Lala

BUSINESS STUDIES Topic One: Marketing 1. Nature & Role of Markets and Marketing Through marketing, a business is able to develop a product and the strategies that will encourage consumers to buy it. Marketing is based on two questions: ● What do customers want to buy now and in the future' ● What will make people buy one brand over another' a) The role of marketing in the firm and in society The role of marketing is to increase market share and therefore increase revenue and profit. Therefore, a business must focus on more than just selling a product. It must connect with its target market, to know and understand what its needs and wants are. Marketing involves bringing the customer and business together to bring about a sale. Three roles of marketing: ● to offer choice ● to increase the standard of living ● to provide employment Marketing offers choice by gathering information, promoting and advertising. Marketing increases the standard of living through increased competition which encourages better quality of products. Employment can be provided through the research and promotion stages. The main emphasis of marketing today is the customer-oriented approach. This means the business wants to satisfy customer needs rather than merely producing products. To achieve the financial goals and make a profit, a business needs to increase sales. A marketing plan helps in achieving business goals. b) Types of marketing A market is a group of individuals, organisations or both with who: ● need or want a product ● have the money to purchase a product ● are willing to spend their money to obtain the product ● are socially and legally authorised to purchase the product The production and sale of goods and services is not limited to consumers. Business buy goods from suppliers, and some businesses sell only to other businesses. There is a diverse range of markets based on certain characteristics. Types of markets: Industrial organisations that purchase products to use in the production of other products or in their daily operations. Intermediate consists of wholesalers and retailers who purchase finished products and resell them to make a profit. Consumer individuals or members of a household who plan to use or consume the products they buy. Mass the seller mass produces, mass distributes and mass promotes one product to all buyers. Niche created when the mass market is finely divided into smaller markets consisting of buyers who have specific needs or lifestyles. Resource consists of individuals or groups that are engaged in all forms or primary production ie. Mining, agriculture, fishing and forestry c) Marketing orientation. The production approach ● 1820s to 1920s ● Emphasis on producing goods ● Demand for goods is greater than supply The sales approach ● 1920s to 1960s ● Emphasis on selling goods ● Demand is less strong The marketing approach ● 1960s to present ● Emphasis on marketing products ● Establishing and maintaining customer relationships ● Identifying consumer needs ● Producing products for customers’ demands ● 1960s-1980s: All parts of business involved in meeting consumer needs and wants as well as business goals ● 1980’s - now: Increased social responsibility and demand for ecologically sustainable products d) The marketing concept This concept recognises that customer satisfaction must be at the core of all business activities. A business must develop and implement a marketing strategy that meets the needs and wants of the customers to be successful. Four principles: 1. customer oriented 2. supported by integrated marketing strategies 3. aimed at satisfying customers 4. integrated into the business plan so as to achieve the businesses goals There are two broad approaches to the marketing concept: customer orientation: occurs when a business bases its marketing decisions and practices on its customers’ wants relationship marketing: the developing of long term and cost effective relationships with individual customers e) Marketing planning process Marketing requires a lot of planning and strategic coordination before the product reaches consumers. The aim of the planning process is to achieve the marketing objectives and goals of the business. The marketing planning process has five parts to it that address the key questions: ● where' - is the business at now' (SWOT - strength, weakness, opportunities, threats) ● what' - outline the products and resources needed to get them to the market, and the marketing objectives to be achieved. ● who' - identify the target markets and their key characteristics. ● how' - sets out how the business will use the four P’s to create a successful marketing campaign. ● check' - are the objectives being achieved' Elements of the marketing plan: 1. Performing situational analysis, including SWOT and product life cycle analysis 2. Establishing market objectives 3. Identifying target market 4. Developing market strategies 5. Implementing, monitoring and controlling Situational analysis investigates the marketing opportunities and potential problems Marketing objectives is a statement of what is to be achieved through the marketing activities Target market is the market segment which a particular product is marketed to Marketing strategies are actions undertaken to achieve the businesses marketing objectives Marketing mix refers to the combination of the four elements of marketing (four P’s) that make up the marketing strategy Marketing management is the process of monitoring and modifying the marketing plan Marketing plans and strategies should continue to evolve over time to adapt to new technology and change, and to fulfil consumer wants and needs. 2. Elements of a Marketing Plan The marketing plan combines all the information gathered in the planning process. Every business should have a marketing plan but the form it takes will vary according to the size and nature of the business. A marketing plan will generally have 5 parts to it, reflecting the five steps required in its development, together with a preamble that gives an outline of the contents. The elements of a marketing plan are: 1. EXECUTIVE SUMMARY 2. SITUATIONAL ANALYSIS 3. ESTABLISHING MARKET OBJECTIVES 4. IDENTIFYING TARGET MARKET 5. DEVELOPING MARKETING STRATEGIES 6. IMPLEMENTATION, MONITORING, CONTROLLING. Executive summary provides a brief description of the issues facing the business, an overview of marketing goals and strategies, and a short summary of the plans and recommendations. May also be called a preamble. a) Situational Analysis Before planning the future, the business must analyse its current situation. This includes: ● Market analysis ● Competitor analysis ● Business analysis ● Product analysis This can be done using a range of tools: SWOT analysis covers business, competitor and market analysis. Product life cycle covers product analysis. Market analysis is the consideration of both the internal and external factors that directly affect the operations of a business. eg. economy and staff skills Competitor analysis is the investigation and assessment of marketing strategies of major competitors and how they affect the business SWOT analysis is the business analysis (strength, weakness, opportunities, threats) Product analysis is the product life cycle SWOT analysis Strengths/Weakness include: ● a general description of the business, location and core activity ● inputs including staff ● product characteristics - type, range, quality ● support services including administration, research and development ● financing of business - debt and equity ● quality of management ● overall view of how the business is functioning Opportunities/Threats include: ● market profile ● image of the business ● rate of technological change ● current government policy, the state of the economy ● current and expected government policy ● possibility of mergers and takeovers ● community and environmental concerns A SWOT analysis provides the information needed to complete the situational analysis and gives a clear indication of the businesses position compared to its competitors. Marketing strategies could change as a product passes through the product life cycle to adapt to changes in consumer tastes, fashion etc. b) Establishing marketing objectives. The marketing plan gets its objectives from the business plan, so the marketing objectives need to compliment the businesses objectives, reflect its overall culture and be more customer oriented. There are three broad, long term marketing goals that most businesses adopt: ● to increase market share which will lead to more sales, which will in turn lead to more profit ● expand the product range which will lead to a larger range of customers, which means more sales and profit ● expand the geographic range which will lead to more customers in more countries, high customer awareness, which means more sales and profits. The broad goals may change as a result of changes in the environment, so they need to be flexible and SMART in the short term. Specific: stated as clearly and precisely as possible Measurable: so that the business can see if its objectives are being met Achievable: within the resources and capabilities of the business Realistic: in terms of time frame, present technology and environmental conditions Timed: a time period must be set for the goal to be achieved in Marketing objectives need to be flexible and SMART in order to achieve an increase in sales and therefore profit. By following those simple guidelines, the business will benefit in the long run. c) Identifying the target market The total market is too big and fragmented to be a viable target for most businesses. A marketing plan must be used to identify a section of the total market for each of its products. Dividing the market into small sections is called market segmentation. Market segmentation occurs when the total market is subdivided into groups of people who share one or more common characteristic. It can occur on the basis of the user of the product - consumer or business, or on the basis of geography, demography, product of psychography. Consumer markets can be either mass, segmented or niche. The target market includes existing and potential customers. In many cases, the 80-20 rule applies. This is where 80% of sales comes from 20% of existing customers. Therefore, it is in the marketers best interest to increase the number of customers in the 20%. d) Developing marketing strategies Once the marketing objectives have been established, the business must develop appropriate marketing strategies - usually one for each market. This involves using a unique combination of the elements of the marketing mix (four P’s). The business uses these elements together with other resources like finance, staff and information to reach its target market. Product The products quality, design, name, warranty & guarantee, packaging, labelling and exclusive features need to be determined. Customers will buy products that not only satisfy needs but also provide them with a number of intangible benefits such as a feeling of security, prestige, satisfaction and influence. Price A price set too high could mean lost sales, unless superior customer service is offered. A price set too low may give customers the impression of a ‘cheap and nasty’ product. Promotion Details the methods to be used by a business to inform, persuade and remind customers about its products. Main forms include personal selling, advertising, promotions etc. Place Deals with the distribution of the good or service and consists of two parts: ● Transportation and storage of the finished product ● Deciding how many intermediate markets will be involved This will determine how widely the good or service will be distributed. e) Implementing the market plan Implementation is the process of putting the marketing strategies into operation. It involves the daily, weekly and monthly decisions which need to be made to make sure the plan is effective. The implementation stage involves how, where and when it has to be done. To implement the marketing plan effectively, a number of basic questions need to be answered: ● Is the plan fully integrated with all other sections of the business' ● How should the business be structured and organised' ● Have effective ties of communication between marketing departments and other departments been established' ● Who are the best people for various tasks' ● Are the marketing personnel motivated and focused' ● Are all employees familiar with the marketing objectives and marketing strategies' The implementation stage is as important as developing marketing objectives because it involves actually putting the plan into action. Monitoring means checking and observing the actual process of the marketing plan. It involves the marketing department gathering information and reporting any changes, problems or opportunities that arise during the life of the marketing plan. Controlling involves the comparison of planned performance against actual performance and taking corrective action to make sure the objectives are achieved. During controlling, the business should constantly ask two questions: 1. What does the business want the marketing plan to achieve' 2. Are those objectives being achieved' These questions should be asked at every stage while the marketing plan is developed. It involves two steps: 1. Establishing forecast performance standards 2. Comparing actual with forecast performance 3. Market Research Process Market research is the process of determining, gathering and analysing information. It allows a business to: ● Gather information relevant to its needs and those of its clients ● Make informed and intelligent decisions. There are three steps in the market research process: 1. Determining information needs: the problem is clearly and accurately stated to determine what needs to be measured and the issues involved. This is a crucial step. 2. Collecting data from primary and secondary sources: Researchers now know the facts that are needed and those that are already available. Plans must be made to gather missing data. Information may be collected by mail, telephone and personal surveys, as well as personal observation or from private data sources. 3. Analysing and interpreting data: Facts, by themselves, do not always provide a solution to the marketing problem. They need to be analysed and interpreted to determine what they mean. a) Determining information needs With technology, we have access to more information than we need or can possibly use, so a market research program needs to determine what information is really needed. The first step in the process is to define the problem. eg. WHY are sales increasing' The second step is to identify the types of information needed to solve the problem. Information is useful if it: ● results in marketing strategies that meet the needs of the business ● assists the business to achieve its marketing objectives ● may be used to increase sales and profits Markets should treat information in the same way as other resources within the business. Information collected must be relevant to the problem being investigated. Ultimately, relevant information will assist the business in achieving its marking objectives. b) Data collection There are two types of data that organisations may gather - primary and secondary. Primary data is information collected for the specific purpose for which it will be used. This is done through surveys, observations, experiments etc. Secondary data is information already gathered by others for another purpose. The difference between internal and external secondary data is that internal data has already been collected from internal sources, and external data is published data from outside the business. A business seeks secondary data before primary research because it is the least expensive form of data to obtain. c) Data analysis and interpretation The purpose of analysis and interpretation of data is to draw conclusions and display the data using graphs etc. The analysis and interpretation of data allows the researcher to offer specific recommendations to overcome the marketing problem being addressed. 4. Customer and Buyer Behaviour a) Types of customers A successful business is one that can incorporate the needs of the consumer into the marketing plan. A business must try to develop products that not only suit its target market(s) but is seen by these markets as a valued product that enhances quality of life. Not all businesses sell to consumers. Most businesses provide products that are used by other businesses. An understanding of why and how customers behave is needed so a business can satisfy their needs. Four broad groups of customers exist, each with different behaviours: 1. Individual and household personal customers: People, families. Personal spending refers to consumer purchases by individuals. Household spending      refers to the combined purchases of individuals living together. Despite their fickle buying      patterns, children interest marketers because of their surprising purchasing power and      the influence they exert over many household purchase decisions. 2. Organisational customers: Firms. The firms market consists of all those businesses that purchase goods and services for      further processing or for use in their production process. 3. Institutional customers: religious organisations, clubs and societies, educational establishment. Institutional customers consist of schools, hospitals, clubs, churches and other nonprofit     organisations. 4. Government customers: Federal, state, local. Governments spend many billions of dollars each year for a wide variety of goods and      services. Governments make many purchases through a process called tendering,      where firms quote to supply a good or service. The lowest bid which meets      specifications is usually accepted. b) The buying process A buyer is the individual or group that purchases the product, whereas a user is the individual or group that actually uses the product being purchased. Each time a buyer goes to purchase a product, they progress through the buying process. The five steps of this process are: 1. Recognise problem. ● Need or want requiring satisfaction 2. Search for information. ● Brand names ● Product characteristics ● Warranty ● Service ● Price 3. Evaluate alternatives. ● Various alternatives discovered ● Cost and benefit analysis 4. Purchase. ● Particular choice made ● Product bought 5. Evaluate after purchase. ● Weighing up suitability of product ● Satisfaction gained ● Dissatisfaction may occur c) Factors influencing consumer choice Marketing is about satisfying the needs of consumers. To do this, we must first understand what drives consumer choice. ie. What determines their needs. Understanding these factors will not only allow marketers to design products according to consumer needs, but also to exploit these factors when convincing customers they should buy their businesses product over another. The main influences on a consumer choice will come from sociocultural, psychological, economic and government sources. 5. Developing Marketing Strategies a) Market segmentation Most products are aimed at a segment of the market. There are a number of ways to segment the market. These include: ● Customer/Business or organisation ● Demographic/Geographic/Lifestyle/Behavioural ● Primary/Secondary There are three ways to approach marketing: ● Mass ● Concentrated ● Niche Household individuals living together Demographic population study Geographic eg. region, urban, suburban, rural, city, size, climate, landforms etc. Lifestyle eg. personality, motives, socioeconomic group, consumer opinion/interest etc. Behavioural eg. purchase occasion, benefits sought, loyalty, average rate, price etc. Mass large range of customers Concentrated direct marketing mix towards one selected segment of the total market Niche buyers who have specific needs. Primary markets are the market segment at which most of the marketing resources are directed, while a secondary market is smaller and a less important market sector. Product differentiation refers to how a business develops and provides the differences of its products to those of its competitors. Differences may be based on price, quality, slogan etc. The business has four marketing strategies available to it that it can control. Each of these can be manipulated to arrive at the best strategy for each market. These are PRICE, PRODUCT, PROMOTION AND PLACE. b) Product and Service Goods are physical objects and therefore tangible. Services and ideas cannot be touched, and are therefore intangible. Buying a product means you buy the tangible and intangible benefits of the product. There are three main product considerations: ● Positioning ● Branding ● Packaging Positioning This refers to the image that a product has in the mind of the customer. Position may be based on prestige, reliability or being environmentally friendly. Marketers will use the attributes of the target market to create the desire for a product in the customers mind. Perceptual maps may be used based on image. Positioning is important because the business is trying to create an image for their product that customers will buy. Positioning can be useful for a business that has no competitors as it could increase the price due to prestige etc. Marketers decide on the image first, then create and maintain it. Strategies will manipulate product attributes like benefits, usage or quality. Branding This refers to the reputation a business or product has developed over time, usually through name, symbol or slogan and protected by a trademark. To be successful, a brand must attract attention, be memorable, be easily distinguishable from competitors and help communicate the position of the product. Brands linked to quality encourage brand loyalty. Packaging This refers to the first point of contact with the customer, and is therefore the last opportunity to influence the buyer. Packaging has both functional and promotional roles. Producers must consider the costs as well as environmental impacts. For services, packaging includes attitudes of staff, their knowledge of their products and willingness to help the customer. The functions of packaging are the development of a container and the graphic design for a product. Well designed packaging will give a positive impression of the product and encourage first time customers. c) Price Price is the cost in dollars to the consumer of buying a product. There are three methods to determine price: ● Cost: Simplest method. The business determines the total cost of production and then adds the amount for profit. This extra margin is referred to as the mark up. ● Market: Instead of using costs to determine price, businesses sometimes set prices according to the level of supply and demand. When demand is high, prices are high. When demand is low, prices drop. eg. Agricultural. ● Competition: Often used when there is a high degree of competition from businesses producing similar products. A business can choose a price that is either below, equal or above that of competitors. There are four strategies for determining price: ● Skimming ● Penetration ● Loss leaders ● Price points There is a link between price and quality. People often use price as a measure of the products overall quality. People who see price as an indicator of quality also see high prices as an indication of prestige. The price set must be consistent with its positioning and overall marketing strategy. Anchoring is a reference point against which all other items in a shop look relatively affordable. d) Promotion The aspect of marketing that we are most familiar with. Range of methods used to inform the market of who the business is, the strengths of products and where they can be bought. There are four elements of the proportion mix: ● Personal selling: involves the activities of a sales representative directed to a customer in an attempt to make a sale. Major advantage is the message to product can be altered to suit each individual customer. Disadvantages are most expensive form of advertising, extensive time and resources needed. ● Advertising: paid, non-personal message. Communicated through a mass medium. Advantages are that it attracts a large mass; aims to persuade, inform and remind; remains constant. Disadvantages involve may not appeal to everyone; costs. Below-the-line promotions: are promotional activities for which the business doesn’t use an agency. Eg. Exhibitions, point of sale material, demonstrations etc. Advantages include the benefit of fitting in with what the customer wants; low cost; pamphlets. Disadvantages include companies getting a bad name from excessive telemarketing calls. Public relations: are those activities aimed at creating and motivating favourable relations between loss and its customers. Advantages are it’s free. Disadvantages are the media can be untrustworthy. ● ● Communication Process The aim of any promotion is to effectively communicate with the target market. It is hard for promoters to break through the thousands of messages we receive each day. The basic communication process is: Sender → Encode Message → Channel → Decode Message → Response. Two reliable channels of communication are: ● An opinion leader who is a person who influences others. The peoples’ opinions are respected, and they are often sought out for advice. ● Word of mouth which occurs when people influence each other during conversations. These help the communication process when customers place trust in the person selling the product. e) Place/Distribution Refers to the locations customers can buy the product and how it gets there. The process begins with the producer and ends with the consumer. Intermediaries (middle men) are used to facilitate the process. There are four main channels of distribution: ● Producer to customer: Simplest channel and involves no intermediaries. Virtually all services, from tax advice to car repairs use this method. ● Producer to retailer to customer: A retailer is an intermediary who buys from producers and resells to customers. Often used for bulky/perishable products. ● Producer to wholesaler to retailer to customer: Most common method for distribution of goods. Wholesalers buy in bulk from producer then resell smaller quantities to retailers. ● Producer to agent to wholesaler to retailer to customer: An agent distributes products to wholesalers but never owns the product. Agents are paid a commission by the producer, Agents used for inexpensive, frequently used products. Channel Choice Choice of channel influences the type of customer attracted to, the perception of, and the accessibility of the product. There are three channel choices: ● Intensive distribution ● ● Selective Distribution Exclusive distribution Physical Distribution The movement of goods from the producer to the consumer. If one function does not operate properly, the distribution channel may collapse. There are three factors in a distribution channel: ● Transport ● Warehousing ● Inventory Intensive distribution occurs when the business wishes to saturate the market with its product. Customers can stop at local outlets and be able to purchase the product. Many convenience store goods, such as milk, lollies and newspapers are distributed this way. Selection distribution involves using only a moderate proportion of all possible outlets. Clothing, furniture and electrical appliances are often distributed using this method. The customer is prepared to travel and seek out a specific retail outlet that stocks a certain brand. Exclusive distribution is the use of only one retail outlet for a product in a large geographical area. This method of distribution is commonly used for exclusive, expensive products. Environmental Effects on Distribution ● Appropriate distribution channels are important to business success. ● External factors in the business environment can also affect distribution. ● The main external factors are technology and local government. Non store retailing is retailing activity conducted away from traditional. American research suggests that business owners have a legal obligation to observe the statutory regulations when setting up and operating a business. Commencing a trade before approval is obtained could result in the closure of the business. 6. Ethical and Legal Aspects Most people now believe that to be successful a business needs to look beyond the bottom line and accept its ethical and legal responsibilities. Ethics are personal moral principles and values. Laws are society’s values and standards which may be protected by the court. The main issues are: ● Marketing and determining what is legal and what is ethical can be difficult as what people may see as ethical, another person may see as unethical so it is difficult to judge this. a) Environmentally Responsible Products People are becoming more concerned with the quality of life issues including damage to the natural environment caused by industrial activity. Natural resources are being consumed unsustainably and production and consumption of goods are creating huge problems of air pollution and waste disposal. Businesses are being forced to change either by consumer demands or government regulations. Green marketing refers to development, pricing, promotion and distribution of products that either do not harm or have minimal impact on the environment. b) Other Issues There are a number of other ethical and legal issues facing marketers. IMPACTS OF RETAIL DEVELOPMENT Retailing will further evolve with developments such as: ● ● ● ● ● Linking of direct marketing to electronic databases Introduction of automatic checkout scanning systems that do not require as operations Provision of internet ordering systems Use of in-store television presentation Transformation of shopping malls into entertainment centres Sugging, or selling under the guise of a survey, is a sales technique disguised as market research. This is an issue as it raises the issue of invasion of privacy and deception. One criticism of marketing is that it results in higher costs for consumers as a result of all the marketing strategies used to sell the product. These costs must be recouped. For some products these costs are estimated at 40% of the price. However, it is well known that people will pay a high price if they think they are getting quality, or for the brand, image, or other intangible features. Promotion helps position the product in the mind of the customer. c) Role of the Consumer Laws The main consumer law in Australia is the Trade Practices Act of 1974. NSW also has the Fair Trading Act 1987. These laws are designed to protect consumers from the unethical business practices and restrictive trade practices (anti-competition). They are constantly being changed to cope with changes in the commercial environment and the ever evolving tricks used by unethical business to cheat customers. These laws deal with a number of issues. There are five issues: Deceptive and misleading advertising False or misleading advertising can be the most serious because of the influential nature of advertising. The most common are fine print, before and after advertising, tests and surveys, superlatives, non-disclosure, country of origin, packaging, special offers, and bait and switch advertising. Price Discrimination The setting of different prices for a product in separate markets. This is possible because the markets are geographically separated; there is product differentiation within one market; and separate discounts and allowances are being offered. Implied Conditions The unspoken and unwritten terms of a contract. Merchantable quality means the product is of a standard a reasonable person would expect for the price. Fitness of purpose means that the product is suitable for the purpose for which it is being sold. That is, it will perform as the instructions or advertisement implies. Warranties All businesses have certain obligations that are designed to offer a degree of protection to the customer if the product is faulty or if the service is not carried out with due care and skill. False or misleading statements concerning the existence, exclusion or certain conditions of the warranty are prohibited under the Trade Practices Act. Resale Price Maintenance Occurs when manufacturer or supplier insists that a retailer sell the product at a certain price. This is a breach as retailers have to right to set its own prices and offer discounts. Manufacturers can, however, recommend a price (R.R.P) Topic Two: Business Management & Change 1. The Nature of Management a) The Importance of Effective Management Management is the process of coordinating a range of financial, human, physical and information resources to achieve the goals of a business. Good management is vital to the success of the business. Businesses rely on managers to coordinate the efforts of employers and to allocate resources. This is done through POLC. Planning: Strategic, tactical, operational plans, goals and resource allocation Organising: Organisational structure and set of procedures to implement plans Leading: Motivating employees Controlling: Monitoring, evaluating and adjusting plans and procedures In small businesses, managers tend to be owners, but in large businesses managers are separate from owners and are accountable for their actions. It is important that managers are ones that achieve set goals. Efficient managers are ones that use the least amount of resources to complete the job. Effective management → ↑ Efficiency →↓ Costs of production; which is necessary to remain competitive in an international market. For most businesses, it is possible to classify managers in a hierarchy. Top level managers control the direction the business takes to achieve its goals. For a public company, the quality of management is reflected in the movement of the share price. The term management hierarchy refers to the arrangement that provides increasing authority at high levels of management. Proactive management refers to a management style that incorporates dynamic action and forward planning to achieve particular objectives. This is important as it means they are flexible to adopt to the changes in the environment around them; they create changes. b) Management Roles In 1973, a prominent management research, Henry Mintzberg, developed a scheme to describe WHAT managers do. He divided the roles of management into three groups: ● The interpersonal role, which refers to the relationship with people, both inside and outside the business, and is based on effective communication skills. ROLE: Figurehead, Leader, Liaison ● The informational role, which involves receiving, collating and analysing information and disseminating it to appropriate people. Information is the life blood to any business. ROLE: Monitor, Disseminator, Spokesperson ● The decisional role involves making choices between alternatives to achieve a specific outcome for the business. ROLE: Entrepreneur, Disturbance Handler, Resource Allocator, Negotiator The emphasis placed on different roles changes with levels of management as well as the type and size of the business. c) Skills of Management In the early 1970’s, researcher Robert Katz classified all the skills required of management into three core areas: technical, interpersonal and conceptual. Degree of importance: Conceptual Skills High Medium Low Top Management Middle Management Supervisory Management Interpersonal Skills Technical Skills Since the 1970s, the management skills are needed as the nature and structure of business and the workplace have changed. There has been a move away from authorisation styles to be more people-oriented styles of management. Today managers need to be approachable, flexible, ethical and be adaptive to change. People skills are extremely important because managers get their work done through other people. Strategic thinking allows a manager to see the business as a whole as a complex of parts that depend on and interact with each other. Vision is important as it is the clear, shared sense of direction which allows people to attain a common goal. Flexibility and adaptability to change is important as how managers perceive and react these changes will have dramatic consequences for their businesses. Self-managing involves adapting techniques that allow people to manage their own behaviour so that less outside control is necessary. Ethical and high personal standards are consistent with societies standards about what is morally acceptable and conforms to society’s judgement about what constitutes right and wrong actions. Teamed/group dynamics is the interactions of individuals within team/groups. Problem solving is a broad set of actions involved in searching for identifying and then implementing a course of action to correct an unworkable situation. Decision making is the process of identifying the options available and then choosing a specific course of action to solve a specific problem. Decision making is a fundamental part of management because it requires choosing an alternative course of action. d) Responsibility to Stakeholders Management has responsibility to both internal and external stakeholders. Included in the internal stakeholders are managers, employees and owners. Owners want a fair a reasonable return on their investment. Employees want a safe and healthy working environment, appropriate wages, challenging work and EEO. The external stakeholders include customers, suppliers, competitors, government, physical environment and society. Responsibilities to these groups include complying with laws, code of practice, using environmentally friendly systems and being ethical. Responsibilities of management to stakeholders in business: ● Manage change: The ability to manage and adapt change will increasingly determine a company’s competitive advantage. ● Social justice: Important because society increasingly expects businesses to use their resources and market power responsibility, and to contribute toward the achievement of social justice goals. ● Ecological sustainability: Important because development needs to regard the ability of future generations. ● Compliance with law: Important as society expects businesses to abide by the laws ● of our country. Codes of practice: Important because it encourages good behaviour at all levels of organisation. Benchmarking compares the strengths and weaknesses of an organisation against those of other businesses, with the aim of reforming those processes that are not achieving the organisations objectives. Benchmarking can be: ● Internal: between operations within a business ● External: between enterprises producing the same product or between organisations that produce different products but share similar processes. Benchmarking is a method of copying and comparing the best practice processes, services and products from other businesses in Australia or overseas. World best practice is comparing your business with the best in the world, so copying it will lead to improvements. Division of labour is where workers are given a single task to do and by repeating it they become good at it, or efficient. The four main features of the autocratic style are: ● Strong, centralised control with a single source of authority. ● Expects subordinates to follow orders. ● One way communication from the top down. ● External motivation through sanctions and rewards. The organising function is important as it is where the performance of the business is compared with its objectives. An organisational chart displays an organisations chain of command using arrows and lines to link managers and employees. An organisational chart can help to become oriented by showing how the place is organised and shows your place in the organisation. b) Behavioural This theory developed in the 1930’s after studies showed that people had social as well as economic needs, and that being a part of a team resulted in job satisfaction and productivity. The theory focuses on people, both as individuals and working in groups, rather than just the task. The worker is viewed as a social person whose behaviour is affected by their social context and their interpersonal relationships. Key features of this theory are: ● Managers lead, motivate and communicate ● A flat organisational structure ● A participative democratic leadership style The behaviour theorists put emphasis on the management function concerned with leading, motivating and communicating with employees. They believed that leading is as important as planning, organising and controlling. Leadership is an important managerial skill in coping with change. By motivating workers though effective communication, resistance to change can be overcome. i) Management Leading is having a vision of where the business should be in the long and short term and being able to direct and motivate the human resources in an organisation to achieve its objectives. A good leader is someone who: ● Sets an example and earns the respect of employees ● Listens to the opinions and ideas of others ● Understands the technical aspects of the industry or business ● ● ● ● Conveys the goals of the business to workers and motivates them to achieve their needs Avoids ‘jargon’ when talking to employees and has an understanding of their needs Demonstrates flexibility in dealing with situations and allows employees to take on responsibility when appropriate Delegates tasks to suitable employees Motivation is the individual, internal process that energises, directs and sustains an individual’s behaviour. It is the personal force that causes a person to behave in a particular way. Communication is the exchange of information between people – the sending and receiving of messages. Effective communication is crucial within a business as it encompasses every management function and role. Without effective communication, the most carefully detailed plans and strategies will most likely fail. Telling employees what they need to know will motivate them. ii) Organisational Structure In the behavioural theory organisation is done using a flat structure and teams. A flat structure has less management to a hierarchal structure, and people and functions mix together to create more flexible and responsible companies. Firms have adopted flatter structures to reduce the number of management, giving greater responsibility to individuals in the organisation. The use of teams is increasing because a team approach can be a catalyst to a superior approach. iii) Leadership Style Leading is done using a participative or democratic style. Delegation is the handing over of certain tasks or responsibilities to an employee who is suitably capable and qualified to carry them out. Behavioural management is when workers were more thought of as people rather than just uneducated people. c) Political Theory Political theory recognises that not all people will agree and groups or coalitions with differing views may evolve with the view of the more powerful group tending to dominate. Power and Influence Managerial power is shared in a business and managers must consider the political consequences of their decisions. The concept of power is different to authority. A manager may have authority, or the right to do something, but little decision-making power. This theory is more of a management style than a theory. It sets out what managers actually do rather than what they should do. Key features of this approach are: ● Managers may disagree over goals and form coalitions to promote their point of view. ● An emphasis on power and where it comes from and is used. ● Self-interest of managers may conflict with the interests of the business. i) Uses of Power and Influence Power is the potential to influence the thinking and/or the behaviour of others. It comes from a variety of sources. Managers must negotiate to get a solution that meets the needs of the business and satisfies most workers. To do this they need to bargain so workers feel they have influenced the outcome – give and take. The effect of the correct use of power can enable managers to achieve for themselves and for others, individual success as well as the businesses goals. However, when power is used incorrectly, the businesses goals will never be achieved. Legitimate power: given because of the status or position of the person within the firm. Managers will normally have a certain amount of formal or legitimate authority. Expert power: emerges as a result of a person’s skills and expertise, and is usually the reason for which the person was employed. Referent power: comes from people’s individual characteristics – their personality or charisma and inspiration or influence on others. Reward power: relates to the rewards or compensation a manager distributes for doing a good job. Coercive power: controls individuals in the organisation by the actions or words of the manager. Eg. A coercive manager might threaten to fire an employee if deadlines are not met. The win win method reflects successful negotiating/bargaining because no matter what the manager will gain something. ii) Structure as Coalitions Managers have to create a coalition out of competing interest groups to achieve common goals of the business and also try to meet the goals of each coalition member. A coalition is two or more people who combine their power to push or gain support for their ideas if they cannot achieve this objective individually, with form conditions. iii) Stakeholder View Various views of stakeholders have to be reconciled if the business is to achieve its goals. Managers need to consider the views of stakeholders when implementing change. The views of stakeholders are dealt with under the political theory might be highly considered in the business one day and not for the next. Stakeholder views: ● Suppliers focus on a continuing relationship with the business ● Shareholders focus on wealth maximisation (dividends and share price increase) ● Managers focus on profitability, efficiency and reconciling conflict ● Employees focus on remuneration, job security and OH&S ● Community focuses on contribution to community quality of life, unemployment and pollution. d) Strengths and Weaknesses of Theories The classical theory established management as a field of study and was successful in increasing productivity, but it did have negative social side effects. The behavioural approach focussed on group dynamics and showed the importance of interpersonal skills in management, however there are weaknesses in this approach. The political approach shows how management decision making actually occurs. However it offers little practical advice to managers. No one management theory provides all the answers and a range of strategies may be used. In reality, managers don’t use just one theory, but instead a little of all. e) Systems of Contingency Theories Two recent approaches aim to integrate the findings of the various schools of thought about management, selecting appropriate elements from each. The ‘systems approach’ focuses on the interdependence in a business, both of the internal activities within a business and between the business and its outside environment. The ‘contingency approach’ focuses on the need for adaptability in management. What works in one situation may not work in another. SYSTEM MANAGEMENT THEORIES ARE MADE UP OF: Inputs: the various human, financial, material, equipment and informational resources needed to produce the product. Transformational processes: the managerial and technological processes of the organisation which convert inputs into finished products. Outputs: the products, as well as other outcomes (such as profit, employment and waste) produced by the organisation. Feedback: information about how well the organisation has performed in relation to its stated goals. CHARACTERISTICS OF SYSTEMS APPROACH: ● Commitment to a shared purpose and direction, supported by common values ● Empathy and sensitivity toward the needs of all members within a group ● Cooperative interaction between all groups within the organisation CONTINGENCY THEORY stresses the need for flexibility and the adaptation of management practices and ideas to suit changing circumstances. Contingency theorists point out to managers that no two situations are absolutely identical, meaning each situation needs its own solution. Advocates of contingency theory believe that managers need to be adaptable, approachable and flexible when solving problems. 3. Managing Change a) Nature and Sources of Change Until the 1970’s, businesses operated in a relatively stable environment. Change was slow and infrequent. Now, they operate in a constantly changing environment and must adapt quickly in order to remain competitive. Change comes from both external and internal sources and may require structural change to the business for it to survive. i) External Influences Most of the changes businesses come across originated outside the business – they are external. Changing nature of markets ● The change in a business is rapid, and thus businesses must adapt quickly ● This has occurred due to globalisation (processes whereby hi-tech communications become more integrated) ● Businesses are now competing worldwide and have had to change operations. This has involved downsizing Economic development ● Fluctuations in the levels of economic activity occur in all market economies ● Fluctuations result in a typical pattern of peaks, troughs, recession and recovery ● The government can effect these by microeconomic and macroeconomic reforms Financial influences ● Deregulation of Australia’s financial system has resulted in a more flexible, market oriented approach across the financial sector ● Due to globalisation of the world’s financial markets it is no longer necessary for many large Australian businesses to use only domestic financial institutions for the raising of finance ● Developments in communications technology has enabled the phenomenon of global financial transactions by changing their nature and speed Geographic influences ● Changing demographic factors: Population size, age, sex, income, cultural background, family size, location near Asia means closer to markets Social influences ● Rapid identification in response to changes in tastes, fashions, and culture which can lead to sales and profit opportunities and business growth. ● Failure to respond to social changes can threaten business stability and liability. ● There are social changes that lead to significant change or have the potential to influence major change in business factors. The major concern is the growing awareness of our vulnerable environment. Businesses need to cater for this. Legal influences ● Process of deregulation in Australia that have led to significant change in the legal framework in which businesses must operate ● Changes in legislation regarding environment and consumer protection, OH&S, industrial relations and trade practices reform will have a major increasing impact on the business conduct Political influences ● Political influences and State and Federal Government policies that majorly impact the business environment. Political changes can lead to business uncertainty or business confidence. ● An example of a major political policy is GST ● It is the responsibility of the business to pay the ATO the amount of GST collected from the customer ● GST requires all registered businesses to prepare a set of accounts at regular intervals, either monthly or quarterly. Technological developments ● With appropriate technology, businesses can increase efficiency and productivity. ● New communication technologies allow information to be rapidly transmitted and ever increasing the number of customers ● Technological developments have lowered the cost of operating due to the fact higher technology has been introduced to the business and some workers have lost their jobs ii) Internal Influences Changes in the way the business operates can also come from within the business and are largely driven by the desire to improve efficiency and productivity. Internal sources of change are mainly associated with accelerating technology such as e-commerce, implementing new systems and procedures and developing a new business culture. The new technologies available to business include email, voicemail, the internet, video conferencing, mobile internet capabilities, pagers etc. iii) Structural Responses to Change The structure of a business is the way is it organised and the systems it uses to organise its labour departments, chains of command and spans of control. Today businesses need to be structured so that they can be flexible and responsive to change. Three common structural responses to change are: ● Outsourcing of various functions ● Adoption of a flatter organisational structure ● The development of strategic alliance and networks b) Reasons For Resistance to Change Although change is an inevitable and necessary feature of the contemporary business environment, it is often resisted, generally based on fear of the unknown, concern over personal loss, and the belief that change is not in the best interests of the business. These findings can be seen on the four main areas of resistance: financial costs, inertia, cultural incompatibility and staffing. i) Financial Costs A major reason to resist change is the financial cost of carrying it out. The costs and benefits of each change need to be evaluated. The four costs are: ● Purchasing new equipment ● Redundancy payments ● Retraining the workforce ● Reorganising plant layout ii) Inertia of management Inertia refers to the unenthusiastic response to changes from management (resist). It occurs because many people may dislike moving away from ‘comfort zones’. iii) Mergers and Takeovers Mergers and takeovers can create a resistance to change by making everything equal and setting guidelines etc. iv) Staffing The three staffing considerations that need to be taken into account by managers are: ● Deskilling: occurs when employees are no longer required to perform skilled tasks due to changes in work methods. Some people feel useless and not needed, and find their jobs boring. ● Acquiring new skills: new skills means rethinking and/or learning to think again and is often hard work. Workers may doubt their capabilities and become tired. ● Loss of career prospects or opportunities for promotion: employees that see new procedures as threats will resist them. c) Managing Change Effectively The need for change can occur at any level of a business, but the more levels involved in the changes, the more complex the task of managing it becomes. The ability to manage and adapt to change will increasingly determine the competitive advantage of a business. Research shows that no matter where the change began, the environment create by the managers can greatly affect employee acceptance. i) Identifying the Need for Change There are four key qualities that managers need in order to identify the need for change. These are: ● Anticipation ● Intuition ● Imagination ● Experience A business can identify the need for change by identifying current trends and predicting future changes. Using a SWOT analysis may assist with this. ii) Setting Achievable Goals Managers can set achievable goals by making sure they are attainable and realistic. iii) Creating Culture of Text A business with a culture of change accepts change as a continual state and is constantly looking for ways to improve effectiveness and efficiency. As business culture covers a range of ideas, it is hard to change and a coordinated approach is needed to address every factor or resistance. Often a change agent is used to help with this. Change agents are creative, lateral thinking people who anticipate the need for change, and have the analytical skills to create and implement change. They may be brought in from outside the business (outsourcing). Businesses have to create a culture of change to survive the increasingly turbulent and competitive environment. They can do this by creating learning organisations. iv) Change Models These explain how change occurs in an organisation and how it can be promoted. Two useful models developed by Kurt Lewin in the 1940’s help managers overcome resistance to change. FORCE FIELD ANALYSIS The key to force field analysis is finding a way to upset the equilibrium either by strengthening the driving forces, or by weakening the restricting forces or both. Driving forces are those forces which initiate, foster, encourage and support the change. Restraining forces are those which work against the change, creating resistance. Unfreeze/Change/Refreeze ● Unfreeze: Prepare business for change ● Change: Make the change of new procedures, behaviours and values ● Refreeze: Formalise the change with rewards, support systems and resources Although Lewin stressed that this was a continuous process, this method is no longer accepted as appropriate to describe the process of change in a business. Today, the rate of change in a business is too rapid, and businesses are rarely in a stable ‘ice’ state. Therefore, the force field analysis model mat be a more accurate way to describe and understand the change process. 4. Change and Social Responsibility Social responsibility refers to obligations a business has to pursue long term goals that are good for society. These are beyond those required by law or the pursuit of profit. Businesses operate in, and are part of society, so they should be good corporate citizens. This is reflected in a businesses attention to the triple bottom line (economic, environmental and social performance). a) Ecological Sustainability Economic development must be accomplished sustainably without compromising the ability of future generations to meet their needs. ESD is a major concern of policy makers forcing managers to consider the environmental effects of their activities, like resource use, control and disposal of waste. Consumers are demanding environmentally responsible products and may boycott dangerous or harmful products. More businesses are responding by changing operational practices. An increasing number of government regulations forces business to decrease and clean up their impacts. b) Quality of Working Life The changing composition of the workforce and the need for increased business flexibility and productivity have meant that quality of working life issues must be taken into account when changes are introduced. The factors that can improve them include: ● Programs to enhance employee dignity ● Improvements to the physical and emotional well being of employees ● Efforts to enhance job satisfaction ● Safe and healthy working conditions ● Opportunities to use and develop talents and skills ● ● The right to personal privacy, free speech and equitable treatment Family-friendly working arrangements c) Technology Technology affects the design of work. As the use of technology increases, people experience more dramatic changes. Where once the office was a place for social interaction, many employees now work from home, their cars or at an isolated work station and may experience a sense of isolation. This may also cause redundancy. d) Globalisation and Managing Cultural Diversity Globalisation has brought a change in the cultural diversity of workplaces. With the pressure to globalise, organisations are having to find new approaches to staffing. Fostering cultural diversity should be given a high priority because it bring many benefits, including: ● Social responsibility ● New markets may be more easily penetrated ● Customers needs served ● Creativity, flexibility and responsiveness e) E-Commerce As previously outlined. Topic Three: Financial Planning & Management 1. The Role of Financial Planning Effective financial control is a key factor in the success of a business. It ensures a business has the necessary resources to achieve its goals and objectives. Financial managers need to consider resources and types of finances as well as their appropriate uses. Forward planning allows a business to avoid situations of insufficient funds, for both short and long term projects. A number of tools are available to determine whether goals are being met. Each organisation has a series of goals and objectives that determine measurable outcomes. Long term goals: General. Short term goals: Specific and more detailed. Short term objectives: SMART (Specific Measureable Achievable Realistic Time) a) Strategic Role of Financial Management The role of financial managers is to manage the funds of the business. They do this by setting goals and objectives, developing strategic plans and managing financial resources. Objectives are things you must achieve, while goals are what you want to achieve. Strategic plans encompass a long-term view of where the organisation is going, how it will get there and a monitoring process to keep track of progress along the way. Financial resources need to be managed as it is crucial if a business is to achieve its financial goals. The mismanagement of an organisations financial resources can lead to a number of problems, such as insufficient cash to pay suppliers. Good financial management involves monitoring cash flows, paying its debts and continuing to make profits for its owners and shareholders. b) Objectives of Financial Management The responsibility of financial management is to make decisions about the best way to achieve the objectives of financial management. There are 5 main objectives: Liquidity: it is the ability of an organisation to pay its debts as they fall due. Profitability: is the ability of an organisation to maximise profits. Efficiency: is the ability of an organisation to maximise its costs and manage its assets so that maximum profit is achieved with the lowest possible level of assets. Growth: is the ability of the organisation to increase its size in the long term. Return on capital: is the amount of profit returned to owners or shareholders as a percentage of their capital contribution. It is achieved by making a profit. c) The Planning Cycle The planning cycle is the steps the manager goes through to write a financial plan. The long term financial goals of the business that focus on financing, inventing and dividends are the starting point. From here, short term objectives can be set and the planning process put into place to achieve them. There are 8 steps involved that fall into 4 broad categories: Goal → Strategy → Monitoring → Control (See book for 8 steps) NOTE: Strategic plans are generally done over a 3-5 year span. 2. Financial Markets Relevant to Business Financial Needs Financial markets are where financial assets are created and traded. They bring together individuals and businesses that have access to funds with those that require funds. They can have a physical location but most are a network of electronic connections. A business can get the financial resources it needs from outside the business in 3 main ways: ● Financial institution: eg. insurance company, merchant bank, who act as intermediaries between borrowers and lenders. ● Financial market: this is the money market, securities or capital market. Here, people with extent funds can make deals with those who need funds through an intermediary. Also, securities through these markets begin in the primary market which can later be traded in the secondary market. ● Private placement: direct deals are done between lenders and borrowers without an intermediary. This is cheaper because there is no middle man or advertising costs. Financial markets consist of both the securities and the intermediaries that allow trade to occur. Primary is creating a new product; Secondary is selling what already exists. b) Role of the ASX as a Primary Market The ASX operates as a primary market by the issuing of shares and through the receipt of proceeds from the sale of securities. The ASX also operates as a secondary market through the trading of shares between investors who may be individually, business, governments or financial institutions. The ASX controls its members by market, listing and operating rules. If necessary, institutes enforce action in respect of rule breaches. c) Domestic and Overseas Influences Domestic influences include: ● Competing demands for funds ● Changes in inflation and interest rates ● The level of economic growth and employment patterns ● Changes in government policy Overseas influences include: ● ● ● ● ● ● ● Interest rates differentials between countries Foreign government intervention Foreign exchange rates World events Accounting regulations affecting foreign operations Tax regulations for foreign operations Political risks i) Domestic This means within Australia. Interest rates are the cost of finance and any changes to it result in changes to the cost of borrowed money. When there is a high level of economic activity, the RBA tends to increase interest rates and this adds to the cost of loans. When this is combined with rising costs of labour as there is increased competition for workers, it makes it difficult for SME. Another government policy that has impacted domestically has been the deregulation of the finance sector. This has reduced the restrictions on foreign banks and NBFI operating in Australia. More foreign institutions now operate here, giving more competition to domestic institutions. In theory, this has resulted in lower interest rates for Australian business as they compete for business. This sector isregulated and monitored by Australian Prudential Regulation Authority (APRA). ii) Overseas Globalisation has had a big impact on Australian businesses. It has created many opportunities for them as our understanding and links with other countries increases. If our interest rates are higher than those overseas, foreign money is attracted here, meaning funds are available for local businesses to use and lower interest rates. There are also negative impacts of our global links - volatility in overseas economies can be transferred to Australia. Our dependence on China as a major market for our mining products makes us susceptible to any decline in their demand for these. iii) Trends It can be expected that our links with the global economy will continue to develop and offer opportunities for Australian businesses. The use of e-commerce can be expected to continue. Other changes in technology and the development of new financial instruments will probably continue, but with closer scrutiny as a result of the financial crisis in 2008. How businesses respond to these challenges will determine their long term growth and success. 3. Management of Funds All businesses need to funds to finance their assets and growth. Managing funds is about choosing the right type and source of funds for each purpose. Three questions need to be considered: ● Where can the funds come from' ● What are they for' ● Which type is best' a) Sources of Funds (Where can the funds come from') There are two main sources of funds - internal and external. Internal: Owners equity, shares, retained profits, sale of assets External: Overdraft, trade credit, lease, bank bill, debenture, mortgage Other external: Factoring, venture capital, grant