S

T
U
D
Y
OPERATIONAL
T

PAPER E1 E
X
T
ENTERPRISE OPERATIONS

Our text is designed to help you study effectively and efficiently.

In this edition we:
 Highlight the most important elements in the syllabus and the key skills you will need

 Signpost how each chapter links to the syllabus and the learning outcomes

 Provide lots of exam alerts explaining how what you're learning may be tested

 Include examples and questions to help you apply what you've learnt

 Emphasise key points in section summaries

 Test your knowledge of what you've studied in quick quizzes

 Examine your understanding in our exam question bank

 Reference all the important topics in the full index

SUITABLE FOR EXAMS UP TO SEPTEMBER 2014

ii

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 iii

Contents Page

Introduction
How our Study Text can help you pass iv
Features in our Study Text v
Streamlined studying vi
Syllabus and learning outcomes vii
Studying E1 xiii
The exam paper xviii

Part A The global business environment

1 The social, political and economic context 3
2 Governance and regulation 39

Part B Information systems

3 The role of information systems 65
4 Systems implementation and business strategy 95

Part C Operations management

5 Operations management and the organisation 131
6 Quality management 159
7 Managing capacity and inventory 191

Part D Marketing
8 Marketing and business strategy 215
9 Marketing plans, branding and communications 243
10 Developments in marketing 277

Part E Managing human capital

11 Human resource management 303
12 Human resource practices 341

Objective test question bank 381

Objective test answer bank 383

Exam question bank 387

Exam answer bank 393

Index 419
Review form
iv INTRODUCTION

How our Study Text can help you pass

Streamlined  We show you the best ways to study efficiently
studying
 Our Text has been designed to ensure you can easily and quickly navigate
through it
 The different features in our Text emphasise important knowledge and
techniques
Exam expertise  Studying E1 on page xiii introduces the key themes of the syllabus and
summarises how to pass
 We highlight throughout our Text how topics may be tested and what you’ll have
to do in the exam
 We help you see the complete picture of the syllabus, so that you can answer
questions that range across the whole syllabus
 Our Text covers the syllabus content – no more, no less
Regular review  We frequently summarise the key knowledge you need
 We test what you’ve learnt by providing questions and quizzes throughout our
Text

Our other products

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Practice and Providing lots more question practice and helpful guidance on how to pass the exam
Revision Kit
Passcards Summarising what you should know in visual, easy to remember, form
Success CDs Covering the vital elements of the E1 syllabus in less than 90 minutes and also
containing exam hints to help you fine tune your strategy
i-Pass Providing computer-based testing in a variety of formats, ideal for self-assessment
Interactive Allowing you to learn actively with a clear visual format summarising what you must
Passcards know

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 INTRODUCTION v

Features in our Study Text

Section Introductions explain how the section fits into the chapter

Key Terms are the core vocabulary you need to learn

KEY TERM

Key Points are points that you have to know, ideas or calculations that will be the
foundations of your answers
KEY POINT

Exam Alerts show you how subjects are likely to be tested

Exam Skills are the key skills you will need to demonstrate in the exam, linked to
question requirements

Formulae To Learn are formulae you must remember in the exam

Exam Formulae are formulae you will be given in the exam

Examples show how theory is put into practice

Questions give you the practice you need to test your understanding of what you’ve
learnt

Case Studies link what you’ve learnt with the real-world business environment

CASE STUDY

Links show how the syllabus overlaps with other parts of the qualification, including
Knowledge Brought Forward that you need to remember from previous exams

Website References link to material that will enhance your understanding of what
you’re studying

Further Reading will give you a wider perspective on the subjects you’re covering

Section Summaries allow you to review each section

vi INTRODUCTION

Streamlined studying
What you should do In order to
Read the Chapter and Section Introductions See why topics need to be studied and map your
way through the chapter
Go quickly through the explanations Gain the depth of knowledge and understanding
that you'll need
Highlight the Key Points, Key Terms and Formulae Make sure you know the basics that you can't do
To Learn without in the exam
Focus on the Exam Skills and Exam Alerts Know how you'll be tested and what you'll have to
do
Work through the Examples and Case Studies See how what you've learnt applies in practice
Prepare Answers to the Questions See if you can apply what you've learnt in
practice
Revisit the Section Summaries in the Chapter Remind you of, and reinforce, what you've learnt
Roundup
Answer the Quick Quiz Find out if there are any gaps in your knowledge
Answer the Question(s) in the Exam Question Bank Practise what you've learnt in depth

Should I take notes?

Brief notes may help you remember what you’re learning. You should use the notes format that’s most
helpful to you (lists, diagrams, mindmaps).

Further help
BPP Learning Media’s Learning to Learn Accountancy provides lots more helpful guidance on studying. It
is designed to be used both at the outset of your CIMA studies and throughout the process of learning
accountancy. It can help you focus your studies on the subject and exam, enabling you to acquire
knowledge, practise and revise efficiently and effectively.
 INTRODUCTION vii

Syllabus and learning outcomes

Paper E1 Enterprise Operations
The syllabus comprises:

Topic and Study Weighting

%
A The Global Business Environment 20
B Information Systems 20
C Operations Management 20
D Marketing 20
E Managing Human Capital 20

Learning Outcomes
Lead Component Syllabus content
A The Global Business Environment
1 Explain the (a) Explain the emergence of  Cross-cultural management and
social, political major economies in Asia different forms of business
and economic and Latin America organisation.
context of (b) Explain the emergence and  Emerging market multinationals.
business. importance of outsourcing
 Liberalisation and economic
and offshoring
nationalism.
(c) Explain the impact of
 Outsourcing and offshoring.
international
macroeconomic  Major economic systems including
developments (eg long- US, European and transition
term shifts in trade economies.
balances), on the  National account balances
organisation’s competitive (especially from international
environment. trade), monetary policy and their
impact on markets.
2 Analyse the (a) Explain the principles and  Corporate governance, including
relationship purpose of corporate social stakeholders and the role of
between the responsibility and the government.
internal principles of good
 Principles of corporate social
governance of corporate governance in an
responsibility and the scope for
the firm and international context
international variation, eg between
external (b) Analyse relationships developed and developing
sources of among business, society economies.
governance and government in
and regulation.  Business-government relations in
national and regional
developed and developing
contexts
economies.
(c) Apply tools of country and
 Regulation in the national and
political risk analysis
international context and its impact
(d) Discuss the nature of on the firm.
regulation and its impact
 Role of institutions and governance
on the firm.
in economic growth.
 Corporate political activity in
developed and developing markets.
 Country and political risk.
viii INTRODUCTION

Learning Outcomes
Lead Component Syllabus content
B Information Systems
1 Discuss the (a) Identify the value of  The role of information systems in
wider business information and organisations.
context within information systems
 Emerging information system
which organisations
trends in organisations (eg
information (b) Discuss the reasons for Enterprise-wide systems;
systems organisations’ increased knowledge management systems;
operate. dependence on information customer relationship management
systems systems, eg E-business, Web 2.0
(c) Discuss the transformation tools).
of organisations through  Information technology enabled
technology transformation; the emergence of
new forms of organisation.
 Geographically dispersed (virtual)
teams; role of information systems
in virtual teams and challenges for
virtual collaboration.
2 Analyse how (a) Discuss ways for  Assessing the costs and benefits of
information overcoming problems in information systems; criteria for
systems can information system evaluating information systems.
be implementation
 Privacy and security.
implemented (b) Discuss ways of organising
in support of  System changeover methods (ie
and managing information
the direct, parallel, pilot and phased).
system activities in the
organisation’s context of the wider  Information system implementation
strategy. organisation. as a change management process;
avoiding problems of non-usage
and resistance.
 Information system outsourcing
(different types of sourcing
strategies; client-vendor
relationships).
 Aligning information systems with
business strategy (eg strategic
importance of information systems;
information systems for
competitive advantage; information
systems for competitive necessity).
 INTRODUCTION ix

Learning Outcomes
Lead Component Syllabus content
C Operations management
1 Explain the (a) Explain the shift from  Supply chain management as a
relationship of price-based to relational strategic process.
operations procurement and
 An overview of operations strategy
management operations
and its importance to the firm.
to other (b) Explain the relationship of
aspects of the  Supply chains in competition with
operations and supply
organisation’s each other; role of supply
management to the
operations. networks; demand networks as an
competitiveness of the firm
evolution of supply chains.
(c) Explain the particular
 Design of products/services and
issues surrounding
processes and how this relates to
operations management in
operations and supply.
services
 The concept of sustainability in
(d) Explain the importance of
operations management.
sustainability in operations
management.
2 Apply tools (a) Apply contemporary  Different methods of quality
and thinking in quality measurement (eg Servqual).
techniques of management
 Approaches to quality
operations (b) Explain process design management, including Total
management.
(c) Apply tools and concepts Quality Management (TQM),
of lean management various British and European
Union systems as well as
(d) Illustrate a plan for the
statistical control processes.
implementation of a
quality programme  External quality standards.

(e) Describe ways to manage  Systems used in operations

relationships with management: Manufacturing
suppliers. Resource Planning II (MRPII);
Optimized Production Techniques
(OPT) and Enterprise Resource
Planning (ERP).
 Use of process maps to present the
flow of information and product
across supply chains and
networks.
 Methods for managing inventory,
including continuous inventory
systems (eg Economic Order
Quantity, EOQ), periodic inventory
systems and the ABC system
(Note: ABC is not an acronym; A
refers to high value, B to medium
and C to low value inventory).
 Methods of managing operational
capacity in product and service
delivery (eg use of queuing theory,
forecasting, flexible manufacturing
systems).
x INTRODUCTION

Learning Outcomes
Lead Component Syllabus content
 Application of lean techniques to
services.
 Practices of continuous
improvement (eg Quality circles,
Kaizen, 5S, 6 Sigma).
 The characteristics of lean
production.
 Criticisms and limitations of lean
production.
 Developing relationships with
suppliers, including the use of
supply portfolios.
D Marketing
1 Explain (a) Explain the marketing  The marketing concept as a business
developments concept, and the philosophy.
in marketing. alternatives to it
 The marketing environment,
(b) Describe the marketing including societal, economic,
environment of a range technological, political and legal
of organisations factors affecting marketing.
(c) Explain marketing in a  Marketing in not-for-profit
not-for-profit context organisations (ie charities, non-
(d) Explain the social context governmental organisations; the
of marketing behaviour public sector).
(e) Describe theories of  Theories of consumer behaviour (eg
consumer behaviour. social interaction theory), as well as
factors affecting buying decisions,
types of buying behaviour and stages
in the buying process.
 Social marketing and corporate
social responsibility.
2 Apply tools (a) Explain the relationships  Market research, including data
and between market gathering techniques and methods of
techniques research, market analysis.
used in segmentation, targeting  Segmentation and targeting of
support of the and positioning markets, and positioning of products
organisation’s (b) Apply tools within each within markets.
marketing. area of the marketing
 How business to business (B2B)
mix
marketing differs from business to
(c) Describe the business consumer (B2C) marketing in its
contexts within which different forms (ie consumer
marketing principles can marketing, services marketing, direct
be applied marketing, interactive marketing, e-
(d) Describe the market marketing, internal marketing).
planning process  Promotional tools and the promotion
(e) Explain the role of mix.
branding and brand  The ‘service extension’ to the
equity. marketing mix.
 INTRODUCTION xi

Learning Outcomes
Lead Component Syllabus content
 Devising and implementing a pricing
strategy.
 Experiential marketing.
 Marketing communications,
including viral, guerrilla and other
indirect forms of marketing.
 Distribution channels and methods
for marketing campaigns.
 The role of marketing in the business
plan of the organisation.
 Brand image and brand value.
 Product development and
product/service life-cycles.
 Internal marketing as the process of
training and motivating employees
so as to support the organisation’s
external marketing activities.
 The differences and similarities in
the marketing of products, services
and experiences.
 Product portfolios and the product
mix.
E Managing human capital
1 Explain the (a) Explain how HR theories  Theories of Human Resource
relationship of and activities can Management relating to ability,
Human contribute to the success motivation and opportunity.
Resources of the organisation
 The psychological contract and its
(HR) to the (b) Explain the importance of importance to retention.
organisation’s ethical behaviour in
operations.  The relationship of the employee to
business generally and for
other elements of the business.
the line manager and their
activities.  Personal business ethics and the
fundamental principles (Part A) of
the CIMA Code of Ethics for
Professional Accountants.
2 Discuss the (a) Explain the HR activities  Practices associated with recruiting
activities associated with developing and developing appropriate
associated the ability of employees abilities including recruitment and
with the (b) Discuss the HR activities selection of staff using different
management associated with the recruitment channels (ie
of human motivation of employees interviews, assessment centres,
capital. intelligence tests, aptitude tests,
(c) Describe the HR activities
psychometric tests).
associated with improving
the opportunities for  Issues relating to fair and legal
employees to contribute to employment practices (eg
the firm recruitment, dismissal,
redundancy, and ways of
managing these).
xii INTRODUCTION

Learning Outcomes
Lead Component Syllabus content
(d) Discuss the importance of  The distinction between
the line manager in the development and training and the
implementation of HR tools available to develop and train
practices staff.
(e) Prepare an HR plan  The design and implementation of
appropriate to a team. induction programmes.
 Practices related to motivation
including issues in the design of
reward systems (eg the role of
incentives, the utility of
performance-related pay,
arrangements for knowledge
workers, flexible work
arrangements).
 The importance of appraisals, their
conduct and their relationship to
the reward system.
 Practices related to the creation of
opportunities for employees to
contribute to the organisation
including job design,
communications, involvement
procedures and appropriate
elements of negotiating and
bargaining.
 Problems in implementing an HR
plan appropriate to a team and
ways to manage this.
 HR in different organisational
forms (eg project based, virtual or
networked firms) and different
organisational contexts.
 Preparation of an HR plan (eg
forecasting personnel
requirements; retention, absence
and leave, wastage).
 INTRODUCTION xiii

Studying E1
1 What's E1 about
E1 explores several discrete subjects which all affect how organisations operate. However, please note
that exam questions are likely to cover more than one of these subjects. You should therefore appreciate
the various links between them.

1.1 The global business environment

In Chapter 1 we introduce the setting within which all organisations compete – the global economy. We
begin by looking at the main influences on the international environment including the major economic
systems of the world, and how nations develop their economy and industry. Following on from this we
shall study the different types of businesses and the cultural considerations multinational companies
have to think about when managing business units in several countries.

The focus of Chapter 2 is on how governments affect their economies through economic policy and
regulation. The chapter also looks at non-legal regulation, in the form of corporate governance and
corporate social responsibility, which are becoming increasingly important to all business organisations.

1.2 Information systems

You are not expected to become an information systems (IS) expert, but the syllabus does require you to
appreciate the role IS plays in organisations. This includes the various types of system and the role
systems play in transforming how organisations operate and the types of business they do. These areas
are all covered in Chapter 3.

Chapter 4 is primarily concerned with how organisations implement new systems. However, you should
also understand the importance of organisations aligning their information systems with their overall
business strategy.

1.3 Operations management

Operations are the main activities of an organisation. They are ‘what it does’, and it is the subject of
Chapters 5, 6 and 7.

We begin by studying how operations develop around a value chain and how organisations join together
to form supply chains and networks. Quality is an important issue for all businesses, whether in terms of
products or services, and we shall see how quality can be measured and managed to ensure the
customer is satisfied. Finally, we shall find out how organisations can balance their inputs (inventory) and
outputs (products and services) with changing demand levels.

1.4 Marketing
Marketing is about communicating the organisation’s sales messages to the customer. It forms a major
part of its business strategy and is the subject of Chapters 8, 9 and 10. We shall firstly study the
marketing environment and see how a marketing strategy and plan are put together. Following on from
this, our study looks into how the marketing message is communicated to the customer and the
important issue of corporate branding.

The syllabus also covers several smaller areas of marketing. These include; consumer behaviour,
marketing not-for-profit organisations, marketing an organisation’s message to its employees (internal
marketing) and how corporate social responsibility affects how an organisation markets its products and
services. We shall cover all these areas in full as well.
xiv INTRODUCTION

1.5 Managing human capital

Many believe that an organisation’s employees are its main asset and they should be carefully managed
to get the best out of them. The E1 syllabus looks at all aspects of managing employees to maximise their
potential. Motivation, remuneration, appraisals and various types of working arrangement are all
important to this end and are covered in Chapters 11 and 12. We shall also look into what constitutes
good HR practice and the importance of employees acting ethically.

2 What's required
You will face a variety of questions in the E1 exam. Each type of question tests a different skill and you
must be confident in answering each of them.

20% of the marks are for objective test questions, such as those requiring a short written answer or the
selection of one correct answer from a choice of four. These questions test your ability to make quick
decisions and write succinctly.

When answering multiple choice questions try to eliminate any obviously wrong answers first before
considering the others.

A further 30% of the marks are available for answering five short answer questions which are based
around a single scenario. These test your ability to assimilate information quickly and either apply
theoretical knowledge or provide a brief analysis or evaluation.

It is always a good idea to list a few bullet points as a plan for each question, covering what you want to
say. This helps to focus your mind on the subject and your answers on the question.

The final 50% of the marks are awarded for answering one or two compulsory questions, each of which
may be related to a scenario. These scenarios will not necessarily be any longer than those in the short
answer questions, but your answers must be in more depth to earn the majority of the marks available.

Always produce an answer plan, including any models or theory that you need to mention. A good tip for
answering questions that require you to, for example,’ explain five advantages of…’ is to produce a bullet
list which you then use to provide the headings in your answer. Add some good explanation to this and
you’ll be well on your way to passing.

What the examiner means

The table below has been prepared by CIMA to help you interpret the syllabus and learning outcomes and
the meaning of exam questions.

You will see that there are 5 levels of Learning objective, ranging from Knowledge to Evaluation, reflecting
the level of skill you will be expected to demonstrate. CIMA Certificate subjects were constrained to levels
1 to 3, but in CIMA’s Professional qualification the entire hierarchy will be used.

At the start of each chapter in your study text is a topic list relating the coverage in the chapter to the
level of skill you may be called on to demonstrate in the exam.
 INTRODUCTION xv

Learning objectives Verbs used Definition

1 Knowledge
What you are expected to  List  Make a list of
know
 State  Express, fully or clearly, the details of/facts of
 Define  Give the exact meaning of
2 Comprehension
What you are expected to  Describe  Communicate the key features of
understand
 Distinguish  Highlight the differences between
 Explain  Make clear or intelligible/state the meaning of
 Identify  Recognise, establish or select after consideration
 Illustrate  Use an example to describe or explain
something
3 Application
How you are expected to  Apply  Put to practical use
apply your knowledge
 Calculate/  Ascertain or reckon mathematically
compute  Prove with certainty or to exhibit by practical
 Demonstrate means
 Prepare  Make or get ready for use
 Reconcile  Make or prove consistent/compatible
 Solve  Find an answer to
 Tabulate  Arrange in a table
4 Analysis
How you are expected to  Analyse  Examine in detail the structure of
analyse the detail of what
 Categorise  Place into a defined class or division
you have learned
 Compare and  Show the similarities and/or differences
contrast between
 Construct  Build up or compile
 Discuss  Examine in detail by argument
 Interpret  Translate into intelligible or familiar terms
 Prioritise  Place in order of priority or sequence for action
 Produce  Create or bring into existence
5 Evaluation
How you are expected to use  Advise  Counsel, inform or notify
your learning to evaluate,
 Evaluate  Appraise or assess the value of
make decisions or
recommendations  Recommend  Propose a course of action
xvi INTRODUCTION

3 How to pass
3.1 Study the whole syllabus
You need to be comfortable with all areas of the syllabus, as questions will often span a number of
syllabus areas. For example, question four in the Specimen Paper tested training (from the Managing
Human Capital syllabus area) in the context of systems implementation (from the Information Systems
syllabus area). A little wider reading will help you keep up to date with the global environment and new
technologies.

3.2 Lots of question practice

You can develop analysis and application skills by attempting questions in the Exam Question Bank and
later on questions in the BPP Practice and Revision Kit.

3.3 Analysing questions

For E1 it's particularly important to consider the question requirements carefully so that you understand
exactly what the question is asking. It is easy to misread multiple choice questions and therefore choose
the wrong answer.

Section C questions will often require you to produce an answer in the context of the scenario. Always
read the question carefully and answer the question set, not the question you hoped would be set!

3.4 Answering questions

Well-judged, clear recommendations grounded in the scenario will always score well as markers for this
paper look to reward good answers. Lists of points memorised from texts and reproduced without any
thought won't score well – you must always relate your knowledge to the specific question that you are
facing. Additionally, only include scenario information or detailed theory in your answer if it supports the
points you're making.

3.5 Exam technique

The following points of exam technique are particularly relevant to this paper.

 Answers with answer plans attached tend to score better and don't repeat the same material in
different question parts.

 You should consider in advance how you are going to use the 20 minute reading time as it can
help reduce time pressure. It is suggested that a good use of this time is to begin answering the
multiple choice questions by marking the question paper. Your answers can be transferred to your
answer book when writing time commences. Do not mark your answer book until you are
permitted to do so.

 Read the question carefully. A question that may appear on first glance to be about the product
lifecycle, may not require you to state the main stages of the cycle, but discuss how the model is
used or the principles behind it.

 Leave time to check your answers at the end to identify and correct any silly mistakes.
 INTRODUCTION xvii

4 Brought forward knowledge

CIMA has stated that syllabus material covered by any of the papers within the CIMA Certificate in
Business Accounting qualification may be relevant for assessment purposes in related subjects.

5 Links with other Operations level exams

The Operations level syllabus is wide and covers a number of different syllabus areas. The E1 syllabus
alone covers five significant syllabus areas, giving the examiner more than enough on which to base the
E1 exam. Therefore, it is unlikely that an E1 examination question would require knowledge from the
other operations level papers (F1 and P1).
xviii INTRODUCTION

The exam paper

Format of the paper

Number of
marks
Section A: Ten compulsory objective test questions, each worth 2 marks. Mini
scenarios may be given to which a group of questions relate. 20
Section B: Six compulsory short answer questions, each worth 5 marks. A short
scenario may be given, to which some questions relate. 30
Section C: Two compulsory written questions. Scenarios may be given, to which
questions relate 50
100

Time allowed: 3 hours, plus 20 minutes reading time

CIMA guidance
CIMA has stated that credit will be given for focusing on the right principles and making practical
evaluations and recommendations. Plausible alternative answers could be given to many questions, so
model answers should not be regarded as all-inclusive.

Numerical content
Questions in this paper usually require written answers. These involve applying theory or explaining key
concepts, so do not expect many calculations. However you should bring a calculator with you to the
exam just in case.

Breadth of question coverage

Questions in all sections of the paper may cover more than one syllabus area.

Knowledge from other syllabuses

Operations level papers can be taken independently and do not require knowledge from other syllabuses.

May 2013 exam paper

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 Centralised IS activities, pay structures, flexible employment practices

4 Branding, marketing operations, development and training

 INTRODUCTION xix

March 2013 resit examination

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 Lean production, recruitment and selection, employee retention

4 Role of Government, benefits of corporate social responsibility, corporate social responsibility

and HR policies

November 2012 exam paper

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 Government policy, consumer buying behaviour and marketing, corporate social responsibility
and ethics
4 Roles of HR and line managers, lean management, Maslow/Herzberg and modular teams

September 2012 resit examination

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 Market segmentation, ISO 9000, quality control

4 Offshoring, job rotation, training

xx INTRODUCTION

May 2012 exam paper

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 Decentralised information systems, total outsourcing, principles of marketing

4 Total quality management (TQM), training, quality costs

March 2012 resit examination

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 Strategic marketing, strategic marketing plans, bonus schemes
4 EPOS systems, resistance to change, HR issues

November 2011 exam paper

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 Strategic marketing strategies, product portfolio management, sustainability
4 Geographically dispersed teams, home-working, role of an HR department
 INTRODUCTION xxi

September 2011 resit examination

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 Brand management, total reward packages, internal marketing
4 People and payroll systems, approaches to quality, corporate websites

May 2011 exam paper

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 ISO 9000, remuneration and reward packages, performance measures
4 Branding, product and place mix, HR activities

November 2010 exam paper

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 HR Practices, HR \ workforce plan, e-HR

4 Ethics and CSR, marketing mix and branding, Internet marketing

xxii INTRODUCTION

May 2010 exam paper

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 Emerging economies (BRIC), off-shoring; HR and redundancy

4 Supply chain management, process design, code of ethics

Specimen exam paper

Section A
1 Ten multiple-choice questions covering the whole syllabus

Section B
2 Six short written questions covering a wide range of syllabus areas

Section C (two longer scenario questions worth 25 marks each)

3 Marketing, market segmentation, promotional activity and ethics

4 Information system implementation problems and training provision

THE GLOBAL BUSINESS ENVIRONMENT

Part A

1
2
THE SOCIAL, POLITICAL AND
ECONOMIC CONTEXT

We start our E1 studies by looking at the develop and then apply our knowledge to the recently
wider environment that organisations operate emerging economies of Asia and Latin America.
in. This consists of the global economy and
Finally, we consider the different types of organisation
the nations which participate in it.
and the important cultural issues that face businesses
Once we have set the global context for business we who operate globally.
shall turn our attention to looking at how nations

topic list learning outcomes syllabus references ability required

1 The global business environment A1(a) A1(ii) comprehension
2 International environmental influences A1(a), A2(c) A1(ii) , A2(vi), application
A2(vii)
3 Economic context A1(a) A1(iii), A1(v) comprehension
4 Emerging economies A1(a), A1(b) A1(ii), A1(iv) comprehension
5 Different types of organisation A1(a) A1(i), A1(ii) comprehension
6 Culture and the global organisation A1(a) A1(i) comprehension

3
4 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

1 The global business environment

Introduction
Today, international trade is truly global. In this section we consider the factors which led to the
globalisation of world trade.

1.1 Globalisation 05/11

GLOBALISATION refers to the growing interdependence of countries worldwide through increased trade,
increased capital flows and the rapid diffusion of technology.
KEY TERM Adapted from an IMF definition

Features of globalisation include:

(a) The ability of individuals to enter into transactions with individuals and organisations based in
other countries.

(b) The increased importance of global economic policy relative to domestic policy.

(c) The rise of globally linked and dependant financial markets.

(d) The reduction in importance of local manufacturing.

(e) Reduced transaction costs through developments in communications and transport.

(f) The rise of emerging, newly industrialised nations.

On an organisational level, global production implies that an organisation's production planning is

considered on a global scale.

(a) Global manufacture. A company can manufacture components for a product in a number of
different countries. China is becoming the workshop of the world.

(b) Global sourcing. Sub-components may be purchased from countries overseas.

1.2 Factors encouraging the globalisation of world trade

(a) Financial factors such as Third World debt. Often, lenders require the initiation of economic
reforms as a condition of the loan.

(b) Country/continent alliances, such as the European Union, which foster trade and other
phenomena such as tourism.

(c) Legal factors such as patents and trade marks, which encourage the development of technology
and design.

(d) Markets trading in international commodities. Commodities are not physically exchanged, only the
rights to ownership. A buyer can, thanks to efficient systems of trading and communications, buy a
commodity in its country of origin for delivery to a specific port.

1.3 Organisations involved in global trade.

A number of organisations are involved in developing and managing global trade. These include, the
World Trade Organisation (WTO), the G8, the International Monetary Fund (IMF), the World Bank and
the European Bank for Reconstruction and Development (EBRD).
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 5

1.3.1 The World Trade Organisation (WTO)

The World Trade Organisation (WTO) was formed in 1995 as successor to the General Agreement on
Tariffs and Trade (GATT) which was set up after World War II in 1948. It is an organisation that devotes
itself to international trade in goods, services, traded inventions, creations and intellectual property.

The WTO has over 150 members and these represent 97% of international trade. The organisation seeks
to promote the free flow of trade by removing obstacles to trade, and to make sure that individuals,
companies and governments know what these rules are.

The WTO:

 Administers trade agreements

 Is a forum for developing new trade agreements
 Settles trade disputes
 Reviews national trade policies
 Assists developing countries in trade policy issues (training/technical assistance)
 Co-operates with other international organisations

GATT is the WTO's main guidelines on international trade in goods. It is the result of negotiations
between nations and is subject to updating and revision. For example, when the WTO was set up, GATT
was extended to intellectual property, services, dispute settlement and other areas.

The WTO Agreements contain the principles of liberalisation of free trade. They include commitments by
each country to lower customs tariffs and other trade barriers, and to open and keep open services
markets. They also set procedures for settling disputes.

1.3.2 The G8
The G8, or Group of Eight, is a forum for eight of the main developed nations. Membership of the G8
includes France, Germany, Italy, Canada, Russia, Japan, the United Kingdom and the United States.

The forum, which has no official powers or resources, was originally established so that talks on
economics and trade can take place, however in recent years, politics has also been discussed and
agenda items have included global warming, AIDS and poverty. The group is seen to take a lead in world
affairs and often sets a direction for the international community to follow.

The group meets at an annual summit meeting. The members rotate the presidency of the forum and
responsibility for hosting the summit. Matters often discussed include:

 International trade generally

 Energy and pollution issues
 Developing nations
 Macroeconomic issues
 International crime
However, other issues that are often discussed include:

 Improved cooperation over trade and finance

 Strengthening the global economy
 Prevention and resolution of conflicts
 Promotion of peace and democracy

1.3.3 The International Monetary Fund (IMF)

The International Monetary Fund (IMF) was established at the Bretton Woods meeting in 1944 in the
US. Its initial role, after the Second World War, was in the rebuilding of national economies. The IMF
oversaw the international monetary system and took on the role of ensuring exchange rate stability and
encouraging members to eliminate exchange restrictions that hinder trade. Since then, the IMF has played
a major role in world affairs, for example in helping former communist nations transition into market
economies.
6 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

In more recent times, the IMF has:

 Promoted financial cooperation

 Established stable exchange rates and easily convertible currencies
 Provided help and support for nations with trade deficits in order to help them overcome them
 Encouraged international liquidity

1.3.4 The World Bank

Like the IMF, the World Bank was founded at the Bretton Woods summit in 1944 and was initially
known as the International Bank for Reconstruction and Development (IBRD). Its role was to assist
nations reconstruct their economies after the Second World War but once that was achieved it refocused
its attention onto the developing world. The organisation (which is now known as the World Bank) is
made up of five main bodies.

The International Bank for Reconstruction and Development (IBRD) which provides loans to middle-
income and creditworthy low-income countries. Funds are raised by the IBRD and provided to nations at
a commercial (but low) rates of interest and on favourable terms.

The International Development Association (IDA) which provides interest-free (or low rate) loans, called
credits, and grants to the poorest countries. Funds are raised by subscription from donor countries and
distributed to borrowing countries.

The International Finance Corporation (IFC) which provides loans, equity and technical assistance to
stimulate private sector investment in developing countries.

The Multilateral Investment Guarantee Agency (MIGA) which provides guarantees against losses caused
by non-commercial risks to investors in developing countries.

The International Centre for Settlement of Investment Disputes (ICSID) which provides international
facilities for conciliation and arbitration of investment disputes.

1.3.5 The European Bank for Reconstruction and Development (EBRD)

The European Bank for Reconstruction and Development (EBRD) was established in 1991 as a response
to the political and economic changes in Central and Eastern Europe. The role of the Bank was to support
the development of market economies in the region following the widespread collapse of communist
regimes. In more recent times, the EBRD has embraced a role as the world’s only transition bank, and is
helping nations around the world to move from state controlled to market economies.

1.4 Impact of globalisation on firms

Globalisation has a number of impacts on firms, for example:

(a) Relocation. Firms may need to relocate their operations to reduce costs, avoid tariffs and quotas,
or to take advantage of areas of industrial excellence.

(b) Markets. New markets may emerge as closed markets (such as China) open up or as nations
become more developed. Consumer tastes change and products become more homogenised and
can therefore be sold in more countries.

(c) Competition. Reduced trade barriers and advances in communications greatly increases the
number of competitors that a firm faces.

(d) Alliances. The opportunities for forming alliances or merging/acquiring other firms will also
increase for the same reasons.

(e) Economic divisions. Wealthy countries with access to modern communications technology will
become more wealthy at the expense of poorer nations that cannot afford to make the necessary
investment. Such nations may also be pressured into producing goods for export rather than
ensuring the production of goods and services needed locally.
 PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 7

Section summary
Global production involves manufacturing and sourcing on a global scale.

World trade has been encouraged by financial factors, trade alliances, legal factors, international
markets and various organisations.

2 International environmental influences

Introduction
The global business environment can be analysed against a number of factors, such as political,
economic, social/cultural and technological. This is known as PEST analysis. There will be differences
between different countries.

2.1 Political and legal

2.1.1 Political risk

Political risk is the risk of an organisation incurring losses due to non-market factors. These factors are
usually related to government policy, for example trade rules, investment incentives and the tax regime.
KEY POINTS
Political risk is also related to financial factors such as currency controls and the economy, and stability
factors such as rioting and civil war.

Some countries present a higher political risk than others. For example, less developed countries are
often viewed as more unstable than developed countries and therefore a higher risk in comparison.

Even in a developed country, there is significant political risk at the time a new government is elected.
This is particularly true where a previous opposition party is elected, as it may hold completely different
views about how the country should be run than the previous regime.

Some political risk directly affects a business (see the table below for examples). However, some political
risk indirectly affects a business (for example government economic policy that affects the general
business environment).

Examples of political risk

Changes to fiscal policy (taxation) Nationalisation of foreign-owned industries
Changes to regulations on paying dividends to Legislation changes (especially to
foreign shareholders corporate/employment law)
Changing/cancelling government contracts Pressure groups affecting government policy

2.1.2 Corporate political activity

Corporate Political Activity (CPA) refers to the involvement of companies in the political process with the
aim of influencing policies towards their preferences. Common activities include lobbying and donating to
KEY POINT political party campaigns.
8 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

Corporate political activities are generally used by companies to attempt to gain competitive advantage
and can be classified into two types, buffering and bridging.

(a) Buffering refers to proactive actions such as warning the government about the impact of
legislation while it’s being considered, in an attempt to influence the content.

(b) Bridging is more reactive and focuses more on ensuring the firm is aware of and meets required
standards of behaviour, for example ensuring the company is aware of proposed new legislation
and complies with it when it is passed.

Organisations may need to deal with governments and make their policy preferences known in a number
of situations. Examples include:

(a) Multinational companies from developed countries may negotiate terms for their investment in that
country. For example finance, taxation and export agreements.

(b) Multinationals may lobby governments to provide conditions in the economy that benefit them.
For example reducing restrictions or controls over labour such as working hours and minimum
wages. The MNC may threaten to withdraw its investment if the government fails to agree.

(c) New industries in developing nations may seek protection from their government, for example
import restrictions.

(d) Developing industries may seek government support such as subsidies or tax breaks to help them
compete in the global market.

There is a difference in corporate political activity between businesses in developed and developing
nations.

In developed nations CPA is well-organised with large organisations nurturing close relationships with
relevant government departments. Businesses often have special government liaison departments to foster
their relationships. There are also organisations set up to lobby government on behalf of interested
parties. Examples of lobby groups in the UK include, Chambers of Commerce, the Confederation of British
Industry (CBI), the Institute of Directors (IOD) and the Federation of Small Businesses (FSB).

This contrasts with developing nations where relationships are not so subtly managed. Businesses are
often more direct in approaching individual policy makers, government departments and politicians to put
across their needs. In some instances, those with the power to make government policy may be subjected
to bribery, corruption and threats.

2.1.3 Country risk

Country risk is similar to political risk, although it is usually wider in scope and includes all risks relevant
to the business environment (including market factors) in a specific country.
KEY POINT

It is important that organisations analyse the political and country risk of a nation before investing or
trading with it to minimise the risk of losses.

Examples of country risk

Political environment (stable/unstable) Level of interference of government in business
Structure of the society The economy
Feelings toward foreign business organisations Culture
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 9

2.1.4 Analysing political and country risk

Analysis of political and country risk is difficult. Some elements of risk, such as financial factors, can be
quantified, however some factors such as the risk of civil war are based on assumptions and judgements.

Macro-political risks are general risks that affect all foreign firms in the same way. The risk of the seizure
of all overseas owned business assets is an example of a macro political risk. Risks relevant to particular
organisations or sectors are referred to as micro-political risks. Industry specific regulation is an example
of a micro political risk.

Many organisations employ a third party to carry out a risk assessment for them.

Rugman and Hodgetts summarised different aspects of political risk as shown in the following tables.

Sources of political risk

Changing economic conditions Social unrest and upheaval
Religious competition and disputes Local business people vested interests
New international alliances Increased nationalism

Groups that generate political risk

The government and its agencies Foreign governments that have influence
International organisations (eg World Bank, United Terrorist groups
Nations)
Organised interest and protest groups (eg students) Political opposition groups

Effects of political risk

Expropriation (seizing) of assets, with or without Influence on government by non-government
compensation groups
Disruption and / or damage from terrorist activity Restrictions on ways of operating
Increased taxes and / or other financial penalties Cancellation or revision of contracts
Restrictions on foreign ownership and / or the favouring of local firms (indigenisation laws)

2.1.5 Weighing up political and country risk

Once the risks have been identified, the organisation needs to weigh up the probability of the risk
occurring and the consequences to the organisation should the event occur. Jennings and Wattam
(1998) devised the following model to weigh up political risk.

Impact of risk
Low High
Probability of risk

High A B

Low C D
10 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

The model is used to classify the probability of the risk and impact of the risk as low or high. Four
possible situations will result:

(a) Situation A – High probability of risk, low impact. There is a good chance of the risk occurring,
although if it does it will not have a significant impact on the organisation. The company should
accept the risk but take action to manage it. If the cost of risk management is too high, the
organisation may decide to simply accept the risk (if it has a very low impact).

(b) Situation B – High probability of risk, high impact. Due to the high risk and potential impact on
the organisation, investing or dealing with the country should only go ahead if the risk can be
managed and contingency plans put in place. The potential benefits of the deal must outweigh the
costs of managing the risk.

(c) Situation C – Low probability of risk, low impact. The probability of the risk is low and the
potential impact on the organisation is also low. This is the ideal situation as the costs of
managing the risk will be low. The organisation may decide that risks classified in this quadrant
can be accepted with minimal or no additional risk management actions.

(d) Situation D – Low probability of risk, high impact. It can be difficult to decide what action is
appropriate in this situation because although the probability of risk is low, the damage it can
inflict on the organisation is high. If the organisation chooses to go ahead, then it must take action
to minimise the chance of the risk occurring and the potential impact it will have (for example, an
insurance policy). If this cannot be achieved in a cost-effective manner then the organisation
should consider abandoning its plans.

2.1.6 Managing country and political risk

RISK MANAGEMENT involves reducing the probability of the risk occurring and minimising the impact on
the organisation that it will cause.
KEY TERM
Managing political risk begins even before an investment is made as it is important for the organisation to
consider and understand it before making a commitment. At this stage the main issue is whether the
potential return from the investment outweighs the risk involved in making it.

Once the investment is made, the business should review the risks regularly. It should, in particular, look
out for the emergence of new risks or minor risks becoming more serious. These reviews ensure that the
risks can be addressed as soon as possible once they are detected.

Country risk can be analysed three ways – politically, financially and economically.

Political factors include the stability of the government and any tensions between groups (such as
religious or ethnic groups). Financial factors are usually macro-economic factors in relation to levels of
government debt, the exchange rate and balance of trade. Economic factors are key statistics relating to
economic activity – for example levels of GDP and inflation.

Once these factors are identified and analysed, the level of country risk can be assessed.

The following table contains general examples of how businesses can minimise the probability and
impact of both types of risk.

Minimising probability of risk Minimising impact of risk

Postponing/abandoning of project until the level of Continually monitor the environment and be
risk is reduced prepared to react quickly
Develop links with relevant government Develop contingency plans
departments to help shape policy
Abandon the project Take out country/political risk insurance

You will revisit risk management when you study P3.

PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 11

2.1.7 Legal
The system of courts and the law will differ from country to country although many share similar
characteristics. The rule of law and independent judiciaries may be strong in one country but absent in
another. Rules relating to corporate status, property, the regulation of business and to financial reporting
may all be very different.

2.2 Economy and economic development

Various economic factors specific to a country may affect international trade:
 Is there growth or is the economy stagnating?
 Is the exchange rate stable?
 How does the interest rate compare with other countries? Is it stable?
 What is the rate of inflation? What is the government's policy? Is it realistic?

Economic factors affect the demand for, and the ability to acquire, goods and services. As countries
develop, demand increases for more and more sophisticated products and services. Countries generally
have larger agricultural sectors in the early stages of economic development. As the economy develops,
the manufacturing sector increases.

PEST analysis can also be used as a tool to identify the risks within an economy. In this case, potential
risks are generated for each of the four headings.

Factor Example of risk

Political Unstable government
Economic Economic slowdown
Social High crime rates, risk of civil war
Technological Lack of technological infrastructure – poor telecommunications network

2.2.1 Level of economic development

Generally each country can be classified under one of five headings. Note that gross domestic product
(GDP) is the value of the goods and services produced by an economy in a given period.

LESSER DEVELOPED COUNTRY (LDC). Relies heavily on primary industries (mining, agriculture, forestry,
fishing). Low GDP and poorly developed infrastructure.
KEY TERMS
EARLY DEVELOPED COUNTRY (EDC). Largely primary industry based but with developing secondary
(manufacturing) industrial sector. Low but growing GDP, developing infrastructure.

SEMI-DEVELOPED COUNTRY (SDC). Significant secondary sector still growing. Rising affluence and
education with the emergence of a 'middle class'. Developed infrastructure.

FULLY DEVELOPED COUNTRY (FDC). Primary sector accounts for little of the economy. Secondary sector
still dominates, but major growth in tertiary (service) sector. Sophisticated infrastructure.

TRANSITIONAL ECONOMIES (TES). These are countries which used to be part of the planned economy of
the Soviet Union but which are now in various stages of transition towards a market economy.

2.3 Social/cultural
A country's culture consists of a number of factors such as beliefs, morals and how citizens behave. A
nation's culture is very difficult to change and if change does occur it will take place very slowly.
National culture is important to businesses because it influences the perceptions and behaviour of
consumers as well as employees and managers. The national way of doing things pervades society.
Business practice is part of the structure of society and therefore subject to cultural influences.
12 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

Language is another important aspect of culture. While English is fast becoming the international
language of business, there are many areas where it is not commonly understood, sometimes as a matter
of local pride. Mistaken use of a foreign language can have a detrimental affect on a business.

2.4 Technology
Technology is the key driver of global economic activity. It is an enabler, allowing new types of business
and organisational structure. It has had other impacts, such as:

(a) Protection of intellectual property. Patents, trademarks and copyright are particularly important in
international operations. Can they be protected? Similarly, in manufacturing, can trade secrets be
protected, perhaps by importing part-completed assemblies? Some countries require local
ownership of relevant patents before production can proceed in that country.

(b) If advanced technology is involved, it will be necessary to consider local standards of education
and technical infrastructure.

(c) Reliance on 'e' methods for marketing communications and product delivery (eg information or
music downloads) depends on potentially differing levels of infrastructure (eg availability of
broadband Internet connections) and adoption (eg mobile phone ownership).

(d) Ease of communication with overseas markets (eg via email and e-commerce) creating potential
fulfilment/delivery problems (given distance and infrastructure).

You can use PEST analysis to analyse many aspects of an organisation’s environment so
expect to apply it in your future exams, up to and including TOPCIMA.

We shall also apply PEST in connection with gathering information about an organisation’s environment,
and in relation to the marketing environment.

PEST analysis is also sometimes known as PESTEL analysis. This is the same as PEST, but considers
ecological factors and at legal factors separately from political factors.

Section summary
The global business environment can be analysed into political, economic, social and technological
factors, this is known as PEST analysis.

3 Economic context

Introduction
Free trade is not a new concept, but free trade on a global scale has grown massively in recent decades.
There are arguments for and against free trade.

In the global business environment a number of regional trading arrangements exist. These regional
trading groups take three forms, free trade areas, customs unions and economic unions/common
markets.

Another feature of the global environment is the increasing number of transition economies which are
becoming more outward looking and competitive.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 13

3.1 Free trade v protectionism

FREE TRADE encourages easy movement of goods, services labour and capital between different countries.
Free trade involves an absence of quotas, tariffs, subsidies and discriminatory taxation or other barriers
KEY TERM that may hinder trade.

Free trade is sometimes referred to as liberalisation or liberal trade policies.

Arguments for free trade

Conflict is less likely between countries that trade and communicate with each other, and closer political
links should be formed
Facilitates specialisation by countries in the production of the goods and services they are best suited to
producing
Enables countries to develop and invest in resources leading to more efficient production
Encourages entrepreneurship and economic growth
Encourages all countries to export and competition is encouraged
Leads to better quality goods and a better quality of life as surpluses and deficits are removed
Internationalisation increases the size of markets which improves economies of scale
Competition lowers prices and improves consumer choice

Arguments against free trade

Countries become dependent upon a single product or type of product (eg the oil exporting countries of
the Middle East)
Less developed countries become dependent upon other countries for some products (eg high tech
products)
Can undermine local culture (eg the Americanisation of Europe)
Increases consumer expectations and encourages inefficiencies (eg air-freighting fruit to areas it is out of
season)
Free trade can prevent new industries developing and becoming established
Unfair competition is created as countries with excess goods can 'dump' their surplus cheaply into other
countries
Opening up of markets allows foreign monopolies to take over local industries
It allows potentially harmful products to be traded
Relaxed border controls reduce national security
Multi-national companies may have an unfair influence on a country's political system

PROTECTIONISM aims to restrict trade with one or more other country to protect home country producers
from overseas suppliers.
KEY TERM
Protectionism is sometimes referred to as economic nationalism.
14 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

Protective trade measures

Quotas - restricting the quantity able to be imported (an embargo is a total ban on the import/export of a
particular good).
Tariffs and/or customs duty - effectively taxing imports making them more expensive
Subsidies - helping local producers giving them an advantage over overseas competitors
Campaigns – encouraging citizens to buy locally produced goods
Technical/administrative barriers - implementing strict quality, environmental, health and safety and / or
packaging regulations that effectively restrict imports

3.2 The move towards free trade

From the industrial revolution in the nineteenth century until the middle of the twentieth century, nations
held a nationalist view of their economy – in other words governments were only interested in protecting
and developing their own industries.

However, in the mid to late twentieth century economic liberalisation took place. Governments moved
away from the single minded view of looking after their own economies, towards working with others in
groups for the common good of all members.

Several forms of trading group have developed, including, free trade areas, customs unions, economic
unions/common markets and single markets.

Those in favour of such trading groups point out that by harmonising economic policies and removing
trade restrictions, trade is encouraged and prices are reduced.

However, critics of these trading groups point out that trade is encouraged within the group at the
expense of nations outside the group – even if their prices are lower.

The World Trade Organisation (WTO) opposes trading groups because they develop trade internally by
creating barriers to prevent external organisations entering their market. World trade may be affected as
each group seeks to promote trade within itself, this may create conflicts between different groups – for
example caused by import and export restrictions imposed. Protectionism may also be encouraged at the
time when the WTO is trying to free up world trade.

As an alternative to free trade or protectionism, countries may seek a policy of 'balanced trade'. The
objective of balanced trade is to manage the imports and exports between two nations so that neither
runs up a large trade deficit.

3.3 Free trade areas

Members in these arrangements agree to lower barriers to trade amongst themselves. They enable free
movement of goods and services, but not always the factors of production such as materials and labour.

3.4 Customs unions

Customs unions provide the advantages of free trade areas and agree a common policy on tariff and non-
tariff barriers to external countries. They attempt to harmonise tariffs, taxes and duties amongst
members.

3.5 Economic unions/common markets

In an economic union or common market, members become one for economic purposes. There is free
movement of the factors of production.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 15

The European Union (EU) began as a single market and was created in 1957 by the Treaty of Rome.
This treaty had the goals of:

 Creating common policies on areas such as farming and transport that member countries should
abide by.

 Encouraging competition within the market by removing restrictive practices created by business.

 Removing duties and quotas on trade between member countries.

 Increasing trade with non-member countries.

 Allowing the free movement of goods, services, people and capital between member countries.

 Creating a customs union and common trade policies between members and non-members.

Since 1957, the EU has developed and now an economic union has been created. Some member states
have adopted a common currency, the Euro.

3.6 Single markets

A single market is a level playing field for all producers within an economic community. The community
creates common policies concerning the movement of goods, product specification and regulation so all
producers must meet the same requirements.

3.7 Other types of agreement

Bi-lateral and multi-lateral trade agreements eliminate protectionist policies such as quotas and tariffs on
goods traded between nations subject to the agreement. Bilateral agreements are between two nations
(for example the Closer Economic Relations agreement between Australia and New Zealand). Multi-lateral
agreements are between three or more nations and some examples are listed below.

3.8 Examples of trade agreements

The following are examples of the different types of trade agreements which are currently in operation.

Free movement of
Free trade eg EFTA
goods and services
area
between members

plus
Customs eg the EEC (the EU
Common external
union in earlier years)
tariffs

plus
Common eg the EU now
Free movement of
market
factors of production
16 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

The major regional trade organisations are as follows.

(a) North American Free Trade Agreement (NAFTA) – A free trade area between the US, Canada and
Mexico.

(b) European Free Trade Association (EFTA) – Norway, Switzerland, Iceland, Liechtenstein.

(c) European Union (EU) – A single market / economic union between Ireland, United Kingdom,
France, Germany, Italy, Spain, Portugal, Finland, Sweden, Denmark, Luxembourg, Belgium, the
Netherlands, Austria, Greece, Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Malta, Poland, Romania, Slovakia, Slovenia.

Croatia is due to become a member in mid-2013.

(d) Asean Free Trade Area (AFTA) – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the
Philippines, Singapore, Thailand, Vietnam.

(e) Asia-Pacific Economic Co-operation (APEC) – Australia, Brunei, Malaysia, Singapore, Thailand,
New Zealand, Papua New Guinea, Indonesia, the Philippines, Taiwan, Hong Kong, Japan, South
Korea, China, Canada, US, Mexico, Chile, Peru, Russia and Vietnam.

(f) Mercosur – A customs union between Brazil, Argentina, Paraguay, Uruguay and Venezuela
(Bolivia, Chile, Columbia, Ecuador and Peru are associates).

(g) Southern African Development Community (SADC); Angola, Botswana, Democratic Republic of the
Congo, Lesotho, Malawi, Mozambique, Mauritius, Namibia, South Africa, Seychelles, Swaziland,
Tanzania, Zambia, Zimbabwe.

(h) West African Economic and Monetary Union (UEMOA) – Ivory Cost, Burkina Faso, Niger, Togo,
Senegal, Benin, Mali and Guinea-Bissau.

(i) South Asian Association for Regional Co-operation (SAARC) – India, Pakistan, Sri Lanka,
Afghanistan, Bangladesh, the Maldives, Bhutan and Nepal.

(j) Andean Pact – Colombia, Ecuador, Peru and Bolivia.

(k) Association of Southeast Asian Nations (ASEAN) – A free trade area between Brunei, Indonesia,
Malaysia, Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar and Cambodia.

(l) The Economic Community of West African States (ECOWAS) – A single market between Benin,
Burkina Faso, Cabo Verde, Ivory Coast, Gambia, Ghana, Guinee, Guinee-Bissau, Liberia, Mali,
Niger, Nigeria, Senegal, Sierra Leone and the Togolese Republic.

Section summary
Economic nationalism is a nation's view that it should protect its own economy and industries.

Economic liberalisation involves nations moving away from economic nationalism towards working with
others in a group to benefit all member economies and industries.

Free trade areas, customs unions and economic unions/common markets are all types of economic
system designed to provide members with a trade advantage.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 17

4 Emerging economies 11/10

Introduction
Economies develop over time. Development begins with agriculture and moves to manufacturing and
services once demand for such goods is created and the economy is wealthy enough to afford them.

Traditionally the largest and most powerful economies of the world were those of the US, Japan and
Western Europe. These countries were the first to become developed and therefore they had a 'head start'
on the rest of the world. However, in recent years a number of other countries have begun to compete
with them.

4.1 Absolute advantage and comparative advantage

An early explanation for the success of different countries was Adam Smith’s theory of absolute
advantage. In The Wealth of Nations, way back in 1776, Smith proposed that each nation should
specialise in producing those goods that it could produce most efficiently. Some of these would be
exported to pay for the imports of goods that could be produced more efficiently elsewhere.

Smith’s theory of absolute advantage is based on the assumption that the nation is more efficient at
production of certain goods than are its trading partners, and that nations would gain from trade.

Smith’s theory was refined by David Ricardo (around 1817) and in the 1930s by Hecksher and Olin to
become the theory of comparative advantage. This held that relative opportunity costs were most relevant
when considering economic activities in relation to other countries. Even if a country is able to produce all
its goods at lower costs than another country can, trade would benefit both countries.

4.2 Competitive advantage - Porter's diamond

Michael Porter argues that comparative advantage is too general a concept to explain national sources of
competitive advantage. His The Competitive Advantage Of Nations (1992), suggests that some nations'
industries are more internationally competitive than others.

Porter believes the conditions within a country affects the ability of organisations and industries based in
that country to compete with organisations based in other countries. He identifies four principal factors,
that impact on the competitiveness of organisations as shown in the following diagram - the diamond.
Governments can intervene in their economy to support each factor and as a result can influence the
competitiveness of its organisations.

Porter’s diamond

Firm strategy,
structure, rivalry

Factor Demand
conditions conditions

Related and
supporting industries
18 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

4.2.1 Factor conditions

Factor conditions relate to those factors used as inputs in the production of goods and services.

 Human resources (skills, price, motivation, industrial relations)

 Physical resources (land, minerals, climate, location relative to other nations)
 Knowledge (scientific and technical know-how, educational institutions)
 Capital (amounts available for investment, how it is deployed)
 Infrastructure (transport, communications, housing)

Porter distinguishes between basic and advanced factors.

(a) Basic factors are natural resources, climate, semiskilled and unskilled labour. They are inherent, or
at best their creation involves little investment. They are unsustainable as a source of national
competitive advantage, since they are widely available. For example, the wages of unskilled
workers in industrial countries are undermined by even lower wages elsewhere.

(b) Advanced factors are associated with a well-developed scientific and technological infrastructure
and include modern digital communications networks, highly educated people (eg computer
scientists), university research laboratories and so on. They are necessary to achieve high order
competitive advantages such as differentiated products and proprietary production technology.

An abundance of factors is not enough. It is the efficiency with which they are deployed that matters.
The former Soviet Union had an abundance of natural resources and a fairly well educated workforce, but
was an economic catastrophe.

Porter also notes that generalised factors, such as transport infrastructure are not significant in
establishing competitive advantage as specialised factors. Specialised factors are relevant to a limited
range of industries, such as knowledge bases in particular fields and logistic systems developed for
particular goods or raw materials. Such factors are integral to innovation and very difficult to move to
other countries.

4.2.2 Demand conditions: the home market

The home market determines how organisations perceive, interpret and respond to buyer needs. This
information puts pressure on organisations to innovate and provides a launch pad for global ambitions.

Important home market considerations include:

(a) There are no cultural impediments to communication.

(b) Segmentation of the home market shapes an organisation’s priorities. Companies will be
successful globally in segments which are similar to the home market.

(c) Sophisticated and demanding buyers at home encourage high quality standards.

(d) Anticipation of buyer needs. If consumer needs are expressed in the home market earlier than in
the world market, the organisation benefits from experience.

(e) The rate of growth. Slow growing home markets do not encourage the adoption of state of the art
technology.

(f) Early saturation of the home market will encourage an organisation to export.

4.2.3 Related and supporting industries

Competitive success in one industry is linked to success in related industries. Local suppliers may be
preferable to overseas suppliers if continuing close co-operation and co-ordination is important. The
process of innovation is also enhanced when innovative organisations in related industries are based close
to each other. For example, many innovative high-tech businesses are based in “Silicon Valley”,
California.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 19

4.2.4 Firm strategy, structure and rivalry

Management style and industrial structure. Nations are likely to display competitive advantage in
industries that are culturally suited to their normal management practices and industrial structures. For
example, German managers tend to have a strong bias towards engineering and are best at products
demanding careful development and complex manufacturing processes. They are less successful in
industries based on intangibles such as fashion and entertainment.

Strategy. Industries in different countries have different time horizons, funding needs and so forth.

(a) National capital markets set different goals for performance. In Germany and Switzerland, banks
are the main source of capital, not equity shareholders. Short-term fluctuations in share prices are
not regarded as of great importance as funds are invested for the long term. In the USA, most
shares are held by financial institutions whose own performance indicators emphasise short-term
earnings growth.

(b) National attitudes to wealth are important. The egalitarian Swedes (as a generalisation) may be
less motivated to pursue success in industries that have the potential to create individual fortunes
but depend on new start-ups.

(c) National culture affects industrial priorities through the relative prestige it allots to various
industries and their leaders. Italy values fashion and furnishings, for instance, while in Israel the
most prestigious industries are agriculture and those related to defence.

Domestic rivalry is important for several reasons.

 All rivals are working under the same domestic conditions

 With little domestic rivalry, organisations may be happy to rely on the home market.
 Tough domestic rivals teach an organisation about competitive success.
 Domestic rivalry forces organisations to compete on grounds other than basic factors.
 Each rival can try a different strategic approach.

The promotion of one or two 'national champions' who can reap major economies of scale in the domestic
market is undermined by the vigorous domestic competition among high-performing companies. Examples
are the Swiss pharmaceutical industry and the US IT industry.

Porter’s diamond is a key theory which you will use again in the future, for example in paper
E2.

4.3 Influencing the diamond

A nation's competitive industries tend to be clustered. Porter believes clustering to be a key to national
competitive advantage. A cluster is a linking of industries through relationships which are either vertical
(buyer-supplier) or horizontal (common customers, technology, skills). For example, the UK financial
services industry is clustered in London.

Machinery that
produces the goods

Finished goods

Inputs, supplies

Related services
20 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

4.3.1 Government intervention

How does a country create a diamond of competitive advantage? Governments cannot compete, only
organisations can do that. Governments can influence the context in which an industry operates and can
create opportunities and pressures for innovation.

(a) Factors of production provide the seeds for development. A large endowment of easily mined iron
ore would suggest metal-working industries.

(b) Related and supporting industries can also be a foundation, if the competences within them can
be configured in a new way.

(c) Government policy should support cluster development and promote high standards of education,
research and commercially relevant technologies.

(d) Extraordinary demand in the home market based on national peculiarities and conditions can set
the demand conditions determinant in the diamond.

It must be remembered that the creation of competitive advantage can take many years.

Individual organisations will be more likely to succeed internationally if there is a supporting cluster.
Businesses should be prepared to invest in co-operative ventures in such fields as training, infrastructure
and research. However, the cluster approach is not guaranteed to be successful.

4.4 Offshoring and outsourcing 11/10

Two relatively recent techniques organisations may decide to utilise are offshoring and outsourcing. Cost
reduction is often the primary reason for offshoring and outsourcing.

OFFSHORING is the relocation of some part of an organisation's activities to another country.

OUTSOURCING involves an organisation sub-contracting business activities to external providers. These
KEY TERMS
providers may be in the same country as the organisation, or based overseas.

SERVICE LEVEL AGREEMENTS are contracts between organisations and outsourcing partners that set out the
terms of the outsourcing agreement. It may include factors such as, details of the precise service to be
provided, targets and benchmarks that must be met, response times for technical issues and serious
problems, reporting procedures, complaints procedures and termination procedures.

Developments in technology have made offshoring and outsourcing feasible in many situations. These
technological advances permit business processes to be split up and performed in several locations.
Communication devices such as smartphones and computers allow people in various locations to work
together and to share information.

4.4.1 Offshoring 05/10, 09/12

Offshoring could involve locating a department or subsidiary in another country, or using an external
company based in another country (referred to as ‘offshore outsourcing’).

The most common motivation for offshoring is to make cost savings by taking advantage of lower labour
and / or other costs.

Managing operations based in another country involves a number of challenges:

 Risks associated with currency exchange rates and political and economic stability of the offshore
country
 Loss of skills and jobs in the home country
 Exercising control from a distance and security of sensitive information
 Cost savings and efficiency improvements may be slow to accrue or may not be realised at all
 Dealing with cultural, time zones and language differences
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 21

Offshoring has grown significantly in many developing countries in recent years. It is popular due to the
creation of new jobs and improvements in technological infrastructure and in education and skills that are
created. However, some nations have voiced concerns over wages, working hours and other issues
regarding the treatment of employees.

India is one popular offshoring country, for example many UK banks and other large companies now have
service centres based in India.

4.4.2 Outsourcing - what to outsource? 05/11

Generally speaking, outsourcing is appropriate for peripheral, non-core activities. To outsource strategic
or core competences could lead to loss of competitive advantage and risk the collapse of the whole
organisation.

Outsourcing of non-core activities is widely acknowledged as having the potential to achieve important
cost savings. However, it can be difficult to distinguish between core and non-core competences.

Threshold competencies are activities that an organisation must possess in order to be a realistic
competitor in a market. Outsourcing may be the only way for some organisations to obtain this type of
competence.

Cox categorises competences into three groups.

Cox’s types of competence

Core competences are those that result in competitive advantage. They should not be outsourced. Product
design is an example.
Complementary competences aren’t core themselves, but are connected or essential to core competences.
These may be outsourced, but only to trusted key suppliers with whom a strategic relationship is formed.
In many industries and organisations, the IT function is a complementary competence.
Residual competences aren’t in any way core and are suitable for outsourcing. The payroll function is an
example.

Quinn and Hilmer developed three tests that can be used to identify an organisation's core competences.

Quinn and Hilmer's core competence tests

Does the competence allow entry into a number of markets?
Does the competence make a substantial contribution to a customer's perceived benefits of a product?
Is the competence difficult for a competitor to copy?

If the answer to the questions is yes, then it is likely that the competence is core.

Quinn and Hilmer also identified three tests to establish whether an activity should be outsourced.

Quinn and Hilmer’s tests to establish whether an activity should be outsourced

Potential for competitive advantage. The lower the potential for competitive advantage, the more suitable
an activity is for outsourcing.
Strategic risk (or vulnerability) and the need for flexibility. Where strategic risk is high, or where an
organisation is vulnerable, the activity should be kept in-house. However, where strategic risk is low and
the need for flexibility is high, then the activity should be outsourced on a short-term contract.
Transaction costs. The level of transaction costs should be input into the decision.
22 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

4.4.3 Transaction costs

A transaction cost is incurred by an organisation as a consequence of having a business activity
performed by a third party. Such costs arise from activities associated with the arrangement, for example
creating product specifications, managing quality and co-ordinating delivery and manufacturing
operations. Standard products which are mass produced may have low transaction costs due to the
standardisation of design. However, non-standard products may have high transaction costs which can
be classified as:

 Search and information costs. These are the result of determining which products are needed and
selecting a supplier at an appropriate cost and quality.

 Bargaining costs. These result from negotiating a deal with the supplier and completing any legal
formalities such as drawing up contracts.

 Policing and enforcement costs. These are the costs of monitoring whether the supplier adheres to
the terms of the contract and taking appropriate legal action if they do not.

4.4.4 Transaction cost theory

According to Williamson an organisation has a choice of whether to produce goods itself (by owning
assets and running the production process) or to buy-in the use of another organisation’s assets to
produce the goods for it. There are three aspects to the make or buy decision:

 Uncertainty - uncertainty in the business environment makes it difficult to arrange long-term

contracts and therefore it is more likely for a process to be undertaken in-house.

 Frequency – work is more likely to be outsourced if it is infrequent or unlikely to re-occur.

 Asset specificity – where the assets required are specific to the transaction then the process
should be taken on in-house as the corresponding transaction costs will be high.

Williamson suggests that the main concern in the decision is asset specificity which can be classified into
six main types.

Type of asset specificity Description

Site specificity Some sites, such as factories, are immobile and
therefore specific to a certain location.
Physical asset specificity Customised assets, or those with limited other
uses have lower alternative use values. This
means they are more specific to the task.
Human asset specificity Workers acquire knowledge or skills that are
specific to their role. This knowledge or skill has
a higher value within the activity (and therefore
within an organisation) rather then outside it.

Brand name capital specificity A brand name may become so associated with an
activity or process that it cannot be used in other
activities or for other customers.
Dedicated asset specificity This is similar to physical asset specificity but
relates to assets acquired solely for work
undertaken for a specific customer.
Temporal specificity Some activities, such as those involving
perishable goods, are so time specific that an
alternative processor is unlikely to be found in
time if the current supplier fails.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 23

4.4.5 Advantages and disadvantages of outsourcing

The advantages of outsourcing are as follows.

(a) Outsourcing can remove uncertainty about cost, as there is often a long-term contract where
services are specified in advance for a fixed price.

(b) Long-term contracts (maybe up to ten years) encourage planning for the future. The organisation
can focus on its core business.

(c) It can save on costs by making use of a suppliers' economies of scale, reduced headcount, reduced
research and development costs and reduced capital spending on equipment.

(d) It can increase effectiveness and quality of output where the supplier deploys higher levels of
expertise.

(e) Access to specialist knowledge and innovations in technology is made possible, and easier, if the
organisation is experiencing a skills shortage. A specialist company can share staff with specific
expertise between several clients.

(f) Flexibility (contract permitting). Resources may be able to be scaled up or down depending upon
demand. In the long-term, the organisation may be able to switch suppliers to match cost and
quality requirements.

Some possible disadvantages are outlined below.

(a) Difficulties negotiating and managing a Service Level Agreement that meets the organisation’s
needs.

(b) There are cost implications to consider, for example, the supplier will need to make a profit, which
may result in outsourcing being more expensive than doing the work internally. Transaction costs
will also arise as a consequence of the outsourcing arrangement.

(c) It can lead to loss of control, particularly over quality and continuity of supply.

(d) It means giving up an area of threshold competence that may be difficult to reacquire. The
organisation may become out-of-touch with new developments resulting in a lack of in-house
knowledge.

(e) The same outsourcing service is likely to be available to competitors. There is a risk of confidential
information being leaked.

(f) Potential damage to employee morale due to redundancies and impact on corporate culture.

Question 1.1 Offshoring and outsourcing

Learning outcome A1(iv)

Explain the differences between offshoring and outsourcing. (4 marks)

4.5 Newly industrialising and emerging nations 05/10

Newly industrialising and emerging nations (NIEs) are countries which are grouped together by virtue of
the fact that their economies have grown significantly in recent years and they are becoming increasingly
important in the world economy.

NIEs are often (but not always) located in Asia and Latin America and include the BRIC nations (Brazil,
Russia, India and China – see below) and other countries such as Argentina, Mexico, South Korea,
Taiwan, and Singapore.
24 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

4.5.1 The BRIC economies

Brazil, Russia, India and China have all experienced rapid economic growth in recent years, partly as a
consequence of globalisation. When combined, the BRICs have a bigger share of world trade than the
USA.

China has attracted most attention. China is now the second largest economy in the world (behind the
US), having recently overtaken Japan.

Key factors influencing the growth of the BRIC economies

Settled political system
Increased economic activity
Abundance of natural resources
Plentiful, cheap labour
Increased education standards
Free market philosophy encouraged
Foreign direct investment (FDI – although in the future the BRICs are likely to be investing overseas
themselves)

The BRICs have been affected by the global economic downturn since 2008. For example, inward FDI
and outsourcing arrangements have reduced, as has demand for exports. However, they are expected to
continue to see high growth, driven by strong national consumer demand and public spending, using
reserves built up from foreign trade.

4.5.2 Second tier emerging nations

Many other nations are often referred to as ‘emerging nations’. Examples include Vietnam, Indonesia,
Columbia and the Ukraine (which is also a transition economy). We now take a brief look at three other
emerging nations - South Korea, Taiwan and Mexico.

In South Korea since the 1980s the government has reduced the amount of control it held over industry
and allowed more foreign investment. Controls over the financial system were removed and the previously
controlled exchange rate was left to market forces.

This liberalisation saw the Korean government abandon many of the principles that had brought previous
economic growth, but was necessary for the country to integrate into the global economy – which is seen
as essential for long-term prosperity.

Taiwan's government initially focussed on the development of certain industries such as plastic, fibreglass
and textiles. Like South Korea, import-substitution policies were introduced for protection. This
development created an industrial base that could be built on.

The government was able to steer private investment away from industries which already produced a
surplus, or which operated in a non-growth market, into products that could be exported.

As a result of government intervention and operational efficiency, Taiwan has moved from a textiles based
economy to one which now produces hi-tech electrical goods.

Mexico suffered an economic crisis caused by its level of international debt and the oil price crash of
1981. After the economic crisis Mexico followed protectionist policies while it tried to stabilise itself. This
was followed by reform and more liberal trade and economic policies. The country formed an association
with the USA and Canada (NAFTA) and entered into a trade agreement with the European Union. These
measures led to an opening up of the economy to global business and helped to drive investment in the
economy to record levels.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 25

4.6 Types of economic system

There are four main types of economic system in operation in the world - planned, free market, mixed and
transition.

A planned economy is one which is controlled by the government. This means that the state fixes the
price of goods and services and makes all the decisions regarding how resources are allocated in the
economy.

Free market economies are the opposite of planned economies. This means that prices and the allocation
of resources are not controlled by any individual or the state, but by market forces and the actions of
producers and suppliers.

In reality, there are no true free market economies in the world as governments tend to have some kind of
input into the economy and may intervene to influence the actions of private sector organisations. This
means that most economies are a halfway house between free market and planned economies – and are
known as mixed economies.

The term ‘transition economy’ has been applied to the countries that abandoned the Soviet-type political
and planned economic system at the end of the twentieth century. Often quoted examples include the
Russian Federation, Poland, Hungary, Romania, the Czech Republic, Ukraine, Kazakhstan, the Slovak
Republic, Bulgaria and Belarus. A number of these countries have completed their transition to a market
economy and have become members of the European Union.

The term is sometimes used with a wider meaning, referring to any country emerging from a socialist-type
economy towards a market-based economy (eg China). This means that in general usage, there is overlap
between transition economies and emerging economies.

4.7 Industrialisation strategies

Successful emerging nations follow three main strategies.

 Export of natural commodities

 Import-substitution
 Export-led industrialisation

4.7.1 Export of natural commodities

Countries are endowed with natural resources in various degrees. For example, oil, precious metals such
as gold, and fertile agricultural land. The first stage of industrialisation is to simply sell natural resources
to foreign countries. This generates income for the country which can be used to invest in infrastructure
(such as education and technology) and develop the economy. However the country must import products
that it cannot produce domestically.

4.7.2 Import-substitution
Once the economy has created wealth through exporting natural resources it begins to invest in new
industries which produce the more advanced products that it needs. Historically, to protect these
fledgling industries so that they can be developed and to reduce the country's dependence on foreign
imports, protectionist measures were used (eg import tariffs and quotas).

4.7.3 Export-led industrialisation

Protecting and developing new industries was the only perceived method of creating an industrial base up
until the 1960s. However, with the liberalisation of economic systems came an alternative – an export-
centred, outward looking strategy. Governments realised that the key to rapid economic growth was to
increase exports – and that by doing so the wealth of the country would be substantially improved.
26 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

4.7.4 Foreign Direct Investment (FDI) 11/10

Many emerging and / or transition economies have benefited from Foreign Direct Investment (FDI). For
example, the growth of the Russian economy has been stimulated by multinational companies such as
Coca-Cola establishing bases in the country. In China, foreign investment has largely funded the growth in
the manufacturing sector.

FDI can take a number of forms but two of the most common is to acquire an existing organisation in the
local market or to develop new production facilities (known as greenfield investment).

FDI is now global in nature, with investment flows becoming more multi-directional. The BRIC nations are
now making and well as receiving foreign investments. For example, Ford sold its Jaguar and Land Rover
operations to India’s Tata Group in 2008.

Section summary
Porter identifies four principal factors that influence the competitiveness of an economy. These are factor
conditions, demand conditions, related and supporting industries and firm strategy, structure and
rivalry.

Governments can influence the context in which an industry operates and can create opportunities and
pressures for investment.

Offshoring is the relocation of an organisation's business activities (such as manufacturing) from one
country to another. Outsourcing involves an organisation sub-contracting business activities to external
providers.

Newly industrialising and emerging nations (NIEs) are countries which are grouped together by virtue of
the fact that their economies have grown significantly in recent years and they are becoming increasingly
important in world politics.

The term transition economy has been applied to the countries that abandoned the Soviet-type political
and economic system at the end of the twentieth century.

5 Different types of organisation

Introduction
Economies contain different types of organisation and the economy itself can be divided into the public
and private sectors.

In this section we consider the different types of organisation found in each sector.

5.1 The public and private sectors

The economy of a developed country can usually be divided into two sectors – public and private. Private
sector organisations, also called businesses, are owned and operated by private individuals or institutions,
while organisations in the public sector are usually owned by the state.

5.2 Private sector organisations

Private sector organisations are of two main types – those that seek profit for their owners and those that
have other objectives. The latter are known as non-profit making or not-for-profit organisations. However,
the majority of organisations in the private sector are businesses which aim to make profits for their
owners (shareholders).
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 27

5.2.1 Not-for-profit organisations

This terminology is a little misleading, in that 'not-for-profit' organisations often engage in profitable trade
and they are not able to run consistently at a loss. The essence of their status is not that they seek to
avoid generating a surplus of funds, but that the generation of wealth for their owners is not the purpose
of their existence.

Such organisations still aim to operate as efficiently as possible, but their primary objective is to provide a
service rather than to maximise profit. Not-for-profit organisations include co-operatives, charities and
unincorporated clubs, societies and associations.

Not-for-profit organisations use the surplus they generate to further their other objectives. Clubs and
associations exist to provide some kind of benefit to their members. Charities and voluntary organisations
generally exist to provide some kind of benefit to society at large.

Although not-for-profit organisations are not profit seekers, they still use economic factors of production to
produce goods or services. Therefore they need to be efficiently managed so that their resources are used
effectively to meet the objectives of the organisation whilst not making a financial loss.

5.2.2 Mutual organisations

Mutual organisations are a special type of non-for-profit organisation in the private sector. The essence of
their nature is that they are commercial operations owned by their customers, rather than having capital
and associated shareholders for whom they have to earn profit. This means that their customers benefit
both from the services the mutuals provide to them and from the trading surplus they make by doing so.

It is also possible for the managers of mutuals to pursue purposes other than maximise their trading
surplus. These can include a high level of charitable giving, the promotion of community interests and a high
quality of service. Mutuals therefore resemble both not-for-profit organisations and profit-seeking companies,
but as they don’t produce profit for shareholders, strictly speaking are not-for-profit organisations.

5.2.3 Profit seeking organisations

The economy is mostly driven by the profit-seeking part of the private sector. It is businesses that
undertake the most enterprising aspects of economic activity. They provide the bulk of employment
opportunities and tax revenue and create the growth needed to enhance economic welfare. Businesses are of
two main types, distinguished by the extent to which the owners are liable for the debts of the undertaking.

(a) An individual may set up business on their own account as a sole trader or in partnership with
others. In either case, the law will not distinguish between the private assets and liabilities of the
owners and those of the enterprise. The owners have unlimited liability for the debts of their
businesses.

(b) This degree of risk is unattractive to many potential investors, so to enable them to invest and
therefore release more funds for wealth-producing enterprise, the legal systems of most countries
provide for some form of limited liability enterprise. Such businesses are referred to as
corporations or companies.

In the UK, there are two forms of limited liability company. They both limit the liability of investors to the
nominal value of their share holdings but they differ in the extent to which they are permitted to solicit
investment from the general public.

Private limited companies may not offer their securities to the public – public limited companies (plcs) may.

KEY POINT When the shares of plcs are regularly bought and sold on a stock exchange, they may be referred to as
quoted companies, because the current price of their shares will be quoted in a journal of record.
28 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

Exam skills
Remember that not all public limited companies are quoted companies.

5.2.4 Multinational corporations

Some businesses may develop into multinational corporations (MNC's). These organisations have the
capacity to produce in more than one country, either by owning or controlling a foreign subsidiary. They
are often large, well-known organisations such as petrol companies, but they may also be small in size.

There is no ‘typical’ multinational, some may operate in hundreds of countries, some in only a few. Many
types of businesses may be multinational – from large scale manufacturing operations to small scale
financial service companies. Finally, some may get the majority of their revenue from their foreign
operations, whereas others may only do a fraction of their trade overseas.

Advantages of becoming multinational

Production should increase as products are sold more widely. This means that costs (such as research
and development) can be spread over a greater amount of output.
Investment in new technology (also spread over higher output) can be made to take advantage of
economies of scale and improve productivity.
Multinationals may attract a higher calibre of staff in terms of experience or ability.
Operations can be located to take advantage of low cost materials, labour, transport and other operating
costs. High quality staff or government investment incentives may also be found.
The most appropriate business model can be used. For example, internalising costs of an overseas
subsidiary might be better in one country, but contracting with a supplier to produce the goods might be
better in another.

MNC's are estimated to account for a quarter of the world's economic output (Campbell and Craig, 2005;
Worthington and Britton, 2006).

The growth of MNCs can be attributed to

 Innovation in communications technology

 Improved transport and infrastructure
 Market homogenisation (eg the world's needs and wants have become increasingly similar)
 Political stability
 Increased merger activity

Due to these factors and especially Internet improvements and political changes such as the opening of
trading borders, some organisations, although they are still small, are actually 'born global' now .

MNC's have many opportunities because they are able to identify countries in which they are able to
maximise their competences and make the most of the variances in the business environment.

Many UK based IT companies are now retaining their sales divisions in the UK, but moving their system
development activities to India where there is a large pool of newly qualified system development
specialists who can be employed at a cheaper rate than in the UK. This is an example of offshoring that
we explained earlier.

MNC's also benefit from being able to spread their risk over many businesses in many countries.
Companies such as Proctor & Gamble, Pepsi co, Philips and Nestle for example, have large portfolio's of
businesses and brands which are located in many countries.

The legal and tax differences between countries in which they operate also means that MNC's, through the
process of internal transfer pricing, can reduce their overall tax burden and significantly increase profits.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 29

Many emerging nations have made use of MNCs by attracting their investment through subsidies and low
labour costs. We have already seen that (for some organisations) it no longer really matters where an
organisation is based. This type of organisation has been the key to export-led industrialisation.

5.3 Public sector organisations

Public sector organisations used to be divided into two main groups – those that provide public services
(such as hospitals, schools, the police and the armed forces) and state owned industries. This distinction
has become less clear over the last quarter-century as governments have privatised state-owned industries
and sought to reform the public sector by involving private companies in the provision of public services.
The objective has been to curb waste of public money and improve efficiency by importing the
disciplined cost control found in the private sector.

In the UK, many providers of public services such as hospitals and schools, and formerly state owned
industries such as London Underground, are now involved in different forms of public-private partnership.
In such partnerships, the private sector provides funds for public sector purposes such as education. For
example the Private Funding Initiative (PFI) for schools seeks private partners to fund and manage school
buildings in return for an agreed fee. Some services in the UK such as the National Health Service (NHS)
are provided by self-governing trusts. These trusts sell their services to the NHS.

Public sector bodies are all, ultimately, responsible to government for their activities, and their purposes
are defined in the laws that establish them. They have a range aims and objectives but rarely will they set
out to trade at a profit. Nevertheless, their managers will be expected to exercise good stewardship and
prevent waste of resources. Public sector bodies' objectives will usually be defined in terms of the
provision of a service that is deemed to be beneficial to society.

An important feature of public sector bodies is that they have little control over their income. This is because
they depend upon government for the funds they need to operate. The funds they receive will be influenced
by a large number of factors, including current public opinion, government aspirations, the skill of their
leaders in negotiation, the current state of the public finances overall and the current economic climate.

5.3.1 Non-governmental organisations (NGOs)

Non-governmental organisations are defined by the World Bank as “private organisations that pursue activities
to relieve suffering, promote the interests of the poor, protect the environment, provide basic social services or
KEY POINT
undertake community development.” Many of the largest NGOs are charities such as Oxfam and the Red Cross.

There are two main types of NGO. The first seeks to influence government policy through lobbying and
generating public feeling in its favour – through marketing and public relations techniques. These are
known as campaigning NGOs. The second attempts to make a positive impact directly in the area it is
interested in. This might be through though specific projects or undertaking work to make a change.
These are known as operational NGOs.

Many NGOs have developed relationships with business organisations, for example where they share a
common goal. The benefits to each party of such an arrangement might include; the acquisition of skills
and knowledge that it might no otherwise obtain, the creation value (through reduced of duplication of
effort), to reduce their environmental impact, to develop corporate social responsibility and improve their
credibility in the eyes of their stakeholders.

Another type of NGO is the quasi autonomous non-governmental organisation (QUANGO). These share
similar objectives to public sector organisations, but are actually private organisations, independent of the
government, but to which the government has devolved the authority for running public services.
Examples of QUANGOs in the UK include ACAS (the independent employment relations mediator) and
Ofsted (the school inspection body).
30 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

Section summary
The economy of a developed country can usually be divided into two sectors – public and private.

Private sector organisations are of two main types – those that seek profit for their owners and those that
have other objectives.

Examples of not-for-profit organisations include charities and voluntary or mutual organisations.

Examples of profit making organisations include sole traders, partnerships and companies.

Multinational companies have the capacity to produce in more than one country, usually with a centrally
located head office.

Public sector organisations provide services to the general public such as hospitals and schools.

6 Culture and the global organisation

Introduction
We have already discussed culture in a society as a factor of an organisation's environment. The issue of
corporate culture is important for multinational businesses because culture influences how things are
done.

CULTURE embodies the common set of values: 'the way things are done around here'.
Culture is embodied in rituals and behaviour.
KEY TERM
Culture is an important filter of information and an interpreter of it. For example, an organisation might
have a cultural predisposition against embarking on risky ventures. Existing behaviour patterns may make
a proposed strategy incompatible with the culture and so impossible to implement.

An organisation's culture is influenced by many factors.

(a) The organisation's founder. A strong set of values and assumptions may have been established by
the organisation's founder. Even after they have retired, these values have their own momentum.

(b) The organisation's history. The effect of history can be determined by stories, rituals and symbolic
behaviour. They legitimise behaviour and promote priorities.

(c) Leadership and management style. An organisation with a strong culture recruits managers who
naturally conform to it.

(d) Structure and systems affect culture as well as strategy.

(e) The industry (eg computer software organisations in the 'silicon valley' had a reputation for being
laid back on office dress).

(f) Location of head office – and its acquired culture

6.1 Management culture

A factor which has an impact on the culture of transnational organisations, or organisations competing in
global markets, is management culture. This is the view about managing held by managers, their shared
educational experiences, and the 'way business is done'. Obviously, this reflects wider cultural differences
between countries, but national cultures can sometimes be subordinated to the corporate culture of the
organisation (eg the efforts to ensure that staff of Euro Disney are as enthusiastic as their American
counterparts).
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 31

MANAGEMENT CULTURE is a part of overall organisational culture and relates to the prevailing view within
management about how to do its job.
KEY TERM

6.2 Managing across borders

There are often severe cultural differences as to what constitutes 'management' in the first place. Are
management principles universally applicable? Organisations need an awareness of effective management
approaches in different cultures.

6.2.1 Hofstede 05/11

Geert Hofstede analysed the role of national culture within organisations based on a large scale
investigation of the cultural attitudes of the employees of IBM in the 1960s and 70s. Hofstede identified
a number of dimensions that contributed to cross-cultural differences in beliefs and values.

Dimension Comment
Power – This refers to how far society and organisations tolerate an unequal distribution of power.
distance In high power-distance cultures (eg India) and organisations, power tends to be
concentrated at the top and managers exert their status and power over subordinates.
Uncertainty This measures the extent to which people are able to tolerate ambiguity and uncertainty.
avoidance For example whether individuals wait until they are completely sure of all details before
acting.
Individualism This measures the extent to which people see themselves in individual terms as opposed
versus to being members of a group – be it family, company, caste, class or even simply a
collectivism sporting club.
Masculinity This is about the degree to which a culture encourages one set of qualities (the
versus 'masculine' ones such as competitiveness and assertiveness) as opposed to another set
femininity (the so-called 'feminine' ones such as concern for others, attention to quality of life or to
the environment).
Long term This refers to whether people associate themselves with a long-term (forward looking)
orientation orientation (values such as thrift and perseverance – often associated with China) or a
(Confucian short-term (historical) orientation (values such as tradition, meeting social obligations
dynamism) and saving face – often associated with Germany).

Hofstede’s work has its critics. The following points must be considered.

(a) Hofstede's study is based on data that is now thirty years old. International attitudes have
changed significantly in that time – many people in the middle 1970s had hardly travelled
away from their home country. Today we have global organisations and markets, and the
consequent movement of people across the world.

(b) People's experience of other cultures has therefore changed, and so has their own self
image and behaviour.

The following table illustrates some consequences of Hofstede's categories on organisations.

Category Consequences
High power-distance Autocratic organisation
Many layers of management
Different work statuses of managers and sub-
ordinates
High uncertainty avoidance Rules and regulations prevail
Formal structures
Standardisation
High individualism Autonomy
Personal achievement
Self-reliance
32 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

Category Consequences
High masculinity Achievement of challenge
High status sought
High earnings required
High long-term orientation Education and training respected
Strong ethic of work

Hofstede also found cultural differences in the following areas of employee attitude.

Motivation – Incentives used to motivate employees must match the culture. Not all cultures are
motivated by money.

Structure – In some cultures a bureaucracy works best, in others a more open and professional
approach is more effective.

Leadership – In some cultures a manager is expected to take a personal and social interest in their
subordinates, in other cultures this is discouraged.

McDonalds – national cultures and global organisations

The 'golden arches' logo of McDonalds is one of the most recognised symbols in the world. Alongside the
CASE STUDY
logo, McDonalds have developed a business format that is successful and established in 130 countries of
the world.

This success has occurred even in places where there has been 'cultural resistance', for example France
and Spain where there is a very distinctive (perceived and real) attitude to food as a key aspect of national
and regional culture.

Countries have absorbed the influences of McDonalds and have grown familiar with the nature of the
brand and what it has to offer. McDonalds have absorbed the influences of the communities in which
they locate, by offering differentiated and localised meals and foods according to location.

6.2.2 Other models

Trompenaars and Hampden Turner (1997) developed a Seven Dimensions of Culture model.

Five of their dimensions relate to how people deal with each other.

1 Universalism versus particularism. In universalistic cultures, rules are more important than
personal relationships. For example, high value is placed on written contracts.

2 Individualism versus collectivism (or communitarianism). Does the culture value and encourage
self-orientation and decision making or group orientation and decision making?

3 Neutral versus emotional (or effective). In neutral cultures, emotions aren’t expressed openly.

4 Specific versus diffuse. This refers to whether people change the way they act and relate to each
other in specific situations (specific) or whether behaviour and relationships are consistent
(diffuse). For example, in a culture that favoured specific behaviour people may relate to each
other differently outside the workplace than at work.

5 Achievement versus ascription. Is status based on achievement, or on other factors such as age
and years of experience?

The sixth dimension refers to how different societies view the concept of time.

6 Sequential versus synchronic. Do individuals work on one thing at a time (sequential) or on

several things at once (synchronic)?
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 33

The seventh and final dimension looks at how culture views the effect of the general environment.

7 Internal or high context versus external or low context. High context behaviour includes tradition
and ritual, the environment controls behaviour. Low context behaviour is controlled by individuals
rather than the environment.

Ronen and Shenkar (1985) identified four key characteristics of national culture.

 The importance placed on work goals

 The role of job satisfaction
 The impact of organisational and managerial factors
 The impact of work roles and interpersonal relationships

They identified groups of nations that displayed shared characteristics.

Models provide a framework that enables managers to consider what management structure and style
may work best in different countries. Managers need to be flexible enough to adapt to cultural differences
and are able to ride what Ronen and Shenkar refer to as ‘the waves of culture’.

6.3 Management structure

Local conditions and the scale of operations will influence the organisational structure of companies
operating internationally. Very large and complex companies may be organised as a heterarchy.

A heterarchy is a rather organic structure with significant local control.

(a) Some headquarters functions are diffused geographically. For example, R&D might be based in
the UK, marketing based in the US. Or certain products made in one country and others elsewhere
(motor manufacturers do not make every model of car at each factory.) Some central functions
might be split up – many organisations are experimenting with having several centres for R&D.

(b) Subsidiary managers have a strategic role for the corporation as a whole (eg through bargaining
and coalition forming).

(c) Co-ordination is achieved through corporate culture and shared values rather than a formal
hierarchy. Experienced employees might have worked in a number of different product divisions.

(d) Alliances can be formed with other parts of the company and with other businesses, perhaps in
joint ventures or consortia.

6.4 Influences on structure and methods

A variety of factors influence management methods in an international setting. These factors pull in
different directions and it may be that compromise is necessary. As always, a consideration of objectives
is a good starting point. A company merely seeking to expand sales volume while concentrating on its
home market will use very different methods from one seeking to operate in truly global markets such as
energy and telecommunications.

Central control may be appropriate if the volume of international business or the company's experience in
international operations is low. Centralisation is seen as promoting efficiency and prevents duplication of
effort between regions. Even when operations are on a limited scale, when conformity with demanding
technical standards is required, functional representation in international management may be necessary.
For example, a largely autonomous international subsidiary may have to accept supervision of its quality
assurance or financial reporting functions.

If business is done globally, a form of regional organisation may be appropriate if there is some measure
of social and economic integration within regions. The need for rapid response to local opportunities and
threats may be served by a significant measure of decentralisation. National political and cultural
sensitivities may reinforce this, but a shortage of local talent may limit it.
34 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

As far as management processes and decision making are concerned, typical problems include:

(a) Poor information systems and communications. However, the rapidly falling costs of
telecommunications and the development of e-mail and video-conferencing facilities mean this is
now less likely to be a problem.

(b) Interpretation of information. Culture affects how information is interpreted and can also
determine the priorities of the planners. By failing to allow for diversity or to understand local
culture, planners based elsewhere can make marketing on the ground more difficult.

(i) Managing a local market in a large country with a rural population would be different from
marketing to a small country with most people living in cities.
(ii) High tech products may not be suitable for a country with a poorly developed educational
and technological infrastructure.
(iii) Consumers and managers in countries with very high rates of inflation will have different
priorities to those in countries with low inflation. Managers' may need to minimise holdings
of local currency, by converting it into a harder currency or into tangible assets.
(c) Meetings can be difficult when a company expands internationally. Air travel and hotel costs can
be significant. Video-conferencing is emerging as an alternative to face-to-face meetings.

You will study organisational culture further in paper E2.

6.5 Human resource management

The balance between local and expatriate staff must be managed. There are a number of influences.

 The availability of technical skills such as financial management

 The need for control
 The importance of product and company experience
 The need to provide promotion opportunities
 Costs associated with expatriates such as travel and higher salaries
 Cultural factors

6.5.1 Expatriates or locals?

International companies, which must think globally and act locally, have to consider a number of issues.

 Does it employ mainly expatriate staff to control local operations?

 Does it employ local managers with the possible loss of central control?
 Is there such a thing as the global manager, equally at home in different cultures?

Expatriate staff are sometimes favoured over local staff.

(a) Poor educational opportunities in the market may require the import of skilled technicians and
managers. For example, expatriates have been needed in many western business operations in
Russia and Eastern Europe, simply because they understand the importance of profit.

(b) Some senior managers believe that a business run by expatriates is easier to control than one run
by local staff.

(c) Expatriates might be better able than locals to communicate with the corporate centre.

(d) The expatriate may know more about the organisation overall, which is especially important if
they are fronting a sales office.
PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 35

The use of expatriates in overseas markets has certain disadvantages.

(a) They cost more (eg subsidised housing, school fees).

(b) Culture shock. The expatriate may fail to adjust to the culture (eg by associating only with other
expatriates). This is likely to lead to poor management effectiveness, especially if the business
requires personal contact.

(c) A substantial training programme might be needed.

(i) Basic facts about the country will be given with basic language training and some briefings
about cultural differences.
(ii) Immersion training involves detailed language and cultural training and simulation of social
and business experiences. This is necessary to obtain an understanding and awareness of
the culture.

Employing local managers raises the following issues.

(a) A glass ceiling might exist in some companies. Local managers may not make it to board level if,
as in many Japanese organisations, most members of the board are drawn from one country.
(b) In some cases, it may be hard for locals to assimilate into the corporate culture, and this might lead
to communication problems.
(c) They will have greater local knowledge but may not be trained to understand the wider corporate
picture, but this is true of most management at operational level.

Question 1.2 Setting up overseas

Learning outcome A1(i)

Identify four issues which may affect an organisation that wishes to set up an overseas subsidiary.

(4 marks)

Section summary
Culture embodies the common set of values: 'the way things are done around here'.

Organisations need an awareness of effective management approaches in different cultures.

Local conditions and the scale of operations will influence the organisational structure of companies
trading internationally.

The balance between local and expatriate staff must be managed.

36 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

Chapter Roundup
 Global production involves manufacturing and sourcing on a global scale.

 World trade has been encouraged by financial factors, trade alliances, legal factors, international
markets and various organisations.

 The global business environment can be analysed into political, economic, social and technological
factors, this is known as PEST analysis.

 Economic nationalism is a nation's view that it should protect its own economy and industries.

 Economic liberalisation involves nations moving away from economic nationalism towards working with
others in a group to benefit all member economies and industries.

 Free trade areas, customs unions and economic unions/common markets are all types of economic
system designed to provide members with a trade advantage.

 Porter identifies four principal factors that influence the competitiveness of an economy. These are factor
conditions, demand conditions, related and supporting industries and firm strategy, structure and
rivalry.

 Governments can influence the context in which an industry operates and can create opportunities and
pressures for investment.

 Offshoring is the relocation of an organisation's business activities (such as manufacturing) from one
country to another.

 Outsourcing involves an organisation sub-contracting business activities to external providers.

 Newly industrialising and emerging nations (NIEs) are countries which are grouped together by virtue of
the fact that their economies have grown significantly in recent years and they are becoming increasingly
important in world politics.

 The term transition economy has been applied to the countries that abandoned the Soviet-type political
and economic system at the end of the twentieth century.

 The economy of a developed country can usually be divided into two sectors – public and private.

 Private sector organisations are of two main types – those that seek profit for their owners and those that
have other objectives.

 Examples of not-for-profit organisations include charities and voluntary or mutual organisations.

 Examples of profit making organisations include sole traders, partnerships and companies.

 Multinational companies have the capacity to produce in more than one country, usually with a centrally
located head office.

 Public sector organisations provide services to the general public such as hospitals and schools.

 Culture embodies the common set of values: 'the way things are done around here'.

 Organisations need an awareness of effective management approaches in different cultures.

 Local conditions and the scale of operations will influence the organisational structure of companies
trading internationally.

 The balance between local and expatriate staff must be managed.

PART A THE GLOBAL BUSINESS ENVIRONMENT 1: The social, political and economic context 37

Quick Quiz
1 Which type of country is described below?

'Largely primary industry based, but with a developing secondary (manufacturing) industrial sector. Low
but growing GDP, developing infrastructure.'

A Lesser developed country

B Early developed country
C Semi-developed country
D Fully developed country

2 Which of the following is not classed as a transitional economy?

A Poland
B Romania
C Japan
D Belarus

3 Which of the following cannot be described as a newly industrialised emerging economy?

A China
B Singapore
C South Korea
D Hungary

4 Briefly explain the main reason why organisations choose to offshore or outsource their operations.

5 Which of the following is a public sector organisation?

A A school
B A charity
C A public limited company
D A partnership
38 1: The social, political and economic context PART A THE GLOBAL BUSINESS ENVIRONMENT

Answers to Quick Quiz

1 B The text describes an early developed country.

2 C Transitional economies include those countries which have recently emerged from the planned
economy of the Soviet Union and are moving towards a free market economy.

3 D NIEs are mainly located in Asia and Latin America and include nations such as Brazil, Argentina,
Mexico, India, South Korea, Taiwan, Singapore and China.

4 Cost reduction is the primary reason for offshoring and outsourcing. Organisations will locate
production units where production costs are lowest and then move completed units around the
world for sale.

5 A Public sector organisations provide services for the general public. Charities are part of the private
sector as not-for-profit organisations. Companies and partnerships are examples of profit seeking
organisations in the private sector.

Answers to Questions
1.1 Offshoring and outsourcing

Offshoring is the relocation of part of an organisation’s business activities from one country to another.

Outsourcing involves an organisation sub-contracting business activities to external providers.

Two key differences are:

Outsourcing often involves the activity remaining in the same country, using an outsourcing partner based in the
home country.
Offshoring always involves the relocation of some activity outside the home country, and usually means the
activity remains within the organisation.

1.2 Setting up overseas

Four issues which may affect an organisation that wishes to set up an overseas subsidiary include:

Educational constraints – poorly educated employees will result in poor management and decision making.

Sociological constraints – the employees of some countries may have a greater work ethic than others.

Legal and political constraints – legal or other regulations may restrict the subsidiary’s working practices.

Economic constraints – factors such as inflation will affect the subsidiary’s cost base and profitability.

Now try this question from Number Level Marks Time

the Exam Question Bank 1 Examination 25 45 mins
GOVERNANCE AND REGULATION

Governments have a key role to play in the Government influence is usually associated with economic
economy and development of a nation. policy, but as we shall see, governments also affect a
market through regulation.
The decisions they make and the policies they establish
Later in this chapter we consider the impact of two topical
all have an effect on an organisation's business
areas – corporate governance and corporate social
environment.
responsibility.

topic list learning outcomes syllabus references ability required

1 Government intervention in business A2(b) A2(iii), A2(iv) analysis
2 Government and the macroeconomic A1(c), A2(b) A1(vi), A2(iii), A2(v) analysis
environment
3 Market regulation A2(d) A2(iii), A2(iv), A2(v) analysis
4 Corporate governance A2(a) A2(i), A2(ii) comprehension
5 Corporate social responsibility A2(a) A2(i), A2(ii) comprehension

39
40 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

1 Government intervention in business

Introduction
In the previous chapter we focussed on the emergence of newly industrialised nations in the global
economy. In this chapter we consider how governments influence their economies and the competitive
environment of organisations.

A country's government has a major role to play in the success or failure of its economy. We have already
seen how it can influence a number of factors related to competitive advantage and foreign investment
but these are only part of the story. Governments can influence a number of other areas:

 The macroeconomic environment

 Legal and market regulation
 Corporate governance and social responsibility

Section summary
Government influence over business extends to the macroeconomic environment, legal and market
regulations, corporate governance and social responsibility.

2 Government and the macroeconomic environment

Introduction
The macroeconomic environment is concerned with factors in the overall economy, for example interest
rates, exchange rates and levels of demand and supply.

Microeconomics is concerned with economic circumstances of individual industries or companies.

A government will usually have four main objectives for its macroeconomic policy.

 Economic growth
 Controlled inflation
 Employment
 A controlled balance of trade and exchange rate

These objectives are affected by macroeconomic policy, and in particular, fiscal and monetary policy.

2.1 Growth, inflation and employment

Three key factors that indicate the strength of an economy are growth, inflation and employment.

2.1.1 Growth
Growth means the expansion of the economy and it is usually measured in percentage terms compared to
previous years. It is the product of a number of factors, the main factor being demand in the economy.
Demand from consumers and the Government for goods and services stimulates business organisations
to increase production and sell more.

Growth can be measured using two figures, GDP and GNP. Gross Domestic Product (GDP) is the total
value of a nation’s income produced by economic activity from within its borders. Gross National Product
(GNP) is a more complete figure than GDP because it also includes income earned overseas but
deducting income earned domestically by overseas residents.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 41

An effect of growth is that employment levels rise as more employees are required to produce the goods
and services, and those employed should enjoy increasing wages. This means the cycle of demand is
continued as consumer demand increases further. ‘Real’ growth is net of the nation’s inflation rate and
therefore growth must exceed inflation for any benefits to be created.

Despite the positive aspects of growth, it is not without issues. If demand for goods cannot be met by
what can be produced within the economy, then the amount of imported goods will rise to fill the gap,
worsening the nation’s balance of trade. Growth may also increase the gap between the rich and the
poor if its effects are unevenly distributed across the population. The environment and the poor may be
exploited by businesses taking advantage of commercial opportunities. For example, natural resources
may be increasingly used up in the production of goods and low paid workers may be forced to work
harder as production levels rise. Finally, growth may occur in unwelcome areas, such as in the trade of
illegal substances.

2.2.2 Inflation
Inflation is the increase in prices over time and, like growth, is measured in percentage terms compared
to previous years. Governments seek low, stable inflation for a number of reasons:

 Stable inflation creates certainty – the ideal condition for business investment.
 Low inflation levels are fairer to those on low or fixed incomes. If incomes increase at a lower rate
than the inflation rate then individuals will be worse off.
 If the inflation rate is greater than interest rates then savers will be worse off as they see the value
of their savings being eroded. Individuals are encouraged to spend rather than save.
 Higher prices reduce the amount of money individuals have to spend and therefore spending
within the economy falls. This may encourage savings to increase (the ‘real balance’ effect).
 Inflation acts to distort the price mechanism as prices are driven increasingly by cost rather than
true demand and supply factors.
 In extreme cases, soaring inflation rates, where prices rise on a daily basis, can create civil unrest.

2.2.3 Employment
Although some degree of unemployment within an economy is unavoidable (as some people are unable to
work and others will be between jobs), governments are keen to increase the overall level of employment
for a number of reasons.

 Large numbers of employment people can stifle economic growth because being on a low income
means an individual can afford to spend less and therefore demand within the economy falls.
 Welfare payments to those out of work have to be paid out of taxes collected from the working
population. High levels of unemployment increase the welfare bill, resulting in pressure to increase
taxes and cut back on other public services – both of which will harm economic growth.
 A number of societal problems, such as crime, poor health and the breakdown of family units are
linked to unemployment.

2.2 The balance of trade

A country's balance of trade is the difference, in financial terms between the value of its imports and
exports. If a country imports more than it exports there is a trade deficit, if it exports more than it imports
KEY POINT
there is a trade surplus.

National account balances measure the production, income and expenditure levels within an economy.
The balance of trade forms part of the current account of a nation's national account balances.
42 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

2.2.1 Factors affecting the balance of trade

A number of factors influence a country's balance of trade.

Factor Influence
Availability, price and If local producers are able to supply the home market with high-quality,
quality of goods competitively priced goods, it will be difficult for overseas producers to export to
produced by local that market.
producers
Inflation If a nation's inflation rate is higher than its competitors, producers in that
country will face higher costs which will cause the price of their products to
rise.
Exchange rates If a nation's currency weakens against those which export to it, then the goods
it imports become more expensive.
Trade agreements Trade agreements affect the volume of imports and exports between nations.
Nations are more likely to be able to export competitively to nations they are on
an ‘even playing field’ with.
Taxes, tariffs and trade Taxes and tariffs increase the price of imports, making them less attractive to
measures buy. Governments may attempt to help home producers with subsidies,
although free trade agreements mean this may be difficult (or lead to tit-for-tat
retaliation).
The business cycle Nations looking for export-led growth require sufficient demand in overseas
markets for their products.

If producers in one country are able to produce something cheaper than producers in other countries, it is
likely they will export it. This improves the balance of trade in the country in which the producers are
based.

On the other hand, if overseas suppliers are able to supply something cheaper than domestic producers
can, demand for imports will increase.

Most countries expect to import some goods and services and export others. For example New Zealand
produces lamb for export, far more is produced than the home market could consume. Many countries
import oil as they lack their own supply.

The volume of imports and exports, and the price levels of the products and services imported and
exported, affect the balance of trade.

A long-term trade surplus creates a positive national income because it represents the country making a
net inflow of funds. However, it may contribute to a rising inflation rate as demand within the economy
increases. This may contribute to reduced international competitiveness in the future, as firms face
increasing costs that must be passed on in their prices.

On the other hand, a long-term trade deficit is a major problem because the country experiences a net
outflow of funds. A deficit has to be financed through a reduced national income account (see below) and
this will impact on the nation’s production capacity and future growth prospects as demand in the
economy falls.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 43

2.2.2 National accounts

Like businesses, nations produce accounts that show their financial performance. The format of each
country's accounts will differ, however they are usually based around four elements.

(a) Current account. This is made up of three sub-accounts.

(i) Production accounts – the value of the nation's output less the value of the goods and
services used to create it. The difference is the nation's gross domestic product (GDP).

(ii) Income accounts – the total income generated by production less government redistribution
of tax and social security benefits. The difference is the nation's disposable income.

(iii) Expenditure accounts – this records how the nation's disposable income is either spent or
saved.

(b) Capital account. This records the total accumulation of the nation's non-financial assets and how
they were financed. The difference is the nation's net borrowing or lending.

(c) Financial account. This records the nation's net acquisition of financial assets and liabilities. The
difference between them is the change in the nation's financial position.

(d) Balance sheet. This records the nation's financial and non-financial assets and liabilities. The
difference between them is the nation's net worth.

2.2.3 Effect of balance of trade on national account balances

A nation's balance of trade forms part of its national account balance. National outputs and the resources
used to produce them will be reflected in the production account. A nation's income comes from its
exports which form the income account.

If a country imports more than it exports, the deficit will reduce the income account. This will also feed
to the financial account and balance sheet. If a nation’s income falls, it has less money to invest in assets
and it may have to increase its liabilities in order to support its industries.

2.3 Correcting a balance of payments deficit

A government may follow an expenditure-reducing or expenditure-switching strategy when attempting to
correct a balance of payments deficit.

2.3.1 Expenditure-reducing strategy

This strategy involves the government reducing overall demand within the local economy, usually by
increasing interest rates. By increasing interest rates, individuals and firms pay more on their borrowing
and therefore have less cash to spend on goods, therefore reducing demand.

Whilst reducing demand for local goods, it also may reduce demand imports and increase demand for
exports (high interest rates usually reduce inflation which makes exports cheaper).

However, this strategy may worsen the deficit as high interest rates can increase the value of a nation’s
currency, making exports more expensive and imports cheaper. It may also reduce investment in the
nation as the cost of borrowing is high. Unemployment may also increase as a consequence of this policy.

Demand in the home nation can also be reduced by contracting the money supply or increasing taxation.

2.3.2 Expenditure-switching strategy

This policy involves the government attempting to switch domestic expenditure from imports to locally
produced goods whilst increasing exports.
44 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

Policies that can be used to achieve this include:

 Import controls – such as tariffs and quotas on imports.

 Exchange controls – reducing the amount of foreign currency available to domestic consumers to
buy imports with.

 Currency devaluation/depreciation – to reduce demand for imports whilst making exports cheaper
to overseas countries.

 Subsidies – providing subsidies to exporters to help them compete in foreign markets.

 Export guarantees – reducing the risk to exporters seeking to sell their goods overseas.

2.4 Fiscal policy

FISCAL POLICY refers to government policy on taxation and government spending.
Fiscal policy is based on the theories of British economist John Maynard Keynes. Keynesian economics is
KEY TERM
based around the theory that governments can influence macroeconomic productivity levels by increasing
or decreasing tax levels and public spending.

The aim, generally, is to keep inflation relatively low (between 2% and 3%) while maintaining high
employment levels. This is a balancing act, as stimulating a stagnant economy to increase demand and
employment may result in a decrease in the value of money – inflation.

2.4.1 Taxation 11/12

DIRECT TAXES are levied on earnings or profits, for example income tax for individuals and corporation tax
for companies. Taxes may also be raised on unearned income such as dividends, or special one-off taxes
KEY TERMS may be brought in for particular purposes. Direct tax is often viewed as progressive (as higher earners
tend to pay more tax), simple and easy to understand.

INDIRECT TAXES are levied on spending or expenditure. For example, Value Added Tax, specific sales taxes
such as those imposed on tobacco and petrol, import duties, road tax etc. Governments favour indirect
taxation as it is easy and cheap to collect. The tax is collected by sellers of goods and services and paid
over to the government. However, indirect taxes are often viewed by the public as regressive, unfair and
difficult to understand.

A key decision that governments need to make in their fiscal policy is what proportion of tax should be
paid by individuals rather than businesses.

By mainly taxing individuals the Government risks stopping the economy growing as people do not have
enough disposable income to spend on goods and services, this will also reduce company profits and
reduce the level of corporation tax collected.

If levels of corporation tax are too high then the country may become a less attractive place for foreign
companies to set up business and they may relocate their operations to other countries with a more
favourable tax regime. This may have an affect on the products and services available in the country as
well as on growth and unemployment levels.

The second key decision that is required is what proportion of tax should come from direct and indirect
taxes.

Indirect taxation is generally cheaper for the Government to administer as the cost of collecting and
paying the tax is a burden on business organisations, but it will increase inflation since it increases the
cost of goods and services. It is also generally more popular with the public than direct tax, as they feel
that they have a choice of whether to incur it (by deciding whether or not to buy goods subject to the tax).
It becomes unpopular where all goods and services are subject to indirect taxation and it is impossible to
avoid.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 45

Direct taxation is generally unpopular with the general population as they see that their income is
reduced. This reduction in income helps to reduce inflation by reducing demand but it is expensive for the
Government to administer and requires sometimes complex laws and regulations to be introduced.

2.5 Monetary policy

MONETARY POLICY refers to government policy on the money supply, the monetary system, interest rates,
exchange rates and the availability of credit.
KEY TERM
Monetary policy can be used as a means of achieving economic objectives for inflation, the balance of
trade and economic growth. Most economists believe that an increase in the money supply will increase
demand leading to increases in prices (inflation) and incomes.

Monetary policy focuses on three factors, interest rates, exchange rates and national income.

2.5.1 Interest rates

The government may change interest rates (the price of money) in an attempt to influence the level of
expenditure in the economy and/or the rate of inflation.

A rise in interest rates increases the price of borrowing for both companies and individuals. If companies
see the rise as relatively permanent, rates of return on investments will become less attractive and
investment plans may be curtailed. Corporate profits will fall as a result of higher interest payments.
Companies will reduce inventory levels as the cost of having money tied up in stocks rises. Individuals
should be expected to reduce or postpone consumption in order to reduce borrowings, and should become
less willing to borrow for house purchases.

Although it is generally accepted that there is likely to be a connection between interest rates and
investment (by companies) and consumer expenditure, the connection is not a stable and predictable
one. Interest rate changes are only likely to affect the level of expenditure after a considerable time lag.

The table below explains some impacts of a rise in interest rates.

Impact Comment
Spending falls Higher interest rates increase the cost of credit. The higher interest rate makes
it more attractive to hold money than to spend it.
Investment falls The higher rate will increase the opportunity cost of investment (for example in
new projects) and reduce the net present value of the investment. This will
discourage organisations from investing.
The increased interest rates will make borrowing more expensive.
Foreign funds are Interest rates are the reward for capital, so a rise in interest rates will encourage
attracted into the overseas currency investors because of the increased rate of return relative to
country other countries.
Exchange rate rises The inflow of foreign funds (above) increases the demand for the home currency
and therefore strengthens the exchange rate making exports more expensive and
imports cheaper.
Inflation rate falls This is often the main goal of an interest rate rise. The reduction in spending
and investment will reduce aggregate demand in the economy.
The stronger exchange rate means imported goods will be cheaper.

An increase in interest rates will have a deflationary impact on the economy.

Note, however, the potential conflicting objectives which monetary policy faces. A change in interest
rates will have effects on both the domestic economy and on a country's international trade position (for
example through exchange rate movements).
46 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

It may be the case that the interest rate movement required for the domestic economy conflicts with that
required to achieve a balance on the external current account.

2.5.2 Exchange rates

Exchange rates are often used in monetary policy for two reasons.

(a) If the exchange rate falls (or weakens), exports become cheaper to overseas buyers and so the
nation becomes more competitive in export markets. Imports will become more expensive and so
less competitive against goods produced by manufacturers at home. A fall in the exchange rate
might therefore be good for the domestic economy, by giving a stimulus to exports and reducing
demand for imports.

(b) An increase (or strengthening) in the exchange rate will have the opposite effect, with dearer
exports and cheaper imports. If the exchange rate rises and imports become cheaper, there should
be a reduction in the rate of domestic inflation. A fall in the exchange rate, on the other hand,
tends to increase the cost of imports and adds to the rate of domestic inflation.

When a country's economy is heavily dependent on overseas trade it might be appropriate for government
policy to establish a target exchange value for the domestic currency. However, the exchange rate is
dependent on both the domestic rate of inflation and the level of interest rates. Targets for the exchange
rate cannot be achieved unless the rate of inflation at home is first brought under control.

2.5.3 National income

The authorities might set targets for the level of national income. For example, the policy might be for the
growth in the national income to be X% per annum for Y years. However, it takes time to collect
information about national income.

For this reason, although a target growth rate in national income itself is, in theory, probably the most
suitable target of monetary policy, it is the least practical because the authorities would always be
working with out-of-date information.

Question 2.1 Exchange and inflation rates

Learning outcome A1(vi)

Briefly explain how a nation’s exchange and inflation rates may affect its national income. (4 marks)

Section summary
Key elements of the macroeconomy include, interest rates, exchange rates and levels of demand and
supply.

A number of factors influence a nation's balance of trade because they affect the price of domestic goods
compared to foreign imports.

A nation's balance of trade forms part of its national account balance.

Fiscal policy refers to government policy on taxation and government spending.

Monetary policy refers to government policy on money supply, the monetary system, interest rates,
exchange rates and the availability of credit. It can directly affect a nation's balance of trade.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 47

3 Market regulation 03/13

Introduction
Regulation can be defined as any form of state interference with the operation of the free market.
Efficient regulation is where the total cost of the regulation is less than the benefit it provides to society.
Regulation is effective if the function of business is not impeded and the end-product or service being
controlled is safe and works as it should.

3.1 Regulation and Competition Policy

Regulation could involve regulating demand, supply, price, profit, quantity, quality, entry, exit,
information, technology, or any other aspect of production and consumption in the market

In the UK, much regulation concerns competition. However the government also plays a part in regulating
externalities (costs or benefits that arise from industry which are experienced by wider society rather than
producers and consumers). The actions of business people may also be controlled – for example to
prevent insolvent companies trading and where market abuse, insider dealing and money laundering
occur.

3.1.1 The Competition Act 1998

In the UK, this Act sought to encourage competition by introducing the presumption that anti-competitive
arrangements are against the public interest and so should be illegal. Competition is thought to be in the
best interests of the consumer because the aim is to reduce prices, raise quality and encourage the
efficient use of resources. The Office of Fair Trading (OFT) has the power to investigate organisations
suspected of breaching the Act. Fines of up to 10% of revenue may be imposed.

3.1.2 Industry regulators

Most countries have specific industry regulators to monitor the activities of private companies in
‘essential’ industries. For example, the UK has OFCOM to regulate the telecommunications market, while
OFGEM regulates the gas industry.

The regulators aim to promote competition, for example by imposing price caps and performance
standards or removing barriers preventing new organisations entering the market.

3.2 The Competition Commission

In the UK, the Competition Commission's (CC's) role is to promote competition. For example, the CC may
investigate proposed mergers where the assets involved exceed a certain value and recommend whether
or not it should be allowed to proceed.

3.3 The Restrictive Practices Court

The UK Restrictive Practices Court (RTP) has jurisdiction to declare that certain agreements are contrary
to the public interest and to restrain parties from enforcing them.

The RTP considers applications made by the Director General of Fair Trading in respect of agreements
under which at least two parties are imposing restrictions on the price or supply of goods.
48 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

3.4 European Union competition policy

European Union competition policy is intended to ensure free and fair competition in the EU. The
Commission of the European Union has authority under the Treaty of Rome (Articles 81 to 89) to
prohibit price fixing and other uncompetitive arrangements, including limiting production or seeking to
exclude competitors from a market.

The Commission also has authority to prevent national governments within the EU offering subsidies or
other state aid to organisations in their countries which will distort competition across the wider market.

3.5 Self-regulation
In many markets, the participants may decide to maintain a system of voluntary self-regulation, possibly
in order to try to avert the imposition of government controls. Self-regulation often exists in the
professions.

3.6 Costs of regulation

The costs of regulation include:

(a) Enforcement costs. Direct costs of enforcement include the setting up and running of the
regulatory agencies. Indirect costs are those incurred by regulated organisations in conforming with
the regulations relevant to them.

(b) Regulatory capture. This refers to the process by which the regulator becomes dominated and
controlled by the regulated companies, such that it acts increasingly in the latter's interests, rather
than those of consumers. This is a phenomenon which has been observed in the USA.

(c) Unintended consequences of regulation. Organisations will not react passively to regulatory
constraints on their behaviour – instead they try to limit their effectiveness. In general, theory and
observation suggest that if it’s practical, businesses will move away from regulated activities
towards those which are less constrained or completely unregulated.

3.7 Deregulation
Deregulation can be defined as the removal or weakening of any form of statutory (or voluntary)
regulation of free market activity. Deregulation allows free market forces more scope to determine the
outcome.

There was a shift in policy in the 1980s in the UK and in the USA towards greater deregulation of
markets, in the belief that this would improve efficiency.

A rational assessment of deregulation should weigh the potential benefits against the costs. If there will
be a net gain to society, we can say that the deregulation should proceed. It would be simplistic to
contend that all regulation is detrimental to the economy.

3.7.1 Advantages and disadvantages of deregulation

Deregulation measures are also known as liberalisation.

Those who favour deregulation quote possible benefits such as:

(a) Increased incentive to find internal cost savings and efficiency. Increased competition should lead
to the most efficient organisations being the most successful.

(b) Improved allocative efficiency. Competition should result in prices closer to marginal cost and
therefore result in overall production that is closer to the socially optimal output level.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 49

In some industries, liberalisation could have certain disadvantages.

(a) Loss of economies of scale. If increased competition means that each organisation produces less
output on a smaller scale, unit costs will be higher.

(b) Lower quality or quantity of service. The need to reduce costs may lead organisations to reduce
quality or eliminate unprofitable but socially valuable services.

(c) Need to protect competition. It may be necessary to implement a regulatory regime to protect
competition where inherent forces have a tendency to eliminate it.

Section summary
Regulation can be defined as any form of state interference with the operation of the free market.

In the UK there have been various pieces of legislation enacted to maintain competition in the market
place and there are a number of industry regulators.

European Union competition policy is intended to ensure free and fair competition in the EU.

Deregulation can be defined as the removal or weakening of any form of statutory (or voluntary)
regulation of free market activity.

4 Corporate governance

Introduction
Although shareholders own a company, the responsibility for directing and controlling it rests largely with
the board of directors. In the UK, a series of high profile corporate scandals in the 1980s and 1990s led
to a range of corporate governance controls.

CORPORATE GOVERNANCE is the system by which companies and other entities are directed and
controlled.
KEY TERM (CIMA Official Terminology)

Corporate governance concerns shareholders (the owners) and directors (the management), as between
them they direct and control the company.

Sometimes, particularly in smaller businesses, companies are owned and managed by the same people.
This is the situation where people form a company to carry out their own business, buy the shares and
appoint themselves as directors.

In other, mainly bigger, companies, the directors and shareholders are different sets of people. Often in
larger companies quoted on stock exchanges, shareholders purchase shares as an investment and may
have very little personal contact with the company. Directors are employed for their management
expertise and have no other connection with the company.

There is a key difference between these two types organisation, which is known as the 'knowledge gap' or
‘agency problem’. In the owner-managed company, as the directors and shareholders are the same
people, they have access to the same information and are in a position to direct company policy. In the
other company, the shareholders do not have access to day-to-day company management information
and therefore have to rely on the directors to act in their interest.
50 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

4.1 Stakeholders
Stakeholders are persons or groups that have a legitimate interest in a business's conduct and whose
concerns should be addressed as a matter of principle. Many stakeholder groups have influence over the
way in which organisations are managed and operated. They can therefore be fundamental to corporate
governance.

STAKEHOLDERS are those persons and organisations that have an interest in the strategy of an
organisation.
KEY TERMS (CIMA Official Terminology)

STAKEHOLDER THEORY states that shareholders should not be the sole focus of an organisation’s attention,
but that it should be accountable to all stakeholders.

There are three broad types, or constituencies, of stakeholder in an organisation.

 Internal stakeholders such as employees and management

 Connected stakeholders such as shareholders, customers, suppliers and financiers
 External stakeholders such as the community, government, trade unions and pressure groups

Stakeholders

Connected Banks and

Shareholders Customers Suppliers
financiers

Internal INTERNAL, eg
Management
Employees

External Pressure
Community Government
groups

The extent to which external stakeholders are interested and recognised is linked in some ways to the size
of the organisation. For example the policies and actions of larger organisations are more likely to be of
interest to national governments and even international bodies than are those of smaller organisations.

Stakeholders may also be analysed into those who have a formal contractual relationship with the
organisation and those who do not. These two groups are called primary and secondary stakeholders.
Internal and connected stakeholders fall into the primary category, while external stakeholders are
secondary stakeholders.

It is important for management to consider stakeholders when determining corporate goals, objectives
and strategy for two reasons. Firstly, certain stakeholder groups, that hold power in the organisation,
might be able to disrupt or prevent certain policies being carried out. For example, staff may go on strike
and suppliers may choose not to supply the organisation if they do not agree with its activities. Secondly,
the organisation may legitimise its goals if it discusses them with those affected. In other words, the
organisation can demonstrate that its goals have been agreed upon by not just the senior management
team and therefore the decision may not be questioned by others.

You will use your understanding of the types of stakeholders in paper E3 when you study how
to manage them.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 51

4.1.1 Stakeholder conflict

Stakeholders are mostly interested in the success of the business, and this creates a common goal
between them. However, they may pursue their own interests in certain circumstances, and these
interests may be incompatible with the interests of other stakeholder groups, creating conflict between
them.

Examples of conflicting interests include:

 Shareholders demanding rising profits and customers wanting higher quality (more costly) products
 Employee demand for pay rises against the need for management to maximise profit (perhaps at
least in part to achieve their bonuses)
 The community wanting minimal environmental impact from the organisation but shareholders
want the least costly option for disposing of waste chosen
 Directors may recommend that the business is taken over by another but shareholders want to
remain independent

Directors usually give priority to those stakeholders which have the most power, but decisions are usually
a compromise between the various stakeholder groups.

Mendelow classifies stakeholders on a matrix whose axes are power (or influence) and degree of interest
in the organisation's activities. These factors help define the type of relationship the organisation should
seek with its stakeholders.
Level of interest
Low High

Low A B
Power/influence

High C D

(a) Key players are found in segment D. Any strategy must be acceptable to them, at least. An
example would be a major customer. These stakeholders may participate in decision-making.
(b) Stakeholders in segment C must be treated with care. While often passive, they may be capable of
moving to segment D. They should, therefore be kept satisfied. Large institutional shareholders
might fall into segment C.
(c) Stakeholders in segment B do not have great ability to influence strategy, but their views can be
important in influencing more powerful stakeholders, perhaps by lobbying. They should therefore
be kept informed. Community representatives and charities might fall into segment B.
(d) Minimal effort should be expended on segment A. An example might be a contractor's employees.
Internal stakeholder groups are likely to have both more influence and more interest than external groups.
Coalitions of stakeholder groups are likely to have more influence than single stakeholders or small
uniform groups.

Stakeholder mapping is also part of the syllabus for Paper E2.

52 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

4.2 Failures of corporate governance

Though mostly discussed in relation to quoted companies, governance is an issue for all organisations. An
increasing number of high profile corporate scandals and collapses, including Polly Peck International,
BCCI and Maxwell Communications Corporation prompted the development of governance codes in the
early 1990s. However, scandals since then, such as Parmalat and Enron, have raised questions about
further measures that may be necessary. These scandals have highlighted the need for guidance to tackle
the various risks and problems that can arise in organisations' systems of governance.

4.2.1 Domination by a single individual

A feature of many corporate governance scandals has been boards dominated by a single senior executive
with other board members merely acting as a rubber stamp. Sometimes the single individual may bypass
the board to action their own interests. The report on the UK Guinness case suggested that the Chief
Executive, Ernest Saunders paid himself a substantial reward without consulting the other directors. The
presence of non-executive directors on the board is felt to be an important safeguard against domination
by a single individual.

4.2.2 Lack of involvement of board

Boards that meet irregularly or fail to consider systematically the organisation's activities and risks are
clearly weak. Sometimes the failure to carry out proper oversight is due to a lack of information being
provided.

4.2.3 Lack of adequate control function

An obvious weakness is an ineffective internal audit function, since this is one of the most important
aspects of internal control. Another important weakness is a lack of adequate technical knowledge in key
roles, for example in the audit committee or in senior compliance positions. A rapid turnover of staff
involved in accounting or control may suggest inadequate resourcing and the constant change will make
control more difficult.

4.2.4 Lack of supervision

Employees who are not properly supervised can create large losses for the organisation through
incompetence, negligence or fraudulent activity. The behaviour of Nick Leeson, the employee who caused
the collapse of Barings bank was not challenged because he appeared to be successful, whereas he was
using unauthorised accounts to cover up his large trading losses. Leeson was able to do this because he
was in charge of both dealing and settlement, a systems weakness or lack of segregation of key roles
that has also featured in other financial frauds.

4.2.5 Lack of independent scrutiny

External auditors may not carry out the necessary questioning of senior management because of fears of
losing the audit and internal audit may avoid awkward questions because the chief financial officer
determines their employment prospects. Often corporate collapses are followed by criticisms of external
auditors; such as the Barlow Clowes affair where poorly planned and focused audit work failed to identify
illegal use of client monies.

4.2.6 Lack of contact with shareholders

Board members may be out of touch with the interests and views of shareholders. One possible symptom
of this is the payment of remuneration packages that do not appear to be warranted by results. Equally,
the directors may choose to pursue their own interests and ignore the requirements of the shareholders.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 53

4.2.7 Emphasis on short-term profitability

Emphasis on short-term results can lead to the concealment of problems or errors, or manipulation of
accounts to achieve desired results.

4.2.8 Misleading accounts and information

Often, misleading figures are symptomatic of other problems (or are designed to conceal them). In many
cases, poor quality accounting information is a major problem if markets are trying to make a fair
assessment of the company's value. Giving out misleading information was a major issue in the UK's
Equitable Life scandal where the company gave contradictory information to savers, independent
advisers, media and regulators.

4.3 Benefits of improving corporate governance

4.3.1 Risk reduction
Clearly, the ultimate risk is of the organisation making such large losses that bankruptcy becomes
inevitable. The organisation may also be closed down as a result of serious regulatory breaches, for
example misapplying investors' monies. Proper corporate governance reduces such risks by aligning
directors' interests with the company's strategic objectives and by providing for measures to reduce fraud.

4.3.2 Performance
Performance should improve if accountabilities are made clear and directors' motivation is enhanced by
performance-related remuneration. Also, the extra breadth of experience brought by non-executive
directors and measures to prevent domination by a single powerful figure should improve the quality of
decision-making at board level.

4.3.3 External support

External perceptions of the company should be enhanced. This can have wide-ranging benefits.

 Improved ability to raise finance

 Improved corporate image with public and government
 Improved relations with stakeholders such as customers and employees

4.4 The UK Corporate Governance Code (an example)

The UK Corporate Governance Code applies to listed companies in the UK. These companies must either
comply with the code or explain any departures from it in a note to their financial statements (‘comply or
explain’). The approach taken by the UK Corporate Governance Code is one based on a framework of
best practice principles.

The key principles of the code are explained briefly below.

4.4.1 Leadership
Every company should be headed by an effective board. The board consists of the chairman, chief
executive, executive directors and non-executive directors.

The roles of chairman and chief executive should not be exercised by the same individual. The chairman
runs the board and the chief executive runs the operations of the company. If the board decides that the
roles of chief executive and chairman should be held by the same individual, they should consult major
shareholders in advance, setting out their reasons.
54 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

Executive directors are involved in the day-to-day management of the company and may have titles that
describe their function – such as Finance Director. The main role of non-executive directors (NEDs) is to
attend board and board committee meetings and constructively challenge and help develop proposals on
strategy.

The board should include sufficient non-executive directors. What is ‘sufficient’ in terms of number of
NEDs depends on the company. In larger companies, NEDS should make up half the board (excluding the
Chairman), but in small companies on two NEDS are required.

A ‘senior independent director’ should be appointed out of the NEDs and act as a point of contact for
shareholders who wish to raise issues that concern them.

4.4.2 Effectiveness
The board should have an appropriate balance of skills, experience, independence and knowledge.

There should be a formal and transparent procedure for the appointment of new directors via a
nomination committee. This committee should ensure that appointments to the board are based on
finding the best person for the job (ie on merit).

The board should undertake a formal annual evaluation of its performance.

All directors should receive induction on joining the board and should regularly update and refresh their
skills and knowledge. Directors should be submitted for re-election at regular intervals.

The board should be supplied in a timely manner with information in a form and of a quality appropriate
to enable it to discharge its duties.

The board should include an appropriate combination of executive and non-executive directors such that
no individual or small group of individuals can dominate.

4.4.3 Accountability
The board should present a balanced and understandable assessment of the company’s position and
prospects.

The board is responsible for determining the nature and extent of risks it is willing to take to achieve
strategic objectives.

The board should establish an audit committee of at least three (or in the case of smaller companies
two), independent non-executive directors. At least one member of the audit committee should have
recent and relevant financial experience.

The main role and responsibilities of the audit committee should include monitoring the integrity of
accounting policies and financial statements, reviewing the company’s internal controls and risk
management, reviewing the work and effectiveness of the internal audit function, monitoring the external
auditor’s independence and objectivity, short-listing external audit firms when a change is needed and
being available for internal and external auditors to speak to.

4.4.4 Remuneration
Director remuneration should be sufficient to attract, retain and motivate directors of the quality
required, but should not be more than is necessary. A significant proportion of executive directors’
remuneration should be linked to corporate and individual performance.

There should be a formal and transparent procedure for developing policy on executive remuneration and
for fixing the remuneration of individual directors. No director should be involved in deciding his or her
own remuneration, rather a remuneration committee with a number of non-executive directors should set
director pay. The number of NEDs on the remuneration committee should be the same as the audit
committee.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 55

4.4.5 Relations with shareholders

There should be a dialogue with shareholders based on the mutual understanding of objectives. The
board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes
place. The Annual General Meeting (AGM) has a key role to play in this.

Exam skills
You may be asked to read a scenario and identify any corporate governance issues. Learn the principles
of good corporate governance rather than the specific requirements of the UK Corporate Governance
Code or any other country-specific regime.

Corporate governance is a popular topic – it appears on several syllabuses.

Further details of the UK Corporate Governance code are available on the web. Visit
www.frc.org.uk

4.5 Sarbanes-Oxley Act 2002

The US Sarbanes-Oxley Act 2002 (SOX) takes a different, rules-based approach, to corporate
governance. The objective is to prevent creative accounting. Examples of some SOX rules include:

 Restrictions on non-audit services provided by auditors

 Report on internal control systems to form part of the financial statements
 All off-balance sheet finance to be disclosed in the financial statements
 Companies to be prevent from trading if they do not have an audit committee

Question 2.2 Corporate governance and directors

Learning outcome A2(i)

Briefly explain what is meant by corporate governance and explain three measures concerning directors
recommended by the UK Corporate Governance Code. (4 marks)

Section summary
Corporate governance is the system by which companies and other entities are directed and controlled.

Stakeholders are persons or groups that have a legitimate interest in a business's conduct and whose
concerns should be addressed as a matter of principle.

Since their interests may be widely different, conflict between stakeholders can be quite common.

An increasing number of high profile corporate scandals and collapses prompted the development of
governance codes in the early 1990s.

The UK Corporate Governance Code sets out standards of best practice in relation to issues such as
board composition, remuneration and accountability.
56 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

5 Corporate social responsibility 11/10, 03/13

Introduction
Corporate social responsibility (CSR) refers to the expectation in society that companies are accountable
for the social and ethical effects of their actions. This expectation has grown since the 1970s and
organisations are expected to demonstrate a duty of care to society. If they fail in their duty to the public
then compensation may be sought from them.

In most countries, some CSR issues are covered by legal regulations (eg pollution and child labour).
Increasingly, consumers are demanding that producers of the products and services they use do more
than simply comply with laws - they expect companies to behave ethically and with moral responsibility.

The term Corporate Social Responsibility (CSR) is used to describe a wide range of obligations that an
organisation may feel it has towards its secondary or external stakeholders, including the society in which
KEY POINT
it operates.

The traditional view of business is that companies have the sole objective of maximising profits for
shareholders and that social responsibility has no part to play in business decision making. In recent
times, however, this view has shifted towards CSR related strategies that may offer a business a number
of advantages. The main benefits are to improve the organisation’s image in society and create a long-
term attachment with customers. Other advantages include the following:

Advantages of CSR strategies

Attractive to likeminded, high quality employees Differentiation from competitors
May reduce packaging costs and environmental Creates new markets for goods and services and
taxes attracts new, likeminded customers
Improves image of firm/brand Positive impact on profitability if sales increase and
costs fall

5.1 Caroll and Buchholtz's layers of corporate social responsibility

Caroll and Buchholtz argued that there are four main 'layers' of corporate social responsibility.

5.1.1 Economic responsibilities

Companies have economic responsibilities to shareholders demanding a good return, to employees
wanting fair employment conditions and to customers seeking good-quality products at a fair price.
Businesses are formed to be properly functioning economic units and so economic responsibilities form
the basis of all other responsibilities.

5.1.2 Legal responsibilities

Since laws codify society's moral views, obeying them must be the foundation of compliance with social
responsibilities. Although in all societies corporations will have some legal responsibilities, there is
perhaps more emphasis on them in continental Europe than in the Anglo-American economies. In Anglo-
American economies the focus of discussion has often been whether many legal responsibilities are
unnecessary burdens on business.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 57

5.1.3 Ethical responsibilities

These are responsibilities that require corporations to act in a fair and just way even if the law does not
compel them to do so. If customers demand this, acting ethically may be as much a business decision as
a moral one.

5.1.4 Philanthropic responsibilities

According to Carroll and Buchholtz, these are desired rather than being required of businesses. They
include charitable donations, contributions to local communities and providing employees with the
chances to improve their own lives.

Whilst CSR principles tend to be similar the world over, there are differences in application. For example,
in America, the approach of many businesses is to make charitable donations, but in Europe, the focus
tends to be on investing in communities and having responsible business practices. Although some
investment is needed when implementing a CSR policy, most firms see them as profitable in the long-
term as customers expect companies to be socially responsible, and if they’re not, they will spend their
money elsewhere.

5.2 Corporate citizenship

The concept of corporate citizenship provides a different perspective on organisations and society. It
seeks to explain what determines how much and in what ways organisations engage with society. Again
there are different views of how far it should extend.

5.2.1 Limited view

This is based on voluntary philanthropy undertaken in the organisations' interests. The main stakeholder
groups that the corporate citizen engages with are local communities and employees. Citizenship in action
takes the form of limited focus projects.

5.2.2 Equivalent view

This is based on a wider general definition of citizenship that is partly voluntary and partly imposed. The
organisation focuses on a broad range of stakeholders and responds to the demands of society. Self-
interest is not the primary motivation, instead the organisation is focused on legal requirements and
ethical fulfilment.

5.2.3 Extended view

This view is based on a partly voluntary and partly imposed view of active social and political citizenship.
Corporations must respect citizens' rights, particularly as governments have failed to provide some
necessary safeguards. Given this, corporations can make a big impact since they are the most powerful
institutions in society. Again the focus is on a wide range of stakeholders.

Under the extended view, organisations will promote:

 Social rights, by provision (for example decent working conditions)

 Civil rights, by intervening to promote citizens' individual rights themselves or to pressurise

governments to promote citizens' rights

 Political rights, by channelling (allowing individuals to promote their causes by using corporate
power)
58 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

5.3 Corporate social responsibility in developing nations

Developing economies face different challenges to corporate social responsibility than developed nations.

Key drivers for CSR in developing economies include:

(a) Culture. Many developing nations already have in their culture a tradition of ethics and
community. Often this has come about through religion. As businesses are part of a nation's
culture it is natural for such traditions to be followed.

(b) Politics. Political reform and the introduction of democracy is common in developing countries as
this is often the spark which drives economic development. Countries undergoing development
often follow examples of good practice, such as CSR, in developed nations.

(c) Socio-economic priorities. Developing countries often face a conflict of priorities. For example,
reducing pollution may be desirable to preserve the environment, but cleaner production methods
may be more expensive and hinder economic progress.

(d) Governance gaps. CSR can be used as a form of governance to 'plug the gaps' that result from
poor government services. For example, organisations can be used to provide healthcare or
education where the government cannot afford to.

(e) Market access. As developed nations have high public pressure for CSR, companies in developing
nations must follow the same principles if they are to sell in the same market.

(f) Multinational companies. Multinational companies strive for consistency across all their
international subsidiaries and production units. Where these are located in developing countries,
they will adopt the same policies as those in developed countries. Countries (or companies) that do
not adopt CSR are less likely to receive investment (or orders) from MNCs.

Exam skills
You may be asked to apply the concept of corporate social responsibility to a number of business areas.
For example in March 2013 a 5 mark question required candidates to link it to HR policies. Students
who understand the subject, rather than just rote learning facts, should be able to deal with such
situations successfully.

Section summary
Corporate social responsibility (CSR) is a recent development brought about by pressure on companies to
show an awareness of the social and ethical effects of their actions.

Developing economies face different corporate social responsibility challenges. For example, culture,
politics, socio-economic priorities, governance gaps, market access and the influence of multinational
companies all influence government, company and consumer attitudes towards corporate social
responsibility.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 59

Chapter Roundup
 Government influence over business extends to the macroeconomic environment, legal and market
regulations, corporate governance and social responsibility.

 Key elements of the macroeconomy include, interest rates, exchange rates and levels of demand and
supply.

 A number of factors influence a nation's balance of trade because they affect the price of domestic goods
compared to foreign imports.

 A nation's balance of trade forms part of its national account balance.

 Fiscal policy refers to government policy on taxation and government spending.

 Monetary policy refers to government policy on money supply, the monetary system, interest rates,
exchange rates and the availability of credit. It can directly affect a nation's balance of trade.

 Regulation can be defined as any form of state interference with the operation of the free market.

 In the UK there have been various pieces of legislation enacted to maintain competition in the market
place and there are a number of industry regulators.

 European Union competition policy is intended to ensure free and fair competition in the EU.

 Deregulation can be defined as the removal or weakening of any form of statutory (or voluntary)
regulation of free market activity.

 Corporate governance is the system by which companies and other entities are directed and controlled.

 Stakeholders are persons or groups that have a legitimate interest in a business's conduct and whose
concerns should be addressed as a matter of principle.

 Since their interests may be widely different, conflict between stakeholders can be quite common.

 An increasing number of high profile corporate scandals and collapses prompted the development of
governance codes in the early 1990s.

 The UK Corporate Governance Code sets out standards of best practice in relation to issues such as
board composition, remuneration and accountability.

 Corporate social responsibility (CSR) is a recent development brought about by pressure on companies to
show an awareness of the social and ethical effects of their actions.

 Developing economies face different corporate social responsibility challenges. For example, culture,
politics, socio-economic priorities, governance gaps, market access and the influence of multinational
companies all influence government, company and consumer attitudes towards corporate social
responsibility.
60 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT

Quick Quiz
1 Briefly explain the impact a falling exchange rate will have on a nation's balance of trade.

2 The primary consequence of an increase in a nation's interest rates is:

A To make imports more expensive

B To make borrowing more expensive
C To make imports cheaper
D To make borrowing cheaper

3 Which of the following is an external stakeholder?

A Shareholders
B Customers
C Suppliers
D Pressure groups

4 Which of the following is not an example of a corporate governance failure?

A Domination by a single individual

B Lack of contact with shareholders
C Strong corporate finance controls
D Short-term profitability is pursued

5 Charitable donations are an example of which layer of corporate social responsibility according to Caroll
and Buchholtz?

A Economic
B Legal
C Ethical
D Philanthropic

Answers to Quick Quiz

1 If an exchange rate falls, exports become cheaper to overseas buyers and so the nation becomes more
competitive in export markets. Imports will become more expensive and so less competitive against goods
produced by manufacturers at home. A fall in the exchange rate might therefore be good for the balance
of trade, by giving a stimulus to exports and reducing demand for imports. However, if the demand for
imported goods remains constant at the higher price level (for example demand for oil-related products
such as petrol tends to be inelastic), the falling exchange rate may have an adverse effect on the balance
of trade.

2 B An increase in interest rates makes company and individual borrowing more expensive.

3 D Pressure groups are external stakeholders. The others are connected stakeholders.

4 C Strong corporate finance controls would be an example of good corporate governance.

5 D Charitable donations are an example of the philanthropic layer of corporate social responsibility
according to Caroll and Buchholtz.
PART A THE GLOBAL BUSINESS ENVIRONMENT 2: Governance and regulation 61

Answers to Questions
2.1 Exchange and inflation rates

Exchange rates affect the relative cost of a nation’s imports and exports. If its currency falls in value, imports
become more expensive and exports cheaper. This leads to an improvement in national income as the country
exports more than it imports.

Inflation rates affect the cost-base of organisations. If a nation experiences rising inflation, then the cost of
producing goods will rise. As a result, organisations have to raise their prices. This makes the price of goods
produced locally relatively more expensive compared to imports. Consequently, this will lead to a worsening
national income as the local demand for cheaper imports increases and overseas demand for expensive exports
decreases.

2.2 Corporate governance and directors

Corporate governance can be defined as the system by which an organisation is directed and controlled.

It is concerned with systems, processes, controls, accountability and decision making at the highest level of an
organisation. Therefore, it affects the way in which board members and senior managers execute their
responsibilities how they account for that authority to those who have entrusted them with assets and resources.

Three recommendations of the UK Corporate Governance Code concerning directors are:

(a) Companies should appoint non-executive directors to the board. They are intended to provide a check or
balance against the power of the chairman and chief executive.

(b) The posts of chairman and chief executive should not be held by the same person. This is to prevent
excessive executive power being held by one individual.

(c) Directors should not set their own remuneration. A remuneration committee consisting of non-executive
directors should set executive pay.

Note: These are just three possible examples, your answer may have included other examples.

Now try this question from Number Level Marks Time

the Exam Question Bank
2 Examination 20 36 mins
62 2: Governance and regulation PART A THE GLOBAL BUSINESS ENVIRONMENT
INFORMATION SYSTEMS

Part B

63
64
THE ROLE OF INFORMATION SYSTEMS

In this chapter we introduce information working and how IT enabled 'transformations' have led to
systems and explain their role within new forms of organisation both real and 'virtual'.
organisations.
Later, we consider two major issues concerning
In particular, we are interested in how developments in information systems – privacy and security.
technology have provided organisations new ways of

topic list learning outcomes syllabus references ability required

1 The role of information systems in organisations B1(a) B1(i) comprehension

2 Data and information B1(a) B1(i) comprehension

3 Types of information systems B1(a) B1(i) comprehension

4 Emerging trends in information systems B1(a) B1(ii) comprehension

5 IT enabled transformation B1(c) B1(iii) analysis

6 IT and new forms of organisation B1(b) B1(iii), B1(iv) analysis
7 Privacy and security B2(a) B2(ii) analysis

65
66 3: The role of information systems PART B INFORMATION SYSTEMS

1 The role of information systems in organisations 09/11

Introduction
In this section we look at the role information systems play in organisations. Two main roles can be
identified:

 Support operations through the processing and storing of transactions

 Support managerial activities such as decision making, planning, performance measurement and
control

These two purposes can be broken down into five elements.

Organisations require information for a range of purposes.

KEY POINT  Recording transactions

 Decision making
 Planning
 Performance measurement
 Control

1.1 Recording transactions

Information about each business transaction or event is required for a number of reasons. Documentation
of transactions can be used as evidence in a case of dispute. There may be a legal requirement to record
transactions, for example for accounting and audit purposes. Detailed information on production costs can
be built up allowing a better assessment of profitability.

1.2 Decision making

Information is also required to make informed decisions. Information and information systems enable
informed decisions to be made.

Information used by information systems may be classified as internal and external.

1.3 Planning
Planning requires a knowledge of, among other things, available resources, possible time-scales for
implementation and the likely outcome under alternative scenarios. Information systems can provide a
number of planning tools.

1.4 Performance measurement

Just as individual operations need to be controlled, so overall performance must be measured in order to
enable comparisons against budget or plan to be made. This may involve the collection of information
on, for example, costs, revenues, volumes, time-scale and profitability. The collection, analysis and
presentation of such data can be performed by information systems.

1.5 Control
Once a plan is implemented, its actual performance must be controlled. Information is required to assess
whether it is proceeding as expected or whether there is some unexpected deviation from the plan. It
may consequently be necessary to take some form of corrective action. Information systems can be used
to monitor and control the outcomes of plans.
PART B INFORMATION SYSTEMS 3: The role of information systems 67

2 Data and information

Introduction
When discussing information systems the terms data and information often crop up. It is worth defining
these terms.

 Data consists of raw, unprocessed facts and figures.

 Information is data that has been processed in a way that makes it meaningful for planning or
decision making.

The process of turning data into information involves a number of stages.

Data collection
Data gathering from internal and external sources.

Data evaluation
The data collected is examined and filtered. Irrelevant data may be deleted or ignored.

Data analysis
Data collected is compared against benchmarks or yardsticks, for example actual versus
budget..

Interpretation
Data is considered, interpreted and meaning added. For example an explanation as to why
actual differs from budget.

Reporting
Information is distributed to those who require it, for example as a report sent out as an
email attachment.

There are costs associated with developing and running the system required to convert data into
information. For example costs associated with system design, purchasing, housing and testing
equipment, and operating costs such as electricity and staff salaries.

It is important that such costs do not exceed the value of the information created by the system.
Information may have an intrinsic value and may be sold, but it may also have a value to the organisation
in terms of creating competitive advantage, cost control and reduction, improving corporate decision
making and strategy (such as marketing decisions).

2.1 Internal data and information

This is data and information that is held within the organisation’s own files. The following are examples of
internal information.

2.1.1 Accounting records

Accounts receivable ledgers, accounts payable ledgers, general ledgers and cash books etc hold
information that may be of great value outside the accounts department, for example, sales information
for the marketing function.
68 3: The role of information systems PART B INFORMATION SYSTEMS

2.1.2 Personnel records

Information about personnel will be held, possibly linked to the payroll system. Additional information
may be obtained from this source if, say, a project is being costed and it is necessary to ascertain the
availability and rate of pay of different levels of staff, or the need for and cost of recruiting staff from
outside the organisation.

2.1.3 Production data

Much information will be produced by a production department about machine capacity, fuel
consumption, movement of people, materials, work in progress, set up times, maintenance requirements
and so on.

2.1.4 Timesheets
Many service businesses, notably accountants and solicitors, need to keep detailed records of the time
spent on various activities, both to justify fees to clients and to assess the efficiency and profitability of
operations.

2.2 External data and information

Organisations often need to collect information concerning environmental factors. The following table
describes some of these factors using PEST analysis.

Factor Comment
Political/legal National or local politics may affect how an organisation operates. Changes in legislation
may put new responsibilities or liabilities on an organisation.
Economic Economic factors affect an organisation’s finances such as the availability of loans or
sales levels.
Social Society’s views may put pressure on how the organisation is run, for example pressure to
reduce environmental pollution.
Technological Technological advances may affect an organisation’s production and/or management
processes. Technology may also allow the development of new products and services
which were not previously possible.

Organisations may also require external information relating to:

(a) Competitors – how successful are they, are they developing new products?

(b) Customers – what are their needs, how large is the potential market, are there any new market
segments?

(c) Suppliers – what are their prices, what is the quality of their products like, are there any new
potential suppliers in the market?

Formal collection of data from outside sources includes the following.

(a) A company's tax specialists will be expected to gather information about changes in tax law and
how this will affect the company.

(b) The company's legal expert or company secretary would collect relevant information relating to
any new legislation on health and safety at work, or employment regulations.

(c) Research and development (R & D) work often relies on information about other R & D work being
done by another company or by government institutions.

(d) Marketing managers need to know about the opinions and buying attitudes of potential customers.
To obtain this information, they might carry out market research exercises.
PART B INFORMATION SYSTEMS 3: The role of information systems 69

The phrase ENVIRONMENTAL SCANNING is often used to describe the process of gathering external
information from a wide range of sources.
KEY TERM Sometimes additional external information is needed, requiring an active search outside the organisation.

The following additional external sources may be identified; the Government, advice or information
bureaux, consultancies, newspaper and magazine publishers, specific reference works which are used in a
particular line of work, libraries and information services, customer or supplier systems can be a source of
information, for instance via electronic data interchange (EDI) and web-based sources of information are
becoming ever more important.

2.2.1 Informal data and information gathering

Informal gathering of data and information from the environment goes on all the time, when employees
learn what is going on in the world around them – perhaps from trade magazines, newspapers, websites,
television reports or meetings with business associates. Knowledge, skills and experience developed by
members of staff is collectively known as the organisation’s human capital. This contrasts with structural
capital with comprises assets such as patents and client-lists that the business owns.

2.3 The qualities of information

To be useful, information requires a number of specific qualities. The mnemonic ACCURATE, shown in
the following table, is a useful way of remembering them. Information systems should aim to produce
information that possesses these qualities.

Quality Example
Figures in a report should add up, the degree of rounding should be appropriate,
Accurate there should be no typos, items should be allocated to the correct category,
assumptions should be stated for uncertain information. Must be reliable.
Information should include everything relevant to the decision being considered. if
relevant, comparative information should be included. Information should be
Complete consistent, for example it should be collected on the same basis each time, to
allow for meaningful comparison. Excessive information should be avoided.
It should not cost more to obtain the information than the benefit derived from its
Cost-effective use. Information collection and analysis should be efficient. Presentation should be
clear, such that users do not waste time working out what the information means.
The needs of the user are paramount. The information must be easy to read and
Understandable well presented.
Information that is not needed for a decision should be omitted. All significant
Relevant information that is relevant to the decision being considered should be included.
The choice of medium to provide the information should appropriate (face-to-
Accessible face, email, letter, written report) and consider the needs of the user.
The information should be available when it is needed and in time for required
Timely action to be effective.
As well as being understandable (clear and well presented) and accessible
Easy to use (correct choice of medium) the information should be presented in a manner that
the user can easily use or pass on as required.
70 3: The role of information systems PART B INFORMATION SYSTEMS

Section summary
Information systems play a key role within organisations. In particular they are used in planning,
controlling, recording transactions, performance measurement and decision making.

Data consists of raw, unprocessed facts and figures. Information is data that has been processed in a way
that makes it meaningful for planning or decision making.

Information used by organisations comes from a variety of internal and external sources.

Information systems should provide information that possesses certain specific qualities (ACCURATE).

3 Types of information systems

Introduction
There are a large range of information systems available to an organisation, with different purposes. In
this section we shall look at common forms of information system, and later, some recent trends and
developments in information systems.

3.1 Information systems at different organisational levels

The term ‘information system’ is a general concept that refers to the people, data and activities, both
computer-based and manual, that effectively gather, process, store and disseminate information. Most
information systems utilised in a business context today rely on information and communications
technologies (ICT).

Exam alert
You must be aware of the difference between information systems and information technology.
Information systems provide management information and assist with business operations. Information
technology is the underlying hardware equipment that the system is built on.

Organisations require different types of information system to provide information at different levels of the
organisation, and in a range of functional areas.

System level System purpose and features Examples

Strategic Purpose: To help senior managers with long-term planning. Key ratios and
Time focus: Long term performance
indicators
Coverage: Whole organisation
Uncertainty and subjectivity: High Ad hoc market
analysis
Accuracy: Less critical than at other levels
Strategic plans
Management Purpose: To help middle managers monitor and control. Variance analyses
or Time focus: Short to medium term Exception reports
tactical
Coverage: Department(s) or function(s)
Uncertainty and subjectivity: Moderate
Accuracy: Moderate level, not as detailed as operational level
PART B INFORMATION SYSTEMS 3: The role of information systems 71

System level System purpose and features Examples

Operational Purpose: To process transactions and help operational Transaction listings
managers track the organisation's day-to-day operational Daily receipts and
activities. payments
Time focus: Immediate
Real-time production
Coverage: Specific activities data
Uncertainty and subjectivity: Low Debtors and creditors
Accuracy: A high level of accuracy is required listings

Different types of information systems exist with different characteristics – reflecting the different roles
they perform. The most common are described below.

3.1.1 Centralised and decentralised systems and departments 05/12, 05/13

An information system or department may be centralised or decentralised.

KEY POINTS
A centralised information system or department involves all functions being based out of a single central
location, such as head office.

A decentralised information system or department involves functions being spread out throughout the
organisation’s locations.

There is no single 'best' structure, so an organisation should consider the merits of each.

3.1.2 Advantages of centralisation

Advantages of a centralised system or department include the following.

(a) Assuming centralised processing is used, there is only one set of files. Everyone uses the same
data and information.

(b) It gives better security/control over data and files. It is easier to enforce standards.

(c) Head office is in a better position to know what is going on.

(d) There may be economies of scale available in purchasing computer equipment and supplies.

(e) Computer staff are in a single location, and more expert staff are likely to be employed. Career
paths may be more clearly defined.

3.1.3 Disadvantages of centralisation

Disadvantages of a centralised system or department include the following.

(a) Local offices might have to wait for IS/IT services and assistance.

(b) Reliance on head office. Local offices are less self-sufficient.

(c) A system fault at head office will impact across the organisation.

3.1.4 Advantages of decentralisation

Advantages of a decentralised system or department include the following.

(a) Each office can introduce an information system specially tailored for its individual needs. Local
changes in business requirements can be taken into account.

(b) Each office is more self-sufficient.

(c) Offices are likely to have quicker access to IS/IT support/advice.

(d) A decentralised structure is more likely to facilitate accurate cost/overhead allocations.

72 3: The role of information systems PART B INFORMATION SYSTEMS

3.1.5 Disadvantages of decentralisation

The disadvantages of a decentralised system or department include the following.

(a) Control may be difficult – as uncoordinated information systems may be introduced.

(b) Self-sufficiency may encourage a lack of co-ordination between departments.

(c) Increased risk of data duplication, with different offices holding the same data on their own
separate files.

Exam skills
The advantages and disadvantages described above are a good starting point for an exam answer, but it is
important to think widely and apply your knowledge to the scenario you are presented with.

For example, in May 2012 a 10 mark question was set requiring a discussion of the advantages of a
decentralised system. Given the scenario, other advantages included being a boost to moral and job
satisfaction, empowering the workforce and reducing red tape.

3.2 Transaction Processing Systems (TPS)

A TRANSACTION PROCESSING SYSTEM (TPS) performs and records routine transactions.

TPS are used for routine tasks in which data items or transactions must be processed so that operations
KEY TERM
can continue. TPS support most business functions in most types of organisation. Transaction Processing
Systems are sometimes referred to as Data Processing Systems (DPS).

The following table shows a range of TPS applications.

Transaction processing systems

Sales/ Manufacturing/ Finance/ Human

marketing production accounting resources Other types
systems systems systems systems (eg university)
Major  Sales  Scheduling  Budgeting  Personnel  Admissions
functions management records
 Purchasing  General  Student
of system
 Market Shipping/ ledger  Benefits academic
research receiving  Billing  Salaries records
 Promotion  Engineering  Management  Labour  Course
pricing  Operations accounting relations records
 New products  Training  Graduates
PART B INFORMATION SYSTEMS 3: The role of information systems 73

Transaction processing systems

Sales/ Manufacturing/ Finance/ Human

marketing production accounting resources Other types
systems systems systems systems (eg university)
Major  Sales order  Materials  General  Payroll  Registration
application information resource ledger  Employee  Student record
systems system planning  Accounts records  Curriculum/
 Market  Purchase receivable  Employee class control
research order control /payable benefits systems
system  Engineering  Budgeting  Career path  Benefactor
 Pricing  Quality  Funds systems information
system control management system

3.3 Management Information Systems (MIS)

MANAGEMENT INFORMATION SYSTEMS (MIS) convert data from mainly internal sources into information
(eg summary reports, exception reports). This information enables managers to make timely and effective
KEY TERM decisions for planning, directing and controlling the activities for which they are responsible.

An MIS provides regular reports and access to the organisation's current and historical performance.

MIS usually transform data from underlying transaction processing systems (TPS) into summarised files
that are used as the basis for management reports.

MIS have the following characteristics:

 Support structured decisions at operational and management control levels
 Designed to report on existing operations
 Have little analytical capability
 Relatively inflexible
 Have an internal focus

3.4 Executive Information Systems (EIS) 05/11

An EXECUTIVE INFORMATION SYSTEM (EIS) pools data from internal and external sources and makes
information available to senior managers in an easy-to-use form. EIS help senior managers make
KEY TERM strategic, unstructured decisions.

An EIS should provide senior managers with easy access to key internal and external information. The
system summarises and tracks strategically critical information, possibly drawn from internal MIS and
DSS (see below), but also including data from external sources eg competitors, legislation and external
databases such as Reuters.

Executive Information Systems are sometimes referred to as Executive Support Systems (ESS). An
ESS/EIS is likely to have the following features.

 Flexibility
 Quick response time
 Sophisticated data analysis and modelling tools
74 3: The role of information systems PART B INFORMATION SYSTEMS

A model of a typical EIS follows.

An Executive Information System (EIS)

EIS
workstation

Menus
Graphics
Communications
Local processing
EIS EIS
workstation workstation

.. Internal data
TPS/MIS data .. External data
Share prices

.. ..
Financial data Market research
Menus Office systems Legislation Menus
Graphics Modelling/analysis Competitors Graphics
Communications Communications
Local processing Local processing

Exam alert
Exam questions may require you to explain the value of a good MIS or EIS. To gain good marks you must
think about the benefits these systems bring to an organisation.

3.5 Decision Support Systems (DSS) 05/11

DECISION SUPPORT SYSTEMS (DSS) combine data and analytical models or data analysis tools to support
semi-structured and unstructured decision making.
KEY TERM
DSS are used by management to assist in making decisions on issues which are subject to high levels of
uncertainty. They are intended to provide a wide range of alternative information gathering and analytical
tools with a major emphasis upon flexibility and user-friendliness.

DSS have more analytical power than other systems, enabling them to analyse and condense large
volumes of data into a form that aids managers' decision making. The objective is to allow the manager to
consider a number of alternatives and evaluate them under a variety of potential conditions.

3.6 Knowledge Work Systems (KWS)

KNOWLEDGE WORK SYSTEMS (KWS) are information systems that facilitate the creation and integration of
new knowledge into an organisation.
KEY TERMS
KNOWLEDGE WORKERS are people whose jobs primarily involve creating new information and knowledge.
They are often members of a profession such as doctors, engineers, lawyers and scientists.

KWS help knowledge workers create new knowledge and expertise. Examples include:

 Computer Aided Design (CAD)

 Computer Aided Manufacturing (CAM)
 Specialised financial software that analyses trading situations

3.7 Office Automation Systems (OAS)

OFFICE AUTOMATION SYSTEMS (OAS) are computer systems designed to increase the productivity of data
and information workers.
KEY TERM
PART B INFORMATION SYSTEMS 3: The role of information systems 75

OAS support the major activities performed in a typical office such as document management, facilitating
communication and managing data. Examples include:

 Word processing, desktop publishing, presentation software

 Digital filing systems
 E-mail, voice mail, videoconferencing (or teleconferencing)
 Groupware (calendars, address books and journals), intranets, extranets, schedulers
 Spreadsheets, desktop databases

3.8 Expert systems

EXPERT SYSTEMS are a form of DSS that allow users to benefit from expert knowledge and information.
Such systems consist of a database holding specialised data and rules about what to do in, or how to
KEY TERM interpret, a given set of circumstances.

For example, many financial institutions now use expert systems to process straightforward loan
applications. The user enters certain key facts into the system such as the loan applicant's name, their
most recent addresses, their income, monthly outgoings and details of other loans. The system will then:

(a) Check the facts given against its database to see whether the applicant has a good credit record.

(b) Perform calculations to see whether the applicant can afford to repay the loan.

(c) Match up other criteria such as whether the security offered for the loan or the purpose for which
the loan is wanted is acceptable and the applicant’s is risk profile. The system makes these
judgements based on previous experience (as represented within the system).

A decision is then suggested, based on the results of this processing. This is why it is now often possible
to get a loan or arrange insurance over the telephone, whereas in the past it would have been necessary
to go and speak to a bank manager or send details to an actuary and then wait for them to come to a
decision.

Exam skills
Do not just learn what these systems are – you need to understand which levels of an organisation's
hierarchy would use them and how they support its operations.

There are many other business applications of expert systems.

(a) Legal advice.

(b) Tax advice.

(c) Forecasting of economic or financial developments, or of market and customer behaviour.

(d) Surveillance, for example of the number of customers entering a supermarket to decide when more
checkouts need to be opened – or of machines in a factory, to determine when they need
maintenance.

(e) Diagnostic systems to identify causes of problems, for example in production control in a factory,
or in healthcare.

(f) Project management.

(g) Education and training, diagnosing a student's or worker's weaknesses and providing or
recommending extra instruction as appropriate.
76 3: The role of information systems PART B INFORMATION SYSTEMS

An organisation can use an expert system when a number of conditions are met.

(a) The problem is reasonably well-defined.

(b) The expert can define some rules by which the problem can be solved.

(c) The problem cannot be solved by conventional transaction processing or data handling.

(d) The expert could be released to more difficult problems. Experts are often highly paid, meaning
the value of even small time savings is likely to be significant.

(e) The investment in an expert system is cost-justified.

Question 3.1 Expert systems

Learning outcome B1(ii)

Explain why organisations use expert systems for decision-making tasks which humans are naturally
better able to perform than computers? (5 marks)

3.9 Intranets and Extranets

Organisations are increasingly using intranets and extranets to disseminate information.

(a) An intranet is like a mini version of the Internet. Organisation members use networked computers
to access information held on a server. The user interface is a browser – similar to those used on
the Internet. The intranet offers access to information on a wide variety of topics.

(b) An extranet is an intranet that is accessible to authorised outsiders, using a valid username and
password. The username will have access rights attached – determining which parts of the
extranet can be viewed. Extranets are becoming a very popular means for business partners to
exchange information.

An INTRANET is a private network inside a company or organisation accessed through web-browser like
software. Intranets are for the use of staff only, they are not accessible by the public. Intranets are used to
KEY TERMS provide and distribute information.

An EXTRANET allows customers and suppliers to gain limited access to an intranet in order to enhance the
speed and efficiency of their business relationship. Put another way, it is an intranet that allows some
access by authorised outsiders.

3.10 Databases
A DATABASE is a collection of data organised to service many applications. The database provides
convenient access to data for a wide variety of users.
KEY TERMS
A DATABASE MANAGEMENT SYSTEM (DBMS) is the software that centralises data and manages access to
the database. It enables numerous applications to utilise the same files

The term 'database system' is used to describe a wide range of systems that utilise a central pool of data.
PART B INFORMATION SYSTEMS 3: The role of information systems 77

Example of a database system

INPUT DATA

DATABASE
MANAGEMENT DATABASE
SYSTEM

APPLICATION
PROGRAMS

SALES BRANCH AND

APPLICATIONS PERSONNEL STAFF PAYROLL OTHER
STATISTICS ETC STATISTICS ETC ANALYSIS ETC APPLICATIONS

3.10.1 The characteristics of a database system

The way in which data is held on a system affects the ease with which the data is able to be accessed
and manipulated. A database system has the following characteristics:

(a) Shared. Different users are able to access the same data for their own processing applications.
This removes the need to hold the same data in different files.

(b) Controls to preserve the integrity of the database.

(c) Flexibility. The database system should provide for the needs of different users, who each have
their own processing requirements and data access methods. The database should be capable of
evolving to meet future needs.

3.10.2 Database queries

A database can be interrogated by a query language. A query language is a formalised method of
constructing queries in a database system. The language provides a way of asking a database for data.
Some query languages are also able to make changes within the database. SQL, short for Structured
Query Language, is a popular language.

Databases connected to a web server are able to be accessed by people outside the organisation through
their web browser. Microsoft ADO is an example of a database connectivity component that enables this
functionality. Potential customers are able to view product and service information, and if the site is
enabled for e-commerce, make a purchase.

3.10.3 Advantages of database systems

The advantages of a database system include the following:

(a) Avoidance of unnecessary duplication of data (data redundancy) brings time and efficiency savings
and reduced storage costs.

(b) Data is looked upon as serving the organisation as a whole, not just for individual departments.
The database concept encourages management to regard data as a resource that must be properly
managed.
78 3: The role of information systems PART B INFORMATION SYSTEMS

(c) The installation of a database system encourages management to analyse data, relationships
between data items, and how data is used in different applications.

(d) Consistency (data integrity) – because data is only held once, the possibility of departments
holding conflicting data on the same subject is reduced.

(e) Data on file is independent of the user programs that access the data. This allows greater
flexibility in the ways that data can be used. New programs can be easily introduced to make use
of existing data in a different way. More than one user can use the information at any one time.

(f) Developing new application programs with a database system is easier because the programmer is
not responsible for the file organisation.

3.10.4 Disadvantages of database systems

The disadvantages of database systems relate mainly to security and control:

(a) There are problems of data security and data privacy. There is potential for unauthorised access to
data. Administrative procedures for data security must supplement software controls. Staff training
may be required.

(b) Since there is only one set of data, it is essential that the data should be accurate and free from
corruption. This process is known as data cleansing.

(c) There may be disputes over who ‘owns’ the data so has the right to decide how it is maintained.

(d) Since data is held once, but its use is widespread, the impact of system failure would be greater.
A contingency plan in case of data loss is required.

(e) If an organisation develops its own database system from scratch, initial development costs will be
high.

Section summary
Different types of information system exist with different characteristics – reflecting the different roles
they perform.

Organisations are increasingly using intranets, extranets and database systems to manage and provide
access to data and information.

4 Emerging trends in information systems

Introduction
In recent years information systems and technology have continued to develop rapidly. Three trends in
information system have emerged as being popular with many types of organisation. These are enterprise-
wide systems, knowledge management systems and customer relationship management systems.

4.1 Enterprise-wide systems

ENTERPRISE-WIDE SYSTEMS are designed to co-ordinate all business functions, resources and
information, wherever they are geographically.
KEY TERM
Under an enterprise-wide system, each business area (such as accounts, HR, production and sales) is
provided with a system that fulfils its needs, however each module shares a common database that is the
basis of all the information within the organisation.
PART B INFORMATION SYSTEMS 3: The role of information systems 79

The central database allows each business area to access and update information in real-time and this
means that information is easy to share, available to all business areas, and above all, reliable.

In some enterprises, even though the system spans the whole organisation individual locations have their
own specific data processing capability, via a direct link to the central database. This is known as
Distributed Data Processing (DDP). The link is provided a network – a connection between devices that
allows them to communicate. The two main types of network are Local Area Networks (LANs) and Wide
Area Networks (WANs).

The difference between the two is where the networked devices are located. Local Area Networks are
often found within an office and are often used to connect printers and other peripherals to computers.
Wide Area Networks are used when the devices are dispersed geographically – even around the world.

Enterprise resource planning (ERP) software is an example of an enterprise-wide system. A relatively

recent development has been the development of web-based enterprise-wide software. To access these
systems requires only a computer with an Internet connection and a web browser. The application is web-
based, so the distance between the user and the data is irrelevant. The use of web-based software is
sometimes referred to as cloud computing.

4.2 Knowledge management systems

KNOWLEDGE MANAGEMENT SYSTEMS (KMS) record and store the knowledge held within an organisation.
Information held on a KMS is easily accessed and shared by employees. Examples of information held in
KEY TERM
a KMS include facts, solutions to problems, relevant legislation and intellectual property.

A KMS is primarily of benefit to knowledge based organisations, such as those involved in research and
development or providing services such as legal advice. This is because their information is best suited to
storing and sharing by a database.

We have already seen examples of knowledge management systems. These include, extranets and
intranets, groupware and LANs and WANs.

Benefits of a KMS include:

(a) Valuable data is preserved for the future and not lost, for example, where an employee leaves

(b) The data is easily shared

(c) Data duplication (or data redundancy) is avoided

(d) It allows employees to 'get up to speed' on knowledge quickly and easily and this may reduce the
time they need to spend training

4.3 Customer relationship management systems

CUSTOMER RELATIONSHIP MANAGEMENT (CRM) systems are software applications which specialise in
providing information concerning an organisation's products, services and customers.
KEY TERM
Most CRM systems are based on a database which stores data about customers such as their order
history and personal information such as address, age and any marketing feedback they have provided.
These systems allow a personalised service to be provided to the customer as well as a swift reply to their
queries.

CRM systems are often used by customer facing staff who handle customer enquiries, orders or
complaints and who need to understand the customer's immediate needs and provide an appropriate
response.

4.4 Web 2.0 and e-commerce

Two other trends are increased business use of web 2.0 applications and increased use of e-commerce.
80 3: The role of information systems PART B INFORMATION SYSTEMS

4.4.1 Web 2.0

WEB 2.0 APPLICATIONS are ‘second generation’ Internet-based services. These sites usually include tools
that let people collaborate and share information online. These may be used as part of a CRM system.
KEY TERM
Examples of web 2.0 applications include blogs (short for web log), RSS feeds, wikis, and You Tube
(although there is some debate as to whether You Tube qualifies as web 2.0 as although users upload to
it, and access content from it, they don’t download from it).

Social networking sites such as Facebook are Twitter are also part of the web 2.0 movement, and are
increasingly being used by businesses. They are frequently used to monitor customer feedback and to
influence sales by providing online content.

4.4.2 E-commerce
E-commerce (the selling of goods or services over the Internet) has developed alongside CRM systems.
The trend is towards providing the customer with a unique shopping experience that is tailored to their
needs. The view and products presented to a customer is geared to their individual tastes, based on their
profile and past behaviour on the site.

Most organisations have e-commerce capability on their website. Many have gone further, for example
Amazon suggests potential purchases for customers when they log-on. These suggestions are driven by
the customer's previous orders and their history of viewing products.

Berens (2006) identifies the following points to consider when building a website with e-commerce
capability.

(a) Ensure transactions are secure, and tell customers they are. Customer trust is essential.

(b) Comply with all applicable consumer, privacy and data protection legislation.

(c) Have clear terms of use for the site.

(d) Don’t require customers to provide excessive amounts of information as this may deter them.

(e) Maintain on-going communication with willing customers, for example by e-mail.

The term e-business refers to conducting business on the Internet. It has a wider meaning than e-
commerce, because it covers not only buying and selling but also servicing customers and collaborating
with suppliers.

Benefits to a business of using e-commerce include; improved marketing and decision making though the
collection of sales and customer data, increased sales as customers increasingly look to the Internet to
purchase goods, and reduced costs as it is cheaper to operate a website than a physical shop.

Despite the benefits of e-commerce, some organisations face a number challenges when adopting it. For
example, they may lack the necessary in-house skills to develop the website, it may be expensive to set-
up and maintain the trading platform, it may be difficult to integrate back-office and fulfilment systems,
there may be security concerns and certain staff may be unhappy or unwilling to work with the new
system.

Business use of Twitter

Stuart Lynn, Head of R&D, Sage Mid Market Division, http://twitter.com/_stuartlynn

CASE STUDY
27% of UK SME’s use Twitter. 27% of the 1.4 million businesses registered for VAT equals 460,000
businesses. This number rises to well over 1 million if you include businesses who are not VAT registered.

Twitter provides a ready made network to share information about your business, to set up a trading
network and to build your brand. What’s more, Twitter is global.

As a social networking tool Twitter has had a meteoric rise to fame with between 3 and 6 million users.
When I first tried it, I was unimpressed. How can I make use of it? How do I know who to follow? How do
I get followers? How could I say it in only 140 characters?
PART B INFORMATION SYSTEMS 3: The role of information systems 81

Today, I’m a convert, I use Twitter every day. It’s an excellent source of news and information on just
about any topic. It allows me to keep my finger on the pulse of IT and business information and to share
information about Sage, as well as my other passions, with people who have chosen to follow me.

The Twitter network means if one of my follower’s re-tweet’s my tweet, then all of their followers see my
tweet, and so on. I tweeted a link to my last blog ‘The secret to successful innovation’ and watched what
happened.

Although I only have a few hundred followers myself, within the first hour, my original tweet had an
audience of over 30,000 people. Within a couple of days my blog had turned up on other sites such as
Innovation America. Others had reused parts of my blog in their own innovation blogs, a way to keep the
message alive and a complement indeed. One piece of information, seen by a huge audience across the
globe and recycled a second and third time.

What’s more, it significantly increased traffic on sage.co.uk - all from a single tweet. The power of social
networking is amazing. Remember though, Twitter is a tool to build your network, headline key
information and lead people to your business. When they get there they need to find a website, or a blog,
with more meaningful and relevant information, and the ability to make a purchase.

Give it a try, other than a little of your time and effort, it’s free, and you might be as amazed with the
results as I was.

Section summary
Enterprise-wide systems are designed to co-ordinate all business functions, resources and information.

The purpose of knowledge management systems (KMS) is to record and store the knowledge held within
an organisation.

Customer relationship management (CRM) systems are software applications which specialise in
providing information concerning an organisation's products, services and customers.

Web 2.0 applications are second generation’ Internet-based services. These sites usually include tools
that let people collaborate and share information online.

E-commerce (the selling of goods or services over the Internet) continues to grow rapidly.

5 IT enabled transformation 11/10, 03/12

Introduction
Information technology and information systems allow an organisation to transform how it does business.
A dependence on IT commits an organisation to continual change. The pace of technological change is
rapid. Computer systems – both hardware and software – are likely to be superseded after a few years.

In this section we consider how IT enables an organisation to transform itself.

5.1 Information technology as an enabler of change

Information technology may be the driving force or trigger of organisational change. Even when IT is not
a significant factor in the actual change, it can play an important part in the change management
process.
82 3: The role of information systems PART B INFORMATION SYSTEMS

The benefits an IT Strategy can bring to an organisation are numerous. For example it may:

 Develop business opportunities

 Improve operational productivity and performance
 Create competitive advantage
 Enable structural change (such as employees working at home)
 Bring congruency to corporate goals

The table below indicates the numerous ways in which IT may enable change within an organisation.

IT's possible role in Comment

organisational change
The type of products For example, companies like Sony manufacture home computers, Virgin have
or services that are an Internet Service Provider business. Technological changes affect many
made and sold products, for example the introduction of tennis and squash rackets with
graphite frames.
The way in which There is a continuing trend towards computer aided design and manufacture.
products are made Computer-Aided Design (CAD) can be used to create designs which can be
quickly amended.
Computer-Aided Manufacturing (CAM) involves the use of software to control
machine tools and related machinery.
Computer-Integrated Manufacturing (CIM) involves using computers to control
the production process. CAD and CAM are integrated and the flow of data, and
processing of material is controlled.
CAD and CAM have changed the methods and cost profiles of many
manufacturing processes as they increase the organisation’s flexibility to meet
customer requirements and reduce mistakes and therefore wastage.
The techniques used to measure and record costs have also adapted to the use
of IT.
The way in which The use of IT encourages de-layering of organisational hierarchies and greater
employees are workforce empowerment and skills. Using technology frequently requires
mobilised changes in working methods.
The way in which High-street banks encourage customers to use 'hole-in-the-wall' cash
services are provided dispensers, or telephone or Internet banking. Most larger shops now use
computerised Point of Sale terminals at cash desks. Many organisations use e-
commerce – selling products and services over the Internet.
To enable change IT can produce dramatic changes in individual businesses and whole industries.
For example, competition in the airline industry has intensified due to
information systems that allow easy fare comparison and booking. IT can be
both a cause of major changes in doing business and a response to them.
To aid communication Co-ordination is essential when introducing change. IT can facilitate this
and co-ordination through the use of e-mail, project management software, an intranet, and
groupware (such as Microsoft Outlook).
As a source of unity In times of restructuring, information systems can be a visible sign of the new
and structure situation. For example, an organisation-wide network, perhaps with an intranet,
provides evidence of and encourages acceptance of the new situation.
PART B INFORMATION SYSTEMS 3: The role of information systems 83

5.2 Degrees of transformation

The diagram below illustrates five different degrees of IT-enabled change.

High
5

Degree of 3
business
transformation Revolution level
Evolution level
2

Low
Low High
Range of potential benefits

Level Name Description

1 Localised exploitation Existing IT is used to reengineer high value
(automation) business areas.

2 Internal integration Integrate business operations into a smooth

process using IT capabilities.
3 Business process reengineering Use IT to enable the redesign of key business
processes to provide future capabilities.
4 Business network redesign The business network and IT are used to develop
new products and services.
5 Business scope redefinition Organisational scope, and that of business
partners, is redefined by what is possible using
IT.

Question 3.2 IT transformation

Learning outcome B1(iii)

Velospeed designs, manufactures and distributes bicycles.
Designs are drawn by hand. These are passed to skilled workers who construct the bicycle frame by hand
using traditional materials such as steel. Some customers have reported quality problems with frames.
The frame is the only part that Velospeed builds itself. Wheels, gears, brakes and pedals are each sourced
from individual suppliers.
Orders for these parts are made over the telephone, recorded on paper and filed in a storage cabinet. The
company has problems in retrieving and analysing cost data for management reports.
Required
Advise Velospeed as to how information technology could transform its business. (9 marks)
84 3: The role of information systems PART B INFORMATION SYSTEMS

Section summary
IT may enable an organisation to transform how it does business. In particular:
 The type of products or services that are made and sold
 The way in which products are made
 The way in which employees are mobilised
 The way in which services are provided
 To enable change
 To aid communication and co-ordination
 As a source of unity and structure

6 IT and new forms of organisation

Introduction
As we have seen, information technology can affect an organisation in many ways including changing the
way it does its business. As a consequence IT has allowed different types of organisation to emerge.
Some examples of emerging types of organisation are described below.

6.1 Virtual organisations

The global explosion of information technology has led to the creation of virtual teams, virtual companies
and virtual supply chains.

6.1.1 Virtual teams

Virtual teams are groups of people who aren’t based in the same office or organisation (and may even be
in different areas of the world) but who:

 Share information and tasks (eg technical support provided by a supplier)

 Make joint decisions (eg on quality assurance or staff training)
 Fulfil the collaborative (working together) function of a team

Technology has facilitated this kind of collaboration, simulating team working through the use of
teleconferencing, video-conferencing, networked computers and the Internet.

(a) Dispersed individuals and units can use such technology to access and share product, customer,
inventory and delivery information (eg using web-based databases and data tracking systems).

(b) Electronic meeting sites and systems allow virtual meeting participants to talk and listen to each
other while sharing data and using electronic 'white boards' on their PCs.

This has enabled organisations to:

(a) Outsource areas of organisational activity to other organisations and freelance workers (even 'off-
shore' in countries where skilled labour is cheaper) without losing control or co-ordination.

(b) Organise 'territorially' without the overhead costs of local offices and without the difficulties of
supervision, communication and control. Dispersed centres are linked to a 'virtual office' by
communications technology and can share data freely.

(c) Centralise shared functions and services (such as data storage and retrieval) without the
disadvantages of 'geographical' centralisation, and with the advantages of decentralised authority.
Databases and communications (email) create genuine sharing of, and access to, common data.

(d) Adopt flexible cross-functional and multi-skilled working by making expertise available across the
organisation. A 'virtual team' co-opts the best people for the task – regardless of location.
PART B INFORMATION SYSTEMS 3: The role of information systems 85

Forming a virtual team is different to forming a team based in a single location. The main issue is the
lack of face-to-face contact. This makes it difficult for team members to bond and build trust, share
knowledge, establish a hierarchy and team processes, and support morale. Cultural differences between
team members may create misunderstandings that damage working relationships.

Skyrme (1997) developed a number of principles regarding virtual teams. These principles suggest that:

 The team should develop a sense of purpose, support members and build high levels of trust
 Team members should give back what they get in terms of support, information and knowledge
 Teams should be small and multi-disciplined
 Communication – there should be frequent communication, where emails are used they should
only have one topic per email, emails should be used to summarise face-to-face meetings and
should be informal

6.1.2 Virtual companies and virtual supply chains

A VIRTUAL COMPANY is a collection of separate companies, each with a specific expertise, who work
together, sharing their expertise to compete for bigger contracts/projects than would be possible if they
KEY TERMS worked alone.

A traditional SUPPLY CHAIN is made up of the physical entities linked together to facilitate the supply of
goods and services to the final consumer.

A VIRTUAL SUPPLY CHAIN (VSC) is a supply chain that is enabled through e-business links, for example
the web and extranets.

A relatively recent development is the virtual company. This is created out of a network of alliances and
subcontracting arrangements. It is as if most of the activities in a particular value chain are conducted by
different organisations, even though the process is loosely co-ordinated. For example, assume an
organisation produces small toys. It could in theory outsource:

 The design to a consultancy

 Manufacturing to a subcontractor
 Delivery arrangements to a specialist logistics organisation
 Debt collection to a bank
 Filing, tax returns, bookkeeping to an accountancy firm

The virtual company relies on technology such as remote networking, the Internet and extranets. Many
companies have become, or are becoming, more 'virtual'. They are developing into looser affiliations of
companies, organised as a supply network.

Virtual Supply Chain networks have two types of organisation: producers and integrators.

(a) Producers produce goods and services. Producers must focus on delivery to schedule and within
cost. The sales driver within these companies is on ensuring that their capacity is fully sold.
Producers are often servicing multiple chains, so managing and avoiding capacity and commercial
conflicts becomes key.

(b) Integrators manage the supply network and effectively 'own' the end customer contact. The focus
of the integrating organisation is on managing the end customer relationship. This includes
synchronising the responses and performance of network functions and members.

Many of the most popular Internet companies are integrators in virtual companies, for example
Amazon.com and Lastminute.com. These organisations 'own' customer contact and manage customer
relationships for a range of producers.
86 3: The role of information systems PART B INFORMATION SYSTEMS

6.2 Advantages of virtual operations

Virtual operations have various advantages.

 Flexibility and speed of operation

 Low investment in assets and hence less risk involved
 Injection of market forces into all the linkages in the value chain

6.3 Disadvantages of virtual operations

But there are some disadvantages.

 Organisations must complement each other and form close relationships if the venture is to
succeed

 Quality may be a problem owing to a loss of control

 The suppliers/resources may also be available to rival operations

 Customers may recognise the virtual characteristics and this might negatively affect customer
perceptions of the service or product

First Virtual Corporation, one of the few truly virtual organisations in existence, was set up in 1993 by
Ralph Ungermann and it generates multi-million dollar sales of its multimedia networking equipment.
CASE STUDY Everything except the crucial design and development work is outsourced. The company has two 'core
competences' according to Ungermann: technical development and forging alliances with large
companies.

Section summary
The global explosion of information technology has led to the creation of virtual teams, companies and
supply chains.

Virtual teams are interconnected groups of people who may not be present in the same office or
organisation.

A virtual company is a collection of separate companies, each with a specific expertise, who work
together, to compete for bigger contracts/projects than would be possible if they worked alone.

A Virtual Supply Chain (VSC) is a supply chain that is enabled through e-business links, for example the
web or extranets.

7 Privacy and security 05/11

Introduction
Most of the advances in technology and information systems that we have seen in this chapter rely on the
Internet as a means of communication. However, establishing Internet links makes organisations
vulnerable to privacy and security risks. Therefore suitable systems, policies and procedures should be
implemented to minimise them.
PART B INFORMATION SYSTEMS 3: The role of information systems 87

Computer systems are exposed to privacy and security risks. Some of the main risks are explained below.

Privacy and security risks

Risk Explanation
Hackers and Hackers attempt to gain unauthorised access to computer systems. They may
eavesdroppers attempt to damage a system or steal information. Hackers use tools like electronic
password generators which enable rapid multiple password attempts.
Data that is transmitted across telecommunications links is exposed to the risk of
being intercepted or examined during transmission (eavesdropping).
Viruses A virus is a small piece of software which performs unauthorised actions and which
replicates itself. Viruses may cause damage to files or attempt to destroy files and
damage hard disks. When transmitted over a network such as the Internet, into a
'clean' system, the virus reproduces and infects that system.
Types of virus:
E-mail viruses spread using e-mail messages and replicate by mailing themselves to
addresses held in the user's contacts book.
Worms copy themselves from machine to machine on a network.
Trojans or Trojan horses are hidden inside a 'valid' program but perform an
unexpected act. Trojans therefore act like a virus, but aren't classified as a virus as
they don't replicate themselves.
Trap doors are undocumented access points to a system allowing controls to be
bypassed.
Logic bombs are triggered by the occurrence of a certain event.
Time bombs are triggered by a certain date.
Hoaxes An associated problem is that of hoax virus warnings. There are a vast number of
common hoaxes, most of which circulate via e-mail. Many are a variation of one of
the most 'popular' early hoaxes – the Good Times hoax. This hoax takes the form of a
warning about viruses contained in e-mail. People pass along the warning trying to
be helpful, but they are in fact wasting the time of all concerned.

Denial of service Another threat, to websites is the 'denial of service attack'. This involves an organised
attack campaign to bombard a site with excessive volumes of traffic at a given time, with
the aim of overloading the site.
Natural disasters Fires, floods and other natural events may damage the place where the system is
stored. It is important for the organisation to protect the system by selecting a
suitable location and environment to house it. Backups should be taken regularly
and be stored in a separate location so that the system can be restored if necessary.
Steps should be taken to prevent risks as far as possible, for example by installing
sprinkler systems and locating the system on a high floor to avoid flooding.
Hardware and Systems may malfunction for a number of reasons. This risk can be minimised by
software failure designing them to cope with extreme volumes of demand. Backups will enable the
system to be restored if it does fail.
Human error Operators may accidently damage or delete information held on the system. This risk
can be minimised by staff training and in-built protections, such as only allowing
certain individuals to alter or amend information.
Operator injury Repetitive strain injury (RSI) is a risk faced by computer operators. This risk can be
minimised through the design of workstations and the office environment.
88 3: The role of information systems PART B INFORMATION SYSTEMS

A number of websites provide information on hoaxes and 'real' viruses – for example
www.sophos.com. If you receive a warning of a virus or the promise of rewards for forwarding
an e-mail to a number of others, this is a good place to look to establish if the warning is a
hoax or not.

7.1 Minimising privacy and security risks

The risks concerned with hackers, eavesdroppers and viruses can be minimised through a variety of
controls that provide network and communications security.

7.1.1 Anti-virus software

The main protection against viruses is anti-virus software. Anti-virus software, such as McAfee or Norton
search systems for viruses and remove them. Anti-virus programs include an auto-update feature that
downloads profiles of new viruses, enabling the software to check for all known or existing viruses. Very
new viruses may go undetected by anti-virus software (until the anti-virus software vendor updates their
package – and the organisation installs the update).

Additional precautions include disabling external media to prevent viruses entering an organisation via
external storage devices. However, this can disrupt work processes. At the very least, organisations should
ensure all files received via external media and e-mail are virus checked.

7.1.2 A firewall
External e-mail links can be protected by way of a firewall that may be configured to virus check all
messages, and may also prevent files of a certain type being sent via e-mail (eg .exe files, as these are the
most common means of transporting a virus). Firewalls can be implemented in both hardware and
software, or a combination of both. A firewall disables part of the telecoms technology to prevent
unauthorised intrusions. However, a determined hacker may well be able to bypass this.

7.1.3 Encryption
Data that is transmitted across telecommunications links is exposed to the risk of being intercepted or
read during transmission (known as 'eavesdropping'). Encryption is used to reduce this risk and involves
scrambling the data at one end of the line, transmitting the scrambled data, and unscrambling it at the
receiver's end of the line. A person intercepting the scrambled data is unable to make sense of it.

7.1.4 Electronic signatures

One way of providing electronic signatures is to make use of what is known as public key (or
asymmetric) cryptography signatures. Public key cryptography uses two keys – public and private. The
private key is only known to its owner and is used to scramble the data contained in a file. The received
'scrambled' data is checked against the original file using the public key of the person who signed it. This
check confirms the file could only have been signed by someone with access to the private key. If a third
party altered the message the fact that they had done so would be easily detectable.

An alternative is the use of encryption products which support key recovery, also known as key
encapsulation. These products incorporate a Key Recovery Agent (KRA) which allows the authorised user
to unscramble data by approaching the KRA with an encrypted portion of the message.

7.1.5 Authentication
Authentication is a technique of making sure that a message has come from an authorised sender.
Authentication involves adding extra data in a form previously agreed between sender and recipient.
PART B INFORMATION SYSTEMS 3: The role of information systems 89

7.1.6 Dial-back security

Dial-back security operates by requiring the person wanting access to dial into the network and identify
themselves first. The system then dials the person back on their authorised number before allowing
access.

7.2 General and application controls

There are two main types of control designed to safeguard information stored in a system, ensure it is
processed accurately and only used by those who are authorised.

7.2.1 General controls

General controls are often physical restrictions on who can access and use information held in the
system. There may be personnel controls, such as Internet use policies, segregation of duties and levels of
access based on seniority which may be protected by passwords and lock-outs. Equipment may also be
physically protected by locks, doors and cages,

7.2.2 Application controls

These are controls to ensure the accuracy and validity of data. For example, there may be checks on who
can access and amend the data, completeness checks built into the system to ensure all expected
information is provided and validity checks to ensure the data being entered is in the expected form (eg to
stop words being entered where numbers are expected).

7.3 Data Protection Act (DPA) 1998

An individual’s privacy relates to their right to control how personal information held about them is
disseminated and used by others. In the UK, the relevant legislation is the Data Protection Act 1998.
This is an attempt to protect the individual. The terms of the Act cover data about individuals – not data
about corporate bodies.

7.3.1 Definitions of terms used in the Act

In order to understand the Act it is necessary to know some of the technical terms used in it.

Personal data is information about a living individual, including expressions of opinion about him or her.
Data about organisations is not personal data.

Data users are organisations or individuals who control personal data and the use of personal data.

A data subject is an individual who is the subject of personal data.

90 3: The role of information systems PART B INFORMATION SYSTEMS

7.3.2 The data protection principles

The UK Data Protection Act includes eight Data Protection Principles with which data users must
comply.

DATA PROTECTION PRINCIPLES

Schedule 1 of the Act contains the data protection principles.

1 Personal data shall be processed fairly and lawfully in accordance with the Act.

2 Personal data shall be obtained only for one or more specified and lawful purposes, and shall not
be further processed in any manner incompatible with that purpose or those purposes.

3 Personal data shall be adequate, relevant and not excessive in relation to the purpose or purposes
for which they are processed.

4 Personal data shall be accurate and, where necessary, kept up to date.

5 Personal data processed for any purpose or purposes shall not be kept for longer than is necessary
for that purpose or those purposes.

6 Personal data shall be processed in accordance with the rights of data subjects under this Act.

7 Appropriate technical and organisational measures shall be taken against unauthorised or unlawful
processing of personal data and against accidental loss or destruction of, or damage to, personal
data.

8 Personal data shall not be transferred to a country or territory outside the European Economic Area
unless that country or territory ensures an adequate level of protection for the rights and freedoms
of data subjects in relation to the processing of personal data.

The Act has two main aims:

(a) To protect individual privacy. Previous UK law only applied to computer-based information. The
1998 Act applies to all personal data, in any form.

(b) To harmonise data protection legislation so that, in the interests of improving the operation of the
single European market, there can be a free flow of personal data between the member states of
the EU.

7.3.3 The rights of data subjects

The Act establishes the following rights for data subjects.

(a) A data subject may seek compensation through the courts for damage and any associated distress
caused by the loss, destruction or unauthorised disclosure of data about himself or herself or by
inaccurate data about himself or herself.

(b) A data subject may apply to the courts for inaccurate data to be put right or even wiped off the
data user's files altogether. Such applications may also be made to the Registrar.

(c) A data subject may obtain access to personal data of which he or she is the subject. (This is
known as the 'subject access' provision.) In other words, a data subject can ask to see his or her
personal data that the data user is holding.

(d) A data subject can sue a data user for any damage or distress caused to him by personal data
about him which is incorrect or misleading as to matter of fact (rather than opinion).
PART B INFORMATION SYSTEMS 3: The role of information systems 91

7.3.4 The Privacy and Electronic Communications (EC directives) Regulations

2003
These regulations are derived from EC directives with the intention of protecting individuals and
organisations from receiving spam (unsolicited electronic communications).

Most e-marketing activities are covered (such as email and SMS messages) and such communications
are only permitted if the recipient has ‘opted-in’ to receive them. For the sender, this means having to
obtain consent from the recipient before contacting them for the first time. The sender must also identify
themselves in any direct marketing communication and provide a valid reply email address.

Permission is also deemed granted where a person is an existing customer (and has already provided
their contact details) or where they have emailed or sent a text enquiry directly to the organisation.

All communications must provide a free ‘unsubscribe’ service and a fine of £5,000 may be imposed on
the sender of any unlawful communications.

The regulations also impose certain controls on the use of cookies which are used to store information
about website visitors.

Section summary
Computer systems with links to other systems such as the Internet are exposed to privacy and security
risks.

The key privacy and security risks come from hackers and eavesdroppers, viruses, hoaxes and denial of
service attacks.

Organisations can take various measures against privacy and security risks, including anti-virus software,
firewalls, encryption, electronic signatures, authentication and dial-back security.

The Data Protection Act 1998 provides individuals with some protection regarding how data held about
them is used.
92 3: The role of information systems PART B INFORMATION SYSTEMS

Chapter Roundup
 Information systems support operations and management activities within organisations. In particular
they are used in recording transactions, decision making, planning, performance measurement and
control.
 Data consists of raw, unprocessed facts and figures. Information is data that has been processed in a way
that makes it meaningful for planning or decision making.
 Information used by organisations comes from a variety of internal and external sources.
 Information systems should provide information that possesses certain specific qualities (ACCURATE).
 Different types of information system exist with different characteristics – reflecting the different roles
they perform.
 Organisations are increasingly using intranets, extranets and database systems to manage and provide
access to data and information.
 Enterprise-wide systems are designed to co-ordinate all business functions, resources and information.
 The purpose of knowledge management systems (KMS) is to record and store the knowledge held within
an organisation.
 Customer relationship management (CRM) systems are software applications which specialise in
providing information concerning an organisation's products, services and customers.
 Web 2.0 applications are second generation’ Internet-based services. These sites usually include tools
that let people collaborate and share information online.
 E-commerce (the selling of goods or services over the Internet) continues to grow rapidly.
 IT may enable an organisation to transform how it does business. In particular:
– The type of products or services that are made and sold
– The way in which products are made
– The way in which employees are mobilised
– The way in which services are provided
– To enable change
– To aid communication and co-ordination
– As a source of unity and structure

 The global explosion of information technology has led to the creation of virtual teams, companies and
supply chains.
 Virtual teams are interconnected groups of people who may not be present in the same office or
organisation.
 A virtual company is a collection of separate companies, each with a specific expertise, who work
together, to compete for bigger contracts/projects than would be possible if they worked alone.
 A Virtual Supply Chain (VSC) is a supply chain that is enabled through e-business links, for example the
web or extranets.
 Computer systems with links to other systems such as the Internet are exposed to privacy and security
risks.
 The key privacy and security risks come from hackers and eavesdroppers, viruses, hoaxes and denial of
service attacks.
 Organisations can take various measures against privacy and security risks, including anti-virus software,
firewalls, encryption, electronic signatures, authentication and dial-back security.
 The Data Protection Act 1998 provides individuals with some protection regarding how data held about
them is used.
PART B INFORMATION SYSTEMS 3: The role of information systems 93

Quick Quiz
1 Which of the following is not a type of information system?

A EIS
B MIS
C DSL
D OAS

2 A private network inside an organisation that is accessed through web-browser like software is known as:

A Internet
B Extranet
C Intranet
D Privatenet

3 Which type of system is designed to co-ordinate all an organisation's functions, resources and
information?

A A knowledge management system

B A customer relationship system
C An expert system
D An enterprise-wide system

4 Web 2.0 applications have what purpose?

A To engage the customer in the organisation

B To reduce the number of customer complaints
C To increase an organisation's sales
D To collect information about the customer

5 Briefly explain what a virtual company is.

Answers to Quick Quiz

1 C DSL (Digital Subscriber Line) is a communications technology. The others are: Executive
Information System, Management Information System and Office Automation System.

2 C A private network inside an organisation that is accessed through web-browser like software is
known as an intranet.

3 D An enterprise-wide system is designed to co-ordinate all an organisation's functions, resources and

information.

4 A Web 2.0 applications allow the customer to interact with the organisation with the purpose of
engaging them in the organisation.

5 A virtual company is a collection of separate companies, each with a specific expertise, who work
together to compete for bigger contracts/projects than would be possible if they worked alone.
94 3: The role of information systems PART B INFORMATION SYSTEMS

Answers to Questions
3.1 Expert systems

The primary reason has to do with the relative costs. A 'human' expert is likely to be more expensive either to
employ or to use on a consultancy basis.

Secondly, enshrining an expert's accumulated wisdom in a computer system means that this wisdom can be
accessed by more people. Therefore, the delivery of complicated services to customers, decisions whether or not
to extend credit and so forth, can be made by less experienced members of staff. If a manufacturing company
has a complicated mixture of plant and machinery, then the repair engineer may accumulate a lot of knowledge
over a period of time about the way it behaves. If a problem occurs, the engineer will be able to make a
reasoned guess as to where the likely cause is to be found. If this accumulated expert information is made
available to less experienced staff, it means that some of their learning curve is avoided.

An expert system is advantageous because it saves time, like all computer systems (in theory at least) but it is
particularly useful as it possesses both knowledge and limited reasoning ability.

3.2 IT transformation

IT could transform Velospeed in three main areas.

The way in which bicycles are made

The current labour-intensive process of manufacture can be made more efficient. Computer Aided Design (CAD)
can be used to allow efficient and accurate design, rather than relying on hand drawings which may contain
inaccuracies or be unclear.

Computer Integrated Manufacturing (CIM) could be used to change the manufacturing process of the bike
frames. Data from the design can be fed into an automated system that cuts and forms the metal into frames.
This will ensure consistent standards of production and will reduce labour costs.

The types of bicycle which are made

The use of modern production methods will facilitate a move to new types of material in the bicycle frame.
Materials not suitable for use under manual methods, such as carbon-fibre, may be used.

The combination of state-of-the-art design technology and modern materials permit new types of product to be
made. For example, professional race bikes, that need to be aerodynamic and extremely light, could be
produced.

To aid communication and co-ordination

Velospeed could change its paper-based ordering and filing system to one which is based on an enterprise-wide
system. Orders could be made electronically over the Internet and invoices posted to an accounting system,
perhaps using EDI.

Data could be stored in a database, and reports extracted. This will result in more accurate and consistent
reports, as all systems will use the same source information.

Now try this question from Number Level Marks Time

the Exam Question Bank
3 Examination 30 54 mins
SYSTEMS IMPLEMENTATION AND
BUSINESS STRATEGY

In this chapter we move on from looking at system failure is user resistance – we look at a number of
the role of information systems to looking at ways to overcome or prevent this.
their implementation and alignment with
Later we consider how aligning a new information system
business strategy.
with the organisation's overall business strategy can help
Implementing a system involves a number of stages, make the system a success and even be a source of
each of which is vital if the completed system is to be a competitive advantage.
success. We shall see that a key cause information

topic list learning outcomes syllabus references ability required

1 System implementation B2(a) B2(iii), B2(iv) analysis
2 Information technology and change management B2(a) B2(iv) analysis
3 Introducing the change B2(a) B2(iv) analysis
4 System evaluation B2(a) B2(i) analysis
5 System maintenance B2(a) B2(iv) analysis
6 System outsourcing B2(b) B2(v) analysis
7 Aligning systems with business strategy B2(b) B2(vi) analysis

95
96 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

1 System implementation 11/10

Introduction
Implementation is part of the systems development cycle, or systems development life cycle (SDLC). The
main stages of the SDLC are Planning, Analysis, Design, Development and Implementation (PADDI).

The planning stage includes a feasibility study into relevant technical, operational, economic and social
factors. A cost-benefit analysis may be used to check that the costs of the new system do not exceed the
benefits. At this stage, the costs and benefits are estimated.

Costs of a new system can be divided into initial costs and running costs, these include: System design,
purchase of equipment, purchase or development of software, testing and implementation, training, staff
costs to operate and maintain the system, consumables associated with the system and support costs for
the developers or in-house IT team.

Benefits of a new system include: Better quality of information, efficient operations, increased capacity,
cost savings (labour), improved access to information across the organisation, better communications,
improved customer service, and potential competitive advantage.

System analysis determines the system’s purpose and the features and procedures required in it. The future
users of the new system should have the opportunity to provide their input, to ensure the new system
satisfies their needs.

After system requirements have been documented, work can begin on system design. Here the
component parts of the system (its hardware and software) are decided upon and purchased. The
systems development stage follows and involves writing software and integrating it with hardware.

Implementation comes next. This is the process the E1 syllabus focuses on – we cover this in detail in
this chapter.

Following implementation comes system review and maintenance. Where appropriate, the outcomes of
both feedback into the planning stage and the cycle starts again.

The main steps in the implementation of an information system are as follows.

(a) Installation of the hardware and software.

(b) Testing.
(c) Staff training and production of documentation.
(d) File conversion.
(e) Changeover.

The items in the list above do not necessarily happen in a set chronological order and some may be done
at the same time – for example staff training and system testing can be part of the same operation. The
requirements for implementation vary from system to system.

1.1 Installation
Installing a mainframe computer or a large network is a major operation that is carried out by the
manufacturer/supplier. If just a few PCs are being installed in a small network, this may be able to be
performed by non-specialists.

Most new software is provided on CD-ROM or DVD and may be able to be installed by non-specialists,
depending upon the complexity of the system and the checks required to ensure it is operating correctly.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 97

1.2 Testing
A system must be thoroughly tested before implementation, to prevent the system ‘going live’ with faults
that might prove costly. The scope of tests and trials will vary with the size and complexity of the system.
To ensure a coherent, effective approach to testing, a testing strategy should be developed.

A testing strategy should cover the following areas.

Testing strategy area Comment

Strategy approach A testing strategy should be formulated that details the approach that will be
taken to testing, including the tests to be conducted and the testing
tools/techniques that will be used.
Test plan A test plan should be developed that states what will be tested, when it will be
tested (sequence), and the test environment.
Test design The logic and reasoning behind the design of the tests should be explained.
Performing tests Detailed procedures should be provided for all tests. This explanation should
ensure tests are carried out consistently, even if different people carry out the
tests.
Documentation It must be clear how the results of tests are to be documented. This provides a
record of errors, and a starting point for error correction procedures.
Re-testing The re-test procedure should be explained. In many cases, after correction, all
aspects of the software should be re-tested to ensure the corrections have not
affected other aspects of the software.

Four stages of testing can be identified as:

 System logic
 Program testing
 System testing
 User acceptance testing

1.2.1 Testing system logic

Before any programs are written, the logic devised by the systems analyst should be checked. This
process often involves the use of flow charts or data flow diagrams. Both tools involve the manual plotting
of different types of data and transactions through the system. The object is to ensure that all possibilities
have been catered for and that the processing logic is correct. When all results are as expected, programs
can be written.

1.2.2 Program testing

Program testing involves processing test data through all system programs. Test data should be of the
type that the program will be required to process and should include invalid/exceptional items to test
whether the program reacts as it should.

Program testing should cover the following areas.

 Input validity checks

 Program logic and functioning
 Interfaces with related modules/systems
 Output format and validity

The testing process should be fully documented – recording data used, expected results, actual results
and action taken. This documentation may be referred to at a later date, for example if program
modifications are required. Two types of program testing are unit testing and unit integration testing.
98 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

1.2.3 Unit testing and unit integration testing

UNIT TESTING means testing one function or part of a program to ensure it operates as intended.
UNIT INTEGRATION TESTING involves testing two or more software units to ensure they work together as
KEY TERMS
intended. The output from unit integration testing is a debugged module.

Unit testing involves detailed testing of part of a program. If it is established that a program is not
operating as intended, the cause of the error must be established and corrected. Automated diagnostic
routines, that step through the program line by line may be used to help this process.

Test cases should be developed that include test data (inputs), test procedures, expected results and
evaluation criteria. Sets of data should be developed for both unit testing and integration testing. Cases
should be developed for all aspects of the software.

1.2.4 System testing (overall system testing)

When it has been established that individual programs and interfaces are operating as intended, overall
system testing should begin. System testing has a wider focus than program testing. System testing
should extend beyond areas already tested, to cover:

 Input documentation and the practicalities of input eg time taken

 Flexibility of the system to allow amendments to the 'normal' processing cycle
 Ability to produce information on time
 Ability to cope with peak resource requirements eg transaction volumes
 Viability of operating procedures
 Ability to produce information on time

System testing will involve testing both before installation (known as off-line testing) and after
implementation (on-line testing). As many problems as possible should be identified before
implementation, but it is likely that some problems will only become apparent when the system goes live.

1.2.5 User acceptance testing

USER ACCEPTANCE TESTING is carried out by those who will use the system to determine whether the
system meets their needs. These needs should have previously been stated as acceptance criteria.
KEY TERM
The purpose of user acceptance testing is to establish whether users are satisfied that the system meets
the system specification when used in the actual operating environment. Users process test data, system
performance is closely monitored and users report whether they feel the system meets their needs. Test
data may include some historical data, because it is then possible to check results against the 'actual'
output from the old system.

It is vital that users are involved in system testing to ensure the system operates as intended when used
by the people expected to utilise it. Any problems identified should be corrected – this will improve
system efficiency and should also encourage users to accept the new system.

1.2.6 Types of test

To ensure as many scenarios as possible are tested, testing should include the following types of test.

(a) Realistic tests. These involve using the system in the way it will be used in reality – ie the actual
environment, users and types of data.

(b) Contrived tests. These are designed to present the system with unusual events to ensure these are
handled correctly, for example that invalid data is rejected.

(c) Volume tests present the system with large numbers of transactions to see how the system copes.

(d) Acceptance tests are undertaken by users to ensure the system meets user needs.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 99

1.2.7 Limitations of testing

The presence of 'bugs' or errors in the vast majority of software/systems demonstrates that even the most
rigorous testing plan is unlikely to identify all errors.

The limitations of software testing are outlined in the following table.

Limitation Comment
Poor testing process The test plan may not cover all areas of system functionality. Testers
may not be adequately trained. The testing process may not be
adequately documented.
Inadequate time Software and systems are inevitably produced under significant time
pressures. Testing time is often 'squeezed' to compensate for project
over-runs in other areas.
Future requirements not The test data used may have been fine at the time of testing, but
anticipated future demands may be outside the range of values tested. Testing
should allow for future expansion of the system.
Inadequate test data Test data should test 'positively' – checking that the software does
what it should do, and test 'negatively' – that it doesn't do what it
shouldn't. It is difficult to include the complete range of possible input
errors in test data.
Software changes inadequately System/software changes made as a result of testing findings or for
tested other reasons may not be adequately tested as they were not in the
original test plan.

1.3 Training
Staff training in the use of a new system is essential if the system is to meet its full potential. Training
should be provided to all staff who will use the system. Training should focus on the specific tasks the
user is required to perform such as entering an invoice or answering a query. There are a range of options
available to deliver training, as shown below.

Training method Comment

Individual tuition 'at desk' A trainer could work with an employee observing how they use a
system and suggesting possible alternatives.
Classroom course The software could be used in a classroom environment, using
'dummy' data.
Computer-based training (CBT) Training can be provided using CDs, DVDs, over an intranet or via an
interactive website.
Case studies and exercises Regardless of how training is delivered, it is likely that material will be
based around a realistic case study relevant to the user.
Software reference material Users may find on-line help, built-in tutorials and reference manuals useful.

The training method applicable in a given situation will depend on the following factors:

 Time available
 Software complexity
 User skill levels
 Facilities available
 Budget

User documentation may be used to explain the system to users. Much of this information may be
available online using context-sensitive help eg 'Push F1 for help'.
100 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

1.4 File conversion

FILE CONVERSION, means converting existing files into a format suitable for the new system.
Most computer systems are based around files containing data. When a new system is introduced, files
KEY TERM
must be created that conform to the requirements of that system.

The various scenarios that file conversion could involve are outlined in the following table.

Existing data Comment

Held in manual (ie paper) files Data will be keyed into the new system – probably via input forms, so
that data entry operators have all the data they require in one
document. This is likely to be a time-consuming process.
Held in existing computer files How complex the process is in converting the files to a format
compatible with the new system will depend on technical issues and
the coding systems used. It may be possible to automate much of the
conversion process.
Held in both manual and Two separate conversion procedures are required.
computer files
Existing data is incomplete If the missing data is crucial, it must be researched and made
available in a format suitable for the new system – or suitable for the
file conversion process.

The file conversion process is shown in the following diagram, which assumes the original data is held in
manual files.

It is essential that the 'new' converted files are accurate. Various controls can be utilised during the
conversion process.

(a) One-to-one checking between records on the old and new systems.

(b) Sample checking. Selecting and checking a sample of records. This is used if there are too many
records to check individually.

(c) Built-in data validation routines in automated conversion processes.

(d) Control totals and reconciliations. These checks could include checking the total number of
records, and the value of transactions.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 101

Exam alert
You may find it useful to remember the main system implementation stages as FITT. File conversion,
Installation, Testing, Training and documentation.

1.5 Changeover
Once the new system has been fully and satisfactorily tested, the final stage of implementation,
changeover, can begin. There are four approaches to system changeover, each varies in terms of time
required, cost and risk.

 Direct ('Big Bang') changeover

 Parallel running
 Pilot operation
 Phased or modular implementation

1.5.1 Direct ('Big Bang') changeover

The old system is completely replaced by the new system in one move. This may be unavoidable where
the two systems are substantially different, or where the costs of parallel running are too great.

While this method is comparatively cheap and convenient, it is risky (system or program corrections are
difficult while the system has to remain operational). The new system should be introduced during a
quiet period, for example over a bank holiday weekend or during an office closure.

A direct changeover is often used where there is:

 Complete confidence in the new system

 A need to overcome a reluctance to ‘let the old system go’
 A need to implement the system before staff have a chance to object
 A need on cost or convenience grounds to avoid running two systems

1.5.2 Parallel running

The old and new systems are run in parallel for a period of time. They both process current data which
enables cross checking to be made. This method provides a degree of safety should there be problems
with the new system. However, if there are differences between the two systems, cross-checking may be
difficult or impossible.

Parallel running delays the actual implementation of the new system, which may be perceived as a lack
of confidence in the system. Also, more staff are required to cope with systems running concurrently.
This cautious approach, if adopted, should be properly planned, and the plan should include:

(a) A firm time limit on parallel running.

(b) Details of cross-checking procedures.
(c) Instructions on how errors in the old system are to be dealt with.
(d) Instructions on how to report and act on any major problems in the new system.

1.5.3 Pilot operation

Pilot operation involves selecting part or parts of an organisation (eg a department or branch) to operate
the new system in parallel with the existing system. When the branch or department piloting the system
is satisfied with it, they cease to use the old system. The new system is then piloted in another area of
the organisation.

Pilot operation is cheaper and easier to control than running the whole system in parallel, and provides a
greater degree of safety than a direct changeover.
102 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

1.5.4 Phased or modular changeover

Phased or modular changeover involves selecting a complete section of the system for a direct
changeover, eg in an accounting system the payables ledger. When this part is running satisfactorily,
another part is switched – until eventually the whole system has been changed. A phased series of direct
changeovers is less risky than a single direct changeover, as any problems and disruption experienced
should be isolated in an area of operations.

1.5.5 Advantages and disadvantages

The advantages and disadvantages of the various changeover methods are outlined below.

Method Advantages Disadvantages

Direct ('Big Bang') Quick Risky
changeover Minimal cost Could disrupt operations
Minimises workload If fails, will be costly
Parallel running Safe, built-in safety Costly, two systems need to be operated
Provides a way of verifying results of Time-consuming
the new system Additional workload

Pilot operation Less risky than direct changeover Can take a long time to achieve total
Less costly than complete parallel changeover
running Not as safe as complete parallel running
Phased or modular Less risky than a single direct Can take a long time to achieve total
changeover changeover changeover
Any problems should be in one area – Interfaces between parts of the system
other operations unaffected may make this impractical

Facing frequent outages in the DSL (Digital Subscriber Line) network serving 50-plus corporate-owned
gyms, Gold's Gyms management knew it was time for a significant upgrade. After looking into the various
CASE STUDY options they opted to replace DSL with a carrier-provided voice VoIP (Voice over Internet Protocol)
service.

If they had to this again, however, they would take a more phased approach. 'We tried the big-bang
theory, doing everything at once,' a spokesman said. That decision was driven by business needs,
because the DSL network was so unreliable, and because the supplier was urging Gold's to sign a contract
that included every gym. 'I think we should've done two or three gyms first, and made sure they worked
OK, before we did the rest.' This would have reduced system downtime.
Adapted from Case study: VoIP implementation The problems of the 'big bang' approach
Paul Desmond, PC Advisor

Section summary
The main stages in the implementation of a computer system are:

 Installation of the hardware and software.

 Testing.
 Staff training and production of documentation.
 File conversion.
 Changeover.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 103

2 Information technology and change management

Introduction
Any change, such as the introduction of a new information system, involves structural and behavioural
factors which may result in resistance from individuals to that change. Many new systems fail, not
because of hardware or software problems, but because the users themselves are against it.

This section considers what causes user resistance and how it can be overcome or prevented by
management action.

2.1 How change affects individuals

Before looking at the causes of user resistance we must first consider how change affects individuals.
Change may affect individuals in several areas.
(a) There may be physiological changes in a person's life, both as the natural product of development,
maturation and ageing, and as the result of external factors. For example, a change in the pattern
of shift-working may temporarily throw the individual's eating, waking and sleeping routine out of
synchronisation with the body's sense of time.
(b) Circumstantial changes – living in a new house, establishing new relationships, working to new
routines – will involve letting go of things, perhaps 'unlearning' old knowledge, and learning new
ways of doing things.
Above all, change affects individuals psychologically.
(a) It may create feelings of disorientation before new circumstances have been assimilated.
(b) Uncertainty may lead to insecurity. This is especially acute in changes involving work, where
there can be very great pressures for continuity and fast acclimatisation.
(c) The secure basis of warm, accepting relationships may be up-rooted – the business of forging new
relationships can be fraught with personal insecurity.

2.1.1 Types of change experience

Four types of change experience have been identified (Torrington and Weightman (1994)).

Type Comment Reaction

Imposition Initiated and driven by someone else Resistance
Adaptation A change in attitude or behaviour as a result of changes by others Uncertainty
Growth A response to opportunities Delight
Creativity The individual instigates and controls the change process Excitement

2.1.2 Reactions to proposed change

There are a range of other possible reactions to a proposed change.

(a) Acceptance – whether enthusiastic espousal, co-operation, grudging co-operation or resignation

(b) Indifference – usually where the change does not directly affect the individual: apathy, lack of
interest, inaction

(c) Passive resistance – refusal to learn, working to rule

(d) Active resistance – deliberate 'spoiling', go-slows, deliberate errors, sabotage, absenteeism or
strikes
104 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

John Hunt highlights a number of responses that may not look like resistance on the face of things, but
are behaviours aimed at reinforcing the status quo. There are a number of responses that the manager
should learn to recognise.

(a) Pleas of ignorance: ('I need more information').

(b) Delayed judgement: ('let's wait and see ...'), perhaps stalling for time with comparisons ('there are
other ways ...').

(c) Defensive stances: ('This isn't going to work', 'It'd be too expensive', 'It's the wrong time to ...').

(d) The display of various personal insecurities: ('I won't be able to cope', 'I won't see my team
anymore', 'We won't have control over our planning any more', 'Why can't we just go on as we
are?'); fear, anxiety, resentment at the manner of change, frustration at perceived losses.

(e) Withdrawal, or disowning of the change: ('Oh well. On their heads be it', 'I'm not interested in
flexitime anyway').

2.2 Problems in the design stage

One common cause of dissatisfaction with new information systems is insufficient user involvement when
establishing requirements for the new system.

Other common causes of dissatisfaction with information systems include:

(a) IS project managers are often technicians, not managers. Technical ability for IS staff is no
guarantee of management skill – an individual might be a highly proficient analyst or programmer,
but not a good manager.

(b) The project manager may accept an unrealistic deadline where the timescale is fixed early in the
planning process. User demands may be accepted as deadlines before sufficient consideration is
given to the realism of this.

(c) Poor or non-existent planning is a recipe for disaster. Unrealistic deadlines would be identified
much earlier if a proper planning process was undertaken.

(d) A lack of monitoring and control.

(e) Users change their requirements, resulting in changes to the system as it is being developed.

(f) Poor timetabling and resourcing. It is no use being presented on Day 1 with a team of
programmers, when there is still systems analysis and design work to do. The development and
implementation of a computer project may take a considerable length of time (perhaps two years
for a relatively large installation). Major projects require formal planning and scheduling.

2.3 Problems in the development process

Problems that occur when implementing a new information system can usually be traced to deficiencies
in the development process. The table that follows outlines some common mistakes that adversely affect
the implementation process – and the systems development stage or activity they relate to.

Stage/activity Problems
Analysis The problem the system is intended to solve is not fully understood.
Investigation of the situation is hindered by insufficient resources.
User input is inadequate through either lack of consultation or lack of user
interest.
The project team is unable to dedicate the time required or insufficient time
spent planning the project.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 105

Stage/activity Problems
Design Insufficient user input.
Lack of flexibility. The organisation's future needs are neglected.
The system requires unforeseen changes in working patterns.
Failure to perform organisation impact analysis. An organisational impact
analysis studies the way a proposed system will affect organisation structure,
attitudes, decision making and operations. The analysis aims to ensure the
system is designed to best ensure integration with the organisation.
Organisational factors sometimes overlooked include:
 Ergonomics (including equipment, work environment and user interfaces)
 Health and safety
 Compliance with legislation
 Job design
 Employee involvement
Programming Insufficient time and money allocated to programming.
Programmers supplied with incomplete or inaccurate specifications.
The logic of the program is misunderstood.
Poor programming technique results in programs that are hard to modify.
Programs are not adequately documented.
Testing Insufficient time and money allocated to testing.
Failure to develop an organised testing plan.
Insufficient user involvement.
User management do not review and sign-off the results of testing.
Conversion Insufficient time and money allocated to data conversion.
Insufficient checking between old and new files.
The process is rushed to compensate for time overruns elsewhere.
Final implementation Insufficient time, money and/or appropriate staff mean the process has to be
rushed.
Lack of user training increases the risk of system under-utilisation and rejection.
Poor system and user documentation.
Lack of performance standards to assess system performance against.
System maintenance provisions are inadequate.

2.4 Dealing with user resistance 03/12

We now look at two models relevant to dealing with user resistance.

2.4.1 Lewin/Schein: Unfreeze, Move, Refreeze

In the words of John Hunt (Managing People at Work): 'Learning also involves re-learning – not merely
learning something new but trying to unlearn what is already known.' This is the thinking behind
Lewin/Schein's three stage approach to changing human behaviour, which may be depicted as follows.

UNFREEZE MOVE REFREEZE

 
existing behaviour attitudinal/behavioural change new behaviour
106 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

Unfreeze is the most difficult (and in many cases neglected) stage of the process, concerned
mainly with selling the change, with giving individuals or groups a motive for changing their
attitudes, values, behaviour, systems or structures. If the need for change is immediate,
clear and perceived to be associated with the survival of the individual or group (for example
change in reaction to an organisation crisis), the unfreeze stage will be greatly accelerated.
Routine changes may be harder to sell than transformational ones, if they are perceived to
be unimportant and not survival-based.

Changing organisational culture is perhaps hardest of all, especially if it involves changes to

long-held cultural values.

Unfreezing processes require four things. These are: a trigger, someone to challenge and
expose the existing behaviour pattern, the involvement of outsiders and alterations to the
power structure.
Move is the second stage. It is mainly concerned with identifying what the new, desirable
behaviour or norm should be, communicating it and encouraging individuals and groups to
'own' the new attitude or behaviour. This might involve the adoption of a new culture. To be
successful, the new ideas must be shown to work.

Refreeze is the final stage, implying consolidation or reinforcement of the new behaviour.
Positive reinforcement (praise and reward) or negative reinforcement (sanctions applied to
those who deviate from the new behaviour) may be used.

This model is based on the view that change is capable of being planned. You should note that this is not
always possible.

2.4.2 Lewin’s Force Field Analysis

Force field analysis consists of identifying the factors that promote or hinder change. In order for change
to be successfully implemented, driving forces need to be exploited and the effect of restraining forces
need to be reduced, such that the driving forces for change outweigh those forces resisting change.

Examples of driving forces

Perceived improvements to organisational performance
Necessary in order to keep up with competitors
Improved profitability and employee bonuses
Dislike of old system
Better information and work processes
New challenges and improved motivation

Examples of restraining forces

Job security fears
Happy with old system
Lack of understanding of need for change
Fears over poor implementation process
Employee loss of control over how they work
Lack of training and fears over difficulty of using new system
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 107

2.4.3 Dealing with resistance

Kotter and Schlesinger (1979) identified six methods of dealing with resistance to change and
restraining forces. They are:

(a) Education and communication. This method is effective where the cause of the resistance is lack
of information about the change.

(b) Participation and involvement. Where those affected by the change have the power to resist it,
this method reduces the resistance by taking their views into account.

(c) Facilitation and support. Where the cause of the resistance is anxiety and insecurity, support such
as training is effective.

(d) Negotiation and agreement. Compensating those who lose out (for example redundancy packages)
may be appropriate in some instances.

(e) Manipulation and co-optation. This method involves the presentation of partial or misleading
information to those resisting change or 'buying-off' the main individuals who are at the heart of the
resistance.

(f) Explicit and implicit coercion. This involves the use or threat of force to push through the change.
A very last resort if parties are operating from fixed positions and are unwilling to move.

The final two options raise ethical and legal issues. They also risk alienating people, making the change
even less likely to be accepted.

The six approaches are not intended to be used separately in isolation – a combination of them is likely to
be required. Remember that people may disguise their real reason for opposing change (such as possible
loss of influence or status) with technical objections.

Exam alert
Exam questions may require you to discuss potential strategies for overcoming resistance to change and
identify which would be most suitable for the organisation in the scenario.

You may also be asked for an analysis of how an organisation has managed resistance to a change.

Question 4.1 Resistance to change

Learning outcome B2(iv)

Which of Kotter and Schlesinger’s six methods of dealing with resistance to change is best suited to a
situation where resistance is caused by a lack of information about the change?

A Education and communication.

B Negotiation and agreement.

C Manipulation and co-optation.

D Explicit and implicit coercion.

(2 marks)
108 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

Section summary
User resistance is a key cause of information systems failure.

Theories that may help when considering how to overcome user resistance include:
 Lewin/Schein's unfreeze, move, refreeze
 Kotter and Schlesingers' six methods of dealing with resistance

3 Introducing the change

Introduction
Rather than dealing with resistance to change after it has occurred, a better approach is to try and
prevent resistance before it occurs.

Several theories have been developed that aim to help managers deal with change more effectively so that
resistance is prevented or at least minimised.

3.1 Pace, Manner and Scope

There are three important factors for managers to consider when introducing change.

 The pace of change

 The manner of change
 The scope of change

3.1.1 Pace
The more gradual the change, the more time is available for questions to be asked, reassurances to be
given and retraining (where necessary) embarked upon. People can get used to the idea of new methods
and become acclimatised at each stage.

(a) Presenting the individuals concerned with change as a fait accompli may avoid resistance at the
planning stage, but may result in resistance surfacing later – probably strengthened by resentment.

(b) Timing will also be crucial. Those responsible for change should be sensitive to incidents and
attitudes that might indicate that 'now is not the time'.

3.1.2 Manner
The manner in which a change is put across (communicated) is very important. The need for change
must made clear, fears soothed, and if possible the individuals concerned positively motivated to embrace
the changes as their own.
(a) Resistance should be welcomed and confronted, not swept under the carpet. Talking thorough
areas of conflict may lead to useful insights and the adaption of the programme of change to the
company’s advantage. Repressing resistance will only send it underground.
(b) There should be free circulation of information about the reasons for the change, its expected
results and likely consequences. That information should appear sensible, clear, consistent and
realistic. There is no point issuing information which will be seen as a blatant misrepresentation of
the situation.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 109

(c) The change must be sold to the people concerned. Objections must be overcome, but it is also
possible to get people behind the change in a positive way. If those involved understand that there
is a real problem, which poses a threat to the organisation and themselves, and that the solution is
a sensible one and will solve the problem, there will be a firm rational basis, for implementing
change. It may even be possible to get staff excited by the change, by emphasising the challenge
and opportunity and perhaps by offering rewards and incentives.
(d) Individuals must be helped to learn, that is, to change their attitudes and behaviours. Few
individuals will really be able to see the big picture in a proposed programmed of change. In order
to put across the overall objective, the organisation should use visual aids to help conceptualise.
Learning programmes for any new skills or systems necessary will have to be designed according
to the abilities of the individuals concerned.
(e) The effects of insecurity and resentment may be lessened if people are involved in the planning
and implementation of the change, so that it is not perceived to have been imposed from above.

3.1.3 Scope
The scope or extent of the change is important and should be reviewed. Total transformation will create
greater insecurity – but also provides the opportunity for greater excitement – than moderate innovation.
There may be hidden changes to take into account. For example, a change in technology may necessitate
changes in work methods, which may in turn result in the breaking up of work groups. Management
should be aware of how many various aspects of their employees' lives they are proposing to alter – and
therefore on how many fronts they are likely to encounter resistance.

3.2 Commitment, co-ordination and communication

Commitment, co-ordination and communication are often cited as playing an important role in the
context of introducing any form of change.
(a) Commitment. Commitment to the change must be universal. Senior management must ensure
adequate resources are provided (people, money, time etc) to achieve change.
(b) Co-ordination. To implement change successfully requires co-ordination. This involves ensuring
those involved in the process work in an efficient and effective way towards an agreed common
goal. This requires planning and control.
(c) Communication. Successful change requires good communication. The right people must
communicate the right things at the right time and in the right way. Good communication early in
the process should ensure all are aware of what the process hopes to achieve. Communication
during the process should aid co-ordination and to maintain momentum. Upon completion,
communication is likely to focus on ensuring there is no return to the previous behaviour – and a
review of the process itself to see if any lessons may be learnt.

3.3 Successful implementation of information systems

A recurring theme when examining the reasons for information system failure is user resistance. Three
types of theory explain the causes user resistance against new information systems together with how
they are overcome (Markus 1983 and David and Olsen 1985).
110 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

Theory Description Overcoming the resistance

People-oriented User-resistance is caused by factors User training.
internal to users as individuals or as a Organisation policies.
group.
Find ‘change champions’ who already
For example, users may not wish to see the benefits of the system and can
disrupt their current work practices and persuade others who are resisting.
social groupings.
User involvement in system
development.
System-oriented User-resistance is caused by factors User training and education.
inherent in the new system design, Improve the user-interface.
relating to ease of use and functionality.
Ensure users contribute to the system
For example, a poorly designed user- design process.
interface will generate user-resistance.
Ensure the system 'fits' with the
organisation.
Interaction User-resistance is caused by the Re-organise the organisation before
interaction of people and the system. implementing the system.
For example, the system may be well- Redesign any affected incentive
designed but its implementation will schemes to incorporate the new system.
cause organisational changes that users Promote user participation and
resist eg reduced chance of bonuses, encourage organisation-wide teamwork.
redundancies, monotonous work.
Emphasise the benefits the system
brings.

Section summary
It is better for the organisation to prevent or minimise resistance occurring in the first place. Theories
aimed at achieving this include:

 Pace, manner and scope

 Commitment, co-ordination and communication

4 System evaluation

Introduction
A system should be reviewed after implementation, and periodically when in operation, so that any
unforeseen problems may be resolved and to confirm that it is achieving the desired results. The system
should have been designed with clear, specified objectives, and justification in terms of cost-benefit
analysis or other performance criteria.

4.1 Cost-benefit review

A cost-benefit review is similar to a cost-benefit analysis, except that actual data can be used. For
instance when a large project is completed, techniques such as DCF appraisal can be performed again,
with actual figures being available for much of the expenditure.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 111

Question 4.2 Cost-benefit review

Learning outcome B2(i)

A cost-benefit review might categorise items under the five headings of direct benefits, indirect benefits,
development costs, implementation costs and running costs.

Required

Give two examples of items which could fall to be evaluated under each heading. (5 marks)

4.2 Measuring system performance

METRICS are quantified measurements used to measure system performance.
The use of metrics enables some aspects of system quality to be measured. Metrics may also allow the
KEY TERM
early identification of problems – for example, by highlighting instances of system failure, the causes of
which may then be investigated.

Metrics should be carefully thought out, objective and stated clearly. They must measure significant
aspects of the system, be used consistently and agreed with users. Examples of metrics include system
response time, the number of transactions that can be processed per minute, the number of bugs per
hundred lines of code and the number of system crashes per week.

Many facets of system quality are not easy to measure statistically (eg user-friendliness). Indirect
measurements such as the number of calls to the help-desk per month can be used as an indication of
overall quality/performance.

4.3 Performance reviews

Performance reviews can be carried out to look at a wide range of systems functions and characteristics.
They will vary in content from organisation to organisation, but may include the following.

(a) The growth rates in file sizes and the number of transactions processed by the system. Trends
should be analysed and projected to assess whether there are likely to be problems with lengthy
processing time or an inefficient file structure due to the volume of processing.

(b) The staffing requirements of the system, and whether they are more or less than anticipated.

(c) The identification of any delays in processing and an assessment of their consequences.

(d) An assessment of the efficiency of security procedures, in terms of number of breaches, or number
of viruses encountered.

(e) A check of the error rates for input data. High error rates may indicate inefficient preparation of
input documents, an inappropriate method of data capture or poor design of input media.

(f) An examination of whether output from the computer is being used for a good purpose. (Is it used?
Is it timely? Does it go to the right people?)

(g) Operational running costs can be examined to discover any inefficient programs or processes. This
examination may reveal excessive costs for certain items although in total, costs may be
acceptable.
112 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

4.4 Post-implementation review

A post-implementation review establishes whether the objectives and targeted performance criteria have
been met, and if not, why not, and what should be done about it. In appraising the operation of the new
system immediately after the changeover, comparison should be made between actual and predicted
performance.

This will include:

(a) Consideration of throughput speed (time between input and output).

(b) Use of computer storage (both internal and external).
(c) The number and type of errors/queries.
(d) The cost of processing (data capture, preparation, storage and output media, etc).

A special steering committee may be set up to ensure that post-implementation reviews are carried out,
although the internal audit department may be required to do the work of carrying out the reviews.

The post-implementation measurements should not be made too soon after the system goes live, or else
results will be abnormally affected by 'teething' problems, lack of user familiarity and resistance to
change. A suitable period is likely to be between one month and one year after completion (the
appropriate length of time will depend upon the role of the system, and how complex it is).

Post-implementation audits are on the paper E2 syllabus in connection with project

management.

4.4.1 The post-implementation review report

The findings of a post-implementation review team should be formalised in a report.

(a) A summary of their findings should be provided, emphasising any areas where the system has
been found to be unsatisfactory so the organisation can learn from its mistakes.

(b) A review of system performance should be provided. This will address the matters outlined above,
such as run times and error rates and whether it meets users' needs.

(c) A cost-benefit review should be included, comparing the forecast costs and benefits identified at
the time of the feasibility study with actual costs and benefits.

(d) Recommendations should be made as to any further action or steps which should be taken to
improve performance. It will also make recommendations on how the project was managed to help
future initiatives.

4.5 Reasons for system failure

The performance review may conclude that the project has failed. Common causes often cited include:

 Poor planning and coordination

 Unrealistic schedules and deadlines
 Poor project control
 Lack of user involvement
 Project complexity
 Lack of support from senior management
 Insufficient skills within the workforce to deliver a successful project.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 113

Section summary
After implementation the system should be evaluated to see if it is a success and whether there are any
lessons to be learned.

Evaluation often takes the form of a cost-benefit review or performance measurement using metrics or
other measurable features of the system.

A post-implementation review compares actual and expected performance levels and is a formal report
that should be compiled after a suitable period of time following implementation.

5 System maintenance

Introduction
After implementation, the system will require regular maintenance if it is to continue operating as
expected and to develop with the organisation.

There are three types of systems maintenance.

CORRECTIVE MAINTENANCE is carried out when there is a systems failure of some kind, for example a
defect in processing or in an implementation procedure. Its objective is to ensure that systems remain
KEY TERMS operational.

PERFECTIVE MAINTENANCE is carried out in order to perfect the software, or to improve it so that
processing inefficiencies are eliminated and performance is enhanced.

ADAPTIVE MAINTENANCE is carried out to take account of anticipated changes in the processing
environment. For example new taxation legislation might require changes to be made to payroll software.

Corrective maintenance usually consists of action in response to a problem.

Perfective maintenance consists of making enhancements requested by users to improve or extend the
facilities available. The user interface may be amended to make software more user friendly.

There are many examples of adaptive maintenance, for example:

(a) The system needs minor modifications to cope with changes in the computer user's procedures or
volume of business.

(b) The system can benefit from advances in computer hardware technology without having to switch
to another system altogether.

5.1 The causes of system maintenance

Besides environmental changes, three factors contribute to the need for maintenance.

Factor Comment
Errors However diligently a system is tested, it is likely that bugs will exist in a
newly implemented system. These require fixing.
Poor documentation If old systems are accompanied by poor documentation, or even a complete
lack of documentation, they may be difficult to understand. It is difficult to
update or maintain these systems. Programmers may opt instead to patch up
the system with new applications using newer technology.
114 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

Factor Comment
Changes in requirements Although users should be consulted at all stages of systems development,
problems may arise after implementation, for example users may have found
it difficult to express their requirements, or not participated fully in
development.
Cost constraints may have meant that certain requested features were not
incorporated. Time constraints may have meant that requirements suggested
during development were ignored in the interest of prompt completion.

5.1.1 Testing the effect of changes

A problem with systems development and maintenance is that it is hard to predict all the effects of a
change to the system. A 'simple' software change in one area of the system may have unpredicted effects
elsewhere. It is important therefore to carry out regression testing.
REGRESSION TESTING involves the retesting of software that has been modified to fix 'bugs'. It aims to
ensure that the bugs have been fixed and that no other previously working functions have failed as a
KEY TERM result of the changes.

Regression testing involves repeating system tests that had been executed correctly before the recent
changes were made. Only the changes expected as a result of the system maintenance should occur
under the regression test – other changes could be due to errors caused by the recent change.

Problems with regression testing include deciding on the extent of testing required, envisaging all areas
possibly affected, and convincing users and programmers that the tests are necessary.

5.2 Hardware maintenance

Provision must also be made to ensure computer hardware is maintained. A hardware maintenance
contract should specify service response times in the event of a breakdown, and include provision for
temporary replacement equipment if necessary. Maintenance services may be provided by the computer
manufacturers or suppliers, or by a third-party maintenance company.

Section summary
Corrective Maintenance is carried out when there is a systems failure of some kind, for example a defect
in processing or in an implementation procedure. Its objective is to ensure that systems remain
operational.

Perfective Maintenance is carried out in order to perfect the software, or to improve it so that processing
inefficiencies are eliminated and performance is enhanced.

Adaptive Maintenance is carried out to take account of anticipated changes in the processing
environment. For example new taxation legislation might require changes to be made to payroll software.

6 System outsourcing 05/10, 05/12

Introduction
We shall now consider the application of outsourcing to information systems.
 PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 115

There are four broad classifications of IT outsourcing.

Classification Comment
Ad-hoc The organisation has a short-term requirement for increased IT skills. An
example would be employing programmers on a short-term contract to help
with the programming of bespoke software.
Project management The development and installation of a particular project is outsourced. For
example, a new accounting system. This approach is sometimes referred to as
systems integration.
Partial Some services are outsourced. Examples include hardware maintenance,
network management or ongoing website management.
Total An external supplier provides the vast majority of an organisation's IS services.
For example, a third party owns or is responsible for IT equipment, software
and possibly staff.

6.1 Levels of service provision

The degree to which the provision and management of IS services are transferred to the third party varies
according to the situation and the skills of both organisations.

(a) Timeshare. The vendor charges for access to an external processing system on a time-used basis.
Software ownership may be with either the vendor or the client organisation.

(b) Service bureaux usually focus on a specific function. Traditionally bureaux would provide the same
type of service to many organisations, eg payroll processing. As organisations have developed their
own IT infrastructure, the use of bureaux has decreased.

(c) Facilities management (FM) . The terms 'outsourcing' and 'facilities management' are sometimes
confused. Facilities management traditionally involved contracts for premises-related services such
as cleaning or site security.

In the context of IS, facilities management involves an outside agency managing the organisation's
IS facilities. All equipment usually remains with the client, but the responsibility for providing and
managing the specified services rests with the FM company. FM companies operating in the UK
include Accenture, Cap Gemini, EDS and CFM.

The retailer Sears outsourced the management of its vast information technology and accounting functions
to Accenture. First year savings were estimated to be £5 million per annum, growing to £14 million in the
CASE STUDY following year, and thereafter. This is clearly considerable, although re-organisation costs relating to
redundancies, relocation and asset write-offs are thought to be in the region of £35 million. About 900
staff were involved: under the transfer of undertakings regulations (which protect employees when part or
all of a company changes hands), Accenture was obliged to take on the existing Sears staff. This provided
new opportunities for the staff who moved, while those who remained at Sears were free to concentrate
on strategy development and management direction.

6.2 Developments in outsourcing

Outsourcing arrangements are becoming increasingly flexible to cope with the ever-changing nature of the
modern business environment.
116 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

Examples of outsourcing arrangements include:

(a) Multiple sourcing. This involves outsourcing different areas of the IS function to a range of
suppliers. Some suppliers may form alliances to present a stronger case for selection.

(b) Incremental approach. Organisations progressively outsource selected areas of their IS function.
Possible problems with outsourced services are solved before progressing to the next stage.

(c) Joint venture sourcing. This term is used to describe an organisation entering into a joint venture
with a supplier. The costs (risks) and possible rewards are split on an agreed basis. Such an
arrangement may be suitable when developing software that could be sold to other organisations.

(d) Application Service Providers (ASP). ASPs are third parties that manage and distribute software
services and solutions to customers across a Wide Area Network. ASPs could be considered the
modern equivalent of the traditional computer bureaux.

6.3 Managing outsourcing arrangements

Managing outsourcing arrangements involves deciding what will be outsourced, choosing and negotiating
with suppliers and managing the client-vendor relationship.

6.3.1 Deciding what to outsource

When considering whether to outsource a particular service the following issues are relevant.

(a) Strategic importance of system. If the decision relates to an information system, strategic
information systems are generally not suited to outsourcing as they require a high degree of
specific business knowledge that a third party IT specialist cannot be expected to possess.

(b) Is the function and/or system relatively isolated? Functions that have only limited interfaces are
most easily outsourced, eg payroll.

(c) Is there enough in-house system knowledge to manage the outsourced service agreement? If an
organisation knows very little about a particular technology it may be difficult to know what
constitutes good service and value for money. It may be necessary to recruit additional expertise to
manage the relationship with the other party.

(d) Are the organisation’s requirements likely to change? Organisations should avoid tying themselves
into a long-term outsourcing agreement if requirements are likely to change.

(e) Communication with employees. Once the decision to outsource has been taken it is important for
employees to be kept informed of the reasons behind the decision and how it may impact on
them. If redundancies are planned then this should be managed sensitively.

6.3.2 Choosing and negotiating with suppliers

The organisation should draw up a short-list of potential suppliers and invite them to bid for the outsource
contract by an invitation to tender. The choice of outsource supplier should be made based on clearly
defined criteria and the organisation should also make background checks into the supplier’s finances,
seek references from its other clients and check its legal history for any litigation against it. Any potential
supplier should be sympathetic to the organisations’ culture and ethics and be willing to put mechanisms
in place to ensure the satisfaction of the organisation’s customers.

A contract, known as a Service Level Contract (SLC) or Service Level Agreement (SLA) should be drawn
up that sets out the terms and conditions of the arrangement.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 117

The key elements of the contract are described below.

Contract element Comment

Service level The contract should clearly specify minimum levels of service to be provided.
Penalties should be specified for failure to meet these standards. Relevant
factors will vary depending on the nature of the services outsourced but could
include:
 Response time to requests for assistance/information
 System 'uptime' percentage
 Deadlines for performing relevant tasks
Exit route Arrangements for an exit route, addressing how the transfer to another
supplier, or the move back in-house would be conducted.
Timescale When does the contract expire? Is the timescale suitable for the organisation's
needs or should it be renegotiated?
Software ownership Relevant factors include:
 Software licensing and security
 If the arrangement includes the development of new software who owns
the copyright?
Dependencies If related services are outsourced, the level of service quality agreed should
group these services together.
Employment issues If the arrangement includes provision for the organisation's IT staff to move to
the third party, employer responsibilities must be specified clearly.

Once the arrangement has been established, handover should take place at an appropriate time either
directly or be phased in stages.

6.3.3 Managing the client-vendor relationship

It is important for the organisation to build a strong relationship with its outsource supplier, perhaps
through the use of a relationship manager responsible for monitoring the costs of the agreement and
checking that the terms and conditions of the SLA are adhered to. Any issues arising should be dealt with
appropriately. The closeness of the relationship would depend on the nature of the function being
outsourced

If full facilities management is involved and almost all management responsibility for IS lies with the
entity providing the service, then a close relationship between the parties is necessary (a 'partnership').
Factors such as organisation culture need to be considered when entering into such a close and critical
relationship.

On the other hand, if a relatively simple function such as payroll were outsourced, such a close
relationship with the supplier would not be necessary. A 'typical' supplier – customer relationship is all
that is required.
118 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

6.4 Advantages of outsourcing arrangements

The advantages of outsourcing are as follows.

(a) Outsourcing can remove uncertainty about cost, as there is often a long-term contract where
services are specified in advance for a fixed price. If computing services are inefficient, the costs
will be borne by the outsourcing company. This is also an incentive to the third party to provide a
high quality service.

(b) Long-term contracts (maybe up to ten years) encourage planning for the future.

(c) Outsourcing can bring the benefits of economies of scale. For example, an outsourcing company
may conduct research into new technologies that benefits a number of their clients.

(d) A specialist organisation is able to retain skills and knowledge. Many organisations would not have
a sufficiently well-developed IS department to offer IS staff opportunities for career development.
Talented staff would leave to pursue their careers elsewhere.

(e) New skills and knowledge become available. A specialist company can share staff with specific
expertise (such as programming in HTML to produce Web pages) between several clients. This
allows the outsourcing company to take advantage of new developments without the need to
recruit new people or re-train existing staff, and without the cost.

(f) Flexibility (contract permitting). Resources may be able to be scaled up or down depending upon
demand. For instance, during a major changeover from one system to another the number of IT
staff needed may be twice as large as it will be once the new system is working satisfactorily.

An outsourcing organisation is more able to arrange its work on a project basis, whereby some
staff will expect to be moved periodically from one project to the next.

6.5 Disadvantages of outsourcing arrangements

Some possible drawbacks are outlined below.

(a) It is arguable that information and its provision is an inherent part of the business and of
management. Unlike office cleaning, or catering, an organisation's IS services may be too
important to be contracted out. Information is at the heart of management.

(b) A company may have highly confidential information and to let outsiders handle it could be seen
as risky in commercial and/or legal terms.

(c) Information strategy can be used to gain competitive advantage. Opportunities may be missed if a
third party is handling IS services, because there is no onus upon internal management to keep up
with new developments and have new ideas. Any new technology or application devised by the
third party is likely to be available to competitors.

(d) An organisation may find itself locked in to an unsatisfactory contract. The decision may be very
difficult to reverse. If the outsourcing company supplies unsatisfactory levels of service, the effort
and expense the organisation would incur to rebuild its own computing function or to move to
another provider could be substantial.

(e) The use of outsourcing does not encourage awareness of the potential costs and benefits of IS
within the organisation. If managers cannot manage in-house IS resources effectively, then it could
be argued that they will not be able to manage an arrangement to outsource effectively either.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 119

6.6 Information systems and broader management operations

The information systems within an organisation should complement and support other functional areas
such as finance, human resources and marketing. For example, an intranet facilitates the sharing of
information.

Effective information systems and information management contribute towards the attainment of
organisational goals. To best achieve this, a cohesive IS strategy should be developed that supports the
organisation's overall strategy.

As with any expenditure, the benefits of information systems should be greater than their costs.

Section summary
Four broad types of information systems outsourcing are ad-hoc, project management, partial and total.

Examples of outsourcing arrangements include multiple sourcing, incremental approach, joint venture
sourcing, Application Service Providers (ASP).

7 Aligning systems with business strategy

Introduction
An organisation's information systems (IS) should support the overall strategy of the business.
A firm's strategy is built in three layers
 Corporate (what products to make or markets to be in).
 Business (how to increase sales or profitability of a product).
 Functional (the strategy of a business function such as HR or Marketing).
Therefore a firm's IT strategy is a functional strategy, although due to its revolutionary nature, it can also
become a business strategy. For example where IT can improve efficiency or sales (such as through
e-commerce).

The identification of business needs and the information technology framework to satisfy them is at the
heart of a strategy for information systems. However, this is not always feasible, especially if an
organisation's use of technology has grown in a haphazard fashion. The purpose of the strategy in this
situation may be to impose some sort of order on a disorganised situation.

We shall begin by looking at the effect information systems have on an industry.

7.1 The effect of IS on an industry

Porter and Millar state that IS has the potential to change the nature of competition within an industry.

The ways in which IS can impact an industry according to Porter and Millar are:

 Change the industry structure

 Create new businesses and industries
 Be used to create competitive advantage
120 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

7.2 Changing the industry structure

Porter's five forces model can be used to analyse the effect of IS on an industry.

Porter identified five competitive forces operating in a competitive environment.

(a) The threat of new entrants.

(b) The bargaining power of suppliers.
(c) The bargaining power of customers.
(d) The threat of substitute products/services.
(e) The existing competitive rivalry in the industry.

Potential
entrants

Threat of
new entrants
Bargaining Bargaining
power of Industry competitors power of
suppliers customers
Suppliers Rivalry among Customers
existing firms

Threat of substitute
products or services

Substitutes

7.2.1 New entrants

IS can have two possible roles in relation to barriers to entry

(a) Defensively. IS can increase economies of scale, raise the capital cost of entry (by requiring an
investment in IS) or effectively colonising distribution channels by tying customers and suppliers
into the supply chain.

(b) Offensively. IS can leap over entry barriers. An example is the use of telephone banking, which
sometimes obviates the need to establish a branch network.

7.2.2 Suppliers
Supplier power can derive from various factors such as geographical proximity and the fact that the
organisation requires goods of a certain standard in a certain time.

The bargaining power of suppliers can be eroded by IS in three ways.

(a) By increasing competition between suppliers. IS can provide a purchases database, which enables
easy scanning of prices from a number of suppliers.

(b) Suppliers' power can be shared. An example is using CAD to design components in tandem with
suppliers. Such relationships might be developed with a few key suppliers. The supplier and the
organisation both benefit from performance improvement.

(c) Suppliers can be integrated, in purely administrative terms, by a system of electronic data
interchange (EDI). This involves the creation of standardised electronic documents (such as order
forms) that can be transmitted between supplier and customer to save duplication of effort in terms
of getting the information into each computer system.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 121

7.2.3 Customers
The bargaining power of customers can be affected by using IS to 'lock them in'.

(a) IS can raise switching costs in both cash terms, and in terms of operational inconvenience). An
example is where IS provides a distribution channel for certain services (eg airline tickets). Another
example comes from the computer industry itself. Until the advent of the PC, most computers were
run with proprietary software in other words, you could not run ICL software, say, on IBM
mainframes. This made any switch in supplier (of hardware or software) too much trouble to
contemplate.

(b) Customer information systems can enable a thorough analysis of marketing information so that
products and services can be tailored to the needs of certain market segments.

7.2.4 Substitutes
IS has the following relationships to existing and substitute products and services.

(a) In some cases IS itself is the 'substitute'. PC-based word processing packages were originally
a substitute for typewriters, e-commerce is a substitute for a high street shop.
(b) Technology is the basis for new leisure activities (eg computer games. Alternatively, IT based
systems can imitate existing goods (eg electronic keyboards imitating pianos).
(c) Technology can add value to existing services by allowing more detailed analysis, by generating
cost advantages, or by extending the market.

7.2.5 Rivalry
IS can be used to compete – as a source of competitive advantage (see below).

Porter’s five forces is another important strategy for analysing an organisation’s environment.
Be prepared to use it again as it is part of the syllabus for Paper E2.

7.3 Using IS for competitive advantage

As the importance of information has increased, organisations have realised that information systems can
be used as a source of competitive advantage.

Where the majority of organisations in an industry use IS for competitive advantage, or the industry is
based on IS to a large extent, there may be a competitive necessity to use it.

COMPETITIVE ADVANTAGE is a profitable and sustainable position. It exists in the minds of customers, who
believe the value they will receive from a product or service is greater than both the price they will pay
KEY TERM and the value offered by competitors.

7.3.1 Generic strategies for competitive advantage

Porter proposes three generic strategies for achieving competitive advantage.

(a) Cost leadership means being the lowest-cost producer in the industry as a whole. A cost
leadership strategy seeks to achieve the position of lowest-cost producer in the industry.
(b) Differentiation is the exploitation of a product or service which the industry as a whole believes to
be unique. A differentiation strategy assumes that competitive advantage can be gained through
particular characteristics of a product or service.
(c) Focus involves a restriction of activities to only part of the market (a segment or niche) through:
(i) Providing goods and/or services at lower cost to that segment (cost-focus).
(ii) Providing a differentiated product or service to that segment (differentiation-focus).
122 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

Cost leadership and differentiation are industry-wide strategies. Focus involves segmentation – pursuing
within the segment a strategy of cost leadership or differentiation. Examples of how IS can support each
of these strategies are shown in the following table.

Strategy How IS can support the strategy

Cost-leadership By facilitating reductions in cost levels, for example by reducing the number of
administration staff required.
Allowing better resource utilisation, for example by providing accurate stock
information allowing lower 'buffer' inventories to be held.
Using IS to support just-in-time and advanced manufacturing systems.
Differentiation Differentiation can be suggested by IS, perhaps in the product itself or in the way it
is marketed. For example moving away from paper-based products to electronic.
Focus IS may enable a more customised or specialised product/service to be produced.
IS also facilitates the collection of sales and customer information that identifies
targetable market segments.

7.4 Porter's value chain

Porter analyses the various activities of an organisation into a value chain. This is a model of value
activities (which procure inputs, process them and add value to them in some way, to generate outputs
for customers) and the relationships between them.

The value chain is usually applied in relation to operations management. We are considering it briefly
here as it can be applied to IS strategy as well.

Value chain analysis can be used to assess the impact of IS, and to identify processes where it could be
used to add value. The activities and how IS can benefit them are described below.

7.4.1 Logistics
In both inbound logistics and outbound logistics IS can have an impact.

(a) Inbound logistics. The use of inventory control systems such as MRP, MRPII, ERP and JIT.

(b) Warehousing. The use of barcodes facilitates accurate inventory data.

(c) It is possible to create computer models, or virtual warehouses of inventory held at different
locations.

7.4.2 Marketing
Marketing and services can be made more effective by customer databases enabling market segmentation.

(a) Buying and analysing a mailing list is a more precise method of targeting particular groups of
consumers than television advertising.

(b) A variety of market research companies use IS to monitor consumers' buying habits.

(c) Supermarkets can use automated EPOS systems to have a precise hour-by-hour idea of how
products are selling to enable speedy ordering and replenishments.

Customer relationship management (CRM) systems can encourage closer customer relationships.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 123

7.4.3 Support activities

As far as support activities are concerned IS has some impact.

(a) Procurement. IS can automate some purchasing decisions. Paperwork can be saved if the
organisation's purchase systems are linked directly to the sales order systems of some suppliers (eg
by electronic data interchange).

(b) Technology development. Computer Aided Design (CAD) is, in a number of areas, an important
influence.

(i) Drafting. CAD produces engineer's drawings, component design, layout (eg of stores, wiring
and piping) and electronic circuit diagrams in complex systems.

(ii) Updating. It is easy to change design in CAD systems and to assess ramifications of any
changes. Some CAD systems have archive data (eg for reference).

(iii) CAD enables modelling to be checked without the necessity of producing working
prototypes. Some 'stress testing' can be carried out on the model.

(c) There is perhaps less impact on human resources. However, HR applications include the
maintenance of a skills database, staff planning, computer based training, time attendance
systems, payroll systems, pension systems.

7.5 IS and strategy – other writers

7.5.1 Ward and Griffiths

Ward and Griffiths suggested four ways that IS could be used for competitive advantage:

(a) Linking the organisation to customers or suppliers.

(b) Creating effective integration of the use of information in a value-adding process.
(c) Enabling the organisation to develop, produce, market and distribute new products or services.
(d) Giving senior management information to help develop and implement strategy.

7.5.2 Clegg
Clegg (2003) stated that an organisation’s information strategy is a plan for ensuring that information is
appropriate, accurate, available, timely and effective. A starting point for achieving this could be the
organisation reviewing its information for duplication or errors, or taking a ‘blank page’ approach and
simply deciding its information requirements from scratch.

He emphasised that information strategy should not be left in the hands of IT experts. It’s the managers
within the organisation that know what information they require.

7.5.3 Boomer
Boomer (2007) identified a number of issues relevant when planning information systems.

Strategic issues relevant when planning information systems:

 The corporate plan and the organisation’s priorities expressed in it

 How technology could be used to meet corporate objectives
 Trends in the use of IT in the organisations industry and in other industries

Tactical issues relevant when planning information systems:

 What skills and abilities do people within the organisation possess?

 How are information systems and IT resources managed? Is outsourcing used – and should it be?
 What is the budget and timescale?
124 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

Question 4.3 Five forces

Learning outcome B2(vi)

Using each of Porter’s five forces, identify and briefly explain five ways that information systems could be
used to create a competitive advantage for an organisation that manufactures wooden furniture for sale
through a chain of its shops. (10 marks)

Section summary
The ways in which IS can impact an industry according to Porter and Millar are, change the industry
structure, create new businesses and industries and be used to create competitive advantage.

Porter identified five competitive forces operating in a competitive environment.

Porter proposes three generic strategies for achieving competitive advantage, cost leadership,
differentiation and focus.

Value chain analysis can be used to assess the impact of IS, and to identify processes where it could be
used to add value.
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 125

Chapter Roundup
 The main stages in the implementation of a computer system are:

 Installation of the hardware and software.

 Testing.
 Staff training and production of documentation.
 File conversion.
 Changeover.

 User resistance is a key cause of information systems failure.

 Theories to overcome user resistance include:

 Lewin/Schein's unfreeze, move, refreeze

 Kotter and Schlesingers' six methods of dealing with resistance

 It is better for the organisation to prevent or minimise resistance occurring in the first place. Theories
aimed at achieving this include:

 Pace, manner and scope

 Commitment, co-ordination and communication

 After implementation the system should be evaluated to see if it is a success and whether there are any
lessons to be learned.

 Evaluation often takes the form of a cost-benefit review or performance measurement using metrics or
other measurable features of the system.

 A post-implementation review compares actual and expected performance levels and is a formal report
that should be compiled after a suitable period of time following implementation.

 Corrective Maintenance is carried out when there is a systems failure of some kind, for example a defect
in processing or in an implementation procedure. Its objective is to ensure that systems remain
operational.

 Perfective Maintenance is carried out in order to perfect the software, or to improve it so that processing
inefficiencies are eliminated and performance is enhanced.

 Adaptive Maintenance is carried out to take account of anticipated changes in the processing
environment. For example new taxation legislation might require changes to be made to payroll software.

 Four broad types of information systems outsourcing are ad-hoc, project management, partial and total.

 Examples of outsourcing arrangements include multiple sourcing, incremental approach, joint venture
sourcing, Application Service Providers (ASP).

 The ways in which IS can impact an industry according to Porter and Millar are, change the industry
structure, create new businesses and industries and be used to create competitive advantage.

 Porter identified five competitive forces operating in a competitive environment.

 Porter proposes three generic strategies for achieving competitive advantage, cost leadership,
differentiation and focus.

 Value chain analysis can be used to assess the impact of IS, and to identify processes where it could be
used to add value.
126 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

Quick Quiz
1 Which of the following is the final step in Lewin and Schien's three stage model of change?

A Refreeze
B Move
C Unfreeze
D Fix

2 Which of the following describes corrective maintenance?

A Maintenance carried out when there is a systems failure

B Maintenance carried out to perfect the system
C Maintenance carried out to adjust the system for changes in the processing environment
D Maintenance carried out to improve user-friendliness

3 How does a cost-benefit review differ from a cost-benefit analysis?

4 Which level of service provision by an IS outsourcing organisation is described below?

‘The vendor charges for access to an external processing system on a time-used basis.’

A Service bureaux
B Timeshare
C Facilities management
D Processing rental

5 Who developed value chain analysis?

A Lewin
B Schein
C Porter
D Clegg
PART B INFORMATION SYSTEMS 4: Systems implementation and business strategy 127

Answers to Quick Quiz

1 A The final stage in Lewin and Schien's three stage model of change is refreeze.

2 A Option B is perfective maintenance, C is adaptive maintenance, D is also perfective maintenance

3 The review uses actual data. The analysis relies on estimates.

4 B Timeshare is where the vendor charges for access to an external processing system on a time-used
basis.

5 C Porter developed value chain analysis.

Answers to Questions
4.1 Resistance to change

A Education and communication is effective where the cause of the resistance is lack of information about
the change.

4.2 Cost-benefit review

Direct benefits might include reduced operating costs, for example lower overtime payments.

Indirect benefits might include better decision-making and the freeing of human 'brainpower' from routine tasks
so that it can be used for more creative work.

Development costs include systems analysts' costs and the cost of time spent by users in assisting with fact-
finding.

Implementation costs would include costs of site preparation and costs of training.

Running costs include maintenance costs, software leasing costs and on-going user support.

4.3 Five forces

The following are just some ideas that are possible, you may have thought of others.

Potential entrants
Technology can reduce the labour cost of manufacturing and speed up the production process so that substantial
economies of scale are created. This may mean that new entrants cannot compete with the organisation on cost.

Suppliers
The organisation can store price, and other data, regarding suppliers on a database. This will allow it to quickly
scan which suppliers provide the best deal, increasing the competition between them and therefore reducing
their bargaining power.

Customers
The organisation can store marketing data that it collects from its customers on a database. This information can
be analysed and used to improve the targeting of the marketing effort, therefore reducing customer bargaining
power.

Substitutes
The organisation can develop a website and an in-store product database that allows customers to analyse and
compare the products that are on offer. For example by colour, size and style. Such value-added activities can
help reduce the threat of substitutes.
128 4: Systems implementation and business strategy PART B INFORMATION SYSTEMS

Industry rivalry

Porter proposed three strategies for competitive advantage. Cost leadership, differentiation and focus.

We have already seen how IS can help the organisation compete on cost. Differentiation can be achieved
through the provision of the website and in-store database – not all of the organisation’s competitors will provide
this.

IS can also help focus the organisation’s activities by allowing it to trade under two different brands on the
Internet. For example one brand could compete on cost – this would sell cheaper products. Another brand could
compete on product differentiation such as stylish or luxury products. Each brand could have a separate website
and be marketed differently, even though the organisation that manufactures their products is the same.

Now try this question from Number Level Marks Time

the Exam Question Bank 4 Examination 25 45 mins
OPERATIONS MANAGEMENT

Part C

129
130
OPERATIONS MANAGEMENT AND
THE ORGANISATION

In this chapter we begin our study of organisation structures itself and its relations with
operations management by discussing what it suppliers, to meet the needs of the customer.
is and the important role it plays in
Finally, we look at the issue of sustainability in operations
organisations.
management. This is a recent development that many
We then continue by considering an organisation's broad organisations are under pressure from customers to
operations strategy. This is concerned with how the address.

topic list learning outcomes syllabus references ability required

1 Operations management C1(a), C1(c) C1(i), C1(iii), C1(iv) comprehension
2 Operations strategy C1(a), C1(b), C2(b), C1(i), C1(ii), C1(iii), comprehension
C2(e) C2(v), C2(xii)
3 Sustainability in operations management C1(d) C1(v) comprehension

131
132 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

1 Operations management

Introduction
The overall objective of operations is to use a transformation process to add value and create competitive
advantage. It involves taking input resources and transforming them into outputs of products or services
for customers. Operations management involves the design, implementation and control of these
processes.

OPERATIONS MANAGEMENT is concerned with the transformation of 'inputs' into 'outputs' that meet the
needs of the customer.
KEY TERM

1.1 The operations function

Organisations will invariably have an operations function. The operations function might be considered as
one of the three traditional 'core functions'.

(a) Operations. This is responsible for fulfilling customer orders and requests through production of the
goods or services, and for delivery of products or services to the customer.

(b) Marketing and sales. This is responsible for identifying customer needs and perhaps more
significantly, for communicating information about the organisation's products or services to
customers so as to procure sales orders.

(c) Product and service development. This is responsible for designing new products and services that
will meet customer needs, to generate sales orders.

There are also support functions within an organisation that help the core functions to operate effectively.
Traditionally, support functions might include accounting, HR and IT. However, what is actually a core
function or a support function will depend on the particular organisation. For example, organisations that
rely heavily on technology (eg the use of computer-aided manufacturing) may consider IT a core function.

The functions within an organisation overlap, and for any particular task or process, input is often
required from more than one core function or support function.

The core functions: examples

Publishing company Hotel
Operations Editing Reservations
Printing Housekeeping
Distribution Building maintenance
Catering
Marketing and Advertise through trade magazines Advertise across media
sales Book fairs Liaise with tour operators, travel agents and
Negotiate sale of rights booking agents
Sell into bookshops and other outlets
Product/ Commission new titles Develop accommodation offerings, creative
service Vet submitted scripts ambience, catering and ancillary facilities
development such as gym, business centre, conference
Develop new media forms, eg Internet
facilities, entertainment etc
delivery
Devise new packages
Identify new locations

At its simplest, operations management tries to ensure that organisations are run as efficiently as possible.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 133

1.2 Mintzberg's operating core

Henry Mintzberg suggested one way of looking at organisations. His theory published in 1983 suggested
organisations are made up of five parts.

Five parts of an organisation (Mintzberg)

Strategic
Apex

Support
Technostructure Staff
Middle
Line

Operating Core

Mintzberg's five basic parts of an organisation

Part Comment
Operating core People involved producing products and services by transforming inputs such
as stock using operations such as manufacturing.
Middle line The hierarchy linking the strategic apex to the operating core. Usually
comprises first line supervisors up to senior managers.
Strategic apex Formulates and implements strategy – and if applicable links the organisation
to those who own or control it.
Technostructure Co-ordinates work through standardising processes, outputs and skills, eg HR
managers includes expert advice, research and work study.
Support staff Provide services and assistance outside the work flow, eg catering, cleaning,
PR.
134 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

1.3 The transformation process model

An operation takes input resources and, through one or more processes, transforms these into outputs.
Input resources are transformed in the process into a product or service that satisfies customer needs.
This generalised concept of the transformation process model applies to all processes and may be
depicted as follows.

Transformation processes

The transformation process could be a physical transformation, a change in nature or form (for example,
a transformation of data into information), a change in location, a change in ownership, or, in the case of
customers, a psychological change (eg giving enjoyment).

Inputs to the transformation process can be categorised as either transformed resources or transforming
resources.

(a) Transformed resources are manipulated and formed into a different condition by the process.
These resources can be materials, information or customers themselves.

(b) Transforming resources are the resources that are used to alter the condition of the transformed
resources. These consist of the work force of the organisation and facilities such as buildings,
equipment and vehicles.

Here are some practical examples of the transformation process.

(a) In a manufacturing process, inputs of raw materials and components are manipulated into a
finished product. The output is the product. This is then distributed to the customer.

(b) In the legal profession, a client seeks clarification about a legal problem. A lawyer holds a meeting
with the client and provides the necessary advice. The output is an informed client.

(c) In the rail industry, rail service providers take customers, and use their work force and facilities (eg
trains) to deliver the customers from one location to another. The output is a re-located customer.

(d) In banking, instructions from a customer (information) are processed using the facilities of the
bank, and the instructions are carried out, for example by the transfer of money. The output is the
completed transfer.

(e) In the entertainment industry, the customer might be provided with entertainment input such as a
comedian telling a joke. The output is an entertained customer.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 135

1.3.1 Product and service outputs

Many operations produce a mixture of product and service outputs. Remember also that in many
countries the service economy may be more significant than the manufacturing economy. Here are some
examples of the close interrelationships between service and manufacturing operations.

(a) The manufacture of machine tools is primarily concerned with the output of products. However,
the organisation will also provide training and technical support services to customers.

(b) An education and training organisation might provide lectures, tutorials and workshops. The
service may include the provision of products in the form of study notes or books. It might also
provide an online helpline.

(c) A restaurant provides products in the form of food and drink. However, for the customer an
essential ingredient of going to a restaurant is usually the overall dining experience that includes
the enjoyment obtained from the service style, entertainment and general ambience.

1.3.2 The Four Vs of operations

Another method of analysing the differences between transformational processes is by using the four Vs.

V Description
Volume The volume of units produced. High volume usually means capital intensive, low
volume usually means labour intensive.
Variety Whether the operation handles a number of different inputs or produces a range
of different outputs.
Variation in Demand for same operations may be seasonal or regular peaks and dips in
demand demand may be experienced.
Visibility The degree to which business operations are visible to the customer.

Section summary
Operations is a core part of any organisation.

The transformational process model describes how inputs are converted through processes into outputs.

2 Operations strategy

Introduction
Organisations may employ one or more of a number of operations strategies to improve their processes
and as a source of competitive advantage over competitors. Common strategies involve what is known as
the value chain and supply chain management. This is the view that an organisation is one link in a
chain that aims to turn raw materials into what the customer wants. As a result all links in the chain
benefit.
136 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

2.1 The value chain

VALUE CHAIN. 'Sequence of business activities by which, in the perspective of the end-user, value is added
to the products or services produced by an entity.' (CIMA Official Terminology)
KEY TERM
In Porter's analysis, business activities are not the same as business functions.

(a) Functions are the familiar departments of a business (eg production function, the finance function)
and reflect the formal organisation structure and the distribution of labour.

(b) Activities are what actually goes on, the work that is done. Activities are the means by which an
organisation creates value in its products – sometimes referred to as value activities. Activities
incur costs and provide a product or service which earns revenue.

An example should make this clear. An organisation needs many inputs of resources to function. It needs
to secure resources from the environment. This activity can be called procurement. However,
procurement will involve more departments than purchasing, for example the accounts department will
certainly be involved and possibly production and quality assurance.

Organisations create value for their buyers by performing these activities. The ultimate value a firm
creates is measured by the amount customers are willing to pay for its products or services above the cost
of carrying out value activities. A business is profitable if the realised value to customers exceeds the
collective cost of performing the activities.

There are two points to note here.

(a) Customers purchase value, which they measure by comparing an organisation's products and
services with similar offerings from competitors.

(b) The business creates value by carrying out its activities either more efficiently than other
businesses, or combined in such a way as to provide a unique product or service.

Porter’s value chain is a model of value activities (which procure inputs, process them and add value to
them in some way, to generate outputs for customers) and the relationships between them.

Porter’s Value Chain

PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 137

2.1.1 Primary activities

Porter distinguished between primary activities and support activities.

Primary activities are those directly related with production, sales, marketing, delivery and services.

The diagram shows five primary activities.

(a) Inbound logistics are those activities involved with receiving, handling and storing inputs to the
production system.

(b) Operations are those activities which convert resource inputs into a final product. In a
manufacturing business, this is relatively easy to identify as the factory. In a service company,
operations include those activities which make up the basic service.

(c) Outbound logistics are those activities relating to storing the product and its distribution to
customers.

(d) Marketing and sales are those activities that relate to informing customers about the product,
persuading them to buy it, and enabling them to do so.

(e) After-sales service includes activities such as installing products, repairing them and providing
spare parts.

2.1.2 Support activities

Support activities are those which provide purchased inputs, human resources, technology and
infrastructural functions to support the primary activities.

(a) Procurement consists of those activities which acquire the resource inputs to the primary activities
(eg purchase of materials, subcomponents, equipment).

(b) Technology development (in the sense of apparatus, techniques and work organisation). These
activities are related to both product design and to improving processes and/or resource utilisation.

(c) Human resource management is the activities of recruiting, training, developing and rewarding
people.

(d) Firm infrastructure. The systems of planning, finance, quality control and management are
activities which Porter believes are crucially important to an organisation's strategic capability in all
primary activities.

2.1.3 Other elements

Furthermore, in addition to the categories described above, Porter identifies three further types of activity.

(a) Direct activities are concerned with adding value to inputs.

(b) Indirect activities enable direct activities to be performed (eg maintenance, sales force
administration).

(c) Quality assurance. This type of activity monitors the quality of other activities, and includes:
inspection, review and audit (eg the quality of the financial records).

Linkages connect the interdependent elements of the value chain together. They occur when one element
of the value chain affects the costs or effectiveness of another. They require co-ordination.

(a) More costly product design, or better quality production, might reduce the need for after-sales
service.

(b) To deliver goods on time requires smooth functioning of operations, outbound logistics and service
activities such as installation.
138 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

Porter’s Value Chain is a key theory which will crop up in other papers, for example E3 and
P2.

Question 5.1 Activities

Learning outcome C1(i)

Which of the following is a support activity in the value chain?

A Inbound logistics
B Human resource management
C Marketing and sales
D Service (2 marks)

2.2 The value system

Activities that add value do not stop at the organisation's boundaries. For example, when a restaurant
serves a meal, the quality of the ingredients – although they are chosen by the cook – is determined by
the grower. The grower has also added value, and the grower's success in growing produce of good
quality is as important to the customer's ultimate satisfaction as the skills of the chef. Consequently, a
company's value chain is connected to what Porter describes as a value system.

Distributor/retailer
value chain

Organisation's Customer
value value
chain chain
Supplier
value
chain

As well as managing its own value chain, a business can secure competitive advantage by managing the
linkages with its suppliers and customers. A company can create competitive advantage by making best
use of these links. An example is a Just-in-Time system where close integration of the organisation's
operations with those of its suppliers is essential.

2.3 Purchasing and supply chain management 05/10

SUPPLY CHAIN MANAGEMENT is concerned with the flow of goods and services through the organisation
with the aim of making the firm more competitive. (Cousins)
KEY TERM
The nature of purchasing has changed dramatically over recent years. Historically, it was viewed as a
clerical function related to the day-to-day purchase of goods. High importance was placed on price,
quality and timely delivery. However, this has changed in recent years.

Purchasing today, in most organisations, is viewed as a strategically important function that impacts
significantly on organisational performance. A degree of control is sought over the supply process and
businesses actively manage the number of suppliers they use, implement outsourcing arrangements as
necessary and consider developing strategic partnerships where appropriate.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 139

2.3.1 What caused the need for closer supply chain links?
Christopher (2005) identified a number of factors.

 Shorter product life cycles requiring more efficient supply pipelines

 Increasingly global supply chains requiring greater coordination
 A move towards more flexible organisations that partner with others (organisational integration)
 More demanding customer service standards

2.3.2 Effective supply chain management

Supply chain management is concerned with the flow of goods and services through the organisation.
Ultimately, the goal is to contribute to customer satisfaction.

Porter recognised that management of the supply chain and supply network could be a source of
competitive advantage. He referred to the position of firms in supply chains and networks in relation to
their proximity to the customer. If a firm is closer to the customer than another, it is ‘downstream’ of it. If
a firm is further away from the customer than another, it is ‘upstream’ of it.

Supply chains today must be responsive and reliable. The relationships between members must
demonstrate a high degree of mutual understanding. Integration between the organisation and other
chain members, both upstream and downstream, should be facilitated by integrated information systems.

2.3.3 Reck and Long 05/11

Reck and Long (1988) devised a model that aimed to provide an insight into the evolution of the
purchasing function. Their strategic positioning tool identified a four-phase development of purchasing
within organisations.

The phases of Reck and Long's strategic positioning tool

Phase Comment
1 Passive  Purchasing reacts to requests from other departments.
 The focus is on efficient transaction processing.
2 Independent  A more professional approach to purchasing is taken.
 During this phase, the importance of negotiation with suppliers to securing
the best prices for individual products/services purchased is recognised.
 Often includes IT improvements and the creation of a purchasing manager
position to manage supplier negotiations.
3 Supportive  The potential for purchasing to support wider organisational goals is
recognised.
 This phase is often characterised by a centralised purchasing department
with organisation-wide buying policies and systems.
 The emphasis is co-ordination and compliance with centrally negotiated
contracts.
 The importance of careful supplier selection is recognised.
 Policies and procedures for supplier management are developed.
140 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

The phases of Reck and Long's strategic positioning tool

Phase Comment
4 Integrative  Purchasing is now fully integrated in the major business activities of the
organisation.
 Pro-active purchasing strategies are developed and followed.
 Purchasing is part of the firm's strategic planning process and purchasing
strategy is aligned with corporate goals and strategy.
 The alignment of purchasing strategy with overall organisational goals and
strategy often leads to new requirements in suppliers' performance and
capabilities.
 Suppliers are viewed as partners and supplier management is viewed as
relationship management.
 Today, closely linked or joint communication and information systems
would facilitate this relationship.

2.3.4 Cousins
Cousins (2000) conducted a 12-month research project to investigate the level of strategic maturity in
the purchasing function of UK/European companies. In particular, the research aimed to establish the
level of collaboration between leading UK companies (ie suppliers) and their major customers. The
research looked at a range of inter-connected aspects considered important when looking at how an
organisation deals with relationships relevant to overall strategy and supply strategy.

These aspects are shown in the diagram below.

Cousin's Strategic Supply Wheel

The research revealed that all of the aspects identified and shown in the Strategic Supply Wheel are
inter-connected. Cousins stated that it was clear that a focus on anyone area (eg relationship
development) would be to the detriment of another area (eg performance measures). Organisations need
to balance these resources and issues.

The research also examined the 'relationship type', using a simple classification of 'opportunistic' (low
level of co-operation with the supplier) versus 'collaborative' (high level of co-operation). The results
showed that the more collaborative the relationship the greater the degree of strategic alignment required
(between overall strategy and purchasing strategy).
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 141

An ‘opportunistic’ (or ‘competitive’) approach is one where suppliers are selected on price and is based
on the power and threat of the purchasing organisation to switch suppliers and insist of heavy penalty
clauses in supply contracts. There is little trust between the parties and very little information passes
between them (as the buyer seeks to retain as much power in the relationship as possible). This means
that the true potential of the arrangement can never be exploited.

A ‘collaborative’ approach is based on the customer and supplier working together to provide the a
package that best meets the needs of the market. The end-result should be that both parties increase
their market share. Such relationships are long-term partnerships where both parties work together when
designing products and overcoming problems. In this regard, the purchasing organisation may offer sole
supply contracts in return for the supplier’s commitment.

2.4 Supply chain networks

A SUPPLY CHAIN NETWORK is an interconnecting group of organisations which relate to each other through
linkages between the different processes and activities involved in producing products/services to the
KEY TERM ultimate consumer.

Increasingly, organisations are recognising the need for and benefits of establishing close links with
companies in the supply chain. Historically, businesses in the supply chain have operated relatively
independently of one another to create value for an ultimate customer. Independence was maintained
through holding buffer stocks and managing lead-times. There was very little control over other channel
members, and no wider perspective on the system as a whole.

Market and competitive demands are now, however, compressing lead times and businesses are reducing
inventories and excess capacity. Linkages between businesses in the supply chain must therefore become
much tighter. This new condition is shown in the 'Integrated supply chain' model (the second model in
the following diagram).

There seems to be increasing recognition that, in the future, it will be whole supply chains which will
compete and not just individual organisations – we saw earlier how Porter's value chain achieves this.

Traditional and integrated supply chain models

142 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

The aim is to co-ordinate the whole chain, from raw material suppliers to end customers. The chain
should be considered as a network rather than a pipeline - a network of vendors support a network of
customers, with third parties such as transport businesses helping to link the companies. In marketing
channels, organisations have to manage the trade-off between the desire to remain independent and
autonomous, and the need to be interdependent and co-operative.

INDEPENDENCE: each channel member operates in isolation and is not affected by others, so maintaining
a greater degree of control.
KEY TERMS
INTERDEPENDENCE: each channel member can affect the performance of others in the channel.

If the supplier 'knows' what its customers want, it does not necessarily have to guess, or wait until the
customer places an order. It will be able to better plan its own delivery systems. The potential for using
the Internet to allow customers and suppliers to acquire up-to-date information about forecasted needs
and delivery schedules is a recent development, but one which is being used by an increasing number of
companies. Some supply chain relationships are strengthened and communication facilitated through the
use of extranets (intranets accessible to authorised outsiders).

2.4.1 Implications for supply chain management

Supply chain management involves optimising the activities of companies working together to produce
goods and services. The trend towards closer links with suppliers and the development of supply chain
networks has implications for supply chain management.

 Reduction in customers served. For the sake of focus, companies might concentrate resources on
customers of high potential value.
 Price and inventory co-ordination. Businesses co-ordinate their price and inventory policies to
avoid problems and bottlenecks caused by short-term surges in demand, such as promotions.
 Linked computer systems. Closer links may be facilitated through the use of Electronic Data
Interchange (EDI), for example to allow paperless communication, billing and payment and
through the use of a computer extranet.
 Early supplier involvement in product development and component design.
 Logistics design. Hewlett-Packard restructured its distribution system by enabling certain product
components to be added at the distribution warehouse rather than at the central factory. For
example user-manuals which are specific to the French market would be added at the French
distribution centre.
 Joint problem-solving.
 Supplier representative on site.

The business case for supply chain management is the benefit to all the participants in terms of the
performance objectives of speed, dependability and cost.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 143

Performance objective Example

Speed Plumbers need to manage their supply chains to ensure they are able to get
hold of parts such as water tanks, boilers, valves etc so they can respond
quickly to customer emergencies.
Dependability A mail order business promises delivery within 10 days of receipt of order. It
will need to ensure good supply chain management to fulfil its promise.
Cost A company providing mortgages will need to manage its supply chain with
great skill with one of its objectives being to obtain the cheapest sources of
finance in keeping with the profile and risks of their mortgage lending.

Businesses that are perceived by customers and potential customers to excel at delivering the desired
performance objectives are likely to derive a competitive advantage.

2.5 Demand networks

Demand networks are a recent evolution of supply chains. The key difference between them is how they
are formed.

In a traditional supply chain, producers form links between themselves in order to produce a product that
the customer wants at an appropriate selling price and cost to the producer. The chain is formed to 'push'
KEY POINT
the product out into the market.

By contrast, products produced by demand networks are 'pulled' into existence in response to demand
signals. Organisations within a demand network share information and collaborate to produce a product
or service the market is demanding.

A demand network is the result of companies evolving internally (or within their departments) and
externally (with their partners). This evolution is a four-stage process.

Reacting
Departments optimise their operations to meet demand. Reacting organisations cannot
sense demand or tie it into corporate strategy – they simply react to market conditions.

Anticipating
Anticipating companies have developed internally to respond to long and short-term
demand. They often use lean production or six sigma (see later) to bring order to their
operations. They can anticipate upstream demand (the demand which is coming to them)
but not downstream demand.

Collaborating
Collaborating organisations have established external relationships with business partners
that allow intelligence to be gathered on downstream demand. This allows better
forecasting and adjustment of plans.

Orchestrating
Supply and demand have evolved into a flow of information throughout the network.
Companies plan new products and product life cycles, and can begin to influence demand
patterns. Production decisions are based on costs and profitability.
144 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

Demand network evolution

To create competitive advantage, organisations within a demand network have to manage three factors:

 Alignment – of shared incentives

 Agility – to respond to demand quickly
 Adaptability – to adjust the structure of the supply chain to meet demand

Exam alert
Exam questions may require you to consider a range of operations strategies and decide which is the most
suitable in a given scenario.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 145

2.6 Supply portfolios and sourcing strategies

Organisations may use a number of suppliers for their raw materials, and there are a range of possible
strategies open to an organisation when deciding who they will purchase their supplies from. For example

 Certain suppliers may produce a better quality of product.

 Some suppliers may be cheaper on price.

 Suppliers may also be selected from a number of countries to guard against the risk of supplies
from one country being affected by circumstances such as bad weather.

 Suppliers are of different sizes so buyers can match order sizes to appropriate suppliers (ie small
suppliers may not be suitable for larger orders).

 Expertise varies between suppliers so building relationships with a number of them can help the
buyer make more informed choices.

The mix of suppliers should be optimised so that the organisation maximises the benefits they offer and
minimises any risks involved in supply – the result is a supply portfolio.

The following strategies may be followed when deciding on a supply strategy.

Supply sourcing strategies

Option Comment
Single Description
 The buyer chooses one source of supply.
Advantages
 Stronger relationship with the supplier.
 Possible source of superior quality due to increased opportunity for a supplier quality
assurance programme.
 Facilitates better communication.
 Economies of scale.
 Facilitates confidentiality.
 Possible source of competitive advantage.
Disadvantages
 Vulnerable to any disruption in supply.
 The buyer is dependent on the supplier.
 Supplier power may increase if no alternative supplier.
 The supplier is vulnerable to shifts in order levels.
Multiple Description
 The buyer chooses several sources of supply.
Advantages
 Access to a wide range of knowledge and expertise.
 Competition among suppliers may drive the price down.
 Supply failure by one supplier will cause minimal disruption – it is easy to switch
between suppliers.
Disadvantages
 Not easy to develop an effective quality assurance programme.
 Suppliers may display less commitment.
 Economies of scale are neglected.
146 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

Supply sourcing strategies

Option Comment
Delegated Description
 A supplier is given responsibility for the delivery of a complete sub-assembly. For
example, rather than dealing with several suppliers a 'first-tier' supplier would be
appointed to deliver a complete sub-assembly (eg a PC manufacturer may delegate the
production of keyboards).
Advantages
 Allows the utilisation of specialist external expertise.
 Frees-up internal staff for other tasks.
 The purchasing entity may be able to negotiate economies of scale.
Disadvantages
 Quality control is difficult to maintain.
 Loss of confidentiality if products use trade secrets.
 Competitors may utilise the same external organisation so it is unlikely to be a source of
competitive advantage.
Parallel Description
 Parallel sourcing involves mixing/combining the other three approaches to maximise the
benefits of each.
Advantages
 If used correctly should provide an efficient/effective strategy.
 Supplier failure will not halt production.
 Price competition is created between suppliers.
Disadvantages
 Can be complicated to manage.
 Quality control is difficult to maintain.

Strategic supply chain management is also part of the Paper E3 syllabus.

Question 5.2 Sourcing and supplier performance

Learning outcome C2(xii)

(a) List four methods organisations use to source materials. (4 marks)

(b) Which method would you recommend to an organisation whose product is based upon a trade
secret and relies on quality for competitive advantage? (1 mark)

(c) List four criteria that could be used to assess supplier performance. (Hint: Come up with these
yourself based on what you have read and your own experience when you order a product or
service.) (4 marks)

2.7 Information flows across supply chains and networks

For supply chains and networks to operate successfully information must flow smoothly between all
participating organisations. One way of analysing and representing information flows is with the use of
process maps. Process maps are a diagrammatic representation of a process. A number of techniques or
notations may be used to produce a process map.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 147

2.8 Process mapping

Process mapping aims to identify and represent the steps and decisions involved in a process, in
diagrammatic form.

Process maps:

 Describe the flow of materials, information and documents

 Display the tasks contained within the process
 Show that the tasks transform inputs into outputs
 Indicate the decisions that need to be made
 Demonstrate the relationships and dependencies between the process steps

There are many types of process maps (also known as process charts) and many charting conventions.
Two common types of process map are:

 A ‘basic’ flowchart – which provides a basic 'birds eye' view

 A deployment chart – which provides an overview and also indicates where or by whom actions
are performed

Process maps should be simple enough for the process under review to be understood by almost anyone,
even someone unfamiliar with the process.

2.8.1 Why process map?

Process maps are important for several reasons.

(a) Changing systems and working methods without understanding the underlying processes can lead
to costly mistakes. It can also create conditions that make it difficult for staff to work effectively.

(b) If organisations don’t understand a process they will not be able to manage it effectively – and if
they cannot manage a process they cannot improve it.

(c) Process mapping enables businesses to clearly define current processes, identifying problem areas
such as bottlenecks, delays or waste. This knowledge provides a solid basis from which to develop
solutions and plan new improved processes.

(d) Process mapping enables an organisation to:

 Establish what is currently happening and why

 Measure how efficiently the process is working

 Gather information to understand where waste and inefficiencies exist and their impact on
employees, customers and/or partners

 Develop new improved processes to reduce or eliminate inefficiency.

2.8.2 Process map types and symbols

Two common types of process map are a basic flowchart and a deployment flowchart.

(a) Basic process map flowchart

Process map flowcharts set out the sequence of activities and decision points. They illustrate the
main steps and decisions in the process. Labels showing the type and level of staff doing each step
can be added if required.

(b) Deployment process map flowchart

Deployment process map flowcharts are similar to basic process maps, but also show who does
what, including interactions between the parties involved. This type of chart is sometimes referred
to as a ‘swim lane’ chart – as the page is divided into vertical lanes for each person or party
involved.
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2.8.3 Process map flowcharting symbols

Below are examples of commonly used flowcharting symbols. You should remember though that different
people and organisations may use different symbols, or may use only some of the symbols below. Factors
such as the complexity of the process being modelled and simple personal preference play a part.

Flowcharting symbols

Start/End

This symbol marks the starting or ending point of the system.

Action or
process

A box can represent a single step (‘add two cups of flour’), or an entire sub-process
(‘make bread’) within a larger process.
Document

A printed document or report. This symbol is not always used – it depends upon the level
of detail required in the model.

Decision

A decision or branching point. Lines representing different decisions emerge from

different points of the diamond.
Input/
Output

Represents material or information entering or leaving the system, such as customer

order (input) or a product (output). Again, the use of this symbol is not consistent – some
people may identify a customer placing an order at a retail counter as an action – others
may identify it as Input.
Flow

This arrow indicate the sequence of steps and the direction of flow.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 149

2.8.4 Constructing a process flowchart

Maps are most-easily produced using relatively specialised software, for example Microsoft Visio. General
purpose software packages such as Word, Excel and PowerPoint can also be used.

Organise the sequence out by working down rather than across.

Having thought through the main 'steps' of the process, flowchart them in the sequence they
are performed.

Use rectangles for 'tasks' and diamonds for ‘decisions’. Use connecting arrows between
boxes to represent the direction of the sequence.

Concisely describe each task or decision in its own box. Boxes may be numbered and a key
provided where the activity is described in more detail.

If the process includes decision points, this will normally imply some 'return-routing' causing
some boxes to have more than one input. ‘Return routing’ or ‘loops’ often indicate an
inefficiency or waste.

Decisions usually (but not always) pose questions answerable by ‘Yes’ or ‘No’. Structure
questions so that the preferred answer is 'Yes'.

Conventions include drawing the 'Yes' route out of the bottom of the diamond (ie normal
flow downward through the chart) and the 'No' route as a line to the side of the box).
150 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

2.8.5 A simple process flowchart

2.8.6 Constructing a deployment flowchart

Deployment flowcharts include a ‘department’ or ‘unit’ dimension along the top of the chart. They may
include individuals, groups, departments, agencies, organisations, functions etc – whatever 'units' involved
in the process.

The following should be considered when constructing deployment flowcharts:

 Draw vertical lines to separate the functional boundaries.

 When the flow moves from one function to another, this is ideally denoted by a horizontal line.

 Apart from the horizontal moves between functions, aim when possible to sequence activities from
top to bottom.

 Always connect symbols with arrows indicating the direction of flow.

PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 151

2.8.7 A simple deployment flowchart

It may be useful to also use the D symbol to indicate any delays in the process, particularly at the
boundaries between agencies or sections.

2.9 Process design

Process mapping is also often used to build a prototype model when designing organisational processes.

Bowhill (2008) saw process design as a way of highlighting inefficiencies and designing improved
processes that ultimately lead to increased customer satisfaction.

An important technique that an organisation can use to identify inefficiencies is through benchmarking.

2.9.1 Benchmarking
Benchmarking is the analysis of performance compared with a similar activity elsewhere. Types of
benchmarking include:

 Internal benchmarking – comparison against the best elsewhere in the organisation

 Competitive benchmarking – comparison against the best elsewhere in the industry
 Inter-industry benchmarking – comparison against the best functional area in any industry

Other management techniques covered elsewhere in this book could be used to improve processes, for
example supply chain management, TQM, Kaizen and Business Process Re-engineering.
152 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

2.10 Operations strategy – Brown

Brown (2001) identified six items to consider when devising an organisation's operations strategy.

Item Comment
Capability required What is it that the organisation wants to 'do' or produce?
Range and location of operations How big and/or widespread does the organisation want to be?
Investment in technology How will processes and production be performed?
Strategic buyer-supplier relationships Who will be key strategic partners?
New products/services How long will the business be able to keep doing what it
does? What are the expected product life-cycles?
Structure of operations How will staff be organised and managed?

2.11 General points

Operations strategy theories are simply illustrations of approaches to operations strategy formulation. In
broad terms, strategy formulation in practice will include many of the following concepts.

(a) Setting operational objectives that are consistent with the organisation‘s overall business strategy.

(b) Translating business strategy or marketing strategy into operations strategy, by means of
identifying key competitive factors.

(c) Assessing the relative importance of different competitive factors.

(d) Assessing current operational performance by comparison with the performance of competitors.

(e) Using the idea of a clean-slate or 'green-field' approach to strategy selection. Managers are asked
to consider how they would ideally design operations if they could start again from scratch. The
ideal operations design is then compared with actual operations, and important differences
identified. Strategy decisions are then taken to move actual performance closer towards the ideal.

(f) Formulating strategy could be based on other types of gap analysis, such as comparing what the
market wants with what the operation is actually achieving, and taking decisions aimed at closing
the significant gaps.

(g) Emphasising the iterative process of strategy selection. Strategies should be continually reviewed,
refined and re-developed through experience and in response to changes in the environment.

Section summary
Porter saw organisations as value chains that are made up of different processes. A competitive
advantage can be gained by ensuring these processes are efficient.

Organisations can become part of a larger supply chain. They purchase from suppliers and sell to other
organisations which are buyers. Eventually raw materials are converted into what the end-customer
wants.

Supply chains are a source of competitive advantage as each organisation works towards a common goal.

Demand networks are an evolution of supply chains. They are formed by demand acting as a stimulus to
produce a product.

Supply portfolios are the mix of suppliers selected by an organisation to balance the benefits and risks
involved in relying on them.

Process maps can be used to present the processes involved in supply chains and networks.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 153

3 Sustainability in operations management

In relation to the world's resources, sustainability has been defined as ensuring that development meets
the needs of the present without compromising the ability of future generations to meet their own needs.
KEY POINT

For organisations, sustainability involves developing strategies that balance environmental, economic and
social needs. The eventual aim is that the organisation only uses resources at a rate that allows them to
be replenished, and that emissions of waste are at a level the environment is able to absorb.

3.1 Sustainability 11/11

SUSTAINABILITY is a long-term programme involving a series of sustainable development practices, aimed
at improving organisational efficiency, stakeholder support and market edge.
KEY TERM Goldsmith and Samson (2004)

Let’s examine three aspects of Goldsmith and Samson’s definition above.

3.1.1 Sustainability and efficiency

Sustainable efficiency practices an organisation could pursue include reducing waste, using less energy
and recycling.

3.1.2 Sustainability and stakeholder support

Sustainable practices that might gain stakeholder support include reducing greenhouse gas emissions,
employee cycle schemes, encouraging employee flexible working (reduce commuting), reduced business
travel, utilise technology eg web conferencing. and sourcing from green suppliers.

3.1.3 Sustainability and market edge

Sustainable practices that could provide ‘market edge’ include innovation, supply chain improvements,
and research and development (eg greener motor vehicles).

3.2 Sustainability considerations

Five sustainability considerations relevant to operations management are:

3.2.1 Sustainable for whom

This issue concerns which species (other than humans) are to be sustained, the level of world population
that should be sustained and the needs of developing countries. An operations management consideration
is whether organisations should source products from developing nations or look to the tried and tested
industries of developed countries.

3.2.2 Sustainable in what way

This concerns what sustainability is about, is it about the environment, employees or economic factors?

(a) Ecological sustainability concerns the preservation of the environment so it can function as
naturally as possible. The operations management issue is whether organisations should continue
production processes which are harmful to the environment, or should they look for other less
harmful (but possibly more expensive) alternatives?
154 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

(b) Social sustainability is about personal growth and development. For organisations the issue is
whether or not employees should be treated like robots by requiring them to perform repetitive
tasks, or should they be given scope to develop their abilities and perform a wide range of
production roles?

(c) Economic sustainability is about producing goods and services that people want whilst maximising
the organisation’s profitability. The operations issue here is to ensure the organisation produces
products and services that its customers want whilst minimising waste to maximise profit.

3.2.3 Sustainable for how long

The issue here is generational equity. This is about ensuring future generations can enjoy the same
environmental conditions as the current generation, and that social welfare is maintained or increased.
The main operations management concern is the use of natural materials. As the world has finite
resources, production levels cannot be sustained forever. Therefore organisations need to plan their use of
resources carefully, especially the rate by which they use them up. They should also look for new ways of
producing the products that people want, as well as looking for sustainable resources.

3.2.4 Sustainable at what cost

There is a balance to be found between preserving the environment and natural resources with the need
to produce goods and services. The operations management issue concerns sourcing materials which
balance the need for sustainability with the need to produce goods and services. For example,
organisations can look at substituting some raw materials with sustainable alternatives or look to produce
products using more sustainable processes.

3.2.5 Sustainable by whom

Ideally the whole world will take responsibility for sustainability, but this is unlikely due to a lack of
meaningful global international agreements. The operations management issue is that organisations must
take on responsibility for sustainability themselves rather than waiting for legal regulation.

3.3 Impacts of sustainability

Sustainability may impact an organisation in several ways. These include:

Quality – by attempting to reduce waste and rework, an organisation may also improve the efficiency of
its production process and improve the quality of its output.

Process and product design – improvements in operational efficiency should be designed into the
production process. Products should be designed to minimise the amount of resources needed to produce
them. Where waste is created, it should be recycled where possible.

Supply chain – an organisation implementing sustainability will look to purchase materials from
sustainable sources, select suppliers that share its objectives and are located the minimum possible
distance away from it.

In the year since Comerica Bank opened its first Leadership in Energy and Environmental Design (LEED®)
certified banking centre, the bank has received recognition for its progress in implementing its
CASE STUDY commitment to sustainability.

‘Integrating green practices into the way we do business is a core commitment and allows us to enhance
our performance as a company and create long-term value for our stakeholders,’ said Richard J. Plewa,
Comerica Bank's Chief Sustainability Officer.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 155

In 2009, Comerica Bank was named to the following sustainability leadership indices in recognition of its
recent sustainability successes:

The Carbon Disclosure Project's (CDP) Carbon Disclosure Leadership Index. The CDP represents 534
global investors responsible for the management of $64 trillion of assets.

For the second year in a row, Comerica was named to the CDP's Carbon Disclosure Leadership Index,
which rates firms according to the level and quality of their disclosure and reporting on greenhouse gas
emissions and climate change strategy. In 2009, Comerica's index score of 91 was top among S&P 500
companies.

Maplecroft Climate Innovation Leaders Index. The Maplecroft Index focuses on U.S. companies with at
least $1 billion of market capitalisation and identifies top performers in climate-related innovation and
carbon management. Comerica was ranked number 61 overall and number 5 in the finance sector.

FTSE4Good Index. The FTSE4Good Index is a leading global responsibility investment index designed to
measure the performance of companies that meet globally recognised corporate responsibility standards.
Companies named in the FTSE4Good Index have demonstrated that they have put policies and
management systems in place to help address relevant corporate responsibility risks as they pertain to
social and environmental change. Comerica launched the following sustainability initiatives to increase
the efficiency of resources and decrease greenhouse gas emissions:

Energy and Emissions. During 2009, Comerica implemented a range of initiatives to reduce energy use,
corporate travel and the related greenhouse gas emissions. Total corporate emissions decreased by almost
5 percent from 2008 to 2009, partly reflecting the positive contributions of these initiatives.

Reducing Paper Use. Other initiatives implemented in 2009 were designed to reduce the use of paper
throughout the company. Paper purchases were down by almost 19 percent for the year, a reduction of
almost 6 million printed pages.

Greener Procurement. A Green Procurement Work Group was established in 2009 and a new Supplier
Questionnaire & Scorecard was developed to help identify environmentally preferred providers of goods
and services. Comerica plans to use this to improve the sustainability performance of its supply chain.

Eco-Friendly Buildings. All of Comerica's newly constructed banking centres in 2010 will have green
features. Specifically, Comerica has five new banking centres that are LEED-certified by the U.S. Green
Building Council. Comerica also is seeking LEED certification for three additional banking centres opening
in 2010. In addition, four existing Comerica buildings received Energy Star certification in 2009 from the
U.S. Environmental Protection Agency.

Sustainability Reporting. Comerica published its Inaugural Sustainability Report in September 2009. The
report was based on the Global Reporting Initiative framework and included a wealth of information on
Comerica's sustainability programs and performance, including baseline environmental performance data
against which future progress can be measured.

‘We've been working hard to develop awareness of sustainability issues among our employees and to tap
into the deep reservoir of creativity they possess when it comes to identifying better and more sustainable
ways to operate,’ noted Plewa. ‘For example, on Earth Day 2010, Comerica teams will be sponsoring and
participating in a range of educational and service projects at Comerica locations and beyond.’

For more information visit www.comerica.com/sustainability.

Section summary
Sustainability in operations is concerned with efficient use of resources and minimising the effect of an
organisation's activities on society and the environment.
156 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

Chapter Roundup
 Operations is a core part of any organisation.

 The transformational process model describes how inputs are converted through processes into outputs.

 Porter saw organisations as value chains that are made up of different processes. A competitive
advantage can be gained by ensuring these processes are efficient.

 Organisations can become part of a larger supply chain. They purchase from suppliers and sell to other
organisations which are buyers. Eventually raw materials are converted into what the end-customer
wants.

 Supply chains are a source of competitive advantage as each organisation works towards a common goal.

 Demand networks are an evolution of supply chains. They are formed by demand acting as a stimulus to
produce a product.

 Supply portfolios are the mix of suppliers selected by an organisation to balance the benefits and risks
involved on relying on them.

 Process maps can be used to present the processes involved in supply chains and networks.

 Sustainability in operations is concerned with efficient use of resources and minimising the effect of an
organisation's activities on society and the environment.
PART C OPERATIONS MANAGEMENT 5: Operations management and the organisation 157

Quick Quiz
1 Which of the following are parts of an organisation according to Mintzberg?

(i) Strategic apex

(ii) Support staff
(iii) Middle core
(iv) Technostructure

A (i), (ii), and (iii) only

B (i), (ii), and (iv) only
C (ii) and (iv) only
D All of the options

2 Which of the following is a primary activity according to Porter's value chain?

A Firm infrastructure
B Technology development
C Procurement
D Marketing and sales

3 Who developed the strategic supply wheel?

A Porter
B Mintzberg
C Cousins
D Reck and Long

4 Organisations within a demand network need to manage which three factors to create a competitive
advantage?

A Acceptability, agility and adaptability

B Agility, adaptability and access
C Adaptability, access and acceptability
D Alignment, agility and adaptability

5 List the six items Brown identified that should be covered by an organisation's operations strategy.
158 5: Operations management and the organisation PART C OPERATIONS MANAGEMENT

Answers to Quick Quiz

1 B The 'middle core' is fictitious, made up from the middle line and operating core.

2 D Marketing and sales is a primary activity according to Porter's value chain.

3 C Cousins developed the strategic supply wheel.

4 D Organisations within a demand network need to manage alignment, agility and adaptability to
create a competitive advantage.

5 Capability required, range and location of operations, investment in technology, strategic buyer-
supplier relationships, new products/services and the structure of operations.

Answers to Questions
5.1 Activities

B Human resource management is a support activity.

5.2 Sourcing and supplier performance

(a) Single sourcing – the buyer chooses one source of supply.

Multiple sourcing – the buyer chooses several sources of supply.

Delegated sourcing – the buyer chooses a supplier to deliver a complete sub-assembly of part of the
product.

Parallel sourcing – the buyer mixes the other three approaches to maximise their benefits.

(b) Single sourcing. This method allows a strong relationship to develop between buyer and supplier and
helps to ensure confidential treatment of trade secrets and allows the development of a quality assurance
programme.

(c) Quality – whether the product or service is fit for purpose, defect rates.

Flexibility and capability – is the supplier open to reasonable requests and able to meet them?

Timeliness – is the product or service delivered on time?

Price – value for money relative to competitors.

Now try this question from Number Level Marks Time

the Exam Question Bank 5 Examination 30 54 mins
QUALITY MANAGEMENT

A significant trend in all business sectors over analyse problems with management of quality in an
recent years has been an increased emphasis organisation described in the question.
on quality. In an increasingly competitive
The purposes of external quality standards (eg the various
environment, quality is seen as vital to success.
ISO standards appropriate to products and organisations)
As with many topics in this paper, you must learn the are also highly examinable.
relevant theory, but also be able to apply it to a
We start this chapter by looking at the concept of quality,
practical situation. For example, a theoretical question
before moving on to the various approaches used to
may require you to evaluate various contemporary
ensure quality in both the product or service produced and
approaches to the management of quality – while a
the systems used by the organisation.
more practical question could ask you to identify and

topic list learning syllabus ability required

outcomes references
1 The scope of quality management C2(a), C2(d) C2(ii) application
2 Quality management approaches C2(a), C2(d) C2(i) application
3 Total quality management (TQM) C2(a), C2(d) C2(ii) application
4 Managing quality using TQM C2(a), C2(d) C2(ii), C2(ix) application
5 Processes of continuous improvement C2(a), C2(d) C2(ix) application
6 Lean production C2(c), C2(d) C2(x), C2(xi) application
7 International Organisation for Standardisation C2(c), C2(d) C2(iii) application
8 Total productive maintenance (TPM) C2(a), C2(d) C2(ii) application
9 The TQMEX model C2(a), C2(d) C2(ii) application
10 Service quality C2(c), C2(d) C2(viii) application

159
160 6: Quality management PART C OPERATIONS MANAGEMENT

1 The scope of quality management

Introduction
In the modern commercial environment, there has been a change in emphasis away from quantity
(produce as much as we can) to quality (produce the best we can). Customers have become more
sophisticated and discerning. Poor quality products and services are no longer tolerated.

Quality applies to both goods and services. Whether a customer goes shopping for food or visits a dentist,
they expect a quality experience. More importantly, quality is increasingly a source of competitive
advantage.

Quality is concerned with 'fitness for purpose'. Quality management is concerned with ensuring that
products or services meet their planned level of quality and conform to specifications.

QUALITY is 'the totality of features and characteristics of a product or service which bears on its ability to
meet stated or implied needs'. (Holmes, 1992)
KEY TERMS
QUALITY MANAGEMENT is concerned with controlling activities with the aim of ensuring that products or
services are fit for their purpose, and meet specifications. Quality management encompasses quality
assurance and quality control.

QUALITY ASSURANCE focuses on the way a product or service is produced. Procedures and standards are
devised with the aim of ensuring defects are eliminated (or at least minimised) during the
development/production process.

QUALITY CONTROL is concerned with checking and reviewing work that has been done. Quality control
therefore has a narrower focus than quality assurance.

1.1 Quality as a concept

Throughout this chapter, the following four themes reappear in relation to quality management.

(a) Commitment. A commitment to quality is required from top management down to the most junior-
level employees.
(b) Competence. Employees must 'know what they are doing'. Training is important.
(c) Communication. The need for quality, and the benefits of quality, must be communicated
throughout the organisation.
(d) Continuous improvement. Quality involves always looking to 'raise the bar'.

1.2 Quality control versus quality assurance

Traditional approaches to quality were focused on inspection. Modern approaches to quality focus on the
prevention of defects through quality standards and processes.

1.2.1 Quality control 09/12

In the past, 'quality' usually meant quality control – which meant inspection. Inspection was usually
carried out at three main points.

 Receiving inspection
 Floor or process inspection
 Final inspection or testing
PART C OPERATIONS MANAGEMENT 6: Quality management 161

The problem with this 'inspection' approach is that it allows for and often entails built-in waste.

(a) The inspection process itself does not add value. If it could be guaranteed that no defective items
were produced there would be no need for a separate inspection function.

(b) The inspection function itself involves requires resources, both people and facilities.

(c) The production of substandard products is a waste of materials, machine time, human efforts, and
overheads.

(d) The production of defects is not compatible with newer production techniques such as just-in-time
– there is no time for inspection.

(e) Working capital is tied up in inventory which cannot be sold.

(f) In a service industry, damage will have been done to customer relations before inspection takes
place.

Quality control involves establishing standards of quality for a product or service, implementing
procedures that are expected to produce products of the required standard in most cases and monitoring
output to ensure sub-standard output is rejected or corrected.

1.2.2 Quality assurance

The demand for better quality has led to the acceptance of the view that quality management should aim
to prevent defective production rather than simply detect it.

Most modern approaches to quality have therefore tried to assure quality in the production process,
(quality assurance) rather than inspecting goods or services after they have been produced.

The term 'quality assurance' is used where a supplier guarantees the quality of goods or services they
supply. Quality assurance programmes usually involve a close relationship between supplier and
customer, which may extend to allowing customer representatives to view and/or monitor production
procedures.

Quality assurance emphasises the processes and procedures used to produce a product or service – the
logic being that if these are tightly controlled and monitored the resulting product and service will be high
quality. As quality has been 'built-in', the need for inspection after production should be eliminated.

Section summary
Most modern approaches to quality try to assure quality in the production process (quality assurance)
rather than inspecting goods or services after they have been produced.

2 Quality management approaches 09/11

Introduction
For any quality policy to be successful a suitable system should be developed and the levels of quality
measured to enable the system's success to be monitored. In recent years a number of approaches to
quality management have been developed.
162 6: Quality management PART C OPERATIONS MANAGEMENT

2.1 Quality management

In general terms, any quality management system should involve the activities outlined below.

Plan. Establish:

(a) Standards of quality for a product (eg a software package) or service

(eg an IT helpdesk).

(b) Procedures or production methods that ought to ensure that these required
standards of quality are met.

Devise suitable instruments and techniques to monitor actual quality.

Compare actual quality with planned quality using quality measures.

Take control action when actual quality falls below standard.

Quality auditing involves a systematic inspection to establish whether quality objectives are
being met.

Review the plan and standards to ensure continuous improvement.

The activities and steps above describe a general approach to quality management. In the following
sections, we will look at some specific methodologies or approaches associated with quality.

2.2 Measuring quality

A number of methods of measuring quality have been developed, including SERVQUAL, the balanced
scorecard and value for money audits.

2.2.1 SERVQUAL
SERVQUAL was developed in the 1980s by Zeithaml, Parasuraman and Berry as a method of measuring
quality in service organisations. It was primarily concerned with measuring the gap between a customer's
preconceived expectations and the actual experience they receive.

When it was first introduced, SERVQUAL measured ten aspects of service quality – understanding the
customer, tangibles, courtesy, security, credibility, competence, communication, access, reliability and
responsiveness. However in the 1990s the model was refined and is now known as RATER.

Aspect Description
Reliability Employee ability to perform the service dependably and accurately
Assurance Employee ability to inspire confidence and trust in the customer
Tangibles The tangible environment, for example facilities, equipment and staff appearance
Empathy The extent to which a caring, personal service is provided
Responsiveness Employee willingness to help and respond to customer requests

SERVQUAL and RATER are not without their critics. Francis Buttle, for example, noted that the five
aspects are not universals and that the model is not based on established economic, statistical or
psychological theory.
PART C OPERATIONS MANAGEMENT 6: Quality management 163

2.2.2 Balanced scorecard

Deciding how to measure quality is an important aspect of quality management. Quality measures should
cover operational, financial and customer aspects. One approach, originally developed by Kaplan and
Norton (1990), is the use of a 'balanced scorecard'.

The balanced scorecard focuses on four different perspectives.

Perspective Question Explanation

Customer What do existing and new Gives rise to targets that matter to customers:
customers value from us? cost, quality, delivery, inspection, handling and
so on.
Operational: What processes must we excel Aims to improve internal processes and decision
internal at to achieve our financial and making.
operations customer objectives?
Operational: Can we continue to improve and Considers the business's capacity to maintain its
innovation and create future value? competitive position through the acquisition of
learning new skills and the development of new products.
Financial How do we create value for our Covers traditional measures such as growth,
shareholders? profitability and shareholder value but set through
talking to the shareholder or shareholders direct.

The scorecard is 'balanced' in the sense that managers are required to think in terms of all four
perspectives, to prevent improvements being made in one area at the expense of another.

The types of measure which may be monitored under each of the four perspectives include the following.
The list is not exhaustive but it will give you an idea of the possible scope of a balanced scorecard
approach. The measures selected will vary considerably with the type of organisation and its objectives.

Perspective Measures
Customer  New customers acquired
 Customer complaints
 Customer satisfaction
 Telephone response times
 Delivery speeds
Operational: internal operations  Quality control rejects
 Productivity levels
 Speed of producing management information
 Streamlining/systems simplification
Operational: innovation and  Training days for employees
learning  Skills enhancement
 Percentage of revenue generated by new products and services
 Average time taken to develop new products and services
Financial  Return on capital employed
 Revenue growth
 Cash flow
 Earnings per share

2.2.3 Value for Money (VFM) audit

Originally associated with the public sector, VFM techniques are now increasingly being applied to private
sector businesses.
164 6: Quality management PART C OPERATIONS MANAGEMENT

The basic approach involves identifying and measuring key aspects of performance, such as: money
spent, inputs purchased, outputs and outcomes achieved.

The relationship between money spent and inputs purchased provides a measure of economy. The
relationship between inputs and outputs provides a measure of efficiency. Comparing outputs with
outcomes achieved provides a measure of effectiveness, eg ten clients serviced (output), nine 'extremely
satisfied' clients (outcome).

2.3 Possible problems when attempting to measure quality

Measuring quality involves taking into account many variables, which can lead to problems.

Problem Explanation
Conflicting measures Some measures in the scorecard such as research funding and cost reduction
may naturally conflict. It is often difficult to determine the balance which will
achieve the best results.
Selecting measures Not only do appropriate measures have to be devised but the number of
measures used must be agreed. Care must be taken that the impact of the results
is not lost in a sea of information.
Expertise Measurement is only useful if it initiates appropriate action. Non-financial
managers may have difficulty with the usual profit measures. With more
measures to consider this problem will be compounded.
Interpretation Even a financially-trained manager may have difficulty in putting the figures into
an overall perspective.
Too many measures The ultimate objective for commercial organisations is to maximise profits or
shareholder wealth. Other targets should offer a guide to achieving this objective
and not become an end in themselves.

Section summary
Three methods of measuring quality include:

SERVQUAL – this can be used to measure quality in a service organisation. It measures the gap between
customer expectations and their actual experience.

Balanced scorecards – these rate quality across four financial and non-financial perspectives.

Value for money audits – these identify and analyse key aspects of performance which are often related
to economy, efficiency and effectiveness.

3 Total quality management (TQM) 11/10, 05/12

Introduction
The development of total quality management (TQM) heralded a new era and philosophy of dealing with
quality. Rather than 'fire-fighting' quality issues, the approach aims to continuously improve quality in all
aspects of the organisation. Customer satisfaction is a key objective of TQM.

TOTAL QUALITY MANAGEMENT (TQM) is the continuous improvement in quality, productivity and
effectiveness obtained by establishing management responsibility for processes as well as output.
KEY TERM
The principles of TQM evolved through a number of management theorists and 'quality gurus', it is
therefore an amalgamation of related but different ideas.
PART C OPERATIONS MANAGEMENT 6: Quality management 165

3.1 Deming (TQM)

Deming (1982) is credited with the development of TQM in Japan. He took the view that as process
variability (the amount of unpredictability in a process) decreases, quality and productivity increase.
Quality can therefore be improved by reducing process variability.

His 14 points for quality improvement stressed the need for statistical control methods, participation,
education, openness and improvement.

1 Create a constancy of purpose.

2 Adopt a new quality-conscious philosophy.
3 Cease dependence on inspection.
4 Stop awarding business on price.
5 Continuous improvement in the system of production and service.
6 Institute training on the job.
7 Institute leadership.
8 Drive out fear.
9 Break down barriers between departments.
10 Eliminate slogans and exhortations.
11 Eliminate quotas or work standards.
12 Give employees pride in their job.
13 Institute education and a self-improvement programme.
14 Put everyone to work to accomplish it.

3.2 Ouchi (Theory Z)

Theory Z was devised by William Ouchi in the early 1980s. It emphasises the following elements.

 Interpersonal skills
 Building relationships
 Group interaction and decision-making
 Participative management
 Free flow of information
 Trust
 Retention of hierarchical rules and control
 Formal procedures for planning and setting objectives

Theory Z combined aspects of US management practice (which Ouchi referred to as Theory A) and
Japanese management practices (Theory J).

3.3 Juran (Fitness for use)

Juran (1988) argued that quality should focus on the role of the customer, both internal and external.
This user-based approach to quality emphasises fitness for use.

Juran emphasised that quality management should aim to ensure that the way in which work is
performed (ie systems and processes) facilitated high quality output. He believed 85% of quality problems
were the result of ineffective systems.

3.4 Ishikawa (Quality circles)

Ishikawa (1985) stressed the importance of people and participation to improve quality. He is often
credited with the idea of quality circles, and their use to achieve participation and overcome resistance to
quality initiatives.
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3.5 Crosby (Quality costs)

Crosby (1979) wrote about quality costs. Like other quality gurus, he argued for worker participation and
the need to motivate individuals to do something about quality. His 'absolutes of quality management'
were:

1 Quality is conformance to requirements.

2 Prevention is required, not an appraisal of the costs of poor quality.
3 Zero defects in production.
4 Organisations should measure the cost or price of 'non-conformance'.
5 There is no such thing as a 'quality problem'.

3.6 Feignbaum (Total Quality Control)

Feignbaum (1961) believed that prevention is better than cure and that the design of systems used in the
production process should reflect the need for, and enhance, quality.

3.7 The elements of TQM

TQM has been described as a natural extension of previous approaches to quality management, such as:

(a) Inspection, ie inspecting output in order to detect and rectify errors.

(b) Quality control, ie using statistical techniques to establish quality standards and monitor
performance.
(c) Quality assurance. This extended quality management to areas other than direct operations, and
uses concepts such as quality costing, quality planning and problem solving.
The following table of principles should help you remember the key elements of TQM.

Principle Description
Prevention Organisations should take measures that
prevent poor quality occurring.

Right first time A culture should be developed that

encourages workers to get their work
right first time.

Eliminate waste The organisation should seek the most

efficient and effective use of all its
resources.

Continuous improvement The Kaizen philosophy should be

adopted. Organisations should seek to
improve their processes continually.

Everyone's concern Everyone in the organisation is

responsible for improving processes and
systems under their control.

Participation All workers should be encouraged to

share their views and the organisation
should value them.

Teamwork and empowerment Workers across departments should form

team bonds so that eventually the
organisation becomes one.

The mnemonic PRECEPT should help you remember them.

PART C OPERATIONS MANAGEMENT 6: Quality management 167

Section summary
Total quality management (TQM) is the continuous improvement in quality, productivity and effectiveness
obtained by establishing management responsibility for processes as well as output.

The key principles of TQM are, prevention, right first time, eliminate waste, continuous improvement,
everyone's concern, participation and teamwork/empowerment.

4 Managing quality using TQM

Introduction
The introduction of TQM requires new ideas and methods of managing quality within an organisation. In
particular, relationships between an organisation's departments and its culture are affected.

4.1 Internal customers and internal suppliers

In a TQM approach, all parts of the organisation are involved in quality issues, and need to work together.
Every person and every activity in the organisation affects the work done by others.

TQM promotes the concept of the internal customer and internal supplier. The work done by an internal
supplier for an internal customer will eventually affect the quality of the product or service to the external
customer.

Internal customers are therefore linked in quality chains. Internal customer A can satisfy internal
customer B who can satisfy internal customer C who in turn can satisfy the external customer.

4.2 Service level agreements

Some organisations formalise the internal supplier-internal customer concept by requiring each internal
supplier to make a service level agreement with its internal customer. A service level agreement is a
statement of the standard of service and supply that will be provided to the internal customer and will
cover issues such as the range of services supplied, response times, dependability and so on.

Service level agreements have been criticised, however, for over-formalising the relationship between the
internal supplier and internal customer, therefore creating barriers to the development of a constructive
relationship and genuine co-operation between them.

4.3 Quality culture

A purely procedures-driven approach is unlikely to secure a culture of quality. Interpersonal factors such
as employee empowerment, teamwork and commitment are likely to be important considerations.

Every person within an organisation has an impact on quality and it is the responsibility of everyone to
get quality right.

Individuals should be encouraged not just to comply with performance standards and procedures, but to
also be proactive improving their performance and the performance of others. This requires the
empowerment of employees (covered in the next section). Customers are better served by employees who
are in a position to make decisions in meeting their needs without having to obtain authorisation from
others.

Teamworking skills are a key competence required of modern management. This recognises that
employees are individuals with individual strengths and weaknesses. They need to work together to
optimise their personal attributes for the collective benefit of the company.
168 6: Quality management PART C OPERATIONS MANAGEMENT

Commitment is also important in achieving quality. This will require management to apply their skill in
persuading and motivating staff into a true commitment to quality. Ultimately it is the employees that will
have to deliver the quality.

4.4 Empowerment
Empowerment recognises that employees are likely to know how best to perform their role and to improve
quality. It contrasts with traditional ‘top down management’ which assumes that management is best
KEY POINT
qualified to make decisions.

Empowerment includes two key aspects.

(a) Allowing workers to have the freedom to decide how to do the necessary work, using the skills
they possess and acquiring new skills as necessary to be an effective team member.

(b) Making workers responsible for achieving production targets and for quality control.

Empowerment may be more appropriate in service organisations where formal procedures might hamper
the flexibility of employees responding quickly to a customer's needs. The concept of empowerment must
be embraced by management and staff at all levels to be effective.

4.5 Continuous improvement or Kaizen

Quality management is not a one-off process but is the continuous examination and improvement of
processes. This continuous improvement is sometimes referred to as 'Kaizen'. Some authors explain that
Japan's competitive industrial success is a result of the implementation of the Kaizen concept.

Kaizen looks for uninterrupted incremental change. It can be implemented by improving every aspect of a
business process in a step-by-step approach, while gradually developing employee skills through training,
education and increased involvement.

The principles of continuous improvement/Kaizen are:

(a) People are the most important organisational asset.

(b) Processes should evolve by gradual improvement rather than radical change.
(c) Improvement should be based on statistical / quantitative evaluation of process performance.
(d) Resources, measurements, rewards, and incentives all need to be aligned.
(e) Continuous improvement enables changing customer needs to be taken into account.
(f) Continuous improvement enables new technologies to be introduced.

Tools used in the Kaizen process include:

(a) The five why process. This process seeks to identify the root cause of a problem by encouraging
the employee to ask ‘Why’ to generate a symptom. This creates issues and questions and the
process repeats until the solution or reason is discovered (often after 5 'Whys'.) This process was
developed by Toyota.

(b) Fishbone diagrams. These are cause and effect diagrams used to analyse all causes (or inputs)
that result in a single effect (or output). A map in the form of a Fishbone is created and the route
of continuous improvement is drawn. Potential problems that may be encountered will ‘splinter’ off
from the path.

(c) Plan-do-check-act (PDCA). The use of a plan-do-check-act cycle to encourage continuous

improvement.

Plan: Plan the process

Do: Execute the process
Check: Check the outcome of the process
Act: Feedback to improve the process
PART C OPERATIONS MANAGEMENT 6: Quality management 169

(d) Pareto analysis (80/20 rule)

Pareto analysis is based on the idea that 80% of an outcome is dependent on only 20% of the
work (inputs or processes). Another way of looking at the rule would be to consider that 20% of
output accounts for 80% of the overall revenue or value. In terms of quality, this means an
organisation should focus its attention on the important 20% of factors that make up 80% of the
overall quality. By doing so it will gain the most benefit from the minimum input.

4.6 Quality costs

The cost of quality may be looked at in a number of different ways.

Some argue that producing higher quality output increases costs, as more expensive resources are likely
to be required to achieve a higher standard.

Others argue that poor quality output will lead to customer dissatisfaction, which generates costs
associated with complaint resolution and loss of revenue as customers move to competitors.

There are four types of quality cost – prevention, appraisal/inspection, internal and external failure.
Prevention and appraisal costs are known as conformance costs, internal failure and external failure costs
are known as non-conformance costs.

Type of cost Definition Examples

Prevention cost Costs incurred prior to making The cost of building quality into the product
the product or delivering the design or service design.
service – to prevent substandard The cost of training staff in quality improvement
quality products or services and error prevention.
being delivered.
The cost of prevention devices (eg fail-safe
features).
Appraisal cost or This is a cost incurred after a The cost of inspecting finished goods or services,
inspection cost product has been made or and other checking devices such as supplier
service delivered, to ensure that vetting.
the output or service Customer or client feedback forms (although
performance meets the required these may be a way of keeping service staff 'on
quality standard or service their toes').
performance.
Internal failure This is a cost arising from Cost of materials scrapped due to inefficiencies in
cost inadequate quality, where the stockholding procedures.
problem is identified before the Cost of materials and components lost during
transfer of the item or service production or service delivery.
from the organisation to the
Cost of output rejected during the inspection
customer or client.
process.
Cost of re-working faulty output.
Cost of reviewing product and service
specifications after failures or customer
dissatisfaction.
Losses due to selling faulty output cheaply.
Not charging for a service so as to pacify
dissatisfied and angry customers or clients.
170 6: Quality management PART C OPERATIONS MANAGEMENT

Type of cost Definition Examples

External failure This is a cost arising from Cost of product liability claims from customers or
cost inadequate quality, where the clients.
problem is identified after the Cost of repairing products returned by customers,
transfer of the item or service including those forming part of service.
from the organisation to the
Cost of replacing sub-standard products including
customer.
those included with a service.
Delivery costs of returned units or items.
Cost of the customer services section and its
operations.
Loss of customer goodwill and loss of future
sales.

4.6.1 Traditional v TQM approaches to quality costs

The traditional approach to quality management is that there is an optimal level of quality effort, that
minimises total quality costs, and that spending more in an attempt to improve quality beyond this point
is not cost-effective. Diminishing returns set in beyond the optimal quality level.

The TQM philosophy is different.

(a) Failure and poor quality are unacceptable. The inevitability of errors is not something that an
organisation should accept. The target should be zero defects.

(b) Quality costs are difficult to measure, and failure costs in particular are often seriously under-
estimated. The real costs of failure include not just the cost of scrapped items and re-working
faulty items or placating an unhappy customer or client. There is also all the management time
spent sorting out problems and the loss of confidence between different parts of the organisation
whenever faults occur.

(c) A TQM approach does not accept that the prevention costs of achieving zero defects becomes
unacceptably high. If everyone in the organisation is involved in improving quality, the cost of
continuous improvement need not be high.

(d) If an organisation accepts an optimal quality level that it believes will minimise total quality costs,
there will be no further challenge to management to improve quality further.

The TQM quality cost model is based on the view:

(a) Prevention costs and appraisal costs are subject to management influence or control. It is better to
spend money on prevention, before failures occur, than on inspection.

(b) Internal failure costs and external failure costs can be reduced through additional effort on
prevention.

In other words, higher spending on prevention will eventually lead to lower total quality costs. The
emphasis should be on getting things right first time and designing quality into the product or service.

4.7 Implementing TQM

The following structure may be used by an organisation looking to implement a TQM approach:

 Obtain senior management support and provide them with training on quality
 Form a quality steering committee to oversee the implementation
 Communicate the change down through the organisation’s hierarchy to obtain employee support
 Form quality circles if appropriate
 Record all actions taken and monitor progress against expectations
PART C OPERATIONS MANAGEMENT 6: Quality management 171

4.8 Common reasons for failure of TQM initiatives

Participation is important in TQM, especially in the process of continuous improvement, where workforce
views are valued. Management should encourage everybody to contribute.

Common reasons for failure in TQM programmes include:

(a) Lack of management buy-in. Managers continue to monitor, control and punish rather than being
facilitators of open communication and worker involvement.

(b) Tail-off. After the initial enthusiasm, interest and support fades.

(c) Deflection. Other initiatives or problems take over from TQM.

(d) Rejection. TQM is not compatible with managers who feel their authority is threatened and make
decisions with the aim of maintaining their position.

(e) General cynicism about quality and its role in fulfilling customer needs.

Question 6.1 TQM and consistency

Learning outcome C2(ii)

A key word in the TQM philosophy is consistency.

Briefly explain what in TQM needs to be consistent, and why consistency is important. (4 marks)

Section summary
In a TQM approach, all parts of the organisation are involved in quality issues, and need to work together.
Every person and every activity in the organisation affects the work done by others.

Some organisations formalise the internal supplier-internal customer concept by requiring each internal
supplier to make a service level agreement with its internal customer.

Kaizen is the continuous examination and improvement of existing processes.

There are four types of quality costs – prevention, appraisal/inspection, internal failure and external
failure.

5 Processes of continuous improvement

Introduction
The concept of Kaizen and continuous improvement has led to the development of new management
strategies and processes to handle it. Multinational organisations, often those which are American or
Japanese, have been at the forefront of this development.

5.1 Quality circles

A QUALITY CIRCLE is a team of workers from within the organisation which meets at intervals to discuss
issues relating to the quality of the product or service produced.
KEY TERM
A typical quality circle comprises employees from many levels of the organisation who meet regularly. The
frequency of meetings varies across organisations – every three months would normally be sufficient.
172 6: Quality management PART C OPERATIONS MANAGEMENT

Suggestions are encouraged regarding how the product or service produced could be made better, and
how processes and working practices could be improved. Members are encouraged to analyse issues in a
logical way.

Wider issues may also be discussed, as it is recognised that the complete working environment will affect
quality levels. In some organisations this has led to quality circles having input on issues such as health
and safety, employee benefits and bonuses, and training and education programmes.

5.1.1 Developing quality circles

An organisation can encourage the use of quality circles by:

 Rewarding the circle for suggestions that are implemented (eg a share of any savings made).

 Providing a budget and support to run the quality circle in terms of room provision, refreshments,
staff to take minutes etc.

 Ensuring management are supportive and prepared to act on useful suggestions from the circle.

 Providing an explanation as to why suggestions not implemented were rejected.

 Management asking the circle for suggestions and comments on specific issues and problems
facing the company, without anticipating the outcomes.

5.1.2 Benefits of quality circles

The benefits of quality circles include:

(a) Employee involvement improves morale.

(b) Practical improvements/solutions are likely as workers know the processes involved.
(c) Organisation unity is fostered as the circle includes all levels.
(d) Suggestions can result in valuable savings.
(e) A 'culture' of quality is fostered.

5.1.3 Drawbacks of quality circles

Possible drawbacks of quality circles include:

(a) Employee 'power' is hard to control.

(b) The scope of influence can become very wide.
(c) Rejected suggestions may cause resentment.
(d) Business practicalities (eg cost) may not be fully understood.

The concept of quality circles has expanded to now include groups drawn from separate organisations but
with a common interest.

5.2 The 5Ss

Often associated with lean production, the overriding idea behind the 5Ss is that there is 'a place for
everything and everything goes in its place'. Discipline, simplicity, pride, standardisation and repeatability
are emphasised in the 5Ss as being critical to efficiency.

The 5Ss Comment/meaning

Seiri or Structurise Segregate or discard. Introduce order where possible.
Selton or Systemise Arrange and identify for ease of use. Approach tasks systematically.
Seiso or Sanitise Clean daily. Be tidy, avoid clutter.
Seiketsu or Standardise Revisit each 'S' frequently. Be consistent in your approach.
Shitsuke or Self-discipline Sustain via motivation. Do the above daily.
PART C OPERATIONS MANAGEMENT 6: Quality management 173

5.3 Six Sigma

SIX SIGMA is a process that is designed to assist organisations to focus on developing and delivering near-
perfect products and services.
KEY TERM
The expression is derived from the discipline of statistics. Sigma is a statistical measure of variation in
output. A score of six times the Sigma within a specification means 99.999% of the manufactured items
are within the specification (3.4 defects per million opportunities). A Three Sigma level of quality implies
a 93.32% specification compliance (67,000 defects per million).

5.3.1 Elimination of defects

Six Sigma ensures the progressive elimination of defects by:

 Identifying the root causes of error

 Confirming the critical root causes
 Implementing corrective action

By minimising defects, customer satisfaction should improve and this should improve profitability. The
thinking might be summarised as follows.

Yield Profitability
Defect reduction Customer delight
improvement improvement

A key advantage of Six Sigma is that it can be implemented alongside other initiatives such as TQM and
ISO 9000. However, where Six Sigma is different is that it is customer focused, rather than operations
orientated. It looks at strategically critical outcomes that affect customer satisfaction.

The method was first devised by Motorola in the USA in 1985 to help manufacture a virtually defect free
pager. It has been successfully implemented by recognised corporations such as Polaroid, Kodak, and
IBM. However, it was General Electric that propelled it to current prominence and popularity.

5.3.2 Example of Six Sigma in practice

General Electric (GE) introduced Six Sigma and there are three elements to its approach.

(a) Delighting customers

(i) The customer sets the quality standard, rather than some manager within the company.

(ii) A focus on performance, reliability, price, delivery, service and transaction processing.

(b) Outside-in thinking

(i) The company must be seen form the customer's perspective.

(ii) There is a need to understand what the customer is seeing and feeling as regard the
company's processes.

(iii) Customer knowledge is used to improve company processes and add value.

(c) Leadership commitment

(i) GE recognises that people are key to creating quality and generating results.

(ii) There is a commitment to providing opportunities for employees to develop themselves in

the services may provide to customers.

(iii) There is a focus on ensuring employee training needs are satisfied.

174 6: Quality management PART C OPERATIONS MANAGEMENT

Tiffinwallah system of Mumbai

The Tiffinwalla system in Mumbai, India, was singled out by Forbes Magazine as an outstanding example
CASE STUDY
and awarded a Six Sigma grading.

Each day, 175,000 tiffins (lunchboxes) are delivered to offices and schools throughout Mumbai and later
returned home, by approximately 5,000 people called tiffinwallahs. Each tiffin holds a variety of dishes of
food. Each tiffin is collected by a tiffinwallah and taken to one of Mumbai's suburban railway stations,
where they are sorted. They are collected at the destination station and taken to the building.

There is a fairly simple method of coding which manages a very low failure rate. Each tiffinwallah does
not have to deal with too many tiffin boxes. The tiffinwallas make only one error in 16 million
transactions. Statistically this represents 99.999% of correctness, thereby achieving Six Sigma.

Section summary
A quality circle is a team of workers from within the organisation which meets at intervals to discuss
issues relating to the quality of the product or service produced.

The 5Ss is a Japanese approach to quality that focuses on the five aspects of structurise, systemise,
sanitise, standardise and self-discipline.

Six Sigma is a process that is designed to assist organisations to focus on developing and delivering near-
perfect products and services.

6 Lean production 11/10, 11/12, 03/13

Introduction
Lean production is a manufacturing methodology developed originally for Toyota. It is also known as the
Toyota Production System. Its goal is 'to get the right things to the right place at the right time, the first
time, while minimising waste and being open to change'.

LEAN PRODUCTION (sometimes referred to as lean manufacturing or lean process improvement) is a

philosophy of production that aims to minimise the amount of resources (including time) used in all
KEY TERM activities. It involves identifying and eliminating all non-value-adding activities.

Lean production or lean process improvement involves the systematic elimination of waste, such as:

 Overproduction and early production

 Waiting – time delays, idle time, any time during which value is not added to the product
 Transportation – multiple handling, delay in materials handling, unnecessary handling
 Inventory – holding or purchasing unnecessary raw materials, work in process and finished goods
 Motion – actions of people or equipment that do not add value to the product
 Over-processing – unnecessary steps or work elements/procedures (non added value work)
 Defective units – production of a part that is scrapped or requires rework

Ohno (an engineer) is generally credited with developing the principles of lean production. He argued that
it eliminated waste and led to improved product flow and improved quality.

Lean production focuses on reducing system response time so that the production system is capable of
rapid change to meet market demands.
PART C OPERATIONS MANAGEMENT 6: Quality management 175

6.1 Characteristics of lean production

The characteristics of lean production are:

 Integrated, single piece continuous workflow.

 Integration of the whole value chain through partnerships with suppliers and distributors.
 Just-in-Time processing.
 Short order-to-ship cycle times synchronised with small batch production.
 Production based on orders rather than forecasts.
 Minimal inventories at each stage of the production process.
 Quick changeovers of machines and equipment.
 Production layout based on work flow.
 Active involvement by workers in problem solving to improve quality and eliminate waste.
 Defect prevention (rather than inspection and rework) by building quality into the process.
 Team-based work with multi-skilled staff empowered to make decisions.

6.2 Applications of lean techniques

During the 1980s lean production methods were adopted by many manufacturing plants in the US and
Europe, with varying degrees of success.

Recent years have seen a renewed interest in lean techniques, particularly since the reduction of
inventory. Dell Computers and Boeing Aircraft have embraced the philosophy of lean production with
great success.

Lean techniques are applicable not only in manufacturing, but also in a service environment. Every
system contains waste (ie something that does not provide value to the customer).

Lean supply chains occur when lean techniques are applied in firms across the chain. This requires a
high degree of trust and coordination. Integrated information systems would be required to ensure each
organisation in the chain is aware of the activities of other chain members.

6.3 Benefits of lean production

Supporters of lean production believe it enables a company to deliver on demand, minimise inventory,
maximise the use of multi-skilled employees, flatten the management structure and focus resources
where they are most effective.

Other benefits include:

 Waste reduction (up to 80%)

 Production cost reduction (50%)
 Manufacturing cycle times decreased (50%)
 Labour reduction (50%) while maintaining or increasing throughput
 Inventory reduction (80%) while increasing customer service levels
 Capacity increase in current facilities (50%)
 Higher quality
 Higher profits
 Higher system flexibility in reacting to changes in requirements improved
 More strategic focus
 Improved cash flow through increasing shipping and billing frequencies

6.4 Criticisms of lean principles

In many situations, organisations supposedly using lean principles have not experienced the
improvements in productivity and profitability expected.
176 6: Quality management PART C OPERATIONS MANAGEMENT

It is difficult to know whether this is due to shortcomings in the lean philosophy or whether the
techniques involved are being interpreted and applied correctly.

For example, the 5Ss concept should be used with the aim of creating a workplace with real organisation
and order which creates pride by employees in their work, improves safety and results in better quality.
However, in some organisations 5S has become a cleaning and housekeeping exercise only.

Lean techniques should be seen and treated as outward signs of a more fundamental approach to
operations and quality. Real improvements require a change in thinking and in culture – which are
difficult to achieve.

There is often a high initial investment required to achieve lean production. For example in terms of
training employees, acquiring new equipment for processes and re-organising factory floors. If the
organisation is not 100% committed to the change, then it may not make sufficient investment to ensure
success. Even where it does, the benefits achieved may be outweighed by the costs.

Many companies use lean manufacturing and Six Sigma techniques to reduce costs, rather than a
fundamental commitment to eliminating waste and adding value.

6.5 World class manufacturing

In a manufacturing environment a commitment to quality (and to the customer) may be referred to as
'world class manufacturing'. This approach involves a focus on customer requirements and then ensuring
products meet these requirements.

As customer requirements often change, flexibility in manufacturing operations is a key feature of world-
class manufacturing.

Three factors Japanese manufacturing organisations focussed on that contributed to world class
manufacturing are:

 Integrated operations processes enabling smooth production flow

 Team leaders that involved employees’ (team members) in quality issues and developed both their
own and employees problem-solving skills

 Tightly integrated value chains with close, productive relationships between supply chain partners

6.6 Flexible manufacturing

Manufacturing operations designed to emphasise flexibility are sometimes referred to as 'flexible
manufacturing'.

Flexible manufacturing describes the situation where 'economies of scope' make it economical to produce
small batches of a relatively wide range of products using the same machines or production facilities.

This is the opposite of traditional large-scale assembly lines with their emphasis on economies of scale.

Exam alert
Exam questions may require you to associate flexible operations with demand management.

TQM, Kaizen, lean production and the balanced scorecard all feature in papers P2 and E3.
PART C OPERATIONS MANAGEMENT 6: Quality management 177

Section summary
The goal of lean production is 'to get the right things to the right place at the right time, the first time,
while minimising waste and being open to change'.

In a manufacturing environment a commitment to quality (and to the customer) may be referred to as

'world class manufacturing'.

7 International Organisation for Standardisation 05/11, 09/12

Introduction
A number of organisations produce quality standards. The most widely used are those published by the
International Organisation for Standardisation (ISO).

The ISO 9000 quality standards have been adopted by many organisations world-wide.

ISO issue standards are applicable to many types of organisation and they are updated periodically.

The ISO 9000:2000 series of standards consists of a number of primary standards: ISO 9000, ISO
9001, ISO 9004, ISO 19011 and ISO 140011.

(a) ISO 9001:2000 contains ISO's current quality management system requirements. This is the
standard you need to use if you wish to become certified (registered).

(b) ISO 9000:2000 and ISO 9004:2000 contain ISO's quality management system guidelines. These
standards explain ISO's approach to quality management presenting definitions and a set of
guidelines for improving performance, but they are not intended to be used for certification
purposes.

(c) ISO 19011 covers quality auditing standards.

(d) ISO 14001 relates to environmental management systems. It specifies a process for controlling
and improving an organisation's environmental performance. Issues covered include:

(i) Planning
(ii) Policies on the environment
(iii) Implementation and operation
(iv) Reviews by management
(v) Checking and taking corrective action

7.1 ISO certified/registered or ISO compliant?

When a company claims that they are ISO 9000 certified or registered, they mean that an independent
registrar has audited their processes and certified that they meet the ISO requirements.
KEY POINTS
When an organisation says that they are ISO 9000 compliant, they mean that they have met ISO's
quality system requirements, but have not been formally certified by an independent registrar. In effect,
they are self-certified.

Of course, official certification carries more weight in the market place.

The ISO 9000 standards are process standards, not product standards. Organisations are granted
certified or compliant status on the basis that their processes rather than their products and services meet
ISO 9000 requirements. The logic is that high quality processes ensure high quality output.
178 6: Quality management PART C OPERATIONS MANAGEMENT

7.2 Criticisms of quality accreditation

Many writers and managers have criticised formal quality schemes. These criticisms tend to emphasise
the following points.

(a) Documentation is expensive (in terms of time) to produce.

(b) Policies and procedures encourage management by manual, discourage innovation and initiative.

(c) The schemes encourage bureaucracy.

(d) Formal methods may conflict with working practices in small and medium-sized organisations.

7.3 The European Foundation for Quality Management (EFQM) model

There are now many smaller self-assessment models for business/organisation improvement. In Europe,
one of the most popular is the European Foundation for Quality Management model. This provides a
structured methodology for organisations to measure their own performance in areas that are critical to
businesses.

The model provides a basis for measurement of 'enablers' (people, leadership, policies, strategies,
processes, partnerships and resources) and 'results' in relation to customers, people, society and
performance indicators.

Criticisms of this and similar schemes include their expense (in terms of time) and the fact that scoring is
largely subjective.

Section summary
ISO certified organisations have had their processes and procedures checked and verified by an
independent auditor.

ISO compliant organisations self-certify that they meet the ISO requirements, however such claims have
not been verified.

8 Total productive maintenance (TPM)

Introduction
Quality issues do not just affect production processes. They filter into every part of the organisation
including the maintenance of production equipment. Total productive maintenance or TPM originated in
Japan. It is defined as 'the productive maintenance carried out by all employees through small group
activities'.

8.1 Five goals of TPM

The goals of TPM are:

(a) Improve equipment effectiveness. The goal should be to examine how the facilities of an operation
are contributing to its effectiveness. Loss of effectiveness could be caused by defects, down-times
and loss of operating speed.

(b) Achieve autonomous maintenance. The employees who use an item of equipment should be
allowed to take on some of the responsibility for its maintenance. Specialist maintenance staff
should be encouraged to take on the responsibility for improving maintenance performance.
PART C OPERATIONS MANAGEMENT 6: Quality management 179

(c) Plan maintenance. Maintenance should be planned, and the frequency and level of preventive
maintenance and standards for condition-based maintenance should be specified.

(d) Train all staff in maintenance skills.

(e) Achieve early equipment management. This goal is linked to maintenance prevention, by which
the causes of failure and the ease of maintenance of an item of equipment are considered at the
design, manufacture, commissioning and installation stages, ie before the equipment is brought
into operation.

8.2 Benefits of TPM

Benefits of TPM include:

 Reduced instances of breakdowns

 Production consistency and uniform output
 Reduction in waste and cost of quality
 Improved accuracy of production schedules
 Facilitation of an on-time delivery

One possible approach is shown in the steps below.

Step 1
Discover what the nature of the failure has been, its possible consequences, and the
reasons why it has happened. Finding out the reason for a failure is not, at this
stage, an in-depth investigation. Being aware of the reason for the failure can,
however, help with making a decision about what the recovery procedure should be.

Step 2
Act by:
(I) Telling people involved what you propose to do about the failure, for example by
keeping customers informed
(ii) Containing the failure in order to stop the consequences from spreading
(iii) Following up to make sure that the containing action has been successful

Step 3
Learn. Use the failure as a learning opportunity, to find out in some depth why the
failure occurred and 'engineering out' the cause to prevent it from happening again.

Step 4
Plan. Operations managers should incorporate the lessons learned from past failures
to plan how they would deal with similar failures in the future. This involves
identifying what failures might occur and their reasons and devising formal
procedures to be followed if and when it occurs.
180 6: Quality management PART C OPERATIONS MANAGEMENT

8.3 Business continuity

Business continuity is a term used to describe measures to help an operation to prevent or recover from
failures, and to continue operating in the event of a disaster. A disaster is a critical malfunction that stops
normal operations (eg a key supplier going out of business, a major computer system failure, a bomb
blast at a key location and so on). One approach to business continuity planning is to:

(a) Identify and assess the risks of various disasters happening.

(b) Identify core business processes, and rank them in order of priority. Make sure that employees
understand these priorities.

(c) Quantify recovery times.

(d) Determine what resources will be needed to carry out the recovery, and make sure that the
resources will be available if and when required.

(e) Communicate with everyone in the organisation and others involved in the recovery process to
ensure they know what they will be required to do in the event of a disaster.

Section summary
Total productive maintenance is a policy that ensures quality is reflected in the maintenance of
production equipment.

9 The TQMEX model

Introduction
As explained earlier, TQM focuses on the needs of customers. In order to fully understand TQM we need
to understand how all elements of an organisation work towards the ultimate goal – customer satisfaction.

Ho (1999) devised his TQMEX model to indicate the relationship between quality management and other
aspects of operations management. The model demonstrates how contemporary approaches to quality
may be integrated to achieve a philosophy of quality throughout the organisation.

Ho's TQMEX model

5S 5S practice
Operations management

BPR Business Process Re-engineering

QCs Quality circles

ISO ISO Quality Management System

Quality management

TPM Total Productive Maintenance

TQM Total Quality Management

The one tool mentioned in Ho’s model that we haven’t covered yet is Business Process Re-engineering
(BPR).
 PART C OPERATIONS MANAGEMENT 6: Quality management 181

9.1 Business Process Re-engineering (BPR) 05/10

The changing of business processes is sometimes referred to as Business Process Re-engineering (BPR).

BUSINESS PROCESS RE-ENGINEERING is the fundamental rethinking and radical redesign of business
processes to achieve dramatic improvements in critical contemporary measures of performance, such as
KEY TERM cost, quality, service and speed. Hammer and Champy (2001).

As the definition states, BPR involves fundamental changes in the way an organisation operates. Other
key words from the definition are ‘radical’, ‘dramatic’ and ‘process’.

(a) Fundamental and radical indicate that BPR assumes nothing: it starts by asking basic questions
such as ‘why do we do what we do’, without making any assumptions.

(b) Dramatic means that BPR should achieve ‘quantum leaps in performance’, not just marginal,
incremental improvements.

(c) A process is a collection of activities that takes one or more kinds of input and creates an output.
For example, order fulfilment is a process that takes an order as its input and results in the delivery
of the ordered goods.

9.1.1 Four themes of BPR

Hammer and Champy identify four themes of BPR.

(a) Process reorientation. There should be a focus on resources, tasks and constraints.
(b) Creative use of IT should be explored.
(c) Ambition. Don’t be restricted by current ways of working. Think widely and ambitiously.
(d) Challenge and break rules. Think radically. Old rules may not apply to new processes.

9.1.2 Five phases of BPR

BPR involves five phases.

 Planning
 Internal learning
 External learning
 Redesign
 Implementation

Example of BPR

CASE STUDY
A company employs 25 staff to perform the standard accounting task of matching goods received notes
with orders and then with invoices. A process review established that 50% of employee time was spent
trying to match the 20% of document sets that do not agree.

One way of improving the situation would be to computerise the existing process to facilitate matching.
This would help, but BPR would go further.

A BPR approach may question why any incorrect orders are accepted. To enable incorrect orders to be
identified before being accepted, all orders could first be entered in to a computerised database. When
goods arrive, they either agree to goods that have been ordered (as recorded in the database) or they
don't.

Goods that agree to an order are accepted and paid for. Goods that are not agreed are sent back to the
supplier. Time is not wasted trying to sort out unmatched documents.

Gains would include staff time saved, quicker payment for suppliers, lower stocks, and lower investment
in working capital.
182 6: Quality management PART C OPERATIONS MANAGEMENT

9.1.3 Limitations of BPR

Some BPR projects have failed to bring the benefits expected. To succeed, a BPR initiative requires
sustained management commitment and leadership, realistic scope and expectations, and a willingness
to change.

BPR has become associated with narrow targets such as reductions in staff numbers and other cost-
cutting measures. Some companies, attracted by the latest high-tech gadgetry, believed they could
enhance their performance solely by re-deploying office automation systems (and laying off workers)
rather than through the much harder task of significant organisational process redesign, which may
involve neither IT investment nor redundancies, just the better use of people.

Exam alert
BPR could be examined together with process mapping – redesigning a process requires an understanding
of the process that may best be obtained from a process map.

Section summary
Ho's TQMEX model indicates the relationship between quality management and other aspects of
operations management.

10 Service quality
Introduction
Many of the models and techniques that we have already studied can be applied to the service industry.
We have already seen how SERVQUAL can be used to measure quality in service organisations by
reference to customer expectations. Therefore managing these expectations and the actual service
provided are key to service quality.

SERVICE QUALITY is the totality of features and characteristics of that service which bears on its ability to
meet stated or implied needs.
KEY TERM
Service organisations have a different nature to those that manufacture goods. For example:

 Goods have a physical presence, whereas services are intangible and cannot be stored.

 Delivery of goods is a separate process to production and purchase and does not involve the
customer. In service industries, delivery is part of the service and customers may be involved in it.

 The manufacture of goods does not usually involve face-to-face contact with the customer. In
service industries, there usually is face-to-face contact. This means that the social skills of the
person providing the service will be evaluated by the customer when deciding on the overall quality
of the service.

 Manufacturing organisations are usually machine-intensive. Service industries are usually labour-
intensive.

10.1 Dimensions of service quality

Service quality has a number of dimensions.

(a) Technical quality of the service encounter (ie what is received by the customer). Was the meal
edible? Was the train on time? Were the shelves fully stocked? Problems of this sort must be
addressed by improving the processes of production and delivery.
PART C OPERATIONS MANAGEMENT 6: Quality management 183

(b) Functional quality of the service encounter (ie how the service is provided). This relates to the
psychological interaction between the buyer and seller and is typically perceived in a very
subjective way.

(i) Relationships between employees For example, do these relationships appear to be

professional? Do they chat to each other whilst serving the customer? Does each appear to
know their role in the team and the function of their colleagues?

(ii) Appearance and personality of service personnel For instance, do they seem interested in
the customer and the customer's needs? Are they smartly presented? Do they convey a
positive image?

(iii) Service-mindedness of the personnel For example, do they appear to understand and
identify with the needs of the customer? Do they convey competence? Do they show
willingness to help?

(iv) Accessibility of the service to the customer Do the service personnel explain the service in
language which the customer can understand?

(v) Approachability of service personnel. For instance, do the service personnel appear alert,
interested or welcoming? Or are they day-dreaming, yawning or looking at their watches?

10.2 Role of customer

For many service operations, the customer represents both the input and the output of a transformation
process eg a patient visiting a dentist.

10.3 Satisfaction as a measure

Service quality therefore focuses on the extent of success achieved in creating a transformed customer.
This can be answered in terms of customer satisfaction. Johnston and Clark (2001) state that customer
satisfaction levels may be 'represented on a continuum from (extreme) delight to (extreme)
dissatisfaction'.

10.4 Customer expectations

Going back to the beginning of the transformation process the input is a customer with certain
expectations. The organisation delivers a service that is intended to meet those customer expectations.
This overall process is depicted as follows.
184 6: Quality management PART C OPERATIONS MANAGEMENT

10.4.1 Influencing customer expectations

A prerequisite to being able to manage customers’ expectations or designing services to meet expectations
is to accurately identify and understand them.

A customer's preconceived expectations is likely to influence a customer's assessment of service quality

eg a guest at an expensive hotel is likely to expect a high level of attentiveness from the hotel staff.

Various authors have tried to identify generic factors that determine a customer's assessment of service
quality. The following is a useful list of 18 service quality factors. (Johnston and Clark, 2001)

Access Comfort Friendliness

Aesthetics Commitment Functionality
Attentiveness Communication Integrity
Availability Competence Reliability
Care Courtesy Responsiveness
Cleanliness Flexibility Security

The following diagram and table explain some major factors that shape customer expectations.
PART C OPERATIONS MANAGEMENT 6: Quality management 185

Factor Example
Marketing Claims may be difficult to deliver eg an optician advertises that no appointments are
required, but a client has to actually wait 50 minutes for an eye test.
Price Customer expectations usually increase as price increases eg if a hair salon charges
high prices, clients expect a good cut and styling.
Alternatives A good past experience at one service provider is likely to set the standard next time
for an alternative service provider eg a tasty meal at one burger chain is likely to
engender expectations of a similar dining experience when visiting another outlet.
Word of mouth Often this is the most influential source for setting up customer expectations.
Previous This helps the customer develop a clearer view of what to expect. This adds to the
experience challenge faced by the service provider but on the other hand also helps to
moderate the consumers' expectations eg experience of travelling with a certain rail
service may inject a certain sense of reality into what a passenger can expect.
Customer's mood It is inevitable that a customer's mood and attitude is likely to influence their
and attitude expectations eg a guest at a restaurant who has received some good news (got a
promotion or passed an exam etc) is more likely to be tolerant of slow service.

There are various ways in which service quality factors may be classified.

Classifications Comment
Hygiene factors These are very much base line factors. If not present will tend to dissatisfy a
customer, eg a hotel guest will expect proper security but it is unlikely to delight.
Enhancing factors These may partially delight but will not be a source of dissatisfaction if absent eg a
hotel guest is likely to really appreciate friendly staff but might not be dissatisfied if
they are not all that cheerful.
Critical factors These have the potential to delight as well as dissatisfy eg a hotel guest will expect
staff responsiveness.
Neutral factors These usually have little impact on satisfaction eg a hotel guest may be delighted if
a hotel is aesthetically pleasing with nice wallpaper, smart fittings etc, but may well
not miss them if not present.

Question 6.2 Service quality factors

Learning outcome C2(viii)

You have recently been appointed to manage an underground rail system for a major international city.

Required

Classify the 18 service quality factors (from the previous section) in terms of the four key categories;
Hygiene factors; Critical factors; Neutral factors and Enhancing factors. (8 marks)

10.5 Perception of service

In product operations there is a physical output which is relatively easy to measure in terms of quality.
With service operations, the expression 'perception is reality' applies. Differences arise between the
service delivered and the customers' perception of quality because people filter what they see and
experience.
186 6: Quality management PART C OPERATIONS MANAGEMENT

Exam alert
The concepts of quality, quality assurance and quality management are now well-established in the
business world. Quality proved highly popular as a topic for examination questions in the past, and can be
expected to feature prominently in the future.

Section summary
Service quality is the totality of features and characteristics of that service which bears on its ability to
meet stated or implied needs.
PART C OPERATIONS MANAGEMENT 6: Quality management 187

Chapter Roundup
 Most modern approaches to quality try to assure quality in the production process (quality assurance)
rather than inspecting goods or services after they have been produced.

 Three methods of measuring quality include:

 SERVQUAL – this can be used to measure quality in a service organisation. It measures the gap
between customer expectations and their actual experience.

 Balanced scorecards – these rate quality across four financial and non-financial perspectives.

 Value for money audits – these identify and analyse key aspects of performance which are often
related to economy, efficiency and effectiveness.

 Total quality management (TQM) is the continuous improvement in quality, productivity and effectiveness
obtained by establishing management responsibility for processes as well as output.

 The key principles of TQM are, prevention, right first time, eliminate waste, continuous improvement,
everyone's concern, participation and teamwork/empowerment.

 In a TQM approach, all parts of the organisation are involved in quality issues, and need to work together.
Every person and every activity in the organisation affects the work done by others.

 Some organisations formalise the internal supplier-internal customer concept by requiring each internal
supplier to make a service level agreement with its internal customer.

 Kaizen is the continuous examination and improvement of existing processes.

 There are four types of quality costs – prevention, appraisal/inspection, internal failure and external
failure.

 A quality circle is a team of workers from within the organisation which meets at intervals to discuss
issues relating to the quality of the product or service produced.

 The 5Ss is a Japanese approach to quality that focuses on the five aspects of structurise, systemise,
sanitise, standardise and self-discipline.

 Six Sigma is a process that is designed to assist organisations to focus on developing and delivering near-
perfect products and services.

 The goal of lean production is 'to get the right things to the right place at the right time, the first time,
while minimising waste and being open to change'.

 In a manufacturing environment a commitment to quality (and to the customer) may be referred to as

'world class manufacturing'.

 ISO certified organisations have had their procedures and procedures checked and verified by an
independent auditor.

 ISO compliant organisations self-certify that they meet the ISO requirements, however such claims have
not been verified.

 Total productive maintenance is a policy that ensures quality is reflected in the maintenance of
production equipment.

 Ho's TQMEX model indicates the relationship between quality management and other aspects of
operations management.

 Service quality is the totality of features and characteristics of that service which bears on its ability to
meet stated or implied needs.
188 6: Quality management PART C OPERATIONS MANAGEMENT

Quick Quiz
1 List five principles of TQM.

1 ...........................................................................................................................................

2 ...........................................................................................................................................

3 ...........................................................................................................................................

4 ...........................................................................................................................................

5 ...........................................................................................................................................

2 Which of the following is not one of the 5Ss?

A Structurise
B Systemise
C Simplify
D Self-discipline

3 An ISO 9000 compliant organisation:

A Has its processes independently checked and verified as meeting the ISO requirements
B Has self-certified the fact that its processes meet the ISO requirements
C Aims to meet the ISO requirements
D Meets ISO 9000 requirements at least 90% of the time.

4 Which of the following is not a critical service quality factor?

A Responsiveness
B Integrity
C Communication
D Competence

5 Who devised the TQMEX model?

A Kaplan and Norton

B Deming
C Ouchi
D Ho
PART C OPERATIONS MANAGEMENT 6: Quality management 189

Answers to Quick Quiz

1 Any five from the following: prevention, right first time, eliminate waste, continuous improvement,
everybody's concern, participation and teamwork.

2 C The other elements are sanitise and standardise.

3 B An ISO compliant organisation self-certifies the fact that its processes meet the ISO requirements.
ISO certified or registered organisations have their claims independently verified.

4 B Integrity is a hygiene factor.

5 D Ho devised the TQMEX model.

Answers to Questions
6.1 TQM and consistency

When producing a product or service, consistency means using the same standard of resources and employing
the same methods and procedures (processes). Consistency in processes should result in consistently high
quality output, and a consistently satisfied customer.

6.2 Service quality factors

Hygiene factors Critical factors Neutral factors Enhancing factors

Access Responsiveness Comfort Attentiveness
Availability Communication Aesthetics Care
Functionality Competence Cleanliness
Integrity Commitment
Reliability Friendliness
Security Courtesy
Flexibility

Now try this question from Number Level Marks Time

the Exam Question Bank 6 Examination 25 45 mins
190 6: Quality management PART C OPERATIONS MANAGEMENT
MANAGING CAPACITY AND INVENTORY

In this final chapter on operations Today's business environment demands speed and
management, we turn our attention to efficiency in the delivery of products and services. This
strategies for balancing capacity with changing nature of business has implications for inventory
demand and the management of inventory. management.

Capacity management is concerned with the The just-in-time philosophy, covered in the final section of
organisation's ability to meet the demand for its this chapter, is one approach that minimises holding costs
products or services. Capacity is a limiting factor on how while allowing timely production and delivery of products
much an organisation can produce, and how much it and services.
can earn.

topic list learning outcomes syllabus references ability required

1 Capacity management C2(b) C2(vii) comprehension
2 Balancing capacity and demand C2(b) C2(vii) comprehension
3 Capacity planning C2(b) C2(vii) comprehension
4 Capacity control C2(b) C2(vii) comprehension
5 Inventory management C2(b) C2(vi) comprehension
6 Just-in-time (JIT) C2(b) C2(vi) comprehension

191
192 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT

1 Capacity management

Introduction
Capacity is a measure of what an operation is able to produce within a specified period of time. Capacity
management aims to maximise the returns an organisation achieves on the assets and systems it utilises.

CAPACITY has been defined as the maximum level of value added activity over a period of time that can
be achieved by a process or production unit under normal working conditions.
KEY TERM
Overcapacity or undercapacity can be detrimental to the business activities of an organisation.

1.1 Overcapacity
Overcapacity means resources available for production are not fully utilised.

(a) Resources are underutilised and return on assets is lower than it could be. If an attempt is made to
increase selling prices to improve the return, products and services may become expensive relative
to competitors.

(b) In the service industry it could send out the wrong messages to customers eg a restaurant that is
not full may give that impression that the food is not good.

1.2 Undercapacity
Undercapacity means more production is being demanded than is able to be produced.

(a) If the organisation is unable to satisfy customer demand it is missing out on profits from the
products or services the market was ready to buy. Also, the customer is likely to acquire the
product or service from a rival organisation and the customer may be lost.

(b) In the service industry, undercapacity may result in slower or less comfortable service, reducing
customer satisfaction and customer retention.

Capacity planning aims to balance capacity with the demand for the product or service.

Section summary
Overcapacity means resources available for production are not fully utilised.

Undercapacity means more production is being demanded than is able to be produced.

2 Balancing capacity and demand

Introduction
One important operations management task within an organisation is balancing the amount it is able to
produce (capacity) with the amount it is able to sell (demand).
 PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 193

2.1 Dealing with uncertainty

Uncertainties in capacity could be caused by a number of factors, for example the shortage or a delay in
the supply of a resource.
KEY POINTS
Uncertainties in demand are often due to the unopredictable nature of customers and potential
customers.

Dealing with uncertainty requires a flexibility in planning and control.

Dependent demand is demand that is predictable because it is based on a factor that is known. For
example, an organisation providing school meals can predict the demand for its meals because the size of
each school population is known.

Dependent demand occurs often in manufacturing, where the demand for raw materials and components
can be predicted from the demand for the main product. Materials requirement planning (MRP) is a form
of dependent demand planning and control. However, many organisations and / or operations within
organisations aren’t able to predict demand as easily. They have to make capacity decisions based on
experience and judgement about the likely level of demand.

Fast turnaround time is important for airlines because, by minimising time on the ground, an airline can
maximise the productivity of its planes in the air (ie maximise capacity).
CASE STUDY
To help airlines achieve the benefits of a fast turnaround time, the Airbus A320 family aircraft has the
following features.

 Larger passenger doors

 Wider aisles
 Larger overhead storage compartments
 Convenient access to underfloor baggage holds
 Wider outward-opening cargo doors

2.2 Planning and control activities

There are four planning and control activities associated with balancing capacity and demand.

(a) Loading
(b) Sequencing
(c) Scheduling
(d) Monitoring and controlling

2.2.1 Loading
Loading is the amount of work allocated to an operating unit. The term was first applied to the allocation
of work to a machine or group of machines, but is applicable to any operating unit (eg a hair salon).

2.2.2 Sequencing
Decisions have to be taken when work comes in about the order in which different jobs will be done or
different orders fulfilled. The sequencing of operations could be on the basis of any of the following.

(a) Customer priority

(b) Due date
(c) Last in first out
(d) First in first out
(e) Longest operation time first
(f) Shortest operation time first
194 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT

The preferred sequencing criteria should be the one that optimises operational performance in terms of:

(a) Dependability of delivery (ie meeting the due dates promised to customers)
(b) Speed of delivery (ie minimising the amount of time that jobs spend in the process)
(c) Cost
(d) Minimising idle time in work centres (which is an aspect of cost)
(e) Minimising inventory levels (which is another aspect of cost)

2.2.3 Scheduling
Once work has been sequenced, it might be necessary to prepare a detailed timetable, specifying the
time that jobs should be started and when they should end.

Formal schedules are only needed when detailed planning is necessary to make sure that customer
demand can be met. In operations where demand is unpredictable, scheduling is impracticable, and the
operation must simply react to orders as they arrive, for example petrol stations.

For an operation that processes a large number of jobs, there is a risk that with poor scheduling,
bottlenecks will occur in different parts of the operation at different times.

2.2.4 Monitoring and controlling

Having loaded, sequenced and scheduled the work, management must monitor the operation to make
sure that the work is proceeding as planned. If a deviation from the plan is shown, corrective measures
may be required so that the work can be re-scheduled.

The terms 'push control' and 'pull control' refer to when control action is taken to manage the flow of
work. With push control, production and inventory levels are forecasted and the focus is on pushing work
through each stage of the process, regardless of whether the next stage is ready to receive it.

With pull control, the focus is on each stage of the process calling for work to be delivered from the
previous process when it is needed. The work is not delivered from the previous process until it is needed.
With pull control, there should be less inventory in the system.

Section summary
There are four planning and control activities associated with balancing capacity and demand, loading,
sequencing, scheduling and monitoring and controlling.

3 Capacity planning

Introduction
Capacity planning aims to balance the capacity of an operation with the demand from customers. The
objective is to maximise both profits and customer satisfaction.

3.1 Purpose of capacity planning and control

Planning and controlling capacity involves:

(a) Planning the normal capacity of the operation, and

(b) Reacting to changes in demand.

Long-term strategic decisions have to be made about what the capacity of an operation should be, and
investment decisions taken to achieve the planned capacity.
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 195

Capacity planning in the short- and medium-term has several implications for operational performance.

Implication Comment
Cost Costs are affected by planned capacity. When the capacity of an operation exceeds
demand, there will be under-utilised resources and costs will be higher than if
capacity were more closely matched to demand.
Revenue On the other hand, revenues could also be affected by the capacity of an
operation. If demand exceeds the capacity of an operation to meet it, revenues will
be forgone that could otherwise have been earned.
Quality The quality of an operation could be affected by capacity planning. For example, if
an operation varies its capacity by using part-time or temporary staff, the quality of
the product or service might be impaired.
Speed of response The speed of response to demand can be improved either by building up finished
to demand goods inventories (which has a cost) or by providing sufficient capacity to avoid
customers having to queue or to wait (which also has a cost).
Dependability of The closer an operation works to its capacity limit, the less easily will it be able to
supply cope with unexpected disruptions to the work flow. Supply will therefore be less
dependable.
Flexibility The flexibility of an operation, and in particular its ability to vary the volume of
output it can produce, will be improved by having surplus capacity. An operation
working at or close to its capacity limit is much less flexible.

3.2 Measuring demand and capacity

3.2.1 Forecasting demand
In most organisations, the sales and marketing department is responsible for forecasting demand.
However, demand forecasts are relevant to operations management and capacity planning.

(a) For operations management purposes, demand forecasts should be expressed in terms of units
rather than in terms of sales revenue. For example, for a manufacturing operation it is more
relevant to express demand in terms of labour hours or machine hours.

(b) Forecasts should be as accurate as possible, because capacity will be planned on the basis of the
forecasts.

(c) Forecasts of demand should give some indication of the degree of uncertainty. Where possible, the
variation in demand should be assessed statistically, perhaps on the basis of demand patterns
from the past.

3.2.2 Measuring capacity

Measuring capacity is not a straightforward task, except for standardised and repetitive operations. When
an operation produces a range of different products or services, measuring capacity in terms of output
produced is difficult, because there isn't a standard measure of output.

Capacity might therefore be measured either in terms of input resources available or in terms of output
produced.
196 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT

Operation Capacity measure in terms of input Capacity measure in terms of output

resources produced
Football club Ground capacity Number of paying spectators
Squad size
Number of matches
Doctors' surgery Number of doctors Number of patients treated
Number of surgery hours
Department store Shelf space or volume, or floor area Number of customers through the check-outs
Air travel Number of seats available on a Number of passengers carried on the route
route each week

Where output is non-standard, any capacity measurement based on output will have to use an average
measure. For example, a doctors' surgery might measure its capacity in terms of being able to treat 400
patients each week, this might be based on the assumption that an average time for treating each patient
is ten minutes. In practice, some patients will need more than ten minutes and some less.

Often, one or more parts of an operation will work at their capacity limit. The parts of an operation that
work at their capacity limit are the capacity constraints for the entire operation. Capacity constraints
limit the total output achievable. They can cause bottlenecks in the work flow and result in unsatisfied
demand. For example, if visitors to an out-of-town shopping centre all use the centre's car park and the
car park is limited to 1,000 spaces, the number of car parking spaces is a capacity constraint for the
centre.

3.3 Planning for capacity

There are different ways of planning for capacity.

 A level capacity plan

 A chase demand plan
 A demand management plan
 A mix of the above three types of plan

3.3.1 Level capacity plan

A level capacity plan is a plan to maintain activity at a constant level over the planning period and to
ignore fluctuations in forecast demand. Staffing and other resource levels are kept constant.

In a manufacturing operation, when demand is lower than capacity, the operation will produce goods for
inventory.

In a service operation, there will be idle resources when demand is low and delays and probably lower
service quality when demand is high.

3.3.2 Chase demand plan

This plan is the opposite of a level capacity plan – it aims to match capacity to forecast fluctuations in
demand.

To achieve this, resources must be flexible. For example, staff numbers might have to be variable and
staff might be required to work overtime or shifts. Variations in equipment levels might also be necessary,
perhaps by means of short-term rental arrangements.

Project-based teams and virtual organisations may help provide the flexibility needed to implement a
chase demand plan.
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 197

3.3.3 Demand management planning

Some organisations attempt to stabilise demand and then plan capacity accordingly.

The aim of demand management planning is to reduce peak demand by switching it to the off-peak
periods.

The most obvious way of managing demand is through price discrimination. Examples include:

(a) Offering low off-peak fares on trains to encourage some customers to switch their travelling time.

(b) Off-peak telephone charges.

(c) Off-peak holiday prices to build up demand out of the holiday season.

Producers can also use advertising and other marketing tools to attempt to stabilise demand.

3.3.4 Mixed plans

In practice, capacity planning is often a mixture of level capacity planning, chase demand planning and
demand management planning.

3.3.5 Yield management

In operations with a fairly fixed short-term and medium-term capacity, such as hotels, restaurants,
theatres and airlines, an objective could be to achieve as much revenue as possible from the available
fixed resources.

A yield management approach is particularly well-suited to an operation where:

(a) Capacity is fairly fixed in the short- to medium-term.

(b) The market can be segmented, to allow some price discrimination.
(c) The service cannot be sold in advance.
(d) The marginal cost of making an additional sale is low.

Yield management techniques have been evident in airline operations, where the techniques used include:

(a) Price discounting. When demand is expected to be low, an airline might sell a block of tickets at a
very cheap price.

(b) Varying the capacity of different types of service. In an airline operation, this could mean
switching the space in an aircraft from first class or business seats to economy class, or vice versa.

(c) Over-booking. An airline will expect a percentage of its customers who have booked in advance to
fail to arrive for their flight. Airlines therefore tend to book more passengers on to a flight than they
have seats. If more passengers arrive than there are seats, some passengers will be offered
inducements to take a later flight, or will be upgraded to first-class or business class travel.

3.4 Other methods of managing capacity

The use of Flexible Manufacturing Systems (FMS), queuing theory and forecasting can also be used to
manage capacity.

3.4.1 Flexible Manufacturing Systems (FMS)

FMSs use automated computer systems to produce output quickly in response to specific customer
orders. For example, print on demand services are operated by some printing organisations. Books or
other publications are stored by the printer and copies are produced in response to customer orders.

These systems enable production to switch quickly between orders of small batches of output. This
provides a responsive, customer-focussed service. However, they may be less efficient than production
systems which focus on a single product, as these benefit from economies of scale and specialisation.
198 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT

3.4.2 Queuing theory

Queuing theory seeks to balance customer waiting (or queuing) time and idle service capacity through
mathematical modelling. The theory states that customer satisfaction and throughput increases if a
single queue is used rather than several, shorter, queues. This is because the frustration of being in a
'slow queue' is removed. The theory can be applied in many situations, such as some shops, hospitals,
banks and airport check-ins, but has a number of other uses (such as in call centres).

Benefits of applying queuing theory include the ability to give customers an estimated waiting time, plan
peaks and dips in demand to ensure staffing levels are appropriate, manage demand through
appointment systems and use queuing theory data as benchmarks to compare performance.

3.4.3 Forecasting
Forecasting systems seek to match production with customer demand by anticipating the latter. These
systems rely on accurate customer information and past demand data, which is not always available.
The organisation must also understand demand and its processes well enough to match the two.

Section summary
There are four main ways of planning for capacity, level capacity plans, chase demand plans, demand
management plans and a mix of the other three types of plan.

Balancing capacity and demand

One of the biggest challenges electronics companies are facing in 2010 is lengthening component lead-
times. After a year of slow sales, just as demand is picking up, lead-times are stretching out.
CASE STUDY
The problem is that component suppliers are unwilling to increase capacity or inventory until recovery is
clearly underway. Given the economic uncertainties that still exist, it is hard to blame component
manufacturers for being reluctant to take a leap of faith and increase inventories and/or capacity.
At the same time, electronics manufacturers are seeing revenues drop, not because of order cancellations,
but because of an inability to get materials. What can these companies do?
At this point, the best business strategy is to address the current situation both reactively and proactively.
The reactive strategy should focus on bringing quality components in as quickly as possible in the given
current market conditions. While creative sourcing may be required, reactive measures should continue to
support customer approved vendor list integrity and avoid questionable sources of supply.
The proactive strategy focuses on longer term solutions that help address a market that could have
extended lead-times for several more quarters and prevent excess inventory liability. Proactive strategy
steps should include:
• Working with customers to develop extended forecasts so that orders can be placed with sufficient
lead-time.
• Working with the customer to expand the approved vendor list, where possible to increase sourcing
options on critical components
• Careful monitoring of total company inventories of critical components. Companies should have ERP
systems and component numbering practices which allow real-time visibility into inventory by
customer and inventory across the company.
• Careful monitoring of lead-time trends and pricing.
Strong supply chain relationships will help.
The good news is that lengthening lead-times are often indicative of a recovering market.
Adapted from an article by Susan Mucha, www.emtworldwide.com, March 2010
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 199

4 Capacity control

Introduction
Capacity control involves reacting to actual demand and influences on actual capacity as they arise.

4.1 Materials requirements planning (MRP I)

MRP I is a technique for deciding the volume and timing of materials, in manufacturing conditions where
there is dependent demand. MRP I is not appropriate if sales cannot be forecasted.

The purpose of an MRP I system is to:

(a) Calculate the quantity of materials required, for each type of material, and
(b) Determine when they will be required.

The materials requirements are calculated from:

(a) Known future orders, ie firm orders already received from customers, plus
(b) A forecast of other future orders that, with a reasonable degree of confidence, will be received.

The quantities of each type of materials required for the product or service will be defined in its bill of
materials. Estimates of firm and likely demand can therefore be converted into a materials requirements
schedule.

MRP I enables manufacturing organisations to determine when to order material, by working back from
when they will be required for production, and allowing the necessary lead time for production or for
purchasing from the external supplier.

There are numerous benefits to an organisation which uses an MRP I system. For example, it can
reduce its stock levels whilst being able to meet orders, the system can identify and warn of production
problems such as bottlenecks and assist with JIT management by forging close relationships with
suppliers.

4.2 Manufacturing resource planning (MRP II)

Manufacturing resource planning, or MRP II, evolved out of materials requirements planning (MRP I). It
is a plan for planning and monitoring all the resources of a manufacturing company: manufacturing,
marketing, finance and engineering.

MRP II is a computerised system that incorporates a single database used by many different areas of the
organisation. The engineering department, manufacturing function and finance function will all be using
the same version of the bill of materials. All functions work from a common set of data.

MRP II is a sophisticated system that enables optimal inventory control based on the matching of supply
and demand.

Features include:

 Production planning
 Capacity planning
 Forecasting
 Purchasing
 Order-entry
 Operations control
 Financial analysis
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Brown (2001) believes possible benefits include:

 Reduced stock-outs – better customer service

 Reduced inventory holding costs
 Improved plant/facilities utilisation
 Reliable order fulfilment times
 Reduced 'crisis management' time

However, MRP II implementations are not always successful. Some potential drawbacks are illustrated in
the following case study.

A family-owned building construction company builds residential and commercial buildings. At any time,
the company is working on about 12 projects.
CASE STUDY
The operations department is organised around project managers, each responsible for between two and
four projects at any time, and a foreman for each site. Full-time employees are organised into work groups
of two, three or four individuals, and each work group has a specialist skill. The company also uses sub-
contractors for many aspects of building work.

The company has recently installed a MRP II system.

One of the projects it is working on is the construction of a new residential estate of 50 houses. The
houses on the estate will be of three different designs. Each design differs in terms of size, layout, window
sizes, roof tile design, electricity supply features, water supply and central heating, furnishings and
kitchen fittings. House buyers also have the option to pay for extra items, such as additional or more
expensive bathroom fittings.

Project managers and site foremen have complained about the MRP II system. They identified the
following issues.

1 The system generates a lot of figures, often using complex formulae (algorithms) to estimate the
required quantities and timing of materials. The figures are produced by production planning staff,
but a large number of people need to be kept informed – the foremen, project managers, possible
sub-contractors and possibly also specialist work teams. This is bureaucratic.

2 The material requirements are estimated by a computer system of the production planning section.
The final users of the information – and of the materials – have no sense of ownership of the
figures. The figures, having been computer-produced, will be difficult to check. Project managers
and foremen etc will probably have no incentive to check the figures to see whether they appear to
make sense.

3 Small hold-ups or difficulties in the building work can have a significant effect on materials
requirements. For example, bad weather could hold up production. Whenever scheduling has to be
changed, there will be a new materials requirements schedule, and this new information will have
to be distributed to all the people affected. This will add to the problems of information over-load.

4 MRP II methods work reasonably well for standardised building, but are not easily applied to one-
off construction work, where materials requirements and scheduling have to be done on a one-off
basis.

4.3 Optimised production technology (OPT)

OPT is a computer-based method for scheduling production that focuses on the known capacity
constraints (bottlenecks) of the operation.

It is used to:

(a) Identify the capacity constraints in the system.

(b) Schedule production to these capacity constraints.
(c) Try to identify ways of overcoming the capacity constraint, so as to increase capacity.
(d) Having done that, identify the next capacity constraint and schedule production to this constraint.
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 201

4.4 Enterprise resource planning (ERP)

Enterprise resource planning developed out of MRP II. ERP performs a similar function but on a wider
basis, integrating and using databases from all parts of the organisation.

Enterprise Resource Planning (ERP) software attempts to integrate all departments and functions of an
organisation in a computer system able to meet the needs of users from across the whole organisation.

An ERP system includes a number of integrated modules designed to support all of the key activities of an
enterprise. This includes managing the key elements of the supply chain such as production planning,
purchasing, inventory control and customer service including order tracking.

ERP has been extended to the growing number of e-business applications, connecting to customers and
supply chain members.

One of the most popular ERP systems has been the R/3 system supplied by SAP. The R/3 system
integrates most of an organisation's business applications and contains sections for manufacturing and
logistics, sales and distribution, financial accounting and human resource management.

ERP has been effective in some situations, for example where it has been implemented as a means of
rationalising and integrating systems where mergers and acquisitions have led to an uncoordinated mix
of systems. ERP also provides efficiencies in supply chain management through facilitating reduced lead
times.

However many ERP implementations have failed to live up to expectations, failing to deliver significant
efficiency gains.

As they cover many areas of an organisation, ERP implementations are relatively expensive. They also
carry significant 'hidden' costs through requiring organisations to change the way they operate. Some
businesses have been restructured simply to fit the restrictions of the ERP software.

Question 7.1 Capacity management

Learning outcome C2(vii)

Identify the ways that service organisations differ from manufacturing organisations when considering
capacity management. (5 marks)

MRP and ERP are included on the paper P1 syllabus in connection with integrating
accounting functions with other systems.

Section summary
MRP I, MRP II, OPT and ERP systems all include elements of capacity control.
202 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT

5 Inventory management

Introduction
Inventories held in any organisation can generally be classified under four main headings.

 Raw materials
 Spare parts/consumables
 Work in progress
 Finished goods

For example, the raw materials of a furniture company would be wood and upholstery. Consumables
would be items such as nails, screws and castors. Work in progress would be partly completed furniture.
Finished goods would be tables, chairs, desks etc ready for sale. Not all organisations will have
inventories of all four general categories.

Inventory control includes the functions of inventory ordering and purchasing, receiving goods into store,
storing and issuing inventory and controlling the level of inventory.

5.1 Why hold inventories?

Brown (2001) identified the following reasons for holding inventory.

 Protection against supply problems

 To meet unexpected increases in demand
 To improve delivery times to customers
 To allow bulk purchases and associated discounts
 To provide a buffer protecting against quality problems in raw materials of newly finished goods
 To improve reliability
 To smooth out production when demand fluctuates.

5.2 Controls
There should be controls over the following functions.

 The ordering of inventories

 The purchase of inventories
 The receipt of goods into store
 Storage
 The issue of inventory and maintenance of inventories at the most appropriate level

Inventory controls are required for a number of reasons.

(a) Holding costs of inventory may be expensive.

(b) Production will be disrupted if the company runs out of raw materials.
(c) If inventory with a short shelf life is not used or sold, their value may decline.
(d) If customer orders cannot be supplied immediately, customer satisfaction will suffer.

5.3 Importance of keeping inventory records

Proper records should be kept of the physical procedures for ordering and receiving a consignment of
goods to ensure the following.

 That enough inventory is held

 That there is no duplication of ordering
 That quality is maintained
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 203

5.4 Storage of inventories

Storekeeping involves storing materials to achieve the following objectives.

 Speedy issue and receipt of goods

 Full identification of all goods at all times
 Correct location of all goods at all times
 Protection of goods from damage and deterioration
 Provision of secure stores to avoid pilferage, theft and fire
 Efficient use of storage space
 Maintenance of correct inventory levels
 Keeping correct and up-to-date records of receipts, issues and inventory levels

One of the objectives of storekeeping is to maintain accurate records of current inventory levels. This
involves the accurate recording of inventory movements (issues from and receipts into stores).

5.5 Perpetual or continuous inventory

Continuous or perpetual inventory is the name for a system that involves recording every receipt and
issue of inventory as it occurs. This means that there is a continuous record of the balance of each item
of inventory.

When the inventory levels drops below a predetermined level, an order for a fixed amount is issued to
replenish inventory.

5.6 Periodic inventory systems

These systems involve a check of inventory levels at specific time intervals. The checks may trigger an
order for new inventory. The quantity ordered depends on the current inventory level.

5.7 ABC system

Under this system, items may be classified as expensive, inexpensive or in a middle-cost range. Because
of the practical advantages of simplifying stores control procedures without incurring unnecessary high
costs, it may be possible to segregate materials for selective stores control.

(a) Expensive and medium-cost materials are subject to careful stores control procedures to minimise
cost.

(b) Inexpensive materials can be stored in large quantities because the cost savings from careful stores
control do not justify the administrative effort required to implement the control.

This selective approach to stores control is sometimes called the ABC method whereby materials are
classified A, B or C according to their value. A refers to high value inventory, B to medium and C to low
value inventory. It is based upon the Pareto 80/20 rule which suggests that 20% of the items are likely to
account for 80% of the overall value.

5.8 Obsolescence and wastage

Obsolete inventories are those items which have become out-of-date and are no longer required. Obsolete
items are disposed of and treated as an expense in the company's financial statements.

From the perspective of operations management, proper controls should be instituted to minimise the
incidence of losses arising from obsolescence or wastage.

Slow-moving inventories are items which are likely to take a long time to be used up.
204 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT

5.9 Holding costs

If stocks are too high, holding costs will be incurred unnecessarily. Such costs occur for a number of
reasons.

(a) Costs of storage and stores operations. Larger stocks require more storage space and possibly
extra staff and equipment to control and handle them.

(b) Interest charges. Holding inventory involves the tying up of capital (cash) on which interest must
be paid.

(c) Insurance costs. The larger the value of inventory held, the greater insurance premiums are likely
to be.

(d) Risk of obsolescence. The longer an inventory item is held, the greater is the risk of obsolescence.

(e) Deterioration. When materials in store deteriorate to the extent that they are unusable, they must
be thrown away with the likelihood that disposal costs would be incurred.

5.10 Costs of obtaining inventories

If inventories are kept low, small quantities will have to be ordered more frequently, thereby increasing
the following ordering or procurement costs.

(a) Clerical and administrative costs associated with purchasing, accounting for and receiving goods

(b) Transport costs

(c) Production run costs, for stock which is manufactured internally rather than purchased from
external sources

5.11 Running out of inventory (stock-outs)

An additional type of cost which may arise if inventories are kept too low is the type associated with
running out of inventories.

 Lost contribution from lost sales

 Loss of future sales due to disgruntled customers
 Loss of customer goodwill
 Cost of production stoppages
 Labour frustration over stoppages
 Extra costs of urgent, small quantity, replenishment orders

5.12 Objective of inventory control

The overall objective of inventory control is, therefore, to maintain inventory levels so that the total of the
following costs is minimised.

 Holding costs
 Ordering costs
 Stockout costs

5.13 Inventory control levels and Economic Order Quantity (EOQ)

Inventory control levels can be calculated in order to maintain inventory at the optimum level. The three
critical control levels are reorder level, minimum level and maximum level. The Economic Order Quantity
KEY POINT
(EOQ) is the order quantity which minimises inventory costs.
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 205

Based on an analysis of past inventory usage and delivery times, a series of control levels can be
calculated and used to maintain inventories at their optimum level (in other words, a level which
minimises costs). These levels will determine 'when to order' and 'how many to order'.

(a) Reorder level. When inventories reach this level, an order should be placed to replenish stocks.
The reorder level is determined by considering the rate of consumption and the lead time (lead
time is the time between placing an order with a supplier and the stock becoming available for
use).

(b) Minimum level. This is a warning level to draw management attention to the fact that inventories
are approaching a dangerously low level and that outages are possible.

(c) Maximum level. This acts as a warning level to signal to management that stocks are reaching a
potentially wasteful level.

(d) Reorder quantity. This is the quantity of inventory which is to be ordered when stock reaches the
reorder level. If it is set so as to minimise the total costs associated with holding and ordering
inventory, then it is known as the economic order quantity.

(e) Average inventory. The formula for the average inventory level assumes that inventory levels
fluctuate evenly between the minimum (or safety) inventory level and the highest possible
inventory level (the amount of inventory immediately after an order is received, ie safety inventory
+ reorder quantity).

Exam skills
You need to understand that holding inventories and ordering inventories involve costs and that these
should be minimised and balanced against the risk of stock-outs.

Section summary
Continuous or perpetual inventory is the name for a system that involves recording every receipt and
issue of inventory as it occurs.

These systems involve a check of inventory levels at specific time intervals.

Under the ABC method of inventory control materials are classified A, B or C according to their value. A
refers to high value inventory, B to medium and C to low value inventory. It is based upon the Pareto
80/20 rule which suggests that 20% of the items are likely to account for 80% of the overall value.

If inventory levels are too high, holding costs will be incurred unnecessarily.

If inventories are kept low, small quantities will have to be ordered more frequently, thereby increasing
ordering or procurement costs

There are also costs involved in running out of inventory (stockouts).

The overall objective of inventory control is to maintain inventory levels so that the total of holding,
ordering and stockout costs is minimised.

Inventory control levels can be calculated in order to maintain inventory at the optimum level. The three
critical control levels are reorder level, minimum level and maximum level. The Economic Order Quantity
(EOQ) is the order quantity which minimises inventory costs.
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6 Just-in-time (JIT)

Introduction
Just-in-time (JIT) is an approach to operations based on the idea that goods and services should be
produced only when they are needed – neither too early (so that inventories build up) nor too late (so that
the customer has to wait). JIT is also known as 'stockless production' and may be used as part of a lean
production process. In its extreme form, a JIT system seeks to hold zero inventories.

6.1 Operational requirements of JIT

Just-in-Time (JIT) requires the following characteristics in operations.

(a) High quality. Any errors in quality will reduce throughput and reduce the dependability of supply.

(b) Speed. Throughput in the operation must be fast, so that customer orders can be met through
production rather than out of inventory.

(c) Reliability. Production must be reliable and not subject to hold-ups.

(d) Flexibility. To respond immediately to customer orders, production must be flexible, and in small
batch sizes (often a ‘batch’ of one).

(e) Lower costs. As a consequence of high quality production, and with a faster throughput and the
elimination of errors, costs will be reduced.

Under JIT, if there is no immediate demand for output the operation should not produce goods.

It is important that organisations which run a just-in-time system develop close relationships with their
suppliers. This is because they rely heavily on the quality of the their goods and on their ability to delivery
on-time as required.

Advantages of developing such close relationships include:

 Location of suppliers – suppliers may locate close to the manufacturing plant. This reduces costs
and delivery times.

 On-time delivery – close relationships should improve the reliability of suppliers to deliver on-time.

 Quality of supplies – the quality of goods supplied should improve as the supplier gets to know the
requirements of the customer better. This means less need to inspect delivered goods, resulting in
fewer production delays and better quality of output.

 Low inventory levels – the combination of the three factors above should mean that the
organisation can rely on small, frequent deliveries that match its production schedule.

6.2 The JIT philosophy

The JIT philosophy originated in Japan in the 1970s, with companies such as the car manufacturer
Toyota.
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 207

6.2.1 Three key elements in the JIT philosophy

Element Comment
Elimination of waste Waste is defined as any activity that does not add value. Examples of waste
identified by Toyota are:
 Overproduction, ie producing more than is immediately needed by the next
stage in the process.
 Waiting time. Waiting time can be measured by labour efficiency and
machine efficiency.
 Transport. Moving items around a plant does not add value. Waste can be
reduced by changing the layout of the factory floor so as to minimise the
movement of materials.
 Waste in the process. There could be waste in the process itself. Some
activities might be carried out only because there are design defects in the
product, or because of poor maintenance work.
 Inventory. Inventory is wasteful. The target should be to eliminate all
inventory by tackling the things that cause it to build up.
 Simplification of work. An employee does not necessarily add value by
working. Simplifying work is an important way of getting rid of waste in the
system because it eliminates unnecessary actions.
 Defective goods are quality waste. This is a significant cause of waste in
many operations.
The involvement of JIT is a cultural issue, and its philosophy has to be embraced by everyone
all staff in the involved in the operation if it is to be applied successfully. Critics of JIT argue
operation that management efforts to involve all staff can be patronising.
Continuous The goal is to meet demand immediately with perfect quality and no waste. In
improvement practice, this ideal is never achieved. However, the JIT philosophy is that an
organisation should work towards the ideal, and continuous improvement is both
possible and necessary. The Japanese term for continuous improvement is
Kaizen.

6.2.2 Criticism of JIT

A criticism of JIT, in its extreme form, is that to have no inventory between any stages in the production
process ignores the fact that some stages, by their very nature, could be less reliable than others. It could
therefore be argued that some inventory should be held at these stages to provide a degree of protection
to the rest of the operation.

6.3 JIT techniques

JIT is a collection of management techniques. Some of these relate to basic working practices.

(a) Work standards. Work standards should be established and followed by everyone at all times.

(b) Flexibility in responsibilities. The organisation should provide for the possibility of expanding the
responsibilities of any individual to the extent of their capabilities. Grading structures and
restrictive working practices should be eliminated as far as possible.

(c) Equality of all people working in the organisation. Equality should exist and be visible. For
example, there should be a single staff canteen.
208 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT

(d) Autonomy. Authority should be delegated to the individuals responsible directly in the activities of
the operation. Management should support people involved in production, not direct them.

(e) Development of personnel. Individual workers should be developed and trained.

(f) Quality of working life. The quality of working life should be improved, through better work area
facilities, job security and involvement of everyone in job-related decision-making.

(g) Creativity. Employees should be encouraged to be creative in devising improvements to the way
their work is done.

(h) Use several small, simple production units. Small machines can be moved around more easily,
and so offer greater flexibility in a shop floor layout. The risk of making a bad and costly
investment decision is reduced, because relatively simple small machines usually cost much less
than sophisticated large machines.

(i) Work floor layout and work flow. Work can be laid out to promote the smooth flow of operations.
Work flow is an important element in JIT, because the work needs to flow without interruption in
order to avoid a build-up of inventory or unnecessary down-times.

(j) Total productive maintenance (TPM). Total productive maintenance seeks to eliminate unplanned
breakdowns and the damage they cause to production and work flow. Staff operating on the
production line are brought into the search for improvements in maintenance.

(k) JIT purchasing. With JIT purchasing, an organisation establishes a close relationship with trusted
suppliers, and develops an arrangement with the supplier for being able to purchase materials only
when they are needed for production. The supplier is required to have a flexible production system
capable of responding immediately to purchase orders.

6.4 JIT planning and control

Holding inventories is one source of waste. Not having materials when they are needed is another. In
other words, both having inventories in hand and having stock-outs is wasteful practice.

6.4.1 Kanban
Kanban is the Japanese word for card or signal. A kanban system controls the flow of materials between
one stage in a process and the next. In its simple form, a card is used by an 'internal customer' as a signal
to an 'internal supplier' that the customer now requires more parts or materials. The card will contain
details of the parts or materials required.
The receipt of a card from an internal customer sets in motion the movement or production or supply of
one unit of an item, or one standard container of the item.

6.5 JIT in service operations

The JIT philosophy can be applied to service operations. Whereas JIT in manufacturing seeks to eliminate
inventories, JIT in service operations seeks to eliminate queues of customers.
Queues of customers are wasteful because:
(a) They waste customers' time.
(b) Queues require space and this space does not add value.
(c) Queuing lowers the customers' perception of the quality of the service.

The application of JIT to a service operation calls for multiskilling, so that employees can be used more flexibly
and moved from one type of work to another, in response to work flow requirements.
 PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 209

A postal delivery service has delivery staff allocated to their own routes. However, there may be scenarios
where, say, Route A is overloaded while Route B has a relatively small number of deliveries.
CASE STUDY Rather than have items for Route A piling up at the sorting office, the person responsible for Route B
could finish their route and then help out on Route A.
Teamwork and flexibility can be difficult to introduce because some people are more comfortable with
clearly defined boundaries and responsibilities.
However, the customer is only interested in receiving a timely service.

Some service organisations use a buffer operation to minimise customer queuing or minimise the
likelihood of customer dissatisfaction during queuing.

For example, hairdressers often give clients a shampoo to reduce the impact of waiting for the stylist.
Restaurants may have an area where guests may have a drink if no vacant tables are available
immediately. Such facilities may even encourage guests to plan in a few drinks before dinner thereby
increasing the restaurant's revenues.

Question 7.2 Capacity management and JIT

Learning outcomes C2(vi), C2(vii)

Discuss why a level capacity strategy might be difficult for a firm wishing to adopt a just-in-time (JIT)
philosophy. (5 marks)

You will meet JIT again in paper P2.

Section summary
Just-in-time is an approach to operations based on the idea that goods and services should be produced
only when they are needed.
The key elements of JIT are elimination of waste, the involvement of all staff in the operation and
continuous improvement.
Kanban is the Japanese word for card or signal. A kanban control system is a system for controlling the
flow of materials between one stage in a process and the next.
JIT philosophy can be applied to service operations. Whereas JIT in manufacturing seeks to eliminate
inventories, JIT in service operations seeks to remove queues of customers.
210 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT

Chapter Roundup
 Overcapacity means resources available for production are not fully utilised.

 Undercapacity means more production is being demanded than is able to be produced.

 There are four planning and control activities associated with balancing capacity and demand, loading,
sequencing, scheduling and monitoring and controlling.

 There are four main ways of planning for capacity, level capacity plans, chase demand plans, demand
management plans and a mix of the other three types of plan.

 MRP I, MRP II, OPT and ERP all include elements of capacity control.

 Continuous or perpetual inventory is the name for a system that involves recording every receipt and
issue of inventory as it occurs.

 These systems involve a check of inventory levels at specific time intervals.

 Under the ABC method of inventory control materials are classified A, B or C according to their value. A
refers to high value inventory, B to medium and C to low value inventory. It is based upon the Pareto
80/20 rule which suggests that 20% of the items are likely to account for 80% of the overall value.

 If inventories are too high, holding costs will be incurred unnecessarily.

 If inventories are kept low, small quantities will have to be ordered more frequently, thereby increasing
ordering or procurement costs.

 There are also costs involved in running out of inventory.

 The overall objective of inventory control is to maintain inventory levels so that the total of holding,
ordering and stockout costs is minimised.

 Inventory control levels can be calculated in order to maintain inventory at the optimum level. The three
critical control levels are reorder level, minimum level and maximum level. The Economic Order Quantity
(EOQ) is the order quantity which minimises inventory costs.

 Just-in-time is an approach to operations planning and control based on the idea that goods and services
should be produced only when they are needed.

 The key elements of JIT are elimination of waste, the involvement of all staff in the operation and
continuous improvement.

 Kanban is the Japanese word for card or signal. A kanban control system is a system for controlling the
flow of materials between one stage in a process and the next.

 JIT philosophy can be applied to service operations as well as to manufacturing. Whereas JIT in
manufacturing seeks to eliminate inventories, JIT in service operations seeks to remove queues of
customers.
PART C OPERATIONS MANAGEMENT 7: Managing capacity and inventory 211

Quick Quiz
1 An organisation is unable to produce enough output to fulfil demand. This is this an example of:

A Overcapacity
B Undercapacity
C Demand-pull production
D Stockouts

2 'A plan to maintain activity at a constant level over the planning period.' This statement defines:

A A chase demand plan

B A steady capacity plan
C A level capacity plan
D A demand management plan

3 Which inventory control level indicates that inventories are nearing a potentially wasteful level?

A Re-order level
B Minimum level
C Maximum level
D Economic order quantity

4 'A perpetual inventory system may be referred to as a continuous inventory system.'

True

False

5 The main feature of the Kanban system is that:

A Cards are used to signal that more items of inventory are required
B Stocks are ordered when they reach the minimum level
C Stockouts are commonplace
D Holding costs are maximised

Answers to Quick Quiz

1 B Undercapacity occurs where an organisation is unable to produce enough output to fulfil demand.

2 C A level capacity plan seeks to maintain constant activity over a planning period.

3 C The maximum level indicates that inventories are nearing a potentially wasteful level.

4 True. A perpetual inventory system can also be referred to as a continuous inventory system.

5 A The main feature of the Kanban system is that cards are used to signal that more items of
inventory are required.
212 7: Managing capacity and inventory PART C OPERATIONS MANAGEMENT

Answers to Questions
7.1 Capacity management

Service organisations differ from manufacturing organisations when considering capacity management in the
following ways.

• Production and consumption occur at the same time. Inventories of services can't be built up in quieter
times, which makes the balancing of capacity and demand more difficult.

• Greater interaction. The customer plays an active role in the delivery process. Customer service quality is
integral to the customer experience.

• Output is different each time. Each customer service interaction is different in some way eg different
conversation, attitude etc. Achieving a consistently high level of output is more challenging.

• Generally greater reliance on staff. Service delivery depends on the people delivering the service. The
'mood' of staff on the front line shouldn't adversely impact upon the customer experience.

• Intangible output makes measuring the quality level of output more difficult as there is no physical
product to inspect. Obtaining feedback of customer satisfaction is important.

7.2 Capacity management and JIT

A level capacity strategy involves building up an inventory buffer to enable orders to be met from stores when
demand exceeds capacity.

A Just in Time (JIT) approach involves producing goods when they are needed – eliminating the need to hold
inventory.

The build up of inventory required under a level capacity strategy contradicts the no inventory approach required
under JIT. Therefore, the two approaches are incompatible.

Under JIT, production is driven by immediate demand. The capacity management approach consistent with JIT
is a chase strategy – which involves adjusting production levels to match demand. This would allow nil (or
minimal) inventory, as required under JIT.

Now try this question from Number Level Marks Time

the Exam Question Bank 7 Examination 30 54 mins
MARKETING

Part D

213
214
MARKETING AND BUSINESS STRATEGY

In Part D of this Text we cover the marketing at how marketing plans are organised and managed – and
area of the syllabus. the role of marketing within an organisation.

We start this chapter with an explanation of marketing, The key activities that we are concerned with in this
the marketing concept and the marketing environment chapter are market research, segmentation, targeting and
which organisations operate in. positioning – the marketing strategy.

The bulk of this, and the next, chapter concern an

organisation's marketing activities. We begin by looking

topic list learning outcomes syllabus references ability required

1 The marketing concept D1(a) D1(i) comprehension
2 The marketing environment D1(b) D1(ii) comprehension
3 Marketing and corporate strategy D2(d) D2(x) comprehension
4 Marketing strategy D2(a) D2(i), D2(ii) comprehension

215
216 8: Marketing and business strategy PART D MARKETING

1 The marketing concept

Introduction
We begin our study of marketing by considering what marketing is and what adopting a marketing
orientation means We consider the marketing concept, as a business philosophy.

Later in the chapter we look at marketing as a core element of an organisation's corporate strategy and
the processes involved in creating a marketing plan.

1.1 What is marketing?

MARKETING is the process of planning and executing the concepts of pricing, promotion and distribution
of ideas, goods and services in order to create exchanges that satisfy individual and organisational
KEY TERM objectives.

Another definition is given by the UK's Chartered Institute of Marketing.

'Marketing is the management process which identifies, anticipates and supplies customer
requirements efficiently and profitably.'

This definition emphasises the wide scope of marketing, ranging from initial identification of customer
needs by means of research, right through to eventual, profitable satisfaction of those needs. This
definition is important because it stresses the importance of the customer and, more particularly,
customer satisfaction.

Kotler, on the other hand, emphasised the importance of marketing as getting 'the right product or
service to the customer, at the right price, at the right time'.

1.2 Products, goods and services: a note on terminology

A product is something that is offered to a market.

(a) Soap powder is an example of a fast moving consumer good (FMCG). It is a physical product that
is bought often.

(b) Durable goods are purchased less often and tend to be more expensive than FMCGs. Televisions,
cars and computers are examples of durable goods.

(c) A haircut is also a type of product – it is an example of a service product.

Broadly speaking, the word product can refer to physical goods or services. FMCGs and durable goods
combined are sometimes referred to as consumer goods.

1.3 Strategic and tactical marketing

Marketing involves several types of activity and many types of decision. For many organisations, the
products they provide are fundamental to their existence.

(a) Strategic marketing is tied in with corporate strategy, by identifying which products and markets
the organisation wishes to operate in.

(b) Tactical marketing is focused more on the short term and on particular elements of the marketing
mix.
PART D MARKETING 8: Marketing and business strategy 217

Example: retail
Strategic marketing A fashion retailer decides to open in the capital city of a country it had not
operated in before as it believes there are new, wealthy customers.
Tactical marketing End of season sale to make way for new stock.

Question 8.1 Strategic and tactical marketing

Learning outcome D1(i)

Distinguish between strategic and tactical marketing, and provide an example. (4 marks)

1.4 Exchanges
The role of marketing is to identify, anticipate and supply satisfactions to customers, to facilitate
mutually beneficial exchanges.

Mutually beneficial exchanges

Customer needs

Identifying
Mutually beneficial
Marketing Anticipating exchange

Supplying

Organisation’s objectives

1.5 The marketing concept and a marketing orientation

The marketing concept and marketing orientation are two interrelated terms. The definitions that follow
are from Brassington and Pettit (2000).

Marketing concept Marketing orientation

A philosophy of business, permeating the whole An approach to business that centres its activities
organisation, that holds that the key to on satisfying the needs and wants of its customers.
organisational success is meeting customers' needs
more effectively and more closely than competitors.
= A BELIEF SYSTEM = ACTUAL PRACTICES

1.6 The marketing concept

The marketing concept is a belief system. A belief system can be incorporated into the culture of the
organisation. Culture involves beliefs and patterns of behaviour.

The organisation as a whole can claim to be 'customer orientated'. Many organisations refer to customer
satisfaction in their statements of corporate purpose (mission statements). But official claims to be
customer orientated are often just claims – with little basis in fact.
218 8: Marketing and business strategy PART D MARKETING

As part of becoming properly ‘customer orientated’, organisations need to seek out gaps in the market
where the organisation or its competitors fail to meet customer demand. They should then produce
appropriate products.

1.6.1 The marketing concept in practice

Even though the marketing concept, with its attempt to match goods to consumer needs, is widely
accepted, most organisations will still require salespeople. The sales team's effort will be more successful
if products and services meet market needs.

A market-led approach will make what is on sale more appealing to customers. Salespeople will be able
to devote a greater proportion of their time to more productive activities such as developing leads,
providing better customer service and identifying changes in customer requirements.

All good sales presentations focus on the benefits that customers will receive from the company's
product or service.

1.7 Marketing orientation (or market orientation) and other orientations

The marketing concept and marketing orientation are often compared to other 'orientations' which are
briefly described below.

1.7.1 Production orientation

Under a production orientation, management believe that success is achieved through producing goods or
services of optimum quality as cost-efficiently as possible. The major task of management is to pursue
improved production and distribution efficiency.

It assumes that customers will want to buy products that have been produced efficiently.

The comparison between a marketing orientation built around the customer and an orientation built
around production is illustrated in the following diagram.

Comparison of marketing orientation with production orientation

Perhaps the most well-known example of production orientation was the Model T Ford, one of the
earliest motor cars to be produced for the mass market. Henry Ford famously said that Ford's customers
could have the (mass-produced) Model T in any colour, so long as it was black.
 PART D MARKETING 8: Marketing and business strategy 219

1.7.2 Sales orientation

Under a sales orientation the tendency is to make the product and then actively and perhaps aggressively
sell it. Underlying this philosophy is a belief that a good sales force can sell just about anything to
anybody.

Selling is preoccupied with the seller's need to convert their product into cash. Marketing is concerned
with satisfying the needs of the customer by means of the product and the whole cluster of things
associated with creating, delivering and finally consuming it.

1.7.3 Product orientation

Product orientated organisations focus on product development, for example the introduction of new
product features. This approach is based upon the belief that a more advanced product or one with more
features will be perceived as superior.

1.8 The potential impact of a marketing orientation

The marketing concept suggests that companies should focus on customer needs. The organisation needs
to interpret customer needs and then produce products and services that meet them, at a price that
customers accept. Do this and, in theory at least, minimal sales effort will be needed.

Customers of banking services generally have expectations that their accounts will be updated efficiently
and effectively, over a period of time, so that they have access to funds. They may also have other needs.
CASE STUDY
(a) Traditional 'western' banking

Banks like to offer other products to their customers, so that a customer with a current account
may also open a savings account. The bank is able to use the money to lend, at higher interest
rates, to other customers, thereby earning a profit. Competition between banks is often based on
interest rates.

(b) 'Islamic' banking

The classic banking model is held by some Muslims to contradict certain tenets of Islam (such as
the payment of interest). Many banks are now able to structure lending transactions in a fashion
that is acceptable to Islam.

In both cases (a) and (b) the bank is providing a service and, over the long term, engaging in a
relationship with its customers.

Question 8.2 Product and production orientation

Learning outcome D1(i)

Compare and contrast product orientated organisations and production orientated organisations.

(4 marks)

1.9 Push v Pull marketing

Traditionally, marketing activities focus on pushing goods out to resellers and consumers. Product
promotion is by the final seller in the value chain.

A 'pull' approach on the other hand, aims to produce a product that consumer demand will pull into retail
outlets. Product promotion is shared between the manufacturer and final seller.
220 8: Marketing and business strategy PART D MARKETING

1.10 The marketing concept: summary

To conclude, marketing has three dimensions.

(a) It is a culture. The marketing concept is to focus on consumer needs.

(b) It involves strategy. A company must select the markets it intends to sell to and the products or
services it will sell. These selections are strategic decisions.

(c) It involves tactics. Marketing tactics can be considered as the 7Ps of the marketing mix.

Exam skills
The syllabus refers to the marketing concept as a business philosophy. Therefore when answering
questions in this area you need to demonstrate that you understand 'marketing' means much more than
the traditional view of 'advertising' and 'public relations'.

In May 2012, a 5 mark exam question was set that required marketing principles and practices to be
applied to a public sector organisation. This was followed by a similar 10 mark question in November
2012 where the application was in relation to Government Policy.

Section summary
Marketing is the process of planning and executing the concepts of pricing, promotion and distribution of
ideas, goods and services in order to create exchanges that satisfy individual and organisational
objectives.

The marketing concept is a business philosophy which attempts to match goods to consumer needs.

A production orientation may be defined as the management view that success is achieved through
producing goods or services of optimum quality and cost.

Under a sales orientation the tendency is to make the product and then actively and aggressively sell it.

Product orientated organisations focus on product development.

2 The marketing environment

Introduction
All organisations exist in, interact with and are influenced by factors in their environment. It is
important for organisations to identify and monitor these factors as they often have a direct effect on the
performance of the business.

The marketing environment consists of three levels.

The macro-environment includes all factors that can influence the organisation, such as the PESTEL
factors explained in the next section. The macro-environment is generally out of the organisation’s control.

The micro-environment is comprised of factors specifically related to the organisation, such as the
organisation’s customers and suppliers. The organisation can have some influence over these factors.

The internal environment refers to factors within the organisation, such as its assets, employees and
finance. These factors are able to be controlled by the organisation.
PART D MARKETING 8: Marketing and business strategy 221

2.1 PESTEL factors

Factors in the environment that influence marketing can be classified using the PESTEL framework, as
shown below.

PESTEL factors
Political Economic Social/Cultural Technological Ecological Legal

These factors influence the organisation in many ways. However in marketing, we are particularly
interested in how they impact on markets and customers.

Environment and markets

Environment
(PESTEL factors)

Company
Customers

Suppliers
Competitors

For example, political factors may influence the market for financial services by encouraging customers to
take out certain types of investment. Economic factors may influence customers' buying power. The
following table shows the type of impact on customers.

Factor Impact on customers

Political factors This can affect consumers' confidence in the
 Changes in government and/or changes in future, their spending power or their rights.
government policy. Clearly this fundamentally affects normal
business. Government policy could give
 Political instability could lead to warfare or civil consumers more rights in relation to business.
unrest.
Economic factors Ultimately, this determines consumers’ effective
These include overall rate of economic growth, demand for products and services. Uncertainty
inflation, interest rates, exchange rates, consumers about the future may lead to more saving and
propensity to save. less spending. General prosperity may lead to
more spending on luxury items.
Social/cultural factors Demographic factors suggest the size and
Demography relates to the composition of the purchasing power of customer groups. Some
population, where people live, social classification. products may indicate high status.

Culture relates to people's values and beliefs. There Culture has significant consequences for the
may be many subgroups (subcultures) within a acceptability of marketing communications
culture. messages, attitudes to products (eg alcoholic
drinks), attitudes towards purchasing, and so on.
222 8: Marketing and business strategy PART D MARKETING

Factor Impact on customers

Technological factors Companies may be able to change the products
 New products or services they offer, but they can also
 New processes communicate in different ways. Customers may
 New working methods have different attitudes to innovation, some
 New communication methods preferring to stay with tried and trusted products
 New ways of distribution or patterns of behaviour.

Ecological factors The effect on customers is two-fold. Changing

 Long-term trends in the global physical attitudes enable businesses to satisfy new needs
environment, such as climate change. with new products, for example organic
vegetables. Natural disasters are a business
 Natural climatic impacts, such as flooding, opportunity for insurance companies, but also
earthquakes and so on. those supplying aid and construction companies.
 As well as considering the physical
environment, we should consider customers'
attitudes to it, as a developing cultural factor
with an influence on political decision-making.
Legal factors  Do legislation and judicial decisions increase
 The law affects ways of doing business. the customer's rights?

 Specific laws exist for particular areas of  Particular classes of customer may be
economic activity. protected in some cases (eg funeral services)
 Are customers increasingly willing and able to
take legal action?

Exam skills
Exam questions may require you to evaluate the environment an organisation operates in. You could use
the PESTEL factors as headings and generate ideas for each of them. This way you can earn marks
quickly and demonstrate good breadth of knowledge.

2.2 SWOT analysis 03/12

Another method of environmental analysis looks at an organisation’s internal strengths and weaknesses
as well as external opportunities and threats. This is known as SWOT analysis.

2.2.1 Internal appraisal: strengths and weaknesses

An internal appraisal will identify:

(a) The areas of the organisation that have strengths that should be exploited by suitable strategies

(b) The areas of the organisation that have weaknesses which need strategies to improve them.

The strengths and weaknesses analysis is intended to shape the organisation’s approach to the external
world. For instance, the identification of shortcomings in products could lead to a programme of product
development.

2.2.2 External appraisal: opportunities and threats

The external appraisal identifies opportunities that can be exploited by the organisation's strengths and
also to anticipate environmental threats against which the company must protect itself.
PART D MARKETING 8: Marketing and business strategy 223

Opportunities

(a) What opportunities exist in the business environment?

(b) What is their inherent profit-making potential?
(c) Can the organisation exploit the worthwhile opportunities?
(d) What is the comparative capability profile of competitors?
(e) What is the company's comparative performance potential in this field of opportunity?

Threats

(a) What threats might arise to the company or its business environment?
(b) How will competitors be affected?
(c) How will the company be affected?

2.2.3 Using a SWOT analysis

The SWOT analysis can be used in one of two ways.

(a) The organisation can develop resource-based strategies which enable the organisation to extend
the use of its strengths. This is common in retailing, for example, as supermarket chains extend
their own brands from food to other areas.

(b) The business can develop positioning-based strategies. In other words identifying what
opportunities are available and what the firm has to do exploit them.

Section summary
An organisation's marketing environment can be analysed into political, economic, social, technological,
ecological and legal factors (PESTEL).

3 Marketing and corporate strategy

Introduction
In this section we look at how an organisation develops and implements a marketing plan. The process
begins by considering what the overall corporate strategy is – the marketing plan is driven by the overall
corporate strategy.

Later in the chapter we explain the structure of a marketing plan.

3.1 Corporate and marketing strategies 11/11, 03/12

The process of corporate planning and the relationship with marketing strategy is shown in the following
table.

Corporate Marketing
Set objectives For the organisation as a whole: eg For products and market: eg increase
increase profits by X%. market share by X%; increase turnover.
Internal appraisal Review the effectiveness of the Conduct a marketing audit. A review of
(strengths and different aspects of the marketing activities. Does the organisation
weaknesses) organisation. have a marketing orientation?
224 8: Marketing and business strategy PART D MARKETING

Corporate Marketing
External appraisal Review political, economic, social, Review environmental factors as they affect
(opportunities and technological, ecological factors customers, products and markets.
threats) impacting on the whole
organisation.
Gaps There may be a gap between The company may be doing less well in
desired objectives and forecast particular markets than it ought to.
objectives. How should the gap be Marketing will be focused on growth.
closed?
Strategy Develop strategies to fill the gap: eg A marketing strategy is a plan to achieve the
diversifying, entering new markets. organisation's objectives by specifying:
 Resources to be allocated to marketing
 How those resources should be used
In the context of applying the marketing
concept, a marketing strategy would:
 Identify target markets and customer
needs in those markets
 Plan products which will satisfy the
needs of those markets
 Organise marketing resources, so as to
match products with customers
Implementation Implementation is delegated to The plans must be put into action, eg
departments of the business. advertising space must be bought.
Control Results are reviewed and the Has the organisation achieved its market
planning process starts again. share objectives?

3.2 The marketing plan

The marketing plan must be consistent with the corporate strategy. It might take the following form
(based on Kotler, 1994).

Section Content
The executive summary This is the finalised planning document with a summary of the main goals
and recommendations in the plan.
Situation analysis This consists of a SWOT analysis and forecasts.
Objectives and goals What the organisation is hoping to achieve, or needs to achieve, perhaps in
terms of market share or 'bottom line' profits and returns.
Objectives should be SMART (Specific, Measureable, Achievable, Realistic
and Time-bound).
Marketing strategy This considers the selection of target markets, the marketing mix and
marketing expenditure levels, as described in the preceding table.
Strategic marketing plan  Three to five or more years long
 Defines scope of product and market activities
 Aims to match the activities of the organisation to its distinctive
competences
Tactical marketing plan  One year time horizon
 Generally based on existing products and markets
 Concerned with marketing mix issues
PART D MARKETING 8: Marketing and business strategy 225

Section Content
Action plan This sets out how the strategies are to be achieved.
 Marketing mix strategy
– The product – People
– The price – Processes
– Place (distribution) – Physical evidence
– Promotion (advertising etc)
 The mix strategy may vary for each segment.
Budgets These are developed from the action programme.
Controls These will be set up to monitor the progress of the plan and the budget.

To summarise, the following diagram shows how marketing planning fits into the corporate plan.

Marketing and corporate planning

Section summary
An organisation's marketing plan is driven by and must therefore be consistent with its corporate
strategy.
226 8: Marketing and business strategy PART D MARKETING

4 Marketing strategy

Introduction
In this section we look at marketing strategy – in other words how the organisation decides which
markets to attack and how to position itself within each market. The key activities in this process are
market research, market segmentation, targeting and positioning.

Market research is the initial stage in which the organisation obtains data about its customers and their
needs.

A market segment is a group of customers with similar characteristics who can be targeted with the same
marketing mix. Segmentation bases can include objective classifications (eg age) as well as more
subjective approaches such as lifestyle or attitudes.

Having analysed the attractiveness of a segment, the organisation chooses one or more target markets.

Market positioning is the act of designing the company's offer and image so that it occupies a distinct
and valued place in the target customer's mind.

4.1 Market research

MARKET RESEARCH is the process of gathering, recording, analysing and reporting data and information
relating to the company's market, customers and competitors.
KEY TERM
Typically, market research is used to determine the characteristics of markets, suggest opportunities for
products and selling approaches and to suggest segments.

The research can relate to:

(a) Existing products and services

(b) New products and services

4.1.1 A market research plan

Market research plans can be analysed into five steps.

Defining the problem

Example

 Explaining a fall in sales

 Investigating potential demand for a new product
 Investigating attitudes to the brand
 Investigating what matters most to consumers

Developing the hypotheses to be tested, and the purpose of the research

Example

In some studies, the researchers have a particular question they want to test. The purpose
of some research may be to see if it is worth doing further research.

Collecting data

Example

A variety of approaches are used, such as surveys or questionnaires.

PART D MARKETING 8: Marketing and business strategy 227

Analyse and interpret the data

Example

The type of analysis depends on the type of research. Not all research is quantitative with
statistical validity. The emphasis on statistical assumptions is important – statistics can be
misunderstood and misused.

Report the findings

Example

The results of the research are written up and presented in a report to the client.

4.1.2 Quantitative vs qualitative data

Quantitative data enables measurement. The purpose is to measure the response of a sample of
consumers, on the assumption that measurable conclusions can be drawn from it. An example could be a
KEY POINTS
survey of structured questionnaires sent out to a sample of a population.

Qualitative data is not measurable, but it is useful to get people to say what they feel and think, as
opposed to giving relatively simple answers to unstructured questions.

4.1.3 Secondary vs primary data

Secondary data may be generated by sources internal or external to the organisation. It is termed
secondary because its intended use is not the specific research the organisation is using it for. Secondary
KEY POINT
data is usually gathered before primary data as it is often cheaper to collect and is used to guide the
primary research. It is not normally sufficient for research purposes by itself.

Secondary data
Source Uses
Internal
 From existing information systems
 Accounting data
 Customer databases  Before primary research to give guidance
 Data produced by other departments (eg complaints)  Instead of expensive primary research –
External some questions may already be answered
 Published statistics from government, professional/  Some information can only be acquired via
trade bodies secondary data
 Review of journals  Where primary research is not possible
 Research already collected by market research
agencies can be purchased, eg Nielsen Index on
grocery chains and random surveys

Primary data may be collected from sources internal or external to the organisation and may be
qualitative or quantitative in nature. Primary data is collected for a specific research purpose.
228 8: Marketing and business strategy PART D MARKETING

Primary data
Data collection method Comment
Questionnaires, such as the following. A number of precise questions requiring precise responses.
 Post surveys Ensuring questions are free of ambiguity is absolutely vital.

 Telephone Survey must be relevant to the data required.

 In street, via market researchers Questionnaires often move from the general to the specific.
 Over the Internet The interviewer always has to locate suitable respondents.
 At home A danger with postal questionnaires is that the response is
 In hotels self-selected.
 In shops
Experiment The researcher may set up artificial surroundings or may test a
product in real surroundings (eg asking software purchasers to
try out Beta versions of certain packages).
Observation People can be observed using product.
Unstructured interviews There is no structure to what is effectively a conversation but
the interviewer may have a checklist of topics to be covered.
Depth interviews The aim is to explore attitudes and motives for behaviour that
may not be conscious. If conducted properly, respondents can
be encouraged to say what they feel.
Projective techniques People often say that they will act in a different way than they
actually behave. Researchers have borrowed methods from
psychologists, and seek to uncover unconscious motives.
Examples include:
 Inkblot tests ('What images do you see in this inkblot?')
 Word association
 Thematic apperception tests ('What is going on in this
picture?')
Focus groups Focus groups usually consist of 8 to 10 respondents and an
interviewer taking the role of group moderator. The group
moderator introduces topics for discussion and intervenes as
necessary to encourage respondents or to direct discussions if
they threaten to wander too far off the point. The moderator
will also need to control any powerful personalities and prevent
them from dominating the group.

4.2 Forecasting demand

Forecasting demand for new products can be difficult. A forecast could be developed based on a range of
information and mathematical techniques. Possible types of data and information are explained below.

4.2.1 Current demand

An estimate of demand as it would be ‘today’ could involve considering a number of factors, such as:

 Total market potential

 Area market potential (geographic)
 Total industry sales
 Relative market shares
PART D MARKETING 8: Marketing and business strategy 229

4.2.2 Forecasting future demand

Preparing a sales (income) or demand forecast usually involves five stages:

Prepare a macroeconomic forecast – what will happen to overall economic activity in the
relevant economies in which a product is to be sold.

Prepare an industry sales forecast – what will happen to overall sales in an industry based
on the issues that influence the macroeconomic forecast.

Prepare a company sales forecast – based on what management expect to happen to the
company's market share.

Prepare a demand forecast – based on three types of information:

 What customers are currently doing in the market (industry sales data, company
sales data)

 Customer intentions in relation to buying products (survey of buyers' intentions,

market tests, sales force opinions, expert opinions)

 What customers have done in the past in the market (past-sales analysis)

Prepare an income forecast – based on the information created in Steps 1-4. Income is
dependent on forecasted demand and prices.

4.2.3 Survey of buyers' intentions

There are many market research agencies that undertake surveys of customer intentions – and sell this
information on. The value of a customer intention survey increases when there are a relatively small
number of customers, the cost of reaching them is small, and they have clear intentions.

4.2.4 Market tests

Instead of simply asking customers about their intentions, marketers may conduct market tests. Tests
may be particularly useful when finalising product design. Alternative designs may be evaluated, with
different features.

4.2.5 Sales force opinions

Another option is to use opinions from members of the sales force to forecast sales. This may be difficult
if the product is new, although salespeople may be able to get a feel for the market by talking with clients
and potential clients.

Unfortunately, sales people may try to forecast low sales if these forecasts will form the basis of their
future sales targets. On the other hand, marketing executives may provide over-optimistic forecasts to
help gain approval for the project or motivate the sales force.

4.2.6 Expert opinions

Expert opinion studies are widely used for forecasting marketing problems. For example, forecasts may be
obtained from industry experts, distributors or consultancies. Sometimes independent forecasts from
more than one expert source may be combined to produce what should be a more realistic forecast.
230 8: Marketing and business strategy PART D MARKETING

4.2.7 Past-sales analysis

Many businesses use past sales as a starting point for future sales forecasts. Figures may then be
processed through a model (for example a spreadsheet) that aims to take into account various factors,
such as:

 Trends: are sales growing, remaining steady ('flat-lining') or in decline?

 Seasonal or cyclical factors that occur in a regular pattern.
 Likely competitor activity.
 Sales and marketing campaigns.

4.2.8 Sales potential

The amount of sales a product can achieve is known as sales potential. Factors influencing sales potential
include:

 How 'essential' the product is to consumers

 The overall size of the market
 The level of competition in the market
 Whether consumers may delay purchasing the product (non-essential luxury items)
 Price – high prices may restrict the market
 Promotional expenditure – investment in promotion may broaden the market.

4.3 Market segmentation 09/12

A market is not a single homogeneous group of customers wanting an identical product. Markets consists
of potential buyers with different needs, and different buying behaviour.

MARKET SEGMENTATION may be defined as the subdividing of a market into distinct and increasingly
homogeneous subgroups of customers, where any subgroup can conceivably be selected as a target
KEY TERM market to be met with a distinct marketing mix.

Although the total market consists of widely different groups of consumers, each group consists of people
(or organisations) with common needs and preferences, who perhaps react to 'market stimuli' in much
the same way. Each market segment can become a target market for an organisation, and would require
a unique marketing mix if the organisation is to exploit it successfully. The organisation can then position
its offer to account for the roles of each segment.

4.3.1 The bases for segmentation

There are many different bases for segmentation. One basis will not be appropriate in every market, and
sometimes two or more bases might be valid at the same time. One segmentation variable might be
'superior' to another in a hierarchy of variables. Simple segmentation could be on one of the bases below.

 Demographic, (geographical area, age, gender, family lifecycle stage – see below)
 Situational and end-use (products being bought at different times or for different uses such as for
work or leisure)
 Level of income
 Occupation
 Education
 Religion
 Ethnicity
 Nationality
 Socio-economic (social class – A Upper middle class, B Middle class, C1 Lower middle class, C2
Working class, D subsistence)
 Buyer behaviour
 Psychological (lifestyle – see below)
PART D MARKETING 8: Marketing and business strategy 231

Demographical segmentation considers a number of factors such as gender and stage in family lifecycle.
For example, individuals and families may be categorised as bachelor, newly married couple, full nest (i,
ii and iii) and empty nest (i and ii).

Bachelors (unmarried males) are considered to be the most financially well-off and may be frequent
purchasers of cars, holidays and expensive kitchen equipment.

Newly married couples still have some disposable income but their priorities change.

The full nest category describes most families. Those in the full nest category are often the least
financially well-off as much of the family income is spent on housing and raising children. Categories ii
and iii describe families becoming better off as the children age and perhaps both partners work. As
incomes rise, the products purchased become less practical and more luxury.

The final category of empty nest describes two possible situations in later life. Those in the empty nest i
category have a good level of income and can spend on expensive goods and holidays. ‘Empty nest ii’
describes people with very little disposable income, for example those living on just the state pension and
struggling to get by. Purchases are limited to necessitates such as food and medicines.

Lifestyle segmentation deals with the person as opposed to the product and attempts to discover the
particular lifestyle patterns of customers. Lifestyle refers to 'distinctive ways of living adopted by
particular communities or subsections of society'. It involves combining a number of behavioural factors,
such as motivation, personality and culture.

One simple example generalises lifestyle in terms of four categories, as follows.

Lifestyle categories
Upwardly mobile, These individuals seek a better and more affluent lifestyle, principally through
ambitious better paid and more interesting work, and a higher material standard of living. A
customer with such a lifestyle will be prepared to try new products.
Traditional and Here, compliance and conformity to group norms bring social approval and
sociable reassurance to the individual. Purchasing patterns will therefore be 'conformist'.
Security and status This group stresses 'safety' and 'ego-defensive' needs. This lifestyle links status,
seeking income and security. It encourages the purchase of strong and well known
products and brands, and emphasises those products and services which confer
status and make life as secure and predictable as possible. Products that are well
established and familiar inspire more confidence than new products, which will
be resisted.
Hedonistic This lifestyle places emphasis on 'enjoying life now' and the immediate
preference satisfaction of wants and needs. Little thought is given to the future.

4.3.2 Segment validity

A market segment will only be valid if it is worth designing and developing a unique marketing mix for it.
A general rule suggested by Kotler, is that a valid segment must be substantial, measurable and
accessible. The following questions are commonly asked to decide whether or not the segment can be
used for developing marketing plans.

Criteria Comment
Can the segment be It might be possible to conceive a market segment, but it is not necessarily easy
measured? to measure it. For example, with a segment based on people with a conservative
outlook to life, can conservatism of outlook be measured by market research?
Is the segment big There has to be a large enough potential market to be profitable.
enough?
232 8: Marketing and business strategy PART D MARKETING

Criteria Comment
Can the segment be There has to be a way of getting to the potential customers via the organisation's
reached? promotion and distribution channels.
Do segments respond If two or more segments are identified by planners, but each segment responds in
differently? the same way to a marketing mix, the segments are effectively one and the same.
Consequently there is no point in distinguishing them from each other.
Can the segment be Do the identified customer needs, cost less to satisfy than the revenue they earn?
reached profitably?
Is the segment The stability of the segment is important, if the organisation is to commit huge
suitably stable? production and marketing resources to serve it. The organisation does not want
the segment to 'disappear' next year. Of course, this may not matter in some
industries.

4.3.3 Segment attractiveness

A segment might be valid and potentially profitable, but is it potentially attractive? Segments which are
most attractive will be those whose needs can be met by building on the company's strengths and where
forecasts for demand, sales profitability and growth are favourable.

4.3.4 Industrial segmentation

Industrial and commercial customers may also be segmented. Typical bases used for industrial
segmentation include:

 Location – geographical area

 Ordering characteristics - such as frequency of orders and average order size

 Company characteristics – type of business, the market they operate in, and their size

 Expectations – what benefit does the company expect to get out of the product? ie reliability,
quality, serviceability, support and safety

4.3.5 Benefits of market segmentation

The organisation may be able to identify new marketing opportunities, because it will have a better
understanding of customer needs in each segment, with the possibility of spotting further sub groups.

Specialists can be used for each of the organisation's major segments. For example, small business
counsellors can be employed by banks to deal effectively with small organisations. A computer
consultancy can have specialist sales staff for, say, shops, manufacturers, service industries and local
government authorities. This builds competences and establishes effective marketing systems.

The total marketing budget can be allocated proportionately to each segment and the likely return from
each segment. This optimises return on investment.

The organisation can make small adjustments to the product and service offerings and to the promotional
aspects for each segment. This again promotes efficient use of resources.

The organisation can try to dominate particular segments, therefore gaining competitive advantage.
Advantages created may function synergistically, promoting improved competitive ability – in other words,
the outcome is more than the sum of its parts.

The product range can more closely reflect differences in customer needs. Marketing relies on
responsiveness to the consumer. When this is improved, benefits can flow.
 PART D MARKETING 8: Marketing and business strategy 233

Question 8.3 Market segmentation

Learning outcome D2(ii)

Identify and briefly explain five benefits that a company may obtain through market segmentation.

(10 marks)

4.4 Competitor analysis

It is important for the organisation to consider any competitors before entering a market. Potential target
markets should be researched and competitors identified. Further research into the competitors should be
undertaken, for example to find out their strategies and how they apply the marketing mix. This will
prevent the business from entering a market where the competition is too strong.

4.5 Target markets

Limited resources, competition and large markets make it ineffective and inappropriate for companies to
sell to the entire market – that is, every market segment. For the sake of efficiency they must select target
markets. A target market is a market or segment selected for special attention by an organisation
(possibly served with a distinct marketing mix). The management of a company may choose one of the
following policy options.

Marketing strategy Comment Alignment to competitive strategy

Mass (or This policy is to produce a single product and The mass (or undifferentiated)
undifferentiated) hope to get as many customers as possible to marketing approach can be pursued
marketing buy it – segmentation is ignored entirely. by cost leaders or companies
pursuing a differentiation strategy
with a single market.
Concentrated The company attempts to produce the ideal Concentrated marketing is
marketing product for a single segment of the market effectively a focus strategy, whether
(for example, Rolls Royce cars). by cost or differentiation.
The disadvantage of concentrated marketing
is the business risk of relying on a single
segment of a single market.
Differentiated The company markets several product Differentiated marketing is
marketing versions, each aimed at a different market effectively a multi-focus strategy,
segment. with a company pursing different
The disadvantage of differentiated marketing opportunities in different segments.
is the additional costs of marketing and
production. When the costs of further
differentiation of the market exceed the
benefits from further segmentation and target
marketing, an organisation is said to have
'over-differentiated'.

Reaching Out to an Older Crowd

For decades, marketing has been youth-focused. But the fact is, 90 million Americans are 50 and over –
CASE STUDY
that's 42% of the adult population of the U.S. And during the next decade that number will grow by 22
million.

'Small-business owners who start recognising the needs and preferences of middle-aged and older
consumers have the chance to gain an advantage over larger firms’, says Dick Stroud.
234 8: Marketing and business strategy PART D MARKETING

Stroud is the founder of 20plus30, a London-based marketing consultancy. He spoke recently with
columnist Karen E. Klein, edited excerpts of their conversation follow.

'When talking about older people, the U.S. media and marketing industry uses the term 'boomers.' Europe
has adopted the term '50-plus.' These groups represent a very large number of potential customers.
During the next decade, their numbers will increase six times faster than their children and
grandchildren's age group of 15- to 34-year-olds.

'The other reason why the over-50s are so important relates to their purchasing power. Older consumers
are the primary purchasers of transportation, healthcare, housing, food, pensions, and personal insurance.
More than half of all cars purchased by an average American household occur after the head of the
household turns 50; and they are big spenders on vacations and travel.

To market to this group effectively, business owners should decide what segment of the over-50
population is appropriate to their product or service. This could be done on the basis of geography,
income, lifestyle, gender, or any number of other factors. Then, research is needed to understand what
the target customers really want.

The most dangerous stereotype is to view all over 50s as a single group. The next mistake is to believe
any of the nonsense about older people being averse to trying new brands, not wanting to use technology,
or not seeking new life experiences. None of these assumptions is substantiated by research.

The Internet is a really important marketing tool for this group. The physiological effects of aging need to
be considered here – image size, colour, contrast and website structure are all important.

I think the bottom line is that smaller companies are already leading the way in marketing to this demographic
and they're going to continue to do so. For example, there are an awful lot of small travel companies that
focus almost exclusively on 50-plus customers because they do spend a lot on travel. They have found,
maybe by accident, that this is a growth market for them, and they've become very successful at it.

I've also seen this in the insurance industry. Real estate, with the amount of people who sell their
property and move as they reach this age group, is another huge sector. But there are lots of other ways
to think about it, if business owners get creative and pay attention.

Adapted from an article by Karen E. Klein, BusinessWeek online, April 3, 2006

4.6 Positioning
Market position refers to how customers perceive a brand or product relative to other brands or products.
When positioning their products and services, most organisations want to achieve a clear, unique, and
positive position, such as the cheapest supermarket or highest quality vehicle manufacturer.

(a) Many products are, in fact, very similar, and the key issue is to make them distinct in the
customer's mind.

(b) Few products occupy a market space on their own. Inevitably they will be positioned in relation to
competing products and companies.

(c) People remember 'number 1', so the product should be positioned as 'number 1' in relation to a
positioning variable.

(i) Attributes (eg size)

(ii) Benefits (eg convenience)
(iii) Use/application (ease of use; accessibility)
(iv) User (the sort of person the product is meant to appeal to)
(v) Product category (consciously differentiated from competition)
(vi) Image
(vii) Quality/price (premium price)
PART D MARKETING 8: Marketing and business strategy 235

4.7 Developments in market segmentation and product positioning

Approaches to market segmentation and product positioning are continually changing. Here are a few
developments in recent years.

Development Comment
There is a growing awareness For example, the same customers of a retail bank can be segmented by
that consumers should be their account profile, for the purpose of product cross-selling, by their
segmented according to the attitudes to risk-taking for the purpose of delivering advertising messages
purpose of the segmentation. and by socio-economic type for the purpose of selecting a marketing
medium.
There is growing interest in Customer information on a database is analysed in order to identify
customer database analysis, segments or patterns of behaviour. This technique, known as 'data
and the idea of 'letting the mining' is likely to increase in significance as e-commerce grows in
data speak for itself'. popularity.
There is growing emphasis on Consumer attitudes and needs and lifestyles (as distinct from 'hard data'
segmentation by 'soft' data. such as age, lifestyle, socio-economic grouping, and so on).
There is a growing use of sub- Consumers within a particular segment can be sub-divided into different
segmentation or 'hybrid segments, and each sub-segment is targeted in a different way.
segmentation' methods.
Computer models are used. These will discover suitable additions to a product line, that will appeal
to a separately-distinguished market segment.

4.8 The Ansoff matrix

Ansoff (1987) devised a matrix showing possible strategies for products and markets.

Ansoff's competitive strategies (Ansoff matrix)

Products
Existing New

Market Product
Existing Penetration Development
1 4
Markets

Market
New Diversification
Development
16
2

The numbers in the quadrants are an approximate indication of the risk attached to each strategy.
Diversification is the riskiest.

(a) Market penetration involves increasing sales of the existing products in existing markets.

(b) Market development entails expansion into new markets using existing products.

(c) Product development involves the redesign or repositioning of existing products or the introduction
of completely new ones in order to appeal to existing markets.

(d) Diversification involves producing new products for new markets. It is much more risky than the
other three because the organisation is moving into areas in which it has little or no experience.
236 8: Marketing and business strategy PART D MARKETING

Question 8.4 Marketing strategy

Learning outcome D2(ii)

Identify and explain Ansoff's possible strategies for products and markets as shown in his matrix.
(4 marks)

4.9 Porter's potential strategies

Porter identified four potential positioning strategies.
Low High
cost cost

Broad Cost
target leadership Differentiation

Narrow Cost Differentiation

target focus focus

You should already understand the terms cost leadership and differentiation. Porter suggests that these
strategies can be applied in a broad or narrow range of the market.

4.10 Perceptual mapping

Perceptual mapping involves using customer perceptions of brands to map out how the market is
currently serviced. Any gaps in the market could be used by an organisation to deploy new products or
reposition existing ones.

Two critical success factors (such as price and quality) are identified and the current market is mapped.
Price
C

A
Quality

A, B and C are products in the market. The gap between A and B suggests a gap in the market for a low
to mid range product in terms of price and quality.
PART D MARKETING 8: Marketing and business strategy 237

Section summary
Market research is used to determine the characteristics of markets, suggest opportunities for products
and selling approaches and to suggest segments.
Market research information can help forecast future sales levels.
Market segmentation involves subdividing a market into distinct and increasingly homogeneous
subgroups of customers which may be selected as a target market to be met with a distinct marketing
mix.
Market position refers to how customers perceive a brand or product relative to other brands or products.
Market penetration involves increasing sales of existing products in existing markets.
Market development entails expansion into new markets with existing products.
Product development involves the redesign or repositioning of existing products or the introduction of
completely new ones in order to appeal to existing markets.
Diversification involves producing new products for new markets.
238 8: Marketing and business strategy PART D MARKETING

Chapter Roundup
 Marketing is the process of planning and executing the concepts of pricing, promotion and distribution of
ideas, goods and services in order to create exchanges that satisfy individual and organisational
objectives.

 The marketing concept is a business philosophy which attempts to meet consumer needs.

 A production orientation may be defined as the management view that success is achieved through
producing goods or services of optimum quality and cost.

 Under a sales orientation the tendency is to make the product and then actively and aggressively sell it.

 Product orientated organisations focus on product development.

 An organisation's marketing environment can be analysed into political, economic, social, technological,
ecological and legal factors (PESTEL).

 An organisation's marketing plan is driven by and must therefore be consistent with its corporate
strategy.

 Market research is used to determine the characteristics of markets, suggest opportunities for products
and selling approaches and to suggest segments.

 Market research information can help forecast future sales levels.

 Market segmentation involves subdividing of a market into distinct and increasingly homogeneous
subgroups of customers which may be selected as a target market to be met with a distinct marketing
mix.

 Market position refers to how customers perceive a brand or product relative to other brands or products

 Market penetration involves increasing sales of existing products in existing markets.

 Market development entails expansion into new markets with existing products.

 Product development involves the redesign or repositioning of existing products or the introduction of
completely new ones in order to appeal to existing markets.

 Diversification involves selling new products in new markets.

PART D MARKETING 8: Marketing and business strategy 239

Quick Quiz
1 Which type of marketing involves identifying the products and markets the organisation wishes to operate
in?

A Mass marketing
B Target marketing
C Strategic marketing
D Tactical marketing

2 Which of the following factors may be useful when forecasting demand'?

A Area Market Potential

B Total Industry Sales
C Relative Market Share
D All of the above

3 According to Ansoff, which approach should be taken when introducing a new product to an existing
market?

A Market development
B Product development
C Market penetration
D Diversification

4 List five possible bases for market segmentation.

1 ...........................................................................................................................................

2 ...........................................................................................................................................

3 ...........................................................................................................................................

4 ...........................................................................................................................................

5 ...........................................................................................................................................

5 Which of the following is an example of data mining?

A Analysing customer information held in a database to identify behavioural patterns.

B Setting up a database to store customer sales records
C Storing and recording customer surveys in a database
D Statistical analysis of macroeconomic data
240 8: Marketing and business strategy PART D MARKETING

Answers to Quick Quiz

1 C Strategic marketing involves identifying the products and markets the organisation wishes to
operate in.

2 D All may help forecast demand.

3 B According to Ansoff, product development should be undertaken when introducing new products
into an existing market. This means making sure the product will be acceptable to the market.

4 Geographical area, age, gender, income level, occupation – others may be equally valid.

5 A Data mining involves analysing a database to identify new information such as behavioural
patterns of customers.

Answers to Questions
8.1 Strategic and tactical marketing

Strategic marketing covers long-term decisions such as which market to operate in.
Example: a retailer decides to set up an outlet in a new country.

Tactical marketing covers short-term decisions relating to the marketing mix.

Example: a retailer decides to cut prices to clear space for new stock.

8.2 Product and production orientation

Product orientated organisations focus on product development particularly product features.

Production orientated organisations focus on production efficiency and minimising costs.

Both production and product orientated organisations place little emphasis on market research or customer
needs – and producing products takes precedence over identifying customers.

8.3 Market segmentation

The table below contains some examples of benefits. You may have thought of others.

Benefit Brief explanation

Better satisfaction of One approach will not satisfy all customers.
customer needs
Revenue growth Segmentation means that more customers may be attracted by, and pay more for,
what is on offer, in preference to competing products.
Customer retention By targeting customers, their needs are more likely to be met leading to repeat
purchase.
Targeted Segmentation enables clear communications as people in the target audience share
communications common needs.
Innovation By identifying un-met needs, companies can innovate to satisfy them.
PART D MARKETING 8: Marketing and business strategy 241

8.4 Marketing strategy

Ansoff's matrix shows possible strategies for products and markets.

Market penetration – increasing sales of existing products in existing markets.

Market development – expansion into new markets using existing products.

Product development – changing existing products or introducing new ones into existing markets.

Diversification – both new products and new markets.

Now try this question from Number Level Marks Time

the Exam Question Bank 8 Examination 20 36 mins
242 8: Marketing and business strategy PART D MARKETING
MARKETING PLANS, BRANDING
AND COMMUNICATIONS

Once an organisation has formed its overall different mixes are required due to the differing nature
marketing strategy work can begin on an of products and services.
action plan which consists of the marketing
Once the action plan has been developed, the
activities required for the strategy to be successful.
organisation's message needs to be communicated. This
The key activities are centred around the traditional can be achieved in a myriad of ways, the choice of which
4Ps of the marketing mix (for products) and the 7Ps depends on whether a consumer or another business is
of the extended marketing mix (for services). The the subject of the marketing campaign.

topic list learning outcomes syllabus references ability required

1 Marketing action plans D2(b) D2(v), D2(vi), application
D2(xii), D2(xiv),
D2(xv)
2 Branding D2(e) D2(xi) comprehension
3 Marketing communications D2(c) D2(iii), D2(iv), comprehension
D2(vii), D2(viii),
D2(ix)

243
244 9: Marketing plans, branding and communications PART D MARKETING

1 Marketing action plans 11/10

Introduction
Once an organisation has determined which market segments to attack and which strategies it should
use, the next stage in the marketing plan is to develop and action plan.

Action plans are usually based around what is known as the marketing mix. Kotler and Keller (2006)
define the marking mix as 'the set of controllable variables and their levels that the firm uses to influence
the target market'.

These variables should be carefully considered as each will directly affect the success of failure of the
marketing effort.

1.1 The marketing mix 05/10, 05/11, 05/13

Most of us have experience of being marketed 'to' in a variety of different ways. In developed countries
and, increasingly, in developing ones, people are subjected to a variety of different marketing activities.

Media and public spaces are full of advertisements such as posters, TV ads, pop-up ads on websites,
even text messages on mobile phones. In marketing terminology these are known as promotion (or
marketing communications).

Many of these messages aim, to persuade people to want to purchase certain products or services.
People are trained to produce and deliver these products or services to places where we can buy them.
Sophisticated processes might be involved in production and managing the sale. Delivery is also designed
and managed.

For a service (which by its nature is intangible), sometimes we require physical evidence that the service
is to be provided. For example, a letter or guarantee for building work or testimonials or references to
reassure potential customers. The price we pay is not arbitrary – it has been thought through. Phrases
such as 'that was good value for money' suggest that price and value are important in buying decisions.

In the paragraphs above, seven words or phrases beginning with 'p' have been emboldened. These form
what is known as the extended marketing mix. Traditionally, the marketing mix was the 'four Ps'
(product, price, place, promotion). Three extra 'P's have been added to describe the issues in service
industries (eg for a restaurant: people waiters, processes the cooking process, place the physical
environment of the restaurant).

The extended marketing mix the 7 Ps

The traditional marketing mix (4 Ps) You can add . . . (3 Ps)

Product People (the '5th P')
Price Processes
Place (distribution) Physical evidence
Promotion

1.2 Product 11/11

A PRODUCT (goods or services) is anything that satisfies a need or want. It is not a 'thing' with 'features'
but a package of benefits.
KEY TERM
From the organisation's point of view the product element of the marketing mix is what is being sold,
whether it be widgets, power stations, haircuts, holidays or financial advice. From the customer's point of
view, a product is a solution to a problem or a package of benefits. Many products might satisfy the
same customer need.
PART D MARKETING 9: Marketing plans, branding and communications 245

On what basis might a customer choose a product?

(a) Customer value is the customer's estimate of how far a product or service goes towards satisfying
their need(s).

(b) Every product has a price, and so the customer makes a trade-off between the expenditure and
the value offered.

(c) According to Kotler a customer must feel that they get a better deal from buying an item than by
any of the alternatives.

1.2.1 Product classification

Products can be classified as consumer goods or industrial goods. Consumer goods are sold directly to
the person who will ultimately use them. Industrial goods are used in the production of other products.
KEY POINTS
Consumer goods can be classified as follows.

Convenience goods Weekly groceries are a typical example. There is a further distinction
between staple goods (eg bread and potatoes) and impulse buys, like the
bar of chocolate found at the supermarket checkout. Brand awareness is
extremely important in this sector.
Shopping goods These are the more durable items that you buy, like furniture or washing
machines. This sort of purchase is usually only made after a good deal of
advance planning and shopping around.
Speciality goods These are items like jewellery or the more expensive items of clothing.
Unsought goods These are goods that the customer did not realise they needed! Typical
examples are new and sometimes 'gimmicky' products, such as 'wardrobe
organisers', or fire resistant car polish!

Industrial goods can be classified as follows.

 Installations, eg major items of plant and machinery like a factory assembly line
 Accessories, such as PCs
 Raw materials, for example plastic, metal, wood, foodstuffs and chemicals
 Components, eg the Lucas headlights on Ford cars, the Intel microchip in most PCs
 Supplies, such as office stationery and cleaning materials
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1.2.2 Product levels

It is useful for marketers to think of a product, and its attributes, at different levels.

Product attributes

 Core benefits provided by the

product/service (eg for a car: transport)
Core product  Features offered as part of the
product/service (eg for a car: design,
efficiency, air bags etc)
 Attributes customers expect when they buy
Actual/basic product (eg for a car: level of performance,
reliability – but also psychological benefits
such as status, thrill)
Expected product
 Elements which support core/actual
features (eg for a car: after-sales service,
Augmented product warranties, credit facilities)
 All augmentations/changes possible in the
Potential product future to enhance or develop the product
(for a car: better fuel economy, enhanced
design, computerised systems)

The core/generic product is those benefits that all the products in the category would have – all cars, for
example, provide transport.
KEY POINTS
The augmented product is the core product plus extra benefits that differentiate it from other products in
the category. These might include warranty, delivery, installation, after-sales support.

Many products are marketed at the augmented product level – the total package of the customer's
experience of purchasing and consuming the product/service is relevant. The expected product level is
also important, because of the potential for customers to be dissatisfied (by disappointed expectations) or
delighted (by exceeding expectations). The potential product is important in providing the marketing
organisation with future avenues to develop the product (and marketing message) in order to stay
competitive and 'fresh' in the market. Product issues in the marketing mix will include such factors as
design (size, shape), after-sales service (if necessary), features, packaging, quality and reliability.

1.2.3 Product range

A company's product range (or product portfolio, assortment or mix) is all the product lines and items that
the company offers for sale.
KEY POINT

A company's product range can be described in the following terms.

Characteristic Defined by:

Product item A specific product, such as a chocolate bar or pair of trainers. Businesses usually sell
multiple product items.
Product line A set of similar items that the organisation produces, for example different flavours of
crisp.
Width/Breadth Number of product lines: eg cosmetics, haircare, toiletries and health products.
Depth Average number of items per product line: eg cosmetics including moisturiser,
cleanser, toner, lipstick, eyeshadow etc.
Consistency Closeness of relationships in product range for the benefit of users and
production/distribution processes.
PART D MARKETING 9: Marketing plans, branding and communications 247

1.2.4 Managing the product range

There are benefits to be gained from using a systematic approach to the management of the product
range. It can be reduced (eg by discontinuing a product) or extended by:

 Introducing variations in models or style (eg a paint manufacturer introducing different colours,
types and pot sizes)

 Differentiating the quality of products offered at different price levels (eg 'premium' paints and
'value' paints)

 Developing associated items (eg a paint roller and brushes, paint trays, colour charts)

 Developing new products with little technical or marketing relationship to the existing range (eg
wallpaper and DIY accessories – or something completely different)

Managing the product range also raises broad issues such as:

 What role a product should play in the range. ('Flagship' brand? Profit provider? Niche filler? New
market tester/developer? Old faithful, retaining customer loyalty?) The roles of products in the mix
should create a balanced range, with sufficient cash-generating products to support cash-using
(declining or new/market-developing) products

 How resources should be allocated between products

 What should be expected from each product

 How far products should be integrated within the brand image and be recognisable as part of the
brand family

Marketing is not an exact science and there is no definitive approach or technique which can determine
how resources should be shared across the product range. There are, however, techniques which can aid
decision making. Ultimately the burden of the decision is a management responsibility and requires
judgement, but tools such as the BCG matrix and the product life cycle can help the decision-making
process.

1.2.5 The BCG matrix

The BCG matrix classifies products or brands on the basis of their market share and according to the rate
of growth in the market as a whole, as a way of assessing their role in the product range.
KEY POINT

Relative market share

High Low

Question mark
Market growth rate

High Star
(or Problem child)

Low Cash cow Dog

248 9: Marketing plans, branding and communications PART D MARKETING

On the basis of this classification, each product may fall into one of four broad categories.

(a) Question mark (or problem child): A small market share in a high growth industry.

The generic product is clearly popular, but customer support for the particular brand is limited. A
small market share implies that competitors are in a strong position and that if the product is to be
successful it will require substantial funds, and a new marketing mix. If the market looks good and
the product is viable, then the company should consider a 'build' strategy to increase market share
by increasing the resources available for that product to permit more active marketing. If the future
looks less promising, then the company should consider withdrawing the product. Which strategy
is chosen will depend on the strength of competitors, availability of funding and other relevant
factors.

(b) Star: A high market share in a high growth industry.

The star has potential for generating significant earnings, currently and in the future. At this stage
it may still require substantial marketing expenditure as part of a 'maintain' strategy, but this is
probably regarded as a good investment for the future.

(c) Cash Cow: A high market share in a mature slow-growth market.

Typically, a well established product with a high degree of consumer loyalty. Product development
costs are typically low and the marketing campaign is well established. The cash cow will normally
make a substantial contribution to overall profitability. The appropriate strategy will vary according
to the precise position of the cash cow. If market growth is reasonably strong then a 'holding'
strategy will be appropriate. However, if growth and/or share are weakening, then a 'harvesting'
strategy may be more sensible by cutting back on marketing expenditure to maximise short-term
profit.

(d) Dog: A low market share in a low-growth market.

Like the cash cow, this is a well established product, but one which is apparently losing consumer
support and may have cost disadvantages. The usual strategy would be to consider divestment,
unless the cash flow position is strong, in which case the product would be harvested in the short
term, prior to deletion from the product range.

The BCG matrix will be a useful tool to use in paper P2 to carry out a product mix analysis.

1.2.6 Product development

The following stages are often followed in the development of a product or service.

Stage 1 Customer needs

The product is designed to fulfil particular customer needs (such as quality, price or design).

Stage 2 Screening
The concept should be considered carefully to ensure it meets certain criteria such as
profitability or taking market share.

Stage 3 Design
The design process can be in different forms such as building an electronic or physical
prototype. Value engineering procedures may be followed to ensure all components add
value.

Stage 4 Time-to-Market
This is the time a product or service takes to get to the market place. A short time span is
desirable to reduce cost and to get ahead of the competition.

Stage 5 Testing
The product or service should be tested to check that it works, that it meets the needs of
the customer and that the customer likes it.
PART D MARKETING 9: Marketing plans, branding and communications 249

1.2.7 The product life cycle

The classic pattern of a product life cycle (PLC) is in four-stages, an introduction to the market, a
growth, market maturity and then decline. However, products can be rejuvenated so that their life cycle
KEY POINT
continues.

The priorities for performance objectives will change as a product goes through the phases of its life cycle.

(a) Introduction stage. The product or service offers something new to customers. There are unlikely
to be any competing products, but heavy advertising costs may be incurred to raise customer
awareness. Design changes may be required, as customer needs become better understood. A
business needs to establish an operational capability that allows it to be flexible and capable of
adapting and changing.

(b) Growth stage. The volume of demand for the product increases, and there are likely to be more
competitors in the market. Product features may become important between different suppliers.
The main objective for the operations function could be to keep up with the growing demand.
Speed of response to customer orders and reliability of supply could also be significant. Quality
standards will have to be maintained or improved in response to the growing competition, and cost
and price are likely to be much more significant.

(c) Market maturity. Demand levels off. Some early competitors are likely to have left the market,
which might now be shared by a small number of organisations. Product design will be largely
standardised, although organisations might try to develop new varieties of the product to extend its
life cycle. Organisations in the market are likely to compete on price and/or on value for money
(product differentiation). To remain competitive, it will be important to achieve low costs through
productivity improvements, whilst still providing reliability of supply.

(d) Decline stage. Total demand declines and competitors will start to withdraw from the market.
There will nevertheless be excess capacity in the industry, and the remaining organisations will
compete on price. Cost targets will remain the key operational objective. The company may also
decide to stop making and selling the product, and to focus its energies instead on another
developing/growing product.

Some writers refer to an additional phase between market growth and market maturity. Often at this time,
some of the weaker players in the market (initially attracted by market growth) are 'shaken out' of the
market by the stronger organisations. This is referred to as a 'shakeout'.
250 9: Marketing plans, branding and communications PART D MARKETING

1.3 Place
Place deals with how the product is distributed, and how it reaches its customers.

(a) Channel. Where are products sold? Supermarkets, corner shops? Which outlets will be chosen?
Zero level distribution is where the organisation sells directly to the customer. In one level
distribution, the organisation sells to the retailer, who sells to the customer. Two level distribution
involves the organisation selling to a wholesaler who in turn sells to the retailer.

(b) Logistics. The location of warehouses and efficiency of the distribution system is also important.
A customer might have to wait a long time if the warehouse is far away. Arguably, the speed of
delivery is an important issue in place.

An organisation can distribute the product itself (direct distribution) or distribute it through intermediary
organisations such as retailers.

1.4 Promotion 05/10

Many of the practical activities of the marketing department are related to promotion. Promotion is the
element of the mix over which the marketing department generally has most control. A useful mnemonic
is AIDA which summarises the aims of promotion.
 Arouse Attention
 Generate Interest
 Inspire Desire
 Initiate Action (ie buy the product)
Promotion in the marketing mix includes all marketing communications which let the public know of the
product or service.
 Advertising (newspapers, billboards, TV, radio, direct mail, Internet)
 Sales promotion (discounts, coupons, special displays in particular stores)
 Direct selling by sales personnel.
 Public relations
Lancaster and Withey (2005) identified the following elements of successful advertising. It must be
 Well planned and executed
 Effective as a method of communication
 Part of an overall effective promotional mix
 Aligned with the overall values and mission of the company

1.4.1 The range of promotional tools

ABOVE-THE-LINE campaigning is advertising placed in paid for media, such as the press, radio, TV,
cinema and outdoor sites. The 'line' is one in an advertising agency's accounts, above which are shown its
KEY TERMS earnings on a commission basis, from the buying of media space for clients.

BELOW-THE-LINE promotion involves product-integral and negotiated sales incentives, such as packaging,
merchandising, on-pack discounts and competitions and so on.

In recent years the range of promotional tools has continued to grow. The variety of media that can be
used for above-the-line campaigns has expanded, both in the printed advertising field and in the
broadcast field. There are literally thousands of publications aimed at different target groups. In the
broadcast field the number of television stations steadily increases through satellite, cable and digital
television and the number of commercial radio stations has also grown considerably.
PART D MARKETING 9: Marketing plans, branding and communications 251

The traditional emphasis on heavy mass above-the-line advertising has given way to more highly targeted
campaigns. Below-the-line, and even what Fill (2002) terms 'through-the-line' promotion is now far more
common. The following quote is from Fill.

"The shift is from an intervention-based approach to marketing communications (one based on

seeking the attention of a customer who might not necessarily be interested), towards permission-
based communications (where the focus is upon communications with members of an audience
who have already expressed an interest in a particular offering)."

MASS ADVERTISING (above-the-line)

t
h
r
DIRECT o
'the line'
MARKETING u
g
h
SALES PROMOTION, PUBLIC RELATIONS
PERSONAL SELLING
(below-the-line)

1.4.2 The product life cycle and promotional strategy

Each of the stages of the product life cycle (PLC), from introduction to decline have different strategic
requirements from their promotional activities.

Promotional Activities Introduction Growth Maturity Decline

Strategic focus Strong push Pull to Pull and push to Some pull to
then pull for differentiate sustain loyalty and remind core
awareness exposure through users
reassurance
Public relations  
Advertising   
Direct marketing   
Personal selling    
Sales promotion  

The table above sets out the strategic focus for each phase, and the main promotional activities to be
considered. What the table does not show is the way the promotional tools are used to support a push as
opposed to pull approach. One particular benefit of the PLC is that it is possible to overlay the various
stages of the process of diffusion. Through this it is possible to identify the different types of buyer
involved with the product at each stage and through this fine tune the appropriate message and media.

1.4.3 Introduction
For consumer brands this phase is critical as the primary need is to secure trade acceptance (and hence
shelf space) and then build public (target audience) awareness. Sunny Delight was developed by Proctor
& Gamble in consultation with major multiple grocers. When the product was launched the multiples
accepted the brand as it had been developed partly to their specification on price, ingredient and
packaging/size.
252 9: Marketing plans, branding and communications PART D MARKETING

1.4.4 Growth
During growth, promotional activity is used competitively to build market share. Customers are normally
willing to buy, having been made aware, but their problem becomes one of brand choice. Marketing
communications should therefore be used to differentiate and clearly position the product such that it
represents significant value for the customer.

1.4.5 Maturity
Once the rapid growth in a market starts to ease, the period of maturity commences. The primary
characteristic of this stage is that there is little or no growth. The battle therefore is to retain customer
loyalty. To do this, sales promotions are often used, to encourage trial by non-users and to reward current
users.

1.4.6 Decline
As sales start to decline it is normal practice to withdraw a great deal of promotion support. Direct
marketing and a little well targeted advertising to remind and reassure brand loyalists is the most
commonly used.

1.4.7 Co-ordinating promotional tools

Promotion aims to influence customers favourably towards an organisation's products or services. It is
necessary to co-ordinate all the promotional elements to achieve the maximum influence on the customer.
This can involve trial and error, and market research to establish the effectiveness of various combinations
of promotional tools (the promotion mix). The aim is optimal effectiveness, economy and efficiency of the
promotional tools.

1.5 Price
There are three main types of influence on price setting: costs, competition and customers (the 3Cs).
Other aspects of the pricing mix include factors such as any bulk purchase discounts given, credit
offered and methods of payment.

1.5.1 Costs
In practice, cost is the most important influence on price. Many organisations base price on simple cost-
plus rules. In other words, costs are estimated and then a profit margin is added in order to set the price.
This method is fairly easy to apply and ensures that costs are covered. A common example occurs with
the use of mark-up pricing. This is used by retailers and involves a fixed margin being added to the
buying-in price of goods for resale.

Because the cost-plus approach leads to price stability, with price changing only being used to reflect cost
changes, it can lead to a marketing strategy which is reactive rather then proactive. In addition, there is
very limited consideration of demand in cost-based pricing strategies. From a marketing perspective, cost-
based pricing may lead to missed opportunities as little or no account is taken, particularly in the short
run, of the price consumers are willing to pay for the brand, which may actually be higher than the cost-
based price.

1.5.2 Competition
In some markets, going rate pricing in which some form of average level of price becomes the norm,
perhaps, in the case of a high level of branding in the market, including standard price differentials
between brands.

In some market structures price competition may be avoided by informal agreement leading to
concentration on non-price competition – the markets for cigarettes and petrol are examples of this.
PART D MARKETING 9: Marketing plans, branding and communications 253

1.5.3 Customers
Rather than cost or competition as the prime determinants of price, a organisation may base pricing
strategy on the intensity and elasticity of demand. Strong demand may lead to a high price, and a weak
demand to a low price – much depends on the ability of the organisation to segment the market price in
terms of elasticity. In other words, price is determined by what customers are willing to pay.

For products or services with a typical downward sloping demand curve, fewer purchasers will buy at a
higher price. If a supplier can identify those purchasers still willing to pay the higher price the supplier
could benefit through charging them a higher price. This is called price discrimination or differential
pricing.

In practice, measurement of price elasticity and, implementing differential pricing can be very difficult.
There are a number of bases on which discriminating prices can be set.

(a) By market segment. A cross-channel ferry company would market its services at different prices in
England, Belgium and France, for example. Services such as cinemas and hairdressers are often
available at lower prices to old age pensioners and juveniles.

(b) By product version. Many car models have 'add on' extras which enable one brand to appeal to a
wider cross-section of customers. Final price need not reflect the cost price of the add on extras
directly. Usually the top of the range model would carry a price much in excess of the cost of
provision of the extras, as a prestige appeal.

(c) By place. Theatre seats are usually sold according to their location so that patrons pay different
prices for the same performance according to the seat type they occupy.

(d) By time. This is perhaps the most popular type of price discrimination.

Price sensitivity will vary amongst purchasers. Those who can pass on the cost of purchases will be
least sensitive and will respond more to other elements of the marketing mix.

Pricing research is notoriously difficult, especially if respondents try to give rational rather than their 'real'
response. As the respondent is not actually faced with the situation they may give a hypothetical answer
that is not going to be translated into actual purchasing behaviour. Nevertheless, pricing research is
increasingly common as organisations struggle to assess the perceived value customers attribute to a
brand to provide an input to their pricing decisions.

1.5.4 Competitors' actions and reactions

An organisation, in setting prices, sends out signals to rivals. These rivals are likely to react in some way.
In some industries (such as petrol retailing) pricing moves in unison, in others, price changes by one
supplier may initiate a price war, with each supplier undercutting the others.

In established industries dominated by a few major organisations, it is generally accepted that a price
initiative by one organisation will be countered by a price reaction by competitors. Here, prices tend to
be fairly stable, unless pushed upwards by inflation or strong growth in demand.

In the event that a rival cuts prices expecting to increase market share, an organisation has several
options.

(a) It will maintain its existing prices if the expectation is that only a small market share would be
lost, so that it is more profitable to keep prices at their existing level. Eventually, the rival
organisation may drop out of the market or be forced to raise its prices.

(b) It may maintain its prices but respond with a non-price counter-attack. This is a more positive
response, because the organisation will be securing or justifying its current prices.

(c) It may reduce its prices. This should protect the organisation's market share at the expense of
profitability. The main beneficiary from the price reduction will be the consumer.
254 9: Marketing plans, branding and communications PART D MARKETING

(d) It may raise its prices and respond with a non-price counter-attack. The extra revenue from the
higher prices might be used to finance promotion on product changes. A price increase would be
based on a campaign to emphasise the quality difference between the organisation's own product
and the rival's product.

1.5.5 Quality connotations

In the absence of other information, some customers tend to judge quality by price. Therefore a price
change may send signals to customers concerning the quality of the product. A rise may be taken to
indicate improvements, a reduction may signal reduced quality

1.5.6 New product pricing

Most pricing decisions for existing products relate to price changes. Such changes have a reference point
from which to move (the existing price). But when a new product is introduced for the first time there
may be no such reference point and therefore pricing decisions will be difficult to make.

In some cases, intermediate customer pricing, may be used. This involves the setting of a recommended
retail price to assist the reseller in setting their own price.

1.5.7 Multiple products

Most organisations market not just one product but a range of products. These products are commonly
interrelated, perhaps being complements or substitutes. The pricing strategy is likely to focus on the profit
from the whole range rather than that on each single product. For example, the use of loss leaders. A
very low price for one product is intended to make consumers buy other products in the range which carry
higher profit margins.

1.6 Price setting strategies

After considering the issues above the following price setting strategies can be developed.

1.6.1 Market penetration

The organisation sets a relatively low price for the product or service in order to stimulate growth of the
market and/or to obtain a large share of it. This strategy is appropriate under three conditions.

 Unit costs will fall with increased output (economies of scale) and experience (experience curve)
 The market is price sensitive and relatively low prices will attract additional sales
 Low prices will discourage new competitors

1.6.2 Market skimming

The organisation sets a high initial price for a new product in order to take advantage of those buyers
who are ready to pay a much higher price for it. A typical strategy would be initially to set a premium
price and then gradually to reduce the price to attract more price sensitive segments of the market.

This strategy is appropriate under three conditions.

 There is insufficient production capacity and competitors cannot increase their capacity
 Some buyers are relatively insensitive to high prices
 High price is perceived as high quality
PART D MARKETING 9: Marketing plans, branding and communications 255

1.6.3 Early cash recovery

The organisation aims to recover the investment in a new product or service as quickly as possible, to
achieve a minimum payback period. The price is set to facilitate this objective.

This objective tends to be used in three circumstances.

 The business is high risk

 Rapid changes in fashion or technology are expected
 The innovator is short of cash

1.6.4 Product line promotion

The organisation focuses on profit from the range of products which the organisation produces rather
than to treat each product as a separate entity.

This strategy looks at the whole range from two points of view.

 The interaction of the marketing mix

 Monitoring returns to ensure that net contribution is worthwhile

1.6.5 Cost-plus pricing

The organisation sets its price by marking up its unit costs by a certain percentage or fixed amount.

1.6.6 Target pricing

The organisation selects the price that gives a specified rate of return for a given output.

1.6.7 Price discrimination/selective pricing

The organisation sets different prices for the same product when it is sold in different markets.

Three sub-categories have evolved.

(a) Category

The product is cosmetically modified to justify a price differential. For example a 'budget' version of
a product is modified into a 'premium' version. Premium pricing is the term given where rich
customers are targeted with a high price, differentiated product.

(b) Consumer group

The price differential is justified by targeting different consumer groups for example, OAP or
student prices. They are often used by leisure facilities such as leisure centres or galleries.

(c) Peak

The price is set in accordance with demand. For example, the price of train ticket is often more
expensive in the morning when most people travel to work. Alternatively, a lower price can be set
during quiet periods to stimulate demand. This is also known as a variable pricing policy.

The danger is that price cuts to one buyer may be used as a negotiating lever by another buyer. This can
be countered in three ways.

(a) Buyers can be split into clearly defined segments, such as overseas and home, or students'
concessionary fares.

(b) Own branding, where packaging is changed for that of a supermarket, is a variation on this.

(c) Bulk buying discounts and aggregated rebate schemes can favour large buyers.
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1.6.8 Going rate/competitive prices

The organisation tries to keep in line with industry norm for prices. This is also known as competitive
pricing where prices are set with reference to competitors' pricing.

1.6.9 Price leadership/predatory pricing

In some markets a price leader (often a large corporation) emerges. A price leader dominates price levels
for a class of products; increases or decreases by the price leader are followed by the market. The price
dominant organisation may lead without moving at all. The price leader generally has a large market
share and will usually be an efficient producer with a reputation for technical competence.

The role of price leader is based on a track record of having initiated price moves that have been
accepted by both competitors and customers. Any dramatic changes in industry competition, (a new
entrant, or changes in the board room) may endanger the price leadership role.

Predatory pricing is a similar strategy but the reason for setting a low price is to damage the competition.

1.6.10 Quantum pricing

The organisation sets prices up to a psychological level but not beyond it. For example, a product's price
is set at 99p not £1.

1.7 Services and service marketing

Services have a different nature to goods and therefore the marketing of services presents a number of
different challenges. As a consequence, particular marketing practices have been developed.

SERVICES include:
'... those separately identifiable but intangible activities that provide want-satisfaction, and that are not, of
KEY TERM
necessity, tied to, or inextricable from, the sale of a product or another service. To produce a service may
or may not require the use of tangible goods or assets. However, where such use is required, there is no
transfer of title (permanent ownership) to these tangible goods.' (Cowell, 1995)

'... any activity of benefit that one party can offer to another that is essentially intangible and does not result in
the ownership of anything. Its production may or may not be tied to a physical product.' (Kotler et al. 2002)

The following characteristics of services distinguish them from goods, and have marketing implications.

Intangibility Inseparability

SERVICES

Ownership Heterogeneity

Perishability
PART D MARKETING 9: Marketing plans, branding and communications 257

1.7.1 Intangibility
'Intangibility' refers to the lack of substance which is involved with service delivery. Unlike goods, there
are no substantial material or physical aspects to a service – no taste, feel, visible presence and so on.
This creates difficulties and can inhibit the desire to consume a service, since customers are not sure
what they will receive.

Marketers and consumers need to try to overcome this problem. The marketer wishes to make the choice
of the product 'safer' and make the consumer feel more comfortable about paying for something they do
not then own and which has no physical form.

Dealing with intangibility may involve the following.

(a) Increasing the level of tangibility. Use physical or conceptual representations/illustrations to make
the customer feel more confident as to what it is that the service is delivering.

(b) Focusing the attention of the customer on the principal benefits of consumption. Communicating
the benefits of purchasing the service so that the customer visualises its use. Promotion and sales
material could provide images or records of previous customers' experience.

(c) Differentiating the service and reputation-building. Enhancing perceptions of customer service
and customer value by offering excellence in the delivery of the service. This reputation can be
attached to brands, which must then be managed to secure and enhance their market position,
(for example, the Virgin brand).

1.7.2 Inseparability
Services often cannot be separated off from the provider, for example having dental treatment or taking a
journey. Neither exists until they are actually being experienced/consumed by the person who has bought
them. The 'creation' of many services is simultaneous with consumption, where the service is

 Made available
 Produced
all at the same time
 Sold
 Consumed

Provision of the service may not be separable from the person or personality of the seller. Consequently,
increasing importance is attached to the need to instil values of quality, reliability and to generate a
service ethic in customer-facing staff. This points up the need for excellence and customer orientation and
the need to invest in high quality people and high quality training.

1.7.3 Heterogeneity (lack of 'sameness' or consistency)

Many services face the problem of maintaining consistency in the standard of output. Variability of quality
occurs because of the large number of variables involved. The quality of the service may depend heavily
on who it is that delivers the service. For example, booking a holiday using standard procedures may well
be quite different on a quiet winter afternoon and on a hectic spring weekend, and may well vary
according to the person dealing with your case.

In terms of marketing policy, heterogeneity highlights the need to develop and maintain processes for:

 Consistency of quality control, with clear and objective quality measures

 Consistency of customer service and customer care, standardising as far as possible
 Effective staff selection, training and motivation in customer care
 Monitoring service levels and customer perceptions of service delivery
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1.7.4 Perishability
Services cannot be stored – they are innately perishable. Seats on a bus or the services of a doctor exist
only for periods of time. If they are not consumed, they 'perish'. They cannot be used later. They cannot
be 'produced' in advance, to allow for peaks in demand.

This presents specific marketing problems. Meeting customer needs depends on staff being available as
and when they are needed. This must be balanced against the need for an organisation to minimise
unnecessary expenditure on staff wages. Anticipating and responding to levels of demand is, therefore, a
key planning priority.

Policies must seek to smooth out fluctuations in supply/demand relationship, or allow for contingencies.
Examples include:

 Using price variations to encourage off-peak demand (eg on travel services)

 Using promotions to stimulate off-peak demand (eg free mobile calls between certain hours)

 Using flexible staffing methods to cover fluctuations in demand (eg part-time and temporary
working, outsourcing to call centres)

1.7.5 Ownership
Services do not result in the transfer of property. The purchase of a service only gives the customer
access to or the right to use a facility, not ownership. This may lessen the perceived customer value of a
service – particularly if the benefit does not accrue until some time in the future (like a pension, or a
voucher for future use).

There are two basic approaches to addressing this problem.

(a) Promote the advantages of non-ownership. This can be done by emphasising the benefits of paid-
for maintenance, or a periodic upgrading of the product.

(b) Make available a tangible symbol or representation of ownership such as a certificate, voucher,
merchandise item or simple receipt. This can come to embody the benefits enjoyed.

Railways and airlines

In the UK, in the nineteenth century, railway passengers could buy tickets for first, second and third
CASE STUDY
classes. Now they buy first and 'standard' classes. The UK was a society heavily stratified by wealth, and
so offering three classes of tickets would seem a natural way of targeting a market segmented by wealth.

In India today, again there are first, second and third classes (with permutations based on air conditioned
compartments, sleepers etc). In China there exist 'hard' and 'soft' classes.

Airlines offer a useful contrast. Segmentation is partly based on purpose of visit and time of booking.
Business class was directed to people travelling on business expense accounts (who would travel
economy on their own account). Some airlines offer 'premium' economy seats to those who want more
legroom. The 'low-cost' airlines flying in the US and Europe designed for the 'no-frills' consumer, are
increasingly frequented by business travellers, for short haul trips.

1.8 The extended marketing mix

As a consequence of the differences between goods and services, the service marketing mix developed.
The intangible nature of services makes these extra three Ps particularly important (people, processes and
physical evidence).
PART D MARKETING 9: Marketing plans, branding and communications 259

1.8.1 People
The role of employees in the marketing mix is particularly important in service marketing, because of the
inseparability of the service from the service provider. Front-line staff must be selected, trained and
motivated with particular attention to customer care and public relations.

In the case of some services, the physical presence of people performing the service is a vital aspect of
customer satisfaction. The staff involved are performing or producing a service, selling the service and
also liaising with the customer to promote the service, gather information and respond to customer needs.

1.8.2 Processes
Efficient processes can become a marketing advantage in their own right. If an airline, for example,
develops a sophisticated ticketing system, it can offer shorter waits at check-in or wider choice of flights
through allied airlines. Efficient order processing not only increases customer satisfaction, but cuts down
on the time it takes the organisation to complete a sale.

Issues to be considered include the following.

 Policies, particularly with regard to ethical dealings (a key issue for many consumers)
 Procedures, for efficiency and standardisation
 Automation and computerisation of processes
 Queuing and waiting times
 Information gathering, processing and communication times
 Capacity management, matching supply to demand in a timely and cost effective way
 Accessibility of facilities, premises, personnel and services

Such issues are particularly important in service marketing. This is because the range of factors and
people involved make it difficult to standardise the service offered. Quality in particular specifications will
vary with the circumstances and individuals. This creates a need for process planning to ensure efficient
work.

1.8.3 Physical evidence

As we saw earlier, services are intangible – there is no physical substance to them. This often means that
the customer has no evidence of ownership. This may make it difficult for consumers to compare the
qualities of service provision and reduce the incentive to consume.

Issues of intangibility and ownership can be tackled by making available a physical symbol or
representation of the service and the benefits it confers. For example, tickets and programs relating to
entertainment and certificates of attainment in training are symbolic of the service received and a provide
a history of past positive experiences.

Physical evidence of service may also be incorporated into the design and specification of the service
environment by designing premises to reflect the quality and type of service. Such environmental factors
include finishing, decor, colour scheme, noise levels, background music, fragrance and general ambience.

Exam skills
If a question refers to four elements of the marketing mix the examiner is referring to the traditional elements
of product, price, place and promotion – the 4Ps. If five elements are referred to, add 'people' to the
traditional four. The other additional Ps referred to above could be referred to in longer written questions.
260 9: Marketing plans, branding and communications PART D MARKETING

Question 9.1 The extended marketing mix

Learning outcome D2(v)

Briefly explain the nature of services and the three additional Ps relevant to services marketing. (5 marks)

Section summary
Traditionally, the marketing mix was the 'four Ps' (product, price, place, promotion). The three extra 'Ps’
have been added to describe additional issues relevant to service industries (people, process, physical
evidence), giving an extended marketing mix of seven Ps.

2 Branding 11/10, 05/11, 09/11, 05/13

Introduction
A brand is a name, term, sign, symbol or design intended to identify the product of a seller and to
differentiate it from those of competitors. It is a key element of marketing and corporate strategy as it
generates revenue and therefore has a value.

Branding is a very general term covering brand names, designs, trademarks, symbols, jingles and the like.
A brand name refers strictly to letters, words or groups of words which can be spoken. A brand image
KEY POINTS
distinguishes a company's product from competing products in the eyes of the user.

Brand equity is the premium customers are prepared to pay for the branded product compared to a non-
branded product.

Brand management is the development of a long-term strategy to keep the brand in customers’ minds at
all times.

Branding might be discussed under any of the four Ps. For instance, part of the branding of a Rolls Royce
is the unmistakeable design of the product, or you might buy a 'cheaper brand' of washing-up liquid if you
are concerned about price.

Tesco has been named the most valuable brand on the high street, worth £8.6bn (2008), almost £4bn
more than rival Sainsbury's. A report has said that Tesco's top ranking was "almost inevitable" following
CASE STUDY sales of £32bn and its market leading share in the supermarket and convenience store markets. Brands in
the study were valued after looking at public sales figures for the last five years and attributing a score to
measures such as future growth, price positioning, customer service and brand heritage.

Tesco's strong brand is likely to give it a better chance to weather tougher times on the UK high street,
because consumers need more reasons to buy.

A brand identity may begin with a name, such as 'Kleenex' or 'Ariel', but extends to a range of visual
features which should assist in stimulating demand for the particular product. The additional features
include typography, colour, package design and slogans. Any distinctive features associated with the
product, that make it recognisable, also form part of the brand.

In addition a brand shares the attributes of a product – it is a bundle of tangible and intangible benefits
which deliver customer value. Consistency of the product is also an essential element. For example it is
important to McDonalds that the same type of burger is identical wherever in the world it is purchased.
PART D MARKETING 9: Marketing plans, branding and communications 261

2.1 Objectives of branding

The key benefit of branding is product differentiation and recognition. Products may be branded for a
number of reasons.

 It aids product differentiation, conveying a lot of information very quickly and concisely. This helps
customers readily to identify the goods or services and thereby helps to create customer loyalty to
the brand. It is therefore a means of increasing or maintaining sales.

 It maximises the impact of advertising for product identification and recognition. The more similar
a product (whether an industrial good or consumer good) is to competing goods, the more
branding is necessary to create a separate product identity.

 Branding leads to a readier acceptance of a manufacturer's goods by wholesalers and retailers.

 It reduces the importance of price differentials between goods.

 It supports market segmentation, since different brands of similar products may be developed to
meet specific needs of categories of uses

 It supports brand extension or stretching. Other products can be introduced into the brand range
to 'piggy back' on the articles already known to the customer (but ill-will as well as goodwill for one
product in a branded range will be transferred to all other products in the range).

 It eases the task of personal selling, by enhancing product recognition.

The relevance of branding does not apply equally to all products. The cost of intensive brand advertising
to project a brand image nationally may not be justified.

The decision as to whether a brand name should be given to a range of products or whether products
should be branded individually depends on quality factors.

 If the brand name is associated with quality, all goods in the range must be of that standard.

 If a company produces different quality (and price) goods for different market segments, it would be
unwise and confusing to give the same brand name to the higher and the lower quality goods.

2.2 Branding strategies

Kotler identified five broad branding strategies – line extension, brand extension, multi-branding, new
brands and co-brands.

2.2.1 Line extension

This is where a brand is applied to a variant of a product within the same product category. It is often
used by car manufacturers when they produce variants within the same class of car.

2.2.2 Brand extension

This is the introduction of new flavours, sizes etc to a brand, to capitalise on existing brand loyalty.
Examples include the introduction of Persil washing up liquid (Persil used to be a washing powder for
clothes) and Mars ice cream (Mars made its name as a chocolate bar).

New additions to the product range are beneficial for two main reasons.

 They require a lower level of marketing investment (part of the 'image' already being known).

 The extension of the brand presents less risk to consumers who might be worried about trying
something new.
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2.2.3 Multi-branding
This is the introduction of a number of brands that all satisfy very similar product characteristics. This
can be used where there is little or no brand loyalty, in order to pick up buyers who are constantly
changing brands.

The best example is washing detergents. The two major producers, Unilever and Procter & Gamble, have
created a barrier to fresh competition as a new company would have to launch several brands at once in
order to compete.

Family branding uses the power of the brand name to assist all products in a range. This strategy is being
used more and more by large companies, such as Heinz. In part it is a response to retailers' own-label
(family branded) goods. It is also an attempt to consolidate expensive television advertising behind one
message rather than fragmenting it across the promotion of individual items.

2.2.4 New brands

Where a new product or market is created, an organisation may decide to create a new brand rather than
use one of their existing brands. One reason for this could be to avoid risking its existing brand’s
reputation. Another reason could be that none of their existing brands are compatible with the new
product or market.

For example, when Whitbread PLC entered the hotel market (in the UK) it create the Premier Inn brand.

2.2.5 Co-brands
Co-branding is where two separate, but compatible brands are used to support each other. For example,
Nike developed running shoes that are compatible with Apple’s iPod.

2.3 Brand value

Brands are often a source of competitive advantage. Products with strong brands often sell themselves
and can command high prices when compared to competitor products. Therefore a value can be
attributed to them.

The following are three approaches to valuing a brand:

 Market approach
 Cost approach
 Income approach

2.3.1 The market approach

This approach generates a value on the basis of market transactions. A common method used in this
form of valuation is known as relief-from-royalty. This reflects the fact that owners of brands have use of
the brand for free, whereas they could generate an income by licensing it. This income stream, or royalty
rate, is derived by reference to royalty or license agreements for similar assets and can be used to
generate a value.

2.3.2 The cost approach

This approach is based on the costs incurred to build the brand. For example, costs involved in
registering trademarks and promotional activities. However, it is not the most accurate method of
valuation because the cost of building the brand is usually unrelated to its ability to generate revenue.
PART D MARKETING 9: Marketing plans, branding and communications 263

2.3.3 The income approach

This approach is based on net present values. The brand's expected future earnings, or cash flows, can
be used to calculate the overall economic benefit that it will generate over its life. This benefit is reduced
by all expenditure relating to brand awareness (such as advertising) that will be incurred over its life to
calculate a net income figure. This income figure is then discounted at an interest rate that an investor
would expect as a return based on the brand's risk profile and characteristics. This final value is the value
of the brand.

Question 9.2 Branding

Learning outcome D2(xi)

Define what a ‘brand’ is and briefly explain three methods by which an organisation may value its brand.

(7 marks)

Section summary
Branding is a very general term covering brand names, designs, trademarks, symbols, jingles and the like.
A brand name refers strictly to letters, words or groups of words which can be spoken. A brand image
distinguishes a company's product from competing products in the eyes of the user.

The key benefit of branding is product differentiation and recognition.

There are three approaches to valuing a brand – market, cost and income.

3 Marketing communications

Introduction
Once an organisation has decided upon its marketing plan it needs to put it into practice. This means
communicating its message to the market and customers. There is a growing range of methods that it
can employ for this purpose which we will now look at.

When conducting a marketing campaign, there is a range of possible communication methods and
channels the campaign could utilise. The most popular methods are shown below.
264 9: Marketing plans, branding and communications PART D MARKETING

Promotional tools

3.1 The promotion mix

The promotion mix consists of the blend of promotional tools that are considered appropriate for a
specific marketing campaign.

These tools represent the deployment of deliberate and intentional methods calculated to bring about a
favourable response in the customer's behaviour. Approaches to promotion may be grouped in three
general categories.

 Mass media – the whole market segment is targeted with the same communication.

 Personal and interactive – two-way communication between a sales person and potential
customer.

 Personal and direct – one-way communication from the seller to the potential customer, usually by
letter or email.

The diagram represents the most obvious promotion methods, though other parts of the marketing mix,
including the product itself, pricing, policy and distribution channels are also important.

Choosing the correct tools for a particular promotions task is not easy. The process is still very much an
art, though it is becoming more scientific because of the access to consumer and media databases.
Computer systems may be utilised to match consumer characteristics with promotional tools.

In reality, an experienced marketing manager may be able to reach sensible conclusions almost
intuitively, based on what has been successful in the past and on knowledge of both customers and
competitors.
PART D MARKETING 9: Marketing plans, branding and communications 265

3.2 Consumer and business-to-business markets

The comment above about experience of a particular market can be generalised in the case of the two
broad categories of consumer and business-to-business markets.

Consumer markets (or business-to-consumer markets B2C) are categorised as consisting of mass
audiences which are cost-effectively accessible by television or national newspaper advertising.
KEY POINTS
Supermarkets allow customers to serve themselves and there is little or no personal selling.

Business-to-business markets (B2B), by contrast, involve a great deal of personal selling at different
levels in the organisation. The needs of individual companies are different and therefore mass advertising
would be most wasteful. Building on these generalised comments it is possible to present the mix of
appropriate tools in the following diagram.

Variation of promotion tools with type of market

3.3 Integrated marketing communications

It is necessary to integrate all the promotional elements to achieve the maximum influence on the
customer. Integrated marketing communications represent all the elements of an organisation's
marketing mix that favourably influence its customers or clients. It goes beyond the right choice of
promotion tools to the correct choice of the marketing mix. This is illustrated in the diagram below.
266 9: Marketing plans, branding and communications PART D MARKETING

The integrated marketing communication process

Product
Decisions

Pricing
Decisions

Advertising
The
Product The
Maker Customer

Place
Decisions

Advertising

Public relations
Promotion
Decisions
Sales promotion

Personal selling
Marketing mix Communications mix

3.4 Types of marketing

The following types of marketing can be applied by an organisation.

 Consumer marketing (the 4Ps)

 Services marketing (the 3Ps of the extended marketing mix)
 Direct/indirect marketing
 Guerrilla marketing
 Viral marketing
 Interactive marketing
 Experiential marketing
 E-marketing
 Internal marketing

3.5 Direct marketing

The Institute of Direct Marketing in the UK defines DIRECT MARKETING as 'The planned recording, analysis
and tracking of customer behaviour to develop relational marketing strategies'. It is worth noting some
KEY TERM further key words and phrases associated with direct marketing.

(a) Response. Direct marketing is about getting people to respond to invitations and offers.

(b) Interactive. The process is two-way involving the supplier and the customer.

(c) Relationship. Direct marketing is in many instances an on-going process of communicating and
selling again and again to the same customer.

(d) Recording and analysis. Response data is collected and analysed so that the most cost-effective
procedures may be arrived at.

(e) Strategy. Direct marketing should be seen as a part of a comprehensive plan stemming from
clearly formulated objectives.
 PART D MARKETING 9: Marketing plans, branding and communications 267

Because direct marketing removes all channel intermediaries apart from the advertising and delivery
mediums, it is known as a ‘zero level channel’. There are no other parties between the seller and the
customer.

Direct marketing encompasses a wide range of media and distribution opportunities, such as:

 Television  Inserts (eg in newspapers)

 Radio  Telemarketing
 Direct mail  The Internet

Direct Line, the insurance company, turned the motor insurance industry on its head through its ability to
by-pass the traditional brokers and offer the average consumer not only a cheaper form of insurance, but
CASE STUDY a high degree of service.

The power of the computer and the Internet has transformed the processes by which marketers relate to
their customers. Improvements in database software mean the smallest of operations are able to benefit
from the information era.

3.5.1 Telemarketing
One form of direct marketing is telemarketing. Telemarketing is a quick, accurate and flexible tool for
gathering, maintaining and helping to exploit relevant up-to-date information about customers and
prospects.

TELEMARKETING is the planned and controlled use of the telephone for sales and marketing opportunities.
Characteristics of telemarketing
KEY TERM
(a) Targeted. The message is appropriately tailored to the recipient.

(b) Personal. Telemarketers can determine and respond immediately to the specific needs of
individuals, building long-term personal and profitable relationships.

(c) Interactive. Since the dialogue is live, the conversation can be guided to achieve the desired
results; the representative is in control.

(d) Immediate. Every outbound call achieves an immediate result, even if it is a wrong number or 'not
interested'. Customers can be given 24 hour constant access to the company (for inbound calls).

(e) Flexible. Conversations can be tailored spontaneously as the representative responds to the
contact's needs. Campaign variables can be tested quickly, and changes made whilst the
campaign is in progress.

Possible disadvantages of telemarketing

Telemarketing can be costly. There are few economies of scale, and in some situations techniques such
as direct mail may be more cost effective.

If poorly handled, telemarketing may be interpreted as intrusive. This may alienate potential customers.

3.6 Indirect marketing

INDIRECT MARKETING is the marketing of products as a consequence of another activity or action.

KEY TERM With indirect marketing the organisation does not push products or services onto customers. Instead it
performs a number of related activities that arouse interest in the product or service.

Examples include posting blogs on the internet and publishing articles. A common example is food
magazines including 'advertising features' in the form of recipes which use a particular producer's products
268 9: Marketing plans, branding and communications PART D MARKETING

Another form of indirect marketing is 'word of mouth' advertising. This involves customers who have had
positive experiences with the organisation recommending the organisation to their family and friends.

Recent developments in indirect marketing have been guerrilla and viral marketing.

3.7 Guerrilla marketing

Guerrilla marketing involves taking people by surprise and 'creating a buzz' in unexpected places. It
relies more use of imagination than large sums of money.

The term guerrilla marketing was created by Jay Conrad Levinson in the 1980s. Levinson encouraged
marketers to devise their own ideas, utilising their contacts and the organisations' products and services
as sources of inspiration.

3.7.1 Principles of guerrilla marketing

Levinson identified the following principles of guerrilla marketing:

 It is specifically geared for small organisations and entrepreneurs

 It should be based on psychology rather than experience, judgment, and guesswork
 It should be based on time, energy, and imagination rather than money
 Organisations should be judged on profit not sales
 Marketers should focus on the number of new relationships created in each time period
 Organisations should focus on creating a standard of excellence in their products and services
rather than diversifying.
 Organisations should focus on increasing the numbers of customer referrals as well as the number
and size of transactions, rather than just aiming to attract new customers
 Organisations should co-operate with competitors.
 A combination of marketing methods should be used in a guerrilla marketing campaign.
 The campaign should make use of technology.

Guerrilla marketing

More extreme attempts at guerrilla marketing can be risky.

CASE STUDY
In an effort to promote an online gaming site, a Canadian man leapt into an Olympic pool at the 2004
games in Athens. He was convicted of trespassing and creating a disturbance and sentenced to months in
a Greek prison, but eventually released with a fine of just a few hundred dollars.

In the U.S, (Boston) in 2007, a number of flashing electronic signs designed to promote the television
program Aqua Teen Hunger Force were planted around the city. Unfortunately these were mistakenly
identified as explosive devices, causing huge disruption.

However, even examples of guerrilla marketing ‘gone wrong’ may actually be considered a success by
some, as they can generate more publicity than campaigns that ‘go well’.

3.8 Viral marketing 11/10

Viral marketing involves the use of pre-existing social networks to spread brand awareness or other
marketing objectives. This form of marketing is termed 'viral' because the life of the marketing message is
KEY POINT
comparable to the self replication and spread of biological and computer viruses. The viral campaign is
successful when a customer receives the marketing message, copies it, and sends it to their friends or
posts it on social networking sites such as Myspace or Facebook.
PART D MARKETING 9: Marketing plans, branding and communications 269

3.8.1 Forms of viral marketing

Examples of viral marketing include:

 Video clips (including those taken on mobile phones)

 Novelty, quirky computer games (usually created using 'Flash')
 E-books
 Text messages
 Music
 Mobile phone ringtones

Viral marketing messages will eventually run out of steam as people who receive the message fail to pass
it on. They can be effective though, even with a relatively short life span.

Individuals who pass on viral marketing are said to have a high 'Social Networking Potential' (SNP).
These people tend to use social networks for much of their time and like to become involved in spreading
messages. It is the goal of viral marketers to identify these individuals and design messages that have a
high probability of being passed on by them.

3.8.2 The six principles of viral marketing

Dr Ralph F Wilson describes six principles of an effective viral marketing strategy.

(a) Provide free products or services – free items attract attention

(b) The form of the message must be easy to pass on

(c) The transmission method must be scalable from small to large very quickly to aid the spread of the
message

(d) The message must exploit common motivations and behaviours. Greed, love, success and the need
to look 'cool' can provide motivation to spread the message

(e) Use existing communication networks. People have lists of contacts on their email and social
networking sites – getting the message in the right place means it will multiply very quickly

(f) Take advantage of other people's resources – for example getting banner ads and links onto other
websites.

3.8.3 Examples of viral marketing

Four recent examples of viral marketing are:

(a) 'Will it blend?' – a series of video clips where various items were blended in a Blendtec blender.

(b) The Cadbury Dairy Milk Gorilla advert which was made popular on YouTube and Facebook.

(c) The movie 'Cloverfield' where Myspace pages were created for the characters and websites created
for fictional companies mentioned in the film.

(d) 'Compare the meerkat.com' a website created as part of a viral marketing campaign for 'Compare
the Market.com'. It was featured in a national TV advertising campaign.

3.9 Interactive marketing

According to Deighton (1996) 'interactive marketing is the ability to address the customer, remember
what the customer says and address the customer again in a way that illustrates that we remember what
KEY POINT
the customer has told us'.
270 9: Marketing plans, branding and communications PART D MARKETING

E-commerce has made interactive marketing easier as customer information can be 'remembered' in
databases and electronic communications with the customer occur very quickly through the Internet.

An organisation which makes good use of interactive marketing is Amazon.com. Customers can set
preferences and the site records their past transactions. In future visits they are presented with possible
purchases based on this information.

3.10 Experiential marketing

Experiential marketing involves providing an experience that creates an emotional connection between a
person and a brand, product or idea.
KEY POINT

Experiential marketing encourages potential customers to engage with the personality of the brand,
through experiencing it. It is a combination of in-store promotion techniques and field marketing. It aims
not only to sell more products in the short-term, but also to encourage customers and potential customers
to engage with the personality of the brand.

Experiential marketing is seen as an effective way of connecting with customers, as the emotional
connection encourages brand loyalty.

In Australia, Absolut Vodka launched a brand called ‘Cut’ using experiential marketing - combining public
relations, point-of-sale, online and event marketing. Absolut leased two bars in Sydney and Melbourne,
CASE STUDY put on DJ sets, band concerts and photo exhibitions in these spaces.

Visitors to the Absolut Cut bars got a free bottle of Cut, and consumers were given a chance to contribute
their photos to the exhibits, generating what Absolut hoped would be a viral element to the campaign.
The campaign flew in the face of traditional ways to launch a brand. Instead of using mass marketing to
blanket the millions in order to reach the few, Absolut chose to target the few to eventually reach the
masses.

Question 9.3 Guerrilla and viral marketing

Learning outcome D2(viii)

Briefly explain the concepts of guerrilla and viral marketing, providing an example of each. (4 marks)

3.11 E-marketing 11/10, 09/11

Most companies of any size now have a website. A website is a collection of screens providing
information in text and graphic form, any of which can be viewed simply by clicking the appropriate
button, word or image on the screen.

E-marketing now includes the use of Short Message Service (SMS) or text messages, e-mail, online
surveys and the use of social network sites such as Facebook and Twitter.

3.11.1 Successful websites

To be successful the website should do the following.

(a) Attract visitors – good quality, up-to-date content, easy to navigate, fast to download and quick
response times.

(b) Enable participation – interactive content, and suitable facilities to allow for transactions
PART D MARKETING 9: Marketing plans, branding and communications 271

(c) Encourage return visits – design the site to target the needs of particular segments. Offer free
services and added value facilities

(d) Allow for two-way information sharing – personalisation reflecting visitor preferences, direct
marketing and information retrieval provide visitors with the information they are seeking

(e) Integrate with back office systems – systems must be in place to process orders and dispatch
products that have been generated by the website.

(f) Security – protect visitors’ and customers’ privacy and security.

3.11.2 Benefits of an effective website

Seven benefits of an effective a website and how they are generated, are shown in the following table.

Benefit How generated

Market size Internet-based organisations have a global market and opportunities to develop new
methods of distributing their products
Loyalty Website offers and features
Productivity Better management of the supply chain
Reputation Opportunity to offer real customer benefits (such as free information) and develop
intimate relationships with customers
Costs Generally lower than for retail outlets
Communication Allows quick responses to queries
Convenient Easy customer access from home or work
Opportunity Smaller organisations can compete globally with large, established ones
Information Customer information can be stored and used in marketing. Opportunity for enhanced
market segmentation

3.11.3 Potential problems with website

The main risks associated with running a website are with security issues, such as viruses or hackers
damaging the website and perhaps accessing any linked systems. Online payment facilities may make the
organisation more susceptible to credit card fraud. There is also the risk of the site failing due to
hardware or software issues and potential damage to the organisation’s reputation if confidential
customer information is lost.

Set-up and running costs for a state-of-the-art website can be high, especially with search engine
optimisation being required to ensure the website appears high up in the search rankings.

3.11.4 Website promotion

To encourage people to visit a website and then to return at a later date, two promotional tools have
become popular. These tools are banner advertising and email promotion.

3.11.5 Banner advertising

Companies such as You Tube make money by selling advertising space. The more popular a site is, in
terms of visitor numbers, the higher the charges will be to advertise on the site.

Banner adverts are a source of revenue for the websites they appear on. Affiliate schemes and Pay-per-
click advertising pay the host site a small fee for every visitor they attract or if they make a subsequent
purchase.
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Search engines such as Google make money in a similar way, but organisations can also pay them a fee
to display an advert whenever key words are entered into the search box. For example, if you search for
‘accountant’ results will include paid-for listings – ie an advertisement.

Advertisers may get visitors to register their interest in the product when they are on the site so that they
can be directly targeted in future. At the very least advertisers know exactly how many people have
viewed their message and how many were interested enough in it to click on it to find out more.

3.11.6 E-mail marketing

E-mail is cheap, relatively easily targeted and can be sent to large numbers of people quickly. It is
therefore of great interest to marketers, but there is increasing concern at the prevalence of 'junk' e-mail.

There are various uses of e-mail for marketing purposes.

 To advertise a product/service, usually with a link to a website.

 To update a subscriber to a product/service with useful information
 To confirm an order
 To invite users to write in or to respond to a helpline

Unsolicited e-mail is probably more intrusive than traditional 'junk mail', though less so than the
telephone. However, poor use of e-mail can upset large numbers of people.

Section summary
Once the organisation has decided on its marketing plan it needs to get its message out to the market
and its customers.

Common forms of marketing communication include:

 Consumer marketing (the 4Ps)

 Services marketing (the 7Ps of the extended marketing mix)
 Direct marketing
 Indirect marketing
 Guerrilla marketing
 Viral marketing
 Interactive marketing
 E-marketing
 Internal marketing

Exam alert
‘New’ forms of marketing such as e-markeing and viral marketing are topical. CIMA are keen for their
exams to be topical and up-to-date, so these topics could be examined regularly.
PART D MARKETING 9: Marketing plans, branding and communications 273

Chapter Roundup
 Traditionally, the marketing mix was the 'four Ps' (product, price, place, promotion). The three extra
‘Ps’ have been added to describe additional issues relevant to service industries (people, process,
physical evidence), giving an extended marketing mix of seven Ps.

 Branding is a very general term covering brand names, designs, trademarks, symbols, jingles and the like.
A brand name refers strictly to letters, words or groups of words which can be spoken. A brand image
distinguishes a company's product from competing products in the eyes of the user.

 The key benefit of branding is product differentiation and recognition.

 There are three approaches to valuing a brand – market, cost and income.

 Once the organisation has decided on its marketing plan it needs to get its message out to the market
and its customers.

 Common forms of marketing communication include:

 Consumer marketing (the 4Ps)

 Services marketing (the 7Ps of the extended marketing mix)
 Direct marketing
 Indirect marketing
 Guerrilla marketing
 Viral marketing
 Interactive marketing
 E-marketing
 Internal marketing
274 9: Marketing plans, branding and communications PART D MARKETING

Quick Quiz
1 Which of the following is included in the additional 3Ps of the extended marketing mix?

A Processes
B Product
C Promotion
D Price

2 Which of the following stages comes immediately after 'introduction' in the product life cycle?

A Growth
B Market maturity
C Market penetration
D Decline

3 Which branding strategy uses the power of the brand name to assist all products in a range?

A Brand expansion
B Multi-branding
C Family branding
D Corporate branding

4 In the context of marketing, which type of marketing is referred to as B2B marketing?

A Business to brand
B Brand to brand
C Business to business
D Buyer to business

5 State four attributes of a successful website

1 ...........................................................................................................................................

2 ...........................................................................................................................................

3 ...........................................................................................................................................

4 ...........................................................................................................................................
PART D MARKETING 9: Marketing plans, branding and communications 275

Answers to Quick Quiz

1 A Processes is one of the 3Ps of the marketing mix extended to services.

2 A Growth follows the introduction stage as demand for the product increases.

3 C Family branding uses the power of the brand name to assist all products in a range.

4 C In the context of marketing, B2B means business to business marketing.

5 Four possible attributes include:

1 Attract visitors
2 Enable participation
3 Encourage return visits
4 Allow for two-way information sharing

Answers to Questions
9.1 The extended marketing mix

Services have a different nature to traditional products. In particular they have the following characteristics that
products do not. They are have no physical form, are inseparable from the provider and may lack consistency as
a different member of staff may provide them each time they are provided. Additionally, they cannot be stored
and usually do not result in the transfer of property.

The three additional elements of the extended marketing mix are:

People – services are provided by members of staff who are inseparable from the service

Process – services involve a process, for example a hair cut may involve waiting to be served, a hair wash,
styling, colouring and hair drying

Physical evidence – as services are intangible, some physical item should be provided to give the customer
evidence of ownership.

9.2 Branding

A brand is a name, term, sign, symbol or design intended to identify the product of a seller and to differentiate it
from those of competitors.

There are three main methods of valuing a brand:

The market approach

This approach generates a value on the basis of market transactions. A common method used is known as
relief-from-royalty. A potential income stream is calculated on the basis of what the owner of the brand could
generate by licensing it to third parties and it is the value of this income stream which is used to calculate the
brand’s value.

The cost approach

Under this approach, the value of the brand is based on the amount of costs incurred in building it. However, it
is not the most accurate method of valuation because the cost of building the brand is usually unrelated to its
ability to generate revenue.
276 9: Marketing plans, branding and communications PART D MARKETING

The income approach

This approach is based on the brand's expected future earnings, or cash flows – ie the amount of cash it is
expected to generate less the costs of building it. The net income figure is then discounted at an interest rate
that an investor would expect as a return based on the brand's risk profile and characteristics. This final value is
the value of the brand.

9.3 Guerrilla and viral marketing

Guerrilla marketing

Guerrilla marketing is an unconventional method of marketing and involves taking people by surprise and
'creating a buzz' in unexpected places.

Example: Surprising store customers with ‘for today only sales’ to which they are given very little notice.

Viral marketing

Viral marketing involves the use of pre-existing social networks to spread brand awareness or other marketing
objectives.

Example: Video clips posted on websites such as YouTube.

Now try this question from Number Level Marks Time

the Exam Question Bank 9 Examination 20 36 mins
DEVELOPMENTS IN MARKETING

In this chapter we conclude our study of Internal marketing is about training and motivating
marketing by considering several 'stand- employees to support the organisation's external
alone' areas. marketing activities. Employee 'buy-in' is often critical
to the success of the marketing effort – especially in
Consumer behaviour and the purchasing process is
service organisations.
an important consideration for marketers since
understanding how consumers think and act will help Finally, we turn our attention to the increasingly
them to fine tune their marketing activities. important issue of social marketing and corporate
social responsibility. Society now expects organisations
Not-for-profit organisations have different
to have a wider responsibility than earning profit for
requirements of marketing than those for whom profit
shareholders.
maximisation is key. There is a distinct charity
marketing mix which is important for you to
understand.

topic list learning outcomes syllabus references ability required

1 Consumer behaviour D1(e), D2(c) D1(iv), D2(iii) comprehension
2 Marketing in not-for-profit organisations D1(c) D1(iii) comprehension
3 Internal marketing D2(c) D2(xiii) comprehension
4 Corporate social responsibility and social D1(d) D1(v) comprehension
marketing

277
278 10: Developments in marketing PART D MARKETING

1 Consumer behaviour

Introduction
Marketing aims to produce mutually beneficial exchanges between customer and supplier. However, 'the
customer' in a transaction can involve a number of different roles.

1.1 The customer

The table below sets out the different roles 'the customer' may have in a transaction.

'Customer' Household example: a family pet Business example: ordering of

animal needing vaccination office stationery
Buyer The person who A veterinary surgeon, on the pet The office manager may order
selects a product owner's behalf, recommends and stationery for other departments.
or service orders a vaccine.
Payer The person who The pet-owner pays for the The payer is the company, via the
finances the vaccination – or perhaps an accounts department.
purchase insurance company pays in the end.
User Receives the The pet receives the benefit of the Users are those with access to the
benefit of the vaccination (but the owner receives stationery.
product or service emotional benefits, too, perhaps).

The value of this distinction is that it enables marketing efforts and activities to be correctly focused on
the people involved in the transaction. For example, an office supplies company would direct most of its
marketing efforts to the office manager buying the stationery. The approach to the accounts department
would be slightly different – a relationship might have to be built up to ensure speedy payment.

1.2 Buyer behaviour

Buyer behaviour describes the activities and decision processes relating to buying. Treating buying
behaviour as a process enables us to distinguish between the different buying roles that customers
sometimes assume. Typically, marketers make a distinction between:

 Consumers as buyers
 Organisations as buyers

1.3 Consumer buying behaviour

There are three main theories of consumer behaviour.

 The cognitive paradigm sees a purchase as the outcome of a rational decision-making process.
 The learned behaviour theory emphasises the importance of past purchases.
 The habitual decision-making theory emphasises habit and brand loyalty.

1.3.1 A consumer decision-making model

Lancaster and Withey (2003) identifies five steps in consumer decision making.
PART D MARKETING 10: Developments in marketing 279

Element Comment

Need/problem recognition The customer recognises a need or a problem to

solve. This is a motive to search for a solution.

Pre-purchase/information search Marketers can provide product information, tailored to

need. The customer might come up with alternatives.

Evaluation of alternatives Marketers can make products available for evaluation

and provide comparative information about competing
products. The important thing, though, is to get the
product onto the short-list of options.

The purchase decision Selection and purchase.

Post-purchase evaluation Experience 'feeds back' to the beginning of the

process, providing positive or negative reinforcement
of the purchase decision. If the consumer is
dissatisfied, they will be back at the problem
recognition stage again. If the consumer is satisfied,
the next decision process for the product may be cut
short and they may skip straight to the decision, on
the basis of loyalty.

Such a model provides a useful descriptive framework for marketers.

Question 10.1 Consumer buying

Learning outcome D1(iv)

Briefly explain the five stages of the consumer buying process. (5 marks)

1.4 Influences on consumer buying

Some of the main influences on consumer buying are shown in the following diagram (based upon
Lancaster and Withey).

Influences on buyers

Personal factors
Age and life-cycle Psychological
stage factors
Occupation Motivation
Social factors Cultural factors Economic Learning
Reference groups Cultural circumstances Perception
Family Sub-culture Lifestyle and Beliefs and
Roles and status Social class personality attitudes

Buyer
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1.4.1 Social factors

Social factors relate to the social groupings a consumer belongs to or aspires to, and trends in society
which influence buying patterns. The learning of gender-related, consumer and occupational roles are
examples of socialisation.

A reference group is an actual or imaginary group that influences an individual's evaluations, aspirations
or behaviour.

Reference groups influence a buying decision by making the individual aware of a product or brand,
allowing them to compare their attitude with that of the group, encouraging the individual to adopt an
attitude consistent with the group, and then reinforcing and legitimising the individual's decision to
conform.

A 'role' is the sum or 'system' of expectations which other people have of an individual. For example, a
male may consider himself to be a father and husband, a good neighbour, an active member of the local
community, a supporter of his sports club, an amateur golfer and perhaps a tradesman or a professional.

Families differ in many ways, not only in broad issue of socio-economic status but in buyer behaviour and
consumption patterns.

1.4.2 Cultural factors

Culture comprises the values, attitudes and beliefs in the pattern of life adopted by people, that help
them integrate and communicate as members of society. Culture comprises cultural artefacts, lifestyles,
and so on. For example, alcohol consumption is part of the culture of many countries in Western Europe,
whereas it is frowned on in Muslim and some other countries.

1.4.3 Personal factors

'Personal' factors include such things as age, stage of family and life cycle, occupation, economic
circumstances and lifestyle.

Individuals will buy different types of product depending on their age. This is particularly relevant to such
products as clothes, furniture and recreation.

The family life cycle is used in the West to model purchase behaviour patterns. For example, couples at
the early stages of their marriage before having children will have different needs and consumption
patterns from those, say, after their children have left home. In the UK, where house purchase is the
norm, this has particular implications for sellers of financial services.

A person's occupation will influence consumption and the task for marketers is to identify the
occupational groups that have an above average interest in their products and services.

Buying patterns are also heavily influenced by an individual's economic circumstances. An individual's
economic circumstances consist of:

 Spendable income: its level, stability and time pattern

 Savings and assets, including the percentage that is liquid

 Borrowing power

 Attitude toward spending versus saving

A lifestyle is an individual's way of living as identified by their activities, interests and opinions. Marketers
will search for relationships between their products and lifestyle groups. There are many different lifestyle
classifications.
 PART D MARKETING 10: Developments in marketing 281

1.4.4 Psychological factors

The process of buyer behaviour is also influenced by four psychological factors:

 Motivation  Learning
 Perception  Beliefs and attitudes

Motivation is an inner state that energises, activates, or moves, that directs or channels.

(a) Maslow's (1954) theory of motivation seeks to explain why people are driven by particular needs at
particular times. Maslow argues that human needs are arranged in a hierarchy comprising, in their
order of importance: physiological needs, safety needs, social needs, esteem needs and self-
actualisation needs.

(b) Herzberg (1968) developed a 'two-factor theory' of motivation that distinguishes between factors
that cause dissatisfaction and factors that cause satisfaction. The task for the marketer is,
therefore, to avoid 'dissatisfiers' such as, for example, poor after-sales service, as these things will
not sell the product but may well unsell it. In addition the marketer should identify the major
satisfiers or motivators of purchase and make sure that they are supplied to the customer.

Perception is the process whereby people select, organise and interpret sensory stimuli into a meaningful
and coherent picture. The way consumers view an object (for example, their mental picture of a brand or
the traits they attribute to a brand) may vary according to their past experience, expectation, needs,
interests, attitudes and beliefs.

Learning concerns the process whereby an individual's behaviour changes as a result of their experience.

A belief is a descriptive thought that a person holds about something. Beliefs are important to marketers
as the brand beliefs that people have about products make up the brand images of those products.

An attitude describes a person's enduring favourable or unfavourable cognitive evaluations, emotional

feelings, and action tendencies toward some object or idea. Attitudes lead people to behave in a fairly
consistent way towards similar objects. Attitudes tend to settle into a consistent pattern – to change one
attitude may entail major changes to other attitudes.

Children as consumers
What do you call a consumer who wants to buy everything you have, doesn't care what it costs and is less
CASE STUDY than five feet tall? A marketer's dream? Nope. You call them kids. – AdRelevance Intelligence Report,
2000
Children are bombarded by brand messages almost from birth, including counting books for preschoolers
that use M&Ms or Cheerios, exposure to brightly coloured and appealing branded packaging in the
supermarket, movie and toy tie-ins in fast-food restaurants, product placement in movies, advertisements
on television and the Internet, and pitches from entertainment and sports stars in a range of media. In
fact, it's almost impossible to escape marketing messages. No wonder, then, that children as young as
two are starting to recognize logos and request specific brands as soon as they begin to speak.
Children are a prime target for marketers. Not only do children today have more disposable income at
younger ages, but they have significant influence over family purchases. YTV's 2002 Tween Report
estimated that Canadian children aged 9 to 14 spend $1.9 billion and influence $20 billion in family
purchases per year. Marketing experts call it "pester power," or the "nag factor" – the ability to get kids to
nag their parents to buy a specific product or take them to a specific restaurant. After all, if your child
asks you for the latest toy 37 times a day for a week, the odds are that you'll eventually give in and buy it.
As a result, there is now a whole segment of the marketing industry devoted to figuring out how to sell
things to kids.
Professionals who work with children are becoming increasingly concerned about this onslaught. In
2003, the Canadian Paediatric Society issued a position statement on the impact of media on children
and youth that raised several concerns about advertising.
282 10: Developments in marketing PART D MARKETING

In 2004, a coalition of Canadian health groups led by the Centre for Science in the Public Interest called
for a ban on advertising aimed at children 13 or younger. Quebec has already banned print and broadcast
advertising aimed at children under 13, although children certainly see advertising from other sources as
well.
Many activists consider food advertising to be a leading cause of the increase in overweight in children. A
report released in December 2005 by the Institute of Medicine, Food Marketing to Children and Youth:
Threat or Opportunity?, observed that in the United States alone, over $11 billion dollars a year is spent
on marketing food and beverages to children. And the food advertised to children is generally less than
nutritious: most of it is highly processed, rich in saturated fat, salt, and sugar, and poor in nutrients like
fibre, vitamins, calcium, and iron.
http://television-vs-children.blogspot.com/2008/11/target-market-children-as-consumers.html,
November 19, 2008.

1.5 Organisations as buyers

Organisations are viewed as more rational than individuals. The buying decision making process is likely
to be formal. Organisational (or industrial) buying is the process organisations use to establish the need
KEY POINT
to purchase products and services and how these products and services are selected and purchased.

As we saw earlier, transactions between organisations are referred to as Business-to-Business or B2B,

whereas transactions involving an organisation and a consumer are sometimes referred to as Business-to-
Consumer or B2C.

When considering organisational markets the following factors should be taken into account:

(a) Organisational markets normally comprise fewer buyers, with a few buyers responsible for the
majority of sales.
(b) Because of this smaller customer base and the importance and power of larger customers there is
generally a close relationship between buyer and seller.
(c) Demand for industrial goods is ultimately derived from the demand for consumer goods. In
addition, the total demand for many industrial products is inelastic, in other words, it is not
affected much by price changes.
(d) The purchase decision is usually made by consensus in an organisational setting, rather than being
the responsibility of one person.

1.5.1 Process of organisational buying behaviour

A typical organisational buying process is summarised in the following table.

Stage in behaviour Comment

Stage 1. The stimulus may come from within or outside the organisation.
Recognise the problem
Stage 2. People participating in the buying decision assess the problem or need
Develop product and determine what will be required to resolve or satisfy it. This may take
specifications or service the form of detailed specifications.
requirements to solve the
problem
Stage 3. The third stage of the process is similar to that of information search,
Search for products and utilising trade shows, trade publications, supplier catalogues, and
suppliers soliciting proposals from known suppliers. This should result in a list of
several alternative products.
PART D MARKETING 10: Developments in marketing 283

Stage in behaviour Comment

Stage 4. These are evaluated in order to ascertain whether they meet the product
Evaluate products relative to specifications developed in the second stage. Suppliers may also be
specifications evaluated according to criteria such as price, service and ability to deliver.
Stage 5. The most appropriate product and supplier is then selected. In some
Select and order the most cases an organisational buyer may select a number of suppliers in order
appropriate product to reduce the possibility of disruption caused by strikes, shortages or
bankruptcy of suppliers. The order will then be made, often with specific
details regarding terms, credit arrangements, delivery dates and technical
assistance or after-sales service.
Stage 6. The product and supplier will then be evaluated by comparing with
Evaluate the product and specifications regarding product quality and so on, and the performance
supplier performance of the supplier over the terms of the contract for the sale.

1.5.2 The Decision Making Unit (DMU) in the organisation

A major difference between consumer and organisational buying behaviour is the fact that organisational
purchase decisions are rarely made by a single individual. Normally, purchasing decisions are made by a
number of people from different functional areas, possibly at different levels within the organisation.

Groups within the DMU

Initiators Initiate the buying process and help define purchase specifications.
Influencers Help define the specification and also provide an input into the process of evaluating
the available alternatives.
Deciders Have the responsibility for deciding on product requirements and suppliers.
Approvers Authorise the proposals of deciders and buyers.
Buyers Have the formal authority for the selection of suppliers and negotiating purchase terms.
Gatekeepers By controlling the flow of information, may be able to stop sellers from reaching
individuals within the buying centre.
Users The end-user, or operator, of the items purchased.

The size, structure and formality of the DMU will vary depending on the specific situation. Key
considerations include:

 Who are the principal participants in the buying process?

 In what areas do they exert the greatest influence?

 What is their level of influence?

 What evaluative criteria do each of the participants make use of and how professional is the
buying process?

 To what extent is buying centralised in large organisations?

The people involved in the buying process must be convinced that the purchase will be safe for them, for
example, there was an advertising slogan to the effect that 'nobody gets sacked for buying IBM'.

1.5.3 Selection criteria

The issue of precisely how organisational buyers make the purchase decision, in terms of the selection
criteria determining the choice of supplier, has been the subject of various pieces of research.
284 10: Developments in marketing PART D MARKETING

Important selection criteria could be as follows.

 Delivery capability  Financial position

 Quality  Attitude toward the buyer
 Price  Compliance with bidding procedures
 Repair and after-sales service  Training support
 Technical capability  Communications on the progress of the order
 Performance history  Management and organisation
 Production facilities  Packaging
 Help and advice  Moral/legal issues
 Control systems  Location
 Reputation  Labour relations

Section summary
In consumer marketing, the customer may combine a number of roles, for example buyer, payer and
user.

The influences on a consumer’s purchasing decision may be classified as social, cultural, personal and
psychological.

Business to business marketing reflects the more complex and formal organisational buying process.

2 Marketing in not-for-profit organisations

Introduction
Increasingly, public sector and charitable organisations are adopting a more commercial approach to their
operations, including the use of marketing techniques.

2.1 Charity and not-for-profit marketing

Marketing has a lot to offer charities and not-for-profit organisations, for example in terms of marketing
research and a clear understanding of segmentation, targeting and positioning.

Marketing techniques are now recognised as just as appropriate in NFP organisations as in a commercial
environment. The tasks of setting objectives, developing strategies, devising appropriate marketing mixes
and implementing controls are just as relevant for charities and NFP organisations.

Public sector organisations may use marketing tools to encourage competitive tendering to provide
government services. Almost all organisations need to compete with other employers to recruit employees.

Many NFP organisations have introduced initiatives to raise money, such as hospitals selling paramedical
services to local industry, and universities developing commercial centres to sell research and consultancy
skills.

2.1.1 What are pubic sector organisations ‘exchanging’

Lancaster and Withey (2006) identified typical exchanges between public sector organisations and their
‘customers’. For example, a university provides education, qualifications and the prospect of career
advancement in return for time and fees. A local government council provides local services and
contributes to the lifestyle of residents in return for taxation payments and perhaps votes.

There are many other possible examples, the key point is that even though we are talking about public
sector bodies an exchange is taking place, and therefore there is likely to be a role for marketing.
PART D MARKETING 10: Developments in marketing 285

2.2 Characteristics of charity and not-for profit marketing

Dibb et al suggests not-for-profit organisations need to consider their marketing objectives, target
markets, marketing mixes and how they will control marketing activities.

(a) Objectives will not be based on profit achievement but rather on achieving a particular response
from target markets. The organisation will need to be open and honest in showing how it has
managed its budget and allocated funds raised. Efficiency and effectiveness are particularly
important in the use of taxpayer funds or donations.

(b) Target marketing will involve identifying a number of different audiences. Bruce (2005) identifies
three types of customers for charities.

(i) Beneficiaries include not only those who receive tangible support, but also those who
benefit from lobbying and publicity.
(ii) Supporters provide money, time and skill. Voluntary workers form an important group of
supporters. Those who choose to buy from charities are supporters, as are those who
advocate their causes.
(iii) Regulators include both formal bodies, such as the Charities Commission and local
authorities, and less formal groups such as residents' associations.

The groups NFPs marketing activities try to reach can be classified as contributors (for example of
time), customers (for example clients, patients, students) and volunteers.

(c) Charities and NFP organisations often deal more with services than products. In this sense the
extended marketing mix that includes people, processes and physical evidence is important.

(i) Appearance should be business-like rather than appearing extravagant.

(ii) Process is increasingly important; for example, the use of direct debit to pay council tax or
donations reduces administration costs.
(iii) People, whether employed or volunteers, must offer good service and be caring in their
dealings with clients.
(iv) Distribution channels are often shorter with fewer intermediaries than in the profit making
sector. Wholesalers and distributors available to business organisations do not exist in most
non-business contexts.
(v) Promotion for charities often includes personal selling with street corner and door-to-door
collections. Advertising is becoming increasingly important for large charities. Direct
marketing is growing due to the ease of developing databases. Sponsorship (online),
competitions and special events are also widely used.
(vi) Pricing. Value for money is important. Opportunity cost, where an individual is persuaded
of the value of donating time or funds, is often relevant.

(d) Control aims to ensure progress is proceeding as planned. For example a charity would compare
donations and expenditure to budget. To control NFP marketing activities, managers must specify
what factors need to be monitored and permissible variance levels. Relevant measures could
include number of employees, number of volunteers (charities), number of ‘customers’ served and
satisfaction levels.

2.2.1 Non-governmental organisations (NGOs)

Non-governmental organisations (NGOs) are private sector, voluntary organisations that contribute to, or
participate in education, training or other humanitarian, progressive, or watchdog activities. Some NGOs
are accredited by the UN.
Important NGOs include the International Committee Of The Red Cross, International Organisation For
Standardisation (ISO), Amnesty International and the World Wildlife Fund (WWF).
286 10: Developments in marketing PART D MARKETING

NGOs use marketing to find a position for themselves in the market, gain supporters, establish client and
donor needs and to communicate with stakeholders.

2.3 The charity marketing mix

The following four elements of the marketing mix are particularly relevant to charities (product, price,
processes and place). The mix adopted must suit the charity's overall philosophy.

2.3.1 Product
A charity's product is essentially the cause it supports and the help it provides, for example cancer
research aims to reduce the suffering and improve the prospects of future cancer patients. It is important
to communicate what work the charity does and what donations are used for.
When a supporter provides money to a charity, the idea of what the money will be used for is their source
of satisfaction, knowing they have helped others or furthered a particular cause.

2.3.2 Price
Price is very important to larger charities since sales of goods and services provide their largest single
source of income. Proper cost accounting techniques must be applied where appropriate.

2.3.3 Processes
Since supporters are crucial to a charity's income and beneficiaries are the reason why it exists, processes must
be as customer-friendly as possible. This is certainly an area where philosophy is important.

2.3.4 Place
If charities distribute physical goods this can present challenges, for example providing disaster relief
overseas.
On the other hand, charities that distribute funds, to the poor, for instance, or to pay for medical research,
may have very short and easily managed distribution chains. Donations for many charities are increasingly
being made online.

Section summary
Charities and not-for-profit organisations are increasingly utilising marketing tools and techniques,
particularly in relation to segmentation, targeting and positioning.
Charities are similar in some respects to service organisations and the extended marketing mix is
particularly relevant to them.
The charity marketing mix adopted must suit the charity's overall philosophy.
 PART D MARKETING 10: Developments in marketing 287

3 Internal marketing 09/11

Introduction
In this section we shall study what internal marketing is and its importance in motivating employees to
support the marketing effort of the organisation.

Internal marketing has been well summarised by Peck et al:

KEY POINT
'Internal marketing is concerned with creating, developing and maintaining an internal service
culture and orientation, which in turn assists and supports the organisation in the achievement of
its goals. …

'The basic premise behind the development of internal marketing is the acknowledgement of the
impact of employee behaviour and attitudes on the relationship between staff and external
customers. The skills and customer orientation of these employees are, therefore, critical to
the customers' perception of the organisation and their future loyalty to the organisation.'

In other words, it is through internal marketing that all employees can develop an understanding of how
their tasks, and the way they perform them, create and deliver customer value and build relationships.

LL Bean (US catalogue retailer)

To inspire its employees to practise the marketing concept, LL Bean has for decades displayed posters
CASE STUDY
around its office that proclaim the following:

‘What is a customer? A customer is the most important person ever in this company, in person or
by mail. A customer is not dependent on us, we are dependent on him. A customer is not an
interruption of our work, he is the purpose of it. We are not doing a favour by serving him, he is
doing us a favour by giving us the opportunity to do so. A customer is not someone to argue or
match wits with, nobody ever won an argument with a customer. A customer is a person who
brings us his wants; it is our job to handle them profitably to him and to ourselves.’

3.1 Implementing internal marketing

Peck et al identified several inter-related activities thought critical in implementing internal marketing.

 Organisational design: eg drawing key employees together in cross-functional customer service or

quality teams

 Regular staff surveys: assessing the internal service culture and attitudes

 Internal customer segmentation: adapting the internal marketing mix to different employee groups

 Personal development and training: focused on core competencies for internal marketing

 Empowerment and involvement: enabling staff, within defined parameters, to use their discretion
to deliver better service to customers

 Recognition and rewards: based on employees' contribution to service excellence

 Internal communications: ensuring information flows to support cross-functional co-ordination,

and all-employee awareness of their role and contribution to service

 Performance measures: evaluating each individual's contribution to marketing objectives

 Building supportive working relationships: creating a climate of consideration, trust and support,
within which internal communications and service delivery can be encouraged and improved
288 10: Developments in marketing PART D MARKETING

3.2 The internal marketing mix

Jobber directly relates the elements of the marketing mix to internal customers as follows.

Product The marketing plan and strategies that are being proposed to employees or other
functions, together with the values, attitudes and actions needed to make the
plan successful (eg marketing budgets, extra staff).
Price What internal customers are being asked to pay or sacrifice as a result of
accepting the marketing plan (eg lost resources, lower status, new ways of
working or harder work).
Promotion (or The communications media and messages used to inform, persuade and gain the
communications) support of internal customers for the marketing plan. The message and language
will have to be adapted to the needs, concerns and understanding of the target
audience (eg eliminating marketing jargon).
Place How the product (plan) and communications are delivered to internal customers:
eg via meetings, committees, seminars, informal conversations and so on. This
may be direct or via intermediaries (eg consultants).

3.3 Segmenting the internal market

The internal marketing mix (like the external marketing mix) will need to be adapted to the needs and
drivers of the target audience. The internal market can (like the external market) be segmented to allow
targeting to the distinctive needs of each group. Two methods of segmentation have been suggested.

3.3.1 Jobber's method of segmentation

Jobber (2007) suggests segmentation of internal customers into:

 Supporters: those who are likely to gain from the change or plan, or are already committed to it.
 Neutrals: those who are likely to experience both gains and losses from the change or plan.
 Opposers: those who are likely to lose from the change or plan, or are traditional opponents.

The product (plan) and price may have to be modified to gain acceptance from opponents. Place
decisions will be used to reach each group most effectively (eg high-involvement approaches such as
consultation meetings for supporters and neutrals). Promotional objectives will also differ according to the
target group, because of their different positions on issues.

3.3.2 Christopher et al's method of segmentation

Christopher et al (2002) suggest an alternative way of segmenting internal customers, according to how
close they are to external customers:

 Contactors have frequent or regular customer contact and are typically heavily involved with
conventional marketing activities (eg sales or customer service roles). They need to be well versed
in the organisation’s marketing strategies and trained, prepared and motivated to service customers
on a day-to-day basis in a responsive manner.

 Modifiers are not directly involved with conventional marketing activities, but still have frequent
contact with customers (eg receptionists, switchboard, the credit department). These people need
a clear view of the organisation's marketing strategy and the importance of being responsive to
customers' needs.

 Influencers are involved with the traditional elements of marketing, but have little or no direct
customer contact (eg in product development or market research). Companies must ensure that
these people develop a sense of customer responsiveness, as they influence the total value offering
to the customer.
PART D MARKETING 10: Developments in marketing 289

 Isolateds are support functions that have neither direct customer contact nor marketing input – but
whose activities nevertheless affect the organisation's performance (eg HR and IT). Such staff need
to be sensitive to the needs of internal customers as well as their role in the chain that delivers
value to customers. Gummesson uses the term 'part-time marketers' to describe such employees.

3.4 The importance of internal customer communications

Information and communication are the foundation of all organisational activity. From a marketing point
of view, internal communications may be particularly important in the following areas.

Employer branding The organisation's image, mediated by communication, creates an employer brand:
the organisation's image or identity as an employer in the market in which it
competes for quality labour.
Recruitment communications (job ads, application handling, interviews and so on)
are public relations and marketing exercises. They must reflect the organisation's
values and make an attractive offering to potential employees.
Employee In many countries, there are legal requirements for communication and consultation
communication and with employees on matters that affect them.
involvement The sharing of marketing information encourages employees to identify with the
organisation, its products/ services and its customers and other stakeholders: the
marketing function effectively 'sells' quality – and customer-focused values.
Information sharing also supports task performance (keeping employees informed
about new products and marketing plans, and equipping them to make a competent
contribution) and decision-making (eg by supplying market information or customer
feedback to managers in other departments).
Internal communications (eg through meetings, presentations, newsletters, intranet
sites or suggestion schemes) can be used to improve information flow in all
directions through the organisation. This may be particularly helpful where it
encourages information – and ideas-sharing between management and front-line
customer-facing staff, and between different organisational functions.
Employee relations Armstrong (2000) describes the aims of employee relations as:
 Building stable and co-operative relationships with employees.
 Achieving commitment through employee involvement and communications.
 Developing mutuality: a common interest in achieving the organisation's goals,
through the development of a culture of shared values
Co-operative employee relations depend on direct and open communication with
employees, and giving employees a voice on matters that concern them (including
customer care and corporate social responsibility).

3.5 Challenges for internal communication

Jones & Cheeseman (2005) argue that it is growing more difficult for organisations to maintain
communication with staff, while other pressures contribute to increasing staff diversity and isolation –
making such communications even more necessary for integration and involvement. Some of the
challenges they identify include:

 Flatter management structures, meaning that managers have more people reporting to them (a
wider 'span of control')

 Downsizing, creating workload pressures that may hinder communication and networking

 A trend towards tele-working and 'virtual' organisation, so that staff may be geographically remote
from the office, manager and each other

 Globalisation, creating increasingly diverse workforces and culturally distinctive units within the
organisation, which pose barriers to 'mass' communication.
290 10: Developments in marketing PART D MARKETING

Jobber (2007) cites the example of software giant Microsoft.

'It is very easy for senior management to decide upon a set of values that represent a company's ethos,
CASE STUDY
but much harder to engage employees' attention. This was the problem Microsoft faced when trying to
communicate its identity as a company internally. It expressed its company values in terms of six
attributes: passion, respect, accountability, integrity, self-criticism and eagerness.

Its internal marketing strategy was to ensure this ethos was communicated to employees in three
stages. First, there was a campaign across the UK to generate positive feelings about the project.
Second, a series of road-shows was held around the firm's UK offices to discuss the core values in
depth. Third, a compulsory education programme was launched to ensure all staff understood the
proposition.

The creative element of the programme was centred on the well-known David Brent character from the
BBC series The Office. Actor Ricky Gervais, who played this character, became involved and a special
15-minute video in the style of the programme was filmed, adding humour to the project and raising its
appeal to staff.

The result was that the project achieved high recognition levels for the main message of the campaign
among employees, national press coverage and an award for the best internal marketing campaign from
the magazine Marketing.'

3.6 Tools of internal communication

A variety of communication tools are used in formal internal communications, including: company
brochures and newsletters, intranets, video presentations (often web-based), team meetings, personal
presentations, conferences, one-to-one interviews, negotiating and consultative meetings (eg with
employee representatives), letters, e-mail and web-based ‘meetings’.

Let’s consider some of these in more detail.

3.6.1 E-mail for internal communication

You should already be aware of the use of e-mail for marketing purposes. We now consider the use of e-
mail for internal communication.

The advantages of e-mail for internal communication include:

 Messages can be sent and received very quickly

 E-mail is cheap

 A 'hard copy' may be printed if required

 Messages can be sent worldwide at any time: e-mail is 24-7, regardless of time zones and office
hours

 The user can attach complex documents (spreadsheets, graphics, photos) where added data or
impact are required

 E-mail message management software (such as Microsoft Outlook) enables the sending of
messages to multiple recipients, integration with an 'address book' (database of contacts),
corporate stationery options and facilities for mail organisation and filing.

3.6.2 Intranet
An intranet is an internal, mini version of the Internet, using a combination of networked computers and
web technology.
PART D MARKETING 10: Developments in marketing 291

'Inter' means 'between' and 'intra' means 'within'. This may be a useful reminder. The Internet is used to
disseminate and exchange information among the public at large, and between organisations. An Intranet
is used to disseminate and exchange information within an organisation: only employees are able to
access this information.

The corporate intranet may be used for:

 Performance data: linked to sales, inventory, job progress and other database and reporting
systems, enabling employees to process and analyse data to fulfil their work objectives

 Employment information: online policy and procedures manuals (health and safety, equal
opportunity, disciplinary rules, customer service values and so on), training and induction material,
internal contacts for help and information

 Employee support/information: advice on first aid, healthy working at computer terminals, training
courses offered and so on

 Notice boards for the posting of messages to and from employees: notice of meetings, events,
trade union activities and so on

 Departmental home pages: information and news about each department's personnel and
activities, to aid cross-functional understanding

 Bulletins or newsletters: details of product launches and marketing campaigns, staff moves,
changes in company policy – or whatever might be communicated through the print equivalent,
plus links to relevant pages for details

 E-mail facilities for the exchange of messages and reports between employees in different locations

 Upward communication: suggestion schemes, feedback questionnaires, employee attitude surveys

 Individual personnel files, to which employees can download their training materials, references,
certificates, appraisals, goal plans and so on.

Benefits of intranets include the following.

 Cost savings from the elimination of storage, printing and distribution of documents that can
instead be exchanged electronically or be made available online

 More frequent use made of online documents than printed reference resources (eg procedures
manuals) and more flexible and efficient searching and updating of data

 Wider access to corporate information. This facilitates multi-directional communication and co-
ordination (particularly for multi-site working). It is also a mechanism of internal marketing and
corporate culture

 Virtual team working. The term 'virtual team' has been coined to describe how technology can link
people in structures which simulate the dynamics of team working (sense of belonging, joint goals,
information sharing and collaboration) despite the geographical dispersion of team members in
different locations or constantly on the move

3.6.3 Team meetings

Meetings play an important part in the life of any organisation.

 Formal discussions are used for information exchange, problem-solving and decision-making. For
example, negotiations with suppliers, meetings to give or receive product/idea presentations or
'pitches', and employee interviews.

 Informal discussions may be called regularly, or on an ad hoc basis, for communication and
consultation on matters of interest or concern: for example, informal briefings and marketing or
project team meetings.
292 10: Developments in marketing PART D MARKETING

Despite the relative inconvenience (compared to group emails, say) of gathering people together in a
physical location, team meetings are an excellent tool of internal communication and marketing.

Face-to-face discussion is particularly effective in exchanging information and developing relationships.

Information exchange Developing relationships

Encourages ideas generation: participants Brainstorming meeting for promotion planning or
encouraging and prompting each other customer care improvement
Encourages problem solving and conflict Customer complaint handling, or team conflict
resolution: allows exchange, supportive resolution
communication and sensitivity to personal factors
Improves decision-making: adds different Team meetings to decide plans or allocate roles
viewpoints and information in real time and tasks
Facilitates persuasion: use of personal charisma, Sales negotiations, pitching ideas to internal
logic, sensitivity to feedback customers, promoting service values
Encourages co-operation: information sharing and Cross-functional team meetings, briefings, project
all-member participation meetings
Shows the human face of an organisation and Personal internal/external customer service,
encourages identification with it internal marketing

3.6.4 The grapevine

In addition to formal attempts by the organisation to communicate with its employees, there are informal
communication channels such as the 'grapevine'. For example friends, colleagues and contacts
developing internal networks, sharing news, information and gossip. This is a fast and effective way of
transmitting information: unfortunately, it is often inaccurate, subjective – and difficult for management
to control.

Question 10.2 Internal marketing

Learning outcome D2(xiii)

Briefly explain four benefits that an intranet will bring an organisation in terms of its internal marketing.

(4 marks)

Section summary
Internal marketing enables employees to develop an understanding of how their role delivers customer
value and build relationships.

The internal market can be segmented according to the roles employees play in relation to the customer.

Internal marketing has implications for employer branding, employee communication and employee
relations.

Key communication tools used in internal marketing include email, intranets, team meetings and
personal/informal communication.
 PART D MARKETING 10: Developments in marketing 293

4 Corporate social responsibility and social marketing 11/10,

11/12

Introduction
Marketing techniques may be applied to encourage consumption of products which are potentially
damaging to the health and well-being of the individual and society. Examples include tobacco, alcohol,
cars, detergents and even electronic goods such as computers.

There may be conflict between what is profitable for a business organisation and the interests of the
customer, or of society.

Many organisations and businesses now accept responsibility for their actions, rather than simply setting
out to provide consumer satisfaction and maximise profits.

CORPORATE SOCIAL RESPONSIBILITY involves an organisation accepting that it is part of society and, as
such, is accountable to society for the consequences of its actions. Socially responsible firms believe that
KEY TERM
they have an obligation to maximise the positive impact they have on their stakeholders.

4.1 Social responsibility, ethics and the law

Social responsibility is closely related to ethics. However, ethics is just one aspect of social responsibility
– ethics also concerns personal moral principles and values. Business ethics is similar to personal ethics,
but relates to principles and standards that govern the behaviour of business organisation. Ethical
business decisions are ones that ‘feel right’ and may be judged as being ‘right’ or ‘wrong’ in the eyes of
those outside the organisation.

Ethics are concerned with judgements of society that have no enforceable impact on an organisation. On
the other hand, laws are rules that can actually be upheld in court. Behaviour which is not subject to
legal penalties may still be unethical and socially irresponsible.

We can classify marketing decisions according to ethics and legality in four different ways.

 Ethical and legal (eg printing on recycled paper)

 Unethical and legal (eg targeting young adults in an ‘alcopops’ advertising campaign)
 Ethical but illegal (eg publishing stolen but revealing documents about mis-selling)
 Unethical and illegal (eg passing off cheap imitation goods as designer brands)

4.1.1 Corporate citizenship in practice

Companies have devised a number of different definitions or approaches to corporate citizenship.

Abbott Laboratories

Global citizenship reflects how a company advances its business objectives, engages its stakeholders,
CASE STUDY implements its policies, applies its social investment and philanthropy, and exercises its influence to
make productive contributions to society.

At Abbott, global citizenship also means thoughtfully balancing financial, environmental and social
responsibilities with providing quality health care worldwide. Our programs include public education;
environment, health and safety; and access to health care. These efforts reflect an engagement and
partnership with stakeholders in the pursuit of sustainable solutions to challenges facing the global
community.
294 10: Developments in marketing PART D MARKETING

AT&T

For AT&T, corporate citizenship means caring about the communities it is involved with, keeping the
environment healthy, making AT&T a safe and rewarding place to work and behaving ethically in all its
business dealings.

Coca-Cola

Responsible corporate citizenship is at the heart of The Coca-Cola Promise, which is based on four core
values

 Marketplace. We will adhere to the highest ethical standards, knowing that the quality of our
products, the integrity of our brands and the dedication of our people build trust and strengthen
relationships. We will serve the people who enjoy our brands through innovation, superb customer
service, and respect for the unique customs and cultures in the communities where we do
business.

 Workplace. We will treat each other with dignity, fairness and respect. We will foster an inclusive
environment that encourages all employees to develop and perform to their fullest potential,
consistent with a commitment to human rights in our workplace. The Coca-Cola workplace will be
a place where everyone's ideas and contributions are valued, and where responsibility and
accountability are encouraged and rewarded.

 Environment. We will conduct our business in ways that protect and preserve the environment.
We will integrate principles of environmental stewardship and sustainable development into our
business decisions and processes.

 Community. We will contribute our time, expertise and resources to help develop sustainable
communities in partnership with local leaders. We will seek to improve the quality of life through
locally-relevant initiatives wherever we do business.

Texas Instruments

Beyond the bottom line, the worth of a corporation is reflected in its impact in the community. At TI, our
philosophy is simple and dates back to our founding fathers. Giving back to the communities where we
operate makes them better places to live and work, in turn making them better places to do business. TI
takes its commitment seriously and actively participates in community involvement through three ways –
philanthropy, civic leadership and public policy and grass roots efforts.

4.2 Ethical marketing 11/10

Ethical issues usually revolve around safety, quality, and value and frequently arise from failure to provide
adequate information to the customer.

Ethical issues relating to the product or service may range from omission of uncomfortable facts in
product literature to deliberate deception.

A particularly serious problem is when an unsafe product is supplied, requiring product recall.

Ethical considerations are also relevant to promotional practices. Advertising and personal selling are
areas in which there may be temptation to exaggerate, slant, conceal, distort and falsify information.

Many people think that persuading people to buy something they don't really want is intrinsically
unethical, especially if ‘hard sell’ tactics are used.

The targeting of children in marketing campaigns has also attracted criticism – potentially damaging an
organisation’s reputation and brand.

Also relevant to this area is the issue of inducements. It is widely accepted that a small gift such as a
mouse mat or a diary is a useful way of keeping a supplier's name in front of an industrial purchaser.
Most people would however condemn the payment of substantial gifts as a way of encouraging use of a
particular supplier. But where does the dividing line lie between these two extremes?
 PART D MARKETING 10: Developments in marketing 295

Some important considerations that an ethical organisation may make include:

 Whether its advertising is fair, balanced and truthful?

 Who does it sell to – who is the marketing aimed at?
 Are its products appropriate, safe and environmentally friendly?
 How does it deal with unhappy customers?
 Does it exploit anyone, for example in its advertising or pricing strategies?

Benefits to socially responsible and ethical organisations

Competitive advantage: Being socially responsible may be a unique selling point and offer the
organisation an opportunity to create a distinct identity for itself and its products.
Greater revenue: Socially responsible organisations can often charge a premium for their products.
Reduced costs: Some costs may be reduced if an organisation adopts socially responsible practices, for
example recycling may reduce costs of sending waste to landfill.
Positive publicity: Introducing changes voluntarily, before any regulations come into force, will reflect
favourably on the organisation.

Banks accused of mis-selling risky investments to the elderly

Banks and wealth advisers are preying on vulnerable elderly people, with commission-driven staff
CASE STUDY
encouraging customers in their seventies or eighties to move large sums of money from savings accounts
into equities.

Many elderly people do not understand the implications of their new investments and end up losing tens
of thousands of pounds when they thought their capital was secure.

Emma Parker, of the Financial Ombudsman Service (FOS), says: ‘We receive thousands of complaints
from elderly people who believe that they have been mis-sold a long-term investment product.
Increasingly, the complaints are about bank or building society branch staff.’

With today’s complex financial products, some pensioners believe they are receiving advice when they are
merely hearing a sales pitch. Since April the FOS has received 1,809 investment complaints from
consumers aged 65 or older. The elderly now account for 22 per cent of all investment complaints,
compared with 19 per cent last year.

The Times, August 15, 2009

Toyota car recall hits US, Europe and China

Toyota has announced the recall of vehicles in the US, Europe and China over concerns about accelerator
pedals getting stuck on floor mats.
CASE STUDY

The firm has announced plans to recall 1.1 million more cars in the US a day after saying it was
suspending sales of eight popular US models.

According to an application to China's quality control office, it wants to recall 75,552 RAV4 vehicles
there. The cars in question were manufactured between 19 March 2009 and 25 January 2010 in
Tianjin, according to a notice on the website of the General Administration of Quality Supervision,
Inspection and Quarantine of the People's Republic of China.

The specifics of the recall in Europe have yet to be decided – the carmaker was trying to establish how
many European models shared the parts used in the cars recalled in the US.

Last week, Toyota recalled 2.3 million cars in the US with faulty pedals. It has now recalled almost 8
million cars in the US in the past four months. Last November, it recalled 4.2 million cars because of
worries over pedals getting lodged under floor mats.
296 10: Developments in marketing PART D MARKETING

‘Toyota's remedy plan is to modify or replace the accelerator pedals on the subject vehicles to address the
risk of floor mat entrapment,’ the company said.

The latest recall affects five models in the US: the 2008-2010 Highlander and the 2009-2010 Corolla,
Venza, Matrix and Pontiac Vibe.

Toyota shares fell a further 3.9% in Japan, after dropping 4.3% on Wednesday, as concerns about the
impact of the recalls on the carmaker's financial health and reputation gripped investors.

Separately, Ford said it would be suspending production of a van made and sold in China that has an
accelerator pedal made by the same firm at the centre of Toyota's investigations.

However, Ford said it had only been using the pedal in the Transit Classic model since December, with
only 1,663 vehicles produced.

www.bbc.co.uk January 28, 2010

4.3 Social marketing

SOCIAL MARKETING is the application of marketing techniques to achieve non-commercial goals, for
example to encourage behaviour that benefits the environment or to encourage good health.
KEY TERM
Governments may attempt to use social marketing to encourage consumption of merit goods and
discourage consumption of demerit goods.

Merit goods are goods or services provided free for the benefit of society by the government, for example
education or healthcare.

Demerit goods are those considered by the government to be unhealthy or damaging to society.
Examples include alcohol, cigarettes and gambling.

For example, a social marketing campaign could encourage people to stop smoking, drive safely, eat
healthily or practise safe sex.

Exam skills
Corporate social responsibility and social marketing are not areas of the syllabus which you can learn and
repeat textbook knowledge. Exam questions are likely to be scenario based and you may be expected to
comment on issues raised in them.

Section summary
Corporate social responsibility involves an organisation accepting that it is part of society and, as such, is
accountable to society for the consequences of its actions.

Unethical marketing practices are ultimately likely to damage an organisation’s reputation and brand –
and ultimately sales.

Social marketing is the application of marketing techniques to achieve non-commercial goals, for
example to encourage behaviour that benefits the environment or encourages good health.
PART D MARKETING 10: Developments in marketing 297

Chapter Roundup
 In consumer marketing, the customer may combine a number of roles, for example buyer, payer and
user.

 The influences on a consumer’s purchasing decision may be classified as social, cultural, personal and
psychological.

 Business to business marketing reflects the more complex and formal organisational buying process.

 Charities and not-for-profit organisations are increasingly utilising marketing tools and techniques,
particularly in relation to segmentation, targeting and positioning.

 Charities are similar in some respects to service organisations and the extended marketing mix is
particularly relevant to them.

 The charity marketing mix adopted must suit the charity's overall philosophy.

 Internal marketing enables employees to develop an understanding of how their role delivers customer
value and build relationships.

 The internal market can be segmented according to the roles employees play in relation to the customer.

 Internal marketing has implications for employer branding, employee communication and employee
relations.

 Key communication tools used in internal marketing include email, intranets, team meetings and
personal/informal communication.

 Corporate social responsibility involves an organisation accepting that it is part of society and, as such, is
accountable to that society for the consequences of its actions.

 Unethical marketing practices are ultimately likely to damage an organisation’s reputation and brand –
and ultimately sales.

 Social marketing is the application of marketing techniques to achieve non-commercial goals, for
example to encourage behaviour that benefits the environment or encourages good health.
298 10: Developments in marketing PART D MARKETING

Quick Quiz
1 Which type of customer is described as 'the person who selects a product or service'?

A The payer
B The user
C The consumer
D The buyer

2 Which group within an organisation's decision making unit initiates the buying process and helps define
purchase specifications?

A Initiators
B Influencers
C Deciders
D Gatekeepers

3 Which of the following is not a type of customer of a charity?

A Beneficiaries
B Supporters
C Regulators
D Lobbyists

4 Briefly describe the purpose of internal marketing.

5 According to Caroll & Buchholtz (2000), what are four main layers of corporate social responsibility?

A Charitable, ethical, economic and philanthropic

B Economic, legal, ethical and philanthropic
C Legal, charitable, ethical and economic
D Social, economic, ethical and legal
PART D MARKETING 10: Developments in marketing 299

Answers to Quick Quiz

1 D The buyer selects the product or service.

2 A Initiators are the group within an organisation's decision making unit that initiates the buying
process and helps define purchase specifications.

3 D Lobbyists are not a type of charity customer.

Beneficiaries are those who receive tangible support from the charity and who benefit from
lobbying and publicity.

Supporters are those who provide the charity with money, time and skill.

Regulators include formal bodies, such as the Charities Commission, and less formal groups such
as residents' associations.

4 'Internal marketing is concerned with creating, developing and maintaining an internal service culture and
orientation, which in turn assists and supports the organisation in the achievement of its goals.'

5 B According to Caroll & Buchholtz (2000), the four main layers of corporate social responsibility are
economic, legal, ethical and philanthropic (this revises what you studied in Chapter 2).
300 10: Developments in marketing PART D MARKETING

Answer to Questions
10.1 Consumer buying

The five stages in the consumer buying process are:

Stage 1: Need/problem recognition

The customer recognises a need or a problem to solve. There is a motive to search for a solution.

Stage 2: Pre-purchase/information search

The customer searches for information they can use to base their decision on.

Stage 3: Evaluation of alternatives

The customer evaluates the various options they have generated.

Stage 4: The purchase decision

The purchase decision is made and the product or service selected based on how it meets their needs and other
factors such as cost.

Stage 5: Post-purchase evaluation

The customer evaluates their purchase. If they are dissatisfied, they will be back at the problem recognition stage
again. If they are satisfied, the next decision process for the product may be cut short and they may skip straight
to the decision, on the basis of loyalty.

10.2 Internal marketing

Four benefits that an intranet will bring an organisation in relation to its internal marketing are:

Cost savings

Intranets eliminate the need to store, print and distribute documents of internal marketing. Instead they can be
exchanged electronically or be made available online.

Efficiency

It is often quicker, easier and generally more efficient to search for and update material which is stored
electronically.

Distribution

Intranets facilitate multi-directional communication and co-ordination. This means information can be distributed
quickly to a number of sites in many countries.

Virtual team working

Employees may work in isolated locations but still be part of a team. Intranets promote virtual teams by
providing a central source of information and corporate culture that enables such individuals to feel part of the
organisation.

Now try this question from Number Level Marks Time

the Exam Question Bank 10 Examination 25 36 mins
MANAGING HUMAN CAPITAL

Part E

301
302
HUMAN RESOURCE MANAGEMENT

In this chapter we examine the subject of the maximum output from employees. In particular we
human resource management (HRM) and by will focus our attention on the factors which contribute to
way of introduction, we note that HRM is employee motivation.
different from traditional personnel management.
Later in the chapter we shall consider recent
Human resource management takes a strategic developments in terms of how organisations are structured
approach to an organisation's recruitment, training and and the effect this has had on working arrangements for
appraisal systems. Personnel management is concerned employees.
with the low-level detail of day-to-day management.
Before concluding with a look at ethical issues, we revisit
However, we will focus most of our attention on a HRM from a strategic perspective by looking at how
number of human resource theories which aim to get organisations develop an HR plan.

topic list learning outcomes syllabus references ability required

1 Human resource management E1(a) E1(i) comprehension
2 Human resource management theories E1(a) E1(i), E1(ii), E1(iii) comprehension
3 Employee motivation: Remuneration E2(b) E2(v) analysis
4 Employee motivation: Other factors E2(c) E2(vii) comprehension
5 HR management in different types of E2(c) E2(ix) comprehension
organisation
6 Working arrangements E2(c) E2(ix) comprehension
7 The HR plan E2(e) E2(viii), E2(x) analysis
8 Ethical behaviour E1(b) E1(iv) comprehension

303
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1 Human resource management 11/12

Introduction
In this chapter we look at what human resource management is, the theories behind it and how it
contributes to the success of an organisation. We also consider the importance of ethics to organisations
and its relevance to the line manager.

1.1 What is human resource management?

HUMAN RESOURCE MANAGEMENT (HRM) is the process of evaluating an organisation's human resource
needs, finding people to fill those needs, and getting the best work from each employee by providing the
KEY TERMS right incentives and job environment. It has the overall aim of helping an organisation achieve its goals.

PERSONNEL MANAGEMENT deals with day-to-day issues such as hiring and firing and industrial relations in
general. Unlike HRM it does not play a strategic role in an organisation.

1.2 The objectives of HRM

It is possible to identify four main objectives of HRM.

(a) To develop an effective human component for the organisation which will respond effectively to
change.

(b) To obtain and develop the human resources required by the organisation and to use and motivate
them effectively.

(c) To create and maintain a co-operative climate of relationships within the organisation and to this
end to perform a 'firefighting' role dealing with disputes as they arise.

(d) To meet the organisation's social and legal responsibilities relating to the human resource.

1.3 Why is HRM important?

Effective human resource management and employee development are strategically necessary as they
contribute to the success of the organisation. Particular benefits of HRM are:

(a) Increased productivity. Developing employee skills might make employees more productive.

(b) Enhanced group learning. Employees work more and more in multi-skilled teams. Each employee
has to be competent at several tasks. Some employees have to be trained to work together (ie in
teamworking skills).

(c) Reduced staff turnover. Training and developing staff often reduces turnover rates. This increases
the effectiveness of operations and profitability as staff become more experienced.

(d) Encouragement of initiative Organisations can gain significant advantage from encouraging and
exploiting the present and potential abilities of the people within them.

1.4 Human resource management

Human resource management (HRM) is based on the assumption that the management and deployment
of staff is a key strategic factor in an organisation's competitive performance. HRM requires top
KEY POINT
management involvement and the promotion of culture and values, so that employees' commitment, as
opposed merely to their consent, is obtained.
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HRM reflects a wider, modern view than traditional personnel management which is primarily concerned
with managing day-to-day operations.

The table below identifies other differences in approach.

Issue Personnel HRM

Employees Viewed as a cost View as assets
Employee motivation Payment/coercion Consent/involvement
Management concern Operational (eg fire Operational and strategic (eg fill
underperforming staff) vacancy and meet future needs
of organisation)
Manager role Negotiator/transactional Facilitator/transformational
leadership

1.4.1 Armstrong
Armstrong (2003) defined HRM as 'a strategic approach to the acquisition, motivation, development and
management of the organisation's human resources.'

1.4.2 Bratton and Gold

Bratton and Gold (1999) gave a more detailed definition. 'HRM emphasises that employees are crucial to
achieving sustainable competitive advantage, that human resources practices need to be integrated with the
corporate strategy, and that human resource specialists help organisational controllers to meet both
efficiency and equity objectives.'

A precise interpretation of HRM centres on the following notions.

(a) The personnel function has become centrally concerned with issues of broader relevance to the
business and its objectives, such as change management, the introduction of technology, and the
implications of falling birth rates and skill shortages for the resourcing of the business.

(b) HRM should be integrated with strategic planning that is, with management at the broadest and
highest level. The objectives of the HR function should be directly related to achieving the organisation's
goals for growth, competitive gain and improvement of 'bottom line' performance.

(c) HRM managers should be professionals.

1.4.3 Tyson and Fell

S Tyson and A Fell (Evaluating the Personnel Function) suggest four major roles for human resource
management which illustrate the shift in emphasis to the strategic viewpoint.

(a) To represent the organisation's central value system (or culture).

(b) To maintain the boundaries of the organisation (its identity and the flow of people in and out of it).
(c) To provide stability and continuity (through planned succession, flexibility and so on).
(d) To adapt the organisation to change.

Some companies will have a separate human resource function with staff authority over other
departments. Smaller companies may not be able to afford the luxury of such a function.

HRM is therefore a set of activities that may or may not have a separate department to manage it.

Exam alert
You may be asked to explain the role of an 'HR' division.
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Question 11.1 Human resource management

Learning outcome E1(i)

Briefly explain how human resource management contributes to the success of an organisation.
(2 marks)

1.5 The human resource cycle

A common approach to viewing HR is as a five stage cycle of recruitment, selection, induction,
appraisal/training/development and termination. However, another relatively simple model that provides
a framework for explaining the nature and significance of HRM is the human resource cycle (Devanna
1984).The model is shown below.
Human resource cycle

Selection is important to ensure the organisation obtains people with the qualities and skills required.

Appraisal enables targets to be set that contribute to the achievement of the overall strategic objectives of the
organisation. It also identifies skills and performance gaps, and provides information relevant to reward levels.

Training and development ensure skills remain up-to-date, relevant, and comparable with (or better than)
the best in the industry.

The reward system should motivate and ensure valued staff are retained.

Performance depends upon each of the four components and how they are co-ordinated.

1.6 The Guest model of HRM

David Guest (1997) developed a model to show the relationship between an organisation's HRM strategy
and HRM activities.

Guest's six components

     
HRM HRM HRM Behavioural Performance Financial
strategy practices outcomes outcomes outcomes outcomes
Differentiation Selection Commitment Effort High: Profits
(innovation) Training Quality Motivation Productivity Return on
Focus Appraisal Flexibility Co-operation Quality investment
(quality) Rewards Involvement Innovation
Cost Low:
Job redesign Organisational
(cost reduction)
Involvement citizenship Absenteeism
Status and Employee
security turnover
Conflict
Customer
complaints
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The model proposes that HRM practices should aim to result in high staff commitment and high quality,
flexible employees. Achieving these three HRM outcomes will facilitate the achievement of the
behavioural, performance and financial outcomes shown in the table.

1.7 Limitations of HRM models

Models of HRM practices (such as Devanna's and Guest's) tend to underestimate the influence of external
opportunities or threats and internal strengths and weaknesses.

External factors such as competition, technology, political/legal factors, economic factors and
social/cultural factors will all impact upon HRM.
KEY POINTS
Internal factors such as the organisational structure and culture will also impact upon HRM.

In addition, the way people are managed often depends upon the approach favoured by their line
manager. Some managers favour the 'hard' or rational approach – others believe in a 'softer' approach that
emphasises individual and organisational development.

Cultural, economic and legal traditions within a country will also shape HR policies. For example, in
Japan and the USA there is little state intervention in business and therefore organisations are free to
form their own practices. However, in former communist states such as China and some Eastern
European countries there remains a relatively high degree of state intervention.

Section summary
Human resource management (HRM) involves evaluating an organisation's human resource needs,
finding people to fill those needs, and getting the best work from each employee by providing the right
incentives and job environment.

HRM contributes to the success of an organisation through increased productivity, enhanced group
learning, reduced staff turnover and encouragement of initiative.

HRM is important at each stage in the human resource cycle.

There are a number of factors both internal and external to the organisation which limit the success of
any HRM policy.

2 Human resource management theories

Introduction
In this section we look at some of the most significant theories related to the management of people.
Exam questions may require you to spot them in a scenario or you may be asked to explain them directly.

Human resource management theories often relate to three interlinked aspects, ability, opportunity and
motivation. Many theorists believe that individual employee performance is a multiplicative function of
ability and motivation and that the environment also determines the level of performance.

2.1 Ability
Ability refers the skill, knowledge and capability required of employees in order to fulfil the objectives of
the organisation.
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2.1.1 Taylor: scientific management

One of the first theorists to discover the link between employee ability and the objectives of the
organisation was Frederick W Taylor who pioneered the scientific management movement. He argued
that management should be based on 'well-recognised, clearly defined and fixed principles, instead of
depending on more or less hazy ideas.'

Taylor was an engineer and mostly concerned with engineering management. His aim was increased
efficiency in production, that is, increased productivity. His methods were later applied to many other
types of work.

2.1.2 Principles of scientific management

The principles of scientific management are outlined below.

(a) The development of a true science of work. 'All knowledge which had hitherto been kept in the
heads of workmen should be gathered and recorded by management. Every single subject, large
and small, becomes the question for scientific investigation, for reduction to law.'

(b) The scientific selection and progressive development of workers. Workers should be carefully
trained and given jobs to which they are best suited.

(c) The bringing together of the science and the scientifically selected and trained men. The
application of techniques to decide what should be done and how, using workers who are both
properly trained and willing to maximise output, should result in maximum productivity.

(d) The constant and intimate co-operation between management and workers. 'The relations
between employers and men form without question the most important part of this art.' There is
much that is relevant today in this approach and the pursuit of productivity is still a major
preoccupation for management at all levels.

2.1.3 Examples of Scientific Management

The following are examples of Scientific Management in practice.

(a) Work study techniques established the 'one best way' to do any job. No discretion was allowed to
the worker. Subsequently, Henry Ford's approach to mass production broke each job down into its
smallest and simplest component parts: these single elements became the newly-designed job.

(b) Planning the work and doing the work were separated. Workers did what they were told – they
did not have any control over how they completed a task.

(c) Workers were paid incentives on the basis of acceptance of the new methods and output norms
as the new methods greatly increased productivity and profits.

(d) All aspects of the work environment were tightly controlled in order to attain maximum
productivity.

It is useful to consider an application of Taylor's principles. In testimony to the House of Representatives

Committee in 1912, Taylor used as an example the application of scientific management methods to
CASE STUDY shovelling work at the Bethlehem Steel Works.

(a) Facts were first gathered by management as to the number of shovel loads handled by each man
each day, with particular attention paid to the relationship between weight of the average shovel
load and the total load shifted per day. From these facts, management was able to decide on the
ideal shovel size for each type of material handled in order to optimise the speed of shovelling
work done.

(b) By organising work a day in advance, it was possible to minimise the idle time and the moving of
men from one place in the shovelling yard to another.
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(c) Workers were paid for accepting the new methods and 'norms' and received 60% higher wages
than those given to similar workers in other companies in the area.

(d) Workers were carefully selected and trained in the art of shovelling properly; anyone consistently
falling below the required norms was given special teaching to improve performance.

(e) 'The new way is to teach and help your men as you would a brother; to try to teach him the best
way and to show him the easiest way to do his work.'

(f) At the Bethlehem Steel Works, Taylor said, the costs of implementing this method were more than
repaid by the benefits. The labour force required fell from 500 men to 140 men for the same work.

2.2 Opportunity
Employees work within an environment that is provided by their employer. This environment must be
appropriate if employees are to be given the opportunity to perform their role at their maximum.

2.2.1 Weber: Bureaucracy, rational form

In the 1940's, Max Weber a German sociologist developed a theory of bureaucracy. Under bureaucracy,
authority is bestowed by dividing an organisation into jurisdictional areas (production, marketing, sales
and so on) each with specified duties. Authority to carry them out is given to the officials in charge, and
rules and regulations are established in order to ensure their achievement. Managers get things done
because their orders are accepted as legitimate and justified. Weber suggested that organisations
naturally evolved toward this rational form.

2.2.2 Lawrence and Lorsch: Contingency theory

Contingency theory is a concept based upon the idea that the organisation's structure and management
approach must be tailored to the situation. There is no one best way to manage.
KEY POINT

One form of contingency theory was developed by Lawrence and Lorsch (1967). They concluded that
organisations in a stable environment are more effective if they have more detailed procedures and a
more centralised decision-making process while organisations in an unstable environment should have
decentralisation, employee participation, and less emphasis on rules and procedures to be effective.

2.3 Motivation
Motivation is an employee's desire to perform their role. It is often linked to the outcome and any reward.

KEY POINT It is in an organisation's interests to know the reasons or motives behind people's behaviour. Motivation
influences employee productivity and their quality of work. By understanding what motivates their staff,
an organisation is better equipped to provide an environment that maximises employee performance. We
now outline some of the main theories of motivation.

2.3.1 Taylor, maximising prosperity

In the late nineteenth and early twentieth centuries, Taylor established four principles to achieve the
maximum prosperity for employers and employees.

(a) Science should be used to determine fair pay for a day's work.

(b) Scientific methods should be used in the recruitment and selection of staff who should be
developed to ensure they are capable of meeting output and quality targets.

(c) 'Mental revolution'. Staff should be encouraged to fulfil their potential.

(d) There should be constant and intimate co-operation between management and staff.
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Taylor appreciated how productivity would improve if staff were specialised and equipped with the
knowledge and skills required to perform their role. Jobs should be broken down into functions that would
each be performed by an individual. However, this view resulted in over-staffing in some organisations as
a relatively large number of middle managers controlled the other workers.

Taylor also held the view that as workers were rational and would be motivated by the highest
remuneration that was possible.

2.3.2 Mayo, Schein: Human relations

In the 1930s, a critical perception of scientific management emerged. Elton Mayo pioneered a new (then)
approach called human relations. This concentrated mainly on the concept of Schein's 'Social Man' where
people are motivated by 'social' or 'belonging' needs, which are satisfied by the social relationships they
form at work.

Attention shifted towards people's higher psychological needs for growth, challenge, responsibility and
self-fulfilment. Herzberg suggested that only these things could positively motivate employees to
improved performance.

The human relations approaches contributed an important awareness of the influence of the human
factor at work on organisational performance.

(a) Most theorists offer guidelines to enable practising managers to satisfy and motivate employees
and so (theoretically) to obtain improved productivity.

(b) However, as far as the practising manager is concerned there is still no simple link between job
satisfaction and productivity or the achievement of organisational goals.

2.3.3 Maslow's hierarchy of needs 11/12

HIERARCHY OF NEEDS: a ranked structure of behavioural stimuli within the individual, which explain
motivation. It is an example of a content theory of motivation. Such theories ask ‘what’ things motivate
KEY TERM people and assumes that there is one best way to motivate everyone.

Apart from 'biogenic needs' or 'drives', that is, biological determinants of behaviour, activated by
deprivation, there are psychogenic needs – emotional or psychological needs. The American psychologist
Abraham Maslow argued that man has seven innate needs, and put forward certain propositions about
the motivating power of these needs.

He described two higher order needs.

(a) The need for freedom of inquiry and expression: for social conditions permitting free speech and
encouraging justice, fairness and honesty.

(b) The need for knowledge and understanding: to gain and order knowledge of the environment, to
explore, learn, experiment. These are essential pre-requisites for the satisfaction of the remainder.

The other five needs can be arranged in a 'hierarchy of relative pre-potency'. Each level of need is
dominant until satisfied – only then does the next level of need become a motivating factor. A need which
has been satisfied no longer motivates an individual's behaviour. The need for self-actualisation can never
be satisfied.
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There are various problems associated with Maslow's theory.

(a) Empirical verification for the hierarchy is hard to come by. Physiological and safety needs are not
always uppermost in the determination of human behaviour.

(b) Research does not bear out the proposition that needs become less powerful as they are satisfied,
except at the very primitive level of primary needs like hunger and thirst.

(c) It is difficult to predict behaviour using the hierarchy: the theory is too vague.

(d) Application of the theory in work contexts presents various difficulties. For example, the role of
money or pay is problematic, since it arguably represents other rewards like status, recognition or
independence.

(e) The ethnocentricity of Maslow's hierarchy has also been noted – it does seem broadly applicable
to Western English-speaking cultures, but it is less relevant elsewhere.

2.3.4 Herzberg's two-factor content theory 11/12

The American psychologist Frederick Herzberg interviewed 203 Pittsburgh engineers and accountants.
The subjects were asked to recall events which had made them feel good about their work, and others
which made them feel bad about it. Analysis revealed that the factors which created satisfaction were
different from those which created dissatisfaction.

Herzberg identified two groups of work related factors which caused satisfaction and dissatisfaction
respectively. He called these factors motivators and hygiene factors.

MOTIVATORS produced satisfaction when present and were capable of motivating the individual.
HYGIENE FACTORS (or MAINTENANCE FACTORS) could not give satisfaction or provide motivation when
KEY TERMS
present. Their absence, however, caused dissatisfaction.

In his book Work and the Nature of Man, Herzberg distinguished between hygiene factors and motivator
factors, based on what he saw as two separate 'need systems' of individuals.

(a) There is a need to avoid unpleasantness. This need is satisfied at work by hygiene factors.
Hygiene satisfactions are short-lived: individuals come back for more, in the nature of drug addicts.

(b) There is a need for personal growth, which is satisfied by motivator factors, and not by hygiene
factors.
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A lack of motivators at work will encourage employees to focus on poor hygiene (real or imagined) and
to demand more pay for example. Some individuals do not seek personal growth: these are 'hygiene
seekers' who may be able to be satisfied by hygiene factors.

Hygiene factors are essentially preventative. They prevent or minimise dissatisfaction but do not give
satisfaction, in the same way that sanitation minimises threats to health, but does not give 'good' health.
KEY POINTS
They are called 'maintenance' factors because they have to be continually renewed to avoid
dissatisfaction.

Motivator factors create job satisfaction and are effective in motivating an individual to superior
performance and effort. These factors give the individual a sense of self-fulfilment or personal growth.

The following table contains examples of hygiene and motivation factors.

Hygiene factors Motivation factors

Company policy and administration Advancement
Salary Gaining recognition
Quality of supervision Responsibility
Interpersonal relationships Challenge
Working conditions Achievement
Job security Growth in role
Status (may also be a motivation factor) Autonomy

Herzberg suggested that if there is sufficient challenge, scope and interest in the job, there will be a
lasting increase in satisfaction, the employee will work well and productivity will be above normal levels.

The extent to which a job must be challenging or creative to a motivator-seeker will depend on each
individual's ability and their tolerance for delayed success.

2.3.5 Adams: Equity theory

Equity theory deals with issues of fairness, in other words that people seek a fair return for their efforts,
not necessarily the maximum reward.

Adams makes these suggestions.

(a) People compare what they receive with what others receive, for a perceived level of effort.

(b) Inequity exists if another person gets more for a given level of input.

(c) People get more upset the more inequity there is.

(d) The more upset someone is, the harder they will work to restore 'equity'.

Equity theory was backed up in the laboratory but is hard to apply in the real world.

2.3.6 McGregor's Theory X and Theory Y

THEORY X AND THEORY Y: Two contrasting managerial approaches to motivation described by McGregor.

KEY TERM
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Douglas McGregor categorises managers' assumptions into two types.

(a) Theory X. Most people dislike work and responsibility and will avoid both if possible. Therefore,
most people must be coerced, controlled, and threatened with punishment to get them to make an
adequate effort towards the achievement of the organisation's objectives.

(b) Theory Y. Individuals wants to satisfy their individual needs through work and wish to make a
contribution towards goals that they have helped to establish. Therefore managers who take a
Theory Y approach seek to allow their staff to follow their own path and satisfy their own needs.

When deciding which approach to take, the following issues are important.

(i) Strict controls and close supervision may be a source of conflict.

(ii) Self motivation and commitment may be more effective and less confrontational.

(iii) Treating individuals in a Theory X manner may prevent the use of initiative and encourage
doing the minimum required.

(iv) Theory X is ineffective when managing individuals who are not financially motivated or
who are not afraid of punishment.

2.3.7 Vroom: Expectancy theory

The expectancy theory of motivation is a process theory. Such theories ask ‘how’ people are motivated
and are based on the assumptions of cognitive psychology that human beings are rational and are aware
of their goals and behaviour.

In 1964 Victor Vroom, an American psychologist, worked out a formula by which human motivation
could actually be assessed and measured, based on an expectancy theory of work motivation. Vroom
suggested that the strength of an individual's motivation is the product of two factors.

(a) The strength of their preference for a certain outcome. Vroom called this valence. It may be
represented as a positive or negative number, or zero – since outcomes may be desired, avoided or
considered with indifference.

(b) The individual's expectation that the outcome will result from a certain behaviour. Vroom called
this subjective probability – it is the individual's 'expectation' and depends on their perception of
the probable relationship between behaviour and outcome. As a probability, it may be represented
by any number between 0 (no chance) and 1 (certainty). It is also called expectancy.

In its simplest form, the expectancy equation therefore looks like this.

Force or strength of Valence ie strength of Expectation that

motivation to do = their preference for a  behaviour will result
something certain outcome in desired outcome
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Expectancy theories suggest the following steps to improve employee motivation.

Determine what an individual values.

Identify the desired managerial behaviour.

Set performance levels which are perceived to be achievable.

Determine methods to link managerial behaviour to individual performance.

Ensure adequate rewards are in place to encourage performance.

Ensure the reward system is fair and equitable.

2.3.8 Schein, common behavioural traits

Schein identified four groups of 'man' with common behavioural traits.

(a) Rational economic man

This group is motivated by the maximisation of economic gain and by following their own self-
interest.

(b) Social man

Performance of this group is improved by raising morale, through socialisation at work. Rather
than acting as a controller, managers should be seen as facilitators.

(c) Self-actualising man

This group is motivated through self-fulfilment. In terms of work they are motivated by challenge
and responsibility.

(d) Complex man

Motivation is based on a 'psychological contract' between employers and employees. Each has
their own expectations of the 'contract' and motivation depends on their fulfilment.

2.3.9 Goal-setting theory

Goal-setting theory suggests that goals can motivate.

(a) Challenging goals, providing they have been accepted, lead to better performance than easy goals.
(b) The best goals are specific as they focus people's attention.
(c) Knowledge of results is essential.

Goal theory has the most empirical support of any motivation theory, but there are some limits to how it
applies.

(a) Research has concentrated on quantity not quality of output.

(b) At work, people pursue several goals consecutively; achieving one may mean neglecting another.
This is particularly a problem for organisations where trade offs have to be made.
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2.3.10 Mullins' classifications of motivation

According to Mullins (2005) motivation is 'the driving force within individuals by which they attempt to
achieve to achieve some goal in order to fulfil some need or expectation.' Mullins also identified three
classifications for understanding motivation.

Classification Examples
Economic reward Pay and benefits
Intrinsic satisfaction Enjoyment of the job and personal development
Social relationships Team working and forming friendships with colleagues

Question 11.2 Theory X and Theory Y

Learning outcome E1(i)

Douglas McGregor suggested that managers have one of two views or theories about subordinates.
View 1. Individuals want to satisfy their needs through work and wish to make a contribution to the goals
they have helped to establish.
View 2. Most people dislike work and responsibility, and so have to be coerced, controlled, and
threatened with punishment, to get them to do their job adequately.
Which of the following statements is correct?
A View 1 is called Theory X and view 2 is called Theory Y, and McGregor suggested that the most
effective managers hold view 1
B View 1 is called Theory Y and view 2 is called Theory X, and McGregor suggested that the most
effective managers hold view 2
C View 1 is called Theory X and view 2 is called Theory Y, and McGregor suggested that the most
effective managers hold view 2
D View 1 is called Theory Y and view 2 is called Theory X, and McGregor suggested that the view
held by the most effective managers depends on the circumstances
(2 Marks)

2.4 Psychological contracts

A psychological contract exists between individuals in an organisation and the organisation itself. Handy
suggested that they are based on what each party wants and what they are prepared to give for it.
(a) The individual expects to derive certain benefits from membership of the organisation (such as
pay, status, career progression) and is prepared to offer their labour and expend a certain amount
of effort in return.
(b) The organisation expects the individual to fulfil certain requirements (for example to work hard and
meet its expectations) and is prepared to offer certain rewards (such as pay, benefits and
continued employment) in return.
Three types of psychological contract can be identified.
(a) Coercive contract. This is a contract in which the individual considers that they are being forced to
contribute their efforts and energies involuntarily, and that the rewards they receive in return are
inadequate compensation.
(b) Calculative contract. This is a contract, accepted voluntarily by the individual, in which they
expect to do their job in exchange for a readily identifiable set of rewards. With such psychological
contracts, motivation can only be increased if the rewards to the individual are improved.
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If the organisation attempts to demand greater efforts without increasing the rewards, the
psychological contract will revert to a coercive one, and motivation may become negative.

(c) Co-operative contract. This is a contract in which the individual identifies themselves with the
organisation and its goals, so that they actively seek to contribute further to the achievement of
those goals. Motivation comes out of success at work, a sense of achievement, and self-fulfilment.

The individual will probably want to share in the planning and control decisions which affect their
work, and co-operative contracts are therefore likely to occur where employees participate in
decision-making.

Motivation happens when the psychological contract, within which the individual's motivation calculus
operates for new decisions, is viewed in the same way by the organisation and by the individual, and
when both parties are able to fulfil their side of the bargain. The individual agrees to work, or work well,
in return for whatever rewards or satisfactions are understood as the terms of the 'contract'.

Psychological contracts are particularly relevant when considering staff turnover and retention rates.
Employees are more likely to stay and be loyal to an organisation where they perceive to have a co-
operative contract rather than a coercive one.

Section summary
The success of any HRM policy can be measured by the contribution of the employees to the success of
the organisation.

There are a number of HRM theories which relate to ability, opportunity and motivation.

Psychological contracts are the expectations that the employee and employer have of each other.

3 Employee motivation: Remuneration 05/11, 05/13

Introduction
Pay is part of the reward system, and can be a motivator in certain circumstances. However, this
depends on the value individuals ascribe to pay and the way in which incentive schemes are
implemented. Pay is usually considered a hygiene factor.

Employees need an income to live and most probably have two basic concerns – to earn enough money
and that their pay should be fair. This can be assessed in two ways.

(a) Equity – a fair rate for the job

(b) Relativity, or fair differentials, that is, justified differences between the pay of different individuals

3.1 Payment systems

Armstrong and Murlis (1998) suggested that payments to employees have two elements.

 Pay with scope to reward progression and promotion

 Benefits such as pensions, company cars and medical insurance

3.1.1 Organisational aims for payment systems

At the organisational (strategic) level, payment systems have the following goals.

 Aid recruitment
 Retain employees
 Reward employees for performance
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3.1.2 Managerial aims for payment systems

At the managerial level, payment systems are used to:

 Attract and retain staff of a suitable quality

 Reward and motivate employees fairly and consistently
 Further the organisation's objectives by providing competitive rewards
 Encourage performance and progression through development
 Recognise non-performance factors such as skill and competence
 Ensure salary costs are controlled

3.2 Pay structures

Common types of pay structure include:

 Graded. A pay range is attached to particular levels of job grades.

 Broad-banded structures usually encompass the whole workforce from the clerk to the senior
manager. The range of pay in this structure is typically higher than in graded structures.

 Individual. Pay is allocated to individuals rather than 'bands'. It is used for senior management
positions and avoids the problem of over/under payment which can result from grading.

 Job family structures. Jobs in specific functions such as accounts or HR are grouped into families.
The jobs differ in terms of skill levels or responsibility (such as accounts technician and
management accountant) and pay is determined accordingly.

 Pay or profession/maturity curves. These recognise that in certain roles, pay must be progressive
to allocate pay fairly. Especially where knowledge or experience is key to the role.

 Spot rates. Allocate a rate of pay for a specific job often linked to the market price.

 Rate for age. Allocates a rate of pay or pay bracket for employees based on age.

 Pay spines are often used by government organisations where it is important for pay to be relative
across a range of roles. They are a series of incremental points from the lowest to the highest paid
jobs. Pay scales for specific jobs are superimposed onto the spine to ensure pay is relative.

 Manual worker pay structures recognise the difference in status between those who work in
manual roles against those in other parts of the organisation. Real differentials are incorporated
that reflect differences in skill and responsibility but otherwise they are similar to other pay
structures.

 Integrated structures incorporate one grading system for all employees except senior management.
They are often used where employees were paid historically under separate agreements.

The assumption behind most payment systems is that money is the prime motivating factor. As
Herzberg, among others, suggested, however, it is more likely to be a cause of dissatisfaction.

Herzberg himself admitted that pay is the most important of all the hygiene factors. Goldthorpe,
Lockwood et al, in their Affluent Worker study of the Luton car industry, suggested that workers may
have a purely instrumental orientation to work – deriving satisfaction not from the work itself but from the
rewards obtainable with the money earned by working. The Luton workers experienced their work as
routine and dead-end, but had made a rational decision to enter employment which offered high
monetary reward rather than intrinsic interest.

As expectancy theory indicates, pay is only likely to motivate a worker to improved performance if there is
a clear and consistent link between performance and monetary reward and if monetary reward is valued.
Salary structures do not always allow enough leeway to reward individual performance in a job (since
fairness usually dictates a rate for the job itself, in relation to others). Incentive schemes, however, are
often used to re-establish the link between effort and reward.
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3.3 Pay differentials

Pay differentials are often key to determining salaries for employees. To calculate pay differentials an
organisation should refer to market rates for the roles and decide a policy of how its pay levels will reflect
the market rate. The following methods may be used in determining pay rates.

3.3.1 Points-factor evaluation scheme

Evaluate the roles and calculate evaluation job scores based on the level or category of
employee.

Plot job scores on a scatter diagram and draw a line of 'best fit'.

Plot the upper, median and lower market pay rates from the available information.

Plot a desired pay policy line based on the market data.

Decide on the overall shape of the pay structure based on the pay policy.

Define pay ranges for each level taking into account flexibility for pay-progression.

3.3.2 Ranking/market method

Rank the existing jobs and plot actual pay rates to show current pay policy.

Plot market data and derive a 'best fit' policy.

Decide on a pay range policy and plot upper and lower pay rates using the 'best fit' policy as
the mid-range.

Develop a grade structure and pay rates for each grade.

3.4 Incentive schemes 05/11, 09/11, 03/12

The purpose of incentive schemes is to improve performance by linking it to reward. It is believed that
performance incentives take effect in several ways.

(a) Staff members' effort and attention are directed to where they are most needed – performance.

(b) Commitment and motivation are enhanced. This is particularly important when there are cultural
obstacles to improvement.

(c) Achievement can be rewarded separately from effort, with advantages for the recruitment and
retention of high quality employees.
PART E MANAGING HUMAN CAPITAL 11: Human resource management 319

A further advantage is that labour costs are linked to organisational performance.

Schemes may be based on individual performance or on group performance.

Individual schemes are common when the work is essentially individualistic and the output of a single
person is easy to specify and measure. However, much work is performed by teams and it is impossible
to identify each person's output. Such work calls for a group incentive scheme.

The main problem with team incentive payments is that there is unlikely to be a single consistent
standard of effort or achievement within the group. Inevitably there will be those who perform better than
others and they are likely to be aggrieved if all group members are rewarded equally.

The ultimate group incentive scheme is the organisation wide scheme, in which all employees are
rewarded in accordance with overall performance, usually as measured by profit . This tends to be very
popular in good times and the cause of disappointment and resentment when the business is doing badly.
The value of such schemes is questionable.

There are three main types of incentive scheme:

 Performance related pay (PRP)

 Bonus schemes
 Profit-sharing

3.4.1 Performance related pay

The most common individual PRP scheme for wage earners is straight piecework: payment of a fixed
amount per unit produced, or operation completed.
KEY POINT

For managerial and other salaried jobs, however, a form of management by objectives will probably be
applied. The SMART criteria (Specific, Measureable, Achievable, Realistic and Time-bound) should be
applied.

(a) Key results will be identified and specified, for which merit awards (on top of basic salary) will be
paid.

(b) There will be a clear model for evaluating performance and knowing when, or if, targets have
been reached and payments earned.

(c) The exact conditions and amounts of awards can be made clear to the employee, to avoid
uncertainty and later resentment.

For service and other departments, a PRP scheme may involve bonuses for achievement of key results, or
points schemes, where points are awarded for performance on various criteria (efficiency, cost savings,
quality of service and so on). Certain points totals (or the highest points total in the unit, if a competitive
system is used) win cash or other awards.

However, Otley (1987) discovered that employees become demotivated if they fail to meet targets,
resulting in a high degree of performance reduction.

3.4.2 Bonus schemes

Bonus schemes are supplementary to basic salary, and have been found to be popular with
entrepreneurial types, usually in marketing and sales. Bonuses are both incentives and rewards.
KEY POINT

Group incentive schemes typically offer a bonus for a group (equally, or proportionately to the earnings or
status of individuals) which achieves or exceeds specified targets. Typically, bonuses would be calculated
monthly on the basis of improvements in output per man per hour against standard, or value added (to
the cost of raw materials and parts by the production process).
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Value added schemes work on the basis that improvements in productivity increases value added, and
the benefit can be shared between employers and employees on an agreed formula. So if sales revenue
increases and labour costs stay the same, or sales revenue remains constant but labour costs decrease,
the balance becomes available. There has been an increase in such schemes in recent years.

3.4.3 Profit sharing schemes and employee shareholders

Profit sharing schemes offer employees (or selected groups of them) bonuses, perhaps in the form of
shares in the company, related directly to profits. The formula for determining the amounts may vary, but
KEY POINT
in recent years a straightforward distribution of a percentage of profits above a given target has given way
to a value added related concept.

Profit sharing is in general based on the belief that all employees can contribute to profitability, and that
that contribution should be recognised. If it is, the argument runs, the effects may include profit-
consciousness and motivation in employees, commitment to the future prosperity of the organisation and
so on.

The actual incentive value and effect on productivity may be wasted, however, if the scheme is badly
designed.

(a) A perceivably significant sum should be made available to employees – once shareholders have
received appropriate return on their investment – say, 10% of basic pay.

(b) There should be a clear, and not overly delayed, link between performance and reward. Profit
shares should be distributed as frequently as possible – consistent with the need for reliable
information on profit forecasts and targets and the need to amass a significant pool for distribution.

(c) The scheme should only be introduced if profit forecasts indicate a reasonable chance of achieving
the target. Profit sharing is welcome when profits are high, but the potential for disappointment is
great.

(d) The greatest effect on productivity arising from the scheme may in fact arise from its use as a focal
point for discussion with employees, about the relationship between their performance and results,
and areas and targets for improvement. Management must be seen to be committed to the
principle.

Exam alert
Exam questions may require you to discuss the difficulties of designing and operating a reward scheme for
performance.

3.4.4 Difficulties associated with incentive schemes

Incentive schemes have the following potential difficulties.

(a) Increased earnings simply may not be an incentive to some individuals. An individual who already
enjoys a good income may be more concerned with increasing their leisure time, for example.

(b) Workers are unlikely to be in complete control of results. External factors, such as the general
economic climate, interest rates and exchange rates may play a part in profitability in particular.
In these cases, the relationship between an individual's efforts and their reward may be indistinct.

(c) Greater specialisation in production processes means that particular employees cannot be
specifically credited with the success of particular products. This may lead to frustration amongst
employees who think their own profitable work is being adversely affected by inefficiencies
elsewhere in the organisation.
PART E MANAGING HUMAN CAPITAL 11: Human resource management 321

(d) Even if employees are motivated by money, the effects may not be altogether desirable. An
instrumental orientation may encourage self-interested performance at the expense of teamwork.
It may encourage attention to output at the expense of quality, and the lowering of standards and
targets (in order to make bonuses more accessible).

(e) It is often all too easy to manipulate the rules of the incentive scheme, especially where there are
allowances for waiting time, when production is held up by factors beyond the control of the
people concerned. Special allowances, guaranteed earnings and changes in methods also
undermine incentive schemes.

(f) Poorly designed schemes can produce labour cost increases out of proportion to output
improvements.

All such schemes are based on the principle that people are willing to work harder to obtain more money.
However, the work of Elton Mayo and Tom Lupton has shown that there are several constraints which
prevent most people from seeking to maximise their earnings.

(a) Workers are generally capable of influencing the timings and control systems used by
management.

(b) Workers remain suspicious that if they achieve high levels of output and earnings then
management will alter the basis of the incentive rates to reduce future earnings. Work groups
therefore tend to restrict output to a level that they feel is fair and safe.

(c) Generally, the workers conform to a group output norm. The need to have the approval of their
fellow workers by conforming to that norm is more important than the money urge.

In the Affluent Worker study referred to above, Goldthorpe and Lockwood recognised that people do not,
by and large, seek to maximise their earnings. Instead, a person will work as hard as necessary to earn
the money they want – but not past the point at which the deprivations demanded of them (in terms of
long hours or danger or antisocial conditions) are greater than they feel are worthwhile.

3.4.5 Total reward schemes

A TOTAL REWARD SCHEME (or package) is a bundle of cash and non-cash motivators offered to staff.

Total reward schemes recognise that individuals are all different and may not all be motivated by money.
KEY TERM
The fact that an individual can supplement their remuneration package may in itself be an attraction for
prospective employees.

Carrington (2004) identified the drivers for the development of total reward package. The key driver was
the skills shortage in the 1990s that caused 'talent wars' where organisations had to attract staff in a
more competitive manner. Around the same time many organisations were developing a vision and
culture – these schemes helped further this development.

Flexible benefits are another method of rewarding staff. Certain incentives have become more or less
popular over time and Prickett (2006) identified which are growing, static and declining in popularity.

Growing Static Declining

Bicycles Personal shopping and dry Golden parachutes
cleaning (city firms mainly)
Childcare Shopping vouchers Bonus schemes
Computers Health and dental insurance Share schemes
Flexible pension schemes (tax Gym membership Final salary pension schemes
efficient)
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Examples of other non-cash benefits that may be offered include:

 Training
 Flexible working hours
 Working at home
 Career progression
 The pursuit of green or ethical policies by the company (may be an attraction to individuals with
strong views on these issues)

Carrington (2004) identified a number of advantages of such schemes. In particular they make a positive
statement about the culture of the organisation, the creation of a more inclusive rather than a 'them and
us' attitude and improved recruitment and retention as a result of employer branding.

Other advantages and disadvantages of total reward schemes include:

Advantages Disadvantages
Attracts potential employees It might have no effect
Improves employee motivation It might cause organisational stagnation as
employees may not push themselves for further
reward
It ignores employee welfare
Employees may prefer to have cash only

3.4.6 Motivation and incentives

Gratton (2004) concluded that although money is important as a staff motivator, its importance is often
over estimated. She found that money often signified status between employees, and that this was
sometimes more important than purchasing power.

She also emphasised the importance of people being involved in decisions and procedures that affected
them. This was an important source of motivation.

Section summary
In many circumstances pay can be a motivator for employees.

There are many methods of determining the pay of employees.

Schemes that link reward to employee performance include, profit related pay, bonus schemes and
profit sharing.

Total reward schemes offer employees bundles of benefits from which they can pick and choose what
they want.
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4 Employee motivation: Other factors 05/10

Introduction
Frustration, conflict, feelings of failure and low prospects tend to show themselves in such effects as
high labour turnover, absenteeism or preoccupation with financial rewards (in compensation for lack of
other satisfactions). These can be as self-defeating for the organisation as they are unhealthy for the
individual.

However, there are a great many other work and non-work variables in the equation. A happy workforce
will not necessarily make the organisation profitable (if the market is unfavourable). They will not
necessarily be more productive (if the task itself is badly designed or resources scarce) nor even more
highly motivated.

Therefore, to ensure employee performance benefits the organisation, organisations should take into
account all factors that influence employee motivation.

4.1 Job redesign, rotation, enlargement and enrichment 09/12

Job redesign, rotation, enlargement and enrichment can all be used to improve the motivation of
employees by introducing changes to their work.

(a) Job redesign aims to improve performance through increasing the understanding and motivation of
employees. Job redesign also aims to ensure that an individual's job suits them in terms of what
motivates them and their need for personal growth and development.

(b) Job rotation allows for a little variety by moving a person from one task to another. Employees
often do this spontaneously. Job rotation permits the development of extra skills, but does not
develop depth of skill.

(c) Job enlargement increases the width of the job by adding extra, usually related, tasks. It is not
particularly popular with workers, many of whom prefer undemanding jobs that allow them to chat
and daydream.

(d) Job enrichment increase the depth of responsibility by adding elements of planning and control to
the job, therefore increasing its meaning and challenge. The worker achieves greater autonomy and
growth in the role.

4.2 Job characteristics model

Hackman and Oldham developed the job characteristics model that sets out the links between employee
motivation, satisfaction and performance (including personal growth) and the characteristics of their job or
role.

Hackman and Oldham's motivating potential score (MPS) is an attempt to measure a job's potential to
produce motivation and satisfaction. The MPS is computed from scores in questionnaires designed to
diagnose the extent to which the job displays five core characteristics.

(a) Skill variety: the breadth of job activities and skills required
(b) Task identity: whether the job is a whole piece of work with a visible outcome
(c) Task significance: the impact of the job on other people
(d) Autonomy: the degree of freedom allowed in planning and executing the work
(e) Feedback: the amount of information provided about the worker's job performance

Hackman and Oldham suggest that the first three characteristics above contribute to the 'experienced
meaningfulness of the work' and this is borne out by empirical research. The extent to which a job's
autonomy and feedback, as measured by Hackman and Oldham, contribute to job satisfaction is less
clear-cut.
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Exam alert
Motivation is an ideal topic for a Section C question. You might be introduced to a situation and asked to
explain why the people in the organisation are, say, demotivated. You could be asked to comment on the
motivational impact of changes proposed by management.

Section summary
There are a number of methods of improving an employee's experience of work and their motivation.
These include, job redesign, rotation, enlargement and enrichment.

5 HR management in different types of organisation

Introduction
Some organisations have found a need to develop new ways of working. This has been brought about
partly by the changing nature of business and the evolvement of different types and forms of
organisations.

5.1 Project-based teams

There is a general trend in organisation structures (particularly in service organisations) away from
traditional hierarchies towards flatter structures with reporting lines that cross functional boundaries.
Instead of traditional departments, some organisations operate using multi-skilled employees organised
into various work teams based around factors such as customer groups or particular projects.

This has implications for the HR plan and policies. For example, if a general pool of multi-skilled
employees is required, recruitment policy should reflect that fact – rather than recruiting large numbers of
specialists. Extensive training programmes are also likely to be required. The advantages and
disadvantages of project-based organisations can be summarised as follows.

Advantages Disadvantages
Greater flexibility of: Dual authority threatens a conflict between
 People. Employees develop an attitude geared functional managers and product/project area
to accepting change. managers.

 Workflow and decision-making. Direct contact

between staff encourages problem solving and
big picture thinking.
 Tasks and structure. The organisational
structure may be readily amended, where
projects are completed.
Inter-disciplinary co-operation and a mixing of An individual with two or more bosses may suffer
skills and expertise, along with improved stress from conflicting demands or ambiguous
communication and co-ordination. roles.
Motivation and employee development: providing Cost: product management posts are added, more
employees with greater participation in planning consultation is required eg meetings.
and control decisions.
Market awareness: the organisation tends to Slower decision making
become more customer/quality focused.
Horizontal workflow: Reduced bureaucracy. Possible lack of accountability
PART E MANAGING HUMAN CAPITAL 11: Human resource management 325

5.2 The 'new organisation'

Some recent trends (identified by writers such as Blyton and Peters) have emerged from the focus on
flexibility as a key organisational value.

(a) Flat structures. The flattening of hierarchies does away with levels of organisation which
lengthened lines of communication and decision-making and encouraged ever-increasing
specialisation. Flat structures are more responsive, because there is a more direct relationship
between the organisation's strategic centre and the operational units serving the customer.

(b) 'Horizontal structures'. What Peters (Liberation Management) calls 'going horizontal' is a
recognition that functional versatility (through multi-functional project teams and multi-skilling, for
example) is the key to flexibility. In the words (quoted by Peters) of a Motorola executive: 'The
traditional job descriptions were barriers. We needed an organisation soft enough between the
organisational disciplines so that … people would run freely across functional barriers or
organisational barriers with the common goal of getting the job done, rather than just making
certain that their specific part of the job was completed.'

(c) 'Chunked' and 'unglued' structures. So far, this has meant teamworking and decentralisation, or
empowerment, creating smaller and more flexible units within the overall structure. Charles
Handy's 'shamrock organisation' (with a three-leafed structure of professional core, contractual
fringe and flexible part-time labour) is gaining ground as a workable model for a leaner and more
flexible workforce, within a controlled framework.

(d) Output-focused structures. The key to all the above trends is the focus on results, and on the
customer, instead of internal processes and functions for their own sake. A project management
orientation and structure, for example, is being applied to the supply of services within the
organisation (to internal customers) as well as to the external market, in order to facilitate listening
and responding to customer demands.

(e) 'Jobless' structures. The employee becomes not a job-holder but the vendor of a portfolio of
demonstrated outputs and competences (Bridges). This is a concrete expression of the concept of
employability, which says that a person needs to have a portfolio of skills which are valuable on
the open labour market. Employees need to be mobile, moving between organisations rather than
settling in to a particular job.

5.3 Virtual organisations

As we have seen previously, developments in technology have enabled the creation of virtual teams and
even virtual organisations.

These have enabled organisations to:

(a) Outsource areas of organisational activity to other organisations and freelance workers (even 'off-
shore' in countries where skilled labour is cheaper), without losing control or co-ordination.

(b) Organise 'territorially' without the overhead costs of local offices, and without the difficulties of
supervision, communication and control. Dispersed centres are linked to a 'virtual office' by
communications technology and can share data freely.

(c) Centralise shared functions and services (such as data storage and retrieval, technical support or
secretarial services) without the disadvantages of 'geographical' centralisation, and with the
advantages of decentralised authority. Databases and communication (eg via e-mail) create
genuine interactive sharing of, and access to, common data.

(d) Adopt flexible cross-functional and multi-skilled working, by making expertise available across the
organisation. A 'virtual team' co-opts the best people for the task – regardless of location.
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Section summary
Organisations may adopt new structures or develop their own. Recent trends in organisational structure
include project-based teams, flat structures, horizontal structures, chunked and unglued structures,
output-focussed structures and 'jobless' structures. Some have even become virtual organisations.

6 Working arrangements

Introduction
The ways in which people are allowed and encouraged to work will affect their motivation and
performance. For example, allowing employees flexibility in when they complete their weekly hours
(flexitime) may allow them to deal with domestic issues when they arise, meaning the time they actually
spend working is more productive.

6.1 Attitudes and values

Working methods and arrangements cover much more then the nuts and bolts of hours and pay. For
example, modern management theorists emphasise values such as the following.

(a) Multi-skilling. Multi-skilled teams involve individuals who are able to perform a variety of team
tasks, as required. This enables tasks to be performed more flexibly, using labour more efficiently.

(b) Flexibility. Flexibility is about being able to respond and adapt quickly to rapidly-changing
customer demands, or to other changes such as technological change and different working
methods. This has created the following.

(i) Smaller, multi-skilled, temporary structures, such as project or task-force teams.

(ii) Multi-functional units, facilitating communication and co-ordination across departmental

boundaries. This is sometimes referred to as a matrix structure, since an employee may
report both to a line manager and to a project or product manager.

(iii) Flexible deployment of the labour resource, for example through part-time and temporary
working, outsourcing, flexitime and so on.

(c) Empowerment. Empowerment is based on the idea that those who are actually doing a job are
best positioned to make decisions relating to how the work is done.

It involves giving employees the freedom to take responsibility for their goals and actions and may
release hidden resources (creativity, initiative, leadership, innovation), which would otherwise
remain inaccessible. People are allowed to use their own judgement.

The extent to which these values are incorporated into an organisation's HR plan and policies will depend
upon the type of organisation, the role of the employees and the philosophy of top management.

6.2 Flexible working arrangements 05/13

When establishing policies and procedures on flexible work arrangements, organisations seek to provide
employees with a means to achieve a balance between professional and personal responsibilities in a
manner that benefits both the employee and the employer.

A well-structured policy should be developed that provides a clear understanding of the expectations and
responsibilities of all parties involved in the flexible work arrangement, and ensures that the same criteria
for making decisions on flexible work arrangements are applied to all employees.
PART E MANAGING HUMAN CAPITAL 11: Human resource management 327

The key to successful flexible work arrangements is to tailor the arrangement to the particular needs of
the individual and the organisation. When considering which flexible work arrangements to offer
KEY POINT
employees, organisations should consider the arrangement's practicality, fairness, and flexibility within the
environment of the organisation.

Typical flexible work arrangements include:

(a) Flexitime. Flexitime is an arrangement where employees work the standard number of hours in a
workday (or in some arrangements within a work week), but are given some flexibility as to when
they work these hours. Most organisations establish 'core working hours', meaning there are certain
hours during the day in which it is mandatory for the employee to be at the workplace. For
example, an employee on flexitime may have to work 7.5 hours per day, but be able to start their
day anytime between 7 and 10 a.m. and finish between 3 and 6 p.m.

(b) Compressed week. A compressed week is an arrangement where an employee works the standard
number of hours in a one-or two-week period, but compresses those hours into fewer work days
(therefore working longer hours on the days the employee is at work). For example, in a 40-hour
work week an employee on a compressed work week may work four 10-hour days in a week with
one day off, or nine 9-hour days with one day off every two weeks.

(c) Job sharing. Job sharing is an arrangement where two employees share one position. There are
many combinations of work hours that are used for job sharing. For example, one employee might
work Monday to Wednesday and the other employee Thursday and Friday, or one employee might
work mornings and the other afternoons.

(d) Part-time/Reduced hours. Part-time or reduced hours are arrangements where an employee works
less than the standard work week hours (and are paid only for those hours).

(e) Telecommuting or homeworking. Telecommuting is an arrangement where an employee works

either part or all of the week from a location other than the standard place of work (office).
Typically employees in such an arrangement work from their homes. For example, an employee
may work three days a week at the office and two days a week from home.

(f) Shift working. Shift patterns, outside of regular working hours, may be used to add flexibility in
relation to the time of day people work.

Organisations introducing flexible working should compile a formal flexible work agreement to be
completed and signed by the employer and the employee. The agreement should include the specific
details of the arrangement.

Often there is an unreasonable requirement that individuals who work a compressed work week should
be required to be available or on-call on their day off, or, on the other hand, the probably reasonable
expectation that employees with the right to work at home should come into work for a meeting held on
their work-at-home day. These issues should be covered by the flexible work arrangement agreement.

6.2.1 Flexibility in organisations

Three types of flexibility organisations look to achieve in the context of HRM are numerical flexibility,
financial flexibility and task flexibility.

(a) Numerical flexibility can be achieved through the use of temporary workers – both contractors and
agency staff. Atkinson (1984) distinguished between 'core employees' (high status, job security)
and 'periphery workers' on temporary or flexible hour contracts.

(b) Financial flexibility is achieved through variable systems of reward (eg performance-related pay).

(c) Task flexibility (sometimes referred to as functional flexibility) involves having employees able to
undertake a wider range of tasks. Introducing task flexibility could involve employees undertaking a
wider range of tasks at the same 'level' (horizontally) or undertaking tasks previously carried out by
employees at higher or lower levels (vertically).
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Exam alert
Exam questions may ask for a discussion of how an organisation could achieve workforce flexibility.

Advantages Disadvantages
The potential benefits to the employer are: Possible disadvantages to the employer include:
 Increased employee motivation and  Increased difficulty co-ordinating work
productivity  Loss of direct control
 Increased employee commitment to the  Dilution of the organisation’s culture as
organisation employees see less of each other.
 The ability to attract high performing individuals
 Reduced absenteeism and staff turnover.
The potential benefits to the employee are: Potential disadvantages to employee include:
 Reduction in stress due to conflicting personal  Loss of the distinction between home and office
and professional priorities life
 Increased job satisfaction, energy and creativity  Increased possibility of being distracted from
 Reduced cost of commuting work tasks

 Wider choice of housing as employees can live  Lack of space at home for office equipment
further from work  Lack of facilities such as IT equipment
 Ease of balancing work/life commitments  Increased utility bills as the employee is at
 Privacy. home more often
 Lack of social contact with other employees.

6.2.2 Flexible HR systems and e-HR 11/10

Organisations are increasingly moving towards electronically-based HR processes and systems, sometimes
referred to as e-HR. Enterprise-wide systems usually include tools to manage and administer employees.

Section summary
Organisations are increasingly offering flexible working schemes for employees.

7 The HR plan

Introduction
HR planning should be based on the organisation's strategic planning processes, with relation to analysis
of the labour market, forecasting of the external supply and internal demand for labour, job analysis and
plan implementation.

PLANNING '(the) establishment of objectives, and the formulation, evaluation and selection of the policies,
strategies, tactics and action required to achieve them'.
KEY TERM
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7.1 HR planning 05/11

Human resource planning concerns the acquisition, utilisation, improvement and return of an enterprise's
human resources. HR planning may sometimes be referred to as ‘workforce planning’ or ‘workforce
strategy’. Human resource planning deals with:

 Budgeting and cost control

 Recruitment
 Retention (company loyalty, to retain skills and reduce staff turnover)
 Downsizing (reducing staff numbers)
 Training and retraining to enhance the skills base
 Dealing with changing circumstances

The process of human resources planning

1. STRATEGIC ANALYSIS
 of the environment
 of the organisation's manpower strengths and
weaknesses, opportunities and threats
 of the organisation's use of employees
 of the organisation's objectives

2. FORECASTING
 of internal demand and supply
 of external supply

3. JOB ANALYSIS
 investigating the task performed in each job
 identifying the skills required

4. RECRUITMENT AND TRAINING
 recruiting and selecting required staff
 training and developing existing staff

7.2 Strategic analysis

The current and future position should constantly be kept under review.

(a) The environment: population and education trends, policies on the employment of women and on
pension ages and trends generally in the employment market must be monitored.

(b) The organisation's HR strengths, weaknesses, opportunities and threats need to be analysed so as
to identify skills and competence gaps and the level of innovation. Threats may involve competitors
'poaching' staff.

(c) Human resource utilisation. An assessment should be made of how effectively the organisation is
currently utilising its staff.

(d) Objectives. Core and subsidiary corporate objectives should be analysed to identify the manpower
implications. New products, technology, 'culture' and structure will all make demands on staff.

Timescales are very important. An immediate gap may prompt instant recruitment while long-term
corporate objectives allow planned staff development, providing them with the skills required.
330 11: Human resource management PART E MANAGING HUMAN CAPITAL

Human resources are hard to predict and control.

(a) Demand. Environmental factors (eg the economy) create uncertainties in the demand for labour.

(b) Supply. Factors such as education or the demands of competitors for labour create uncertainties in
the supply of labour.

(c) Goals. Employees have their own personal goals, and make their own decisions about whether to
undertake further training. When large numbers of individuals are involved, the pattern of
behaviour which emerges in response to any change in strategy may be hard to predict.

(d) Constraints. Legislation as well as social and ethical values constrain the ways in which human
resources are used, controlled, replaced and paid.

7.3 Forecasting
Estimating demand. Planning future HR needs requires accurate forecasts of turnover and productivity (eg
if fewer staff are required for the same output). The demand can be estimated from:

 New venture details  Divestments

 New markets (need new staff)  Organisational restructuring (eg relocation)
 New products/services  Cost reduction plans
 New technology (new skills)

Estimating supply

(a) Current workers. A stocks and flows analysis will define the internal labour market. It describes,
not just aggregate quantities, but movements in and out of certain grades, by occupation and grade
and according to length and service. This can be used in modelling.

(b) The external labour market. Labour market research does four things.

(i) It measures potential employees' awareness of the organisation.

(ii) It discerns attitudes of potential employees towards the organisation.
(iii) It suggests possible segments for advertising purposes.
(iv) It provides analysis of population trends for long-term forecasting.

A position survey compares demand and supply. Differences in the numbers required/available, their
grade, skills or location can be removed by applying an integrated manpower strategy.

7.4 Closing the gap between demand and supply: the HR plan 03/13
At the business unit level, the human resources plan will arise out of the strategic HR plan.

(a) The work required to be done will largely result from the business plan. Production management
might determine how the work will be done. If, for example, the company is introducing new
machinery, then the human resource requirements (eg training, possible redundancy, safety
measures) need to be considered.

(b) The skills base includes technical skills, interpersonal skills, and management skills. The need for
technical and management skills are obvious enough. Interpersonal skills are important, as they
deal with the service offered to customers and affect teamwork.

The HR plan is prepared on the basis of staffing requirements and the implications for productivity and
costs. It should include budgets, targets and standards, and should also allocate responsibilities for
implementation and control (reporting, monitoring achievement against plan).
PART E MANAGING HUMAN CAPITAL 11: Human resource management 331

The HR plan can be broken down into subsidiary plans as shown in the following table.

Plan Comment
Recruitment plan Numbers; types of people; when required; recruitment programme.
Training plan Numbers of trainees required and/or existing staff needing training; training
programme.
Redevelopment plan Programmes for transferring, retraining employees.
Productivity plan Programmes for improving productivity, or reducing manpower costs; setting
productivity targets.
Redundancy plan Where and when redundancies are to occur; policies for selection and declaration
of redundancies; re-development, re-training or re-location of redundant
employees; policy on redundancy payments, union consultation etc.
Retention plan Actions to reduce avoidable labour wastage.

7.5 Tactical plans

Tactical plans can then be made, within this integrated framework, to cover all aspects of the HRM task.

 Pay and productivity bargaining

 Physical conditions of employment
 Management and technical development and career development
 Organisation and job specifications
 Recruitment and redundancies
 Training and retraining
 Staffing costs

7.6 Staffing shortages or surpluses

Shortages or surpluses of labour which emerge in the process of formulating the position survey must be
dealt with.

(a) Dealing with a shortage

(i) Internal transfers and promotions, training etc

(ii) External recruitment
(iii) Reducing labour turnover, by reviewing possible causes
(iv) Overtime
(v) New equipment and training to improve productivity so reducing the need for more people

(b) Dealing with a surplus

(i) Allowing employee numbers to reduce through natural wastage

(ii) Restricting recruitment
(iii) Introduce part-time working for previously full-time employees
(iv) Redundancies – as a last resort, and with careful planning

Exam alert
You may be required to describe the main issues and stages in devising a human resource plan.
332 11: Human resource management PART E MANAGING HUMAN CAPITAL

7.7 Stages in human resources planning

Laurie Mullins (2002) devised a model of the different elements involved in HRM planning.

Stages in human resources planning

Corporate
objectives
Analysis of
existing records
Design organisation
Estimated changes structure
by target date

Supply forecast HR plan Demand forecast

HR management action plan

Target date

Recruitment Management
and selection Training development Redeployment Redundancies

Reconciliation of
supply and demand

7.8 Control over the HR plan

Once the HR plan has been established, regular control reports should be produced.

(a) Actual numbers recruited, leaving and promoted should be compared with planned numbers.
Action may be required to correct any imbalance – depending upon the cause.

(b) Actual pay, conditions of employment and training should be compared with assumptions in the
HR plan. Do divergences explain any excessive staff turnover?

(c) Periodically, the HR plan itself should be reviewed and brought up to date.

Question 11.3 Employee enthusiasm/commitment

Learning outcome E2(vii)

Enthusiastic and committed employees ensure business success. Do you agree? (4 marks)

Section summary
HR plans identify the needs of the organisation in terms of numbers of staff and their skills and compare
this with the resources that the organisation currently has. A plan is formed to close the gap between
the two.
PART E MANAGING HUMAN CAPITAL 11: Human resource management 333

8 Ethical behaviour

Introduction
Ethics refer to a code of moral principles that people follow with respect to what is right or wrong. Ethical
principles are not necessarily enforced by law, although the law incorporates moral judgements (eg theft
is wrong ethically, and is also punishable legally).

Companies have to follow legal standards, or else they will be subject to fines and their officers might
face similar charges. Ethics in organisations relates to business practice and social responsibility.
Increasingly, consumers and businesses prefer to purchase from and do business with organisations with
high ethical standards.

8.1 Ethics in business practice 05/10

ETHICS IN BUSINESS: 'The application of ethical values to business behaviour'. (CIMA Official Terminology)
Businesses have ethical values, based on the norms and standards of behaviour that their leaders believe
KEY TERM
will best help them express their identity and achieve their objectives. Some of these ethical values may
be explicit, for example, expressed in a mission statement or in employee training programmes. Others
may be unwritten rules and customs that form part of the organisations' culture: 'the way we do things
around here'.

Business life is a fruitful source of ethical dilemmas because its whole purpose is material gain, the
making of profit. Success in business requires a constant, avid search for potential advantage over others
and business people are under pressure to do whatever yields such advantage.

The table below summarises three elements to ethics.

Element Explanation
I Ethics concern an individual's professional responsibility to act.
DO Ethics concern the 'real world' practical actions an individual can take. It is important to consider
how an individual acts and not always what they do.
BEST Ethics concern choices between different courses of action. These may involve taking a course of
action which is less unpalatable than another.

8.1.1 An issue of trust

Whatever the situation, there is a public expectation that organisations will act ethically. This is known as
the 'trust me' model and was the case for many years when most businesses were owned by families.
Times have now changed and most companies are now run by directors and mangers rather than fathers
and sons. The model changed to 'involve me' as more evidence is needed of an organisation’s ethical
credentials.

In recent times, trust in businesses has fallen and increasingly more evidence is required to demonstrate
it.

The 'Show me' stage required some demonstration of trust, 'Prove to me' required independent verification
and assurance and the final stage of 'Obey me' would exist when the law creates legislation to cure
instances of unethical behaviour. We are some way off this point currently.

What caused this trust to disintegrate? Since the 1980s, the UK has seen a procession of corporate
disasters including the names of Barings Bank, Polly Peck and Maxwell. In an attempt to counter this
lack of trust, many corporations developed ethical strategies and policies to provide guidance and
training for their employees. The strategy is set by the leadership and feeds into all areas of the business,
becoming part of the cultural DNA of the organisation.
334 11: Human resource management PART E MANAGING HUMAN CAPITAL

8.2 Social Responsibility Policies and Reports

Many companies now produce Corporate Responsibility Policies (CRPs) and Corporate Responsibility
Reports (CRRs) to demonstrate their commitment to being a ‘good corporate citizen’.

8.2.1 Corporate (Social) Responsibility policies

Corporate (Social) Responsibility policies explain the organisation’s approach to helping the community
and reducing the environmental impact of the organisation.
KEY POINT

These policies must be consistent with the overall aims of the organisation, and should not be overstated
in an attempt to paint a ‘better’ image. Exaggerated claims are likely to harm an organisation in the eyes
of the public.

8.2.2 Corporate Responsibility Reports

These reports focus included figures or statistics covering areas such as the orgnisation’s carbon footprint
and impact on the environment. These can be added to more conventional assessments such as staff
KEY POINT
turnover to provide a wide ranging picture of the organisation.

Corporate values also guide staff as to the expectations that employers have regarding their behaviour.
The aim is to end up with consistent behaviour across the workforce in terms of personal conduct and
professionalism. These policies are enforced on a voluntary basis and results are monitored through
audits, surveys and interviews.

It is important that all employees, especially line managers, follow the policies laid down by the
organisation's leadership. The media is quick to pick up on any ethical failings by employees, often
resulting in adverse publicity for the organisation.

8.3 CIMA's Ethical Guidelines

All CIMA members and registered students are subject to CIMA's Ethical Guidelines.

These guidelines make it clear that individuals must:

 Observe the highest standards of conduct and integrity

 Uphold the good standing and reputation of the profession
 Refrain from any conduct which might discredit the profession

In particular, members should pay attention to the fundamental principles given in the Introduction and
the discussion of objectivity and the resolution of ethical conflicts that appear in Part A. Despite being
aimed at accountants, these guidelines are also equally relevant to any employee or manager within an
organisation and are discussed briefly below.

Ethical behaviour and CIMA’s ethical guidelines are core to the CIMA qualification and
feature in many of the syllabuses.

CIMA's ethical guidelines are examinable. You should download a copy from the CIMA
website (www.cimaglobal.com).
PART E MANAGING HUMAN CAPITAL 11: Human resource management 335

8.3.1 Fundamental principles

The fundamental principles of CIMA's Ethical Guidelines are:

(a) Integrity. This is more than not telling lies – professional accountants must not be party to
anything which is deceptive or misleading. You should be straightforward, honest and truthful in
all professional and business relationships.

(b) Objectivity. This is founded on fairness and avoiding all forms of bias, prejudice and partiality.

(c) Professional competence and due care. Individuals must ensure they remain up-to-date with
current developments and are technically competent. Those working under your authority must
also have the appropriate training and supervision.

(d) Confidentiality. Employers and clients are entitled to expect confidential information will not be
revealed without specific permission or unless there is a legal or professional right or duty to do so.

(e) Professional behaviour. Accountants should behave in such a way as to protect the reputation of
the professional and the professional body, and comply with relevant laws and regulations.

8.3.2 Ethical conflicts

Resolution of ethical conflicts is also covered by CIMA’s guidance. The possibility of such conflicts arising
is discussed. Potentially difficult situations include:

 Pressure from an overbearing supervisor

 Pressure from a friend or relation
 Divided loyalties

A CIMA member or student should act responsibly, honour any legal contract of employment and
conform to employment legislation. When dealing with an ethical dilemma, an individual should
consider:

 Whether more information or evidence is required.

 Whether there is an internal system in place for dealing with ethical concerns.
 Whether it is necessary or important to pass the matter up the organisation’s hierarchy (including
the audit committee).
 Whether to obtain professional advice or consult CIMA.

In cases where the CIMA member/student is encouraged or required to act illegally, resignation may be
the only option (if discussion fails to resolve the situation).

Exam alert
An exam question could require a discussion around the necessary changes to HR practices and employee
attitudes when bringing in a corporate social responsibility policy.

Question 11.4 Principles

Learning outcome E1(iv)

For each of CIMA’s fundamental principles, give an example of a situation where someone would be
acting unethically.
(5 marks)
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Section summary
Ethics are moral principles that people follow with respect to what is right or wrong.

Businesses have ethical values, based on the norms and standards of behaviour that their leaders
believe will best help them express their identity and achieve their objectives.

Ethical strategies are not always visible to outsiders so many companies produce Corporate
Responsibility Policies (CRPs) and Corporate Responsibility Reports (CRRs).

It is important that all employees, especially line managers, follow the policies laid down by the
organisation's leadership.

All CIMA members and registered students are subject to CIMA's Ethical Guidelines. These guidelines are
also relevant to other employees.
PART E MANAGING HUMAN CAPITAL 11: Human resource management 337

Chapter Roundup
 Human resource management (HRM) involves evaluating an organisation's human resource needs,
finding people to fill those needs, and getting the best work from each employee by providing the right
incentives and job environment.

 HRM contributes to the success of an organisation through increased productivity, enhanced group
learning, reduced staff turnover and encouragement of initiative.

 HRM is important at each stage in the human resource cycle.

 There are a number of factors both internal and external to the organisation which limit the success of
any HRM policy.

 The success of any HRM policy can be measured by the contribution of the employees to the success of
the organisation.

 There are a number of HRM theories which relate to ability, opportunity and motivation.

 Psychological contracts are the expectations that the employee and employer have of each other.

 In many circumstances pay can be a motivator for employees.

 There are many methods of determining the pay of employees.

 Schemes that link reward to employee performance include, profit related pay, bonus schemes and
profit sharing.

 Total reward schemes offer employees bundles of benefits from which they can pick and choose what
they want.

 There are a number of methods of improving an employee's experience of work and their motivation.
These include, job redesign, rotation, enlargement and enrichment.

 Organisations may adopt new structures or develop their own. Recent trends in organisational structure
include project-based teams, flat structures, horizontal structures, chunked and unglued structures,
output-focussed structures and 'jobless' structures. Some have even become virtual organisations.

 Organisations are increasingly offering flexible working schemes for employees.

 HR plans identify the needs of the organisation in terms of numbers of staff and their skills and compare
this with the resources that the organisation currently has. A plan is formed to close the gap between
the two.

 Ethics are moral principles that people follow with respect to what is right or wrong.

 Businesses have ethical values, based on the norms and standards of behaviour that their leaders
believe will best help them express their identity and achieve their objectives.

 Ethical strategies are not always visible to outsiders so many companies produce Corporate
Responsibility Policies (CRPs) and Corporate Responsibility Reports (CRRs).

 It is important that all employees, especially line managers, follow the policies laid down by the
organisation's leadership.

 All CIMA members and registered students are subject to CIMA's Ethical Guidelines. These guidelines are
also relevant to other employees.
338 11: Human resource management PART E MANAGING HUMAN CAPITAL

Quick Quiz
1 What are the objectives of human resource management?

2 Who developed a version of contingency theory?

A Mayo and Schein

B Weber
C Lawrence and Lorsch
D Taylor

3 In terms of HRM, what is a coercive psychological contract?

A A contract in which the individual considers that they are being forced to contribute their efforts
and energies involuntarily.

B A contract, accepted voluntarily by the individual, in which they expect to do their job in exchange
for a readily identifiable set of rewards.

C A contract in which the individual identifies themselves with the organisation and its goals, so that
they actively seek to contribute further to the achievement of those goals.

D A contract in which the individual is made to believe their working conditions will be better than
they actually are.

4 Which of the following is the correct formula as stated in Victor Vroom's expectancy theory?

A F=VxE
B V=E+F
C E=VxF
D F=V/E

5 Which one of CIMA's fundamental principles is based on fairness and avoiding all forms of bias, prejudice
and partiality?

A Integrity
B Objectivity
C Confidentiality
D Professional behaviour
PART E MANAGING HUMAN CAPITAL 11: Human resource management 339

Answers to Quick Quiz

1 The objectives of HR management include:

 To develop an effective human component for the organisation which will respond effectively to
change

 To obtain and develop the human resources required by the organisation and to use and motivate
them effectively

 To create and maintain a co-operative climate of relationships within the organisation

 To deal with employment disputes as they arise

 To meet the organisation's social and legal responsibilities relating to the human resource.

2 C Lawrence and Lorsch developed a form of contingency theory.

3 A A coercive psychological contract is one in which the individual considers that they are being
forced to contribute their efforts and energies involuntarily.

4 A Force = Valance x Expectation is the formula in Victor Vroom's expectancy theory.

5 B Objectivity is based on fairness and avoiding all forms of bias, prejudice and partiality.

Answers to Questions
11.1 Human resource management

Human resource management concerns the strategic decisions organisations take in order to get the maximum
contribution from their workforce. The main benefit is increased productivity, but others include reduced staff
turnover, enhanced learning and the encouragement of employees to use their initiative.

11.2 Theory X and Theory Y

D The more effective view of managers depends on the circumstances of the work. If a manager is in charge
of a large number of people doing repetitive, routine work, a Theory X approach is likely to be more
effective. At other times, a Theory Y approach will be more effective, for example in dealing with
subordinates who are managers or professionals.

11.3 Employee enthusiasm/commitment

Although enthusiastic and committed employees are often the driving force behind business success, they do not
guarantee or ensure success.

(a) No matter how good, loyal, committed and enthusiastic the people are, if the basic commercial strategy is
wrong, the company will fail.

(b) A strong culture of enthusiasm for all initiatives can inhibit people who have genuine valid concerns from
voicing these – which may led to expensive mistakes.
340 11: Human resource management PART E MANAGING HUMAN CAPITAL

11.4 Principles

There are a huge range of possible answers. Here are some examples, you probably thought of others.

 Integrity – handing over work to a colleague that you know contains errors
 Objectivity – allowing personal feelings to cloud your judgement
 Professional competence and due care – taking on work you are not qualified to do
 Confidentiality – leaving sensitive or confidential information where anyone can look at it
 Professional behaviour – cheating in professional exams

Now try this question from Number Level Marks Time

the Exam Question Bank 11 Examination 30 54 mins
HUMAN RESOURCE PRACTICES

In this final chapter we shall concentrate on Employee development is key to maintaining the
good HR practice at each stage of the workforce's skills and providing a source of future
employment process – from recruitment to managers for the organisation. Appraisal plays a major
dismissal. We shall also consider legal and ethical role in employee development as this is very often where
issues at each stage where relevant. training needs and future potential are discovered.

topic list learning outcomes syllabus references ability required

1 Good HR practice E1(a), E1(b), E2(c), E1(i), E1(iv), E2(i), analysis
E2(d) E2(ii), E2(iv), E2(vii)
2 Human resource development E2(a), E2(d) E2(iii) analysis
3 Appraisal E2(a), E2(b), E2(c), E2(vi) analysis
E2(d)

341
342 12 Human resource practices PART E MANAGING HUMAN CAPITAL

1 Good HR practice 03/12

Introduction
It is important that effective human resource management policies and procedures are followed if
maximum employee performance is to be achieved.

Good practice at the recruitment and selection stages help ensure the most suitable candidates become
employees. Training and development policies provide employees with skills and experience that enable
them to progress through the organisation, providing them with the motivation to stay and the
organisation with a flexible workforce that can meet its future needs.

1.1 Recruitment and selection

RECRUITMENT is concerned with finding applicants: going out into the labour market, communicating
opportunities and information and generating interest.
KEY TERMS
SELECTION consists of procedures to choose the successful candidate from among those made available
by the recruitment effort.

A systematic approach to recruitment and selection should be followed.

Detailed personnel planning.

Job analysis, so that for any given job there are two things.

(a) A statement of the component tasks, duties, objectives and standards (a job
description).

(b) A definition of the kind of person needed to perform the job (a person specification).

Identification of vacancies, by way of the personnel plan (if vacancies are created by
demand for new labour) or requisitions for replacement staff by a department which has
'lost' a current job-holder.

Evaluation of the sources of labour, again by way of the personnel plan, which should
outline personnel supply and availability, at macro- and micro-levels. Internal and external
sources, and media for reaching both, will be considered.

Review of applications, assessing the relative merits of broadly suitable candidates.

Notifying applicants of the results of the selection process.

Preparing employment contracts, induction, training programmes and so on.

PART E MANAGING HUMAN CAPITAL 12: Human resource practices 343

1.2 The recruitment process

The recruitment process begins by determining the nature of the vacancies and ends with the short-listing
of candidates for selection.

1.2.1 Step 1: Job analysis

JOB ANALYSIS is: 'the process of collecting, analysing and setting out information about the content of jobs
in order to provide the basis for a job description and data for recruitment, training, job evaluation and
KEY TERM performance management. Job analysis concentrates on what job holders are expected to do.'
(Armstrong)
The management of the organisation needs to analyse the sort of work needed to be done in order to recruit
effectively. The type of information needed is outlined below.

Type of information Comments

Purpose of the job This might seem obvious. As an accountant, you will be expected to analyse,
prepare or provide financial information; but this has to be set in the context of
the organisation as a whole.
Content of the job The tasks you are expected to do. If the purpose of the job is to ensure, for
example, that people get paid on time, the tasks involved include many
activities related to payroll.
Accountabilities These are the results for which you are responsible. In practice they might be
phrased in the same way as a description of a task.
Performance criteria These are the criteria which measure how good you are at the job. These are
largely task related.
Responsibility This denotes the importance of the job. For example, a person running a
department and taking decisions involving large amounts of money is more
responsible that someone who only does what they are told.
Organisational factors Who does the jobholder report to directly (line manager)?
Developmental factors Likely promotion paths, if any, career prospects and so forth. Some jobs are
'dead-end' if they lead nowhere.

Environmental factors Working conditions, security and safety issues, equipment and so on.

1.2.2 Step 2: Job design

A current approach to job design is the development and outlining of competences.
A person's COMPETENCE is 'a capacity that leads to behaviour that meets the job demands within the
parameters of the organisational environment and that, in turn, brings about desired results'. (Boyzatis)
KEY TERM
Some take this further and suggest that a competence embodies the ability to transfer skills and
knowledge to new situations within the occupational area.
Different types of competences
(a) Behavioural/personal competences are underlying personal characteristics and behaviour required
for successful performance, for example, 'ability to relate well to others'. Most jobs require people
to be good communicators.
(b) Work-based/occupational competences are 'expectations of workplace performance and the
outputs and standards people in specific roles are expected to obtain'. This approach is used in
NVQ systems. They cover what people have to do to achieve the results of the job. For example, a
competence for a Chartered Management Accountant might be to 'produce financial and other
statements and report to management'.
(c) Generic competences can apply to all people in an occupation.
344 12 Human resource practices PART E MANAGING HUMAN CAPITAL

Some competences for managers are shown in the following table.

Competence area Competence

Intellectual  Strategic perspective
 Analytical judgement
 Planning and organising
Interpersonal  Managing staff  Interpersonal sensitivity
 Persuasiveness  Oral communication
 Assertiveness and decisiveness
Adaptability  Flexibility
 Coping with change
Results  Initiative
 Motivation to achievement
 Business sense
These competences can be elaborated by identifying positive and negative indicators.

According to Mintzberg, the parameters of job design include:

(a) Job specialisation

(i) How many different tasks are contained in the jobs and how broad and narrow are these
tasks? The task may be determined by operations management. Until recently, there has
been a trend towards narrow specialisation, reinforced, perhaps by demarcations laid down
by trade unions. On the production line, a worker did the same task all the time. Modern
techniques, however, require workers to be multi-skilled.

(ii) To what extent does the worker have control over the work? At one extreme ('Scientific
Management') the worker has little control over the work. At the other extreme (eg an
electrician) the worker controls the task.

(b) Regulation of behaviour. Co-ordination requires that organisations formalise behaviour so as to

predict and control it.

(c) Training in skills and indoctrination in organisational values.

Belbin (1997) described a way of tailoring job design to delayered, team based structures and flexible
working systems.

(a) Flattened delayered hierarchies lead to greater flexibility but also to uncertainty and sometimes to a
loss of control.

(b) Old hierarchies tended to be clearer in establishing responsibilities.

1.2.3 Step 3: Job description and person specification

A JOB DESCRIPTION sets out the purpose of the job, where it fits in the organisation structure, the context
of the job, the accountabilities of the job and the main tasks the holder carries out.
KEY TERM
There are four main purposes of a job description.

Purpose Comment
Organisational Defines the job's place in the organisational structure
Recruitment Provides information for identifying the sort of person needed (person specification)
Legal Provides the basis for a contract of employment
Performance Performance objectives can be set around the job description
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 345

The main contents of a job description include:

(a) Job title (eg Assistant Financial Controller). This indicates the function/department in which the job
is performed, and the level of job within that function.

(b) The location of the job within the organisation structure (division, department and section).

(c) The job title of the person to whom the jobholder is responsible to (eg the Assistant Financial
controller reports to the Financial Controller), in other words the person's immediate boss.

(d) The job title(s) of the person(s) responsible to the jobholder and the number of staff directly
supervised.

(e) Responsibility and authority level for budgets and expenditure.

(f) A brief description of the overall purpose of the role.

(g) Principal accountabilities or main tasks, ideally listed in order of importance.

(h) Skills required to perform the job including technical skills and physical skills and capabilities.

(i) Typical working patterns or hours of work (eg 9 to 5), including any part-time or job-share options.

Exam alert
Exam questions may require you to produce a job description for a particular position.

Very detailed job descriptions are perhaps most suited for roles where the work is largely repetitive and
predictable. In other situations, a prescriptive job description could cause problems, with employees
perhaps wanting to adhere strictly to it, rather than responding flexibly to task or organisational
requirements.

Increasingly, job descriptions are being written in terms of the outputs and performance levels expected.
Some organisations are moving towards accountability profiles in which outputs and performance are
identified explicitly.

An alternative to job descriptions are role definitions. A role is a part played by people in meeting their
objectives by working competently and flexibly within the context of the organisation's objectives,
structures and processes.

Another trend is increased use of person specifications. These focus on the skills and qualities required by
the person who will fill the role.

Possible areas the specification may cover include:

 Personal skills  Motivation  Innate ability (aptitude)

 Qualifications  Personality and disposition  Intelligence

Alec Rodgers devised a framework for the recruitment process that identifies seven points which can be
used to identify the type of person required by a particular position. It can be remembered using the
mnemonic BADPIGS.
346 12 Human resource practices PART E MANAGING HUMAN CAPITAL

Point Examples
Background/Circumstances Location, car owner
Attainments Qualifications, career achievements
Disposition Calm, independent
Physical make-up Strength, appearance, health
Interests Mechanical, people-related
General Intelligence Average, above average
Special attributes Manual dexterity, mental sharpness

Fraser devised a similar framework which is known as the Five Point Plan.

Point Description
Flexibility and adjustment Ability to deal with stress, get on with others and
emotional stability.
Impact on other people Communication skills, personality and
appearance.
Required qualifications Experience, education and training.
Motivation Achievement, progression and determination.
Innate abilities Aptitude, comprehension, intelligence.

1.2.4 Step 4: Advertising job vacancies

After a job description and a personnel specification have been prepared, the organisation should
advertise the job vacancy (internally or externally, or both).

The job description and personnel specification can be used as guidelines for the wording of any
advertisement.

The choice of advertising medium will depend on cost, frequency, the frequency with which the
organisation wants to advertise the job vacancy and its suitability to the target audience.

A range of options are available when advertising a position.

 In-house magazines  Recruitment agencies

 Professional journals  Schools careers officers
 National newspapers  University careers officers
 Local newspapers  Careers/job fairs
 Local radio  Open days
 Job centres  The Internet

Employment agencies may be used to ease the effort involved in both recruitment and selection. More
junior posts can often be filled from among an agency's pool of registered candidates. Recruitment and
selection of more senior staff may be outsourced to executive search agencies, who will manage the
whole process. This may include preparing the job definition and person specification, advertising and
word-of-mouth communication, and the initial interview process. One or two candidates will then be
presented for assessment.

1.2.5 Step 5: Initial screening

The final process in the recruitment phase (before moving on to 'Selection') is the initial screening of
candidates usually by reviewing curriculum vitaes (CVs) and selecting some candidates for interview.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 347

1.3 Selection
Selection involves a filtering process, by reviewing application forms, interviewing and testing. A variety
of techniques may be used in selection, those chosen in a particular circumstance must be:

 Reliable – generate consistent results

 Valid – accurately predict performance of employees
 Fair – non-discriminating
 Cost-effective – the benefits of obtaining good quality staff must justify the costs of selecting them

An ineffective selection process may result in the

 Employment of unsuitable applicants

 Rejection of suitable applicants

Both errors may be costly to put right.

1.3.1 Application forms

Job advertisements usually ask for a CV (résumé) or require an application form to be completed. The CV
is more usual in applications for executive posts, except in the public sector. Application forms are usual
for jobs below executive level, and at all levels in the public sector.

The application form should therefore help those making the selection to sift through the applicants, and
to reject some at once so as to avoid the time and costs of unnecessary interviews. It should therefore:

(a) Obtain relevant information about the applicant which can be compared with the requirements of
the job.

(b) Give applicants the opportunity to write about themselves, such as their career ambitions or why
they want the job.

1.3.2 The interview: Preparation

Aims of the interview

 Finding the best person for the job, through direct assessment
 Giving the applicant the chance to learn about the business

In preparation for the interview, the interviewer should study three things.

(a) The job description (and specification if separate), to review the major demands of the job.

(b) The personnel specification, to make an assessment of the applicant's character and
qualifications.

(c) The application form, to decide on questions or question areas for each applicant.

1.3.3 The interview: Conduct

The following factors should be taken into account.

(a) The layout of the room and the number of interviewers should be planned carefully.

(b) The manner of the interviewers, their tone of voice, and the way their early questions are phrased
can all be significant in establishing the tone of the interview.

(c) Questions should be put carefully. The interviewers should not be trying to confuse the candidate,
but should be trying to obtain the information they need.

(d) The candidate should be encouraged to talk.

(e) The candidate should be given the opportunity to ask questions.

348 12 Human resource practices PART E MANAGING HUMAN CAPITAL

1.3.4 Types of job interview

There are a number of different types of interview.

(a) Individual interview. A one-to-one discussion between the candidate and the interviewer face-to-
face.

(b) Problem solving interview. Similar to an individual interview but the candidate is set a
hypothetical problem to solve.

(c) Tandem interview. Two interviewers per candidate.

(d) Panel interview. A group of interviewers interview the candidate together.

(e) Stress interview. Another type of face-to-face interview where the candidate is put under pressure
by an aggressive interviewer.

(f) Succession/sequential interviews. An alternative to a panel interview where the candidate faces a
number of individual interviews with different people within the organisation.

(g) Group interview. Similar to a problem solving interview but with a number of candidates who must
solve the problem together.

1.3.5 Limitations of interviews

All of the different types of interview have advantages and disadvantages. For example, an individual
interview is more likely to allow a rapport to build, but is also more subject to bias and therefore possibly
less reliable. Also, involving more than one interviewer could result in differing opinions, making it difficult
to reach a decision.

Some general limitations of interviews are:

(a) Unreliable assessments. Interviewers may disagree. A suitable candidate might be rejected or an
unsuitable candidate offered a job.

(b) They fail to provide accurate predictions of how a person will perform in the job. Research has
shown this time and again.

(c) The interviewers are likely to make errors of judgement even when they agree about a candidate.

(i) A halo effect: a general judgement based on a single attribute.

(ii) Contagious bias. Interviewers might change the behaviour of the applicant through the
wording of questions or non-verbal clues.

(iii) Interviewers sometimes stereotype candidates on the basis of insufficient evidence, eg on

the basis of dress, hair style, accent of voice etc.

(iv) Incorrect assessment of qualitative factors such as motivation, honesty or integrity. Abstract
qualities are very difficult to assess.

(v) Logical error. An interviewer might draw conclusions about a candidate without logical
justification.

Interviewers should be trained to conduct and assess interviews.

Question 12.1 Interviews

Learning outcome E2(a)

Some courses offer tuition in interview technique to candidates looking for jobs. Do you think this means
interviews are likely to be less reliable as a means of candidate selection? (2 marks)
 PART E MANAGING HUMAN CAPITAL 12: Human resource practices 349

1.3.6 Testing of candidates

Tests are used to supplement interviews or select applicants for interview. The following types of test may
be used.

(a) Psychological tests and personality tests. An individual may be required to answer a long series of
questions or score a variety of statements which indicate basic attitude profiles. The best known
personality test is the Cattell P16 PF (Personality Factors), covering sixteen aspects of personality.

(b) Cognitive tests relate to thinking processes. These include intelligence tests which measure the
applicant's general intellectual ability (eg IQ tests), and aptitude tests. Aptitude tests aim to
provide information about the candidate's abilities in different areas, (eg tests in mathematics,
general knowledge, typing, reasoning, persuasion etc).

(c) Proficiency tests are perhaps the most closely related to an assessor's objectives, because they
measure ability to do the work involved.

(d) Psychometric tests contain features of all of the above. They are selection tests that seek to
quantify psychological dimensions of job applicants, for example intelligence, personality and
motivation. Candidates might be required to answer a list of questions. Those answers are then
marked and the candidate is given a score.

The Myers-Briggs Type Indicator is used to categorise people as to whether they are introvert/extrovert,
objective/intuitive, logical/emotional, decisive/ hesitant, and so forth. These tests may be used:
CASE STUDY
(a) In the initial selection of new recruits.
(b) In the allocation of new entrants to different branches of work.
(c) As part of the process of transfer or promotion.

1.3.7 Advantages and disadvantages of tests

Tests have the following advantages and disadvantages.

Advantages Disadvantages
A test can be a sensitive measuring instrument. They may over-simplify complex issues.
Tests are standardised, so that all candidates are They are culturally-specific. Many tests for
assessed by the same yardstick. managers were developed in the US. The cultures
in other countries may differ.
Tests always measure the same thing (eg IQ). Results should only be used to support other
selection methods.

1.3.8 Group selection methods

Group selection methods might be used by an organisation as the final stage of a selection process for
management jobs. They are not generally used for lower level staff due to their cost. They consist of a
series of tests, interviews and group situations over a period of two days or so, involving a small number
(eg six to eight) of candidates for a job. After an introductory chat to make the candidates feel at home,
they will be given one or two tests, one or two individual interviews, and several group situations in which
the candidates are invited to discuss problems together and arrive at solutions as a management team.
350 12 Human resource practices PART E MANAGING HUMAN CAPITAL

Advantages and disadvantages of group selection methods include:

Advantages Disadvantages
Selectors have more time to study the candidates. Time and cost.
They test interpersonal skills. The lack of experience of interviewers/selectors.
They reveal more about the candidates' Candidates might behave atypically in a contrived
personalities. situation.
They are suitable for selection of potential
managers.

1.3.9 Assessment centres

A relatively recent development in the attempt to ensure good recruitment and selection decisions are
made is the assessment centre approach.

An assessment centre may or may not be a particular permanent location – the term refers more the
process of selection rather than to any specific building. The approach involves the candidate's behaviour
being observed and judged by more than one assessor, using specifically developed simulations. This
approach is generally used for senior positions, as it is time consuming (in terms of combined people
hours) and therefore relatively expensive.

Trained assessors observe and evaluate candidates on their managerial qualities while candidates are
performing a variety of situational exercises. Video is frequently used to help the assessors gather
information. Assessment centre exercises are intended to measure dimensions such as:

 Planning and organising skills  Decision-making

 Leadership  Creativity
 Analytical skills  Sociability and sensitivity
 Problem solving  Delegation

Assessor opinions are pooled and ratings discussed with fellow assessors. The exercises should allow key
job success behaviours to be directly observed and measured. Examples could include an in-tray exercise
or a report writing task.

1.3.10 Are assessment centres effective?

Assessment centres are most often used as part of a selection process, but may also be used to identify
training and development needs or to enhance skills (through simulations).

Studies reveal that if assessment techniques are robust, targeted, well-designed and properly
implemented, the assessment centre approach produces reliable outcomes when compared to single-
method approaches such as interviews and questionnaires.

However, the approach can be costly and will only produce good results if the assessors have the required
skills to make meaningful judgements based on the behaviour of candidates. For example, assessors
should be able to organise their behavioural observations by job-related dimensions.

1.3.11 References
It is common to obtain references from the successful candidate's previous employers and other people
the candidate is acquainted with. A reference enables an employer to check the basic accuracy of the
candidate's CV – but often only this because many previous employers will only provide factual
information (for example the person’s job title, duties, period of employment, salary and attendance
record). General opinions about the person could be asked for, but are unlikely to be provided because
they are subjective and may leave the previous employer open to a complaint of providing false or unfair
information.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 351

1.3.12 Negotiation
A job represents an economic exchange. The employer obtains the services of the employee, who
receives benefits such as pay and paid holiday in return. Employees may also seek job satisfaction,
security of employment and personal development.

It is important that both employer and employee feel that the exchange they have contracted is a fair one.
If they do not their relationship will be strained from the outset. An employee who feels undervalued will
seek alternative employment. An employer who feels exploited will seek to cut pay, benefits and number
employed at every opportunity.

1.3.13 Realistic job previews (RJP)

One method (suggested by Herriot) sometimes used to ensure both parties 'know what they are letting
themselves in for' is a realistic job preview.

This usually involves a prospective employee spending some time 'shadowing' an existing employee in a
similar role.

RJPs have been found to lower expectations about the job and the organisation – sometimes resulting in
candidates withdrawing from contention. Candidates that do complete a RJP and accept the role are
more likely to be committed to the job and the organisation.

1.4 Induction
All new staff should go through a proper process of induction. The context of induction programmes may
vary, depending on the role being undertaken, but it is unlikely that anyone can make a satisfactory start
without at least some basic orientation. Induction may be carried out by the recruit's supervisor, by a
departmental trainer or mentor, by HR staff or by a combination of all three.

1.4.1 Induction elements

An induction programme typically would include the following elements.

(a) A welcome

(b) Introductions to immediate colleagues, colleagues and supervisor

(c) Explanation of the nature of the job: a written job description will make this process easier. Some
detailed technical matters may be identified as suitable for deferment to a later date.

(d) Safety rules and procedures

(e) Terms and conditions of employment: a booklet is often provided giving full details, but essential
matters such as hours of work; authorisation of absence and overtime; and any important legal
obligations should be explained in full.

(f) Orientation to the wider mission of the department and the organisation. This is particularly
important in organisations that provide services, because of the importance of staff attitude and
motivation in the provision of high quality service.

(g) Explanation of any systems of continuing training, coaching or mentoring. Many recruits are
expected (and indeed, themselves expect) to undertake significant amounts of training. Rules
relating to attendance, qualification and failure to progress must be explained.

Induction should enable the newcomer to make a quick start as a productive member of staff. It also
gives the recruit and the organisation a chance to become acquainted. From the point of view of the
organisation this can be helpful in such matters as deciding how best to make use of the recruit's
particular set of abilities and competences and how to deal with any problems. The recruit benefits by
obtaining a fuller picture of the new work environment.
352 12 Human resource practices PART E MANAGING HUMAN CAPITAL

1.4.2 'Dialogic learning'

One element of induction emphasised by Harrison (1992) is integrating recruits into how the organisation
operates including the overall culture, beliefs and mission. Harrison referred to this is 'dialogic learning'.

1.5 Legal and ethical issues

We now consider some of the ethical and legal issues relevant to organisations in general, with a
particular emphasis on issues related to Human Resource Management (HRM). The legal issues covered
are done so from a practical standpoint, rather than covering the precise legal position and legal penalties.

1.5.1 Issues relevant to employee recruitment and selection

From an ethical standpoint, employee selection should be made on the basis of who can best perform
the role on offer. Other issues, such as a candidate's sex, race/ethnicity, religion or sexual orientation are
irrelevant so should not play a part in the decision. Practical steps that can be taken in the employee
recruitment process include the following.

(a) Advertising

(i) Any wording that suggests preference for a particular group should be avoided.

(ii) Employers must not indicate or imply any 'intention to discriminate'.

(iii) Recruitment literature should state that the organisation is an Equal Opportunities employer,
and actions should back this up.

(iv) The placing of advertisements only where the readership is predominantly of one race or sex
could be construed as indirect discrimination.

(b) Recruitment agencies. Instructions to an agency should not suggest any preference.

(c) Application forms. These should avoid questions which are not work-related (such as domestic
details) or which only one or some groups are asked to complete.

(d) Interviews. Any non-work-related question should be asked of all subjects, if at all, and even then,
some types of question may be construed as discriminatory. Interviewers should not, for example,
ask only women about plans to have a family or care of dependants.

(e) Selection tests. These must be wholly relevant, and should not favour any particular group.

(f) Records. Reasons for non-selection, and interview notes, should be recorded.

1.5.2 Issues relating to disciplinary procedures and dismissal

The grounds and procedures for dismissing an employee should be stated clearly in the organisation's
disciplinary procedures policy. Except for instances of exceptional misconduct, dismissal should be the
final step in the disciplinary process.

Many minor cases of poor performance or misconduct are best dealt with by informal advice, coaching or
counselling. If the problem persists, it may be decided that formal disciplinary action is needed.
Disciplinary action is usually thought of as consecutive stages, reflecting a progressive response.

(a) First warning. A first warning could be oral or written depending on the seriousness of the case.

(i) An oral warning should include the reason for issuing it, notice that it constitutes the first
step of the disciplinary procedure and details of the right of appeal. A note of the warning
should be kept on file but disregarded after a specified period, such as six months.

(ii) A first written warning is appropriate in more serious cases. It should inform the worker of
the improvement required and state that a final written warning may be considered if there
is no satisfactory improvement. A copy of the first written warning should be kept on file but
disregarded after a specified period, such as 12 months.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 353

(b) Final written warning. If an earlier warning is still current and there is no satisfactory
improvement, a final written warning may be appropriate.

1.5.3 Disciplinary sanctions

The final stage in the disciplinary process is the imposition of sanctions.

(a) Suspension without pay

This course of action would be next in order if the employee has committed repeated offences and
previous steps did not result in sufficient improvement. In the UK, suspension without pay is only
available if it is provided for in the contract of employment.

(b) Dismissal

Dismissal is termination of employment by the employer. Termination of an employee's

employment contract must be done in a way which follows correct procedures, otherwise a claim
for unfair dismissal may follow.

Acceptable reasons for dismissal (UK example)

Conduct  Unacceptable conduct continuing after warnings/counselling
Capability  The employee is not capable of the role (after appropriate
guidance, training etc)
Breach of statutory duty  If continuing the employment relationship would mean the
employer breaching a statutory duty
Other 'substantial reason'  Dishonesty
 Loss of trust
Redundancy  Cessation of business
 Relocation of business
 Cessation of work employed for

Dismissal is a drastic form of disciplinary action, and should be reserved for the most serious
offences. For the organisation, it involves waste of a labour resource, the expense of training a new
employee, and disruption caused by changing the make-up of the work team.

Employers should take care at all times to avoid instances of constructive dismissal. This occurs where
the employee feels that they have been mistreated in a way that causes them to resign. It may happen if
the employer decides to reduce an employee’s salary or make their working conditions unbearable. If an
employment tribunal feels that an employee has been constructively dismissed then the employer will be
liable to pay compensation.

1.5.4 Unfair dismissal

In many countries some reasons are classed automatically as grounds for unfair dismissal. The main
grounds applicable in the UK are set out below.

 Dismissal on grounds of race, sex or disability discrimination

 Pregnancy or other maternity-related grounds
 Due to a request for flexible working practices
 Trade union membership or activities
 Taking steps to avert danger to health and safety at work
 Seeking to enforce rights relating to the national minimum wage
 Refusing or opting out of Sunday working (in the retail sector)
354 12 Human resource practices PART E MANAGING HUMAN CAPITAL

1.5.5 Redundancy 05/10

True redundancy arises when the role an employee performs is no longer required, perhaps due to
restructuring or different working methods. Some (unethical) organisations use redundancy as an excuse
to terminate the employment of employees who are no longer wanted, but who could not justifiably be
dismissed on disciplinary grounds.

Organisations should have policies governing redundancy. These tend to cover areas such as pre-
redundancy consultation and post redundancy support. Selecting which employees will be made
redundant must be fair and in accordance with established policies.

In the UK, the legal position is that an employee dismissed on the grounds of redundancy (that is that
their position is no longer required) may claim remedies for unfair dismissal if in fact the position was not
actually redundant.

Alternatives to enforced redundancies could include:

 Reduced overtime
 Recruitment limits (or a 'freeze')
 Enforced retirement (of those over retirement age)
 Voluntary early retirement (of those close to retirement age)
 Shorter hours
 Job shares (eg two employees working shorter hours)
 Voluntary redundancy

Redundancy is likely to be an unpleasant experience. Even if a generous redundancy payment is made,

this is unlikely to provide the means to support previous expenditure levels for very long.

Managers also need to ensure remaining employees remain motivated, and morale is as high as can be
expected in the circumstances.

1.5.6 Relationship management in disciplinary situations

Even if the manager uses sensitivity and judgement, imposing disciplinary action tends to generate
resentment. The challenge is to apply the necessary disciplinary action as constructively as possible.

(a) Immediacy means that after noticing the offence, the manager proceeds to take disciplinary action
as speedily as possible. On the other hand, care must be taken to avoid hasty decisions and on-
the-spot emotions which might lead to unwarranted actions.

(b) Advance warning. Employees should know in advance what is expected of them and what the
rules and regulations are.

(c) Consistency. Disciplinary action must be applied consistently. Any penalties should be connected
with the act and not based upon the personality involved. No grudges should be borne.

(d) Privacy. As a general rule disciplinary action should be taken in private, to avoid the spread of
conflict and the humiliation or martyrdom of the employee concerned.

Your knowledge of good HR practice, in particular in regard to disciplinary proceedings will be

used again when studying for paper E2.

Section summary
Good human resource practice should be followed in all aspects of human resource management, such as
recruitment, selection and dismissal.

There are a number of legal issues that should also be considered when recruiting and dismissing
employees.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 355

2 Human resource development 05/13

Introduction
Resourcing an organisation is about building and maintaining its skills and knowledge base.

HUMAN RESOURCE DEVELOPMENT (HRD) is the process of extending personal abilities and qualities by
means of education, training and other learning experiences.
KEY TERMS
DEVELOPMENT is 'the growth or realisation of a person's ability and potential through the provision of
learning and educational experiences'.

TRAINING is 'the planned and systematic modification of behaviour through learning events, programmes
and instruction which enable individuals to achieve the level of knowledge, skills and competence to carry
out their work effectively'. (Armstrong, Handbook of Personnel Management Practice)

The overall purpose of employee and management development includes:

 Ensuring the organisation meets current and future performance objectives by…
 Continuous improvement of the performance of individuals and teams, and by…
 Maximising people's potential for growth (and promotion).

2.1 Training and development strategy 05/12, 09/12

Organisations often have a training and development strategy, based on the overall strategy for the
business.

Identify the skills and competences are needed by the business plan.

Draw up the development strategy to show how training and development activities will
assist in meeting the targets of the corporate plan.

Implement the training and development strategy.

This approach produces training with the right qualities.

 Relevance
 Problem-based (ie corrects a real lack of skills)
 Action-oriented
 Performance-related

2.2 Effective learning programmes

The following principles are key to effective learning programmes:

Principle Explanation
Participants Must have the ability, skills, knowledge and motivation to learn.
Overview An overview of what is to be learnt should be provided before focusing of
specific tasks.
Feedback Participants should receive, accurate and timely feedback on their progress.
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Principle Explanation
Rewards Progress should be rewarded by positive re-enforcement such as praise or
tangible items such as certificates.
Active involvement Successful learning involves taking part rather than listening or reading.
Learning curve Training must reflect the fact that some skills are picked up quickly whereas
some will take time to develop. Progress is not always at the same pace.
Job specific Training should be as realistic as possible to the job concerned to minimise
problems of applying the new skill of knowledge.

2.3 Training and the organisation

The benefits for the organisation of training and development programmes are outlined in the following table.

Benefit Comment
Minimise the learning Training and development programs ensure staff, and the organisation as a
costs of obtaining the whole, have the skills required to deliver the business strategy.
skills the organisation
needs
Lower costs and Some people suggest that higher levels of training explain the higher
increased productivity productivity of German as opposed to many British manufacturers.
Fewer accidents, and EU health and safety directives require a certain level of training. Employees
better health and can take employers to court if accidents occur or if unhealthy work practices
safety persist.
Less need for detailed If people are trained they can get on with the job, and managers can
supervision concentrate on other things. Training is an aspect of empowerment.
Flexibility Training ensures that people have the variety of skills needed – multi-skilling is
only possible if people are properly trained.
Recruitment and Training and development attracts new recruits and ensures that the
succession planning organisation has a supply of suitable managerial and technical staff to take over
when people retire.
Change management Training helps organisations manage change by letting people know why the
change is happening and giving them the skills to cope with it.
Corporate culture Training programmes can be used to build the corporate culture or to direct it in
certain ways, by indicating that certain values are espoused.
Training programmes can build relationships between staff and managers in
different areas of the business.
Motivation Training programmes can increase commitment to the organisation's goals.

2.4 Training and the employee

For the individual employee, the benefits of training and development are more clear-cut, and few refuse
it if it is offered.

Benefit Comment
Enhances portfolio of Even if not specifically related to the current job, training can be useful in other
skills contexts, and the employee becomes more attractive to employers and more
promotable.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 357

Benefit Comment
Psychological benefits The trainee might feel reassured that they are of continuing value to the
organisation.
Social benefit People's social needs can be met by training courses – they can also develop
networks of contacts.
The job Training can help people do their job better, thereby increasing job satisfaction.

2.5 Possible shortcomings of training

Training is not always the answer to performance related problems.

(a) It is irrelevant to problems caused by faulty organisation, layout, methods, equipment, employee
selection and placement and so on.

(b) Cost, time, inconvenience, apathy and unrealistic expectations of training in the past may restrict
its effectiveness.

(c) Limitations imposed by intelligence, poor motivation and the psychological restrictions of the
learning process also restrict its effectiveness.

2.6 Training and development needs

In order to ensure that training meets the real needs of the organisation, large businesses adopt a planned
approach to training. This has the following steps.

Identify and define the organisation's training needs. It may be the case that recruitment
might be a better solution to a problem than training.

Define the learning required – in other words, specify the knowledge, skills or competences
that have to be acquired. For technical training, this may include all finance department
staff having to become conversant with a new accounting system.

Define training objectives – what must be learnt and what trainees must be able to do after
the training exercise.

Plan training programmes – training and development can be planned in a number of ways,
employing a number of techniques. It covers three things.

 Who provides the training

 Where the training takes place

 Divisions of responsibilities between trainers, line managers or team leaders and the
individual personally.

Implement the training.

Evaluate the training: has it been successful in achieving learning objectives?

Go back to Step 2 if more training is needed.

358 12 Human resource practices PART E MANAGING HUMAN CAPITAL

Training for quality

The British Standards for Quality Systems (BS EN ISO 9000) identifies training needs for those
CASE STUDY
organisations registering for assessment, and also shows the importance of a systematic approach to
ensure adequate control.

The training, both specific training to perform assigned tasks and general training to heighten quality awareness
and to mould attitudes of all personnel in an organisation, is central to the achievement of quality.

The comprehensiveness of such training varies with the complexity of the organisation.

The following steps should be taken:

1 Identifying the way tasks and operations influence quality in total.

2 Identifying individuals’ training needs against those required for satisfactory performance of the
task.
3 Planning and carrying out appropriate specific training.
4 Planning and organising general quality awareness programmes.
5 Recording training and achievement in an easily retrievable form so that records can be updated
and gaps in training can be readily identified.

2.6.1 Training needs analysis

Training needs analysis covers three issues.

Current state Desired state

1 Organisation's current results Desired results, standards
2 Existing knowledge and skill Knowledge and skill needed
3 Individual performance Required standards

The difference between the two columns is the training gap. Training programmes are designed to improve
individual performance, thereby improving the performance of the organisation.

Training surveys combine information from a variety of sources to discern what the training needs of the
organisation actually are.

(a) The business strategy at corporate level.

(b) Appraisal and performance reviews. The purpose of a performance management system is to
improve performance, and training maybe recommended as a remedy.
(c) Attitude surveys of employees, asking them what training they think they need.
(d) Evaluation of existing training programmes.
(e) Job analysis, which deals with three things:
(i) Reported difficulties people have in meeting the skills requirement of the job
(ii) Existing performance weaknesses that could be remedied by training
(iii) Future changes in the job

The job analysis can be used to generate a training specification covering the knowledge needed for the
job, the skills required to achieve the result, attitudinal changes required.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 359

2.7 Setting training objectives

An investigation into the gap between job or competence requirements and current performance or
competence should be undertaken. If training would improve work performance, training objectives can
then be defined. They should be clear, specific and related to observable, measurable targets.

 Behaviour – what the trainee should be able to do

 Standard – to what level of performance
 Environment – under what conditions (so that the performance level is realistic)

Example
'At the end of the course the trainee should be able to describe … or identify … or distinguish x from y …
or calculate … or assemble …' and so on. It is insufficient to define the objectives of training as 'to give
trainees a grounding in …' or 'to encourage trainees in a better appreciation of …': this offers no target
achievement which can be quantifiably measured.

Training objectives link the identification of training needs with the content and methods of training.

Training needs Learning objectives

To assemble clocks faster The employee will be able to assemble each clock within thirty minutes.
To know more about the Data The employee will be able to answer four out of every five queries about
Protection Act the Data Protection Act without having to search for details.
To establish a better rapport The employee will immediately attend to a customer unless already
with customers engaged with another customer.
The employee will greet each customer using the customer's name where
known.
The employee will apologise to every customer who has had to wait to
be attended to.

Having identified training needs and objectives, the manager will have to decide on the best way to
approach training: there are a number of types and techniques of training, which we will discuss below.

2.8 Incorporating training needs into an individual development

programme
A PERSONAL DEVELOPMENT PLAN is a 'clear developmental action plan for an individual which incorporates
a wide set of developmental opportunities including formal training'.
KEY TERMS
The purpose of a personal development plan will vary.

 Improving performance in the existing job

 Developing skills for future career moves within and outside the organisation.

SKILLS: what the individual needs to be able to do if results are to be achieved. Skills are built up
progressively by repeated training. They may be manual, intellectual or mental, perceptual or social.

Preparing a personal development plan involves these steps.

Analyse the current position. You could do a personal SWOT analysis. The supervisor can
have an input into this by categorising the skills use of employees on a grid as follows, in a
skills analysis. The aim is to incorporate employees' interests into their actual roles.
360 12 Human resource practices PART E MANAGING HUMAN CAPITAL

Performance
High Low

High Likes and does well Likes but doesn't do well

Liking of skills
Low Dislikes but does well Dislikes and doesn't do well

Set goals to cover performance in the existing job, future changes in the current role,
moving elsewhere in the organisations, developing specialist expertise. Naturally, such goals
should have the characteristic, as far as possible of SMART objectives (ie Specific,
Measurable, Achievable, Realistic and Time-bound).

Draw up action plan to achieve the goals.

2.9 Formal training

2.9.1 Formal training methods
Formal training methods include the following.

(a) Internal courses run by the organisation's training department or other employees.

(b) External courses (held either on or off-site) run by an outside organisation.

(c) There are a wide range of training course types.

(i) Day release: the employee works in the organisation and on one day per week attends a
local college or training centre for theoretical learning.
(ii) Distance learning, evening classes and correspondence courses, which make demands on
the individual's time outside work. This is commonly used, for example, by typists wishing
to develop or 'refresh' shorthand skills.
(iii) Revision courses for examinations of professional bodies.
(iv) Block release courses which may involve four weeks at a college or training centre followed
by a period back at work.
(v) Sandwich courses, usually involve six months at college then six months at work, in
rotation, for two or three years.
(vi) A sponsored full-time course at a university for one or two years.

(d) Techniques used in training delivery might include:

(i) Lectures
(ii) Seminars, in which participation is encouraged
(iii) Simulations

(e) Computer-based training involves interactive training via PC. This could involve the use of CD-
ROMs, DVDs or online delivery via the Internet.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 361

2.9.2 Methods used on courses

Common course training methods include the following.

(a) Lectures. Lectures are suitable for large audiences and can be an efficient way of putting across
information. However lack of participation may lead to lack of interest from, and failure to
understand by most of the audience.

(b) Discussions. Discussions aim to impart information but allow much greater opportunities to
audience participation. They are often suitable for groups up to 20 and can be a good means of
maintaining interest.

(c) Exercises. An exercise involves a particular task being undertaken with pre-set results following
guidance laid down. They are a very active form of learning and are a good means of checking
whether trainees have assimilated information.

(d) Role plays. Trainees act out roles in a typical work situation. They are useful practice for face-to-
face situations. However, they may embarrass and may not be taken seriously.

(e) Case studies. Case studies identify causes and/or suggest solutions. They are a good means of
exchanging ideas and thinking out solutions. However trainees may see the case study as divorced
from their real work experience.

2.9.3 Disadvantages of formal training

(a) An individual will not benefit from formal training unless they want to learn. The individual's
superior may need to provide encouragement in this respect.

(b) If the subject matter of the training course does not relate to an individual's job, the learning will
quickly be forgotten.

(c) Individuals may not be able to carry over what they have learnt to their own particular job.

2.10 On the job training

On the job training can include a wide range of activities. One employee shadowing another is one
common method; being assigned a 'mentor' is another.

Pedler (1986) pointed out that at management level, learning and development are often accidental or
unconscious. Any activity that results in a manager being more willing or capable to control events has a
developmental aspect to it.

More specific or structured on the job training schemes typically have the following characteristics.

(a) The assignments should have a specific purpose from which the trainee can learn and gain
experience.

(b) The organisation must tolerate any mistakes which the trainee makes. Mistakes are an inevitable
part of on the job learning.

(c) The work should not be too complex.

362 12 Human resource practices PART E MANAGING HUMAN CAPITAL

Methods of on the job training include the following.

(a) Demonstration/instruction: show the trainee how to do the job and let them get on with it. It
should combine telling a person what to do and showing them how, using appropriate media.
The trainee imitates the instructor, and asks questions.

(b) Coaching: the trainee is put under the guidance of an experienced employee who shows the
trainee how to do the job. The coach should:

(i) Establish learning targets.

(ii) Plan a systematic learning and development programme.
(iii) Identify opportunities for broadening the trainee's knowledge and experience.
(iv) Take into account the strengths and limitations of the trainee.
(v) Exchange feedback.

(c) Job rotation: the trainee is given several jobs in succession, to gain experience of a wide range of
activities.

(d) Temporary promotion: an individual is promoted into their superior's position whilst the superior is
absent.

(e) 'Assistant to' positions: a junior manager with good potential may be appointed as assistant to the
managing director or another executive director.

(f) Action learning: a group of managers are brought together to solve a real problem with the help of
an advisor who explains the management process that actually happens.

(g) Committees: trainees might be included in the membership of committees, in order to obtain an
understanding of inter-departmental relationships.

(h) Project work: Work on a project with other people can expose the trainee to other parts of the
organisation.

2.10.1 Advantages and disadvantages of on-the-job training

Some advantages and disadvantages of on-the-job training are summarised below:

Advantages Disadvantages
Training is provided that is relevant to the job Training is difficult when real customers are
being undertaken. being talked to – they may not take kindly to a
person being trained when they are attempting to
arrange insurance for example.
Training is 'just-in-time' – that is specific queries Where training is being carried out by a manager,
are identified. they may not have the appropriate training skills.

2.11 Learning styles

Kolb and Honey and Mumford developed theories on how people learn.

2.11.1 The learning cycle (Kolb)

Kolb suggested that formal classroom-type learning is 'a specialist activity cut off from the real world and
unrelated to one's life': a teacher or trainer directs the learning process on behalf of a passive learner.

Experiential learning, on the other hand, involves doing and puts the learners in an active problem-
solving role.

Self-learning encourages learners to formulate and commit themselves to their own learning objectives.

The implication of Kolb's theory is that to be effective, learning must be reinforced by experience.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 363

Kolb's learning cycle

2.11.2 Honey and Mumford's learning styles

Honey and Mumford identified four types of learning style.

(a) Theorist

Theorists feel unhappy with subjective judgements and having to think laterally. They prefer
certainty and process information logically.

(b) Reflector

Reflectors are cautious by nature and are often shy or indecisive individuals. They prefer to think
and absorb information before taking action and even see how others use the information before
making their minds up.

(c) Pragmatist

Pragmatists are open, practical people who like to experiment with ideas and theories. They are
quick to adapt ideas they like but do not enjoy debates that are open-ended.

(d) Activist

Activitists are enthusiastic individuals that seek challenges and are open-minded. They are keen to
become, without bias, fully involved in new experiences. Once the initial excitement dies down
however, they become disinterested with implementation and long-term input.

2.12 Training in different industries or sectors

Training and development activities vary in both approach and frequency/quantity across different sectors
and employee groups.

Hendry (1995) attributes these differences to different types of labour markets and points out that service
sectors tend to rely on retraining and training employees (an internal labour market).

Manufacturing industries have instead tended to rely on the apprenticeship system, which provides a
more 'portable' qualification resulting in an external, occupational labour market.

2.13 Evaluating training

There are a number of ways of validating and evaluating a training scheme.

VALIDATION OF TRAINING means observing the results of the course and measuring whether the training
objectives have been achieved.
KEY TERMS
364 12 Human resource practices PART E MANAGING HUMAN CAPITAL

EVALUATION OF TRAINING means comparing the actual costs of the scheme against the assessed benefits
which are being obtained. If the costs exceed the benefits, the scheme will need to be redesigned or
withdrawn.

(a) Trainees' reactions to the experience: course assessment sheets completed after training can ask
trainees whether they thought the training programme was relevant to their work, and whether
they found it useful.

(b) Trainee learning: measuring what the trainees have learned on the course by means of a test at
the end of it. A further test can be taken some time after the course to see if the trainee has
retained the knowledge learnt.

(c) Changes in job behaviour following training. This is relevant where the aim of the training was to
learn a skill.

(d) Organisational change as a result of training: finding out whether the training has affected the
work or behaviour of other employees not on the course.

(e) Impact of training on the achievement of organisational goals: seeing whether the training
scheme has contributed to the achievement of the overall objectives of the organisation.

(f) Trainer assessment: the trainer can complete an assessment that identifies gaps in trainee
knowledge or other deficiencies.

(g) HR review: human resources employees can conduct a critical review that evaluates the training
using a range of information to see if the organisation’s objectives for the training have been met.

2.13.1 Levels of evaluation

Kirkpatrick (1998) identified four levels at which training can be evaluated.

 Reaction – how the trainees act, enjoyment level

 Learning – has the knowledge been absorbed?
 Behaviour – have required behavioural changes taken place?
 Results – what benefits have resulted from the training (eg better quality, reduced costs)?

Evaluating training usually requires measurement before and after training. It is difficult however to
establish with any certainty what changes are directly attributable to the training alone.

Exam alert
Exam questions may require you to explain how the effectiveness of a staff training event could be
evaluated. Good answers would consider issues before the event, after the event and the reaction of the
participants.

Whitbread pubs reported improved performance as a result of a change in the company's training scheme.
Previously the company's training scheme had aimed to improve the service standards of individuals, and
CASE STUDY there were also discussions with staff on business developments. It was felt however that other
companies in the same sector had overtaken Whitbread in these respects.

Whitbread therefore introduced an integrated approach to assessment of the performance of pubs.

Assessment is by four criteria; training (a certain percentage of staff have to have achieved a training
award), standards (suggested by working parties of staff), team meetings and customer satisfaction.
Managers are trained in training skills and they in turn train staff, using a set of structured notes to ensure
a consistent training process.

Pubs that fulfil all the criteria win a team hospitality award, consisting of a plaque, a visit from a senior
executive, and a party or points for goods scheme. To retain the award and achieve further points, pubs
have then to pass further assessments which take place every six months.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 365

The scheme seemed to improve standards. Significantly staff turnover was down and a survey suggested
morale had improved, with a greater sense of belonging particularly by part-time staff. A major cause of
these improvements may well be the involvement of staff and management in the design process.

2.14 Career management and development

CAREER MANAGEMENT is a technique whereby the progress of individuals within an organisation from job
to job is planned with organisational needs and individual capacity in mind.
KEY TERM
Career management is both an individual and an organisational issue.

(a) It ensures that the organisation has a reserve of managers-in-waiting. In flat or delayered
organisations this is particularly important, as the jump in responsibility from junior to senior
positions is much wider than in organisations with extensive hierarchies.

(b) It ensures people get the right training to enable them to develop the right abilities for the job.

For the organisation, career management also determines whether, as a matter of policy, the organisation
will promote from within when possible, as opposed to hiring outsiders.

CAREER DEVELOPMENT is based on an individual’s education, training and development and is an

important factor in any appraisal system.
KEY TERM
Education is the person’s formal qualifications and may have been achieved before the employment starts
(although some education such as obtaining the CIMA qualification may take place at work).

Training relates to the person’s immediate work needs. For example they may need to be trained in order
to use the organisation’s IT system.

Development considers the person’s future needs given their career aspirations. For example, those
looking to obtain management positions in the future may need their management skills developing.

2.14.1 Succession planning

Large organisations are able to plan a logical progression for individuals through its hierarchy over time.
The objective is to ensure suitable replacements (in terms of experience and ability) are available to take
over positions above them as they become available.

Advantages of succession planning Disadvantages of succession planning

Can be cheaper than advertising or using agencies Large 'talent pools' make it hard to decide who to
promote
Develops career structures Reduces 'fresh blood' at higher levels in the
organisation
Motivates employees as rewards are visible (ie Vacancies may occur before suitable
promotions are seen by all) replacements are ready for promotion
Maintains the organisation's culture as long- Better candidates may be available outside the
serving employees are promoted business
It is logical and rational Planning requires resources to manage it
Job-for-life is increasingly becoming an outdated
concept and the best staff may leave before
vacancies become available
366 12 Human resource practices PART E MANAGING HUMAN CAPITAL

2.14.2 Barriers to career planning/succession planning

Flatter organisation structures, the growth of cross-functional teams and generally shorter periods of
employment with a particular organisation have led to reduced potential for succession planning.
Individuals now tend to take increased responsibility for their own career progression, and are more likely
to accept that this may involve working for a number of organisations (and/or for themselves) throughout
their career.

2.15 Management development

Management development includes general education, specific learning and wider experience. It is
essential if managers are to make the leap from functional to general management.

MANAGEMENT DEVELOPMENT is the process of improving the effectiveness of an individual manager by

developing the necessary skills and understanding of organisational goals.
KEY TERM
Pedlar et al considered the development of management should be down to the individual concerned and
that the organisation should provide a system that increases managers' capacity and willingness to take
control and responsibility for their own learning.

2.15.1 Self development

Self-development is now emphasised by many professional organisations such as CIMA. The modern
view is that membership of an organisation does not ensure competence in the future. New knowledge
KEY POINT
must be learnt and skills must be maintained and developed.

Pedlar et al found several possibilities for learning. It can be planned (conscious), accidental
(unconscious) and take place at or away from work. Although management development is in some
respects a natural process, the term is generally used to refer to a conscious policy within an organisation
to provide a programme of individual development. A variety of techniques could be used, either on or off
the job.

 Formal education and training  Job rotation

 On-the-job training  Career planning
 Group learning sessions  Counselling

Accidental learning is unplanned. For example, situations at work or socially may develop personal
attributes of a manager.

The principle behind management development is that by giving an individual time to study the
techniques of being a good manager, and by counselling them about their achievements in these
respects, the individual will realise their full potential. The time required to bring a manager to this
potential is possibly fairly short.

2.16 The transition from functional to general management

There is one particular aspect of management development and training that organisations should look at
closely – the transition from functional to general management. To help with this transition, an
organisation should have a planned management development programme consisting of several aspects.

(a) Individuals should be encouraged to acquire suitable educational qualifications for senior
management. 'High-fliers' for example might be encouraged to study for an MBA early on in their
career. Senior finance managers ought to have an accountancy qualification.

(b) In-house training programmes might be provided for individuals who are being groomed for senior
management. Formal training in general management skills can be very helpful.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 367

(c) Careful promotion procedures should aim to ensure that only managers with the potential to do
well are promoted into senior management positions.

(d) There should be a system of regular performance appraisal, in which individuals are counselled by
their managers on what they have done well and not so well, how to improve their performance in
their current job and how to develop their skills for a more senior job.

(e) Opportunities to gain suitable experience should be provided to managers who are candidates for
more senior positions. There are several possibilities.

(i) Allowing subordinates to stand in for their boss whenever the boss is away

(ii) Using staff officer positions to groom future high fliers

(iii) Using a divisionalised organisation structure to delegate general management

responsibilities further down the management hierarchy.

Question 12.2 Human resource development

Learning outcome E2(a)(iii)

Which of the following are aspects of human resource development (HRD)?

(i) Providing formal training courses

(ii) On-the-job training
(iii) Succession and career planning
(iv) Job re-design

A (i) only
B (i) and (ii) only
C (i), (ii) and (iii) only
D (i), (ii), (iii) and (iv)

(2 Marks)

Section summary
Human resource development has benefits for both the employee and employer.

Training and development should be carefully planned if it is to achieve its aims.

The method of training or development chosen should meet the needs of the employee and employer.

However the training or development is delivered, it should be evaluated in order to ascertain its success.

Career and management training provide the employee with motivation and the employer with a source
of future managers.
368 12 Human resource practices PART E MANAGING HUMAN CAPITAL

3 Appraisal

Introduction
Appraisals review and reward performance and potential. They are part of performance management
and can be used to establish areas for improvement and training needs.

APPRAISAL: the systematic review and assessment of an employee's performance, potential and training
needs.
KEY TERM

3.1 Why are appraisals needed?

Employee appraisal can be viewed as a control tool as it aims to influence employee behaviour and
maximise utilisation of the organisation's human resource. The process of appraisal is designed to review
KEY POINT
performance over the past period and improve it in the future.

Appraisals are needed for a number of reasons.

(a) Managers and supervisors may obtain random impressions of employees' performance (perhaps
from their more noticeable successes and failures), but rarely form a coherent, complete and
objective picture.

(b) They may have a fair idea of their employees' shortcomings – but may not have devoted time and
attention to the matter of improvement and development.

(c) Judgements are easy to make, but less easy to justify in detail, in writing, or to the subject's face.

(d) Different assessors may be applying a different set of criteria, and varying standards of
objectivity and judgement. This undermines the value of appraisal for comparison, as well as its
credibility in the eyes of the appraisee.

(e) Unless stimulated to do so, managers rarely give their staff adequate feedback on their
performance.

3.2 The purpose of appraisal

The general purpose of any appraisal system is to improve efficiency. Personnel appraisal aims to ensure
individuals are performing to the best of their ability, are developing their potential and that the
KEY POINT
organisation is best utilising their abilities.

Appraisals may include:

(a) Reward review. Measuring the extent to which an employee is deserving of a bonus or pay
increase as compared with their peers.

(b) Performance review, for planning and following-up training and development programmes, ie
identifying training needs, validating training methods and so on.

(c) Potential review, as an aid to planning career development and succession, by attempting to
predict the level and type of work the individual will be capable of in the future.

The objectives of appraisals include the following.

(a) Establishing the key deliverables an individual has to produce to enable the organisation to
achieve its objectives.

(b) Comparing the individual's level of performance against a standard, as a means of quality control.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 369

(c) Identifying the individual's training and development needs in the light of actual performance.

(d) Identifying areas that require improvement.

(e) Monitoring the organisation's initial selection procedures against subsequent performance.

(f) Improving communication between different levels in the hierarchy.

3.3 An appraisal system

A typical appraisal system is outlined below.

Identification of criteria for assessment, perhaps based on job analysis, performance

standards, person specifications and so on.

The preparation by the subordinate's manager of an appraisal report. In some systems

both the appraisee and appraiser prepare a report. These reports are then compared.

An appraisal interview, for an exchange of views about the appraisal report, targets for
improvement, solutions to problems and so on.

Review of the assessment by the assessor's own superior, so that the appraisee does not
feel subject to one person's prejudices. Formal appeals may be allowed, if necessary to
establish the fairness of the procedure.

The preparation and implementation of action plans to achieve improvements and changes
agreed.

Follow-up monitoring the progress of the action plan.

3.4 Problems of appraisal systems

Effective appraisals can be difficult to implement. Three particular difficulties are:

(a) The formulation of desired traits and standards against which individuals can be consistently and
objectively assessed.
370 12 Human resource practices PART E MANAGING HUMAN CAPITAL

(b) Recording assessments. Managers should be encouraged to utilise a standard and understood
framework, but still be allowed to express what they consider to be important, and without too
much form-filling.

(c) Getting the appraiser and appraisee together, so that both contribute to the assessment and plans
for improvement and/or development.

3.5 Appraisal techniques

The following techniques are often used in an appraisal system.

(a) Overall assessment. Managers write in narrative form their judgements about the appraisees.
There will be no guaranteed consistency of the criteria and areas of assessment, however, and
managers may not be able to convey clear, effective judgements in writing.

(b) Guided assessment. Assessors are required to comment on a number of specified characteristics
and performance elements, with guidelines as to how terms such as 'application', 'integrity' and
'adaptability' are to be interpreted in the work context. This is more precise, but still rather vague.

(c) Grading. Grading adds a comparative frame of reference to the general guidelines, whereby
managers are asked to select one of a number of levels or degrees to which the individual in
question displays the given characteristic. These are also known as rating scales. Numerical values
may be added to ratings to give rating scores. Alternatively a less precise graphic scale may be
used to indicate general position on a plus/minus scale.

Factor: job knowledge

High  Average Low

(d) Behavioural incident methods. These concentrate on employee behaviour, which is measured
against typical behaviour in each job, as defined by common critical incidents of successful and
unsuccessful job behaviour reported by managers.

(e) Objectives and results-orientated schemes. This reviews performance against specific targets and
standards of performance agreed in advance. The manager becomes a counsellor. Learning and
motivation theories suggest that clear and known targets are important in modifying and
determining behaviour. The objectives set as part of an appraisal process should be agreed – and
(again) these should be SMART (Specific, Measurable, Achievable, Realistic and Time-bound).

(f) Assessments must be related to a common standard (the appraisal standard), in order for
comparisons to be made between individuals. On the other hand, they should also be related to
meaningful performance criteria, which take account of the critical variables in each different job.

3.6 Self-appraisal
Individuals may carry out their own self-evaluation as a major input into the appraisal process. This has
the advantage that the system is aimed at the needs of the individual. Other advantages are:

(a) It saves the manager time as the employee identifies the areas of competence which are relevant
to the job and their relative strengths in these competences.

(b) It offers increased responsibility to the individual which may improve motivation.

(c) This may be a way of reconciling the goals of both the individual and the organisation.

(d) It may overcome the problem of needing skilled appraisers, therefore cutting training costs and
reducing the managerial role in appraisal.

(e) In giving the responsibility to an individual, the scheme may offer more flexibility in terms of
timing, with individuals undertaking ongoing self-evaluation.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 371

However, people are often not the best judges of their own performance. Many schemes combine the two
– the manager and subordinate fill out a report and compare notes.

3.7 Upward appraisal

A notable modern trend, adopted by some major UK companies is upward appraisal, whereby employees
are not rated by their superiors but by their subordinates. The followers appraise the leader.

Advantages of upward appraisal include the following.

(a) Subordinates tend to know their superior better than superiors know their subordinates.

(b) As all subordinates rate their managers statistically, these ratings tend to be more reliable – the
more subordinates the better. Instead of the biases of individual managers' ratings, the various
ratings of the employees can be converted into a representative view.

(c) Subordinates' ratings have more impact because it is unusual to receive ratings from them. It is
also surprising to bosses because, despite protestations to the contrary, information often flows
down organisations more smoothly and comfortably than it flows up. When it flows up it is
qualitatively and quantitatively different. It is this difference that makes it valuable.

Problems with the method include fear of reprisals, vindictiveness, and extra form processing. Some
bosses in strong positions might refuse to act, even if a consensus of staff suggested that they should
change their ways.

3.8 Customer appraisal

In some companies part of the employee's appraisal process must take the form of feedback from
'customers' (whether internal or external). This may be taken further into an influence on remuneration
(at Rank-Xerox, 30% of a manager's annual bonus is conditional upon satisfactory levels of 'customer'
feedback). This is a valuable development in that customers are the best judges of customer service,
which the appraisee's boss may not see.

3.9 180/360 degree appraisal

180 degree appraisal involves the manager obtaining feedback from the appraisee’s colleagues and
peers. It may be used as an alternative to, or in addition to, feedback received from the appraisee’s
supervisor. The feedback may be named or anonymous. The use of 180 degree appraisal gives a wider
picture than simply relying on the individial’s supervisor. It may also prevent the supervisor from providing
unfair feedback on the appraisee, because they know the manager will also obtain feedback from others.

360 degree appraisal involves taking downwards, upwards and customer appraisals together – so it
involves the collection of feedback on an individual's performance from a range of sources. Sources may
include:.

(a) The person's immediate manager.

(b) People who report to the appraisee, perhaps divided into groups.

(c) Peers and co-workers. Most people interact with others within an organisation, either as members
of a team or as the receivers or providers of services. They can offer useful feedback.

(d) Customers. If sales people know what customers thought of them, they might be able to improve
their technique.

(e) The manager personally. All forms of 360 degree appraisal require people to rate themselves.
Those 'who see themselves as others see them will get fewer surprises'.
372 12 Human resource practices PART E MANAGING HUMAN CAPITAL

Sometimes the appraisal results in a counselling session, especially when the result of the appraisals are
conflicting. For example, an appraisee's manager may have a quite different view of the appraisee's skills
than subordinates.

3.10 The appraisal report

Most appraisal systems provide for appraisals to be recorded. The form of the appraisal report will vary
between organisations and the role involved – report forms of various lengths and complexity may be
designed.

The layout of the report and factors to be included in the report should be established before the
interview. The report is likely to focus on key performance issues that relate to the job description.

The report is likely to cover key competences. A competence is an observable skill or ability to complete a
particular task successfully. It can include the ability to transfer skills and knowledge to new situations.

3.11 Interviews and counselling

The extent to which any discussion or counselling interview is based on the written appraisal report
varies in practice.

Maier (The Appraisal Interview) identifies three types of approach to appraisal interviews.

(a) The tell and sell method. The manager tells the subordinate how they have been assessed, and
then tries to sell (gain acceptance of) the evaluation and the improvement plan. This requires
unusual human relations skills in order to convey constructive criticism in an acceptable manner,
and to motivate the appraisee.

(b) The tell and listen method. The manager tells the subordinate how they have been assessed, and
then invites the subordinate to respond. Moreover, this method does not assume that a change in
the employee will be the sole key to improvement – the manager may receive helpful feedback
about how job design, methods, environment or supervision might be improved.

(c) The problem-solving approach. The manager abandons the role of critic altogether, and becomes a
counsellor and helper. The discussion is centred not on the assessment, but on the employee's
work problems. The employee is encouraged to think solutions through, and to make a
commitment to personal improvement.

3.12 Follow-up
After the appraisal interview, the manager may complete the report, with an overall assessment of
potential and/or the jointly-reached conclusion of the interview, with recommendations for follow-up
action.

Follow-up procedures typically include the following.

(a) Informing the employee of the results of the appraisal, if this has not been central to the review
interview.

(b) Carrying out agreed actions on training, promotion and so on.

(c) Monitoring the appraisee's progress and checking that they have carried out agreed actions or
improvements.

(d) Taking necessary steps to help the appraisee to attain improvement objectives, by guidance,
providing feedback, upgrading equipment, altering work methods and so on.

If appraisal systems operate successfully as feedback control systems (in other words, if they do alter
employees' performance) and identify behaviours to be encouraged, then, assuming organisational
success is to some measure based on individual performance, they will influence the success of strategy.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 373

3.13 Improving the appraisal system

In theory, such appraisal schemes may seem very fair to the individual and very worthwhile for the
organisation, but in practice the appraisal system often goes wrong.

3.13.1 Barriers to effective appraisal

Lockett (in Effective Performance Management) suggests that appraisal barriers can be identified as
follows.

Appraisal barriers Comment

Appraisal as Many people dread appraisals, or use them 'as a sort of show down, a good
confrontation sorting out or a clearing of the air.'
 There is a lack of agreement on performance levels.
 The feedback is subjective – in other words the manager is biased, allows
personality differences to get in the way of actual performance etc.
 The feedback is badly delivered.
 Appraisals are 'based on yesterday's performance not on the whole year'.
 Disagreement on long-term prospects.
Appraisal as The appraisal 'is seen as a one-sided process in which the manager acts as
judgement judge, jury and counsel for the prosecution'. However, the process of
performance management 'needs to be jointly operated in order to retain the
commitment and develop the self-awareness of the individual.'
Appraisal as chat The other extreme is that the appraisal is a friendly chat 'without … purpose or
outcome … Many managers, embarrassed by the need to give feedback and set
stretching targets, reduce the appraisal to a few mumbled "well dones!" and
leave the interview with a briefcase of unresolved issues.'
Appraisal as Appraisal is a form-filling exercise, to satisfy the personnel department. Its
bureaucracy underlying purpose, improving individual and organisational performance, is
forgotten.
Appraisal as Appraisal should be part of a continuing process of performance management.
unfinished business
Appraisal as annual Many targets set at annual appraisal meetings become irrelevant or out-of-date.
event

A problem with many appraisal schemes in practice is that they reinforce hierarchy, and are perhaps
unsuitable to organisations where the relationship between management and workers is fluid or
participatory. Upward, customer and 360o appraisals address this, but they are not widely adopted.

Appraisal systems, because they target the individual's performance, concentrate on the lowest level of
performance feedback. They ignore the organisational and systems context of that performance. For
example, if any army is badly led, no matter how brave the troops, it will be defeated. Appraisal schemes
seem to regard most organisation problems as a function of the personal characteristics of its members.

3.14 Appraisal and reward

Another issue is the extent to which the appraisal system is related to the reward system.

Many employees consider that the appraisal system should be linked with the reward system, on the
grounds that extra effort or excellent performance should be rewarded.
374 12 Human resource practices PART E MANAGING HUMAN CAPITAL

Although this appears to be a fair view, there are drawbacks to it.

(a) Funds available for pay rises rarely depend on one individual's performance alone – the whole
company has to do well.

(b) Continuous improvement is always necessary – many businesses have 'to run to stand still'.
Continuous improvement should perhaps be expected of employees as part of their work, not
rewarded as extra.

(c) In low-inflation environments, cash pay rises are fairly small.

(d) Comparisons between individuals are hard to make, as many smaller organisations cannot afford
the rigour of a job evaluation scheme.

(e) Performance management is about a lot more than pay for past performance – it is often forward
looking with regard to future performance.

3.14.1 Performance related pay

Performance Related Pay (PRP) is often introduced when other organisational or HR changes are made
such as:

 The introduction of an appraisal scheme

 The development of flexible working arrangements
 The decentralisation of HR or the responsibility of pay determination
 The harmonisation of working arrangements through the organisation

Payment systems are often modified as a result of the introduction of PRP.

 PRP may form the basis of all general pay increases

 PRP may replace pay increases for length of service or qualifications

 PRP may be used as additional payments above the maximum for the grade where performance is
very high.

All organisations can introduce PRP but it is often best implemented gradually.

By initially introducing it to senior management, they will experience it first hand before they apply it to
their staff.

The use of PRP could be restricted to specific groups of workers to allow adequate testing and to ensure
sufficient safeguards are in place before it is introduced to other workers.

3.15 Management expertise and employee empowerment

There can be problems conducting appraisals in organisations where empowerment is practised and
employees are given more responsibility.

(a) Many managers may not know enough about the performance of individual workers to make a fair
judgement.

(b) In some jobs, managers do not have the technical expertise to judge an employee's output.

(c) Employees depend on other people in the workplace/organisation to be effective – in other words,
an individual's results may not be entirely under their control.

A person's performance is often indirectly or directly influenced by the management style of their line
manager, who will also usually be the person conducting the appraisal.

However, given the seniority of the manager over the appraisee, the appraisee may be reluctant to raise
issues related to their manager's management style.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 375

Even the best objective and systematic appraisal scheme is subject to personal and interpersonal
problems.

(a) Appraisal is often defensive on the part of the appraisee, who believes that criticism may mean a
low bonus or pay rise, or a lost promotion opportunity.

(b) Appraisal is often defensive on the part of the superior, who cannot reconcile the role of judge and
critic with the human relations aspect of interviewing and management. Managers may in any case
feel uncomfortable about 'playing God' with employee's futures.

(c) The superior might show conscious or unconscious bias in the appraisal or may be influenced by
rapport (or lack of it) with the interviewee. Systems without clearly defined standard criteria will be
particularly prone to the subjectivity of the assessor's judgement.

(d) The manager and subordinate may both be reluctant to devote time and attention to appraisal.
Their experience in the organisation may indicate that the exercise is a waste of time (especially if
there is a lot of form-filling) with no relevance to the job, and no reliable follow-up action.

(e) The organisational culture may simply not take appraisal seriously. Interviewers are not trained or
given time to prepare, appraisees are not encouraged to contribute, or the exercise is perceived as
a 'nod' to Human Relations with no practical results.

3.16 Making improvements

The appraisal scheme should itself be assessed (and regularly re-assessed) according to the following
general criteria for evaluating appraisal schemes.

Criteria Comment
Relevance  Does the system have a useful purpose, relevant to the needs of the organisation
and the individual?
 Is the purpose clearly expressed and widely understood by all concerned, both
appraisers and appraisees?
 Are the appraisal criteria relevant to the purposes of the system?
Fairness  Is there reasonable standardisation of criteria and objectivity throughout the
organisation?
 Is it reasonably objective?
Serious intent  Are the managers concerned committed to the system – or is it just something the
personnel department thrusts upon them?
 Who does the interviewing, and are they properly trained in interviewing and
assessment techniques?
 Is reasonable time and attention given to the interviews – or is it a question of
'getting them over with'?
 Is there a genuine demonstrable link between performance and reward or
opportunity for development?
Co-operation  Is the appraisal a participative, problem-solving activity – or a tool of management
control?
 Is the appraisee given time and encouragement to prepare for the appraisal, so that
they can make a constructive contribution?
 Does a jointly-agreed, concrete conclusion emerge from the process?
 Are appraisals held regularly?
Efficiency  Does the system seem overly time-consuming compared to the value of its outcome?
 Is it difficult and costly to administer?
376 12 Human resource practices PART E MANAGING HUMAN CAPITAL

Question 12.3 Performance appraisal

Learning outcome E2(vi)

Most large organisations have a performance appraisal process.

Required

Briefly describe the most common objectives of a performance appraisal system. (5 marks)

Section summary
Appraisal is an important part of human resource management because it enables employee performance
to be measured and corrective action taken if necessary. It also forms part of the reward process.

There are many types of appraisal including, appraisal by a manager, self appraisal, upward appraisal,
customer appraisal and 360 degree appraisal.

Whichever type of appraisal is used it must be carefully conducted and correctly followed up.
PART E MANAGING HUMAN CAPITAL 12: Human resource practices 377

Chapter Roundup
 Good human resource practice should be followed in all aspects of human resource management, such as
recruitment, selection and dismissal.

 There are a number of legal issues that should also be considered when recruiting and dismissing
employees.

 Human resource development has benefits for both the employee and employer.

 Training and development should be carefully planned if it is to achieve its aims.

 The method of training or development chosen should meet the needs of the employee and employer.

 However the training or development is delivered, it should be evaluated in order to ascertain its success.

 Career and management training provide the employee with motivation and the employer with a source
of future managers.

 Appraisal is an important part of human resource management because it enables employee performance
to be measured and corrective action taken if necessary. It also forms part of the reward process.

 There are many types of appraisal including, appraisal by a manager, self appraisal, upward appraisal,
customer appraisal and 360 degree appraisal.

 Whichever type of appraisal is used it must be carefully conducted and correctly followed up.

Quick Quiz
1 Why should an organisation take an interest in an individual's personal development?

2 Which of the following is the final stage of recruitment before selection commences?

A Producing a job description

B Advertising the vacancy
C Screening candidates' CVs and selecting some for interview
D Interviewing candidates

3 A typing test is an example of which type of test used in the selection process?

A Psychological test
B Aptitude test
C Intelligence test
D Personality test

4 In Kolb's learning cycle, which process occurs after reflection?

A Theorising
B Actively experimenting
C Concrete experience
D Learning

5 Which of the following appraisal techniques requires the assessor to rate the assessee's characteristics on
a scale?

A Guided assessment
B Overall assessment
C Behavioural incident method
D Grading
378 12 Human resource practices PART E MANAGING HUMAN CAPITAL

Answers to Quick Quiz

1 Poor personal development can cause high staff turnover, absenteeism or preoccupation with financial
rewards and poor performance – self-defeating for the organisation and unhealthy for the individual.

2 C Recruitment ends when a short list of candidates for interview have been chosen. Interviews are
part of the selection process.

3 B A typing test is an example of an aptitude test as it provides information about a candidate's

abilities.

4 A Theorising follows reflection in Kolb's learning cycle.

5 D Grading requires the assessor to rate the employee’s characteristics on a rating scale.

Answers to Questions
12.1 Interviews

If interview techniques are taught, it might imply that success at interview will have more to do with a candidate's
ability to present themselves in an interview situation rather than their ability to do the job.
On the other hand, an interview is a test of how well a person performs under pressure, in an unfamiliar environment
and with strangers. The interview might therefore reflect some of the interpersonal skills required for the job.

12.2 Human resource development

D HRD covers all aspects of personal and management development, including formal training and on-the-
job training, planning the succession into senior management positions, and career planning for
individuals (particularly management recruits). Job re-design is also related to development, because the
content of a job can be altered to provide better or different learning experiences.

12.3 Performance appraisal

The general purpose of an appraisal is to improve the efficiency of the organisation by ensuring individual
employees are performing their role to acceptable standards and to the best of their ability. The process also
considers the employees' potential to improve and to develop. Objectives of a formal performance appraisal
system include the following:

 To enable a picture to be drawn up of overall staff levels and skills, strengths and weaknesses. This
enables more effective HR planning.
 To monitor the undertaking's initial selection procedures against the subsequent performance of recruits.
 To establish what the individual has to do in a job in order that the objectives for the section or
department are realised.
 To assess an individual's performance including strengths and any weaknesses. This helps identify
training needs.
 To assess appropriate rewards (pay, bonuses etc).
 To assess potential. At the organisational level this permits career and succession planning. At the
individual level it facilitates an individual development plan.

Now try this question from Number Level Marks Time

the Exam Question Bank 12 Examination 30 54 mins
OBJECTIVE TEST
QUESTION AND ANSWER BANK

379
380
 Objective test question bank 381

Each of the questions numbered 1 to 10 has only ONE correct answer. Each of these questions is worth
2 marks.

1 Which one of the following is a not-for-profit organisation?

A Sole traders
B Partnerships
C Mutual organisations
D Public limited companies

2 If the value of a nation’s currency rises in relation to those that it trades with, what will be the
effect?

A Its exports become relatively cheaper and its imports relatively more expensive
B Its imports become relatively cheaper and its exports relatively more expensive
C Its interest rates must rise
D Its national income must increase

3 Which type of computer virus hides itself inside legitimate software?

A Worms
B Trap doors
C Logic bombs
D Trojans

4 Which one of the following is the cheapest method of system changeover?

A Direct changeover
B Parallel running
C Pilot operation
D Phased changeover

5 Which sourcing strategy is most likely to create a competitive advantage for the purchasing
organisation?

A Single sourcing
B Multiple sourcing
C Delegated sourcing
D Parallel sourcing

6 The 5Ss are often associated with lean production. Which one of the following is not one of the
5Ss?
A Self-discipline
B Sanitise
C Systemise
D Specify
382 Objective test question bank

7 Industria is a manufacturing company which makes three types of cleaning product.

‘Budget’ uses low grade ingredients and is aimed at the cheaper end of the household market.
‘Premium’ uses state of the art ingredients and is aimed at the premium end of the household
market.
‘Professional’ is a high strength version which is aimed at professional cleaners.
Which marketing strategy is Industria following?
A Mass marketing
B Differentiated marketing
C Undifferentiated marketing
D Concentrated marketing

8 Marketing activities which occur in unexpected places and take people by surprise are known as:
A Direct marketing
B Viral marketing
C Guerrilla marketing
D Interactive marketing

9 Which theorist pioneered the scientific management movement?

A Taylor
B Weber
C Schein
D Herzberg

10 Integrating new recruits into the culture, beliefs and mission of an organisation is known, according
to Harrison, as:
A Recruitment
B Indoctrination
C Dialogic learning
D Training

Each of the questions numbered 11 to 15 require a brief written response. The response should be in
note form and should not exceed 50 words. Each of these questions is worth 4 marks.

11 Explain what is meant by the term political risk.

12 Describe the philosophy of lean production.
13 Distinguish quality assurance from quality control.
14 Explain why three additional Ps are sometimes added to the original four Ps of the marketing mix.
15 Explain the meaning and the thinking behind employee empowerment.
 Objective test answer bank 383

1 C Mutuals are primarily in business to provide services to their customers. They are not
owned by shareholders whom they have to pay a share of their profit to.

2 B If a nation’s currency rises in value relative to those it trades with, then the cost to customer
nations of its exports will increase. Conversely, the cost of goods imported from those
nations will fall. Interest rates do not have to rise. The nation’s national income may fall if
the rise in prices results in decreased demand for exports. On the other hand, if demand for
exports remains steady, the higher price would mean an increase in national income.

3 D Trojans, or Trojan horses, are a type of virus that hides itself in legitimate software.

4 A Direct changeover is the cheapest because it only involves one step – the old system is
switched off and the new system is switched on (although if the changeover does not go as
expected additional costs may be incurred).

5 A Single sourcing is most likely to result in a competitive advantage because it strengthens the
supplier/purchaser relationship, secures confidential information, aids quality control and
creates economies of scale. Under the other methods the reverse is more likely to be true.

6 D Specify is not one of the 5Ss. The others are Structurise and Standardise.

7 B Differentiated marketing involves selling different product versions, each aimed at different
market segments.

8 C Guerrilla marketing events occur in unexpected places and usually involve taking people by
surprise.

9 A Taylor pioneered the scientific management movement.

10 C Harrison named the element of the induction process, where new recruits are integrated
into the culture, beliefs and mission of an organisation, as dialogic learning.

11 Political risk is the risk of an organisation incurring losses due to non-market factors, usually
related to government policy. These include financial factors such as currency controls and
economic data, and stability factors such as rioting and civil war.

12 Lean production aims to minimise the amount of resources (including time) used in all activities of
an enterprise. It involves identifying and eliminating all non-value-adding activities. Lean
production involves the systematic elimination of all forms of waste.

13 Quality assurance focuses on the way a product or service is produced. Production procedures and
standards are introduced that aim to prevent defects before the good/service is produced. Quality
control focuses on the checking of work that has been done – finding mistakes after the event
rather than eliminating them.

14 The traditional 'four Ps' (product, price, place, promotion) relate to both products and services.
Services have characteristics that led to the addition of three extra Ps (people, processes, physical
evidence) to more accurately reflect the service provision process (eg for insurance: representative,
the policy setting and selling process, insurance certificate).

15 Employee empowerment means giving staff at all levels the authority and freedom to make
decisions that affect how they do their job. The thinking behind the theory is that those who
actually do the work are best positioned to make decisions relating to how their work is done.
384 Objective test answer bank
EXAM QUESTION AND ANSWER
BANK

385
386

What the examiner means

The very important table below has been prepared by CIMA to help you interpret exam questions.

Learning objectives Verbs used Definition

1 Knowledge
What are you expected to  List  Make a list of
know
 State  Express, fully or clearly, the details of/facts of
 Define  Give the exact meaning of
2 Comprehension
What you are expected to  Describe  Communicate the key features of
understand
 Distinguish  Highlight the differences between
 Explain  Make clear or intelligible/state the meaning of
 Identify  Recognise, establish or select after
 Illustrate consideration
 Use an example to describe or explain
something
3 Application
How you are expected to  Apply  Put to practical use
apply your knowledge
 Calculate/  Ascertain or reckon mathematically
compute  Prove with certainty or to exhibit by practical
 Demonstrate means
 Prepare  Make or get ready for use
 Reconcile  Make or prove consistent/compatible
 Solve  Find an answer to
 Tabulate  Arrange in a table
4 Analysis
How you are expected to  Analyse  Examine in detail the structure of
analyse the detail of what
 Categorise  Place into a defined class or division
you have learned
 Compare and  Show the similarities and/or differences
contrast between
 Construct  Build up or compile
 Discuss  Examine in detail by argument
 Interpret  Translate into intelligible or familiar terms
 Prioritise  Place in order of priority or sequence for action
 Produce  Create or bring into existence
5 Evaluation
How you are expected to use  Advise  Counsel, inform or notify
your learning to evaluate,
 Evaluate  Appraise or assess the value of
make decisions or
recommendations  Recommend  Propose a course of action

Guidance in our Practice and Revision Kit focuses on how the verbs are used in questions.
 Exam question bank 387

1 Country and political risk 45 mins

Learning outcome: A2(vii)

TH is a manufacturing company based in Europe. The costs of labour and raw materials have increased
substantially in recent years and the board is now considering relocating all of its factories to a new
country outside Europe – Starland.

Until a year ago, Starland was run by an unpopular military dictatorship, but this was overthrown in a
civil war which finished six months ago. The country is now becoming a democracy and the new
government is keen to establish trade links with countries around the world in order to develop its
economy and new industries. To do this it is offering generous tax breaks for companies who locate their
businesses in the country. This, together with very low labour costs and a plentiful supply of cheap raw
materials, have led to TH considering the relocation.

Required

(a) Explain what country and political risks are and how TH can analyse the risks involved in
relocating to Starland. (10 marks)

Note: You are not required to explain models of risk analysis.

(b) Using a model of your choice, analyse the risks TH will face in relocating to Starland and advise
the company whether the relocation should take place. (15 marks)

(Total = 25 marks)

2 Corporate governance and corporate responsibility 36 mins

Learning outcomes: A2(i), A2(ii)

(a) Define corporate governance and briefly explain four corporate governance issues that
organisations may face. (10 marks)

(b) Define corporate social responsibility and briefly explain the four layers of corporate social
responsibility identified by Caroll and Buchholtz. (10 marks)

(Total = 20 marks)

3 External information 54 mins

Learning outcome: B1(i)

JM is a private company which manufactures a range of packaging materials for customers in the fresh
and frozen food industries. Before his recent retirement, the company's chairman and founder was the
main source of external information – he kept his 'finger on the pulse' of the industry utilising his network
of personal contacts built up over a period of some twenty years. Since his retirement, the board has felt
that external information has been lacking. They wish to implement a formal system to capture relevant
external information.

Required

(a) Describe the aspects of its environment that JM should gather information on and the sources that
may provide it. (22 marks)

(b) Explain four ways the board could use the captured information. (8 marks)

(Total = 30 marks)
388 Exam question bank

4 Service level agreement; obtaining IT services 45 mins

Learning outcome: B2(v)

GDC provides a facilities management service for DS in respect of its information systems, however the
directors of DS are not satisfied with GDC ‘s performance. The appointment of GDC was made two years
ago and was relatively rushed through. Although an outline contract was agreed, no detailed Service Level
Agreement was produced.

Details of the contract are.

The contract can be terminated by either party with three months' notice.

GDC will provide information systems services for DS, the services to include:

 Purchase of all hardware and software

 Repair and maintenance of all equipment
 Help desk and other support services for users
 Writing and maintenance of in-house software
 Provision of management information

Price charged to be renegotiated each year but any increase must not exceed inflation, plus 10%.

Required

(a) Explain, from the point of view of DS, why it might have received poor service from GDC, even
though GDC has met the requirements of the contract. (15 marks)

(b) Explain five benefits of outsourcing that DS would have enjoyed if the contract and SLA had been
drafted properly. (10 marks)

(Total = 25 marks)

5 Operations strategy 54 mins

Learning outcomes: C1(ii), C1(v)

(a) Six factors that should be taken into account when devising an operations strategy are:

 Capability
 Range and location of operations
 Investment in technology
 Strategic buyer-supplier relationships
 New products/services
 Structure of operations

Briefly describe what each of the six factors identified above mean in the context of operations
strategy. Illustrate your answer with examples related to a retail supermarket chain. (15 marks)

(b) Explain the concept of sustainability, including four factors that should be taken into account when
considering the issue of sustainability in operations management. (15 marks)

(Total = 30 marks)
 Exam question bank 389

6 TQM and virtual companies 45 mins

Learning outcomes B1(iii), C2(ii)

Total Quality Management (TQM) and virtual companies are relatively new developments in operations
management.

(a) Explain the main characteristics of a Total Quality Management (TQM) programme. (15 marks)

(b) Define the term 'virtual company' and then explain how technological advances have enabled the
widespread formation of virtual companies and supply chains. (10 marks)

(Total = 25 marks)

7 Inventories and JIT 54 mins

Learning outcome: C2(vi)

(a) In relation to inventory control levels, briefly explain the following.

(i) Reorder level (2 marks)

(ii) Minimum level (2 marks)
(iii) Maximum level (2 marks)
(iv) Reorder quantity (2 marks)
(v) Average inventory (2 marks)

(b) Identify and explain five features of a just-in-time (JIT) production system. (15 marks)

(c) Identify the financial benefits of JIT. (5 marks)

(Total = 30 marks)

8 The marketing concept 36 mins

Learning outcome: D1(i)

Explain what is meant by 'the marketing concept'. Compare this with a production orientation and a sales
orientation.
(20 marks)

9 Branding 36 mins
Learning outcome: D2(xi)

(a) Explain four benefits that branding brings to an organisation. (8 marks)

(b) Explain brand extension, multi-branding and family branding as branding strategies. (6 marks)

(c) Explain the following methods of valuing a brand.

(i) Market approach (2 marks)

(ii) Cost approach (2 marks)
(iii) Income approach (2 marks)

(Total = 20 marks)
390 Exam question bank

10 Consumer purchasing 45 mins

Learning outcome: D1(iv)

(a) Explain the term ‘buyer behaviour’ and the various stages that household consumers go through
when making a purchase. (13 marks)

(b) Explain four influences on household consumer purchasing. (12 marks)

(Total = 25 marks)

11 HR plan and workforce flexibility (OMIS 5/05 – amended)

54 mins
Learning outcomes: E2(viii), E2(x)

The country of Mythland contains several areas of high unemployment, one such area is where CX Beers
were produced until recently. CX was an old, family-owned brewery that supplied licensed outlets,
including local restaurants, with its beer. CX represented one of the last local brewers of any size, despite
retaining many working practices that evolved at least a century ago. Situated on a (now) underused
dockside site, the company had, over the years, invested little in plant and machinery and someone
jokingly once suggested that much of the brewing equipment should rightfully be in a museum! The
company was forced to cease trading last month, despite having an enthusiastic, long-serving, highly
skilled workforce and a national reputation for the beer 'CX Winter Warmer' (thanks to winning several
national awards). The workforce, many of whom have only ever worked for CX Beers are now facing up to
the difficulty of finding alternative employment.

In a press statement the owners said that the brewery's closure was sad for the area, the local workforce
and traditionally brewed beer in general. The owners blamed the situation on inefficient and expensive
brewing methods, fierce competition from large rival brewers and limited geographical sales. They also
mentioned a dependence on seasonal sales that made cash flow difficult (35% over the Christmas
period). They concluded that they would like the CX tradition to continue by selling the company as a
going concern, however unlikely this was.

It is speculated that property developers may be interested in the site as the dockland area is showing
signs of regeneration as a leisure and tourism attraction (thanks to the efforts of the Mythland
government). However, two of CX's managers would like to save the business and are drawing up a
business plan for a management buy-out. They have three main initiatives that they feel could, in
combination, save the enterprise:

 Use the site as a basis for a 'living' museum of traditionally brewed beer (with out of date brewing
equipment and methods of working as an attraction)
 Produce bottled beer for sales in supermarkets
 Employ a more flexible but suitably experienced workforce

One of the managers (your former boss) has asked for your help in advising him how to draft a detailed
human resource (HR) plan to inform the business plan.

Required

(a) Explain the key stages and issues involved in preparing a HR plan for the CX buy-out. (13 marks)

(b) Discuss how the buy-out team can achieve workforce flexibility. (8 marks)

(c) Identify five benefits to the organisation and the community in re-employing previous employees.
(5 marks)

(d) Identify two marketing opportunities available to the new organisation. (4 marks)

(Total = 30 marks)
 Exam question bank 391

12 Online recruitment (OMIS 11/06 amended) 54 mins

Learning outcomes: B1(i), B2(i), B2(ii), B2(iv), E2(i), E2(ii)

B3 is a family run personnel agency. It offers a range of services to both individuals and corporate clients
(mainly local medium-sized organisations). The son of the managing director (MD) is currently studying
for a specialist university business degree. His course includes a 'management consultancy' module where
students are required to analyse an organisation and identify a range of development options for the
business. The MD's son's investigations of B3 have led to a consultancy report being produced, extracts of
which include:

'B3 should maximise the opportunities offered by information technology to a greater extent. In particular:

 Opportunity 1. B3 could develop its recent successful experiment in e-cruitment (the identification
of employment opportunities through the world wide web and the emailing of clients). Currently
details of vacancies are collected and matched to individual client's search criteria. When a match
is identified clients are emailed and, if they are interested, interviews arranged. This service is not
offered by any of B3's main competitors. There is a difficulty, however, in that many companies
have barred access to personal emails at work and web access to recruitment sites such as B3's
site from their offices. Market research suggests that significant opportunities for m-cruitment
(advertising jobs by mobile telephones) also exist. Making use of recent software developments, a
text message containing a job title and some contact details could be sent out to individual clients
instead of an email, so providing a more convenient and speedy service.
 Opportunity 2. Virtually all CVs are currently received in electronic form and a policy decision
should be made to develop a paperless operating environment through the development of
databases, so upgrading existing office technology.

Analysis of profit indicates that executive searches, corporate 'headhunting' and vacancy identification for
individuals (traditional and especially e-cruitment) are all profitable activities.

Involvement in selection processes with corporate clients is unprofitable and should be discontinued.
Instead B3 should identify clear guidelines for corporate clients to follow once the short-listing of
candidates has occurred'.

Required

(a) Evaluate the opportunities for B3 identified in the consultancy report. (12 marks)

(b) Produce guidelines for the selection process that should be adopted by an organisation presented
with a short-list of candidates. (8 marks)

(c) Briefly explain five acceptable reasons for dismissing employees. (10 marks)

(Total = 30 marks)
392 Exam question bank
 Exam answer bank 393

1 Country and political risk

Top tips. Part (a) just requires the reproduction of textbook knowledge and should not pose you any
problems. In part (b) you could have used a SWOT or PEST analysis to analyse Starland’s risk. Providing
you came up with sensible points, relevant to the scenario then you would have scored good marks.

(a) Political risk

Political risk is the risk of an organisation incurring losses due to non-market factors. These factors
are usually related to government policy such as trade rules and the tax regime. However it also
relates to financial factors such as currency controls and economic data, and stability factors such
as rioting and civil war.

Country risk

Country risk is wider in scope than political risk and usually relates to risks in the business
environment (including market factors) in a specific country.

Analysing political and country risk

It is important that TH analyses the political and country risk of Starland before it commits to
relocating all of its factories. Once it knows the risks, the organisation can decide whether or not to
proceed with the relocation. If relocation does go ahead, by knowing what the risks are, TH can
put into place plans to reduce or avoid them.

Analysis of political and country risk is notoriously difficult. Some elements of risk, such as
financial factors, can be quantified, however some factors such as the risk of civil war are based
on assumptions and guess work.

TH has the choice of employing a third party (such as a global credit rating agency) to carry out
the risk assessment, or it can do its own research into Starland and produce its own assessment
using news stories and market information. Some organisations may provide this information for a
fee.

(b) Starland risk analysis

Once TH has identified the political and country risks of Starland, it needs to weigh up the
probability of the risk occurring and the consequences to its operations should the worst happen.
Jennings and Wattam (1998) devised the following model to weigh up political risk.

Impact of risk
Low High
Probability of risk

High A B

Low C D

Using the model, TH will classify Starland and its relocation according to the probability of risk and
the impact the risk will have on the business.
394 Exam answer bank

The possible results and implications for the organisation are:

Situation A – High probability of risk, low impact.

TH should accept the risks it classifies in this segment but introduce a policy to manage them.
However, it may have to reconsider its plans if the cost of preventing the risk is too high compared
to the impact that the risk will have on it.

Situation B – High probability of risk, high impact.

The relocation to Starland is likely to fall into this category. Due to the high risk and potential
impact on TH, the relocation should only go ahead if the risk can be managed and contingency
plans put in place. The potential benefits of the plan must outweigh the costs of managing the risk
and the potential impact.

Situation C – Low probability of risk, low impact.

To the classified in this segment, the risk must be unlikely to occur and have low potential impact.
This is the ideal situation as the costs of managing the risk will be low, but this doesn’t apply to
TH and the proposed relocation.

Situation D – Low probability of risk, high impact.

Risks in this segment are problematic because although the probability of risk is low, the damage
it can inflict on TH is high. If TH chooses to go ahead then it must take action to minimise the
chance of the risk occurring and the potential impact it will have on the organisation. If this cannot
be achieved in a cost-effective manner then the organisation should consider abandoning its plans.

Risk analysis of Starland

The main risks involved in relocating factories to Starland are civil war and failure of the fledgling
government. The nation has only just recovered from a previous war and it is highly possible that if
tensions rise or if the new government becomes unpopular, trouble could occur again. Therefore
there is a high probability of risk.

By relocating all of its factories to Starland means TH is risking its entire operation. If civil war or
governmental failure occurs, it will have a major impact on business operations. This will probably
mean the factories will stop production, or may even be destroyed. Therefore there is a high
impact on the organisation.

Advice

TH should only go ahead with the relocation if the risks can be managed and contingency plans
put in place.

The company cannot manage the risk because civil war and governmental failure are out of its
control. However, it could develop contingency plans to cover the risk of operations ceasing. This
is likely to be expensive as it will mean finding alternative locations to produce its goods. These
costs are likely to outweigh any benefits of moving production and therefore TH should not
relocate its factories – at least not until the country is stable.
 Exam answer bank 395

2 Corporate governance and corporate responsibility

Top tips. Notice how our answers in this answer bank use headings and small paragraphs. These enable
the marker to quickly identify each point that you make and award you marks. Answers that consist of
large blocks of text can be unreadable, resulting in fewer marks being awarded as the marker cannot spot
the points easily.

Always present your answers clearly to maximise the amount of marks you can be awarded.

Both parts of this question could be answered using textbook knowledge and are quite straightforward as
they don’t require you to apply your knowledge or analyse a scenario. Not all questions will be structured
like this so make the most of it.

In part (b) you did not have to use the Caroll and Buchholtz model to come up with points, if you did
then you would indicate to the marker that you have good depth of knowledge. However you could have
come up with four equally valid points of your own.

(a) Corporate governance

Corporate governance is the system by which companies and other organisations are directed and
controlled. In other words it consists of an organisation’s internal rules which control how it
functions.

A number of high profile scandals and corporate failures have identified a number of corporate
governance failings that business organisations may face.

Domination by a single individual

A feature of many corporate governance scandals has been boards dominated by a single senior
executive with other board members merely acting as a rubber stamp. Sometimes the single
individual may bypass the board to action their own interests. The report on the UK Guinness case
suggested that the Chief Executive, Ernest Saunders paid himself a substantial reward without
consulting the other directors.

Lack of adequate control function

An obvious weakness is a lack of internal audit, since this is one of the most important aspects of
internal control.

Another important control is the lack of adequate technical knowledge in key roles, for example in
the audit committee or in senior compliance positions. A rapid turnover of staff involved in
accounting or control may suggest inadequate resourcing, and will make control more difficult
because of lack of continuity.

Lack of supervision

Employees who are not properly supervised can create large losses for the organisation through
their own incompetence, negligence or fraudulent activity. The behaviour of Nick Leeson, the
employee who caused the collapse of Barings bank was not challenged because he appeared to be
successful, whereas he was using unauthorised accounts to cover up his large trading losses.
Leeson was able to do this because he was in charge of both dealing and settlement, a systems
weakness or lack of segregation of key roles that featured in other financial frauds.

Lack of contact with shareholders

Often, board members grow up with the company but lose touch with the interests and views of
shareholders. One possible symptom of this is the payment of remuneration packages that do not
appear to be warranted by results. Equally, the directors may choose to pursue their own interests
and ignore the requirements of the shareholders.
396 Exam answer bank

(b) Corporate social responsibility

Corporate social responsibility is an appreciation of companies that they should show an

awareness of the social and ethical effects of their actions.

There is no legal framework forcing companies to be socially responsible, however pressure is

created through consumer demand for the producers of products and services to demonstrate an
ethical and moral side.

Caroll and Buchholtz identified four main 'layers' of corporate social responsibility that
organisations have.

Economic responsibilities

Economic responsibilities relate to an organisation’s obligations to provide a source of finance to

various stakeholders. These include, shareholders who demand a good return on their investment
and employees who want fair pay and good employment conditions. Businesses are formed to be
properly functioning economic units and so economic responsibilities form the basis of all other
responsibilities.

Legal responsibilities

All organisations are required to comply with the laws of the states that they operate in, for
example employment laws or companies legislation. Business have a duty to obey these legal
responsibilities because laws are based on the moral values and beliefs of the people who live in
the state and therefore they should uphold them.

Ethical responsibilities

Ethical responsibilities require organisations to act in a fair and just way even if the law does not
compel them to do so. An example of this is paying employees above the legal minimum wage if it
means they will have a better quality of life.

Philanthropic responsibilities

Philanthropic responsibilities include charitable donations, contributions to local communities and

providing employees with the chances to improve their own lives. Companies are not required by
anyone to make charitable donations and so on, but it is argued that they have a duty to support
their local environment and employees because they obtain benefits from them.

3 External information
Top tips. Your answer to part (a) should have considered a range of issues – a PEST analysis is a
particularly useful tool for doing this. However you did not have to use this model as a wide range of
answers could have scored well.

In part (b) you should have considered a strategic approach to using the information as this reflects the
level of the board within JM.

(a) The business environment

Some aspects of JM's external environment will be more important for the company than others.
Just what the most important aspects are vary from organisation to organisation. The first step that
should therefore be taken is for an individual or a committee to be appointed to establish (and
subsequently review) what aspects of the external environment should be monitored by formal
methods and procedures.
 Exam answer bank 397

The aspects of the environment that might be monitored include the following.

Competitors

Information should be gathered about what competitors are doing, how successful they are and
how much of a threat they are. New contracts awarded by food companies will be of interest to
JM.

Suppliers

Information should be gathered about suppliers and potential suppliers, their prices, product or
service quality and delivery dates etc.

Customers

An organisation should always try to be aware of the needs of its customers, to identify changes in
these needs, to recognise potential market segments, and to assess the size of a potential market.
Customer awareness is vital for new product development and successful selling.

Legal changes

Changes in the law might affect how an organisation operates, and any such changes should be
monitored. For example, changes in data protection legislation.

Political changes

Some organisations are affected by national or local politics. If politics are important, the
organisation should try to monitor political decisions at both national and local level.

Financial and economic conditions

Most organisations have to monitor developments in financial and economic conditions. For
example, a company's treasury department must be aware of current money market interest rates
and foreign exchange rates. The general rate of inflation is also significant for decisions about wage
increases for employees.

Environmental pressures

The use of CFCs in packaging has been identified as contributing to the hole in the ozone layer.
Companies such as JM therefore need to find alternative materials to use in their products.

Sources of information

(i) Suppliers' price lists and brochures.

(ii) Published reports and accounts (of competitors, suppliers and business customers).

(iii) Government reports (often, reports on specific topics. Economic and trade reports, for
example, are frequently produced by central government).

(iv) Government statistics.

(v) External databases, provided by specialist organisations and often available over the
Internet. Treasury departments, for example, use external databases to obtain information
about current interest rates and foreign exchange rates.

(vi) Newspaper and other media reports.

(vii) Competitor and industry websites.

398 Exam answer bank

(b) The board will take a strategic approach when using the captured information. It is likely to use
the information for:

Planning

The information will help JM to formulate a plan to react to the external environment and therefore
assist with, among other things, resource planning, assessing possible time-scales for
implementation and the likely impact of alternative scenarios on the company.

Controlling

Once the plan is implemented, its actual performance must be controlled. Information is required
to assess whether it is proceeding as planned or whether there is some unexpected deviation from
plan. It may consequently be necessary to take some form of corrective action.

Performance measurement

Overall performance of the plan must be measured in order to enable its success or failure to be
determined. Constant monitoring of the external factors will help the board keep the plan on
course.

Decision making

The board requires information to make informed decisions. Without it they cannot react logically
to the situation that faces JM.

4 Service level agreement; obtaining IT services

Top tips. In part (a), think about what is in the SLA, and also what isn't. For example, there isn't a clause
detailing any financial penalty for providing poor service. Part (b) requires you to think more widely about
information systems service provision. Consider the general benefits of outsourcing and apply to DS.

(a) GDC appears to have met its legal obligations even though the level of service it has provided to
DS has been poor. There are a number of reasons for this.

Lack of service level agreement (SLA)

DS rushed the appointment of GDC and did not insist on a detailed Service Level Agreement
(SLA). The contract does not specify the level of service that GDC will provide.

For example, GDC is obligated to provide 'management information', but there is no detailed
definition of what this information will entail, and no deadline for the provision of the information.
(eg '…within 5 working days of month-end').

Transfer of systems control

DS handed complete control of its systems to GDC. The absence of expertise within DS puts it at a
disadvantage when arguing its case with GDC.

For example, GDC could spend significant amounts of DS money on sub-standard hardware and
software. DS would not have the expertise to question or challenge this purchase, resulting in
poor use of DS funds and a poor level of service. However, even when purchasing sub-standard
hardware GDC would not have breached the requirement of the contract to 'purchase all hardware
and software'.
 Exam answer bank 399

Transfer of systems development control

GDC is also responsible for the writing and maintenance of in-house software. Unless GDC has a
detailed understanding of DS the software written may not be suitable. As GDC receives a set
annual fee, it may be tempted to produce software as quickly and cheaply as possible. As the
contract has no mention of software standards, GDC would be meeting its legal obligations.

Age of agreement

Another reason that could be contributing to DS receiving poor service is that the agreement is
now two years old. Changes could have taken place inside DS within the past two years that an
outside organisation such as GDC does not understand. The nature of management information
required now may be different to that required two years ago.

Lack of financial incentive

Service levels could also be suffering because GDC has no financial incentive to provide a good
standard of service. GDC has the right under the contract to increase the annual fee, above the
rate of inflation, without any consultation and with no reference to the satisfaction of DS.

(b) The advantages to DS of outsourcing are as follows.

(Any five from the following.)

Cost

Outsourcing removes uncertainty about cost, as the annual contract price is fixed in advance. If
computing services are inefficient, the costs will be borne by GDC.

Stability

Successful contracts build a stable relationship over the long-term. This would encourage DS to
plan for the future.

Economies of scale

Outsourcing brings the benefits of economies of scale to DS. GDC may conduct research into new
technologies or agree deals with equipment suppliers that that benefit a number of its clients
including DS.

Skills and knowledge

Specialist organisations, such as GDC, are able to retain skills and knowledge. DS may not have a
sufficiently well-developed information systems department to offer staff opportunities for career
development. Talented staff would leave to pursue their careers elsewhere.

Expertise

New skills and knowledge become available. A specialist company such as GDC can share staff
with specific expertise (for example, with experience of writing in-house software) between several
clients who would not otherwise benefit from them.

Flexibility

GDC can scale resources up or down depending upon demand. For instance, during a major
changeover from one system to another the number of information systems staff needed may be
twice as large as it will be once the new system is working satisfactorily.
400 Exam answer bank

5 Operations strategy
Top tips. Part (a) is based on Brown's theory. When reading the question, remember that 'brief
descriptions' mean basic 'book knowledge'. You are then required to apply this knowledge to a
supermarket chain.

Your answer to part (b) might be based on any of the five considerations mentioned in the chapter (you
only needed to mention four of them), however you would still earn marks for others as long as they are
relevant to operations management.

(a) Brown identified six factors important to operations strategy. Each of these is described below,
with examples relating to a retail supermarket chain

Capability required

Any operations strategy will be influenced by what it is that the organisation 'does'.

For example, a supermarket chain sells food and other items to consumers.

Range and location of operations

The operations strategy will be affected by the scale and geographical spread of the organisation's
operations.

For example, a supermarket chain with say 10 outlets in one region of a country will face different
operation strategy issues than a nationwide chain.

Investment in technology

Technology will impact upon operations and therefore operations strategy as it has the potential to
change the processes associated with operations.

For example, a supermarket chain that uses an electronic bar code scanning system at its
checkouts which is linked to its stock/warehousing system will operate differently to a chain relying
on less-automated systems.

Strategic buyer-seller relationships

Who the key strategic partners are will affect operations strategy.

For example, a supermarket may have a preferred supplier for canned food items. Operations may
then be designed to help facilitate this relationship. Relationships with 'buyers' (consumers) may
be developed using loyalty card schemes – and operations changed based on what the scheme
reveals.

New products/services

This relates to how long the business will be able to do what it is currently doing (in the same
way).

A supermarket may find it also needs to offer on-line shopping and home delivery. It could also
decide to move into non-traditional areas such as consumer electronics – or even consumer
insurance or finance. These types of changes require changes to operations strategy.

Structure of operations

Operations strategy will also be influenced by how staff are organised and managed.

For example, will 'regional managers' have responsibility and complete control over all stores in one
region – or will one national strategy apply?

Issues such as staff levels, shift patterns and human resources policies will also affect operations
strategy. For example, will stores be open 24 hours – and if so how will this be staffed?
 Exam answer bank 401

(b) Sustainability

Sustainability is about ensuring a better quality of life for everyone, both now and in the future. It
focuses on social progress that recognises the needs of everyone, effective protection of the
environment, prudent use of natural resources and maintenance of high and stable levels of
economic growth or employment.

Sustainability and operations management

Five sustainability considerations relevant to operations management are:

Sustainable for whom

This issue concerns which species (other than humans) are to be sustained, the level of world
population that should be sustained and the needs of developing countries.

An operations management consideration is whether organisations should source products from

developing nations or look to the tried and tested industries of developed countries.

Sustainable in what way

This issue concerns what is meant by sustainability.

Ecological sustainability concerns the preservation of the environment so it can function as

naturally as possible. The operations management issue is whether organisations should continue
production processes which are harmful to the environment, or should they look for other less
harmful (but possibly more expensive ) alternatives?

Social sustainability is about personal growth and development. For organisations the issue is
whether or not employees should be treated like robots by requiring them to perform repetitive
tasks, or should they be given scope to develop their abilities and perform a wide range of
production roles?

Economic sustainability is about producing goods and services that people want whilst maximising
the organisation’s profitability. The operations issue here is to ensure the organisation produces
products and services that its customers want whilst minimising waste to maximise profit.

Sustainable for how long

The issue here is generational equity. This is about ensuring future generations can enjoy the same
environmental conditions as the current generation, and that social welfare is maintained or
increased.

The main operations management concern is the use of natural materials. As the world has finite
resources, production levels cannot be sustained forever. Therefore organisations need to plan their
use of resources carefully, especially the rate by which they use them up. They should also look for
new ways of producing the products that people want, as well as looking for sustainable resources.

Sustainable at what cost

There is a balance to be found between preserving the environment and natural resources with the
need to produce goods and services.

The operations management issue concerns sourcing materials which balance the need for
sustainability with the need to produce goods and services. For example, organisations can look at
substituting some raw materials with sustainable alternatives or look to produce products using
more sustainable processes.

Sustainable by whom

Ideally the whole world will take responsibility for sustainability, but this is unlikely due to a lack of
meaningful global international agreements.

The operations management issue is that individual organisations must take on responsibility for
sustainability themselves rather than waiting for legal regulation.
402 Exam answer bank

6 TQM and virtual companies

Top tips. An easy way to answer part (a) is to memorise the seven principles of TQM – if you remember
what they are you should not have a problem explaining them.
Hopefully part (b) will not have caught you out. We covered virtual companies in Chapter 3, but they
could equally be examined as part of an operations question. Exams frequently test different syllabus
areas together, so it is important that you get used to answering questions such as this.

(a) Total quality management

In a nutshell, total quality management (TQM) is a management philosophy aimed at continuous

improvement in all areas of operation.

A TQM initiative aims to achieve continuous improvement in quality, productivity and

effectiveness. It does this by establishing management responsibility for processes as well as
output

Principles of TQM

Prevention

Organisations should take measures that prevent poor quality occurring. The emphasis is on
quality assurance rather than quality control.

Right first time

A culture should be developed that encourages workers to get their work right first time. This will
save costly reworking and help ensure high quality output. This ultimately results in satisfied
customers, repeat business and improved profitability.

Eliminate waste

The organisation should seek the most efficient and effective use of all its resources.

Continuous improvement

The Kaizen philosophy should be adopted. Organisations should seek to improve their processes
continually. High quality processes mean high quality output.

Everybody's concern

Everyone in the organisation is responsible for improving processes and systems under their
control.

Participation

All workers should be encouraged to share their views and the organisation should value them.

Teamwork and empowerment

Workers across departments should form team bonds so that eventually the organisation becomes
one. Quality circles are useful in this regard. Workers should be empowered to make decisions as
they are in the best position to decide how their work is done.

(b) Virtual companies

A virtual company is a collection of separate companies, each with a specific expertise, who work
together, sharing their expertise to compete for bigger contracts/projects than would be possible if
they worked alone.

Within recent years it has become increasingly common for combinations of organisations and
individuals to combine in the form of a virtual company and virtual supply chains. Virtual
companies enable people such as executives, engineers, researchers and others, based in a
number of locations, to collaborate on a particular venture.
 Exam answer bank 403

Technology behind virtual companies

This trend has been made possible by the widespread use of remote networking which is now
available at relatively low cost to organisations of all sizes. The collaborators are able to utilise
technology to work together and present themselves as a single virtual entity to potential clients.

Virtual companies and members of virtual supply chains tend to utilise the Internet and related
technologies such as intranet and extranet. To be successful the partners involved must do more
than establish virtual links. They must provide complimentary areas of expertise, and develop a
close relationship based on mutual need and trust.

A virtual company may be the best way to implement business strategies particularly strategies
that require close collaboration with others. For example, in order to exploit a new opportunity,
business partners may be required to move fast. Establishing a virtual company may enable these
partners to quickly establish a united entity to pursue the opportunity. Establishing traditional
'bricks and mortar' links would take considerably longer – increasing the risk of competitors
grasping the opportunity first.

7 Inventories and JIT

Top tips. Part (a) requires you to repeat text book knowledge on inventory control levels.

Part (b) is reasonably straightforward if you have studied JIT in sufficient depth. Your answer to this part
may have mentioned a number of other features of a JIT system – not just the ones we mention. As long
as your points are valid you will earn marks.

Part (c) requires you to think about some benefits of JIT. To answer this part you need to think a little
about what you have read and apply your knowledge. In the exam you would probably only need to
provide five (relevant) financial benefits to gain the full five marks.

Also, note the verb, ‘identify’. If you see this verb or ‘list’ then you know explanation is not required.

(a) (i) Reorder level. When inventories reach this level, an order should be placed to replenish
stocks. The reorder level is determined by considering the rate of consumption and the lead
time (lead time is the time between placing an order with a supplier and the stock
becoming available for use).

(ii) Minimum level. This is a warning level to draw management attention to the fact that
inventories are approaching a dangerously low level and that outages are possible.

(iii) Maximum level. This also acts as a warning level to signal to management that stocks are
reaching a potentially wasteful level.

(iv) Reorder quantity. This is the quantity of inventory which is to be ordered when inventory
levels reach the reorder level. If it is set so as to minimise the total costs associated with
holding and ordering inventory, then it is known as the economic order quantity.

(v) Average inventory. This is a calculation of the average inventory level that assumes actual
levels fluctuate evenly between the minimum (or safety) inventory level and the highest
possible inventory level (the amount of inventory immediately after an order is received, ie
safety inventory + reorder quantity).
404 Exam answer bank

(b) JIT production systems include the following features.

Multi-skilled workers

In a JIT production environment, production processes are shortened and simplified, however, the
variety and complexity of work carried out by employees is increased. Workers must therefore be
flexible and adaptable. They should be trained to operate all machines on the production line and
undertake routine preventative maintenance.

Close relationships with suppliers

JIT production systems go hand-in-hand with JIT purchasing systems. These match the usage of
materials with delivery of replacements from external suppliers. This means that material stocks
can be kept at near-zero levels.

For JIT purchasing to be successful, the organisation must have confidence that its suppliers will
deliver on time and that the materials supplied will be of very high quality. There can be no rejects
or returns which would result in production delays. Therefore the company and its suppliers must
build up close relationships.

Work floor layout based on workflow

Factory layouts under JIT production are designed to reduce the movement of workers and
products. Traditionally machines were grouped by function (drilling, grinding and so on). A part
therefore had to travel long distances, moving from one part of the factory to the other, often
stopping along the way in a storage area.

Under JIT systems, material movements between operations are minimised by eliminating space
between work stations and grouping machines or workers by product or component instead of by
type of work performed. Products can flow from machine to machine without having to wait for the
next stage of processing or returning to stores. Lead times and work in progress are therefore
reduced.

An emphasis on quality

Production management within a JIT environment seeks to both eliminate scrap and defective
units during production and avoid the need for reworking of units. Defects stop the production line,
creating rework and possibly resulting in a failure to meet delivery dates. Quality, on the other
hand, reduces costs.

Quality is assured by designing products and processes with quality in mind, introducing quality
awareness programmes and statistical checks on output quality, providing continual worker
training and implementing vendor quality assurance programmes to ensure that the correct product
is made to the appropriate quality level on the first pass through production.

Set-up time reduction

If an organisation is able to reduce manufacturing lead time it is in a better position to respond

quickly to changes in customer demand. Reducing set-up time is one way in which this can be
done.

Machinery set-ups are non-value-added activities which JIT aims to reduce or even eliminate.
Reducing set-up time also makes the manufacture of smaller batches more economical and
worthwhile. Managers do not feel the need to spread set-up costs over as many units as possible,
which then leads to high levels of inventory.
 Exam answer bank 405

(c) JIT systems have a number of financial benefits.

(i) Increase in labour productivity due to labour being multiskilled and carrying out preventative
maintenance

(ii) Reduction of investment in plant space

(iii) Reduction in costs of storing inventory

(iv) Reduction in risk of inventory obsolescence

(v) Lower investment in inventory

(vi) Reduction in costs of handling inventory

(vii) Reduction in costs associated with scrap, defective units and reworking

(viii) Higher revenue as a result of reduction in lost sales following failure to meet delivery dates
(because of improved quality)

(ix) Reduction in the costs of setting up production runs

(x) Higher revenues as a result of faster response to customer demands

8 The marketing concept

Top tips. With open questions such as this it is always a good idea to create a structure for your answer
first by producing a bullet point plan of your headings. This will help focus your answer on the question
and avoid unnecessary waffle.

The marketing concept

One definition of the marketing concept is 'a management orientation or outlook, that accepts that the
key task of the organisation is to determine the needs, wants and values of a target market and to adapt
the organisation to delivering the desired satisfaction more effectively and efficiently than its competitors'.

In other words, customer needs and the market environment are considered of paramount importance.
Since technology, markets, the economy, social attitudes, fashions, the law and so on are all constantly
changing, customer needs are likely to change too. The marketing concept is that changing needs and
attitudes must be identified, and products or services adapted and developed to satisfy them.

Some organisations may be production-oriented and others sales-oriented, although it is generally

accepted that most business should be marketing-oriented to be successful in the longer term.

If the marketing concept is to be applied successfully, it must be shared by all managers and supervisors
in an organisation. 'Marketing' in its broader sense covers not just selling, advertising, sales promotion and
pricing, but also product design and quality, after sales service, distribution, reliability of delivery dates
and in many cases (such as the retailing industry) purchasing supplies. This is because the customers'
needs relate to these items as well as more obvious 'marketing' factors such as sales price and how
products are promoted.

Production-oriented organisations

A production-oriented organisation is one which believes that if it can make a good quality product at a
reasonable price, then customers will inevitably buy it with a minimum of marketing effort. Businesses
which take this view will probably concentrate on product developments and improvements, and
production efficiencies to cut costs.

If there is a lack of competition in the market, or a shortage of goods to meet a basic demand, then
production orientation should be successful. However, if there is competition and over-supply of a
product, demand must be stimulated, and a production-oriented organisation will resort to the 'hard-sell'
or 'product push' to 'convince' the customer of what they want.
406 Exam answer bank

Sales oriented organisations

A sales-oriented organisation is one which believes that in order to generate large volumes of output, it
must invest heavily in sales promotion. This attitude implies a belief that potential customers are by
nature sales-resistant and have to be persuaded to buy (or buy more). This means that the task of the
business is to develop a strong sales department, with well-trained sales people.

Key differences

The fundamental difference between production, sales and marketing-oriented organisations can be
summarised very briefly.

Where an organisation follows a production or selling orientation, it produces goods or services, and then
expects to sell them. The nature of the organisation's business is determined by what it has chosen to
produce, and there will be a reluctance to change over to producing something different.

Organisations which embrace the marketing concept, commit themselves to supplying what customers
need. As those needs change, so too must the goods or services which are produced.

9 Branding
Top tips. Questions such as this are a gift because they provide you with a ready-made structure for your
answer and the mark allocations indicate how much you should write in each part. For example, part (a)
requires an explanation of four benefits for a total of eight marks – therefore you only need write enough
to earn two marks for each.

To earn the two marks you only need to identify each benefit and write a sentence or two to justify your
answer.

You should follow the same principles for parts (b) and (c).

(a) Benefits of branding

The key benefits of branding are:

Product differentiation

Branding aids product differentiation as it conveys a lot of information very quickly and concisely.
This helps customers to readily identify the goods or services and thereby helps to create customer
loyalty to the brand. It is therefore a means of increasing or maintaining sales.

Advertising

Branding maximises the impact of advertising for product identification and recognition. The more
similar a product is to competing goods, the more branding is necessary to create a separate
product identity.

Industry acceptance

Branding leads to a readier acceptance of a manufacturer's goods by wholesalers and retailers. It

also reduces the importance of price differentials between goods and improves product recognition.

Market segmentation

Branding supports market segmentation, since different brands of similar products may be
developed to meet specific needs of categories of user.

(b) Brand extension

Brand extension involves the introduction of new products which 'piggy back' on the goods that are
already known to the customer. The idea is to capitalise on brand loyalty which should help make
the new products successful.
 Exam answer bank 407

Multi-branding

Multi-branding is the introduction of a number of brands that all satisfy very similar product
characteristics. This can be used where there is little or no brand loyalty, in order to pick up buyers
who are constantly changing brands.

Family branding

This is the use of brand name power to assist all products in a range. It is often used to
consolidate expensive advertising costs by putting out one message – that of the brand - rather
than promoting a range of individual items.

(c) The market approach

The market approach generates a value on the basis of market transactions. A common method
used in this form of valuation is known as relief-from-royalty which reflects the fact that owners of
brands have use of the brand for free, whereas they could generate an income by licensing it. This
income stream, or royalty rate, can be derived by reference to royalty or license agreements for
similar assets and used to generate a value.

The cost approach

The cost approach is based on the costs incurred to build the brand. For example, costs involved
in registering trademarks and promotional activities. However, it is not the most accurate method
of valuation because the cost of building the brand is usually unrelated to its ability to generate
revenue.

The income approach

The income approach is based on net present values. The brand's expected future earnings, or
cash flows, can be used to calculate the overall economic benefit that it will generate over its life.
This benefit is reduced by all expenditure relating to brand awareness that will be incurred over its
life to calculate a net income figure. This income figure is then discounted at an interest rate that
an investor would expect as a return based on the brand's risk profile and characteristics. This final
value is the value of the brand.

10 Consumer purchasing
Top tips. This answer may appear difficult to achieve, but it is just the repetition of textbook knowledge.
To produce a full answer you needed to remember the stages of the consumer decision-making process
and the factors which influence it. Each stage/factor is quite self-explanatory so you should have been
able to write a few sentences on each without too much trouble.

(a) Buyer behaviour

Buyer behaviour describes the activities and decision processes relating to buying. Treating
buying behaviour as a process enables organisations to distinguish between the different buying
roles that customers sometimes assume.

Marketers make a distinction between business and non-business (household) consumers when
considering buyer behaviour because the needs and processes used by each type of consumer are
very different.

According to Lancaster and Withey 2003, consumer decision making can be broken down into
five stages or steps.

Need/problem recognition

At this initial stage, the customer recognises that they have a need to fulfil or a problem to solve.
This creates a motive for them to search for a solution.
408 Exam answer bank

Pre-purchase/ information search

The consumer then searches for products or services that meet their need or solve their problem.
This may involve visiting shops, searching the internet or telephoning potential suppliers.

Evaluation of alternatives

Once they have done their research, the consumer will evaluate each of the possible solutions that
they have discovered. The evaluation will determine which of the possible solutions meet their
needs best, however issues such as price may also have an influence.

The purchase decision

On the basis of their evaluation, the consumer selects the product or service they want and makes
the purchase.

Post-purchase evaluation

Following the purchase, the consumer evaluates the product or service to see if it does in fact meet
their needs. If they are satisfied then they may purchase the product or service again out of loyalty.
If they are dissatisfied then the purchasing process begins again as the need has not been fulfilled
nor the problem solved.

(b) Four influences on household consumer purchasing are:

(i) Social factors

Social factors relate to the social groupings a consumer belongs to or aspires to, and trends
in society which influence buying patterns. Examples of social factors which influence the
consumer purchasing process are reference groups, families and roles or status.

Reference groups are actual or imaginary groups that influence an individual's evaluations,
aspirations or behaviour. They influence a buying decision by making the individual aware
of a product or brand, allowing the individual to compare their attitude with that of the
group.

All families differ, for example in terms of socio-economic status and consumption patterns.
Therefore they affect the amount of money the consumer has to spend and in what volumes
purchasing needs to be made.

Roles and status influence an individual’s purchasing decision because the products or
services selected must be compatible with them. For example a person who sees
themselves as being part of a high social class may not select an ‘economy’ range of food
products.

(ii) Cultural factors

Culture comprises the values, attitudes and beliefs in the pattern of life adopted by people,
that help them integrate and communicate as members of society. It may affect a
purchasing decision in many ways. For example, alcohol consumption is part of the culture
of many countries in Western Europe, whereas it is frowned on in Muslim and some other
countries.

(iii) Personal factors

Personal factors include such things as a consumer’s age, stage of family life cycle, and
lifestyle. They each influence an individual’s purchasing decision because the products or
services they select must be compatible with them.

Individuals will buy different types of product depending on their age. This is particularly
relevant to such products as clothes, furniture and recreation.

The family life cycle affects a consumer’s needs and purchasing patterns. For example, a
single man will have different requirements to a man who is married with children.
 Exam answer bank 409

A lifestyle is an individual's way of living as identified by their activities, interests and

opinions. For example vegetarians will avoid purchasing meat-based food products and
those who are interested in protecting the environment will only select products which are
non-polluting.

(iv) Psychological factors

The process of buyer behaviour is also influenced by four psychological factors, motivation,
perception, learning and beliefs and attitudes.

Motivation is an inner state that energises, activates, or moves, directs or channels an

individual. These factors will influence a consumer’s desire to purchase a particular product.

Perception is the process whereby people select, organise and interpret sensory stimuli into
a meaningful and coherent picture. The way consumers view an object may vary according
to their past experience, expectation, needs, interests, attitudes and beliefs.

Learning concerns the process whereby an individual's behaviour changes as a result of

their experience. This may be key in a purchase decision – an individual who has had a bad
experience with a product, or with the company they purchased it from, may not buy those
products again.

A belief is a descriptive thought that a person holds about something. An attitude describes
a person's feelings and action tendencies toward some object or idea. Both can affect a
purchasing decision. For example if a person can demonstrate their beliefs through a
product, or if they have an emotional attachment to it, they may be more likely to purchase
it.

11 HR plan and workforce flexibility

Top tips. At all costs, avoid using this question to write everything you know about HR! Strong answers
keep to the question set and are relevant to the scenario.
There is much to cover in part (a). Ensure you don't just focus on the stages involved in developing a HR
plan – you are also required to describe the main issues to consider in this process.
You may have used a slightly different planning model referring to HR plans including: strategic analysis;
forecasting; job analysis, recruitment and training.
In part (b), mention the different types of workforce flexibility (eg numerical, task, financial) and suggest
how these could be achieved at CX.
Part (c) allows you to 'brainstorm' an answer. Make sure you plan out your answer before you start write
as you may lose ideas that you generated.

You might not have realised how HR can create marketing opportunities so you might need to think
laterally in Part (d).

(a) Human resource planning

Human resource planning involves developing a plan to recruit, utilise, develop and retain staff.

The CX buy-out involves three main initiatives; heritage 'real ale' tours, bottling beer for sale in
supermarkets and employing a flexible but experienced workforce. The HR plan associated with
the buy-out must support these initiatives.

The main issues involved in developing a HR plan for the CX buy-out are described below.
410 Exam answer bank

Workable

The plan must be realistic and suitable for implementation (taking into account cost and working
practices).

Impact upon culture

CX has a long history and a national reputation for traditional 'real ale' production. Although CX
wishes to change, the organisation and the people that work there should preserve this feeling and
reputation as it is a source of competitive advantage. Therefore, the HR plan should encourage
valued ex-employees back – it should not be a case of 'out with the old and in with the new'.

Specific issues the plan should address include:

 Budgets, targets and standards for staffing at all levels

 How the flexibility required within the workforce will be achieved
 The retraining required and how this will be addressed
 Remuneration and reward systems
 Responsibilities and procedures for implementing, monitoring and controlling the plan
There are four main stages involved in developing a HR plan for the CX buy-out.

Stage 1: Conduct an audit of existing human resources

As the brewery has closed, technically there are no existing human resources. However, as the
shut down only occurred a month ago, and the workforce has specialist skills, it is highly likely
that most ex-employees would be available for re-employment. The buy-out team should consult
HR records and speak to key ex-employees to establish the current position.

Deciding who should be offered employment is a key task. Selection should take into account
existing employee skills and the potential to develop any new skills required. A key consideration
for re-employment would be a willingness to be flexible rather than simply 'I want my old job back'.

Stage 2: Forecast future demand for skills/labour

Past experience should provide a reasonable estimate of staff numbers required (including seasonal
fluctuations).

New activities (eg bottling) will require new skills – and increased workforce flexibility also needs
to be taken into account when estimating the numbers/skill mix required. Bottling may also impact
upon seasonal fluctuations. Brewery tours will require significantly different skills.

All of these factors need to be considered and addressed – within a realistic, budget.

Stage 3: Assess the external labour market and forecast supply

In this situation, the external market is somewhat blurred with the internal market (as Stage 1 of
this plan included ex-employees). Supply for many positions/skills is likely to be able to be satisfied
from the pool of ex-employees – but areas such as bottling and brewery tours may require
specialist knowledge and skills that may need to be found from other sources. Teaching ex-
employees new skills is another option.

Information relating to ex-employees will be available using CX HR records. These should provide a
wide range of information including positions held, age, training undertaken and performance
levels.

Stage 4: Establish a plan reconciling demand and supply

When a realistic estimate of employee numbers and skills has been established, the next step is to
produce action plans that will result in the recruitment and training of a workforce that will meet
the demands of CX.
 Exam answer bank 411

The plan should ensure steps are taken to ensure all required positions and skills are accounted
for. Key employees should be identified by name. There may also need to be contingencies built
into the plan to allow for circumstances where expected 'first options' are unavailable.

The four steps outlined above will not run completely sequentially – in reality many aspects of the
plan will span more than one stage.

(b) Workforce flexibility

Before the shut-down, seasonal fluctuations in sales were large – an indicator that labour flexibility
has always been important.

Logic dictates that as the old CX was ultimately unsuccessful the new CX must do something
different. Changes in working practices will therefore be required. This is why the CX buy-out team
have identified workforce flexibility as a key aspect of their plan.

Although the introduction of brewery tours and bottled beers may help smooth seasonal
fluctuations, they will also introduce the need for new skills and probably new working hours.
Flexibility is therefore essential.

Types of flexibility

For CX, the flexibility required would include numerical, task and financial.

Numerical flexibility

This is key to deal with seasonal fluctuations and for different demand levels during the day and or
week eg for tours.

The development of a numerically flexible workforce will involve the use of temporary and part
time workers supplementing full time employees (eg Handy's Shamrock). Another option is the
outsourcing of non-core functions.

Task or functional flexibility

This involves recruiting and developing multi-skilled staff able to perform a range of tasks. This
helps reduce overall numbers and provides ready made cover in cases of absence.

At CX, an employee may for example be able to help with brewing, carry out maintenance and
conduct a brewery tour all on the same day.

Financial flexibility

This is achieved most often through performance related reward system.

At CX, staff payments should be linked to output (eg litres brewed, bottles produced, feedback
scores from brewery tours or achieving financial targets related to sales figures and profitability).

(c) Five benefits of employing ex-employees to the new organisation and local community.

Benefits to the new organisation

Knowledge and skill base

By re-employing skilled staff, CX will save money on training new employees. Their experience will
be vital to keep the brewery operating, as the business grows.

Local support

The local population may get behind the new venture and offer it support by going on tours or
purchasing the beer. This support may be enough to see the venture through its early stages.

Benefits to the local community

Influx of cash

The influx of cash from employment and visitors to the area will benefit other local businesses who
may find their sales improve due to a knock-on effect.
412 Exam answer bank

Flexible working

Employees and their families may benefit from the flexible working practices on offer. Older
employees can enjoy semi-retirement and younger ones can fit the job around their family
commitments.

Local tradition/history

The local area will retain an important part of its history and tradition that would otherwise be lost
through property development.

(d) Marketing opportunities

Employing local ex-employees and the other benefits to the community offer excellent PR and
social marketing opportunities that may extend wider than the local area.

The diversification opportunity with the visitor centre should lead to tourism and also add more
personality to CX's own beer brand. The exposure the beer is likely to receive in the local news will
present CX with an opportunity to push the product further afield.

12 Online recruitment
Top tips. Open-ended questions such as Part (a) are best attempted by drawing up a list of reasonable
points first. Once you're happy with them you can flesh out your answer. You will need to think of wider
issues when considering the opportunities in the scenario, and the chances are you would have thought of
others that are not in this answer. However, you will still earn marks providing your answers are relevant,
well explained and related to the scenario.

Parts (b) and (c) are answerable using textbook knowledge – don’t forget to present your answer clearly
using headings.

(a) Opportunity one: develop e-cruitment and m-cruitment

The report identified a potential opportunity to expand B3's business by using the internet as a
source of employment opportunities and to match them with particular clients who have registered
with them. Clients would then be contacted by email or text message and interviews arranged.

The following issues should be considered.

The matching process

How will candidate details be matched to appropriate vacancies? This is likely to rely on 'keywords'
but the matching criteria must be tested and refined to prevent unsuitable matches being
suggested.

Speed of service

Providing the client's requirements and job specifications from the employers are held in a
database, the process of matching clients to jobs would be very quick indeed. This speed would
increase client satisfaction.

Communication cost

Despite many clients not being able to access personal emails and B3's website at work, they
could still access them from home or Internet cafes. E-mail is far cheaper than telephone or post
and a large number clients with similar needs can be contacted by a single email. This will help
keep B3's costs down.
 Exam answer bank 413

Text content

Are text messages a suitable format for this type of communication? Can sufficient detail be
provided to enable an informed judgement?

Database accuracy

It is essential B3’s database of vacancies and candidates is kept up-to-date. Candidates may fail to
inform B3 that they're no longer looking for a new position and employers websites may not be up-
to-date. There is a risk B3 would waste its (and its clients) time applying for interviews for
positions that had already been filled.

Opportunity two: upgrade technology

This opportunity involves B3 adopting a paperless office through the upgrading of office
technology.

The following issues should be considered.

Data security

B3 would be storing the personal details of individuals. It is important that steps are taken to
protect the security and privacy of data that is held.

Data protection

As the organisation would place very high reliance on the database, system failure and complete
data loss could result in its operations ceasing it. This risk can be reduced by B3 regularly backing
up its data and storing it in a safe location offsite.

Practicalities

It may not be practical for all tasks to be made paperless, for example client companies may not
wish to be invoiced electronically or may not have sufficient systems to process such invoices.
Where agreements or contracts are made between employees, employers and B3, paper copies
may still be required for signing and to give to the employee for their records.

Backup systems

In the event of a disruption to power supplies or equipment failure, B3 would struggle to continue
its operations. Therefore some kind of back up paper based manual system should be available
just in case.

Cost-saving

The expense of developing new software and investment in systems should create a benefit to B3
that offsets these costs. Paper, printing, filing, storage and general administration are fairly cheap
and it may take sometime for B3 to recoup its investment.

File conversion

Care must be taken when converting existing paper and electronic files into the new database. In
particular, it must be ensured that the source data is complete and accurate and the process of
converting data includes verification and validation.

(b) Selection process

Once a short-list has been created from a number of suitable applicants, the selection of the most
suitable can be made using the following techniques.

Interview

The aim of interviews is to find the best candidate for a position through direct assessment.
414 Exam answer bank

The potential employer must decide the type of interview that is most appropriate. Where the line
manager makes the decision of who to select, a one to one interview should suffice. Where the
input of more than one person is required, a final or sequential interview can take place.

The interviewer should use a job description for the vacancy as well as a person specification. This
will enable them to understand what is expected of a suitable candidate.

The interview should be conducted in a location that is quiet and comfortable to enable all parties
to relax.

Candidates should be given the opportunity to talk and ask questions as it is important for them to
learn about the organisation as much as the organisation to learn about them.

Testing

Testing candidates is a method of selection that allows the comparison of abilities and personality
traits that would not be discovered by interviewing alone.

Testing should be set directly in relation to the person and job specification. This will ensure the
personality and ability traits tested are required by the role.

The type of testing selected should be relevant to the position concerned. For example
psychometric tests may not be relevant to select between candidates who have applied for a
manual job making door knobs, however it would be relevant for a senior management position.

Care must be taken when interpreting test results since they do tend to over simplify results – the
best score may not indicate the best person for the job. Results should always be considered in
relation to other selection methods.

Assessment centres

Particular roles, such as those requiring leadership, problem solving or creative abilities may
benefit from the use of assessment centres in the selection process.

The location of centres should be easily reached by candidates and assessors. They should provide
all the facilities that are required by the types of assessment being carried out. Care must be taken
to select assessors with the right skills to make meaningful judgements.

Final steps in the process

Further into the process, reference checks, medical examination and the final decision/selection
should be made. The offer should be made in a formal letter.

All steps in the process should be reliable, valid, fair and cost effective.

(c) Five acceptable reasons for dismissal are:

Conduct

The employee's behaviour breaches acceptable limits deemed by the employer. Unacceptable
conduct may or may not be laid down in the contract of employment, however most employers
have rules concerning drunkenness, immorality or misconduct.

Before conduct becomes an acceptable reason for dismissal, the employee should be given
warnings and an opportunity to change behaviour. However, certain misconduct may be deemed
so serious that it warrants summary dismissal.

Capability

The standard of the employee's work is below that what is expected and after appropriate support
and guidance it is clear that they are not capable of performing the role.

Before dismissing on the grounds of capability, the employer should give an employee a
reasonable chance to improve. This can involve consulting with the employee to identify
difficulties and providing training to help them.
 Exam answer bank 415

Breach of statutory duty

It is an acceptable reason for dismissal if by continuing the employment of the employee the
employer would breach a statutory duty (for example, a solicitor could not continue to be
employed if they are struck off the professional register). The employer would be justified in
terminating the employment as soon as the issue comes to light since the employer must not break
the law.

Other substantial reasons

Employers are entitled to dismiss an employee where another substantial reason affects them
adversely. Examples include loss of trust in an employee or even where an employee marries a
direct competitor.

Redundancy

Redundancy occurs where the business ceases, is relocating far away (so the employee cannot
attend work), or where the role an employee performs is to cease and they cannot be
accommodated within the organisation in another role. To be an acceptable reason for dismissal,
the employer must select employees for redundancy fairly, provide reasonable notice and consider
offers of alternative employment.
416 Exam answer bank
INDEX

417
418
 Index 419

Note: Key Terms and their references are given in bold.

180 degree appraisal, 371 Association of Southeast Asian Nations

(ASEAN), 16
3 60 degree appraisal, 371 Atkinson, 327
3Cs, 252 Attitude, 281
Audit committee, 54
80/20 rule, 169 Augmented product, 246
Authentication, 88
ABC method of stores control, 210 Average inventory, 205
ABC system, 203
Above-the-line, 250
Absolute advantage, 17
B2B, 282
B2C, 282
Acceptance, 103
Balance of trade, 41
Acceptance tests, 98
Balance sheet, 43
Accountability, 54
Balanced scorecard, 163
Accounting records, 67
Balanced trade, 14
Action learning, 362
Banner advertising, 271
Active resistance, 103
BCG matrix, 247
Activities, 136
Behavioural incident methods, 370
Actual/basic product, 246
Belbin, 344
Adams, 312
Belief, 281
Adaptation, 103 Below-the-line, 250
Adaptive maintenance, 113
Benchmarking, 151
Advertising job vacancies, 346
Berens (2006), 80
Affiliate schemes, 271
Block release, 360
After-sales service, 137
Blyton and Peters, 325
Agency problem, 49
Bonus schemes, 319
AIDA, 250
Boomer, 123
Allocative efficiency, 48
Bowhill, 151
Andean Pact, 16
BPR, 181
Ansoff matrix, 235
Brand equity, 260
Anti-virus software, 88
Brand extension, 261
Application controls, 89
Brand identity, 260
Application forms, 347
Brand management, 260
Application Service Providers (ASP), 116, 119
Brand value, 262
Appraisal, 367, 368
Branding, 260
Appraisal and pay, 373
Branding strategies, 261
Appraisal barriers, 373
Brassington and Pettit, 217
Appraisal cost or inspection cost, 169
Bratton and Gold, 305
Appraisal interviews, 372
BRIC economies, 24
Appraisal report, 371
Bridging, 8
Appraisal system, 368, 369
Broad-banded pay structures, 317
Appraisal techniques, 369, 370
Brown, 200, 202
Approvers, 283
Brown's six items, 152
Aptitude tests, 349
Bruce, 285
Armstrong, 289, 305
Buffering, 8
Armstrong and Murlis, 316
Business continuity, 180
Asean Free Trade Area (AFTA), 16
Business network redesign, 83
Asia-Pacific Economic Co-operation (APEC), 16
Business Process Re-engineering (BPR), 83,
Assessment centre, 350 181
Assistant to positions, 362 Business scope redefinition, 83
Business-to-Business (B2B), 282
420 Index

Business-to-business markets, 265 Compressed week, 327

Business-to-Consumer (B2C), 282 Computer Aided Design (CAD), 123
Buyer behaviour, 278 Computer Aided Manufacturing (CAM), 82
Buyers, 283 Computer-Aided Design (CAD), 82
Computer-based training, 360
C alculative contract, 315 Computer-Integrated Manufacturing (CIM), 82
Capacity, 192 Concentrated marketing, 233
Capacity control, 199 Concept, 217
Capacity management, 192 Confidentiality, 335
Capacity planning, 194 Conformance costs, 169
Capital, 18 Constructive dismissal, 353
Capital account, 43 Consumer buying behaviour, 278
Career development, 365
Consumer goods, 245
Career management, 365
Consumer markets, 265
Caroll and Buchholtz, 56
Contactors, 288
Carrington, 321
Contagious bias, 348
Cash cow, 248
Content theory, 310
Cattell P16 PF, 349
Contingency theory, 309
Centralised information system, 71
Continuous improvement, 168, 171, 207, 374
Changeover, 101
Continuous inventory, 203
Characteristics of services, 256
Contrived tests, 98
Charities, 27
Control, 66
Charity marketing mix, 286
Co-operative contract, 316
Chase demand plan, 196
Co-ordinating promotional tools, 252
Christopher, 139
Co-ordination, 109
Christopher et al, 288
Core employees, 327
Chunked structures, 325
Core functions, 132
CIMA's Ethical Guidelines, 334
Core product, 246
Clegg, 123
Corporate (Social) Responsibility policies, 335
Cloud computing, 79
Corporate culture, 30
Coaching, 362
Corporate governance, 49
Co-brands, 262
Corporate governance failures, 52
Coercive contract, 315
Corporate Political Activity (CPA), 7
Cognitive paradigm, 278
Corporate Responsibility Reports, 334
Cognitive tests, 349
Corporate social responsibility, 56, 293
Commitment, 109 Corrective maintenance, 113
Committees, 362 Correspondence courses, 360
Common markets, 14 Cost approach, 262
Communication, 109 Cost leadership, 121
Companies, 27 Cost-benefit analysis, 96
Company sales forecast, 229 Cost-benefit review, 110
Comparative advantage, 17 Cost-plus pricing, 255
Competence, 343, 372 Costs of regulation, 48
Competition, 252 Country risk, 8
Competition Act 1998, 47 Cousins strategic supply wheel, 140
Competition Commission, 47 Cowell, 256
Competition Policy, 47 Creativity, 103
Competitive advantage, 121
Critical factors, 185
Competitive benchmarking, 151
Crosby, 166
Competitive prices, 256
Cryptography, 88
Competitor analysis, 233
Cultural factors, 280
Competitors' actions, 253
Culture, 30
Complex man, 314 Current account, 43
 Index 421

Current demand, 228 Differentiation, 121

Customer, 278 Dimensions of service quality, 182
Customer appraisal, 371 Direct ('Big Bang') changeover, 101
Customer expectations, 183 Direct activities, 137
Customer relationship management (CRM), 79 Direct marketing, 266
Customer value, 245 Direct tax, 44
Customs unions, 14 Disciplinary procedures, 352
Disciplinary sanctions, 353
D ata, 67 Discussions, 361
Data analysis, 67 Dismissal, 352, 353
Data collection, 67 Distance learning, evening classes, 360
Data evaluation, 67 Distributed Data Processing (DDP), 79
Data integrity, 78 Diversification, 235
Data interpretation, 67 Dog, 248
Data mining, 235 Downstream, 139
Data Processing Systems (DPS), 72 DPS, 72
Data Protection Act 1998, 89 Durable goods, 216
Data Protection Principles, 90
Data redundancy, 77 E arly cash recovery, 255
Data subject, 89, 90 Early developed country (EDC), 11
Data users, 89 Early retirement, 354
Database, 76 Eavesdroppers, 87
Database connectivity component, 77 E-business, 80
Database management system (DBMS), 76 Ecological/environmental factors, 222
Database queries, 77 E-commerce, 80
Database system, 76 Economic circumstances, 280
David and Olsen, 109 Economic development, 11
Day release, 360 Economic factors, 221
Decentralised information system, 71 Economic nationalism, 13
Deciders, 283 Economic Order Quantity (EOQ), 204, 205
Decision making, 66 Economic responsibilities, 56
Decision Making Unit (DMU), 283 Economic unions, 14
Decision Support System (DSS), 74 Economies of scale, 254
Decline, 252 Economies of scope, 176
Decline stage, 249 Effective appraisals, 369
Demand, 252, 253 Effective learning programmes, 355
Demand conditions, 18 Effectiveness, 54
Demand forecasts, 229 EIS, 73
Demand management planning, 197 Electronic signatures, 88
Demand networks, 143 Email marketing, 272
Demerit goods, 296 E-mail viruses, 87
Deming, 165 E-marketing, 270
Demographical segmentation, 231 Emerging economies, 17
Demonstration/instruction, 362 Empowerment, 168, 326, 374
Denial of service attack, 87 Encryption, 88
Dependent demand, 193 Enforcement costs, 48
Deregulation, 48 Enhancing factors, 185
Devanna, 306 Enterprise resource planning (ERP), 79, 201
Development, 355, 363 Enterprise-wide systems, 78
Dial-back security, 89 Environmental scanning, 69
Dialogic learning, 352 Equity theory, 312
Dibb et al, 285 Equivalent view, 57
Differentiated marketing, 233 ESS, 73
422 Index

Ethical behaviour, 333 Fishbone diagrams, 168

Ethical marketing, 294 Five different degrees of IT-enabled change, 83
Ethical responsibilities, 57 Five Ss, 172
Ethics, 293 Five why process, 168
Ethics in business, 333 Flat structures, 325
European Bank for Reconstruction and Flexibility, 326
Development, 4, 6 Flexibility in organisations, 327
European Foundation for Quality Management Flexible manufacturing, 176
model, 178 Flexible Manufacturing Systems, 197
European Free Trade Association (EFTA), 16 Flexible working arrangements, 326
European Union (EU), 16 Flexitime, 327
European Union Competition Policy, 48 Focus, 121
Evaluating training, 363 Forecasting, 198, 330
Evaluation of training, 364 Forecasting demand, 195, 228
Exchange rate, 46 Foreign Direct Investment (FDI), 26
Exchanges, 217 Formal training methods, 360
Executive directors, 54 Four Vs of operations, 135
Executive Information System (EIS), 73
Fraser’s Five Point Plan, 346
Executive Support System (ESS), 73
Free market economy, 25
Exercises, 361 Free trade, 13
Expectancy theory, 313, 317 Free trade areas, 14
Expected product, 246 Fully developed country (FDC), 11
Expenditure accounts, 43 Functional quality, 183
Expenditure-reducing strategy, 43 Functions, 136
Expenditure-switching strategy, 43 Fundamental principles of CIMA's Ethical
Experience curve, 254 Guidelines, 335
Experiential learning, 362 Future demand, 229
Experiential marketing, 270
Expert opinions, 229 G8, 4, 5
Expert systems, 75 Gatekeepers, 283
Export of natural commodities, 25 General Agreement on Tariffs and Trade (GATT),
Export-led industrialisation, 25 5
Extended marketing mix, 244, 258 General controls, 89
Extended view, 57 Generic strategies for competitive advantage,
External appraisal (opportunities and threats), 121
224 Global business environment, 4
External courses, 360 Global manufacture, 4
External failure cost, 170 Global sourcing, 4
External information, 68 Globalisation, 4
Extranet, 76 Goal-setting theory, 314
Going rate, 256
Facilities Management (FM), 115 Going rate pricing, 252, 256
Factor conditions, 18 Government intervention, 20
Family branding, 262 Graded pay structure, 317
Family life cycle, 280 Grading, 370
Fast moving consumer good (FMCG), 216 Grapevine, 292
Feignbaum, 166 Gratton, 322
File conversion, 100 Gross Domestic Product (GDP), 40
Fill, 250 Gross National Product (GNP), 40
Financial account, 43 Group incentive schemes, 319
Financial flexibility, 327 Group interview, 348
Firewall, 88 Group of Eight, 5
Fiscal policy, 44
Group selection methods, 349
 Index 423

Growth, 40, 103, 252 Indirect marketing, 267

Growth stage, 249 Indirect tax, 44
Guerrilla marketing, 268 Individual interview, 348
Guest, 306 Individual pay structures, 317
Guided assessment, 370 Induction, 351
Industrial goods, 245
Habitual decision-making, 278 Industrial segmentation, 232
Hackers, 87 Industrialisation strategies, 25
Hackman and Oldham, 323 Industry regulators, 47
Halo effect, 348 Industry sales forecast, 229
Hammer and Champy, 181 Influencers, 283, 288
Handy, 315 Influences on consumer buying, 279
Hardware and software failure, 87 Informal data gathering, 69
Hardware maintenance, 114 Information, 67
Harrison, 352 Information and Communication Technology
Hendry, 363 (ICT), 86, 325
Herzberg, 281, 311, 317 Information qualities, 69
Heterarchy, 33 Information systems, 70
Heterogeneity, 257, 259 Information technology, 70
Hierarchy of needs, 310 Infrastructure, 18
Ho, 180 Initial screening, 346
Hoaxes, 87 Initiators, 283
Hofstede, 31 Inseparability, 257, 259
Holding costs, 204 Installation, 96
Homeworking, 327 Intangibility, 257
Honey and Mumford's learning styles, 363 Integrated marketing communications, 265
Horizontal structures, 325 Integrated pay structures, 317
HR legal and ethical issues, 352 Integrated supply chain, 142
HR plan, 328 Integrators, 85
HR practice, 342 Integrity, 335
Human capital, 69 Intelligence tests, 349
Human error, 87 Interaction theory, 110
Human resource cycle, 306 Interactive marketing, 269
Human resource development (HRD), 355 Interdependence, 142
Human resource management, 34, 137 Interest rates, 45
Human Resource Management (HRM), 304 Inter-industry benchmarking, 151
Human Resource Management theories, 307 Intermediate customer pricing, 254
Human resource planning, 329 Internal appraisal (strengths and weaknesses),
Human resources, 18 223
Hunt, John, 104, 105 Internal benchmarking, 151
Hygiene factors, 185, 311
Internal communication, 290
ICT, 70 Internal courses, 360
Internal customer, 167
Import-substitution, 25
Internal customer communications, 289
Imposition, 103
Internal environment, 220
Inbound logistics, 137
Internal failure cost, 169
Incentive schemes, 318
Internal information, 67
Income accounts, 43
Internal integration, 83
Income approach, 263
Internal marketing, 287
Incremental approach, 116
Independence, 142 Internal marketing mix, 288
Indifference, 103 Internal suppliers, 167
Indirect activities, 137 International Bank for Reconstruction and
Development, 6
424 Index

International Centre for Settlement of Investment Kirkpatrick, 364

Disputes, 6 Knowledge, 18
International Development Association, 6 Knowledge management systems, 79
International Finance Corporation, 6 Knowledge Work Systems (KWS), 74
Knowledge Workers, 74
International Monetary Fund, 4, 5
Kolb, 362
International Organisation for Standardisation
Kotler, 224, 231, 244, 245, 256, 261
(ISO), 177
Kotter and Schlesinger, 107
Internet, 142
KWS, 74
Interview, 347, 372
Interviews and counselling, 372
Intranet, 76, 290
Labour markets, 363
Lancaster and Withey, 250, 278, 279, 284
Introduction stage, 249
Lawrence and Lorsch, 309
Inventory control levels, 204
Leadership, 53
Inventory controls, 202
Lean production, 174
Inventory management, 202
Learned behaviour, 278
Inventory records, 202
Learning, 281
Inventory storage, 203
Learning cycle (Kolb), 362
Invitation to tender, 116
Learning styles, 362
Involve me model, 333
Lectures, 361
Ishikawa, 165
Legal factors, 222
Isolateds, 289
Legal responsibilities, 56
IT enabled transformation, 81
Legal risk, 11
Lesser developed country (LDC), 11
Jennings and Wattam, 9 Level capacity plan, 196
JIT in service operations, 208
Levels of evaluation, 364
JIT philosophy, 206
Levels of service provision, 115
JIT planning and control, 208
Lewin/Schein: Unfreeze, Move, Refreeze, 105
JIT techniques, 207
Lewin’s force field analysis, 106
Job analysis, 343
Liberalisation, 13, 48
Job characteristics model, 323
Job description, 342, 344 Liberation Management, 325
Job design, 343 Lifestyle, 280
Job enlargement, 323 Limitations of interviews, 348
Job enrichment, 323 Limitations of testing, 99
Job family pay structures, 317 Limited liability company, 27
Job redesign, 323 Limited view, 57
Job rotation, 323, 362 Line extension, 261
Job shares, 354 Linkages, 137
Job sharing, 327 Loading, 193
Job specialisation, 344 Local Area Network (LAN), 79
Jobber's method of segmentation, 288 Localised exploitation, 83
Jobless structures, 325 Lockett, 372, 373
John Maynard Keynes, 44 Logic bomb, 87
Johnston and Clark, 183, 184 Loss leaders, 254
Joint venture sourcing, 116
Jones & Cheeseman, 289
M acro environment, 220
Macroeconomic environment, 40
Juran, 165
Macroeconomic forecast, 229
Just-in-time (JIT), 206
Maier, 372
Kaizen, 168 Maintenance factors, 311
Management culture, 31
Kanban, 208 Management development, 366
Kaplan and Norton, 163 Management Information Systems (MIS), 73
Keys, 88 Management planning, 137
 Index 425

Management structure, 33 Motivating potential score (MPS), 323

Manual worker pay structures, 317 Motivation, 281, 309, 315
Manufacturing resource planning (MRP II), 199 Motivation and incentives, 322
Market approach, 262 Motivators, 311
Market development, 235 Mullins, 315, 332
Market maturity, 249 Mullins' classifications of motivation, 315
Market penetration, 235, 254 Multi-branding, 262
Market positioning, 234 Multilateral Investment Guarantee Agency, 6
Market regulation, 47 Multinational corporations, 28
Market research, 226, 228 Multiple products, 254
Market research plan, 226 Multiple sourcing, 116
Market segmentation, 230, 235 Multiskilling, 208, 326
Market skimming, 254 Mutual organisations, 27
Market tests, 229 Myers-Briggs Type Indicator, 349
Marketing, 216
Marketing action plans, 244 National account balances, 41
Marketing and sales, 132 National accounts, 43
Marketing communications, 263 National income, 46
Marketing concept, 216, 217 Natural disasters, 87
Marketing environment, 220 Negotiation, 351
Marketing in not-for-profit organisations, 284 Neutral factors, 185
Marketing mix, 244 New brands, 262
Marketing orientation, 217, 219 New product pricing, 254
Marketing plan, 224 Newly industrialising and emerging nations, 23
Marketing strategy, 226 NGOs, 285
Markus, 109 Non-conformance costs, 169
Maslow, 281, 310 Non-executive directors, 54
Mass (or undifferentiated) marketing, 233 Non-governmental organisations, 285
Materials requirements planning (MRP I), 199 Non-governmental organisations, 29
Matrix structure, 326 Non-profit organisations, 27
Maturity, 252 North American Free Trade Agreement (NAFTA),
Maximum level, 205 16
Mayo, Schein: Human relations, 310 Not-for-profit marketing, 284
Mayo and Lupton, 321 Numerical flexibility, 327
McGregor, 312
Measuring capacity, 195 OAS, 75
Measuring quality, 162 Obey me model, 333
Measuring system performance, 111 Objectives and results-orientated schemes, 370
Mendelow, 51 Objectivity, 335
Mercosur, 16 Obsolete inventories, 203
Merit goods, 296 Occupation, 280
Metrics, 111 Office Automation System (OAS), 74
Micro environment, 220 Office of Fair Trading, 47
Microeconomics, 40 Off-line testing, 98
Middle line, 133 Offshoring, 20
Minimum level, 205 On the job training, 361
Mintzberg, 344 One level distribution, 250
Mintzberg's operating core, 133 Online testing, 98
Mixed economy, 25 Operating core, 133
Mixed plans, 197 Operations, 132, 137
Modifiers, 288 Operations management, 132
Monetary policy, 45 Operations strategy, 135
Monitoring and controlling, 194 Operator injury, 87
426 Index

Optimised production technology (OPT), 200 PESTEL factors, 221

Organisation impact analysis, 105 Peters, 325
Organisation strategy, structure and rivalry, 19 Phased changeover, 102
Organisational buying behaviour, 282 Philanthropic responsibilities, 57
Organisational buying process, 282 Physical evidence, 259
Organisations as buyers, 282 Physical resources, 18
Orientation, 217 Pilot operation, 101
Otley, 319 Place, 250, 286
Ouchi, 165 Plan-do-check-act (PDCA), 168
Outbound logistics, 137 Planned economy, 25
Outplacement consultants, 354 Planning, 66, 328
Output-focused structures, 325 Points-factor evaluation scheme, 318
Outsourcing, 20, 21 Political factors, 221
Overall assessment, 370 Political risk, 7
Overcapacity, 192 Porter, 17, 120, 122, 136
Ownership, 258 Porter and Millar, 119
Porter's diamond, 17
Pace, Manner and Scope, 108 Porter's five forces, 120
Panel interview, 348 Porter's potential strategies, 236
Parallel running, 101 Porter's value chain, 122
Pareto 80/20 rule, 203 Positioning-based strategies, 223
Pareto analysis, 169 Post-implementation review, 112
Partnership, 27 Potential product, 246
Part-time/Reduced hours, 327 Predatory pricing, 256
Passive resistance, 103 Premium pricing, 255
Past-sales analysis, 230 Prevention cost, 169
Pay differentials, 318 Price, 252, 286
Pay spine, 317 Price discrimination, 255
Pay structures, 317 Price elasticity, 253
Payment systems, 316 Price leader, 256
Pay-per-click advertising, 271 Price sensitivity, 253
Peck et al, 287 Price setting strategies, 254
Pedler, 361, 366 Pricing research, 253
People, 259 Prickett, 321
People- oriented theory, 110 Primary activities, 137
Perception, 281 Primary data, 227
Perception of service, 185 Privacy and Electronic Communications (EC
Perceptual mapping, 236 directives) Regulations 2003, 91
Perfective maintenance, 113 Privacy and security, 86
Performance measurement, 66 Private sector organisations, 26
Performance related pay, 319, 374 Problem solving interview, 348
Performance reviews, 111 Process design, 151
Periodic inventory systems, 203 Process mapping, 147
Periphery workers, 327 Process of human resources planning, 329
Perishability, 258 Process theory, 313
Perpetual inventory, 203 Processes, 259, 286
Person specifications, 345 Procurement, 137
Personal data, 89 Procurement costs, 204, 210
Personal development plan, 359
Producers, 85
Personal factors, 280
Product, 244, 286
Personality tests, 349 Product and service development, 132
Personnel management, 304
Product classification, 245
Personnel records, 68
Product development, 235, 248
 Index 427

Product levels, 246 Question mark, 248

Product life cycle, 249 Queues, 208
Product line promotion, 255 Queuing theory, 198
Product orientation, 219 Quinn and Hilmer, 21
Product positioning, 235
Product range, 246 Rate for age, 317
Production accounts, 43 RATER, 162
Production data, 68 Rational economic man, 314
Production orientation, 218 Reactions to proposed change, 103
Productivity plan, 331 Realistic job previews, 351
Profession/maturity curves, 317 Realistic tests, 98
Professional behaviour, 335 Reck and Long, 139
Professional competence and due care, 335 Recording transactions, 66
Proficiency tests, 349 Recruitment, 342
Profit seeking organisations, 27 Recruitment and selection, 342, 352
Profit-sharing schemes, 320 Recruitment plan, 331
Program testing, 97 Recruitment process, 343
Project based teams, 324 Redevelopment plan, 331
Project work, 362 Redundancy, 354
Promotion, 250 Redundancy plan, 331
Promotion mix, 264 References, 350
Regression testing, 114
Promotional strategy, 251
Regulation and Competition Policy, 47
Promotional tools, 250, 264
Protectionism, 13 Regulatory capture, 48
Prove to me model, 333 Related and supporting industries, 18
Psychological contract, 315 Relations with shareholders, 55
Psychological factors, 281 Relief-from-royalty, 262
Psychological tests, 349 Remote working, 327
Psychometric tests, 349 Remuneration, 54, 316
Public sector, 284 Remuneration committee, 54
Public sector organisations, 29 Reorder level, 205
Pull control, 194 Reorder quantity, 205
Pull marketing, 219 Reporting, 67
Purchasing, 138 Resistance to change, 108
Push control, 194 Resource-based strategies, 223
Push marketing, 219 Restrictive Practices Court, 47
Retention plan, 331
Q ualitative data, 227 Revision courses, 360
Quality, 160, 358 Reward scheme, 321
Quality assurance, 137, 160, 161 Reward system, 316, 373
Quality auditing, 162 Risk management, 10
Quality circles, 165, 171 Rodgers, Alec, 345
Quality connotations, 254 Role, 345
Quality control, 160 Role definitions, 345
Quality control procedures, 161 Role plays, 361
Quality costs, 166, 169 Ronen and Shenkar, 33
Quality culture, 167 Rugman and Hodgetts, 9
Quality management, 160, 162
Quality management, traditional approach, 170 Sales, 137
Quango, 29 Sales (income) forecast, 229
Quantitative data, 227 Sales force opinions, 229
Quantum pricing, 256 Sales orientation, 219
Query languages, 77 Sales potential, 230
428 Index

Sandwich courses, 360 South Asian Association for Regional Co-

Sarbanes-Oxley Act 2002, 55 operation (SAARC), 16
Satisfaction continuum, 183 Southern African Development Committee
Scheduling, 194 (SADC), 16
Schein, 314 Sponsored full-time course, 360
Scientific management, 308 Spot rates, 317
Search engines, 272 SQL, 77
Second tier emerging nations, 24 Staff shortage, 331
Secondary data, 227 Staff surplus, 331
Segment attractiveness, 232 Stages in human resources planning, 332
Segment validity, 231 Stakeholder theory, 50
Segmentation bases, 230 Stakeholders, 50
Segmentation benefits, 232 Star, 248
Segmenting the internal market, 288 Stocks and flows analysis, 330
Selection, 342, 347 Strategic analysis, 329
Selection criteria, 283 Strategic apex, 133
Selective pricing, 255 Strategic marketing, 216
Self development, 366 Strategic positioning tool, 139
Self-actualising man, 314 Stress interview, 348
Self-appraisals, 370 Structural capital, 69
Self-learning, 362 Structured Query Language, 77
Self-regulation, 48 Successful websites, 270
Semi-developed country (SDC), 11 Succession planning, 365, 366
Senior independent director, 54 Succession sequential interviews, 348
Sequencing, 193 Supply chain, 85
Service bureaux, 115 Supply chain links, 139
Service economy, 256 Supply chain management, 138, 139, 142
Supply chain network, 141
Service Level Agreement (SLA), 20, 116, 167,
Supply portfolios, 145
171
Support activities, 137
Service Level Contract (SLC), 116
Support staff, 133
Service marketing, 256
Service quality, 182 Survey of Buyers' intentions, 229
Service quality factors, 184 Suspension without pay, 353
Services, 256 Sustainability, 153
SERVQUAL, 162 SWOT analysis, 222
Shakeout, 249 System evaluation, 110
Shamrock organisation, 325 System implementation, 96
Shift working, 327 System maintenance, 113
Signatures, 88 System outsourcing, 114
Single markets, 15 System testing, 98
Six Sigma, 173 System-oriented theory, 110
Skills, 359 Systems development life cycle, 96
Skyrme (1997), 85 Systems integration, 117
SMART objectives, 224
Social factors, 280 Tactical marketing, 216
Social man, 314 Tactical plans, 331
Social marketing, 293, 296 Tandem interview, 348
Social responsibility, 293 Target markets, 233
Social Responsibility Policies and Reports, 334 Target pricing, 255
Social/cultural factors, 221 Task flexibility, 327
Sole trader, 27 Taxation, 44
Sourcing strategies, 145 Taylor, 308
Taylor, maximising prosperity, 309
 Index 429

Team meetings, 291 Trompenaars and Hamden Turner, 32

Technical quality, 182 Trust me model, 333
Techniques, 360 Two level distribution, 250
Technological factors, 222 Two-factor content theory, 311
Technology development, 137 Types of interview, 348
Technostructure, 133 Types of organisation, 26
Telemarketing, 267 Tyson and Fell, 305
Tele-working, 327
Temporary promotion, 362 U K Corporate Governance Code, 53
Testing, 97 Undercapacity, 192
Testing of candidates, 349 Unfair dismissal, 353
Testing system logic, 97 Unglued structures, 325
Theory X and Theory Y, 312 Unintended consequences of regulation, 48
Theory Z, 165 Unit integration testing, 98
Through-the-line, 250 Unit testing, 98
Time bomb, 87 Upstream, 139
Timeshare, 115 Upward appraisal, 370
User acceptance testing, 98
Timesheets, 68
User resistance, 105, 109
Torrington and Weightman, 103
Users, 283
Total productive maintenance (TPM), 178, 208
Total quality management, 164
Total reward scheme, 321
V acancies, 342
Validation of training, 363
TPS, 72
Value added schemes, 320
TQM, 165
Value chain, 136
TQMEX model, 180
Value for Money (VFM) audit, 163
Trade agreements, 15
Value system, 138
Trade deficit, 41
Variable pricing policy, 255
Trade surplus, 41
Viral marketing, 268, 269
Traditional marketing mix, 244 Virtual company, 85, 86
Traditional supply chain, 141 Virtual organisations, 84, 85, 325
Training, 99, 344, 355, 363 Virtual Supply Chain (VSC), 85, 86
Training and development needs, 357 Virtual teams, 84, 325
Training and development strategy, 355 Viruses, 87
Training and the employee, 356 Volume tests, 98
Training and the organisation, 356 Voluntary organisations, 27
Training manager, 359 Vroom, 313
Training needs analysis, 358
Training objectives, 359 W ard and Griffiths, 123
Training plan, 331 Web 2.0, 80
Transaction cost theory, 22 Web 2.0 applications, 80
Transaction costs, 22 Weber, 309
Transaction Processing System (TPS), 72 Website promotion, 271
Transformation process, 134 West African Economic and Monetary Union
Transformed customer, 183 (UEMOA), 16
Transformed resources, 134 Whitbread, 364
Transforming resources, 134 Wide Area Network (WAN), 79
Transition economy, 25 Williamson, 22
Transition from functional to general Wilson, Dr Ralph F, 269
management, 366 Working arrangements, 326
Transitional economies (TEs), 11 World Bank, 4, 6
Trap door, 87 World class manufacturing, 176, 177
Treshold competencies, 21 World Trade Organisation, 4, 5
Trojan horses, 87 Worms, 87
430 Index

Worthington and Britton, 28 Z eithaml, Parasuraman and Berry, 162

Zero level distribution, 250
Yield management, 197
Notes 417
Notes
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