. The main aim for for any business is profit – making.

2.

OPPROTUNITY COST This is the next best choice given up in favour of the alternative chosen from two choices. E.g. If a busine busine ss has a choice of purchasing purchasing new premises or or new machinery and it also has the abilit abilit y to buy these but chosen new machinery because because of its greater utility, then the premises is the cost opportunity.

3.

FACTORS OF PRODCUTION They are are the resources resources neces necessary sary for for the prod uction uction of go ods and and services services.. There There are four factors of production as follows: a. Land Land:: Thes These e incl includ udes es all all rene renewa wabl ble e and and n on-r on-ren enew ewab able le reso resour urce ce s (raw (raw mat mat eria erial) l) including water (fish), forests, coal, oil and minerals. b. Labour: Labour: The human human res ource ource required required in the d evelopme evelopment nt of produc products ts e.g. for run ning machinery i.e. the employees of the business. c. Capital: The finance (money) invested by the owner to start a business business e.g. machinery machinery & rent. d. Enterprise / Entrepreneur: An organization organization or individual that takes risk to start a business by initial investment.

4

CONSUMER GOODS These are the tangible goods (that can be felt) which are sold to the general public. This include dur able and non-durable goods. Durable goods such as machinery, garments and mobiles can can last for a long time while non-durable non-durable goods such such as e dible things soon become damaged.

5.

CAPITAL GOODS They are are ph ysical ysical produ products, cts, manufac manufactured tured specifical specifically ly to be sold to oth er industri industries es for the production of other goods and services like commercial vehicles.

6.

SERVICES They are non-tang non-tangible ible products products for the public public to satisfy satisfy t heir wants. wants. They could could be commercial or personal. personal. Commercial services services include banking, banking, insurance, transport transport ation which are done on a large scale. Personal services are one-to-one services such as hairdressing, teacher and lawyer.

7.

PRIAMRY SECTOR Also called extraction industry. industry. These include f irms involve d in activitie s to extract the natural resources of the earth e.g. mining, fishi ng and agriculture. The se will give with the resources (raw materials) for production of goods and services.


8.

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SECONDARY SECTOR Also termed as Manufacturing Manufacturing indust indust ry. These deals or inclu includes des firms and industries industries that process the raw materials extracted by by the primary sector sector into finishe d goods goods to satisfy the needs and wants of customers e.g. Steel Industry, Textile Industry & Food Industry.

9.

TERTIARY SECTOR Another name is the service sect or. They include include firms and indust indust ries that pr ovide serv servic ices es to othe otherr fir firms ms or cust custo o mers mers belo belong ngin ing g to to the the gene genera rall p ubli ublic c e.g e.g.. r etai etaili ling ng,, banking, teaching, consultants.

10.

PUBLIC SECTOR The firms in this business are owned, controlled and run purely by the g overnment. They are usually usually f inanced inanced by t he taxes. taxes. e. g. Pakistan Pakistan State Oil. Oil. Usually Usually these these firms might might be too important important or strateg strateg ic to left to the private owners. owners. e.g. e.g. certain healt healt h and educatio education n instit instituti ution on serv service ices s may have have to to be given given for for free free to the the p oor sect sector or of popu populat lation ion that that private sector wont usually provides.

11.

PRIVATE SECTOR The firms firms a re own owned, ed, contro controlle lled d an d run run by by priva private te indi individ vidual uals s who who h ave profit profit a s th e main main object objective ive.. Most Most bu siness siness fa fa ll in this this categ categ ory. ory. The sizes sizes of of busin busin esses esses vary vary sole sole traders, partnerships, limited companies companies are all included in this sector.

12.

INDUSTRIALISATION The The incr increa ease se in the the impo import rtan ance ce of the the seco secon n dary dary sect sector or agai agains nstt th th e prim primar ary y s ecto ector r usually in developing developing countries countries is industriali zation. This means an overall increase increase in the level of an an d value of output as well as ratio of working working force in the manufacturing industry. This results in increased GDP and higher living standards.

13.

DE-INDUSTRALISATION It is th e rise rise in the import importanc ance e of tertia tertiary ry se ctor ctor and de crease crease in t he import importanc ance e of secondary or manufacturing manufacturing sector. It occurs mostly in developed countries. This means means that the val val ue of service service sector sector increas increases. es. De-indu De-industril strilisati isatio o n reduces reduces competiti competition on with developing countries countries and has has more more specialized jobs for edu edu cated people that are are more interesting.

14.

BUSINESS FUNCTIONS They They are th e activi activitie ties s t hat occu occurr in a busin business ess and and are are contr controll olled ed and and direct directed ed by by th e business business manageme management. nt. They They are n ecessary ecessary for for the eff eff icient icient running running of the bu siness siness as well as production. The different functions are: a. PRODUCTION: This de als with the actual actual manufacture manufacture of goods / products demanded by the customers. It requires co-ordination of all resources to produce the best product at lowest cost.


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b. RESEARCH & DEVELOPMENT: It is to find out the exact requirements of customers as to the the produ product ct and and its its price throug throug h market market re search. search. It also also inclu include de s finding finding the right right market segment to be aimed. c. FINANCES: The finance and accounting accounting function function is the allotment of relevant funds for each and ev ery function function as well a s to keep record of all inco inco mes and expenses and and the profits or losses. d. MARKETING: This function involves the 4 Ps. Product & Packagin g which is the deve develo lopm pmen entt of of the the act actua uall pro produ duct ct as dema demand nded ed by the the cust custom omer ers s and and with within in an attractive packaging packaging suitable for the segment aimed as well as keeping the product safe. Promotion of the product through through advertising advertising so the information information of a prod uct reaches the target audience. Charging the correct price is also necessary so that customers buy and profits are also made. And selling at the correct place is necessary too. e. ADMINISTRATION: ADMINISTRATION: It is the physical physical office environment that ensures efficient working working of different functions in co-ordination as well as good communication. communication. f. HUMA HUMAN N RESO RESOUR URCE CE:: It deal deals s with with the the recr recrui uitm tmen entt and and appr apprai aisa sall of empl employ oye e es to mainta maintain in corr correct ect standa standa rds of work working ing in the the comp company any.. Its functi function on is is ident identifi ificat catio io n of vacancy, finding a suitable employee and conducting training workshops.


QUICK TIPS: Private Sector - Sole trader - Partnerships Limited Companies Public

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BUSINESS ORGANISATION

Pvt. Ltd. Ltd.

- Joint ventures - Co-operatives Co-operatives - Franchises - Holding Companies - Multinationals Multinationals Charities / Non-profit Organization Public Sector -

Central Government Organization Local Government Organization

Deed of Partnership profit and loss sharing - bonuses - salary requirements requirements of each partner Partnerships can be limited only upto 20 people In lim limit ited ed p artn artner ersh ship ip o ne or or more more per perso sons ns h ave ave unli unlimi mite ted d liab liabil ilit ity. y. The The oth other ers sa partners while unlimited responsibility holding partners take all decisions.

re sle sleep epin in g

Capital sources are still few as compared to Ltd. companies. Limited Companies – common to both types shares are sold i.e. ownership is shared 1 limited liability – liable only to investment 2 separate, legal identity owners and business business a re separate separate i.e. the company has a separate name. so rewards rewards and suring is on the company 3 continuity – in case of death of any shareholder, the business business doesn’t doesn’t stop but but continues. continues. Differences: 1. the public public limited co. sh ares are are sold to general general public public throu gh stock exchange. exchange. But Pvt. Ltd. co. shares shares are only sold to fa mily me mbers or friend friend s. Risk Risk of ta keover keover of plc. plc. is more 2. AGMS are are not in pvt. pvt. L td but only i n plc. plc. KSC 100 means 100 top companies, companies, i.e. those those which which are are most active active traders traders to t heir share share p rices in crease crease or decre decre ase affect affect s a lot. Bullish Bullish is tr end increa increa se in sh are price. Beari sh trend de crease crease in share share prices prices plc – devoice between ownership and control avoiding risk of takeover min minimis imis e lo losses ses. • •

Menu of Ass


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Name, Address, Authorized Share Capital Basic Aims Articles of Ass No. of Directors, AGM Prospectus – basically an advert



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QUESTION: Q. Why might a private limited company be converted into a public limited company? Ans.

A private limited company company is one in which shares are sold only only to friends and family family while the shares shares of a publ public ic limite limited d comp company any can be sold sold to the genera generall publ public ic thro through ugh the Stock Exchange. Exchange. This is the main r eason for a private limited company to be conv erted into a public limited company or plc. The issue of shares to the public ca n raise very large sums of capital (finance). (finance). This can prove prove very beneficia beneficiall fo r the owners owners of a r apidly apidly expandin expandin g private private ltd. company company who need need fina financ nce e in in a shor shortt per perio iod d of of tim time. e. This This mean means s th th at alon alongw gwit ith h hav havin ing g all all the the advantages of a private private limited company, company, like limited liability and separate separate legal legal identity, a plc. also has a Stock Exchange listing. So the business can not only sell shares to th e general public public but the flexibility of shares shares is an additional attraction to the sha reholders. Due to this flexibility, the shareholders shareholders can quickly quickly sell sell t heir share shares s (transferr (transferring ing of of shares) shares) if they they wish t o, which which is not not possible possible for the shareholders of a private limited company. Then finally finally the owners of the privat e limited limited company who are converting converting to a plc. also know that once their aims are fulfilled fulfilled,, th ey can convert convert back to a private private limited limited company. The The addi additi tio o nal nal capi capita ta l is not not only only used used for for expa expans nsio ion n but but to incr incre e ase ase effi effici cien en cy b y moderniz modernizing ing and buying buying new new machi nery. nery. It could also be u sed to diversify diversify by take-ove take-over r and mergers or starting a different product type.

Q.

Why might a public limited company be converted to a private limited company? company?

Ans.

There are several several reasons for a p lc to be co nverted to a private limited. The major major reason is the divorce between between ownership and control. Due to the large a mount of shares sold, sold, the the nu mber of owners owners increa increa se, meaning meaning that the orig inal owners owners will not be the sole investors. investors. Then the control control or management management of of a p lc is in the hands of the board of dire direct ctor ors s (B ODs) ODs) sele select ct ed at the the annu annual al gen gen eral eral meet meetin in gs (AGM (AGMs) s).. So the the or igin iginal al owners could feel that they have lost control of the business business and to regain regain it may wish to convert to a private limited company. The risk of takeover of a plc is very high as shares are sold to the public and if one g roup controls more than than 51% of shares, t hen ownership ownership may cha nge hand. However However this risk is very minute in a private limited company. Also the plc’s trend to have short term te rm aims due to the investors only being interested in quick gains. So if the or iginal owners owner s of th e plc foresee the business going go ing into losses due to damage to long-term long-term invest invest ment plans, plans, then they they may convert convert back to a private limited company to minimize losses.


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QUICK TIPS: Co-operatives Workers retail / consumer – associations made by retailers manufacturing service members th at work for mutual benefits and ha ve shares but vote is only one for slightly informal in nature.

a me mbers

Retail: They can buy together from the wholesaler so get better discounts. Holding Company Company is a f irm that buys shares of several companies. companies. They control the shares i.e. if they expect shares price to rise they sell the the sh ares and if they expect expect prices prices to drop they buy. buy. They can also sell the assets as they are part owners.

Charities – non non – pr ofit ofit orga organi niza zati tion ons. s. Wor Wor k on do nati nation ons s and and char charit itie ies s– distribution of products.

welf welfar are e and and

PUBLIC SECTOR 1. Central Government Organizations Organizations Defence, Central Bank 2.

Local - WAPDA State Bank – gives regulations such as interest rates installments leasing rates commercial banks must follow these

Economic system An economy is a fra mework or s ystem that attempts to tackle and and solve the basic economic problem of scarcity i.e. what should be produced, how should it be produced and for when should it be produced. produce d. To make these decisions differen t countries have different economic systems. 1.

Market Economy / Free / Price – private ownerships – resources resources are allocated according to consumer demand – profit motive 2. Planned Economy / Command 3. Mixed nece necess ssit itie ies s are are prod produ u ced ced less lesser er whil while e busi busine ness ss are are in grea greate terr amo amoun unt. t. No dire direct ct government intervention, intervention, prices are set by the market forces – demand & supply. ADV - consumers sovereignty more efficient utilization of factors of production effective labour increased competition – low price – low inflations more variety – better quality products -

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DISADV less necessities and more luxury goods large gap between rich and poor no equal dist formation of monopolies – increase price – inflation and fall in living standards.


Q. Ans.

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Explain the differences between a sole trader and a partnership. A sole trader is an individual individual or a single person who o wns, controls and runs the business. The partnership, on the other hand, is a business owned and controlled by two or more (upto 20) members called partners. The sole trader invests all the capital into the b usiness due to which the capital is limited only to the owners savings, profits and any any oth er income income source. The sole sole trader trader also also gets gets to to kee kee p all all the the prof profit its s or is lia liabl ble e for for all all debt debts. s. In In a par partn tner ersh ship ip,, more more cap capit ital al is is availabl available e as more peopl peopl e are are investi investing. ng. The profits profits made made and any losses losses incur incurred red are shared among the partners. Also there t here are greater chances of expansion in a partnership as compared to sole traders. t raders. A sole trad er is the only person who who owns an d so ha s to take care of all a spects like marketing, accounting accounting i.e. he / she might have t o do things he / she is n ot good at. But in a partner partnership ship,, greate greaterr chance chances s of speciali specializati zati on are availab availab le as as the dif ferent ferent partn partn ers may sepcialise in different areas of business functions. Even though both sole t raders and partnerships have unlimited liability, there is a limited partnership. In this one member has unlimited liability and so runs the b usiness while the others are sleeping partners and have limited liability. For the sole trader business, if the owner becomes becomes sick or takes a holiday, holiday, the business stops working working while while in a partner partnership ship,, the other other partners partners ca ca n take take care care of the the busines business s and keep it running in case of unfitness or absence of a partner. Then ifif a problem arises for a sole trader, trader, he has no one to discuss it with and and financial costs of the consultants would be too high. But in a partnership, the p artners can discuss problems amongst amongst themselves and and may co me up with a solution solution with out the need of any advisors. Also since partnerships are larger than sole trad trad ers and work on a great er scale so t hey could even even benefit from the econo mies of scale. Therefore, Therefore, it means means that the average average cost of running a partnership could be lower than sole traders in general. Sinc Since e a sole sole trad trader er is sing single le pers person on,, he he is is abl able e to to est estab abli lish sh clo clo se rela relati tion ons s wit wit h his his customers. He talks directly to them and enjoys their confidence. Therefore, a sole trader can meet the exact exp ectations of the customers. But in a partnership, partnership, due to greater greater number number of of people people workin working g togeth together, er, the the person personal al conta contact ct with with the the cust cust omers omers migh migh t be difficult difficult and a subord subord inate inate would would h ave to to be e mployed mployed into talk with and deal deal with the customers. A sole trade r also is able to do a work of his o wn choice a nd gain per sonal satisfaction from itit while while in a partnersh partnership, ip, all all the different different partn partners ers must must agree agree one one sort sort of busin busin ess regardless of their personal interests and satisfaction.


Unit 1: Business & Environment

BUSINESS ORGANIZATIONS MARKET ECONOMIES QUICK TIPS PLANNED ECONOMY / COMMAND

- state -

all major assets are owned by government ownership prices are set by the government no profit motive increase in economic growth – welfare of the society resource allocation according to government plan.

ADVANTAGES

- high employment equal distribution of services - inflation controlled - necessit ies are produced no private monopoly no consumer or employee exploitation exploitati on less exploitation of resources no duplication of resources (e.g. a successful good is produced by several people) DISADVANTAGES

- low -

efficiency no variety – no competition quality is low slow decision – making – bureaucracy exploitation of the resources by the government for their own benefits.

MIXED ECONOMY

Only few essential sectors of society in government control - defence education & health services. The rest with private sector Best form of economy as competition is present and distribution of resources also occurs. INTERNATIONAL TRADE

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trade betwe tween two countries leading to communication communication and transportation. transportation.

globalization because of bett

er

Multinationals are a part of International Trade. Benefits -

speciali specialisati sation on – produce produce only what you are expe rt in. One country country is efficient efficient in on e so costs are reduced and price are lower. Relationships on even political level improve. Economies of scale – lowering costs – prices are reduced further – GDP increases Standard of living increases Technology transfer and training Increased competition – more choice – more jobs so unemploymen unemploymentt goes down.



Drawbacks: 1. Overspeci Overspecialisa alisation tion – restriction restriction to o ne aspect aspect so in case of war peopl people e are deprive deprive d of of the good. Keep on gaining knowledge. 2. decline in domestic production - difference to compete with foreign goods 3. Exploitation of labour labour by multinationals multinationals 4. diseconomies diseconomies of scale difficult to control, communicate and co-ordinate finance problem as some country might have very high inflation too much hardwork 5. balance of payment payment deficit – exports are higher than than imports 6. inflation – if demands demands becomes becomes very high. If GDP GDP increases increases living standard increase per capital income increases too much purchase 7. Dumping Dumping – when too many goods goods by by foreig foreigners ners are sold t o us us at at very very low prices prices our our domestic industries is killed. 

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Protection Measures tariffs, taxes are imposed Quotas – quantity is fixed in short limits Embargo – complete ban of trade on a country Voluntary Export limitati on – countries them selves say that they won’t export more then a certain limit MULTINATIONALS

They have a head office office in one country while while t heir operating operating branches branches and / or factories are in different countries Government have to bear them because they provide employment they invest and so help in building economy they give tax revenues ADV of Multinationals Multinationals getting getting over the tariffs tariffs and import import duties-red duties-reduce uce transport transport costs – nea rness rness to the market – cheap labour economies of scale – lower costs of production Transportation Cost / unit market knowledge is better nearness to natural resources / rawmaterials rawmaterials diversification – reducing risks – compensation of losses influence the government policies government government grants if it wants to attract investors expansion of profits.  

DISADV of Multinationals Multinationals a percentage of profits as well as taxes to the government government (payments) to maintain quality standards, they need to train, so high costs. Language and cultural differences Diffe fferenc rence e in econ econo omies mies – e.g e.g. worki rking in a cou country ntry which ich is dev underdeveloped Co-ordination Co-ordination and communication communication is difficult

elop elopin ing g and



ADV for the host country country 1. increased employment 2. GDP increases 3. economic growth 4. standard of living 5. increased competition 6. improves quality and efficiency 7. controls prices 8. increases variety and choices 9. technology transfer 10. better trained labour 11. revenue to the government 12. foreign investments increase 13. relationships between host and guest companies improve p economically 14. balance of payment surplus

olitically and

DISADV for the host country 1. decline in domestic industries 2. unemployment unemployment increase 3. monopolies can be created by multinationals multinati onals 4. control prices which can increase / inflation increase 5. balance of payment deficit 6. cultural damages – problems related to cultural identity 7. exploitation of labour – extended working hours 8. depletion of natural resources 9. profit is sent back – high percentage of profits sent to the parent country 10. pollution 11. influenc influence e o n gover govern n ment policies policies – no no comp comp ensation ensation if t hey close close as as peopl people e are are unemployment



TYPES OF ECONOMIC SYSTEM Q.

Ans.

Explain Explain with advan advantage tage s and disadvan disadvantage tages s the free mark et and planned planned economie economies. s. Which type of economy in your opinion is the best for your country. FREE MARKET ECONOMY ECONOMY A free market economy economy is one in which all economy resources, and business sectors are owned, owned, controlle controlled d and run by privat privat e individuals individuals or companie companies. s. There is no govern govern ment control or extremely limited control in this economy. However, no such economy e xists in any any cou count ntry ry thou though gh USA USA is is clo close sest st to it. it. In this this type type of econ econom omy, y, th e res resou ourc rces es are are allocated to different products according to the demand demand of t he consumers. Also Also the main objective of business in free market market economy economy is profit – as h igh profits profits as a s are efficie ntly possible. ADVANTAGES Since such an economy is driven driven by a profit mot ive so businesses businesses are motivated to work harder. Therefore they are more more ef ef ficient as th ey want want as as high productivity as possible possible because this would lower costs and so increase profits. The labour is also more efficient as training is provided periodically to improve the skills skills of workers to increase increase p roductivity. Also the lab our is highly motivated motivated a s it may rec eive bonuses and extra wages for hard work. Then there is a lot of competition in free economy economy as anyone could start up a business in any sector they want want so this means that pr ices remain low as each business business owners’ owners’ try to beat the other in sales. Since prices are low, inflation will also be low. Also a major advantage advantage is con sumer sovereignty. sovereignty. This means that more more of those g oods are produced produced which which a re required required and demanded demanded by the consumers consumers.. This leads leads to efficient allocation of of re sources as the best possible possible use of the land, la bour, and capital is made to get the maximum maximum out put required required to satisfy satisfy the wants wants and needs needs of customers. Cont Contin inuo uous us tech techno nolo logi gica call adva advanc ncem emen entt take take s plac place e as busi busine ness ss try try to find find f ew techniques and logics to improve the efficien cy of workers as well as make better utilization of of the scarce resources resources of production. This would lead to increased increased GDP that leads to economic growth. Also a very wide variet variet y of produc ts are available for the consumers to choose choose from which are are of the best quality possible at the the lowest prices prices possible. p ossible. This leads leads to r ise in living standards of the population. DISADVANTAGES The major disadvantage disadvantage is the large gap that exists between the rich and poor sector s of society. society. Th e busine busine sses in free market market eco nomy concentra concentrate te on those with higher higher incomes as profit is the main motive. motive. So the rich become richer richer while th e poor beco becomes mes poorer which could lead to an average fall off in the living standards. In the free economy, more luxury g oods are produced as t hey give hig her profits while necessities are less. This means means tha t the poorer people may not get services and goods which which form form the basic basic n eeds eeds of sur sur vival vival like like food food,, water water,, shelt shelter, er, hea hea lth servic services es and education. Another big disadvanta ge is t he fo rmation of monopolies is possible as mergers and and take-overs occur unco ntro ntroll lled ed.. Th e mon monop opol olie ies s coul could dt hen hen char charge ge high higher er pric prices es exploiting their position as the sole dealer in in a certain market. market. This co uld lead to rise in in inflation and so a fall in living standards that could lead the economy into recession. Also the resources resources are exploited in the fr ee economy as du du plication of products occurs occurs so in the e nd wasta wastage ge of resour resources ces and and quic quick k exha exhaust ustio io n of of scar scarce ce resou resource rces s could could occur.



PLANNED MARKET ECONOMY This is the t ype of economy in which all all resources resources are owned, owned, controlled controlled and run by the state or gov gov ernment. ernment. It is also known as the co mmand mmand economy. There There is virtually virtually no private sector activity in this type and the main objective of the government is the w elfare of society. However, However, non e of such economies economies really exists and the close st examples are that of North Korea and Cuba and even in these there is a lot of private activity. ADVANTAGES There is very less wastage of resources since the government produces only as much as needed needed by the people. people. So no duplicati duplication on of products products occurs occurs an d so no wasteful wasteful competition takes place. Another major advantage advantage is that there’d there’d be high employment employment as the government seeks to provide as many jobs as possible because this would keep the community happy and the government intact. Then Then in in a p lanned lanned eco nomy, nomy, there there is equa equa l dist distrib ributi ution on of goods goods and servic services es fo r all all socio-economic socio-economic levels levels of of society society to f ulfill the ba ba sic needs needs of everyone. T his reduces reduces the gap between between the rich and poor sectors sectors of economy. economy. It may be that that certain certain goods goods are provided for free to t he very poor members. Since Since the governme government nt controls controls price price s, this means means that that there’d there’d be no hig hig h prices prices and so inflation will be low. This would lead to economic growth which is a major majo r objective of the government. Then since private activity is nearly non-existent, it means that that there’d be no private monopolies that could exploit the consumers. Also private businesse businesse s have short-term ai ai ms, while the government government can do long -term planning and work for the benefit of the country in the long-run. DISADVANTAGES Since Since gove governm rnment ent does doesn’ n’tt run the the econ economy omy fo fo r profit profit,, there there is nearly nearly no no motiv motivati atio o n to work hard hard in emplo employee yee s and the the business businesse e s t end to be be very ineffi inefficie cie nt so there there is very very low productivity. productivity. Also th e labour is very inefficient inefficient as it knows knows that whether whether or not it works, wages would be given to them. The labour can’t trained and if dismissed from the job, it has no where where to go. Also, there is no comp etition in a government economy. economy. So there is no incent ive for technological technological advancement. This means that costs of production might be high that could lead to higher prices prices and so losses for government controlled economy. economy. It could also in the long-run lead to inflation. Even Even thou thoug g h it is said said that that reso resour urce ces s last last lo nger nger in a plan planne ned d econ econom omy, y, yet yet thei their r utilizatio utilization n is not effici efficien en t as there there is no motive motive to work properly properly.. The labour labour knows knows tha t whether they come come late late or early, early, do their jobs jobs or or not, they would get their their salaries. salaries. Also frustration is felt in those employees who are by nature hard workers as they get no extra returns in any form i.e.: monetary or non-monetary. There since since the government government decides decides what what to pr oduce and and in what quantity, quantity, this means means that the de de mand of of consumer is n ot taken int o account. account. I t also means means that people of all levels levels get t he same go ods so the quality quality and packagin packaging g o f goods goods q uality uality of services services would be very low. low. It also means tha tha t the consumers are left with no choice and have no variety as over the entire country the same things are produced. The decisions decisions taken are very very slow and bureaucratic. bureaucratic. This is because because t he approval approval of all all leve levels ls of gove govern rnme ment nt from from the the bot bottt om to up must must be take taken n for for whic which h a lot lot of ti me is needed. needed. Then the the impleme implementati ntation on of the the decisio decision n is also also very very slow slow and so the ch anges anges take a long time to be visible. Therefore economic growth is very slow. ECONOMY FOR MY COUNTRY In my my opinio opinion, n, the the best type of eco eco nomy fo r my country. country. Pakistan Pakistan would be the mi xed econo economy. my. In this this pr pr ivate ivate sect sector or owned owned and co ntroll ntrolled ed priv priv ately ately and and th e pub public lic se ctor, ctor, owned and run by government.



It is the best type type because because as as a developing developing country Pakista Pakistan n has a large large percentage percentage of population in rural rural areas area s while the elite society is also there. Therefore the private sector is required for efficient b usinesses that that form pro fits and provide provide variety a s well as luxury goods and are also involved in exporting and importing, leading to economic growth. The public public se ctor ctor is requir require e d to produc produced ed chea cheap p g oods oods of basic basic need needs s for for the benefi benefitt and welfare of t he rural so ciety as well as provide education a nd health services. It is also needed to keep a control over defence. In Pakistan state intervention is needed to prevent people from illegal illegal activities and the th e private sector is required to counter the corruption in the public sector.



MULTINATIONALS Q. Ans.

Evaluate the impact of multinationals multinationals on the host country. Multinational companie companie s are those that have their head head office in on e country while operating br anches are spread in several count ries. This means that they produce i.e. manufacture the good or service in several countries in their factories. So an exporting or importing importing business business is n ot a multinati multinational onal unless unless it produce produce s goods goods in other other countr countr ies. Usually the head head offices of these multinationals multinationals are are in developed developed countries like like USA and Europe Europe whil while e their their bran bran ches ches are in devel developi oping ng or third third world world coun countri tries. es. Exam Example ples s of multinationals multinationals include MacDonalds, MacDonalds, Pizza Hut, Toyota. Multinatio Multinationals nals ca n be very beneficia beneficiall to t he ho ho st countr countr ies in many many ways. ways. The major major adva advant ntag age e is that that they they prov provid ide ee mplo mploym ymen entt to the the loca locall work workfo forc rce. e. In deve develo lo ping ping coun countr trie ies s th ere ere are are hig hig h rate rates s of unem unempl ploy oyme ment nt that that crea create te a lot lot of burd burden en on the the government and the economy, economy, as benefits like free food, food, clothes clothes or or even even money money h as to be give given n to to the the unem unempl ploy oyed ed.. So So by by pro provi vid d ing ing inc incre reas ase e d emp emplo loym ymen entt opp oppor ortu tu niti nities es,, unemployment rates are decreased and so burden on economy is also lessened. Since more people are working and the total number of products produced in the country is increasin g so this means that the GDP (Gross Domestic Product) as the output output of multinationals is now also included included in the natio nal production. production. Increase in GDP lea ds to economic growth. growth. This leads to the increase increase in p er capital income of the people so t here is a rise in in t he living standards sta ndards of the general population population as as people have have more money to spend. As the mul tinationals are employi ng local people, people, it would result in their g aining experience. Not only only this but multin multin ationals are established established companies with standard standard to maintain for which they require skilled skilled workers. workers. So they train and provide provide facilities to the employees which would improve the efficiency and productivity of the people. The multinationals multinationals also provide additional additional competition to the local firms. This increased increased competition and and the wider wider variety of choice available available to cust cust omers keeps the prices low while product quality increases. This also controls inflation. Also the multinationals are very efficient efficient and technologically technologically advanced. advanced. They ha ve better machines as well a s better production techni ques. So a technology transfer take s place as the local firms, in ord er to increa increa se their competitiveness try to take advantage of the new technology. Because of this th e quality of the local pr oducts increase and so does the effi efficie ciency ncy and and prod prod uctivi uctivity ty of the the local local fir fir ms and and they they would would abl abl e to impro improve ve their their image in the global market. New local factories and industries industries co uld be set u p in order to supply certain machines machines or spare parts for the working multinationals. multinationals. This would crate additional additional jo bs and and also also an increase in the incomes. A future major advantage advantage is the foreign investment coming into the ho st country by the setting setting up o f a multinat multinationa ionall compa compa ny. This This increas increases es the f oreign oreign curre curre ncy reserv reserves es of the country that could be used to pay back debts or to import goods. Not only only thi thi s but but the multin multinati ationa onals ls increa increase se th e reve revenu nues es of the govern governmen ments ts of th e countr country y as t axes axes are are given given by the the mult multina inatio tional nal s on th th eir sales sales as as well well as as profi profitt s. Also Also they they pay pay land land rents rents for the area area o n which which they they ha ve set up their their operat operating ing base base or factory. The manageme management nt expe expe rtise of the the local local comm comm unity unity improv improves es as as multina multination tionals als have better management ideas. So qualifications and skills of local managers are bettered and they may replace the foreign managers and supervisors and so gain experience. If the multin multin ationals ationals export export their goo ds to nearb nearb y countries countries,, then the the exports exports of the host country increases, that that could lead lead to t o additional additional foreign exchange exchange earnin earnin gs and also to a balance of payment surplus once the exports are more than imports. Lastly, relations relations with the parent parent country of t he multinationals improves both politica politica lly as well as economically. economically.



Howeve However, r, multin multinati ationa onals ls also also have have some some major major draw drawbac backs, ks, the main main bein being g declin decline e in domestic industries. Since multinationals are well-established industries with an excellent brand image and reput ation and are highly efficient, they soon soon face th e local businesses businesses to close down. Local businesses businesses may not be able to compete compete with the giant company company a s consumers are quickly attracted towards the ‘big name’ of the multinational. This This closur closur e of lo cal b usines usinesses ses means means that that hundre hundreds ds of jobs jobs are lost lost that that can’t can’t b e covered covered up by jobs pr ovided ovided by multinati multinational onals. s. So this would would lead to an incre incre ase in unemploy unemployment ment that wo uld become become a burden burden on the country’s country’s economy. economy. Also as the output output of of local local indus industri trie e s becom becomes es less, less, this this mea means ns that that GDP GDP would would decre decrease ase as as the total output output of the count count ry decreas decreases. es. This This would would cause cause a major major decreas decrease e in e conomic conomic growth. So the per capita income of the people may actually fall resulting in the fall of the living standards of the people The multinatio multinationals nals cou ld also also form monopoli monopolies es in in their their particula particularr indu indu stries stries in the host country by eliminating eliminating competition. So So t hey could exploit th eir advantageous advantageous position posit ion by controlling prices. They could could charge very high prices which could lead to an increase in inflation. This again decreases economic growth as well as living standards. Then the the multinat multinationa ionals ls could could explo explo it the loca loca l labour labour by giving giving low low wages wages to keep keep their their profits high. high. They may not take car e of the wor wor king conditions conditions of the workers and could also force long working hours upon them. They know that the governments of developing countries could be forced to listen to them because multinationals are very powerful and have sales sales and profits exceeding exceeding the economies economies of countries. They know know that the host countr country y requir requires es their their invest investme ment nt and if they they are monop monopoli olies es then then they they have have the additi addition onal al a dvanta dvantage ge of of being being a much much need needed ed busine business ss f or the the host host countr country. y. So So they they could influence government government decision to a great extent. A great dra wback is th e depletion of the natural resources resources of the host country as as multin multinati ationa onals ls utiliz utilize e th ese scarce scarce resour resources ces t o carry carry out their their produ producti ction on in the host host coun countr trie ies. s. Not Not onl only y this this but but all all the the prof profit its s m ade ade by by mul multi tina nati tion onal als s is is sen sentt b ack ack to th th e parent country country while the profits of th e closed closed do wn domestic domestic busine busine sses had had been been kept in the country. country. So this means means that that there is an overall overall decline decline in th e investments investments in th e country country because because profits profits of local local bu sinesses sinesses are re-invested re-invested and and boost boost up the country country’s ’s economy. Also the multinationals multinationals being foreign cause major major damages to the cultu cultu ral identity of the host count countrr y e.g. e.g. the fast fast food food culture culture in in east east ern countr countrie ie s is the the result result of copyin copying g the western culture. Also the adverts on T.V.s and b ill boards use themes that are not a part of the host country. country. These These may be very expen expen sive and so result result in th e trade trade balance balance deficit of the host country slowing down economic growth. Concluding, Concluding, I think think that it would would be best to let multinationals multinationals set up in a country a s their benefits are very much required required by devel developin oping g countri countries. es. However, However, st rong and pr oper meas measur ures es must must be ta ken ken to mon mon itor itor thei theirr a ctiv ctivit ity y so so tha tha t the they y don don’t ’t gain gain too too much much influence over over the government. government. In th is way ec onomic growth would occur in the country and yet the drawbacks would be minimized.



INTERNATIONAL TRADE Q.

List the protection measures against international international trade and explain any two of them.

Ans.

International trade trade means the impo impo rting and ex porting of g oods and services bet ween countries. In creased import for any country would mean the balance of payment deficit de ficit and may also result in decline of local industries. There governments may impose certain protection measures against imports that are: a) Tariffs b) Quotas c) Voluntary d) Embargo

limits

TARI TARIFF FFS: S: T hey hey are are ta xes xes on on imp impo o rts rts tha thatt must must be give given n by by an an y co co mpan mpany y imp imp orti orting ng goods goods of a certain certain amoun amountt as fixed fixed by the la la w. They make make the import imports s more e xpensive xpensive,, increasing its price and so lowering its demand in the country. QUOTAS QUOTAS:: T hey are are the the limits limits imp impose osed d on the the phys physica icall qu antity antity or or the valu value e of go ods. ods. This prevents the goods goods being imported imported in any la rger quantity so so as to prevent dumping dumping of goods in the country.



THE SIZE OF THE BUSINESS Ways to measure: 1. Sales turnover 2. Profits 3. No. of employees 4. Capital Employed 5. Market Share 6. Market Capitalization 7. Others: agriculture – land area hospitals – no. of rooms or no. of customers. There is no best way to measure the size of business. Also the comparison should be amongst businesses of the same industry in the same conditions. At least two to three ways should be used. If the no. of employees is more then the size would be larger expectedly. However, the limitation is that a business using capital intensive methods would have fewer no. of labour e.g. if packaging is manual then lot of labour is required but if packaging is automated, then less no. of employees are received. Capital employed may be higher in new businesses due to large investment. Sales – if turnover is high then business is large but if a business produces luxury goods, then profit margin is high and sales volume may be not high. Profit may not be made in a very large firm due to several reasons. Market Share =

Total Sales of company Total Sales of industry

×

100

It’s the percentage of a market captured by a company. If the share of a market is higher its called a market leader. Limitations: - Declining of sales of large – scale firm. - Increase in shares of a small – scale scale firm which a consumer consumer likes more. - Handicrafts (e.g.) is a small scale industry industry so network is is small. small. So itit means that market leader is a small firm holding large amount of capital. Market Capitalization – related to share on Stock Exchange. = Current share price × Total no. of shares issued e.g. Rs 10/share × 100 shares = 1000 rupee share or market capitalization Limitations: - Large firm but may have become plc recently so not large shares. - Stock market fluctuation is high high so charge in share share price price is is very misleading. misleading. Only established companies have trends in their market capitalization but unestablished companies shares price fluctuates a lot.



BUSINESS EXPANSION Growth of the business expand internally or externally INTERNAL EXPANSION opening new branches increasing no. of employees re-investing profits. EXTERNAL – Integration: mergers and take-over. Merger is when two firms willingly combine their assets, liabilities, employees and management style. Take – over is when one firm buys out another firm and the identity is lost but at times brand names are kept. Friendly take-over is when some one willingly sells out the business. Hostile takeover occurs in public limited company; through stock exchange. If any body buys more than 50% of the shares. Higher prices are kept for sellers to sell and get extra money. TYPES OF INTEGRATION (External Integration) Vertical, Horizontal, Conglomerate Conglomerate DISADVANTAGE OF INTEGRATION Competition is decreased. Losing of jobs and employee frustration as changes in management – Managerial problems.



SIGNIFICANE OF SMALL BUSINESS ORGANIZATION For a small business no. of employees < 50. Advantage to the firm: easier to control easy to set up / start personalized personalized relationships with customers & staff higher motivation – staff relations enthusiasm and excitement of being in growth state better knowledge of market conditions less taxes easier to locate problems within the business less interference of the government more independent in decision – making lower management costs flexible in nature as they can charge quickly with the demand of customers monopolized in local area as are very conveniently convenientl y approachable Advantages to the consumers: personalized personalized service convenient convenient for the buyer ease of availability credit purchasing / facility door – to – door service / delivery cheaper goods after – sales service Advantages to the economy: increases employment increases competition for large scale firms prices controlled stable inflation improves GDP increases economic growth higher standards of living government revenue small – scale firms of today are large scale firms of tomorrow – future progress of economy is ensured / expected prevent situations that could lead to large – scale firms monopolizing monopolizing Problems: difficulty in obtaining finance difficulty in marketing products - expenditure - limited products -

difficult to compete no economies of scale capacity problems / demand satisfaction problem lack of skilled labour low sales / profits difficult in producing varieties

BUSINESS GROWTH Expansion

Internal

-

external (integration Hostile takeovers Friendly mergers

Types of integration: 1. Horizontal integration Forward 2. Vertical Vertical integration backward 3. Conglomerate integration 4. Lateral integration: when two firms at the same stage of production but are diversified type of a horizontal like soap and ice-cream i.e. having the same suppliers due to a single integration source of raw materials Business growth means increasing the scale of operation, expanding production and increasing the sales and profits of any firm. Business expansion is of two types 1. Internal Expansion 2. External Expansion INTERNAL EXPANSION It means expanding the business from within by using its own internal factors of production. It means increasing the number of employees, increasing the production of existing products or services, launching new products or services by finding new markets, opening new outlets or factories and increasing the quantity of goods sold. This growth can be quite slow, however, it can avoid the problems of rapid expansion (excessive fast growth) which tends to lead to inadequate capital (overtrading) and managerial problems associated with bringing two businesses together that might have very different cultures attitudes and leaderships styles. EXTERNAL EXPANSION

(External integration)

External growth is achieved through integration i.e. from mergers and takeovers of firms from either the same or different industries. Integration leads to rapid expansion which might be essential in a competitive and expanding market. However, it often leads to financial, marketing, managerial and control problems. These are caused by the need for different managerial systems to deal with a bigger organization and due to conflicts between the two corporate cultures and business ethics. TYPES OF INTEGRATION A.

Horizontal Integration

It occurs when two firms which are in exactly the same line of business and at the same stage of production process joined together.

1. 2. 3. 4. 5. 6. 7. 8.

ADVANTAGES Common knowledge of the market in which they operate. Reduced risk of failure. Eliminates competition Possible economies of scale Greater power over suppliers Similar skills of employees Less managerial problems as compared to vertical or conglomerate mergers. Scope for rationalizing production i.e. concentrating output on one site as opposed to two or more. DISADVANTAGES

1. 2. 3. 4. 5. 6.

They lead to monopoly and higher prices. If the production procedures are different into two companies, then technical and managerial problems might occur. Previous relationships with suppliers or distributors of one firm might suffer. Control problems might occur. Financial problems related to longer size might occur. Rationalising may bring bad publicity.

B.

Vertical Integration Vertical Integration can be forwards or backwards. Forward vertical integration is with a business in the same industry but at a next stage in the production process i.e. with a customer of the existing business e.g. a car manufacturer merging with a retailer (showroom). Vertical backward integration is with a business which is operating at a previous stage of a production process i.e. with a supplier of the firms e.g. leather garment manufacturer merging with an organization that manages cattle to get the leather. Or if retailer merges with a manufacturer. ADVANTAGES – FORWARD INTEGRATION

1. 2. 3. 4.

Greater control over promotion and pricing of the products. Eliminates the profit margin in expected by the firm in the next stage of the production process. Greater confidence in production planning. Gives a secure competition free outlet. DISADVANTAGES:

1. 2. 3.

Lack of experience in this sector of the industry. Can be expensive to manage on its own as compared to dealing with a specialized competition. Consumers may suspect uncompetitive activity and react negatively.

ADVANTAGES – BACKWARD INTEGRATION 1. 2. 3.

Gives greater control over the quality, price and delivery times of the suppliers. Eliminates the profit margin demanded by another supplier. Encourage joint supply and development for improved quality of supplies. DISADVATNAGES:

1. Lack of experience of managing a supplying company. 2. Supplying business may become complacent due to having a guaranteed customers. 3. Supplies might be more expensive as compared to another business with larger economies of scale.

C.

Conglomerate Integration or Diversifying mergers This integration is between firms in completely different lines of business. A firm might fear a loss of market share due to greater competition. As a result is might try to explore different opportunities to minimize min imize or diversify risks. ADVANTAGES

1. 2. 3. 4.

Reduces risks of losses. Reduced risk might take the business into a faster growing market. Profit margins can be increased due to other businesses. Market share can be increased because of the increased. DISADVANTAGES

1. 2. 3.

Risk of failure might increase due to the lack of experience in the new market. Entry problems might occur. If the business is new then its difficult to lower down the prices as compared to the established competitors.

REASONS FOR MERGERS 1. 2. 3. 4. 5. 6. 7. 8. 9.

Growth in the economy and expectations of higher profits. Active stock markets. Greater competition in the service sector leads to many financial institution mergers. Deregulation and literalization of markets. Increased and of globalization. Improvements in the information and communication technology. Economic problems in some countries made their firms cheaper for the developed country organization. Quick and easy way to expand so companies can increase their market share in a short period of time. Buying a business is sometimes cheaper than growing internally. Internal growth is costly and it takes time.

10. 11. 12. 13.

14.

It is a profitable way to utilize available cash or other idle resources. A businesses might buy another to consolidate its position in the market and to avoid takeover. It’s a way to enter the international market. Economies of scale can be achieved. The effect of the reduced costs can be transferred to prices to increase the sales of the company. If the effects is not transferred still profits can be increased. It is the way of asset stripping which is generally very profitable.

TAKEOVERS Takeovers in plcs can occur because their shares are traded openly and anyone can buy them. One business can acquire another by buying 51% of the issued shares either from the stock exchange or strictly from the exciting shareholders. When a takeover is complete, the company that has been bought loses its identity and becomes a part of the buying company. Private limited companies however cannot be taken over unless the majority shareholders invite others to buy their shares. So this takeover is friendly and not hostile. Takeovers of plcs often result in sudden increases in share prices due to the volume of buying by the predators and also speculation by the investors. If more than one firm is attempting to takeover a company, then this can result in a very sharp increase in the share prices as the two buyers bid up the prices. REVERSE TAKEOVERS Reverse takeovers usually occur when a small firm takes over a larger one. It’s a friendly takeover as a smaller firm doesn’t have enough funds to buy a larger firm against its will. The larger company may allow this takeover due to the smaller company’s future potential to grow or due to the unprofitable conditions of the larger company at present. DE-MERGERS It is where a company sells of a significant part of its existing operations. A company might choose to break up due to the following reasons: 1. raise cash to invest into the remaining sections. 2. concentrate its efforts on a narrower range of activities. 3. avoid rising costs and inefficiency by being too large. 4. take advantage of the fact that the company has a higher share valuation when split into two components then it does when operating as one. ASSET STRIPPING Some takeovers result in asset – stripping. The asset – stripper aims to buy another company at a market price lower than the value of the firm’s total assets. It then sells off the profitable parts of the business and closes down those which are unprofitable which activity has often been criticized since it leads to unemployment and uncertainity in those sections which are closed down.

BUSINESS GROWTH

Q.1.

Define synergy. Explain it with respect to integration. (5)

Ans.

Synergy literally means that the “whole is greater than the sum of individual parts.” This in terms of integration means that when two businesses merge together their profitability, efficiency and effectiveness would increase to more than the combined profitability of the separate businesses. This can be because the economies of scale of the larger merged business is greater (e.g. purchasing) then could be gained by either of the business. This would lead to far lower costs and increase profitability. Also marketing and distribution costs can be saved by using the same sales outlets and sales teams. Finally if the businesses merged are similar then they could share their research and development ideas and technologies. This would result in higher efficiency.

Q.2.

Explain the problems of rapid growth of businesses businesses and suggest suggest ways to deal deal with these problems. (20)

Ans.

Expansion is one of the major objectives of private private businesses businesses which means increasing in size in terms of number of employees, outlets, higher market share, etc. It is needed to remain dynamic and competitive against other companies. However too fast or rapid growth can lead to problems especially through external growth i.e. mergers or takeovers. The problems caused are financial, managerial, marketing and loss of control by original owners. Business expansion, whether internal or external is expensive. Therefore rapid expansion can be very financially draining on a business i.e. on its financial resources. Rapid expansion would require fixed additional capital such as bigger factories, machinery etc. It would also require large working capital. Also takeovers are partialarly expensive because buying more than 51% of the issued shares of a company would require a lot of each. A business in order to get the required finance may take large long – term bank loans. Such borrowing may cause it to become highly geared over after the merger and large sums of interest payment may have cause a big problem. On solution to this financial problems would be through use of internal sources of finance such as retained profits, so long – term borrowing could be avoided. Then finance could be raised through share issue but it could mean loss of control. In case of a takeover, offer shares in the new business rather making a cash offer to the shareholders of the target business. But this could only be in case of a friendly takeover. Another major problem caused by rapid growth is managerial problems. Rapid expansion means larger operations, more employees and more divisions. The present managers may not be able to cope with problems of controlling a larger business with a larger organizational structure and greater number of hierarchy levels. Also when two businesses integrate, there may be duplication of certain division and departments. Due to this a lack of co-ordination may occur between departments and the management may find it difficult to control the expanding business effectively. In addition to it, the original owner of a business or that of a business or that of the larger business (in case of integration) may find it difficult to adapt to being a traditional manager. In case of integrating businesses, both organizations may have different corporate cultures. E.g. one may be following an autocratic culture where employees do not give their feedback and do not participate in making decision. The culture of the other might be democrate

where employees take an active apart in the business decision. Thus there may be clash of culture and employees may find it difficult to settle and adjust. Management would have to make employees adapt to the integration too. Strategy to deal with such a problem might be to build new management structures and systems according to the requirements of the expanding business. Also a policy of delegation and empowerment would reduce pressure on staff and they could concentrate on strategic issues instead of difficulties of running a day–to–day business. A company expanding its divisions could benefit from decentralization. This would enable national divisions to use a degree of autonomy and would motivate managers alongwith giving them a clear focus. Since a lot of burden falls upon the original owner, he would have to decide the most important areas of management in which he has to personally remain involved while he should relaxed control over others e.g. the original owner should concentrate more on to the extent the company needs to remain diversified, which operations he should close down and which he needs to continue. These are the more strategic decisions. Others such as daily purchasing and daily rent & tightening should be left to lower management. Then several marketing problems are also faced. First and foremost is that rapid growth leads to sudden increase in the products. This would require new marketing strategies which have to be quickly developed in order to maintain competitiveness. The original marketing strategy would no longer remain appropriate for a larger organization with a wider range of products. E.g. a marketing strategy for a product portfolio of four products would fail to effectively manage a portfolio of eight products that has formed because of the expansion. Also in the expansion results to growth from national to international markets, it would be unsuccessful if market strategies are not suitably adapted. It may be that prices may have to be changed for the products to sell in the international market, also changes may need to be appropriately made to package designs in accordance to the culture of different countries. At times even brand names have to be changed. For all these things, extensive market research should be immediately undertaken. The results would show what should be done such as adopting focused marketing strategies for each specific product or each country operated in the expanding business especially if its through takeover, would have to completely change its advertisements as the taken over business has lost its identity. Thus any shops and markets of that business would have to be redesigned and all its marketing strategies altered. Finally rapid growth may result in loss of control by original owners. It is most likely to occur if a sole trader takes on partners or if a private limited company converts to a public one. In both these cases, there is an increase in the numbers of owners due to which control is divided between the raw owners / shareholders especially in the latter case where several new owners introduce capital into the business. This is an unavailable consequence of changing legal structure to gain additional capital. It also occurs within public limited companies when a large issue of shares occurs due to which owned to is diluted. Business growth, due to bring an important objective, is one faced by managers at least once during their business era. Managers must therefore evaluate whether growth is desirable objective for achieving the aim of maximizing returns to investors. The cost of growth, especially external growth (integration) can easily outweigh the hoped for benefits. Also expanding the company too swiftly can overstretch both management and financial resources. It this problems becomes too seniors, then rapid retrenchment (cutting back)n of activities may

become necessary and this could lead to negative n egative publicity and negative reaction from stakeholders. The pace of growth, the form that it should take and how the consequences of expansion are dealt with are some of the most vital issues for any manager to be concerned with.



HIERARCHY OF OBJECTIVES Starts with broad aims and targets and narrows down to individual objectives.

Corporate aim / Vision 

Mission Statement 

Corporate Objectives 

Divisional Objectives 

Departmental Departmental objectives 

Individual Targets Corporate aim – basic goal or general goal or purpose of the organization e.g. establishment as an ethical firm or maximize shareholders value and returns. Mission Statement – purpose of organization stated in words. When the philosophy and at times core systems. They may be technical or emotional theme based. KODAK: We make memories old – we form films and pictures. They are displayed at several places so employees and visitors can see. ARGUMENTS: Negative : Its not true – contradicting contradicting performance goods things are said but never done – very vogue can’t be transferred into achievable facts. facts. Positive: - served as a formality – norms of corporate world - provides direction to employees get to know their purpose and framework of how to work - may help increase profits Corporate objectives – set for whole organisaiton organisaiton Survival Growth Increasing market share Maximizing profits Social, environmental environmental and ethical considerations. considerations. They are very specific and SMART Specific Measurable Agree Realistic Timetabled They should provide framework and guidance to set other objectives. Divisional objectives: these are usually based on geographic division though could be based on product lines. Departmental:

they are for each of the markets, production and other functional department.

Individual: monthly basis. Strategies – long – term plans to achieve the objectives, general and broad. Tactics – short – term – specific and narrow e.g. advertising magazines, magazines, channels and so on.



CORPORATE OBJECTIVES

Factors which determine the corporate objectives: 1. corporate culture 2. size and legal form of the business 3. public or private sector businesses 4. the age of the business 5. financial strength of the business

CORPORATE OBJECTIVES Q.

List any six types of corporate objectives a business can set. Explain with their benefits and possible limitations, the following two corporate objectives: a. profit maximization b. growth

Ans.

Corporate objectives are the goals of of the whole whole organization organization.. They are the outcomes or largest that the business wants to gain in order to achieve its aims. They are specific, agreed upon by everyone involved, measurable, realistic or achievable and are time specific. Six types of corporate objectives are: i) Survival ii) Profit maximization iii) Growth iv) Increasing shareholder shareholder value v) Increasing market share vi) Social, ethical and environmental environmental considerations considerations PROFIT MAXIMISATION This is the main objective assumed for all established private sector organizations. It means to produce at the output level where there is the greatest possible difference between sales revenue and total costs. The major benefit is that greater returns are given to the investors or shareholders of the business. It means that the risk-takes of the business are satisfied so more people would be willing to invest into the business and so raise capital. Another support is that higher profits may mean greater re-investment into the business by which other objectives like growth could be achieved. Also it is thought as the most rational thing to achieve greatest possible profits as otherwise it would be a missed opportunity. However there are several limitations to it. The owners of small firms may not wish to expand to the extent of reaching profit maximization point. They would be more interested in retaining control and could be satisfied with their current level of profits and lifestyle. They could also want to keep their revenue below VAT levels as well as not employ more workers. Firms also usually opt for sales maximization and by this decide their profit targets. Profit maximization is an aggressive short-term objective that would cause competitors to enter the market and endanger long-term survival. So firms usually keep long-term profits as their objective. Also it is very difficult to gather all the information such as costs, prices and demand to determine the precise maximization point. Also the pressure of objective of other stakeholders like workers and community make profits maximization impractical. Then performance of company is divided by return on capital employed rather than profits. GROWTH The growth of businesses is the increase in sales and market share of the business which is usually also an increase in the total output level of the business. There are



several benefits to many stakeholders because of the growth and expansion of a business. The growth of a business results in its becoming more competitive. Growing demand leaves survival no more a concern. Larger firms are able to dominate a market, enjoy monopoly power to a certain extent and raise prices too. They are less prone to takeovers and also benefit from economies of scale. Growing businesses are able to benefit from diversification and so reduce risks. They are able to introduce new ranges of products so if one range fails, there are many others and so the entire business doesn’t fails. Managers are highly motivated as they have greater status get high salaries and fringe benefits if they make the growing business work to full potential. Directors and managers also have more power and recognition. The employees part of an expanding business may find their jobs more secure (if capital intensiveness isn’t used) and could also get higher wages and so may be greatly motivated. Growth may also give higher profits and so greater returns to investors (shareholders and owners). But growth has its own drawback. If business grow beyond a certain size, they may face diseconomies diseconomies of scale because of poor communication and frustration amongst workers. Too rapid expansion may result in severe cash flow problems that could cause a profitable business to become insolvent. Also increase in sales may have been possible only by reduction in profit margins. So even though the business grow, it has lower profit margins. So even though the business grew, it has lower profits and so low returns to investors. Then the business may be re-investing a higher percentage of profits to grow which would result in anger amongst the owners / shareholders. Finally it may be that moving into new markets away from the ‘core’ activities would result in a loss of focus and unacomplishment of the central aim of the organization leading to a loss of direction as well. This would result in inefficiency, low productivity and increased costs.



CONSTRAINTS ON BUSINESS OBJECTIVES & STRATEGIES Constraint – a constraint on business activity is a factor that limits or restricts particular courses of action’s or strategies. 1. Internal Constraints result from the policy and strength of the business itself and are usually controlable. - Strengths - Weaknesses - Policy (Business) - People and their behaviour 2. -

External Constraints are limits on business activity from outside the business and are usually beyond the direct control of the business. Economic Constraints Political Constraints Technological Technological Constraints Legal Constraints Social, Ethical and Environmental Constraints Economic Influences Macro – economic objectives of a government 1. maintaining economic growth 2. controlling inflation 3. reducing unemployment 4. to maintain maintain the balance of payment 5. to stabilize exchange rate Economic growth – increase in the real GDP of a country in a particular period of time, usually one year. Real GDP is the nominal GDP minus affects of inflation. Benefits  increase in production  increase in employment  increase exports so   balance of trade   balance of payment surplus  increase in purchasing power   increase in prices  investment: local as well as foreign increases. Negative  price increase – types inflation  other countries may impose protection measures  tariffs, quotas  increase costs



Real GDP

Overheating Boom

Boom Recession

Growth

Slump time Boom – may lead to increase in prices that causes fall in aggregate demand and so employment is reduced and so overall GDP falls f alls and purchasing power decreases. At slump – strong investors buy stock at this point as stock prices are low so they know that profits once grow the stocks would be very high. 2.

Inflation – general and persistent rise in the levels of prices over a particular period of time. Causes of Inflation. (a) cost – push inflation (b) demand – pull inflation (c) monetarist view of inflation (a) This is when costs of production increases e.g. fuel price rises, raw materials increase, higher wages so prices are increased. (b) Monetarist view is that when money supply increases so prices increases, interest rates decrease, installment buying is encouraged so flow of money increases so aggregate demand increases that pushes the prices. Government monetary policy is related to the money supply - reflationary / expansionally expansionally monetary policy - deflationary / contractionary monetary policy Reflationary Reflationary – government decreases rates,  installment buying  leasing,  borrowing,  spending and so overall money supply increase. So all these measures increases demand so production will increase. Deflationary – government increases interest rates  leasing,  installment buying,  spending,  borrowing so over all money supply decreases so all these measures decreases demand to lower inflation. Deflation – decrease in price Dis-inflation – level of prices are going up but at a slower rate than before. Slump inflation – increase in inflation, so employees have to be laid off because of cost of production, cause of slump. Traditional relation is, when inflation is high unemployment is low.



Fiscal policy of governments:

Government budget: government Revenue – Taxation high taxes government government Expenditure – Social Welfare,  disposal income Defence, distribution of wealth / serve  prices fall  demand falls   reduces economy 3.

Unemployment is a situation where people who are willing and able to work cannot find proper jobs. (or appropriate jobs) Types: (i) Cyclical Unemployment (ii) Structural Unemployment Unemployment (iii) Frictional Friction al Unemployment (iv) Seasonal Unemployment (v) Technological Technologic al Unemployment (vi) Regional Unemployment (vii) Voluntary Unemployment Unemployment (viii) Residual Unemployment 1. 2. 3. 4. 5. 6. 7. 8.

Cyclical is due to recession in overall economy. Deindustrialization. Deindustrialization. Structural is due to any reason a industry (e.g. textile) is decline. Even in tertiary sector When people switch jobs so in between time is frictional. When employment situations change due to season e.g. agriculture, woolen garments in summer, construction when projects are being made so once completed the people are unemployed. Technological Technological is due to automation i.e. when industries become capital – intensive. When factories move from one region to another so unemployment unemployment in the left region. When unemployment occurs in any one region. Voluntary is when people choose not to work because of unemployment unemployment benefits even though they are able to work. (willing & able but want to delay) e.g. wanting for a higher salary pay. Residual is due to disabilities of people i.e. when they become physically and mentally disabled but to only a certain extent. These are people with simple disabilities.

Impacts of Unemployment

1. lowered aggregate is demand – due to decrease in purchase power as incomes are low as unemployment & . Due to this output decreases. 2. lesser tax revenues revenues for the government government – government government expenditure increases, increases, burden on on working population increases. 3. social costs – crime rate , frustration  and suicide , measures against government. 4. wastage of of a very imp. factor of production production i.e. labour labour  production possibility curve not achieved  efficient utilization of FOPs is not possible. Unemployment means exploitation of employees are possible as they are desparate. So low wages rates. 5. balance of Payments It is a summary of all the payments made by a country and proceeds taken by a country over a particular period of time which is one year. It is actually the monetary record of transactions of one country with the rest of the world. It is a summary of cash flows. Surplus of bop government invests the money into some other country. o give loans to other countries



put in reserves deficit of bop take loans from other countries (IMF, WTO, World Bank) o invite investors to invest in country o take out money from reserves o Impacts of bop deficit liabilities increase o bankruptcy o interest payments increase o economy can go to a slump o foreign exchange rate decrease as demand of currency falls o reserves go down so output decrease o o



unemployment unemployment increases Impacts of bop surplus inflation increases due to money supply increases and value of money o decreases. Trading countries can impose protection measures. o Important aspect, goods Current A/C – visible trade & invisible trade o Capital A/C – big foreign investments air bus. sector / loans o Other investments – bank transactions, remittances o EXCHANGE RATES It is the value of one currency against another currency appreciation appreciation – spend less o of currency to buy Increase of value spend less to buy one unit of another o Currency depreciation o Decrease in value – spend more of currency to buy one unit of another o Depends on demand and supply of currency o



MACRO – ECONOMIC POLICIES

Q.

Explain macro – economic policies of the government. - monetary policy - fiscal policy - exchange rate policy

Ans.

The macro – economic economic policies policies of the government government are those that affect the overall economy of a country. There are three types of macro – economic policies. policies. (i) Fiscal policy (ii) Monetary policy (iii) Exchange rate policy FISCAL POLICY This policy is related to the government budget which is the government income through taxation, its expenditure as well as borrowing. This policy is used to control the aggregate demand as well as inflation to stabilize the economy i.e. avoid many unwanted slumps or booms that may be bad for overall economic growth. When the economy is in recession and the rates of unemployment are high, this means that two of the objectives of government are not being met which are economic growth and low unemployment. To counter this, the government would increase its spending by constructing new hospitals and schools. The government would also reduce direct and indirect taxes which are corporation tax, income tax and value added tax respectively. This would result in a rise of disposable income i.e. an increase in the purchasing power of the public. Therefore, the aggregate demand for goods and services would increase. So there would be an increase in the industrial output i.e. a rise in GDP. Also employment would increase as more people are required to produce the increased output. However, if the economy is booming and is in danger of overheating then there may be very high rates of inflation and current account deficit. It may be due to a very high aggregate demand. So to counter this, the government would reduce its expenditure by cutting back on road construction. Also, higher taxes could be imposed like income tax or value – added tax (this would increase price). Due to this the consumer demand falls as their disposable income is decreased. These measures would control the excessive economic growth and current account deficit would reduce. MONETARY POLICY This policy is related to the changes in interest rates that causes an increase or decrease in money supply. This in turn works for the regulation of inflation and so the economic growth is kept in check. When inflation is increasing and is forecasted to reach levels beyond that which the government wants, then deflationary or contractionary monetary policy is used. So the central bank or state bank increases the interest rates. This leads to decrease in leasing, installment buying and borrowing of money as no one wishes to pay higher rates of interest. There is also a fall in spending and so the money supply is reduced. Therefore, the overall aggregate demand falls and this would lead to a decrease in inflation as prices are lowered. Also the existing loans and mortages would now take up a greater part of the income as interest on them increases. This further reduces the disposable income of the customers and is another factor that leads to fall in aggregate demand. demand. On the other hand, if the inflation rates are too low, then the government would decrease the interest rates. This would encourage the customers to buy good especially houses, cars and machinery on borrowed loans, by leasings and through installment buying as less interest has to be paid. Also the interest on existing loans and mortages would decrease and so the disposable income of customers increase. Therefore, they are able to buy more products and so the aggregate demand increases. This would push up



prices leading to higher rates of inflation. This is called reflationary or expansionally monetary policy. Controlling inflation so that prices don’t increase a lot nor decrease too much sustains the real GDP and so cause continuous economic growth that also keeps levels of unemployment low. EXCHANGE RATE POLICY Exchange rate is the price of one currency or the value of a currency in the terms of another currency. The policy of the government would be to decide if they want it to float or to be fixed. A floating exchange rate is determined by the demand and supply of the currency in the international market. If the demand increases, then the exchange rate appreciates as its value increases e.g. when the interest rates of the country are high. This is good for the importing businesses as they buy more in the same amount of money. However, when the demand falls, then the currency depreciates and its value falls e.g. if 60 Rupees = US$1 and the US$ depreciates then 50 Rupees = US$ 1. This shows that the value of rupee appreciates as less is to be given in return of $1. This is good for exporters. However, too many fluctuations in the exchange rate prove bad for domestic industries and its the government’s duty to keep the rates stable.



FURTHER ECONOMIC CONSTRAINTS

Labour Market: one of a types of market Factors determining the demand of labour: 1) Demand for the finished product (labour has a derived demand) i.e. influenced by a demand of finished good. 2) The effects of technology or the price and efficiency of labour saving machinery. Price of machinery efficiency  of machinery  then demand of unskilled labour  and demand of skilled labour . 3) The trend of the industry to increase capital intensity. 1) 2) 3) 4) 5) 6) 7) 8)

Factors effecting supply of labour: population size mobility of labour For the economy %of working population no. of people who are not willing to work unemployment wage rate offered by particular industry. availability of suitable labour in other industries level of unemployment unemployment (structural unemployment unemployment Unemployment  supply  people are ready to work even at lower wages

To the industry

If there is skill surplus then wages will decline and if there is skill shortage then wages will rise. To cover skill shortages 1) To hire more trained staff 2) Training your existing employees Advantages of hiring new training employees 1) Saves time 2) New employees can bring new ideas to business. Disadvantages 1) frustration would be created because they (existing employees) will think that they should be trained rather then training new person. 2) cost of training increases. State intervention to handle labour market 1) government set up a minimum wage rate if government increases the level of wage rate then supply would be more but demand would be less so employees from A to B will become unemployed.

D S

S

D A↔B



MARKET FAILURE

Market failure – when the resources are not utilized efficiently. Resources can be underutilized i.e. when resources are not fully used Resources cannot be over utilized. Types of market failure f ailure (examples) (examples) 1. External cost (effect on good, consumers and workers) 2. Inadequately trained labour (effect on govt., consumer and companies) 3. Exploitation by monopolies

MANAGEMENT

Functions of management 1. 2. 3. 4. 5. 6. 7.

Planning Organizing Co-ordinating Motivating and Leading Controlling Staffing Communicating

Management is the process by which a manager allocates and controls resources of a business. Management is getting people to do their work effectively and efficiently to achieve the organizational objective. Management is the process of planning, organizing, coordinating, motivating & teaching, controlling, staffing and communicating the resources of production to achieve the organizational objectives. Planning – deciding today what to do in future it is setting objectives – aims to achieve in a certain time period in order to firm strategies and tactics → → →

corporate objectives should be specific, achievable, realistic, time tabled and measurable. They are specific aims of the whole corporate. They should be relevant, communicated and agreed upon. corporate divisional departmental individual targets. Strategies are long – term plans of action to achieve an objective and are broad / general. →

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Factors affecting the corporate objectives 1. 2. 3. 4. 5.

Size and position of the business & its legal form. Public or private sector business (Business vs. State) Competitor’s Competitor’ s objectives Time period Corporate Culture – business ethics (moral values e.g. min wage rate) - leadership style - task culture or people’s culture - organizational structure

MANAGEMENT – CORPORATE CULTURE

Q. Ans.

Explain the link between corporate culture and business behaviour. (14–16) Corporate or organization organization culture culture is a set of values values and beliefs beliefs that are shared shared by people and groups in an organization. It is the pattern of shared beliefs, attitudes, assumptions and values which shape the way people act and interact. It is the code of behaviour and attitudes that influence the decision – making style of the managers and other employees. Therefore the business dealings or the business behaviours with stakeholders is clearly affected by the corporate culture of the business. Task – oriented corporate culture causes the management to be very strictly and autocratic with its employees as it is only concerned about tasks being completed and targeted and targets being achieved. In such a culture, the dealings with customers and suppliers are usually very fair. Customers are given all orders on time with the highest quality goods the company is able to produce. Suppliers are dealt with fairness and are expected to give all deliveries on time as asked. However, strictness with employees mean that disciplinary measures are taken immediately against absenteeism. Management is very particular about work timings and punctuality and wants highest productivity. This can cause demotivation amongst employees as too much control prevents fulfillment of selfesteem and employees don’t feel part of the business. This may pass onto the production by poor quality maintenance. Switching and high labour turnover may become a problem as would bad publicity. Very strict culture may cause management to forget that employees too could be customers of the firm. Being too supervising over them and a centralized control may cause them not to buy the firm’s products. This is a loss of potential customers. A democratic or decentralized decentralized culture encourage the involvement involvement of employees in the business. It asks for the ideas of workers. This encourages innovation and also solves problem within the business since workers have a hands on experience. So they are better able to understand certain areas such as production than the management does. This would mean that the business would have an edge over the competitors and may remain more dynamic. There would be flexibility in its dealing with customers too and may be more friendly towards them. They may offer alternations in the time when debtors could payback and may allow suppliers to flexible delivery time. However, this may result in high bad debts and cause disruptions in supply. However, such cases are rare and usually democratic firms have high motivation due to delegation and decentralization. Such firms have good reputation amongst the general community for their good behaviour towards customers and well treatment of employees. A culture of following the limits of legal regulations regulations also has affects upon the behaviour. This means that if the law has a minimum legal wage, then management may not set higher pay rates despite high profits. This may be a very negative culture as it promotes conservative attitude where employees don’t try to work to their full potential and are demotivated. In such a culture, customer may be demanded cash payments for all purchases if laws making credit – giving services necessary are not in place. Though all taxes are paid exactly, the government may still not be satisfied due to low contributions to society welfare despite high growth. Pollution may be prevented only to the level that laws state despite the ability to reduce furthur. All this may result in bad publicity and poor

It is a system which includes establishing the required business outcome and coordinating and motivating workers to assist in the achievement of this aim. This method involves translating the overall aim of the business to specific targets for divisions, departments and individuals. It can be an effective way of delegating authority and motivating staff. It is done through discussion and agreement from every level of the organization and hierarchy then all the advantages of a motivated workforce can be gained. However, if the objectives and targets are merely imposed from the top management, then motivation levels are low. Therefore, to achieve the true benefits of MBO good communication and democratic style of leadership is preferred.

BENEFITS OF MBO 1. 2. 3. 4. 5. 6. 7.

Increased job enrichment and motivation Strategies can be implemented quickly Co-ordinated and consistent approach Decreased conflicts Improves the understanding of the whole system Monitory performance becomes easier. (deviation is identified) Helps in setting priorities

DRAWBACKS 1. Time consuming 2. Objectives can become outdated quickly as compared to the dynamic nature of environment. 3. Setting targets doesn’t guarantee success. 4. Very careful and able leadership is required which is generally difficult to get. STRATEGIES Focused Strategies Corporate Strategy ⇒ Marketing Strategy ⇒ Cost – Leadership lowest cost of good sold in the market – cheapest good Differentiation Focused to concentrate on one particular area. When originally used this is called penetration pricing in introductional stage of product life cycle ⇒

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STAKEHOLDERS Q.

Discuss the conflicts of objectives amongst the stakeholders of the business.

Ans.

Stakeholders are individuals individuals or or groups groups of people people who who have a direct or indirect indirect interest in the running of the business. They are the owners/shareholders, directors, workforce, customers, suppliers, competitors, government, banks and the community as a whole. Each of the groups have different objectives and are affected differently by the business activity. Due to the differences of their objectives, conflicts may arise amongst the stakeholders. One type of conflict may be between owners and directors. The directors of a company are the actual managers. They control and plan the resources and are the actual decision makers. Their main objectives would be to retain control and increase their status and power. This would be possible by increased growth of the organization. So in order to achieve their interests they might overlook the interests of the owners or shareholders who are the real risk takers as they have invested into the company. So, the shareholders would want greater returns in the form of dividends while the directors may decide that less dividends should be paid and greater percentage of profits reinvested to induce technological change. Also the directors may be paying themselves higher salaries and organizing their time to meet their own interests. This would result only in a satisfactory level of profits while the owners would want a higher level of profits. This conflict is the major reason of the divorce between ownership and control in the limited companies. Conflicts also occur between the interests of the owners and the workforce. The workforce wants higher salaries and wages. They also want good working conditions like hygiene as well as moderate temperatures which would include fans. They would want proper safety equipments and clothing if their jobs are dangerous as in nuclear power plants. All these things would increase costs of the business and reduce profits while owners want higher profits and may even be thinking of reducing the wags and salaries. This also causes a conflict of workforce and managers / directors. The directors would want to keep prices low while the costs of satisfying the objectives of the workforce would force price to increase and the sales would drop. The director whereas want sales increase. The directors and owners may also want to increase the production which they may want to increase the working hours of the employees or introduce technological change and use more efficient machinery. This would again be in conflict with the objectives of the workforce who would want fever working hours and job security while more capital capital - intensive intensive methods methods mean the redundancy redundancy of workers that that lead to frustration and insecurity. Conflicts may also arise between the suppliers and the owners or directors. The directors and owners want increased working capital for the development of innovative products and upgrading of older products to increase market demand and share. For this they may wish to buy goods on credit for longer periods of time. However the suppliers on the other hand would want to receive payment on time specially if they are small business because this causes severe hardships for the small suppliers as they too have to pay their employees and return loans. There it may be that suppliers aren’t able to deliver the goods on time and are delayed. The owners and directors want the supplies to be delivered on time as late deliveries halt production and cause many difficulties for a business including wastage of time. Customers and business may also disagree on several aspects. The major area of conflict is the price. The owners and directors wish to maximize profits for which they may increase prices if the quality of product is good or if too many resources of production had to be used. The customers however, want to have the best quality of products at a low price. If there is competition in the market as is the case with clothes, then prices are low. However, when competition is low like in the computer market then



customers are forced to pay higher prices charged by owners. Then at times customers may not be satisfied with the quality of goods they bought as they may not be what customers had expected seeing the adverts. So the customers may wish to return the goods and receive a refund. However, the owners and directors may not agree to accept the returned goods or may not wish to return the money to the customer. Also, customers like to have after – sales service for certain expensive goods such as electric gadgets e.g. mobiles or MP3 player. However, the business in order to save costs may not offer these services or if the gadget breaks down after its first weak of use, conflict occurs if the owners refuse to investigate the matter or compensate the customer. One other type of conflict is between the owners and the community. The community wishes to live in a clean and pollution. – free environment. It would want the industries and factories located away from residential areas and nature parks. However, conflict occurs if the owners decide to start a factory close to houses. This would cause a lot of noise pollution firstly because of construction and then because of the running of the factory. Air pollution is also possible from smoke-emitting factories that endanger the health of the community. So the community would rise against the business and may form pressure group to ruin the reputation of the business which is the last thing the owners want as it results in falling sales and profits and loss of goodwill. Also the community wishes the businesses to run in an environmentally friendly manner and dispose of its wastes clearly. This would decrease the profits as costs of the business increases a limit expansion chances which is conflict with the owners and directors objectives. The community would also want a business to run ethically and may rise against it if they use animals to do research e.g. for testing new food types. This would be against the objectives of owners who wish to research new types of products and must use the animals experimentally. A business activity would always lead to conflict due to the diverse objectives of the stakeholders. A good strong and successful management is one which is able to deal with all the stakeholders and still run the business efficiently by reaching agreements to minimize conflicts e.g. the owners could get employees to agree on them with good working conditions to show that they are cared for. Profit – sharing with employees could be done in good years to increase their loyalty. For this the owners shouldn’t chose aggressive objectives like maximizing profit but keep it at a moderate level!



CORPORATE CULTURE Culture followed by an organization e.g. informal culture where people are easy – going so most probably less aggressive objectives. It is the way things are done in a business e.g. democratic culture where objectives are discussed. DEFINITION: The pattern of shared beliefs, attitudes, assumptions and values which shape the way people act and interact which strongly influence the way that things get done. It is the code of behaviour and attitudes that influence the decision – making style of the managers and other employees of the business. It is actually the way of doing things that is shared by all those in the organization. organization. Factors that determine the corporate culture: 1. The philosophy and personality of the leader. 2. The history and tradition of the organization. organization. 3. The nature of activities of the business. 4. The structure of the organization. organization. 5. The focus of management (Task culture – Theory X) or (people culture – Theory Y) 1.

2.

3.

4.

If the leader is authoritative or autocratic then he doesn’t consult the employee but imposes his decisions. Employees therefore won’t give opinions as to the decision making and would be afraid. There is very less communication. So this will lead to jobs switching. If the organization doesn’t take care of the employees because employees feel loyalty to organizations that give them proper working conditions alongwith pay. Conspiracies and secret grouping are also possible. However, at times it is necessary to work fast as there is no time, then it would be better if no discussions are held to make decision. History and tradition involves the reputation of the business. If the reputation is good and there has been continuous growth in the past, then the employees would want to become a part of it as the culture would be of job security. Traditions would include dress codes e.g. informal dressing on Saturdays. It would also include get togethers and dinners for both employees and management. nature of activity is the type of activity a business is in e.g. in media related business there is an open culture. Here a lot of communication communication and interaction between people occurs and is necessary for programs to be made and discussions held. However, in manufacturing organizations, there may be a very monotonous atmosphere. Only tasks would be set for employees and very less interaction may occur. This is closed culture. Nature of activity would also depend on the scale of organizations, whether large scale or small scale and they are multinationals. multinationals. This affects the culture by e.g. close contact with customers in small scale organizations. Then businesses following ethical and environmental regulations would reflect it in their organization by working clearly and friendly. The structure means the organizational organizational structure of the organization starting with the CEO on top. If the structure is centralized, this means the organization is autocratic with all decisions made at the top levels of management. If structure is de-centralised then the culture is more democratic with employees and lower levels or organization involved in decision – making. The narrower and longer structures means less communication. Broader structure means more discussions as greater no. of subordinates subordinates under one person. It is the hierarchy of an organization.


5.


Focus means the focus of management and the choice of managerial theories they select to implement and follow in the t he organization 2. Theories X and Y. Theory X: Employees are in nature lazy and wouldn’t work unless and until clear orders are given to them and punishments decided if they don’t follow the orders. Money or monetary reward is the main resources or incentive they wok for. They do not wish to have responsibility. When tasks are set, they must be completed by hook or by crook. There is a lot of negotiating. Also such workers require a lot of supervision. Theory Y: employees, subordinates or people in general are responsible and are able to make decisions. They need monetary reward alongwith non-monetary areas. They also like slight leniency. They don’t need a lot of monitoring and are easily motivated. They like to given the will to make decisions and like being given responsibility. No particular theory is best. They must be made to work together. However, control is necessary. Theory is that control should be strict and rigid so that work is done on time and there is minimal absenteeism. Theory Y managers believe consideration should be given and interaction is good for decision making and delegation of responsibilities should also be exercised. Leaders may also use certain tools like lying and black – mailing as well as cheating. However if they are honest and don’t use these then employees too are usually honest. No one really teaches the culture but the juniors of an organization usually do what their seniors do.



STRATEGY Type of strategies: - Corporate strategies - Divisional / Departmental Strategies - Global strategies e.g. in multinationals there is a change of strategy, then the entire strategy worldwide is affected. Quality standards globally should be maintained. - Generic Strategies (Cost Leadership, Differentiation, Focus) Cost Leaderships means that leading in terms of cost i.e. by cutting down costs raise profits but not by raising prices e.g. China is following this. So prices of its products are low and quality good. However, the quality standards change from country to country. Due to this exports of China are spread throughout the world. Differentiation – setting up a strategy to make the company’s product different from others by introducing unique features. Keep on innovating different products. Focus only on one market segment e.g. diamonds are only for higher class and they don’t deal with mass-market. Research on drugs for specific patients is-focus-strategy while precautions are for mass-marketing. mass-marketing. Factors on which strategy depends: 1. Strengths of a business 2. Competitive Competitiv e environment 3. Resources available 4. Company objectives 1. Strength would be the financial strength as well as the type of people working – whether good or bad. 2. Resources available available decide the type of equipment equipment used so how innovative innovative a product could be made e.g. adverts. 3. company objectives – growth, growth, expansion, profits SWOT Analysis – Strategic analysis The process of reviewing existing plans and identifying new opportunities and risks associated with them is known as strategic analysis Strengths Weaknesses Opportunities Threats

internal - resources of a business external - e.g. Free Gwador Port but too many imports.



CORPORATE CULTURE Q.

Write a comprehensive comprehensive note on corporate culture.

Ans.

Corporate culture is one of the factors that determine determine the corporate objectives of an organization. It is the pattern of shared beliefs, attitudes, assumptions and values which shape the way people act and interact. It is the costs of behaviour and attitudes that influence the decision making style of the manager and other employees. It is actually the way of doing things that is shared by all those in the organization e.g. at Microsoft, the employee dress casually and work long hours. This is their culture or the norms of their business life. Corporate cultures may be created by business leaders as part of their strategy to increase the efficiency of a business and its competitive advantage. The cultures may also influence decision – making. e.g. insurance companies encourage caution and conservation so that employees don’t take risky decisions. There are several factor that determine the corporate culture of an organization: the philosophy and personality of the leader, the history and tradition of the organization, the nature of activities of business, the structure of the t he organization and the focus of management. Autocratic and authoritative leader would cause a culture of no discussions before decision – making to flourish. The leader to CEO would set all strategies and tasks that everyone from managers to employees would have to follow. The workforce would be afraid to voice its opinions that would lead to frustration and a culture of high labour turnover and absenteeism amongst employees. Job switching would be common. However, if the leader encourages employees (e.g. in a computer company) to perform tasks in creative ways then this would become a positive culture. The employees may be able to come up with innovative ideas for products and gain advantage over other competitors. Also, if the leaders are honest and don’t use tools like lying, cheating and black-mailing then a culture of honesty would be attached to the organization as employees too tend to be honest. It is basically the tendency of juniors to follow their seniors. Therefore if the leader is one who believes in discussions to gain better ideas for the running of the business, the employees are eager to participate in talks. Every organization has its history and tradition. The organization may have a casual dress code for Saturdays. It may hold get together for employees once every month which would give a feeling of care and loyalty to workers for the company. The history of an organization may to some extent reflect its objectives. An organization which has grown continuously in the past would have several of its workers for years and so a culture of job security would prevail. If the business is profitable then it may have a culture of profit – sharing amongst employees. employees. Nature of business activity affects its culture greatly. If the business takes care of environmental considerations, then the employees may be very particular about the recycling of papers, switching off lights for conservation of energy and being very tidy at their workplace. If the business is a media network, then it would have an open culture. There would be a lot of communication between workers and many discussions take place in order to come up with the best ideas for program preparations. However in manufacturing businesses there is closed culture. The working atmosphere is very monotonous as there are no discussions. The workers are given tasks that must be completed and they tend to be very serious and no interaction is required. The organizational structure also plays an important role in corporate culture determination. It is the hierarchy of an organization with the CEO (Chief Executive Officer) on top. If there is a centralized structures this would means that all decisions, whether of strategic importance or of day–to–day business, would be taken at the top levels of management. They would then be passed down the chain of command and must be acted upon by lower level of management and employees. So this would cause a culture of fear and instant obedience without discussions in the organization.



However, if the structure is decentralized then lower management would also take decisions and workers would be delegated responsibility. The culture would be of interaction and dutifulness. Finally the focus of management decides the culture. If it follows managerial theory X, then this would mean that workers are thought of being generally lazy. Their main and only incentive is money / monetary reward. They don’t want responsibility and must be ordered about and just given tasks to be completed in a limited time in whatever way but the job must be completed on time. This is task culture. On the other hand the theory Y managers believe that people in general are responsible. They don’t like too much supervision and wish to be able to make decisions. They like being delegated and receive non-monetary rewards too. This is people’s culture. Several types of culture exist depending on the type of leadership. Adaptive cultures are those where managers are able to introduce changes in corporate cultures according to changes in outside environment. They are most suitable for the modern business world. In them employees are encouraged to take entrepreneurial decisions, is decentralized and has close relations to customers. Inert cultures are those that can’t adapt to changes and follow old norms. Usually decisions are centralized. Solidarity and sociability are other ways of explaining cultures. Solidarity is the unity amongst workers to get things done while sociability is the friendliness amongst employees. High sociability and low solidarity is the culture of networked organizations, while mercenary organizations have low sociability and high solidarity e.g. Pepsi Co. Fragmented organization have both low solidarity and sociability while communal organizations have high solidarity and high sociability and so are more cohesive, goal – oriented and have shared values. Corporate cultures that are strong and clear and are influential in the corporation have several benefits. The employees gain a feeling of identity and have a sense of being a part of the organization. organization. This makes workers flexible and increase their ability to adapt to changes in the company or difficulties it may face. They help workers to identify amongst themselves. Due to this greater teamwork is possible and employees are more unified. This also helps employees feel committed to the organization so labour turnover and absenteeism is low. This may enable higher productivity and efficiency. So industrial relation problems are low and employees are highly motivated. The cultures also enable employees to understand what they are required to do as well as what the business activity is about. So misinterpretations and lack of understanding, instructions may be prevented. The cultures enable management management to set up corporate strategy as it provides a control of the employee behaviour. It may also provide a sense of direction to the workers. However there are certain limitations to corporate cultures. It is not always true that economic performance is improved by minimal culture gap. The organizations with strong cultures are as likely to prove a successful as those with a weak culture because there are several external influences such as fashion trend changes that cultures can do nothing about. Also a business could have a number of sub-cultures existing together. In certain cases they may co-exist in harmony while in others there may be a conflict between the different interests and opinions. Then while lack of strong centres due to decentralization decentralization is common, corporate cultures may not be able to exist where temporary and part – time workers are appointed. Also the fast changing working practices could alienate some workers socially. This may be seem as negative as a corporate cultures doesn’t exist yet for business life, it is positive. People don’t do things at times because it is a culture established by their senior management but because it is their interest, beliefs and philosophy.



UNIT 1 REVISION QUESTIONS Q.

Using examples, distinguish between a currency appreciation and a currency depreciation. (4)

Ans.

The currency currency appreciation appreciation is the rise in the value of one country’s currency currency in in terms of another currency, e.g. if the pound sterling’s exchange rate in terms of us Dollar is £1 = $1.5 and the pound appreciates, then the new rate would be £1 = $2. This means that currency appreciation enables the appreciated currency to buy more of another currency. A currency depreciation is the fall in the value of one country’s currency as compared to another currency e.g. if in the previous example instead of appreciating, the pound sterling had depreciated, then the new exchange rate could be £1 = $1.25. The pound is able to buy 25 pence less i.e. the depreciated currency buys less of the other currency. A currency appreciation occurs due to the increase in demand of a currency due to which it becomes short in supply which may be because of higher interest rates. A currency depreciation occurs when demand decrease.

Q.

Explain the difference between fiscal policy and monetary policy

Ans.

Fiscal policy policy is the government’s government’s policy policy on budget (i.e. (i.e. spending spending and borrowing) and taxation. Monetary policy on the other hand is the government’s policy on interest rates and bank loans restriction. Fiscal policy is able to control the aggregate demand of goods and services in the country by increasing or decreasing direct taxes like income or corporation tax and indirect taxes like value added tax on product. This serves to control disposable income and controls inflation. The fiscal policy is also used to prevent current balance deficit by increasing taxes and reducing spending on imports. The monetary policy, however, controls the supply of money in the economy. It is used to control inflation in relation to prices. The decrease in interest rates and fewer instructions on loans, credit purchase and hire purchase enables more money to be available that pushes up prices. It is used to expand the economy by allowing the money to circulate among the lower income classes of society too.

Q.

Assume that your country is given the chance of joining a common currency scheme with other nations. Discuss the issues involved in making such a decision.

Ans.

Common currency means using a single currency across a trade block or a group of countries instead of the local currencies (e.g. euro). The major issue to be kept in mind would be the exchange rate fluctuations faced by the Pakistan rupee due to having a floating exchange rate. Once a common currency is joined then there are no fluctuations with all those countries that use the same currency. Fixed exchange rate means that the importing businesses businesses and exporting businesses can easily sell and buy. The imports of raw materials are easier to calculate and so costs of production are easier to find. Also the uncertainty of exchange rate is removed and changes of unexpected chances in demand for Pakistan’s exports reduced as there is a single currency. So the exporting businesses are able to easily find accurate operating profits and sales. Since a common currency is shared, it causes a reduction in cost as the local currency doesn’t have to be converted to pay for imports which requires giving commission to banks e.g. if Pakistan and India were to have the same currency, the India wouldn’t have to convert Indian rupees into Pakistan rupees to pay for agricultural and sports imports but could easily pay in the common currency. Common currency leads to price transparencies. Suppliers which supply best at lowest prices can easily be found as all businesses have same currency and so prices are

(2)



easily checked. Customers too easily find the best product at good value. Competitors can easily see where their business stands as comparing is easier. Companies can also know the prices that other businesses in the same industry charge. The choices of goods and services for customers increase. Also the foreign investments which Pakistan greatly requires would be more forthcoming if it had a common currency as there are less exchange rate fluctuation to worry about. However, Pakistan must keep in mind the costs for such a conversion like the changing of all accounting system into the new currency. Then the redesigning of the packaging and new adverts as well as retraining of staff to handle the new currency. It may also be that a Central Bank is set up to keep the affairs of the common currency and it may decide the interest rates and monetary policy which may not be good for Pakistan (i.e. The State Bank of Pakistan has reduced powers). This may mean that Pakistan isn’t able to maintain its own inflation rates but must agree on the general rates. Common currency could mean too much competition from more developed countries with better technology and products that could prove bad for the local industries. Therefore, all these issues must be kept in mind and all benefits and drawbacks calculated before a decision is made to join a common currency. Q.

How might a depreciation of a country’s currency lead to benefits for its industries?

Ans.

The depreciation depreciation of a country’s currency currency means means that that its value falls falls against against that that of another currency. E.g. The current exchange rate of pound sterling against US Dollar is £1 = $3. The value of pound depreciates. It is now £1 = $2 i.e. the pound is weaker. This would make the exports of England cheaper. If England exported a machine of £300 worth. It would have cost $900 to United States at the original rate. However, at the new rate, the same machinery would cost $600. Thus at this lesser prices the united states may increase its import of England’s machines which would increase England’s value of exports and give a greater balance of payments surplus. At the same time imports would appear more expensive. If England imported a curtain of $30 it would have cost £10 at the original rate. But at the new rate it costs £15. This would be beneficial as it would reduce the imports of England and encourage use of local materials. This may increase the GDP and employment.

Q. Choose 1 ex. of market failure and explain its significance to business – decision making. Ans.

One example example of market market failure failure is the failure failure to find find the true total costs of production including the external (social) costs such as pollution (air, water and noise). This has to then be borne by the rest of society. The business must think of this failure before making decisions as not caring for the pollution may give a bad name to the business and pressure groups at the same time as running the reputation would also force the business to pay for the costs. So it would be better if the business accounted for these costs instead of paying forcibly and losing customers. The government is also affected if the business doesn’t take care of external costs as the voters gave the government vote also for maintaining a clean and pollution – free environment. So if the business doesn’t take into account these external costs the government may impose taxes and fine, impose strict limits on pollution levels so its better if the business thinks of this market failure beforehand during decision decision – making.

Q.

Write a note on technological technological advancements advancements impacts on today’s business.

Ans.

Technology is the creative process which uses human, scientific and material resources to solve problems and generate better efficiency. An important area of technology is IT, Information Technology which is the recording and use of information by electronic means. The advancements in technology creates new opportunities as well as threats



and the major business areas affected are communication, product technology, cost of production, human resources and the market. In communication, the major impact has been caused by computers and Internal. Within an organization, people communicate via telephone, e-mails and can hold meetings across countries by video – conferencing. The internet is becoming increasingly increasingly common as an interface between customers and the business and customers place orders either over the net (e-commerce) or by an interactive television technology called Teletext. Such changes have reduced the retail floor space considerably as well as made communication communication extremely fast. It has also meant that information is collected, stored and sent quickly which saves money and makes sure information is passed correctly. Advanced technology has had many changes in production and manufacturing. The use of (AD – Computer Aided Design) CAM (Computer Aided Manufacturing), CMC (Computer Numerically Controlled) Controlled) production. The designs produced are more accurate that after being viewed as 3D can be altered and tested for faults cheaply and so make them easier to be produced. Then the use of robots in production lines means that boring but essential repetitive tasks can be carried out accurately and quickly which may not be possible for humans due to lack of motivation and tiredness. The nature of the technology creates new products and new demands. The invention of the computer led to a market in computerized games. Even though technology can’t be cheap due to its complexity and rise in fixed costs, the prices are falling. This is because of the volume of production that has spread fixed costs and reduced unit costs of production. It is because businesses have merged for mass production for a global market and so it has become easier to be effective, efficient and fast. Since labour hasn’t increased due to the machines and capital intensity, the labour productivity has increased and thus reduced unit costs. The technology industry is a big human employer and at the same time has affected human resources of many industries. There have been redundancies as certain staff (e.g. workers on production levels) aren’t required. Changes of methods has replaced people at all levels. But at the same time many new job opportunities have been created (e.g. computer specialists and machine operators). There is de – skilling as certain skill like designing and crafts are done by computers. But workers have become multi – skilled as they become flexible so that they are able to work with the needs of the new technology. It has caused changed attitudes to career choice and a rise in small organizations as redundant people get together to employee themselves. Delayering in organizational structures has occurred since computers have taken over roles of middle management alongwith team working. It has created a shortage of computer engineers and programmers while the acceptance of change has increased. In marketing there has been a change in nature of products as well as an increase in variety. The way we shop has changed like over the internet instead of going to retail outlets. Pricing ways are different. First products are expensive but once they are common in market, they become very cheap. Competition has increased and made survival difficult for low technology firms. New ways of distribution have emerged as the world becomes a single market and so delivery of products safely has become faster as well as their availability has increased, then prices reduced while they remain fresh. The high disposable income of some has meant large sales and a healthy entertainment, holiday and leisure industry. Transactions are dealt with differently as bank accounts are present and payments are made via debt and credit cards. There is an increase in home banking. Health and medicine have improved considerably as many more life saving drugs and surgeries can be done easily and so increase life spans. However technology has –ve effects too. The major is the increasing need of strict data protection as our data becomes compiled like personal interests, lifestyle and work. Data legislation controls the spread of such data but has to change quickly to regulate new ways of hacking and accessing data. The cost of software has increased due to the speed with which it changes and becomes obsolete within months of being made and so there are large costs of updating software incurred. Training costs are also high. The



increased dependency on computer systems mean that system failure leads to a total failure on production gives a bad reputation to business. The technology has been resisted by workers representatives due to the insecurity of jobs that they create. Skills of workers are outdated and either they are redundant or have to be retrained in other skills. There are certain ill effects to health like computer glare and an increase in dangerous radiations. There is a resistance to the continuous changes in technology from old managers as their skills become obsolete. The management of change is also difficult as it has led to management being exercised in lower levels of organization which is particularly difficult in organizations organizations with a culture of centralized authority. Due to the increased competitiveness of markets, assets become obsolete quickly and a lot has to be invested on new ones. The management has to time carefully the purchasing of assets so that the business is atleast able to cover its cost. Technological literacy is still a problem especially in third world countries where people aren’t even simple literates, let alone computer literates.

MOTIVATION Employees turnover



the rate at which labour leaves particular job.

Indicators of non-motivated staff      

low profit inefficiency low productivity more absenteeism laziness low product quality etc

Motivation It is a desire that pushes an individual to work well. It is an influence that causes people to behave in a particular way. There is positive and negative motivation. Positive motivation related to monetary and non-monetary rewards and negative motivation is referred to punishment and penalties.

Gains of Motivation For the Workers 1. keen to be at work 2. takes pride in business performance 3. displaced positive attitude 4. regular and punctual 5. accepts responsibility 6. willing to accept changes rather than resist them 7. shows highest level of commitment 8. gets personal satisfaction out of work 9. makes suggestion for improvement 10. higher productivity

For the organisation 1. improves efficiency 2. low absenteeism rates 3. punctual and regular staff 4. lower labour turnover 5. minimum complains 6. lower level of accidents 7. workers respond to orders and the leaders so it is easy to implement strategies in turn to achieve desired objectives 8. improved quality of goods with less wastage 9. changes are accepted so the organisation becomes dynamic 10. contribution of ideas and higher productivity 11. higher outputs and profits

Motivation Q.1.

Give the indicators of poor staff motivation.

Ans.

There are several indicators which would show that that low morale exists exists amongst employees. Absenteeism – Greater number of days that employee doesn’t attend to  the job due to no feet of loyalty to work. High labour turnover – More workers leave the job for others as they don’t  derive job satisfaction. Lateness – Employees aren’t bothered about punctuality and are take for  work. Low and falling labour productivity – workers don’t work hard or efficiently.  Low product quality – Workers don’t concentrated on work and no quality  maintenance and faults occur. Low profit – Since productivity is low average cost are higher and output  is low so owners get less return.

Q.2.

Make a note on productivity

Ans.

Productivity is the number of units produced by each worker and is calculated by the following formula: total no. of output Pr oducitivty per wor ker = total no. of wor ker s This is labour productivity. There are other types of productivity like capital productivity and multi factor productivity which measures the efficiency of these factors of production. High loabour productivity may be an indicator of a well-motivated workforce. It is because workers which derive job satisfaction and feel that they receive good financial rewards are encouraged to work harder and efficiently. Well trained workers due to on-the-job training and off-the-job training like workshops would also be efficient. Better machinery and technology also improves a firms productivity. It allows output to increase in less have h ave as production is quickes, less faulty and accurate. The effectiveness of management also affects productivity. If managers are efficient then they would allocate resources properly the deliveries of supplies & raw materials would be on time and co-ordinator would be good. Higher productivity results in lower costs of production and could lead to greater profits if prices aren’t reduced by the same ratio as costs have decreased. However, it must be remembered that the increase in productivity shouldn’t be at the expense of quality. The quality must be maintained so that sales are higher and customers are getting the value of their money and are satisfied.

MOTIVATIONAL THEORIES 1. 2. 3. 4. 5.

F.W. Taylor’s Scientific Management Elton’s Mayo’s Hawthorne Effect Abraham Maslow’s Need Hierarchy McGregor’s Theory X and Theory Y Herzberg’s Two Factor Theory

(1911) (1932) (1954) (1960) (1969)

Taylor’s Scientific Management The approach of establishing an idea or a hypothesis, than standing and recoding performance at work, altering work methods and re-recording performance is known scientific management. Taylor’s scientific principles designed to reduce inefficiencies of workers and manager. It creates a partnership between managers and workers which reduces conflicts. Approach The concept of an economic man: 1. This theory revolves around the assumption that workers only motivated through money or monetary rewards. 2. A fair day’s pay for a fair day’s work. 3. Bonuses and and rewards should be related with performance. 4. This is based on principles of work study. Work study is defined as the system to find out the best possible way (with the exact nos. of employees and time needed) to perform and complete a particular task in the most efficient manner. Scientific Methods 1. Select groups of workers. 2. Observe and note the key elements 3. record time 4. Eliminate unnecessary or redundant elements 5. Identify the quickest method 6. train workers accordingly 7. Include time for tests and breaks 8. Supervise the performance again 9. Paid according to the results Drawbacks 1. It doesn’t take into account individual differences. 2. There is no guarantee that the best way will suit everyone. 3. It had considered people at work more as machines with financial needs rather than humans with social needs. 4. Workers can get demotivated and frustrated. 5. A lot of competition amongst the colleagues can give rise to conflicts.

Maslows Need Hierarchy

1. 2. 3. 4.

When one need is satisfied then only individuals move onto the next level. If one level of need is being satisfied then that category of needs will become inferior or less important. Self actualization, although people are capable of reaching this stage, is practically very difficult to achieve. Reversion is also possible e.g. if a businessman is working at self-esteem needs but suddenly suffers from a great financial loss. He can come back to safety & security needs.

Limitations of Maslows Theory 1. Very difficult to delivermine which level an individual accurately at. 2. Needs differ in individuals. 3. very difficult to determine whether a particular set of need has been satisfied or not.

Mc-Gregors Theory X and Y

1. 2.

3.

4.

Theory X People dislike work and will seek to avoid it. Workers are un-ambitions, lazy, irresponsible and not to be trusted. Workers have to be controlled and directed by the management. They require monetary rewards & money is their largest motivator.

1.

2.

3.

4.

Theory X Acceptance of Theory X 1. Autocratic leadership (authoritarian) 2. Traditional organisationals structures 3. Scientific management 4. centralized decision making 5. A stress on extensive rewards external i.e. can be seen.

Theory Y People enjoy their work and seek responsibility of motivate properly. They do not need to be directly controlled all the time. Workers have many base need which includes monetary as well as social esteem and selfactualization needs so they should be given appropriate rewards. Management must create a situation where workers can show job knowledge.

Theory Y Acceptance of Theory Y 1. Democratic leadership and laissez fairee. 2. More flexible organizational structure 3. Decentralised decision making 4. A search for appropriate ways of motivating a workforce 5. Stess on intrusic / factors of the

Hertzberg’s two factor Theory 1.

Hygiene factors (dissatisfiers) (create dissatisfaction and must be eliminated) unfavourable or strict company policy  bad relationship with the colleagues as well as supervisors  poor working conditions  inadequate salary and wage structure  no opportunities for development  lack of job security  treatment workers receive on their job (unfavorable) 

2.

Motivators sense of achievement and recognition  sharing of responsibility i.e. delegation  liberty to perform the job  opportunities of career advancement and promotion  changes of self – development and grooming  options of gaining more experience  bonuses, allowances and other fringe benefits 

3.

Evaluation of Herzberg’s Theory some doubt that the result of Herzberg’s theory have had a significant  impact on business however, team working is now much more wider, spread with whole units  of work being delegated workers tend to be made much more responsible for the quality of then  own work Group meetings allow two ways communication are often favoured  Above all there is little doubt that his work and the publicity given to the  research conclusions led to a hastening of the trends that may have occurred much more slowly without his intervention

4.

Elton Mayo’s Hawthorne Effect Experiments were conducted on factory workers to determine how far – reaching were the effects of changing working conditions on workers and their productivity. A control group was set up whose working conditions weren’t changed at  all Other groups were established that bad varying high tuning heating, rest  periods, and other working conditions. The experiments were to determine the optimum working condition but the result was surprising. Productivity rose in all groups (those who had bad as well as those who  had good condtions) including the control groups This proved that: working conditions weren’t alone imp. in determining productivity  other factors had to be investigated before conclusion 

Other experiments were conducted an assembly hire workers changes were made at twelve – week intervals to rest period, canteen  food, payment systems, assembly layout & other conditions the new changes were firstly discussed with workers  at the end, working conditions were returned to as they were before trial.  The result was a significant rise in output or productivity of workers.

5.

Conclusions of Hawthorne Effect changes in working conditions and financial rewards have little no effect  on productivity when management consults with workers and takes interest in their work,  then motivation is improved working in teams and developing a team spirit can improve productivity  there is +ve motivational effect when some control over their working lives  is given to workers such as breaks groups can establish their own targets and nouns and these can be  greatly influenced by the informal leaders of the group.

FINANCIAL REWARD AND NON-FINANCIAL REWARD Financial Rewards 1. 2. 3. 4. 5. 6. 7.

Time rate / hourly wage rate Price rate Salary Commissions Performance – related pay Profit – sharing Fringe benefits / parks

Non - financial Rewards 1. 2. 3. 4. 5. 6. 7. 8.

Job enlargement Job rotation Job enrichment Team working Quality circles Target setting Delegation Appreciation and recognition by the organization (onwards)

Job enlargement – in those that are not too skilled like manufacturing firms – this prevents monotony and makes it feel part of whole organization (job rotation) Job enrichment could be promotions in same department and make it more detailed. Team working – e.g. Matrix structure – share of ideas so creativity increases – social needs are satisfied i.e. better relationship. Conflicts can occur – delays occur – waste of time Quality circle – Japanese management concept – meetings are concluded even of workers on machines as they have hands on experience and can get suggestion to improve anything in organisation so quality of products, services and public relations improved.

Target setting (Management by objectives – MBC) set realistic objectives after discussions and then communicate the aim. This makes it clear to employees what they are to achieve i.e. what is required of them. If you achieve a target you get rewards.

FINANCAIL REWARDS Q.

Explain what is meant by financial rewards and discuss with advantages and disadvantages the following: 1. time rate 2. piece rate 3. performance – related pay

Ans.

Financial rewards rewards are those rewards in which payment is given to workers or monetary rewards are given. These rewards are regarded as necessary for motivation according to Taylor’s Scientific Management and Theory X by which workers do work as a means to an end. Theory want the monetary rewards for buying the needs of life like food, clothes, shelter and some wants. The necessity of financial rewards is recognized by all theorists as means to live a life, but the difference is over whether financial rewards are the only source of motivation. They include, time-rate, piece-rate, salary, commission, performance – related pay, profit – sharing and fringe – benefits. TIME-RATE This is monetary payment to the manual and clerical workforce according to the time an individual spends on a job. Usually, an hourly wage rate is fixed according to what other workers in the market receive for a particular job. This is then multiplied by the number of hours worked. Payment is made weekly. It may be that 35 hours a week is a fixed requirement which all workers must conform too. However, if some more enthusiastic workers wok for a greater time then they receive over-time which is at a slightly higher rate. Advantages: The major benefit is that it is very easy to calculate the wage that a worker would receive for a week. The worker doesn’t rush a job which proves extremely useful for specialist tasks or difficult one as workers also maintain high quality standards since they know the it doesn’t matter if they haven’t produced several units since wage is given according to time. Time – rate is also a guarantee of income and so makes work feel secure about receiving wages. They know that they’d still get the pay even if production is halted due to an unprediction breakdown in the process. It is very suitable to give to workers whose output units cannot be determined e.g. the value of the work of a doctor or a teacher is very difficult to decide. So they get pay according to the time they spent. However, they receive annualized payments. They are also fairer than price-rates when situations exist in which employees cannot control the speed at which they work (e.g. dependency on the speed of machines). Also it is easy to adjust the pay level according to the job status of the worker i.e. the skills required may be different. So this rate is flexible to account for changes of such differences. Disadvantages:

The workers may delay their job in order to increase their work hours and get higher pay. This may result in inefficiency and loss of productivity as workers laze around and work slowly for overtime as high payment is made. Also as there is no reward for working fast, the workforce may take too much time to complete a job and so there may be need for additional supervision. Then if the production is halted completely, the workers would still have to be paid wages if they have come to work despite no untis being produced. PRICE – RATE This system is the giving of monetary rewards to the workers according to the number of units produced by an individual. A fixed rate of wage for every unit is given and so the total wage is found by multiplying the rate by the output. This ensures that wages are paid only for the work that they employees do. It is regarded as an incentive for the workforce as the more they produce, the higher wages they get. This system is also known as Payment by Result. Advantages: It is a very easy way to reward employees for whom the value of output can easily be calculated, e.g. workers in a textile factory. Workers are encouraged to work quickly to produce more and so there is high productivity and no time wastage as workers don’t try to delay work. The working atmosphere is highly competitive as each worker tries to produce more in lesson time. The cost of labour for each unit is determined beforehand and so the total costs of production can be determined. Therefore the setting of prices is easy. Disadvantages: For piece rate to be used fairly amongst all workers, the products being made should be of the same type quality and standard and should require the same skills. If each product is different, then piece rate is inappropriate. It may also be that workers may compromise on the quality of goods in order to rush through the job to produce a greater number of outputs for higher rewards. In case of failure of machinery, the output produced would drop considerably and workers who are willing to work and are present on the job will have no basic salary to fall to and may have to go without wages until production starts again. This aim fair for workers as it was an unavoidable situation. Workers may decide to achieve a certain level of pay for themselves as sufficient and so may not be motivated to work harder or faster. They would only work upto a certain level and get the wages. Workers may also become rigid by this system of pay as so may lose their willingness to accept charges if it affect their level of pay. Then it is also difficult to decide the best rate for each unit of output so that workers get good wages. There is also a continuous trade union pressure hat piece rate results in tower wages. PERFORMANCE – RATED PAY This scheme is used to reward workers who have performed well and reached targets on time or exceeded the targets in addition to their basic salary, they get an extra bonus or monetary reward. It is usually used to motivate employee

whose value of work cannot be judged quantitatively. Such employees are in the lower and higher level of management. Such a pay reflects the importance given to an individual employee and her performance. For PRP to be possible an individual is given a target or set objectives to be achieved annually. At the end of the year, an appraisal or services of performance occurs by comparing it to the objectives worker is now paid according to her placement in the perform category which is done by the degree of achievement or exceeding of targets. Then the extra bonus is given.

Advantages: PRP is a source of motivation to staff to be improve their performance and efficiency in order to seek the extra financial rewards. The annual appraisal provides a chance of feedback on the performance of workers and whether they are performing to their fullest potential. But just once an year isn’t enough to find out exactly where are employee stands and if its in need of job enrichment then is it possible. Since objectives are set for workers at an individual level, all of them feel a sense of direction and purpose to work towards. Disadvantages: Since the seniors are appraising the work and giving rewards, it may be that the employees feel an increased control over themselves, as seniors may not give the bonus unless employees conform to them. It is not guaranteed that additional financial rewards will motivate an employee. It may be that employees don’t want more pay and to wouldn’t be motivated to improve the performance. Then if some workers receive frequented and high bonuses, the other employees could accuse managers of favoritisms which negatively affects the relationship of subordinates & managers. Also due to the competition and rivalry to do better than others, the team spirit of the organisation could be damaged due to jealousy of colleagues receiving higher pay.

NON-FINANCIAL REWARDS Q.

Explain what is meant by non – financial rewards and explain the following: 1. job enlargement 2. quality circles 3. target setting

Ans.

Non-financial rewards are those rewards that that are given to workers to motivate them but do not involve any monetary rewards. They are needed for the job satisfaction of employees. They are required according to the motivation theories of Herzberg’s two factor, McGregor’s Theory Y, Hawthorn’s effect and Maslows need hierarchy for the workers social, self-esteem and self actualization needs. These have proven that money alone is not an effective motivator and that workers are not machines but have many other requirements. It is also not possible to use individual reward scheme in teams. The nonfinancial rewards include job enlargement, job rotation, job enrichment, team working, quality circles, target setting, delegation and appreciation by the organisation. JOB ENLARGEMENT It is the increase of the scope of the job so as to provide broader and deeper tasks. It is for unskilled or semi-skilled workers as in manufacturing firms. It can include both job rotation and job enrichment. Job rotation is when workers switch jobs e.g. on a production line after a set time. This allows them to handle more jobs and breaks the routine. Job enrichment is organizing work in such a way that employees are able to use their fullest abilities and do work with lesser supervision. They are given more responsibility. They are provided with tasks of similar nature to original ones but more challenging. They may also be allowed to take some decisions e.g. allowing the shopkeeper to arrange products on shelves along with cleaning and keeping a record of their quantity. Advantages: Job enlargement provides variety to the workers and so they don’t get bored or find their work monotonous. They feel themselves a greater part of the process and business as they are carrying out more than one task and may be encouraged to become more efficient. They may find that they are given responsibility and they could feel trusted which may make them more loyal to the business. As workers may be carrying out tasks related to the entire production process, they would derive greater satisfaction of having seen the entire process along with the end result. As the workers have performed more tasks, they would have increased their skills as well as gained greater experience and so increased their opportunities for the future. Since workers feel more satisfied with their job, there would be less labor turnover and absenteeism and so the effieciency of the business would increase. Disadvantages:

Even though productivity may increase, however, it may be countered by the time taken for workers to learn and adjust to the new jobs during which productivity would have been lost or slowed down. Their motivation isn’t guaranteed. It may be that the additional task is as boring as the one before which leaves no motivating factor. Not all workers feel ready to do new jobs as they aren’t sure of their abilities and whether they’d be able to perform the new tasks efficiently. QUALITY CIRCLES Quality circles are small groups of workers in the same area of production who meet regularly to study and solve production problems. They not only deal with the quality of product and its improvements but about the production process as a whole and any problems with it. They are not led by a proper manager and so are considered as informal meetings of workers. There may be several teams on a single line. Each team tries to find the solutions to problems and presents their researches and results to the management. The management may then implement the best result not only in the production line but across the whole organisation as per the nature of the solution. Advantages: Quality circles allow the successful participation of the entire staff in the decision – making. They provide responsibility to workers and offer many challenges to give the workers a deeper sense of trust and satisfaction. They make the workers feel part of the organisation and workers are more willing to work and follow targets that they have themselves helped to decide. Workers have had hands-on experience and are in the best position to understand the problems and so are best able to provide solutions to exactly meet the situation and can therefore greatly improve efficiency of the organisation. •

•

•

•

Since the most successful circles are also rewarded by the management, this would make workers feel appreciated and recognized.

Disadvantages: There may be time wastage if the groups call their meetings a bit too frequently and keep on requesting changes. A feeling of jealousy may be created between the successful and other groups that may affect the team spirit of the entire organization. The major limitation of Quality circles is the willingness of employees to make them. Sometimes employees are not willing to take on the responsibility or may just not willing to try to come up with ideas and be creative. •

•

•

TARGET – SETTING It is related to the techniques of management by objectives (A2 topic). This is the setting of targets for each division, department and individual by dividing the overall aim of the organization.

This process should be undertaken after discussion and agreements with workers at each level. This would enable the best possible delegation of responsibility and authority. This is according to Theory Y where workers like responsibility and wish to work. This enables greater motivation. Advantages: As targets have been discussed with managers and workers, which means that there is involvement of staff which is a great motivating force as it makes employees feel part of the decisions. Also as managers and workers know exactly what they have to do they feel a sense of direction and purpose? They are able to fully utilize their time in the best manner possible. As they could see what they are doing, they feel their importance and their value to the organization. Since all departments and individuals have objectives as their key focus, they know exactly what they are aiming for. This should avoid any conflicts and ensure a co-ordinate approach. The targets also act as a control. By comparing the work of the employees with their set targets, their performance is known i.e. what they have achieved by a particular date. •

•

•

•

Disadvantages: The division of the overall aim all the way down to individual targets is only possible after consultation with the entire workforce. This could prove very time–consuming and slows down production until targets are set. New objectives are required all the time as targets become out dated quickly. So if the economic environment changes then checking workers performance with the fixed targets is pretty useless as targets have to be updated in accordance with the economic changes. Setting targets doesn’t guarantee their fulfillment. Managers also have to keep in mind the resource allocation and staff training so that the set targets could actually be achieved. •

•

•

MANAGEMENT AND LEADERSHIP Definition 

  

Management is the attainment of organizational goals in an efficient and effective manner by planning, organizing, coordinating, leading and controlling the humans as well as artificial capital. It is the achievement of objectives with the help of effective utilization of resources. Management is the art of getting things done through people Management is the art of getting people to do their work efficiently and effectively to achieve the organizational objectives.

Managerial functions 1. 2. 3. 4. 5. 6.

Planning – deciding for future, setting & discussing objectives, formulating tactics. Organizing – capitalize and prioritize resources, making departments. Staffing – hire people according to requirements. Coordinating – getting proper communication to all departments & getting every one orientated. Leading / Commanding Controlling – (a) setting targets / standards (b) measuring performance according to to set standards (c) analyzing the results

Management process 1. 2. 3. 4. 5.

Setting objectives Organizing the work Motivating employees Job measurement Developing people – training, feedback, grooming, attend workshops.

Management roles 1. 2. 3.

Interpersonal roles Information roles Decision-making roles

1.

Interpersonal – managers are a link between workers and organization as well as customers and organisation like see to their problems and suggestion as well as feedback.

2.

Decision–making – decisions have to be taken day in day out and mostly for the employees that who is efficient? How to motivate them or punish them as well as when to hold the decision.

Managers act on the behalf of the owners, however they are the leaders and they should work in partnership with the subordinates also. They ensure the corporate values in an organisation and they are responsible for the achievement of objectives.

LEADERSHIP Definition Leadership is the art or process of influencing people so that they perform the assigned tasks willing by, effectively and efficiently. Its is the role adopted by managers when bending workers towards the goals of the organisation. It is the ability to command (in an organisation) Qualities of a good leader 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Positive self-image and natural self-confidence. Ambitions – they have a desire to succeed. Able to get to the core of the other problems – intelligent. Creative thinkers. Innovative Charismatic and dynamic – good personality. Inspiring for other. Generally expert in one field and well informed in others. Effective communication skills. Good analytical abilities. Can delegate effectively. Decision making power. Organizational ability. Risk bearing capacity – willing to risks and face the consequences. Motivating for others. Role models for their subordinates. Dependable. Dominant Energetic Persistent

Difference between managers and leaders

MANAGERS • • • • • • • • • • •

• • •

Functionaries Protect their operations Accept responsibility Control Employees Competent Specialist Minimize risk Accept speaking opportunities Set reasonable goals Pacify Strive for a comfortable working environment Use power cautiously Delegate cautiously View workers as employees

LEADERS • • • • • • • • • • •

• • •

Innovators Advance their operations Seek responsibility Trust employees Creative Flexible Take calculated risks Generate speaking opportunities Set challenging goals Challenge Strive for exciting working environment Use power forcefully Delegate enthusiastically enthusiastically View workers as potential followers

LEADERSHIP Important leadership positions in a firm Director Manager Supervisor – e.g. of Factory floors Workers’ Representatives / Leader of the Trade Union

   

Leadership Styles 1. 2. 3. 4.

Autocratic / Authoritarian leadership paternalistic leadership democratic leadership Persuasive laissez–faire leadership Constructive

3.  negative

Persuasive – when leader leads the employees by telling then the Positive and allowing them to select.

4.

 

Appropriate for creative business – architecture – art galleries – artists Scientists given broad guidance

Informal Leaders They are the leaders of informal organisation. They are the people who have the ability to lead without formal power perhaps  because of their experience, personality or special knowledge. They may have more influence over the activities of the group then formal leaders especially when the formal leaders are inefficient. Factors affecting the leadership styles type of the workforce – skilled or unskilled  personality of the leader  group personality  group size  the task itself or the nature of the job  the tradition of the organisation or its corporate culture  time factor  Autocratic / Authoritarian Leadership leader retains all authority and responsibility  takes all decisions  gives little information to staff  assign people to clearly defined tasks  primarily a downward flow or one – way communication  requires greater supervision of workers who have very limited knowledge  of the business expects compliance from workers  such leadership results in prompt, orderly and predictable performance.  Drawbacks

  

de-motivates staff who want to contribute and accept responsibility stifles individual initiative as no chance to participate decisions do not benefit from staff input who can offer valuable hands on experience

Possible Applications defense forces and police where quick decisions are needed and the  ‘scope’ for ‘discussion’ must be limited in times of crisis when decisive action might be needed to limit damage to  the business or danger to others Paternalistic Leadership they are father–like leaders  similar to autocratic leadership except importance to welfare of workers is  given managers do what they think is best for their workers  some consultation might take place but final decisions are taken by the  managers some fearible chances of two–way communication  Drawbacks  

some workers will be dissatisfied with the apparent attempts from leader to consult, while not having any real power or influence experienced–workers will want more delegated authority

Applications 

used by managers who have a genuine concern for workers interests but feel that managers know best in the end. When workers are young, unskilled and untrained, this might be an appropriate style.

Laissez–Fire Leadership means to let them do it  managers delegate virtually all authority and decision making powers  relaxed atmosphere where employees carry out activities freely to the  best of their abilities within broad limits permits self–starters to do things as they see fit without interference  Drawbacks  

workers may not appreciate the lack of structure and direction in their work as this could lead to a loss of security the lack of feedback – as managers may not be closely monitoring progress – may be de-motivating

Applications   

when managers are too busy (or lazy) to intervene where the work requires creativity like architecture appropriate in research institutions where experts are more likely to arrive at solutions when not constrained by narrow rules or management controls

Demcoratic Leadership encouraging participation in decision making 



could be

Persuasive leader has made a decision but takes time to persuade others that it is a good idea Consultative Leaders consult others about their views before making a decision. The decision takes into account the views leaders delegates a great deal of authority while retaining responsibility work is divided and assigned on basis of participatory decision–making workers given information about business to allow full staff involvement active two-way communication to allow staff feedback enhances personal commitment and gives higher morale • •

• •

    

Drawbacks  

consultation is too time–consuming and at times quick decisions needed certain issues such as job losses are too sensitive or new product development are too secret to be consulted

Applications 

 

it is most likely to be useful in business that expect workers to contribute fully to the production and decision–making process, there by satisfying their higher order needs an experienced and flexible workforce will be likely to benefit most from this style in situations that demand a new way of thinking or new solution then staff input can be very valuable

Democratic leadership style: ⇒ ⇒

pervasive – convincing to choose a particular option consultative – discussing all options MOTIVATIONAL THEORIES

Motivation is the process by which workers are induced or given the incentive to work harder to raise their productivity to achieve the objectives of the firm e.g. through monetary and non-monetary rewards:

Different Theories A.

Taylor’s Scientific Management work study ⇒ method study & work measurement McGregor’s Theory X and Theory Y ⇒ X – autocratic, centralization ⇒ Y – democratic, decentralization, delegation Maslows Need Hierarchy Self – actualization ⇒ Self - esteem ⇒ Social Needs ⇒ Social Needs ⇒ Security Needs ⇒ Physiological Needs ⇒ Herzb’s Two – Factory Theory motivators ⇒ ⇒ hygiene factors Elton Mayo’s Hawthone Effect working conditions is not essential for productivity ⇒ ⇒ involvement of workers in decision – making is necessary →

B.

C.

D.

E.


Unit 2: People in Organisations

HUMAN RESOURCE MANAGEMENT Definition It is the modern term used for the personnel function of the organisation which includes a wide range of responsibilities responsibilities such as recruitment, selection, training and appraising the employees in order to increase this efficiency so that they can work together to achieve the organisation goals. HRM is broader and more for reaching in scope as compared to the traditional personnel department. Q.

Explain the difference between the traditional personnel department and human resource management.

Ans.

The human human resource resource management management (HRM) has evolved evolved from the personnel department and its main purpose is to recruit, train and utilize the personnel of the business is such a way so to give maximum productivity. However, there are major differences between the two since the HRM is broader and more far – reaching while personnel department was responsible just for recruiting, training, discipline and welfare of staff. TRADITIONAL PERSONNEL DEPT.

• • •

• •

•

• • • • •

Advisory and administrative Not central to the organisation Mediating role between management and workforce The preservation of specialists Emphasis on written rules and procedures Collective bargaining & negotiations Management hierarchy Collective rewards & benefits Tightly defined jobs Employees must be monitored Controlled access to training

HUMAN RESOURCE MGMT.

• • • •

• • • • • • •

Strategic Seen as essential A central management role All managers and supervisors are human resource managers Stress on flexibility Consultation and participation Team–based structure Individual rewards and benefits Loosely defined jobs Employees are to be nurtured The learning organization

Due to the above – mentioned factors, the traditional personnel departments tended to be: •

•

•

rather bureaucratic in their approach with an inflexible approach to staff issues focused on recruitment, selection and discipline rather than development and training reluctant to give any HR roles to any other functional managers

However, the human resource management focuses on planning the workforce need of the business recuriting and selecting appropriate staff, using a variety of techniques appraising, training and developing developing staff at every stage of their careers developing appropriate pay systems for different categories of staff measuring and monitoring staff performance involving all managers in the development of their staff – emphasizing that this is not just the job the HR department • • • • • •



Functions of human resource management: management: 1. 2. 3. 4. 5. 6.

Human resource planning or workforce planning Recruitment and selection training and development performance appraisal developing appropriate appropriat e rewards and pay systems Involving all managers in the development development of their staff.

Other Functions 1. 2. 3. 4.

Advisory and guidance roles drawing up contracts of employment discipline and dismissal of employee Informing staff about redundancies redundancies

Human Resource Planning Systematic process of planning human resources requirement for the organisation. organisation. 

Estimates demands for numbers and skills of employees, depends depen ds on org objectives e.g. expansion, diversification diversification



Estimates existing supply



Accounts for e.g. staff learning, productivity, gains, new working practices, promotions



Assess external labour market e.g. availability of employees in the area



Take action e.g. train, recircuit, transfer, make redundancies, promote etc.

Training and development The key objectives are: 1. to help new employee reach the level of performance performanc e expected from an experienced worker 2. to provide a wide pool of skills for the organisation organisation 3. to develop a knowledgeable, knowledgeable, committed and informed workforce 4. to deliver high quality services 5. training bridges the gap between the actual performance, performance , knowledges and skills and the desired performance, knowledge and skills Types of training 1. 2. 3.

Induction training on–the– job training off–the– job training



Limitations of Training 1. 2.

time–consuming expensive – payment for travel – costs of preparing preparing presentation trained employees can leave the organisation and this fear makes managers hesitant

3. Prevention   

sharing of costs between business and workers make a contract – workers can’t leave the job after training for a certain time if contract is broken, then workers have to pay the penalty

performance Appraisal Objectives of performance appraisal are: 1. 2. 3. 4. 5. 6.

to improve the performance of the employee to provide feedback to the individuals individuals about their performance to recognize the future training needs to develop individuals’ individuals’ corporate careers to identify employees for advancements advancements and promotions to identify any problem areas in the staff

Factors influencing Organisations performance appraisal 1.

2. 3. 4.

5. 6. 7.

labor productivity =

output per certain time period

total no. of wor ker s (employee) it can also be calculated by the value of output which would show the contribution of each employee according to the money it is giving to the business. Then the wages of employees could be determined if they are according to the value. In service sector, productivity is measured only by the value of goods e.g. in hotel, the rooms which are vacant are useless or wastage of the productivity Late–coming – Not punctual Absenteeism rate Labor turnover = No. of employees leaving the organisation in a particular period of time × 100 No. of total employees in that particular time that were hired (Av. no. of people employed) This gives the to percentage of people leaving the organisation Waste levels – the greater the wastage i.e. damaged good so this means that employees are careless Customer complaints Achievement of targets



Methods or ways to improve performance Continuous appraisal on regular basis Continuous training Encouraging Quality circles Cell production and autonomous work groups Other financial and non-financial non-financial rewards   

Sales meeting, marketing staff meeting – regular basis Business environment environment is dynamic – skills of staff should be updated Quality circles – part of TQM – Total Quality Management quality management is responsibility responsibility of all departments

Labor Management Relations Trade Unions Trade unions can be defined as an organization of employees with the objective of protecting their interests at work. Functions of Trade Unions Negotiating with the employers on behalf of all the members about the appropriate pay and working conditions at job as well as their job security. This process is known as collective bargaining. Acting as a channel of communication between employers and employees so that grievances can be heard and views expressed. Providing assistance to individual members about their work–related work–related problems. Helping employees participate in the process of decision making. Protecting discrimination, unfairness  Providing a source of support and legal representation in case of a dispute between the employers and the employees Benefits to employers 1. Saves time as management have only to deal with trade union instead of all workers. 2. Managers also also work more more efficiently due to the pressure of of trade unions. unions. 3. Workers work harder / more more motivated. Types of Trade Union 1. Crafts Union – workers only to a particular skill 2. Industrial Industria l Union – unskilled labor / manual work 3. General Unions – very big / manual but from several industries 4. White – collar Unions – for service Industries / clerical / administration administration insurance Professional / Occupational Unions – for highly professionally qualified unions – medical / engineer / educational – related to one particular field.

TRADE UNIONS Privatization is the transfer of public sector resources to the private sector. It is the process of selling the state owned and control TRADE UNIONS

Trade unions can be defined as all organizations of employers with the objective of protecting their interests at work and negotiating their problems as the top management. FUNCTIONS OF TRADE

1.

2. 3. 4. 5.

Negotiating with the employees on behalf of the members about the appropriate pay and working conditions at job as well as the job security issues. This process is known as collective bargaining. Acting as a channel of communication between employees and employers so that grievances can be heard and views can be expressed. Providing assistance to individual members about their work related problems. Helping employees participate with the decision making process. Sources of support and legal representation in case of a dispute with the employers.

TYPES OF TRADE UNIONS

1. 2. 3. 4. 5.

Craft unions Industrial unions General union White–collar union Occupational or professional unions / association

APPROACHES OF LABOUR – MANAGEMENT RELATIONS

1. Autocratic management style (take it or leave it attitude with workers) 2. Collective Bargaining with powerful unions and major employers and their associations. 3. Co-ordination between labour and management in the recognition – that successful competitive businesses will ultimately be beneficial to the owners, managers and workers. * Autocratic generally do not allow trade unions – only possible in compact and closed organizations. Lock out by employers i.e. not allowing workers to work. THREE LEVELS OF COLLECTIVE BARGAINING

1. 2. 3.

Individual or team level (small level bargaining) At a business level (of firms or different branches) At a national level (bargaining with govt. officials)

ARBITRATION:

(when collective bargaining fails)

It is to resolve industrial disputes. It is process where a third party tries to resolve the industrial disputes by offering a compromise. It can be approached by either the employer or the trade union. E.g. ACAS – Advisory, Conciliation and Arbitration Services. A Case Study of Trade Union’s Development (PS) UK Experience JOB EVALUATION:

This is a formal process of comparing jobs so that a rank order is obtained based upon the demands of each job.

Delegation Delegation means the assigning of tasks to others. As a business grows and expands, the scope of operational activities becomes more elaborate and complex. Therefore, for efficient and effective expansion, day-to-day operational tasks need to be delegated to subordinates so that the senior management can then focus on major strategic and policy related decisions. However, the senior management should monitor the performance of subordinates to ensure that work is carried out in accordance with company goals and policies. This would require two-way communication and reporting systems. Delegation also acts as a non-monetary motivating factor for willing (Theory Y) employees because they are encouraged by more responsibility and importance. Thus, delegation enables effective growth and expansion because workload can be shared. Difficulties in delegation can occur either if managers are reluctant to delegate work to others or if subordinates are reluctant to accept delegation. Managers may be reluctant to delegate due to job insecurity i.e. fear of being replaced by subordinates, or they might not have confidence in their subordinates’ capability. In the long run, this would severely limit what managers can accomplish. On the other hand, subordinates might be reluctant to accept delegation either because they might be reluctant to work hard (Theory X), or they might fear criticism or even dismissal due to mistakes. Lack of training might also cause reluctance among subordinates to accept delegation. These problems can be resolved by the HRM department by devising suitable motivation schemes and incentive plans for employees.

Human Resource Planning (H.R.P) Human Resource Planning (H.R.P) is the process of forecasting the workforce requirements of the business for future years.

It looks at how many employees the business will require in the future, as well as the type of employee that will be required (e.g. graduate trainees, skilled-manual and supervisors). H.R.P. also ensures that the ‘right’ employee is in the ‘right’ job, to ensure maximum efficiency and effectiveness of the workforce. Clearly the process of H.R.P. requires that the business make estimates of the number of workers that it believes it will require at all levels in the business in the future. This can be done in a number of ways: 1. Using past data (e.g. if the workforce has grown at 4% per year over the past 3 years, this trend may well continue). 2. Analysing the expected levels of customer demand and sales (e.g. more employees will be required if the number of customer orders is estimated to rise significantly). 3. Estimating the level of labour turnover. For example, if the number of employees that are expected to leave the business next year is 50 (due to retirement or transfers), then the business will have to recruit many new employees to replace those that are leaving. 4. The views of the management (the management are often in the best position to estimate the number of new employees that will be required in their department or division). 5. Expected changes in working practices. For example, if a manufacturing business is wishing to change its production technique from labour-intensive to capital-intensive, then it is not likely to require many new employees in the future.

It is possible that a business may decide to meet any requirements for employees at the supervisory and management levels from within the existing workforce. This can be done by promoting those employees who have already demonstrated their potential and effectiveness in their current posts. These employees have the advantage of already knowing about the systems and the routines of the business, but they would still require the relevant training and development in order to prepare them for their new, more senior positions. Alternatively, the business may decide to fill these (and more junior) positions from outside the business. There are a number of factors, however, that will affect the availability of external labour for a business:

1. The rate of unemployment in the area. 2. The extent of the infrastructure in the area (e.g. price and availability of housing or availability of public transport). 3. Government incentives and subsidies (paying the training costs for the business). 4. The availability of workers with the necessary skills and qualifications. 5. The number of competitors in the area. However, there are a number of problems associated with Human Resource Planning, including: 1. Will the ‘new’ employees mix effectively with the existing workforce? 2. Changes in the external environment (e.g. a recession) could lead to the business having to make redundant several of the recently-appointed employees.

It will always be difficult for a business to accurately forecast the number of new employees that it will require, because both the business-world and the internal requirements of the organization are very dynamic.

Management by Objectives

What is MBO? Management by objectives (MBO) is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources. It aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization. Ideally, employees get strong input to identify their objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback in the process to reach objectives. MBO was first outlined by Peter Drucker in 1954 in his book 'The Practice of Management'. In the 90s, Peter Drucker himself decreased the significance of this organization management method, when he said: "It's just another tool. It is not the great cure for management inefficiency... Management by Objectives works if you know the objectives, objectives, 90% of the time you don't." Core Concepts According to Drucker managers should "avoid the activity trap", getting so involved in their day to day activities that they forget their main purpose or objective. Instead of just a few topmanagers, managers , all managers should: participate in the strategic planning process, in order to improve the implementability of the plan, and implement a range of performance systems, designed to help the organization stay on the right track. •

•

It is all too easy for managers to fail to outline and agree with their subordinates what it is that everyone is trying to achieve. MBO is a process that requires precise written description of goals and timelines for their monitoring and completion. It is a sensible substitute for just good intentions. The process requires that the manager and the subordinate agree to what the employee must attempt to achieve in the period ahead and it is important for employees to believe in the objectives and understand what they are. Thereafter, managers and employees should regularly communicate to ensure that the objectives are being met as agreed and will be completed on time. Reliable management information systems (MIS) are needed to establish relevant objectives and monitor their penetration across the organization. Organizations have scarce resources and so MBO ultimately helps to achieve the best resource allocation effort. MBO is often achieved using set targets or goals. MBO introduced the SMART criteria i.e. objectives for MBO must be Specific, Measurable, Agreed, Realistic and Time-specific.

Topic: Motivation - Theories There are a number of different views as to what motivates workers. The most commonly held views or theories are discussed below and have been developed over the last 100 years or so. Unfortunately these theories do not all reach the same conclusions. Therefore, the HRM department needs to rely on a combination of these theories in order to devise varied motivation schemes from time to time and for employees at different positions and nature of job.

Taylor Frederick Winslow Taylor (1856 – 1917) put forward the idea that workers are motivated mainly by pay. His Theory of Scientific Management argued the following: Workers do not naturally enjoy work and so need close supervision and control Therefore managers should break down production into a series of small tasks Workers should then be given appropriate training and tools so they can work as efficiently as possible on one set task. Workers are then paid according to the number of items they produce in a set period of time- piece-rate pay. As a result workers are encouraged to work hard and maximize their productivity. Taylor’s methods were widely adopted as businesses saw the benefits of increased productivity levels and lower unit costs. The most notably advocate was Henry Ford who used them to design the first ever production line, making Ford cars. This was the start of the era of mass production. Taylor’s approach has close links with the concept of an autocratic management style (managers take all the decisions and simply give orders to those below them) and Macgregor’s Theory X approach to workers (workers are viewed as lazy and wish to avoid responsibility). However workers soon came to dislike Taylor’s approach as they were only given boring, repetitive tasks to carry out and were being treated little better than human machines. Firms could also afford to lay off workers as productivity levels increased. This led to an increase in strikes and other forms of industrial action by dis-satisfied workers.

McGregor According to McGregor, workers can be classified into two categories, Theory X and Theory Y. Theory X type workers basically dislike work and are therefore reluctant to work hard. Money is the only motivator for them but even then they have to be supervised and pushed to work hard. The threat of being dismissed for poor performance may be necessary as a way of getting such employees to work productively. Theory Y type w orkers are self-motivated and derive pleasure from working. While monetary benefits are important, it isn’t the only motivator for them because they are motivated by more work responsibility as it makes them feel important.

Mayo (Hawthorne Effect) Elton Mayo (1880 – 1949) believed that workers are not just concerned with money but could be better motivated by having their social needs met whilst at work (something that Taylor ignored). He introduced the Human Relation School of thought, which focused on managers taking more of an interest in the workers, treating them as people who have worthwhile opinions and realising that workers enjoy interacting together. Mayo conducted a series of experiments at the Hawthorne factory of the Western Electric Company in Chicago He isolated two groups of women workers and studied the effect on their productivity levels of changing factors such as lighting and working conditions. He expected to see productivity levels decline as lighting or other conditions became progressively worse What he actually discovered surprised him: whatever the change in lighting or working conditions, the productivity levels of the workers improved or remained the same. From this Mayo concluded that workers are best motivated by: Better communication between managers and workers ( Hawthorne workers were consulted over the experiments and also had the opportunity to give feedback) Greater manager involvement in employees working lives ( Hawthorne workers responded to the increased level of attention they were receiving) Working in groups or teams. ( Hawthorne workers did not previously regularly work in teams) In practice therefore businesses should re-organise production to encourage greater use of team working and introduce personnel departments to encourage greater manager involvement in looking after employees’ interests. His theory most closely fits in with a paternalistic style of management. Maslow Abraham Maslow (1908 – 1970) along with Frederick Herzberg introduced the Neo-Human Relations School in the 1950’s, which focused on the psychological needs of employees. Maslow put forward a theory that there are five levels of human needs which employees need to have fulfilled at work. All of the needs are structured into a hierarchy and only once a lower level of need has been fully met, would a worker be motivated by the opportunity of having the next need up in the hierarchy satisfied. For example a person who is dying of hunger will be motivated to achieve a basic wage in order to buy food before worrying about having a secure job contract or the respect of others. A business should therefore offer different incentives to workers in order to help them fulfill each need in turn and progress up the hierarchy. Managers should also recognize that workers are not all motivated in the same way and do not all move up the hierarchy at the same pace. They may therefore have to offer a different set of incentives from worker to worker. Herzberg Frederick Herzberg (1923-) had close links with Maslow and believed in a two-factor theory of motivation. He argued that there were certain factors that a business could introduce that would directly motivate employees to work harder (Motivators (Motivators). ). However there were also factors that would de-motivate an employee if not present but factors) would not in themselves actually motivate employees employees to work harder ( Hygiene factors) Motivators are more concerned with the actual job itself. For instance how interesting the work is and how much opportunity it gives for extra responsibility, recognition and promotion. Hygiene factors are factors which ‘surround the job’ rather than the job itself. For example a worker will only turn up to work if a business has provided a reasonable level of pay and safe working conditions but these factors will not make him work harder at his job once he is there. Importantly Herzberg viewed pay as a hygiene factor which is in direct contrast to Taylor who viewed pay, and piece-rate in particular Herzberg believed that businesses should motivate employees by adopting a democratic approach to management and by improving the nature and content of the actual job through certain methods. Some of the methods managers could use to achieve this are: Job enlargement – workers being given a greater variety of tasks to perform (not necessarily more challenging) which should make the work more interesting. Job enrichment - involves workers being given a wider range of more complex, interesting and challenging tasks surrounding a complete unit of work. This should give a greater sense of achievement. Empowerment means delegating more power to employees to make their own decisions over areas of their working life.

Personnel Effectiveness Many businesses spend a significant proportion of their total costs on their workforce (e.g. interviewing costs, training, pay, and fringe benefits). Businesses will, therefore, wish to discover if the money that they have invested in their workforce has been spent effectively and if it has improved the effectiveness of the employees. There are four main measures that a business can use in order to measure the effectiveness of its employees: 1. Labour Turnover. Turnover . This measures the number of employees who leave a business per year, expressed as a percentage of the total number of people employed. It is calculated using the following formula: Labour turnover =

Number of employees that leave per year

x 100

Total number of staff employed

A high labour turnover rate could be a sign that the workforce have low levels of job satisfaction and motivation. This could be due to poor wages, poor management techniques, or better remuneration packages being offered by competitors. This high rate will inevitably lead to the business having to spend a large amount of money on recruitment and training of new employees. 2. Absenteeism. Absenteeism . This measures the proportion of the workforce who are absent from work in a particular period of time. It is calculated using the following formula:

Absenteeism =

Number of employees absent per period

x 100

Total number of staff employed

Ideally, the business would wish the figure to be as low as possible, since a high figure could indicate that the employees have low rates of morale, job satisfaction and motivation. A high rate will inevitably lead to the business having to spend a large amount of money on training and paying temporary workers who are performing the jobs of the absent employees.

3. Labour Productivity. Productivity . This reflects the efficiency of the workforce, and it is measured by the amount of output per worker. It is calculated using the following formula: Labour Productivity =

Total output Total number of workers

It can be argued that labour productivity is the most important measure of employee effectiveness, since it directly affects the average cost of production and, therefore, the competitiveness of the business. An increase in labour productivity will benefit the business since it means that more output can be produced for a given amount of inputs, hence the production cost per unit will fall. 4. Waste levels. levels . ‘Waste’ products refers to lost and damaged raw materials, poor quality output which has to be reworked, and output which has to be discarded due to its poor workmanship. It is calculated using the following formula: Quantity of material wasted Total number of staff employed

If a business has a high percentage of ‘waste’ products, then this could be due to a poorly trained workforce with low levels of both motivation and job satisfaction. In this case, the business should ensure that the employees are all adequately trained for their specific tasks, and investigate any other reasons for the poor quality of the output. It is vital that the reasons for this are discovered quickly, since the effect on customer loyalty and reputation could be

3. Labour Productivity. Productivity . This reflects the efficiency of the workforce, and it is measured by the amount of output per worker. It is calculated using the following formula: Total output

Labour Productivity =

Total number of workers

It can be argued that labour productivity is the most important measure of employee effectiveness, since it directly affects the average cost of production and, therefore, the competitiveness of the business. An increase in labour productivity will benefit the business since it means that more output can be produced for a given amount of inputs, hence the production cost per unit will fall. 4. Waste levels. levels . ‘Waste’ products refers to lost and damaged raw materials, poor quality output which has to be reworked, and output which has to be discarded due to its poor workmanship. It is calculated using the following formula: Quantity of material wasted Total number of staff employed

If a business has a high percentage of ‘waste’ products, then this could be due to a poorly trained workforce with low levels of both motivation and job satisfaction. In this case, the business should ensure that the employees are all adequately trained for their specific tasks, and investigate any other reasons for the poor quality of the output. It is vital that the reasons for this are discovered quickly, since the effect on customer loyalty and reputation could be disastrous if the business supplies poor quality output to its customers.

OPERATIONS MANAGEMENT (PRODCUTION MANAGEMENT) Production takes place when a business takes input, carries out a production process and produces output. In other words it is the conversion of resources such as raw materials or components into goods and services. Production can be done at primary, secondary or tertiary levels.

Raw Materials Components

Inputs Land Labour Capital Enterprise

Production Process

Outputs Goods Services

Conversion Conve rsion

Operations management is a wide range term which indicates the management of production process. It deals with issues like what to produce, what production methods to be used, how to control quality, how to maintain inventory or stock, location and size of the firm and how to make production more efficient. ADDED VALUE OR VALUE ADDED It is the difference between the cost of bought in components and the price charged for the

OPERATIONS MANAGEMENT (PRODCUTION MANAGEMENT) Production takes place when a business takes input, carries out a production process and produces output. In other words it is the conversion of resources such as raw materials or components into goods and services. Production can be done at primary, secondary or tertiary levels.

Raw Materials Components

Inputs Land Labour Capital Enterprise

Production Process

Outputs Goods Services

Conversion Conve rsion

Operations management is a wide range term which indicates the management of production process. It deals with issues like what to produce, what production methods to be used, how to control quality, how to maintain inventory or stock, location and size of the firm and how to make production more efficient. ADDED VALUE OR VALUE ADDED It is the difference between the cost of bought in components and the price charged for the finished product. Value added is not the same as profit. To calculate profit, we need to subtract wages (labour costs) financial costs and overheads. Value added can be calculated by the following formula: Value = Sales – External added revenue Expenditure External expenditure does not include the cost of land, labour and capital of the organization. IMPORTANCE OF OPERATIONS MANAGEMENT One major reason for the growing importance of operation management is the need for firms the compete more effectively in the market. To become the leader of the market, most areas of concern revolve around the ask and quality of production. With the help of operations management, firms produce better quality products at reasonable costs and can get a chance of gaining more market share. LOCATION OF THE FIRM Location is the general area selected for a particular business. Its choice is likely to involve a detailed process of analyzing alternatives through investment appraisal and other cost benefit analysis. Industrial location is the geographic positioning of our operation in relation to its customers resources, employers, employees and other markets organizations faces problems in finding out the best location for their business and choice can be critical for success. Location decisions also depend upon the type and size of the business. The best location is one which has comparatively low cost of production and therefore should provide the opportunity to maximize return on investments in terms of sales and profits. FACTORS INFLUENCING THE LOCATION (OF BUSINESS) DECISION Types: Quantitative – tax, cost, etc Qualitative – availability of labour, legal cultural 1. Population and demand in the market 2. Number and location of competitors 3. Availability and cost of labour 4. Availability and cost of raw materials 5. Degree of government intervention

6. 7. 8. 9.

Rent and cost of land Physical features, weather and quality of land Personal preference and interest of the owners Industrial inertia – locating in a congested area where there are already several similar industries 10. External economies of scale 11. Availability of infrastructure, transportation and communication facilities 12. Availability of natural resources and utilities 13. Financial incentives  by govt. as regional policy grants  profits more, cash surplus, loans are easy ISSUES REGARDING INTERNATIONAL LOCATION A multinational organization has to make key decisions about location as they are dealing with a wide range of local and international markets. Following issues are considered while making this decision: 1. Trade barriers 2. Exchange rates 3. Political stability 4. Legal boundaries 5. Language and cultural barriers 6. Ethical considerations 7. Market opportunities 8. Availability of labour 9. Financial incentives 10. To build a strong corporate image worldwide Multinationals are growing very rapidly and represent a significant source of industrial development in countries throughout the world. Benefits of multinationals to host countries are as follows: 1. increased employment 2. GDP increases 3. economic growth 4. standard of living 5. increased competition 6. improves quality and efficiency 7. controls prices 8. increases variety and choices 9. technology transfer 10. better trained labour 11. revenue to the government 12. foreign investments increase 13. relations between host and guest countries improve politically and economically 14. balance of payment surplus

OPERATIONS MANAGEMENT PRODUCTIVITY PRODUCTION Production is the measured quantity of output that a firm produces in a given period of time. EFFICIENCY Efficiency is how well resources such as raw material, labour and capital can be used to produce a product or a service. Efficiency can be measured through the following ways

Output per period

1.

labour productivity (output per worker) =

2.

capital productivity (output per unit of capital) =

3.

labour employed in that period

Output per period quantity / value of capital employed in that period

multi factor productivity =

Output per period cos ts of (raw material + labour + capital ) employed in that periods

current output

100

4.

capacity utilization =

5.

added value = sales = external expenditure

Max. capacity

×

PRODUCTIVITY It is the means of the ratio of output to any of the firm’s inputs. Productivity is an efficiency measure. If a firm becomes more productive, it becomes more efficient. Following are the ways in which productivity levels can be increased. 1. 2. 3. 4. 5. 6.

improve the training of staff to raise skill levels. purchase more technologically advanced equipment to increase the capital productivity improve employee motivation change the layout of work improve working conditions more efficient management

Raising productivity is not always a guarantee for success. It does not crate demand among the customers so it is the quality of management which determines the success of any policy. Discuss and evaluate work study as a method of improving labour efficiency-

OPERATIONS MANAGEMENT METHODS OF PRODUCTION TYPES 1. 2. 3. 4. 5.

Job Production Batch Production Flow Production Mass Customization Cell Production

innovations of mass / flow production

JOB PRODUCTION It involves the production of a single product at a line. It is generally used when orders for products are small and different from each other. Production is organized in such a way that one job is completed completed at a time and then you start the next job or the next next product. Examples Examples includes tailors, a doctors’ client, design bridal wear, contractor constructing a building, bridge or flyover. ADVANTAGES

6. 7. 8. 9.

Unique items can be produced Motivated workforce Better satisfaction of customers Organisation of job is simple as co-ordination communication, supervisor and inspector can be regularly and easily carried out.

DISADVANTAGES

1. 2.

It is time-consuming time-consuming Highly skilled labour is required which is difficult to get and is expensive Benefits such as bulk buying cannot be achieved. Economics of scale is not possible It is generally labour – intensive which again increase the production cost

3. 4. 5.

BATCH PRODUCTION It involves the production of products in separate batches or quantities where the products in a batch go through the whole production process together. This method may be used when demand for the firms products expand. Products can be produced in very large or very small batches depending on the level of demand. Production process is divided into a number of operations. E.g. furniture manufacturer making 100 chairs followed by 100 tables, houses bring built in sets of 20s or 30s, baker making birthday cake, doughnuts, breads in groups or sets. ADVANTAGES

15. 16.

17.

18. 19.

20.

flexibility (each batch can be different) employ as can concentration one operation rather than the whole task. less variety of machinery as products are standarlised in one batch. labour of lower skills can also be employed / managed. it results in partly finished products so you can respond to demands quickly. more economic of scale as compared to job production.

DISADVANTAGES

10.

11. 12.

13. 14.

careful planning and coordination is needed which is difficult to manage. work force may be less motivated as compared to job production. more complex machinery is required as labour is not that skilled. if batches are small than unit costs are high. money will be tied up in work in progress so cash flow problems can occur.

FLOW PRODUCTION / MASS PRODUCTION Main features of flow production a. b. c. d. e.

large quantities are produced simplified or standardized products a semi-skilled workforce specializing in one operation only is generally employed large amounts of machinery and equipment is required large stocks of raw materials and components may be kept Examples: Washing powders Printing newspapers Tea and coffee DISADVANTAGES

ADVANTAGES

21. 22.

23. 24. 25. 26.

unit costs are reduced as firms gain from economics of scale highly automated production process minimizing need for labour and so reducing costs. the need to stockpile finished goods is reduced constant output rate makes input planning easy use of JIT and stock control. quality is consistent and high and easy to check at various stages of the process

1.

2. 3. 4. 5.

high initial set up cost of capital intensive, high technology production lines. work is boring, demotivating and repetitive. wide product range isn’t available. inability to meet all customers needs independence in entire system means breakdowns in one area cause entire system to breakdown

MASS CUSTOMIZATION Several important recent developments in the production process have occurred which try to combine the advantages of job production (namely worker satisfaction and product variety) with the benefits on flow production like lesser units costs. One such innovation to mass production is mass customization which uses advances in technology like • Computer aided design (CAD) Computer aided manufacture (CAM) • The new technology combined with multi skilled labour has allowed the production of a range of varied products. The main features or key paints of mass customization are as follows: allows focused or differentiated marketing to be used in the strategy • allows for higher added value • changes only a few components to meet specific needs of the customers while • others are kept same maintains low unit cost but providing grater product choice due to advanced • flexible robotic machinery which can make a range of products examples include the Pepsi Twist and Diet Pepsi variations of the basic drink • “Pepsi” another example is of shampoos e.g. Sunsilk providing pro-vita variations as well • as anti dandruff, silky hair, and dry hair specials drawback: Redesigning could be very expensive in practice •

CELL PRODUCTION Cell production fully known as cellular production is a form of flow production but it involves dividing the workplace into “cells”. The cells are a number of self-contained mini production units. Each cell occupies an area on the factory floor and focuses on the production of a “product family”. A product family is a group of products which requires a sequence of similar operations e.g. metal body part of machine may have to be cut, punch, weld and dispatch. An individual cell consists of a team of multi-skilled staff with a team leader. The cell may be responsible for tasks such as designing, schedule planning, maintenance and problem solving as well as the manufacturing tasks. The performance of each individual cell is checked against preset targets which would include things as output levels, quality, lead times and cash targets. Cells are responsible for the quality of their own complete units of work. The advantages of cellular production are: 1. flour space is released because cells use less space than a linear production line 2. product flexibility is improved 3. lead liens are cut 4. movement of resources and handling time is reduced 5. there is less work – in – progress 6. teamworking is encouraged 7. worker commitment and motivation improve 8. leads to higher increase in productivity 9. there may be a safer working environment and more efficient maintenance.

CAPACITY UTILISATION MAXIMUM CAPACITY Maximum capacity is the highest output level possible from a business over a particular period of time. CURRENT OUTPUT The actual output that firm is producing at present is known as its current output. CAPACITY UTILISATION It is the actual output as the proportion of the maximum capacity of the business. It measures the firms’ operational efficiency and shows the current output as a percentage of the maximum output the firm can produce. increased capacity utilization will spread the fixed costs over more units of output which as a result lowers down the average cost per unit. Disadvantages related to continuous maximum capacity 1. workers can get demotivated and tried at full capacity all the time. No relaxation time 2. machinery can get stressed out and get damaged quickly. It would require higher maintenance for which again workers are required 3. if always working on full capacity then orders may have to be turned down saying that maximum capacity is being used. So priorities may have to be taken into account 4. especially in service sector, if hotels and hospitals are always full then potential customers may be turned away and loss of existing customers So firms working at maximum capacity should think about expanding its • operations or closing down certain areas of operations

Q.1.

A production house has installed a machine which has the maximum capacity of producing 2000 units per year. Today reached the level of 80%, 75% and 90% capacity utilization in years 1,2, 3 respectively. Calculate yearly production for these years: Capacity Utilisation =

Q.2.

Current Output Max.PossibleOutput

Year 1:

=

80 × = 1600 units 100

Year 2:

=

75 × 2000 = 1500 units 100

Year 3:

=

90 × 2000 = 1800 units 100

×100

A food processing plant is capable of working 20 hours per day. Calculate the capacity utilization for the following situation: 1. 2.

when the plant is working for 14 hours a day when the production lunch operating in two eight hour shifts per day

1.

Capacity utilization =

2.

14 ×100 = 70% 20 8+8 Capacity utilization = ×100 = 80% 20

COST, REVENUE AND PROFIT ANALYSIS Cost Analysis: Cost analysis is important to: 1. analyze profitability 2. make respective decision for various departments e.g. pricing decisions for marketing departments 3. make comparisons with past records 4. assess efficiency 5. set budgets in future 6. set target returns for future Classification of costs Costs can be classified in the following ways 1. By type (whether they are direct or indirect costs) 2. By behaviour (according to the effect of change in output) e.g. foxed, variable, semi-variable or step-fixed costs. 3. By function (according to the bus function they are associate with) e.g. production, administration selling & personnel cost. 4. By the nature of resource for material to how DIRECT COSTS Direct costs are costs which can be identified with a particular product or process e.g. raw materials, packaging and direct labour. INDIRECT COSTS

Indirect costs or overheads are usually associated with performing a range of tasks or producing a range of products. It is not possible to associate then directly with a particular product or production process e.g. rent, insurance, salaries of managers, etc. – factory overheads. FIXED COSTS They are the costs which stay the same at all levels of output in the short run e.g. insurance, heating bills, as well as capital costs such as factories and machinery. They remain same whether the business process nothing or works at full capacity. Costs D

It is worth nothing that fixed here means that the costs don’t increase as a result of change in output in the short run.

F.C.

O

Output

VARIABLE COSTS Costs of production which increase directly as output rises are called variable costs e.g. raw materials, fuel, packaging and wages. If the firm does not produce anything than variable costs will be zero.

Notice that the graph is linear i.e. it is an upward sloping straight line.

TOTAL COST: If fixed and variable costs are added together they show total cost of a business. The cost of producing at any given level of output is total cost. Cost T.C.

F.C. Output

F.C. =$10,000 V = $10 / unit q = 100 T.C. = ? T.C. = F.Cr V.C. = 10,000 +1000 = $11,000

STEP–FIXED COST Step–fixed cost illustrates what happens to fixed costs over a longer period of lime. E.g. if a firm is at full capacity but needs to raise production it might decide to invest in more equipment. The new machine + raise overall fixed costs as well as capacity. The rise in fixed costs is shown by a step with graph. Costs F.C.

Output SEMI–VARIABLE COSTS Some production costs are not entirely fixed or variable. E.g. labour. If a firm employs a member of staff on permanent basis, no matter what level of output, then this is fixed cost. But if the same member is asked to work overtime, then this extra cost is variable. AVRAGE COST: A.C.

T .C . Units of Output

A.V.C. =

A.F.C. =

T .F .C . Output

T .V .C . Output

MARGINAL COST M.C. =

Δ in T .C . Δ in Output

Marginal cost is the cost of increasing output or the extra cost incurred by producing one more unit. REVENUE: R = price / unit × No. of units sold The amount of money which a firm receives from selling its product is referred to as revenue. It is found by multiplying the number of units sold by the price of each unit. PROIFT P = Revenue – Total Cost Profit is the surplus which is left after the costs are deducted from the sales revenue. All firms operate to make profits to provide returns for their owners. LOSS L = Total Cost – Revenue It is the excess amount of total costs which is found after deducting the revenue from the costs.

BREAK – EVEN POINT

T.R.

Deviation:T.R. = T.C. p × q = F.C. + V.C. pq = F.C. + vq q (p – v) = F.C. q=

F .C .

p = price / unit q = quantity in units v = variable cost / unit F.C. = fixed cost where (p – v) is the contribution per unit.

p − v

formula to calculate B.E. level of output in units. B.E. levels of sales = q BE × price Margin of safety = Current Output – B.E. Output M.O.S. in % =

m arg in of safety Break even

×100

It target profit is given, how to find required quantity: q=

F .C .T arg et Pr ofit Contributi on

BREAK – EVEN ANALYSIS Exercises (Business Studies: Bruce R. Jewell, page 398) Q.1.a. Contribution is the difference between setting price and variable costs because this difference contributes to the total fixed costs of the business and its profits Contribution = Selling price – Variable Cost = £ 10 - £ 4 =£6 b.

Break even point

=

=

Fixed Costs Contributi on

90,000 6

= 15,000 units c.

Current output

=

=

Fixed Costs + T arg et Pr ofit Contributi on

90,000 + 270,000

6 360,000 = 6 = 60,000 units d.i.

Sales revenue

ii.

Sales after implementation of proposal = 25% (current output) + Current Output = 25% (60,000) + 60,000 = 75000 units Sales Revenue = 75,000 × 9 = £ 675,000 change in revenue = New revenue – Original revenue = £ 675,000 - £ 600,000 = £ 75,000

e.i.

ii.

= price × quantity = 10 × 60,000 = £ 600,000

Change in costs: Original Costs = 60,000 (4) + 90,000 = £ 330,000 New Costs = 75,000 (4) + 90,000 = £ 390,000 Change

= New Costs – Original costs = 390,000 – 330,000 = £ 60,000

f.

Yes, it should because the resulting change in revenue is higher i.e. increases more than the increase in costs. This would cause the profits to increase by £ 15,000.

(Business Studies: Bruce R. Jewell, page 399) Q.2.a. At price A = £ 2.20 BEP

= =


1200,000 2.2 −1.25

= 1,263,158 units At price B = £ 2.00 BEP

=

1200,000 2.2 −1.25

= 1,600,000 units At price C = £ 1.80 BEP

=

1200,000 1.7 −1.25

= 2,666,667 units b.

Margin of safety = Current Output – Break even output For Price A: Most at full capacity = 2700,000 – 1,263,158 = 1,436,842 units Most at current output For Price B: Most at full capacity Most at current output For Price C: Most at full capacity Most at current output

For Price D: Most at full capacity Most at current output

= 2600,000 – 1,263,158 = 1,336,842 units = 2700,000 – 1,600,000 = 1100,000 units = 2600,000 – 1, 600,000 = 1000,000 units = 2700,000 – 2,181,818 = 518,182 units = 2600,000 – 2,181,818 = 418,182 units

= 2700,000 – 2,666,667 = 33,333 units = 2600,000 – 2,666,667 = 66,667units

i.e. output is below BEP so there is no margin of safety

c.

For Price A: Profit at full capacity

= MOS × Contribution = 1436842 × 0.95 = £ 1,364,999.90

Profit at current output = 1336842 × 0.95 = £ 1,269,999.90 For Price B: Profit at full capacity

= 1100,000 × 0.75 = £ 825,000.0

Profit at current output = 1000,000 × 0.75 = £ 750,000.0 For Price C: Profit at full capacity

= 518,182 × 0.55 = £ 285,000.1

Profit at current output = 418,182 × 0.55 = £ 230,000.1 For Price D: Profit at full capacity

d.

= 33,333 × 0.45 = £149,99.85

Loss at current output

= 66,667 0.45 = £ 30,000.15

BE output (%age)

=

BEP Current Outpue

For Price A %BEP at full capacity

=

1263158 ×100 2700,000

= 46.8% % BEP current output

=

1263158 ×100 2600,000

= 48.6% For Price B %BEP at full capacity

=

1600,000 ×100 2700,000


=

1600,000 ×100 2600,000

= 61.5% For Price C

×100

%BEP at full capacity

=

2,181,818 ×100 2700,000


=

2,181,818 ×100 2600,000

= 83.95% For Price D %BEP at full capacity

=

2,666,667 ×100 2700,000


=

2,666,667 ×100 2600,000

= 102.6%

OPERATIONS MANAGEMENT BREAK – EVEN ANALYSIS EALUATION OF BEA Advantages: 1. Charts are relatively easy to construct and interpret. 2. It provides useful guidelines to management on break – even points, safety margins and profit or loss levels at different levels out output. 3. Comparisons can be made between different options by constructing new chars to show changed circumstances. 4. The equations produce precise output, break-even and price results. 5. It helps in making decisions of choosing a particular location or setting a particular price. Disadvantages: 1. The assumption that costs and revenue are always, expressed in straight lines is unrealistic. Not all variable costs change directly or smoothly with output. Even revenue can be curved line which can cause two break – evens which makes the analysis useless. 2. Not all cost can be classified into fixed and variable costs. The introduction of semivariable cost will make the technique much more complicated. 3. There is no no allowance made for stock levels on the break – even charts is assumed that all units produced are sold which is an unlikely situation. 4. It is also unlikely that fixed cost would remain unchanged at different output levels.

BRUCE JEWELL BREAK – EVEN ANALYSIS (Business Studies: Bruce R. Jewell, page 399) Exercises: 3.a.i. Contribution = Selling Price – Variable Cost

= £ 0.60 - £ 0.20 = £ 0.40

ii.

Break – even point

Fixed Costs

=

Contributi on

20,000 0.40

=

= 50,000 units (mugs) iii.

Margin of Safety = Current Output – Break – even point = 90,000 – 50,000 = 40,000

iv.

Profits at full capacity = Margin of Safety = (120,000 – 50,000)

×

×

Contribution

0.40

= 70,000 × 0.40 = £ 28,000 b.

Quantity

= =

Total Cost + T arg et Pr ofit Selling Pr ice

40,000 + 120,000 (0.2) + 40,000 Selling Pr ice

84000 120,000

Selling Price

=

Selling Price

= £ 0.70 = 70p

(Business Studies: Bruce R. Jewell, page 399) Q.4. Break – Even graph for Smith Limited

b.i.

Break – even output

=


=

1,000,000 10 − 2

=

1,000,000 8 = 125,000 units

ii.

Margin of safety = Current Output – Break – even output = 150,000 – 12500 = 25000 units

iii.

Profits = 25,000 x 8 = £ 200,000

(MOS & Contribution

1.8 m

1.4 m

1.0 m

0.1 m

0.2 m 0

50

100

140

200

Profit from Graph = Total Revenue = Total Costs = 1800,000 – 1400,000 = 400,000 d.

The marketing manager’s proposal is a good idea as the profit level is higher than before by (400,000 – 200,000) £ 200,000 as the variable costs continue to be lesser than selling price. The drawback is that the break – even won’t be a problem. Therefore the proposal should be implemented. The margin of safety has also increased which is another proof of the higher profit levels. It must evertheless be kept in mind that it is being assumed that sales would increase. There is no knowledge of customer demand being given. So market research must be undertaken to find the trend in the demand. If it is increasing and the business is sure to require the higher output level then only should the manager’s proposal be put into.

(Business Studies: Bruce R. Jewell, page 400) Q.5.ai. Monthly profit = Total Revenue – Total Costs = $150,000 (21) – [800,000 + (4) 150,000] = 3,150,000 – 2900,000 = £ 250,000 ii.

Break even level =


= =

800,000 21 − 14 800,000 7

= 114,286 units bi.

Output = = =

Fixed Costs + T arg et profit Contributi on

800,000 + 200,000 21 −14 1000,000 7

= 142,857 units ii.

Output =

Fixed Costs + T arg et profit Selling − V .C .

800,000 + 200,000 Selling Pr ice −14 Selling price - 14 Selling price

= 100,000

1000,000 100,000

= 10 + 14 = £ 24

(Business Studies: Bruce R. Jewell, page 400) 6.a. Break – even graph for Richardson Pen-Company 2.5 m

2.0 m

1.5 m

1.0 m

0.5 m

0

1m

2m

b.

Contribution

= selling price – variable cost = £ 0.50 - £ 0.30 = £ 0.20

c.i.

Break-even output

= =

3m

4m

5m


500,000 0.20

= 2500,000 units ii.

Margin of Safety

= Current Output – Break even output = 5000,000 – 2500,000 = 2500,000 units

iii.

Profit at full capacity

= Margin of safety x Contribution = (Current Output (full capacity) – BE Output) = (6000,000 – 250,000) x 0.2 = £ 700,000

d.

x

contribution

Since the extra pens that have to be produced will continue to give a contribution of £ 0.5 to wards the fixed costs as well as profits of the firm. Also the business isn’t utilizing or working at its full capacity and has capacity to produce another 1 million pens, therefore taking this order world also improve its capacity utilisation. Also, the extra plus have a fixed cost of £10,000 which after being covered, the order still generates a profit of £15000 which would go towards the final profits of the firm. Therefore, if there is no other order, then Richardson Pen Company should take up the order. However, it must keep in mind that £ 10,000 aren’t the only fixed costs that have to be taken into account. Therefore other costs as well. Also when other customers get to know of this special offer then they may also ask the company to reduce prices to £35 for them instead of the usual £ 50. So if the company knows how to deal with such a situation, then it should take up the order.

(Business Studies: Bruce R. Jewell, page 400) Q.7ai. Contribution is the difference between the selling price and variable costs. This amount shows how much each units produced contributes to the fixed costs and then the target profit. ii.

Break even point is the place or the level of output at which there is no profit nor loss i.e. the total costs is equal to the total revenue.

iii.

Margin of safety is the difference between the current output and the break even output showing the area of profit.

bi.

Contribution

ii.

Break even output

= Selling price – Variable Cost = 0.15 – 0.10 = £ 0.05 = =


1000,000 0.05

= 20,000,000 = 20 million units iii.

Margin of Safety = Current Output – Break even output = 32 million – 20 million = 12 million

iv.

Profits = Margin of Safety x contribution = 12,000,000 x 0.05 = £ 600,000

c.

Yes, Davidson should accept the smartprice contract in the absence of the Goodprice after. This is because the variable cost of 10 pence is still below the selling price offered of 11 pence. So even though the profits for these 5 million units would be less than that from the standard price, however, these units would also contribute towards the fixed costs i.e. the fixed cost would how be spread over 37 million units instead of 32 million. Therefore, the profits would also be higher. Accepting the smartprice offer would also improve the capacity utilization by 12.5% which would otherwise be wasted for that year. Also overall productivity is increased as the same machinery was being used to produce 82 m units before and now of ten the acceptance of offer it would produce 37 m units. However, certain assumptions are made. Firstly that there would be no rise in fixed costs as capacity is available. At times even then F.C. increases e.g. yearly electric or gas supplies. Also variable costs are assumed constant while it may be that extra labour has to be appointed or overtime paid.

d.

The Goodprice offer in essence is excellent when seen quantitatively. It allows capacity utilization to reach 95% which is a very good level. Also the price is only 1p less than the standard price and is generating a very good level of profit of £240,000. This also means that the safety margin of the business improves by 6 million units. However, the other customers may also pressurize the business to sell them at 14 pence instead of 15 pence when they hear of this contract. This wasn’t a problem with smartprice contract since they would sell under ‘own be and’ i.e. no one would know of the real manufacturers nor of the lower price contract. So if Goodprice offer leaks out then profit margin may fall. Also Goodprice wants a too – year contract. It may be that the next year demand rises and the company may be able to sell at the standard price. However due to the contract the business would have to lose profits the next way. Therefore careful market research into sales turned is required.

(Business Studies: Bruce R. Jewell, page 401) Q.8ai. Contribution = Selling price – Variable Costs = 500 – (100 – 200)

= 500 – 300 = £200 / units ii.

Break even output

= =


110,000 200

= 550 units iii.

Profits = Margin of Safety x Contribution = (2000 – 550) x 200 = 1450 x 200 = £290,000

b.

Output = 2000

=

Fixed Cost + T arg et Pr ofit Selling price − Variable Cost

110,000 + 150,000 Selling price − 300

Selling price – 300 =

260,000 2000

Selling price = 130 + 300 Selling price = £430 (Business Studies: Bruce R. Jewell, page 401) Q.9.ai. Sales revenue at BEP = BE output x Price per unit = 100,000 x 2.50 = £250,000 ii. iii.

Variable Costs = Total Costs – Fixed Costs = 250,000 – 40,000 = £210,000 Contribution per unit = Selling price – Variable Costs = 2.50 – 210,000/100,000 = 2.50 -2.1 = £0.40

b.

Output = =

Fixed Costs − T arg et Pr ofit Contributi on

40,000 + 66,000

0.40 106,000 = 0.40 = £265,000 c.

Loss

= Margin of loss x Contribution = (100,000 – 90,000) x 0.40 = 10,000 x 0.40 = £4000

d.

New fixed costs = 40000 + 25% = £50,000 New BE output =

x

40,000

50,000 0.40

= £125,000 Q.10.ai. Capacity Utilization

= =

Current Output Full Capacity

12 million 15 million

×100

×100

= 80% ii.

Break even output

=


=

5000,000 1.40 − 0.70

=

5000,000 0.70

= 7142,857 units iii.

Margin of Safety

= Current Output – Break even Output = 1200,000 – 7142857 = 4857,143 units

iv.

Profits = Margin of Safety x Contribution = 4857, 143 x 0.70 =£3400,000

v.

Unit Costs

= =

Total Costs Total Units

5000,000 + 12000000 (0.70)

12000000 13400000 = 12000000 b.

= £1.12 Super market chain offer: Quantity = 1 million units Price = 80p = £0.8 Since the company has a capacity utilization of 80%, it may be tempted to accept the offer which would improve the capacity utilization to 86.7% which means an improvement in productivity. Also the selling price in the contract is higher than the variable cost. So this means that all of the extra units sold do contribute towards the fixed costs and profits i.e. they won’t generate a loss. However, 80 pence is 60 pence less than the standard price of £1.40. So if existing customers team of the offer and stand demanding a similar treatment then the business may find it very difficult of may be impossible to earn any profits at all. Also if the company is purposefully charging higher prices to establish exclusivity of brand then lower prices could destroy the image. Also these lower priced goods may leak

into higher priced market and result in complete disithursioning of certain customers who may think the lower price a symbol of low quality. So the firm must weigh its advantages and disadvantages of the contract. If it is sure that its other customers are loyal and won’t complain nor its image is going to be damaged them I would strongly recommend it to accept the contact as the offer does increase sales and profits and marginal safety and prevents the extra capacity available from being wasted.

COSTS, BREAK-EVEN & COSTING METHODS (Business Studies: Stimpson, page 332) ACTIVITY SITE A Break – even

= =


60,000 6 .3

= 20,000 units Safety margin

= Current Output – Break even = 40,000 – 20,000 = 20,000

Maximum profit = Safety margin – Contribution = 20,000 x 3 = $60,000 SITE B Break – even

=

80,000 6 − 2.50

= 22.857 units Safety margin

= 50,000 – 22,857 = 27143 units

Maximum profit = 27,143 x 35 = $95,000 2.

As can be seen from the lable, SITE A has lower fixed costs than SITE B and so it has a lower break – even output i.e. the point until which the business must produce to cover all its costs and so not have a loss (nor profit). This means that for SITE B, the firm must produce 22,857 units to avoid losses which is 2,857 units higher than the BE level of sales of Site A. However, a larger capacity of production is available at SITE B and so the safety margin that the firm achieves when producing at high capacity is greater than that of SITE A. This also gives the firm locating at SITE B to have a higher chance of profit pen product as the contribution towards profit is higher than at SITE A by (3 – 2.50), $0.50 on each product. So the maximum profit on SITE B is £95,000 which is £35,000 more than the chances of maximum profit that the firm locating at SITE A has.

Therefore, if the business has high demand for the product it aims to produce, then I would advise the firm to locate on SITE B due to the higher capacity avail able as well as the higher maximizing profit opportunities. 3. Five other factors affecting the locating decision are:i. Information:- the quality of the communication links and the transportation facilities available. ii. Industrial inertia:- the frequency of similar industries in the same area which could be beneficial due to supply of qualified staff. iii. Financial incentives:- like grants from the government in accordance with their regional policy. iv. Physical features, weather and quality of land:- e.g. if land can withstand the factory structure i.e. is not swampy. v. Personal preference and interest of the owners:- looking for certain quality of life benefits like schooling and medical facilities.

(Business Studies: Peter Stimpson, page 333) ACTIVITY Option 1 (a) 400

T.R. T.C.

300 V.C. 200

100

F.C.

0

2000

4000

6000

8000

10000

Units Produced Break – even output = 4500 units Option 2

T.R.

300 T.C. 200 V.C. 100

60

F.C.

0

2000

3000

4000

6000

Units Output Break – even output = 3000 units ARITHMETIC CHECK ON BEP: Option 1:

Break – even

= =


54000 + 27000 40 − (10 + 12)

= 4500

8000

Option 2:

Break - even

=

54000 + 6000 40 − 20

= 3000 Option 1: Maximum profit = Total Revenue – Total Costs = 10,000 (40) – [81000 + 10000(22)] = 400,000 – 301,000 = $99,000 Option 2: Maximum profit = 75000 (40) – [60,000 + 75000 (20)] = 300,000 – 210,000 = $90,000 Option 1: Margin of Safety

Option 2: Margin of Safety: b.

= Current Output – Break–even Output =7000 – 4500 = 2500 units = 7000 – 3000 = 4000 units

Fixed costs are 20% higher

T.C.

= 209 x 81000 + 81000 = 162000 + 81000 = $97,200

(a) 400 T.C. 300 V.C. 200

100

F.C.

0

2000

4000

6000 Units Produced

From the chart Break – even point

≈

5000 units – 5500 units

8000

10000

Verification BEP

= =


97,200 40.22

= 5400 units c.

Since the new machinery is being purchased which would work faster and more efficiently so this would result in increased productivity and so the labour cost per unit may fall. It may also be that less labour is required. The since there is less wastage of raw materials so this would lower the cost of material again leading to a fall in variable cost as due to efficient use less material is required per product. Break – even point

= = =


54000 + 8000 (10 + 12) − 2.50 62000 19.5

= 3179 units PROBLEMS OF CLASSIFICATION OF COSTS 1.

2.

3.

Labour costs can not be easily classification into direct variable costs or indirect costs e.g. if the season for a particular type of good is of them it is not possible to lay of all the workers that were appointed on a particular production line. It is not practical to make workers redundant when the reason ends and then expect them to join again when reason begins. So these workers would still have to be paid even if production was zero, and the wages would have to be indirect costs since they aren’t related to any one particular product. Same is the case in case of machinery breakdown. Also not all costs can be classified directly into fixed costs or variable costs e.g. line rent and electricity charges. It may be that a fixed line rent has to be paid annually while the per phone call charges vary. Also electricity standing charge is fixed while per unit consumed cots vary. So these are semi – variable costs which have to be taken into account when preparing BEP chants and finding BEP. Also it is wrong to equate variable costs with direct costs and fixed costs with indirect costs. E.g. Depreciation and rent are both fixed cots but the former can be directly associated with a particular product while factory rent is can’t. Also despite both being variable costs, energy costs can’t be directly related to specific types of production while raw material costs can.

WORK STUDY Definition: Work study is an attempt to find the best or most efficient way of using labour, machines and materials. It includes a number of techniques which are all directed towards improving the productivity of labour. F.W. Taylor’s scientific management is said to have formed the basis of work study methods. Taylor presented the argument that by observing and analyzing the different work methods and rates, it would be possible to deduce the most productive and efficient way of working or continuing production. Work Study Techniques: There are two techniques involved in work study: Method Study • Work Measurement • Method Study It involves identifying all the specific activities in a job, analyzing them and finding the most effective way of undertaking a task or job. This could be an existing job or a new one. However, method study usually aims at the progress of existing work practices. STAGES INVOLVED IN METHOD STUDY 1. the selection of the task which is required for analysis 2. observing the current method of carrying out the task wile making notes of the material flow, worker movement as well as the equipment layout. 3. analyzing the collected data 4. suggestion of improvement of the method e.g. reducing movement of partly finished goods round the factory. 5. putting the new method into practice 6. recording the impact of the new methods on productivity

BENEFITS OF METHOD STUDY i. identify an optimum way to carry out a task ii. improve the layout of the factory or the workplace to enable the most efficient use of the available space iii. minimize effort and reduce fatigue iv. improve the effectiveness of process v. improve the use of labour, machines and materials Work Measurement It involves recording output levels using different methods and arriving at a standard or target time for each task. It aims to measure how long workers take to perform each task. STAGES INVOLVED IN WORK MEASUREMENT 1. decide on the task to be recorded 2. record the time taken for the task • allowances for necessary stoppages must be taken into acc. 3. rate the performance against standard performance of an average, experienced, motivated worker. Workers may exceed the scale 4. establish the average time for a job (if done by an average trained and competent worker) BENEFITS OF WORK MEASUREMENT i. working out price rates if this type of payment system is used ii. establish the costs of particular activities to help with accounting\ iii. help with the planning of production schedules iv. achieve results in the least time v. help to judge future performances by comparisons In summary work study means identifying the best work method and then using work measurement to find the effort needed to carry out a task to an acceptable standard. The results can be used to design incentive schemes and determine staffing levels. Evaluation of Work Study Introducing work study programs is not easy. Work study assessors are often disliked by employees. The major problem is the workers resistance to this process. Workers feel that observing and analyzing their work habits is part of inspection of individual practices and so they feel distrust. Therefore stress should be put by higher management that work study is infact a method of improving efficiency and determining the task length. It is not appraisal of individuals and so no disciplinary measures can arise from it. Workers generally feel less secure because they think that redundancies will arise due to work study as better methods may mean less labour requirements. Also they find difficulty in changing or adapting to changes to practices they are at ease at. Their fears can be alleviated by involving the staff in the work study through discussions on areas requiring improvement and benefits of efficiency. Accurate measurements are difficult as staff may work fast during study to impress and increase their wages or slowly to increase the set standard time. Therefore, skilled consultants should be able to identify workers at an unusually high or slow pace during work study.


UNIT 4: Operations Management

OPERATIONS MANAGEMENT PRODUCTION PLANNING The role of production function is to turn inputs into outputs by changing factors of production into finished goods and services as efficiently as possible. The role of production planning is to establish short-term and long-term production schedules. In order to observe efficient production functions, the production planning must be realistic and achievable. Production controls also play a vital role in efficient production function. It ensures that the plans made are being properly followed and deadlines are timely met. Following are the ares of control: 1. 2. 3. 4.

Cost Control Progress Control Stock Control Quality Control

STOCK MANAGEMENT – STOCK CONTROL Basic objective of stock control is to minimize cost of stock by maintaining adequate adequate levels of stock. Firms have the following reasons for holding stock: 1. Stock of raw materials is kept in order to meet production requirements 2. Stock of work in progress co maintained to continue the production process and allowing greater flexibility and better utilization of time and machinery. 3. Stocks of finished goods is maintained in order to provide services and to meet customer demands on time 4. Stocks of equipment and spares are kept in order to support sales and production 5. For valuation purposes 6. To control cash tied up in stocks 7. To control wastage COSTS OF HOLDING HIGH LEVELS OF STOCK 1. Opportunity Opportunity cost as capital is tied up in stored stocks. 2. Storage Costs 3. Spoilage Costs 4. Administration Administration and financial costs e.g. insurance 5. Risk of wastage in case of lower demands in the market 6. Risk of thefts COSTS OF HOLDING INADEQUATE OR LOW LEVEL OF STOCK 1. Lost sales (also known as out of stock costs) 2. Idle production resources 3. Special and sudden orders could be expensive as the firm is less able to cope with unexpected shortages 4. Firm holding very low level of stock may have to place more number of orders. This will raise local ordering costs and the advantages of bulk buying cannot be achieved STOCK CONTROL TECHNIQUES STOCK CONTROL CHARTS (Graphical Approach) 50

Max stock level

40 30 20 10

Minimum stock level



0 2 4 6 Lead Time

8

10

12

14

Time (weeks)

MINIMUM STOCK LEVEL Also called buffer stock. This is the minimum number of stock that should be held to ensure that production could still continue in case of a delay in the delivery of raw materials. MAXIMUM STOCK LEVEL It is the maximum amount of stock kept and is limited by space or the financial costs of holding higher levels. One way to calculate this is to add the EOQ (Economic order quantity) quantity) to the minimum stock level. REORDER LEVEL This is the level of stock at which a new order is placed with the supplier. The quantity of this order or the re-order quantity will be influenced the EOQ concept. LEAD TIME It is the amount of time it takes for a stock purchased to be placed, achieved, inspected and made ready for use. The longer the lead time, the higher the minimum level of stock needed. RESOURCE QUANTITY It is the quantity of stock that is ordered at the re-order level. Management will seek to discover the roorder quantity that minimizes the total cost of holding and ordering ordering the stock. If I f stocks are purchased purchased from an outside supplier the optimum level is known as economic order quantity (EOQ). If the orders are obtained from internal suppliers, the equivalent is known as economic batch quantity. Therefore EOQ is defined as the order quantity which minimizes the balance of costs between stock holding costs and re-order costs. EOQ is the point where the total cost is minimizes. It can be calculated with the help of the following formula:

EOQ =

2OD h

where O = Ordering Cost D = Annual Demand h = Holding Cost of one unit per annum

JUST-IN-THE INVENTORY CONTROL (JIT) Just in time or JIT involves both production and stock control systems. For this the work flow has to be scheduled very precisely so that minimal amount of work-in-progress has to be held. JIT does not require



any buffer stocks to be held. The components arrive just at the time that they are needed and the finished goods are delivered to customers as soon as they are completed. JIT is basically a Japanese approach towards production and is an important part of the team production on the Kaizen approach. JIT production has reversed the conventional approaches to manufacturing.



REQUIREMENTS FOR JIT PRODUCTION If the business really wishes a successful introduction of JIT production then it must make sure that a few very important requirements of JIT are met: 1. Excellent relationships with suppliers JIT production essentially depends upon the very precise delivery of raw materials and other suppliers. Therefore, the business suppliers should be ready to supply at a very short lead time. The firm therefore can have only one or two suppliers at the most for mutual benefits. 2. Employee flexibility The workers a employees of the business have to be multi-skilled and should be able to switch jobs quickly so that no excess stocks of goods built up while those in demand are produced quickly for orders to be met. 3. Flexibility Flexibilit y of machinery Old fashioned equipment can only produce one type or range of product in large quantities. Modern, computerized machinery is required for JIT production as it can produce a wide variety of products just by changing a single software. This adaptability would produce small batches of single products to keep the stocks to t o a minimum. 4.

5.

6.

7.

Accurate demand forecasts This would enable to produce a reliable production schedule which would help in the calculation of precise number of goods to be produced over a certain time. If forecasts or demand is fluctuating then keeping no tocks would be a very risky strategy. Extensive use of IT Computerised records of sales, sales trends and stock levels would allow minimal stocks to be held. Electronic communication with suppliers would enable accurate delivery of supplies Employee commitment Workers must work smoothly for JIT to be effective. Therefore empowerment i.e. giving employees power to undertake decisions as well as team working is essential for worker motivation as well as for the meeting of customer orders. Strict Quality control or zero-defect zero-defect Since there are no spare stocks, therefore goods have to be produced correctly the first time otherwise customer orders will not be completed on time.

BENEFITS OF JIT This also is part of evaluation i. the right quantities are produced or purchased at the right time ii. higher quality iii. improved customer service iv. reduced space requirement leads to reduced storage costs v. system flexibility leads to quicker response to change in demand vi. space released from stock holding used for more production purposes vii. reduction in manufacturing manufacturing lead time viii. increased equipment equipment utilization ix. simpler planning systems x. increased worker participation xi. multiskileld and adaptable staff gain from improved motivation xii. continuous emphasis on improvement and problem solving xiii. less chance of stock being outdated or obsolescent obsolescent xiv. less stock reduces risk of damage and wastage xv. reduces capital invested or tried in stock and reduces opportunity opportunity cost of stock holding xvi. higher multi factor productivity xvii. higher profits due to overall decrease in costs Evaluation does not only mean disadvantages. It includes advantages.



Evaluation of JIT Disadvantages Disadvantages JIT is not suit for all businesses at all times. It is a very expensive system to implement implement i.e. it has very high start-up costs. Other control systems are often referred to as JIC-Just in case as stock are kept tin case they are required. JIT requires a very different organizational culture than this. There are several problems that have to be overcome for successful JIT working: i. requires a high degree of delegation ii. requires change in the philosophy and culture of business iii. advantages advantages of bulk buying are lost iv. business is vulnerable to a break in supply including breakdown in machinery v. doesn’t work in case of irregularly used parts or specially ordered materials vi. reputation depends significantly on outside factors vii. requires atmosphere of close cooperation and mutual trust between work force and managers viii. delivery costs rise as frequent small deliveries are essential ix. purchasing requires reliable and flexible suppliers x. order admin costs rise as so many small orders need to be processed However JIT is an important aspect of the move to wards lean production and is definitely a principle which is widely accepted. LEAN PRODUCTION It is an approach to production developed in Japan. Its aim is to reduce the quantity of resources used up in production. Lean production uses les of everything including factory space, materials, stocks, suppliers, labour, capital and time. It is the term used to describe the concept of managing the production process more efficiently with minimum of resources. The objective is to eliminate wastage of resources and time from original stock ordering through to the financial customer service. With the help of this production method better quality and variety of output with fewer resources is produced with less wastage and less duplication. Lean means cutting out anything in the production process which adds complicity cost and time and does not add nay value for the customers. With team production the number of defective products is reduced, lead times are cut down and reliability improves. It involves the range of practices designed to improve productivity and quality and to reduce wastage of resources. FEATURES AND PRACTICES RELATED TO LEAN PRODUCITON 1. Simultaneous engineering 2. Flexible specialists 3. Just-in-time Just-in-ti me manufacturing and stock control techniques 4. Kaizen production 5. Karban system 6. Empowerment 7. Time-based management 8. Team-working 9. Quality circles 10. Cellular or Cell Production QUALITY MANAGEMENT Quality could be described as those features of a product or a service that allow it to satisfy customers needs wants and expectations. Quality does not necessarily mean the best that can possible be produced because high costs will then make the product unsaleable. Therefore a high quality product is one that best fulfills the particular needs of consumers at a price that they are willing to pay. Consumers judge quality every time they purchase, therefore the minimum standard demanded by consumers is that the product should work and fit to the purpose intended. Quality might be assessed on the basis of physical appearance design, specifications, reliability, durability, suitability, special features, after sales services, image and reputation. Advantages of producing high quality products and services are as follows: 1. 2. 3. 4. 5.

Consumer loyalty Low level of complaints (reduces costs) Longer product life cycles Less promotion efforts may be required High price can be charged


6. 7.


Better corporate image Generates future sales in other product lines also

QUALITY CONTROL It means inspecting and checking the work to ensure that products and services come up to an agreed standard of quality. It is an important element in production control through its identification and scrapping of unsuitable output. The method of production, employed workforce, technology and management style affect the quality of goods being produced. QUALITY CONTROL TECHNIQUES 1. Inspection and testing 2. Random sampling 3. Involving the work force in making their own decisions about quality checking 4. Quality control charts and statistical measures to control quality

BUSINESS EXPANSION ECONOMIES OF SCALE Business expansion by employing more of a few or all the factors of production is referred to as an increase in the scale of operation / production. The advantages that a business achieves by producing at a large scale are known as economies of scale. They are the educations in a firm’s average cost of production (unit costs) TYPES 1. 2.

Internal Economies of scale External Economies of scale

INTERNAL ECONOMIES OF SCALE They are the benefits of growth that arise when a business grows from within. They are: 1. Purchasing economies 2. Production or technical economies 3. Financial economies 4. Marketing economies 5. Risk – bearing economies 6. Information economies 7. Managerial economies

EXTERNAL ECONOMIES OF SCALE They are the benefits or the reduction in costs which any business in an industry might enjoy as the industry as a whole grows in size. They are: 1. Emergence of skilled labour force supply of labour is high – low wage rates less need to train efficient and productive labour – less avg. costs 2. Training courses in local educational institution 3. Co-operation among the firms 4. Government support 5. Ancillary or supportive business emerge 6. More specialization can take place (Disintegration) – focus on core activities DISECONOMIES OF SCALE The factors that increase the average costs as a firms scale of operation increases beyond a certain size are known as diseconomies of scale. TYPES 1. 2.

Internal Diseconomies of scale External Diseconomies of scale

INTERNAL DISECONOMIES OF SCALE They are the disadvantages of expansion that arise when a business grows from within. They are: 1. Communication problems 2. Managerial problems 3. Co-ordination problems 4. Control problems 5. Alienation of the workforce 6. Technical or efficiency related diseconomies EXTERNAL DISECONOMIES OF SCALE They are the disadvantages or increases in costs which any business in an industry might face as the industry as a whole grows in size. They are: 1. Overcrowding in industrial problems Traffic congestion 2. Price of the factors of production might rise as firms complete for a limited amount of resources. 3. Firms can pressurize the government policies for their own benefit 4. Inflation increases demand increases salaries high – purchasing power high 5. Overcrowding pollution increases skilled labour shortages due to high competition Average Costs Curve

Costs Economic

O

Output

APPROACHE STO AVOID DISECONOMIES OF SCALE 1. Management by Objectives 2. Decentralisation 3. Reduced diversification diversificatio n to control co-ordination and communication problems

Business Studies Unit 1,2,4

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